Morningstar | Frac Sand Companies Hit by Weakened Pricing in First Quarter
Frac sand companies Hi Crush and Covia were hit by weakened proppant pricing in the first quarter. Hi-Crush's revenue was down 1% sequentially, although adjusted operating margins increased to 2% from negative 1% due chiefly to lower G&A expense. Covia's revenue fell 3% due to an 8% fall in Energy segment revenue. Companywide adjusted operating margin fell to negative 8% from negative 6% previously. Our fair value estimates and no-moat ratings are unchanged for now.Hi-Crush revenue slipped 1%, despite a 22% increase in volumes sold, owing to a more than offsetting fall in revenue per ton to $66 from $82 previously. Covia's Energy segment revenue fell 8% with a 2% increase in volumes being offset by a fall in revenue per ton to $53 from $59 previously. For both companies, a shift in mix to regional sand mines played a role in lower revenue per ton, but falling like-for-like pricing played a role as well. In particular, we estimate that average regional pricing fell by about $5 per ton in the first quarter, driven chiefly by the oversupply of local West Texas 100 mesh sand. Meanwhile, Northern White minegate pricing was flat sequentially (at $22 to $24 per ton by our estimates) after having fallen from just above $35 per ton in the second quarter of 2018. Weaker pricing showed up in weaker gross margins: Hi-Crush's gross margin per ton fell to $12 from $14 previously, and Covia's Energy segment fell to per ton fell to $3 from $7.
As a reminder, U.S. shale well completions have fallen in past quarters due chiefly to temporary pipeline bottlenecks in the Permian Basin. Cumulatively, the U.S. horizontal well completions count fell by about 18% from third-quarter 2018 to first-quarter 2019. This has pushed frac sand demand down about 20% since the second quarter of 2019 (when demand peaked), by our estimates. However, frac sand demand should rebound along with U.S. shale completions through the rest of 2019, owing to the alleviation of the pipeline bottlenecks.
Covia Holdings is a holding company. Through its subsidiaries, the company provides minerals-based and material solutions for the Industrial and Energy markets. The company's Industrial segment provides raw products to the glass, ceramics, coatings, polymers, construction, foundry, filtration, sports and recreation and various other industries. The company's Energy segment provides the oil and gas industry a portfolio of raw frac sand, proppants, well-cementing additives, gravel-packing media and drilling mud additives that meet or exceed the American Petroleum Institute standards. The company's products serve hydraulic fracturing operations in the United States, Canada, Argentina, Mexico, China, and northern Europe.
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