Morningstar | Similar to Peers, U.S. Silica Affected by Downturn in Frac Sand Demand in 4Q
U.S. Silica reported weak fourth-quarter results, chiefly owing to the downturn in frac sand demand. Revenue decreased sequentially 16% overall with oil & gas proppant segment revenue decreasing 19%. Volumes were actually only down about 3% as the company gained share with the ramp-up in production at its Crane facility in the Permian Basin. However, pricing suffered immensely, with a lower average selling price accounting for most of the top-line drop. Additionally, lower pricing led to a fall in the oil & gas unit gross margin to $15 per ton from $23 previously (roughly in line with peer Hi Crush, which reported earlier).The bottleneck in Permian Basin takeaway capacity has caused a slowdown in U.S. shale completion activity and therefore reduced the demand for frac sand. This completion slowdown accelerated in the fourth quarter, and we think industry frac sand demand declined about 20% sequentially. However, the takeaway constraints are still set to be alleviated by the second half of 2019, meaning that these issues are largely temporary. On the other hand, the ongoing expansion of low-cost in-basin sand capacity is a permanent headwind affecting frac sand producers' pricing and utilization. In-basin sand capacity expanded throughout 2018, and we forecast that it will continue to grow in coming years.
We note that U.S. Silica's oil & gas results were even more negative if excluding the contribution from the SandBox last mile sand logistics business. We estimate that oil & gas margin per ton ex-SandBox fell sequentially to about $7 per ton from $17 per ton. To be sure, the company's achievements in SandBox are impressive, with management estimating that they've achieved a 24% total market share as of the fourth quarter of 2018. Still, we think this is a no moat business, and therefore competitive pressures will push down SandBox's profitability in coming years.
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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