Will Point-To-Point Distribution Drive Sand Industry Consolidation?

The North American Frac Sand Exhibition & Conference 2017Houston, Texas

Joel Schneyer – Managing Director

jschneyer@headwatersmb.com303.619.4211

February 22, 2017

It Feels Like the Industry Is Off The Bottom

Page | 2

Rig counts, company budgets, and frac sand forecasts have turned a corner… and there are a number of positive developments in the marketplace

Drilling Activity Is On The Upswing

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Tota

l Nu

mb

er

of

Rig

s (O

il +

Gas

)

Weekly Rig Count by Basin

Others Fayetteville Granite Wash Haynesville Mississippian

Barnett Utica Cana Woodford Arkoma Woodford Ardmore Woodford

DJ-Niobrara Eagle Ford Marcellus Permian Williston

Source: Baker Hughes, North America Rotary Rig Count Current Week Data, as of January 13, 2017

… Driven by Horizontal Wells

Page | 4

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Proportion of Active Rigs by Trajectory

Horizontal Directional Vertical

> 90% Horizontal &

Directional Wells

as of January 2017

….

Source: Baker Hughes, North America Rotary Rig Count Current Week Data, as of January 13, 2017

Completion Trends Create New Proppant Demand Drivers

Page | 5

Lon

ger

Late

rals

Mo

re S

tage

s

Ove

rpac

kin

g

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2012 2013 2014 2015

Average Sand per Well (Permian/ Bakken/ Eagle

Ford)

Clo

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Wel

l Sp

acin

g

> 2

x in

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2014 2016 2017 2018

# Horizontal Wells

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# Active Horizontal Rigs

• Increase in frac sizes per stage

• Increased interest in utilizing finer mesh sand (40/70 & 100 mesh) & CRC

Source: Goldman Sachs Global Investment Research (July 2016), Bloomberg Intelligence 0

500

1,000

1,500

2,000

Permian Williston EagleFord

Pounds Sand Per Lateral Foot

2012 2016

Trend Shows Increasing Proppant Volume Demand Per Well

Page | 6

Source: Energent Group

Industry Average Proppant per Job

EOG Average Proppant per Job

3,210 tonsN = 8451

6,450 tonsN = 366

Ton

sTo

ns

But Things Are Different Now…

Page | 7

WE A

Operators are using more sand, and are finding finer and lower-quality sand fits the needs as well as their tight budgets

Source: C.L. Dake, Univ of Missouri School of Mines & Metallurgy Bul. Tech. Ser., Vol. 6, No. 1 August 1921

Sand Supply - No Shortage of Frac Sand Deposits

40/70 & 100 mesh: Southern White

20/40, 40/70 & 100 mesh: Northern White

Page | 8

14% 40%

share marketRegional sand

$210 million

Regional Sand is No Longer Shunned

Page | 9

Major Northern or White frac sand producing region

Major Texas Brown, Brady Brown, Hickory, and other sand types

Sources: Bloomberg Markets “The Next Shale Boom Will Be Built on Sand” (August 3, 2016), PacWest (2014)

• Trend toward “In-Basin” sales versus FOB Mine

• Use of finer grain sizes

• Acceptance of lower quality “Brown” or “Regional Sand”

U.S. Silica purchased brown-sand miner NBR Sand in July 2016 with plans to double output near Texas oilfields to 2 million tons/year

Page | 10

Texas Regional “Brown” or “Hickory” Sand Northern White Sand

Regional Sand Seems to Be Good Enough

Source: Energent Frac Report data & company SEC disclosures

Large Overhang Of Capacity Has Been Sitting On The Sidelines

• ~ 108 million tons of industry capacity equates to 27 million tons per quarter of sand available for sale

• 4 public companies provide ~ 60% of the industry’s current sand demands

Page | 11

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(M

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Other Companies Hi-Crush Emerge US Silica

Fairmount Santrol Smart Sand Eagle Materials Muskie Proppants

US Proppant Demand Is Set For A Rebound

Page | 12

Source: Smart Sand Inc. S/1 dated September 16, 2016 filed on Edgar

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2013 2014 2015 2016E 2017E 2018E 2019E 2020E

New Horizontal Wells Proppant Demand (Million Tons)

New Horizontal Wells 20,236 23,674 16,029 8,331 11,115 13,236 16,286 16,860

Proppant Demand 55.0 72.5 52.5 30.0 45.0 59.0 77.5 85.0

Tons Proppant / Well 2,718 3,062 3,275 3,601 4,049 4,458 4,759 5,042

New

US

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rizo

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lls

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pp

ant

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man

de

d (

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There Will Be Winners and Losers

Page | 13

Someone must receive the smaller slice of the economic pie

Supply Chain Profit Squeeze: Delivering Sand to Well Sites

Page | 14

$15 - $30 / ton

$30 - $60 / ton

$7 - $20 / ton $15 - $50 / ton

In-basin sales of frac sand is a game changer

The frac sand producer must now work into his economics all the costs of production and delivery of products through to the “Basin Transload”

Sources: Headwaters MB research

Eagle Ford In-Basin Delivered Cost Estimates

Page | 15Source: Headwaters MB research

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mining/processing outbound transload barge

rail truck rail line switch

short line inbound transload 3rd party transload fee

Co

st P

er

Ton

Regional Sand$45-49/t

Southern White Sand

$52-58/t

Northern White Sand

$60-65/t

unit train & volume discounts

Northern White Sand

$65-68/t

unit train

Northern White Sand

$71-75/t

unit train & volume discounts & rail line

switch

Northern White Sand

$82-86/t

manifest

Northern White Sand

$93-99/t

manifest & rail line switch

Northern White SandSouthern

White SandRegional Sand

Distance Matters: Estimated Delivered Cost of Sand To Eagle Ford

Page | 16

Source: Headwaters MB research (2016); U.S. EIA based on data from various published studies as of April 2015

Red : > $82/ton manifestOrange : ~ $60 - $75/ton unit trainsBlue : ~ $52-58/ton rail & bargeGreen : ~ $45-49/ton truck

Lower 48 Shale Plays and Major Sand Basins

Airlines Analogy: Hub-and-Spoke Versus Point-to-Point

Page | 17

Minneapolis Hub for Delta Airlines• Subject to congestion and delays at hubs• High capital investment to cope with surge hours

P2P Route Map for Spirit Airlines• Minimizes connections and travel time• Reduced interdependency of flights

Sources: Company websites

The Frac Sand Industry Scorecard

Page | 18

WINNERS

“Point-to-Point” Regional Sand Suppliers

(lowest cost substitute)

Southern White Sand Mines located in

Missouri and Arkansas

(proximity to highest demand growth)

Regional Truckers

(replacement of long-distance railcar supply)

Mixed

Big “Hub & Spoke” Northern White Mines

Short-line Railroads

LOSERS

×Marginal Northern White Mines

×(need to truck to outbound transload)

Class I Railroads

(reduced carload volumes)

×

×

What is the New Paradigm?

Page | 19

Follow the supply chain

Sand Producers Building Out Destination Rail Terminals

Page | 20

Sources: Company websites

What Are the Sand Companies Doing To Respond?

Page | 21

• Expanding their product lines into resin coated sands to get out of commodity space

• Increasing their product lines to include regional sands

Diversifying

Product Lines

• Building out or partnering with transload operators

• Looking at “shipping box” and providing the last mile solution

Squeezing Value from

Logistics

Expect Sand Prices to Rise

Page | 22

The market expects sand companies to make money too

Sources: SEC Edgar, Yahoo Finance, Headwaters MB research

The Market Is Expecting Higher Volumes and Better Margins

Page | 23

86.7

58.5

23.6

9.1

5.86.18.08.512.6

21.2

16.914.3

05101520253035404550556065707580859095100

2016Q32016Q22016Q12015Q42015Q32015Q22015Q12014Q42014Q32014Q22014Q12013Q4

TEV / LTM (Adjusted) EBITDA

Hi-Crush Emerge US Silica Fairmount Santrol Average

Sources: SEC Edgar, Yahoo Finance, Headwaters MB research

EBITDA Margins Already Up $7 - 10/Ton (Q1 2017 over Q3 2016)

$ P

er

Ton

Page | 24

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Adjusted EBITDA US $ / Ton Sold

Hi-Crush P Emerge P US Silica P Fairmount Santrol P US Silica IS Fairmount Santrol IS WTI Ave Price

This Is The End To Growth At Any Cost

Page | 25

Customers are now more focused on making money

Breakeven* Oil Price in Key Worldwide Basins

Page | 26

Notes: * Price required to achieve 10% Direct ATRORSource: EOG Presentation at Bank of America Merrill Lynch Global Energy Conference November 2016

Strong Regional Variation in Proppant Demand Exists…

• Proppant demand fell 17% between 2014 (52 mm tons) and 2015 (43 mm tons) and current run rate for 2016 was ~ 30 million tons, about 25% less than 2015

• Permian Basin forecast to be most active…because it has the best economics

Page | 27

Source: Energent Frac Report, data as of January 2017

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1

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Pro

pp

ant

(MM

to

ns)

Other Williston Granite Wash Mississippian Fayetteville Woodford

DJ-Niobrara Barnett Eagle Ford Utica Marcellus Permian

… But, Overall Proppant Demand Whips Behind Oil Price Changes

Page | 28

Sources: Energent Frac Report, data as of January 2017; Energy Information Administration, Cushing, OK WTI Spot Price FOB (USD per Barrel) as of Dec 2016

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Oil

Pri

ce (

WTI

, USD

/bar

rel)

Pro

pp

ant

(MM

to

ns)

Total US - Proppant Spot Price Oil

• Proppant demand covaries with oil price with approximately a 6 month lag

While A Future Proppant Demand Boom is Widely Acknowledged

• Projected proppant rebound to ~ 55 MM tons in 2017, followed by ~ 73 MM tons in 2018

• Oil price trajectory suggests proppant markets may be optimistic

Page | 29

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2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Oil

Pri

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, USD

/bar

rel)

Pro

pp

ant

(MM

to

ns)

Energent - actuals Superior Silica - Consensus Smart Sand S/1

"Tudor Pickering & Holt" Jeffries Goldman Sachs

Wells Fargo RBC Oil Price - EIA

Sources: • Smart Sand Inc. S/1 dated September 16, 2016 filed on Edgar • Rich Shearer (President & CEO) Superior Silica Sand presentation at the Industrial Minerals 4th Frac Frac Sand Conference in Minneapolis Sept 13, 2016• Wells Fargo, Oil Service Statistics and Valuation Handbook, January 6, 2017• RBC Capital, Frac Sand Supply Demand Update, December 5, 2016• Energy Information Administration, Short-Term Energy Outlook, as of January 10, 2017, and Annual Energy Outlook, Table: Petroleum and Other Liquids Prices

CLOSING THOUGHTS – Check the Numbers

Page | 30

• US proppant demand is set for a rebound… but the proppant forecasts seem too optimistic and do not appear to reflect the oil price, supply-demand feedback loop

Sources: • Energy Information Administration, Short-Term Energy Outlook, as of January 10, 2017, and Annual Energy Outlook, Table: Petroleum and Other Liquids Prices • Headwaters MB research, correlation of historical proppant, oil price, and production• Energent, Frac Report data as of January 2017

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Proppant - actual reported

Proppant - Mean Analyst Forecast

Oil&Gas Production - Most Likely -EIA

Oil&Gas Production, with Low OilPrice - EIA

Oil&Gas Production - actualreported

Oil&Gas Production - Inferred fromProppant Correlation

Continental Onshore USA Tight Oil & Gas Production