U.S. producers of sand used to extract oil from shale are raising prices due to stronger demand, a sign higher oil prices are improving the outlook for the domestic fracking industry.
U.S. shale oil companies, which pump sand into oil wells to make them more efficient, were ravaged by a 2014 global crude glut that hammered prices from more than $100 a barrel to near $26 in February 2016. Dozens fell into bankruptcy.
However, publicly traded sand companies have pulled thousands of rail cars out of storage after oil hit a one-year high in October, thanks to rising demand, according to recent earnings calls and interviews. Sand companies idled half of the roughly 125,000 frac sand cars they had in service in 2014 after oil plunged, experts said, but nearly all are expected to return to service by 2018.
Companies including Chesterland, Ohio-based Fairmount Santrol Holdings Inc; U.S. Silica Holdings Inc of Frederick, Maryland; Southlake, Texas-based Emerge Energy Services LP; and Hi Crush Partners LP in Houston all saw increased business in the year’s third quarter.
Smart Sand held its initial public offering on Friday in another sign of industry confidence.
Rangeland Energy LLC, a privately held logistics company in Sugar Land, Texas, that unloads sand from rail cars to put onto trucks, is eyeing expansion to handle more volumes, said Patrick McGannon, vice-president for business development.
“We’ll have three more sets of three silos,” he said of the company’s sand storage facilities, which take months to set up. He said that will more than double current capacity, which is 26,000 tons of storage, according to the company’s web site.
Hi Crush had just over 600 rail cars in storage at the end of the year’s third quarter, down from about 1,900 six months ago, chief financial officer Laura Fulton said on an earnings call on Nov. 1.
“What a different picture we see from just six months ago,” she said, adding that Hi Crush expects double-digit volume increases in the fourth quarter.
While the increase in sand volume represents a ramp-up of U.S. activity, it does not necessarily correlate with improved global oil demand, said Credit Suisse analyst Charles Foote. Fracking is unique because the sand is instrumental to the process, unlike other types of drilling.
“It’s a good little pocket of positive activity, but I don’t think you can extrapolate it much,” he said.
Still, in increasing prices, sand companies are betting on an improving outlook for the oil industry, said Scott Cockerham, managing director at the consulting firm Huron. “It’s a very symbiotic system,” he said. However, of late, crude prices have dipped from their recent highs near $52 a barrel; U.S. crude futures on Friday were trading at $43.87 a barrel, a six-week low.
The United States has 450 active drilling rigs, according to oil services company Baker Hughes Inc. It has been steadily rising from a six-year low of 316 reached in May.
“Our customers are talking about actually adding some crews even in Q4 and certainly adding crews into Q1 2017,” said Rick Shearer, chief executive of Emerge. “We’re very bullish, going forward, that our volumes and our pricing will continue to build.”
Source: Reuters (Reporting by Ethan Lou; Editing by Andrew Hay)