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Logistics Engineering Supply Chain
Frac Sand – New Volume Impact
The North AmericanFrac Sand Exhibition & Conference 2015
George R. Brown CenterHouston, TXJune 29, 2015
Taylor Robinson
PresidentPLG Consulting
2
Boutique consulting firm with team members throughout North America
• Established in 2001
• Over 90 clients and 250 engagements
• Significant shale development practice since 2010
Practice Areas• Logistics
• Engineering
• Supply Chain
Consulting services • Strategy & optimization
• Assessments & best practice benchmarking
• Logistics assets & infrastructure development
• Supply Chain design & operations
• Hazmat training, auditing & risk assessment
• M&A/investments/private equity
Industry verticals• Energy
• Bulk commodities
• Manufactured goods
• Private Equity
About PLG Consulting
Frac Sand – New Volume Impact
Partial Client List
3
Frac Sand Industry Has Been a Rollercoaster Ride
Frac Sand – New Volume Impact
2014 2015 and beyond??
Why?
• Maturing industry with few barriers to entry…supply chain is evolving…has not experienced a steady state
• Highly dependent on market conditions - Oil & Gas market prices…# of rigs…fracking technology changes
• Hard to predict as industry volume data availability is weak and delayed…USGS historical numbers are in arrears
by a year+…volume obscured with other aggregates/industrial sand…forecasting is quite difficult
4
Five Historical Phases of Frac Sand Market
0
500
1,000
1,500
2,000
2,500
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
U.S. Quarterly Carloads Originated for Industrial Sand and U.S. Land Rigs
U.S. Quarterly Carloads Originated for Industrial Sand (STCC 14413) U.S. Land Rigs
High Intensity
Fracking
Shale Gas Boom
Rig Shift from
Gas to Liquids
Shale Oil Boom
Oil Price
Collapse
Note: PLG utilizes rail car origination loads as the best way to track industry volume trends
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Frac Sand Supply Chain Undergoing Significant
Rationalization
Mining Processing Rail
Load-outLong Haul
Rail
Transloading
and Storage
Trucking to
Well
Sand Capacity
Industry in an over capacity state based on current volume requirements
New market entrants are now challenged to find funding
Unit train loading capability will continue to grow in importance as long term differentiator
Sand Pricing
Sand buyers have asked for large discounts to help offset lower oil prices
Sand companies have already given 20%+ price reductions in exchange for lengthening contracts
Huge variation in sand pricing based on size of sand buyer
Future • Industry consolidation will likely increase during this drastic volume downturn – survival of the fittest
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Premium Frac Sand Deposit Locations
Most desired sand still Northern White
from WI, MN, IL
MO is growing
Frac Sand – New Volume Impact
During industry downturns, buyers revert to only
highest quality sand –marginal quality sand mine
volume will be hit first
7
Frac Sand Supply Chain Undergoing Significant
Rationalization - Continued
Mining Processing Rail
Load-outLong Haul
Rail
Transloading
and Storage
Trucking to
Well
Rail volume
Q1 volume decreased by 15% vs. Q4 2014 (rail origination volume)
Q2 volume expected to decrease by an additional 20%+
Numerous frac sand railcars in storage – started in Q4 2014
Will Q3 / Q4 volume flatten out?
If/when oil prices are above $65 WTI, how fast can/will volume increase?
Trucking
Still regionalized industry with many players
Downturn likely to drive consolidation as cash strapped players are forced to sell
Frac Sand – New Volume Impact
8
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Ca
rlo
ad
s
Quarterly Data of STCC 14413 (Industrial Sand)
UP
BNSF
CN
NS
CPRS
CSXT
KCS
Quarterly Frac Sand Handled by Railroad
Frac Sand – New Volume Impact
Source: STB, June, 2015; Note that Industrial Sand category (STCC 14413) includes other commodities beside frac sand
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Updated Processed Sand Total Delivered Cost per Ton
Source: PLG analysis using BNSF public pricing – does not include fixed assets at origin or destination
Current average sand price per ton = $40
“Benchmark” unit train example – Illinois to South Texas
Single-line haul (one rail carrier)
Private railcars
Railcar fleet achieving two round trips per month
Origin sand facility has direct rail load-out
Destination trucking is less than 100 miles
Unit train operations include efficient origin/destination handling
24 – 36 hours per train
Manifest service would increase rail-related costs by 17%
Increased freight rate (12% higher)
Railcar fleet only achieves one turn per month, on average
Additional trackage required to accommodate larger fleet
Delivery patterns are more variable, requiring additional
destination storage and inventory
Frac Sand – New Volume Impact
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Growth of “Fracklog” has contributed to the volume
decrease
Also called “Drilled, Uncompleted Wells” (DUCs)
Producers are holding off completion of wells in the some locations
until price recovers to $65-70/barrel
Refracking…lots of hype… but not widely growing
High intensity techniques producing 25-100%
productivity increases vs. traditional methods
Inner “perf” distances reduced by half
Large increases in stages per well – up to 80!
Sand per lateral foot – 2X to 5X more – little to no ceramics
Increased use of fine sand, especially 100 mesh
Slickwater technique enables higher sand intensity
High intensity fracking is more cost effective on a per
barrel basis, so will continue to grow in share even in
low price oil environment
Early adopters continue to increase share of high intensity wells
Followers are quickly adopting the method
Only a few smaller players are reducing sand volume to “save”
money
Fracking and Technology Trends
Source: Whiting Petroleum, December Investor presentation
Frac Sand – New Volume Impact
Source: North Dakota Industrial Commission, May 2015
Balkken Fracklog Example
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Hydraulic Fracturing Materials Inputs and Logistics Involved
Frac Sand – New Volume Impact
Materials
Chemicals
Clean Water/Cement
Frac Sand
OCTG (Pipe)
Source to Transloading
2
Local source
25 ~ 100
5
Transloading to
Wellhead Site
8
~1,000
100 ~400
20
~1,200 Total Truckloads
Oil/Gas/NGLs
Truck, Rail, Pipeline
Waste Water
~500 Total Truckloads
35~100+ Railcars
1 Unit train of sand=100 railcars=10,000 tons=20,000,000 pounds
12
Small Cube Covered Hopper Market – Another Roller Coaster Market
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0
2,500
5,000
7,500
10,000
12,500
15,000
17,500
Q4
20
10
Q1
20
11
Q2
20
11
Q3
20
11
Q4
20
11
Q1
20
12
Q2
20
12
Q3
20
12
Q4
20
12
Q1
20
13
Q2
20
13
Q3
20
13
Q4
20
13
Q1
20
14
Q2
20
14
Q3
20
14
Q4
20
14
Q1
20
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Orders
Delieveries
Order/Del'y Ratio
Source: Chicago Freight Car Leasing, ARCI Committee of the RSI
Wild swings in order/delivery ratio over last 5 years with market changes
During 2014 frenzied market, “double ordering” took place by OFS and Sand companies for same
volume - ~40k orders placed
2015 Q1 orders were only 131 cars!....….While 2015 car production will shatter delivery records
Current backlog (34K Cars), if filled, will take production through 2016 – where will they be used?
13
Current market conditions
Lots of cars in storage starting in Q4 2014
Market is very quiet except for some interest from cement
Minimal outright cancellations of car orders
Some shifting of new-build delivery schedules
New-build production schedules are full through 2016
Cement consumption is expected to grow by 8%+ in 2015
Cement also utilizes small covered hoppers; small help to the market
May be build/lease opportunities for cement cars with frac sand downturn
Plastic pellet cars market growing and will help builders to utilize some capacity
Major questions on small covered hopper market after backlog build out in 2016
Gas market growth slowed by low gas prices resulting in low gas rig count
Oil price level will be key driver on future oil rig counts and sand usage
Frac sand industry consolidation will further rationalize the car market
Industry will continue to move to unit trains – improved cycle time reduces car volume requirement
How long until the “double buying” of rail car phenomena of 2014 will be worked out?
Small Covered Hoppers Market in a Correction State
Frac Sand – New Volume Impact
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Frac sand volume is in a free fall…future?
-15% in Q1
15-20% down in Q2?
Recovery not foreseen in 2nd half of 2015 – will volume level out?
Excessive capacity throughout the supply chain
Reduction of Fracklog and high intensity fracking will have short and long
term implications on frac sand volume
Frac sand buyers have negotiated 20%+ price reductions – is
this the new “normal” price level?
Logistics accounts for 2/3 of the total delivered cost of sand
– largest opportunity for further cost reductions
Small covered hopper market in a state of disarray due to:
Double ordering during overheated 2014 market
And rapid decrease in drilling starting in Q4 2014
How long will it take to be worked out after backlog built out in 2016?
Summary Slide
Frac Sand – New Volume Impact
15
Thank You!This presentation is
available at:www.plgconsulting.com/categories/presentations
For follow up questions and information, please contact:
Taylor Robinson, President+1 (508) 982-1319 / trobinson@plgconsulting.com
Frac Sand – New Volume Impact
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