fracking 101 for investors: profiting from proppants

Fracking 101 for Investors: Profiting from Proppants

Photo credit: Flickr/Damian Gadal

What are proppants?Proppants are typically sand or ceramic materials used by energy companies to prop open fractures

created in the hydraulic fracturing process.

Energy companies use high pressure to pump water mixed with proppants and chemicals as part

of the “frack fluid” to fracture stimulate shale formations.

Proppants 101: Raw Sand• High-purity quartz

sand is very durable with round grains.

• It’s crush-resistant making it a great material for propping open fractures beneath the earth.Photo credit: Hi-Crush Partners

Proppants 101: Resin Coated

• Sand or ceramics can be coated with resin to increase its resistance to being crushed.

• Costs more but yields higher production due to better porosity. Photo credit: Carbo Ceramics

Proppants 101: Ceramics

• Ceramic proppants are stronger and uniform in size and shape.

• Provides higher performance but at a higher cost.

Photo credit: Carbo Ceramics

Ceramics vs. Sand

The uniform shape and size of ceramics provides maximum porosity. This allows more oil and gas to flow through the proppant and out the wellbore.

By using ceramic proppants a well yields 20-30% in incremental production as well as increasing the estimated ultimate recovery of the well by 30%. This improves the value

of the well, but comes with a higher cost.

Credit: CARBO Ceramics website

Proppant industry overview:In 2013 energy companies used an estimated 56.3

billion pounds of sand for fracking. That’s 25% more than the industry used in 2011.

Proppant volume is expected to continue rising, as well as the price of raw frac sand.

Profiting from proppants:This massive trend is fueling the stocks of proppant

producers.

U.S. Silica Holdings

• A leading producer of industrial minerals including whole grain silica.

NYSE: SLCA

U.S. Silica Holdings

U.S. Silica Holdings• Diversified as 50% of its volume is sold to the oil

and gas sector while the other half is sold to industrial and specialty products customers.

• However, 72% of its margins is from sales to the oil and gas industry.

• Dividend yield is less than 1%.

Hi-Crush Partners

• A pure-play, low cost producer of premium monocrystalline sand.

• Structured as an MLP.

NYSE: HCLP

Hi-Crush Partners

Hi-Crush Partners• Predictable income due to its business model of

signing long-term contracts for its capacity.• Visible organic growth with several construction

projects underway as well as potential drop-down transactions with its sponsor.

• Because it’s an MLP, units currently yield more than 4%. Targeting at least double digit growth in 2014.

CARBO Ceramics

• The world’s largest producer of ceramic proppants.

NYSE: CRR

CARBO Ceramics

CARBO Ceramics

CARBO Ceramics• Focused on higher end ceramics.• Ceramics can increase the estimated ultimate

recovery and return on investment of an oil and gas well by optimizing the well.

• CARBO is using technology to improve its ceramic proppants to increase the low recovery rate of shale wells.

• Current dividend yield is 0.87%.

Investor takeaway:Investors have a number of options to profit from proppants:1. U.S. Silica is a large proppant producer, but adds a

layer of diversification that reduces its overall risk profile.

2. Hi-Crush Partners is a low-cost, pure-play frac sand producer. Offers compelling income due to its structure as an MLP.

3. CARBO Ceramics offers higher end products that are known to improve well economics.

The IRS is daring you to make this energy

investment.