Morningstar | Frac Sand Producers See Dismal 3Q Results Owing to Weakening Pricing
Frac sand producers U.S. Silica and Hi-Crush experienced very poor third-quarter results owing to weakening frac sand pricing. U.S. Silica Proppant segment revenue fell 7% sequentially in spite of 10% higher volumes (as the company's Permian Basin mines ramped up) and contribution margin per ton fell to $23 from $33. Hi-Crush revenue fell 14% with a 9% decrease in volumes, and contribution margin per ton fell to $24 from $31.Frac sand pricing owing to stagnant to slightly declining demand (perhaps as much as 5% in the third quarter) combined with ongoing additions of low-cost Permian Basin sand supply. The demand issues, caused by a slowdown in Permian well completions in anticipation of oil pipeline takeaway constraints, will worsen further in the fourth quarter. However, these issues are set to be alleviated after mid-2019. By contrast, the additions of low-cost Permian sand supply are here to stay.
We've long anticipated the sand supply additions, however, the impact to pricing thus far has been somewhat more severe than we anticipated. Therefore, we will likely be decreasing our fair value estimates for our covered frac sand companies after reviewing third-quarter results for the full batch of companies.
U.S. Silica's overall company results showed muted impact (revenue down 1%, adjusted operating margins slipping from 15% to 14%) only because the impact of a full-quarter impact from the acquisition of EP Minerals, which has joined the Industrial & Specialty Products segment. The all-cash acquisition of EP Minerals doesn't significantly affect our U.S. Silica fair value estimate--the price paid looks fair in our view.
U.S. Silica Holdings is a holding company. Through its subsidiaries, the company is a performance materials company and a producer of commercial silica used in industrial applications and in the oil and gas industry. The company is also engaged in the production of products derived from diatomaceous earth, perlite, engineered clays, and non-activated clays. The company's segments include: Oil and Gas Proppants, which serves the oil and gas recovery market by providing and delivering fracturing sand; and Industrial and Specialty Products, which provides products and materials for building and construction products, fillers and extenders, filtration, glassmaking, absorbents, foundry, and sports and recreation.
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