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The U.S. proppant market spent much of 2018 in a state of
oversupply. In fact, I think I read that you guys said this is an
interesting and challenging landscape. How do you explain the
imbalance?
Brandon Savisky:
Great question, Jessica and a popular one, as well. It is
complicated and challenging. As complicated of a market that it may
seem, it boils down to the basic fundamentals of supply and demand.
To offer some background, ever since the downturn in late 2014 and
through the bottom of 2016 now riding the state of recovery a bit
into 2017 and 2018, the market not only continued to grow almost
exponentially year-over-year in 2016, 2017, and 2018, but it also
set a course to cut cost and optimize operations. All toward
maximizing capital efficiency. So, with that in mind and
particularly looking at cutting cost, operators been focusing on
optimizing operations. Which in turn often increased completion
design intensities. By that I mean, adding a lot more proppant and
typically a lot more water as well. While at the same time
operators began to focus on reducing cost around every corner,
wherever it made sense of course, they continued to look for low
price alternatives. One of the major drivers of the oversupply
predicament was when they started looking for these alternatives in
the hunt for low-cost proppant alternatives.
This is where the Permian Basin regional supply oversupply began to take center
stage, as operators began to utilize and initiate tests as to
whether or not the cost trade off of the lower quality, yet closer
proximity (in respect to the Permian) versus their traditional
premium northern white sand (which is located in the north) would
result in similar or better well performance and most of all
greater Mbds, and all while boosting capital efficiency. With this
strategic shift, especially in the Permian, it didn't take long for
sand suppliers and other capital investors to notice this supply
opportunity and to quick act. In fact, from the fourth quarter in
2017 to the second half of 2018, we saw a demand increase of about
48 percent of sand and that lead to a six-fold increase in sand
supply for the same period. So, that equates to about a 498 percent
increase in local sand supply for a 48 percent increase in demand.
Now that's quite over stripped.
These actions lead to a rapid spur of sand proppant greenfield
development as well as many upgraded brownfield projects, and a
race for strategic location scattered across Southwest Texas. With
a high value placed on location among the acreage conditions that
many operators had in general. So, I mentioned location because
it's another interesting topic. We've estimated that about roughly
60- 65 percent of the cost of proppant is made up of purely
logistics. The proximity of the local regional supply was a huge
factor; therefore, you can see why location is so valuable.
Bringing it all together, it was a perfect storm of operators
acceptance to the lower quality sand as a substitute for northern
white, and the vast amount of capital waiting on the sidelines for
an opportunity like this to be presented.
In turn, this produced a large glut of supply that operators
required, however at the same time the second half of 2018 a
timeliness issue became the problem. That was the final piece of
the supply glut. The sand supply continued, but E&P operations
began to slow down due to capacity and constraints, and that
resulted in what we are currently wading through which is the
oversupply in sand.
Jessica Nelson:
Speaking of supply and demand, I know late 2018 you guys said
you expect to see a slight decrease in demand in the first part of
2019 with potentially an aggressive recovery by the end of the
year. How does that look to you now? I know you made that little
bit of a prediction at the end of the year. What do you think of
that prediction at this point?
Brandon Savisky:
That's absolutely correct. As I briefly touched on the capacity
issue, we are anticipating an aggressive recovery at the back end
of the year and that is tied to the relinquishment of capacity to
help the operators take away issues. We absolutely have seen a
moderation in activity coming out of 2018 and leading into the
first half of 2019 in these first two months. It has been by design
and according to the plan of the operators, yet it has been much to
the dismay of oilfield companies and suppliers. We projected the
moderation dating back to the second half of 2018 so it shouldn't
come as too much of a surprise to many of those who may have been
informed or appropriately planned. With that said, this particular
moderation has manifested itself in a one and half percent decrease
heading out of 2018, from the third quarter of 2018 to year-end
2018 and continued at a 2.2 percent decrease from that same third
quarter through what we expect at the end of 2019 in total proppant
and sand. So, our prediction absolutely demonstrated what you
mentioned, moderate decline in proppant activity. Unfortunately,
it's had a larger impact with oil field companies and oil field
equipment product suppliers who may have been caught off guard or a
bit ill prepared.