Morningstar | U.S. Silica and Hi-Crush Benefit From Higher Volumes and Last-Mile Logistics Profits
Frac sand producers U.S. Silica and Hi-Crush reported strong second-quarter results. Volumes improved sequentially 16% for Hi-Crush and 7% for U.S. Silica, as the former benefited from the resolution of disruptive rail issues and the latter benefited from the ramp-up of its Permian-based mines. Gross margin per ton also improved slightly for both companies, with Hi-Crush improving to $31 per ton from $29 and U.S. Silica to $33 per ton from $31. Our fair value estimates and no-moat ratings for the two companies are unchanged for now.The sequential margin per ton improvement was unsurprising, given both companies’ ongoing ramp-up of their currently quite profitable last-mile logistics operations. Hi-Crush also benefited from the aforementioned resolution of the rail issues. Adjusting for changes in mix, pricing for the two companies was essentially flat sequentially, indicating that the frac sand market may have already reached a pricing peak. We expect pricing to fall sharply over the next two years as demand flattens and low-cost Permian Basin supply continues to come on line.
Hi-Crush announced its $60 million acquisition of FB Industries, a provider of silo-based well-site handling systems for proppant. This acquisition complements Hi-Crush’s existing container-based proppant last-mile logistics offering. Across the industry, advanced proppant last-mile logistics solutions have come in the form of either containers (Hi-Crush, U.S. Silica’s SandBox) or well-site silos (most notably Solaris).
However, we don’t think Hi-Crush’s acquisition expenditure or subsequent deployment of expansion capital on silos has a significant impact on our valuation, because we expect Hi-Crush to receive only a mediocre return on capital on these investments. The last-mile proppant logistics market will imminently reach maturity as advanced, high-efficiency systems (now at around 50% market share) reach full penetration. We think this is a no-moat business in the long run owing to the low barriers to entry, and Hi-Crush’s entry into the silo-based market will probably be too late to capture the benefits of a first-mover advantage.
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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