EUR 850.00 For Business Accounts Only

Morningstar | Smart Sand Has Strong 2Q Owing to Improved Pricing and Oakdale Capacity Expansion

Proppant supplier Smart Sand had an excellent second quarter, with revenue improving 28% sequentially owing to 16% higher frac sand volumes as well as stronger pricing. The company experienced strong bottom-line improvement as well, with contribution margin improving to $28 per ton from $14 per ton in the previous quarter. Our fair value estimate and no-moat rating are unchanged for now.

The volume increase came from the capacity expansion at the company's sole facility as Oakdale, Wisconsin, which completed midway through the quarter. We expect the company to continue to increase its volumes sold as it boosts utilization of its now-5.5 million tons of production capacity. The pricing increase for Smart Sand was due primarily to higher pricing on its long-term contracts, for which pricing is determined by benchmark oil prices at a one-quarter lag. Given our bearish view on long-term oil prices, we don't expect the benefit for Smart Sand from elevated contract pricing to last. In any case, our fair value for Smart Sand is driven mainly by our expectations for overall midcycle frac sand market pricing, given the shorter-term nature of the company's contracts.

Additionally, Smart Sand's pricing per ton and margin per ton benefited from its expanded logistics operations. The company was able to sell more volumes at higher, in-basin pricing due to its expanded transportation capacity. We remain skeptical about any proppant company's ability to create substantial value from proppant logistics, owing to our no-moat assessment of the space, and Smart Sand all the more owing to it being quite late to the game.