US funds begin to buy energy sector’s latest bull market: Sand
NEW YORK (Reuters) – With new signs of life in US oil fields as the price of crude has climbed back above $50 a barrel, fund managers are upping their bets on an unheralded aspect of the fracking boom: sand.
Shares of companies that mine and sell sand, which is pumped into wells to make them more efficient, are on a tear. Some stocks have nearly doubled for the year to date, while the benchmark Standard & Poor’s 500 index is up less than 3 percent. On Monday, for instance, shares of Fairmount Santrol Holdings Inc. were up 14.4% at $7.61 at one point, while Hi-Crush Partners LP shares were up 8% at $11.61, following analyst upgrades.
Yet even with Monday’s outsized gains, fund managers and analysts say they expect the bounce-back from the bottom to be leveling off. They are focusing instead on companies they perceive as gaining market share in the year ahead.
“If you look out over two to three years, you can see overall sand usage some 50 percent to 100 percent higher than current levels,” said Stephen DeNichilo, a portfolio manager at the $5.1 billion Federated Kaufman Fund, which added a new position in US Silica Holdings Inc., the largest publicly traded sand company, in the first quarter by buying one million shares.
Shares of the $2.1b. market-cap company are up 72% this year to date, yet they still remain 2% below their level at this time last year. The number of funds adding new positions in the company has jumped 183% over the last three months compared with the quarter before, according to Morningstar data, and includes funds from firms such as Loomis Sayles, Wells Fargo and Meridian.
FOCUS ON LOGISTICS
Overall, sand companies are still trying to recover from the oil bust that sent prices down from above $100 a barrel in June 2014 to 13-year lows of $26 a barrel this February. Shares of Fairmount, for example, are still 52% below their October 2014 high of $16.
Sand usage overall should rise even if oil prices stay within a range of $40 to $60 a barrel because drillers are now using two to three times more sand per well than they were three years ago, said Brandon Dobell, an analyst at William Blair.
Between 2,000 and 3,000 tons of sand are now routinely pumped into new and refracked wells, with wells in some parts of Texas consuming up to 8,000 tons, he said. The largest well Dobell has seen required 15,000 tons – enough to fill up a 2.4-kilometer-long train of rail cars.
Sand is also proving much more efficient in fracked wells than higher-priced substitutes made by companies including Carbo Ceramics Inc., whose shares are down 23% for the year despite a jump of more than 10% on Monday.
Companies including US Silica and Fairmount, which have the best access to rail and barge lines to ship sand quickly, will continue to take share, Dobell said.
“If sand is sand, then what matters is a facility on a rail that allows you to ship 100 rail cars at once and beat me by $20 to $40 a ton in costs,” he said. “The market is still very focused on costs.”
The broad bounce-back among sand companies, meanwhile, will likely soon peak, at least until companies start to show rising earnings, KLR Group analyst Darren Gacicia said.
“We’re starting to creep into ‘show me some numbers’ territory before we get another leg up,” he said.