PLG 2nd proppants summit

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PLG Consulting

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Prepared for:

»  Boutique consulting firm specializing in logistics, engineering, and supply chain §  Established in 2001 §  Over 80 clients and 200 engagements §  Significant shale development practice since 2010

»  Headquarters in Chicago USA, with team members throughout the US and with “on the ground” experience in: §  North America / Europe / South America / Asia / Middle East

»  Consulting services §  Strategy & optimization §  Assessments & benchmarking §  Transportation assets & infrastructure development §  Logistics and Supply Chain operations §  M&A/investments/private equity

»  Specializing in these industry categories: §  Energy §  Bulk commodities (Proppants, Chemicals, Plastics) §  Manufactured goods §  Private Equity

About PLG Consulting

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Correlation of Operating Rig Count with Sand and Crude Shipments

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0

500

1000

1500

2000

2500

0

20,000

40,000

60,000

80,000

100,000

120,000

2007 Avg. 2008 Avg. 2009 2010 2011 2012

Ope

ratin

g O

nsho

re R

igs

Car

load

s

Operating On Shore Rigs All Sand Carloads Petroleum Carloads

STCC 14413 (sand) and 13111 (petroleum) Data sources: US Rail Desktop, Baker Hughes

0  

5,000  

10,000  

15,000  

20,000  

25,000  

30,000  

35,000  

40,000  

2008   2009   2010   2011   2012  

Carlo

ads  

Quarterly  Data  

BNSF  

UP  

NS  

CN  

CPRS  

CSXT  

KCS  

All Sand Handled by Railroad

4 STCC 14413 Source: US Rail Desktop

Proppant Market Demand Trends

»  Future demand trends by play

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Source: Warlick Energy, August YTD

0  

1000  

2000  

3000  

4000  

SAND   CERAMIC   OTHER  

$USD

 (MM)  

US  Proppant  Demand  

2006   2011   2016  

Data Source: The Freedonia Group, Inc

»  75% demand growth expected over next 5 years

»  Big 4 plays have over 80% of activity

§  Bakken, Eagle Ford, Permian –  Continued growth expected –  Major new wells continue to be

drilled

§  Marcellus –  New activity depressed by gas price & infrastructure –  Utica is still very early – tremendous potential for

liquids & crude

Technology Trends Impacting Proppants Market

»  Factors influencing increasing demand §  Increasing lateral drilling length and increased

focus on liquid-rich plays could impact proppant demand

§  Trend towards “monster wells” and expanded staging

»  Opportunities for increasing efficiency §  Increased focus on improving completion and

fracturing programs, e.g. Schlumberger HiWAY

§  Tagged, detectable “engineered” proppants allow for smarter use of proppant supply

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Source: Schlumberger

Source: CARBO

Proppant Industry Trends

»  Consolidation & acquisitions in the supply base §  Fracking fluid companies acquiring proppant suppliers (Rockwater Energy, Southwest

Proppants) §  Major US suppliers acquiring international facilities (Saint-Gobain in China) §  PE firms continue to be interested in this space

»  Partnerships & alliances – Class I railroads & sand suppliers §  BNSF & US Silica §  CN & Superior Silica Sands

»  International expansion examples §  Investments in China supply market §  Demand market growth - Argentina

»  Local market uniqueness §  Trend toward proppant selection on a well-by-well basis

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Proppant Shipping Flows

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Major Frac Sand Mining Areas

Frac Sand Transloading Clusters

Foreign Ceramics Import Sites

Major Frac Sand Rail Traffic Lanes

Import Ceramic Traffic Lanes

Hydraulic Fracturing Materials Inputs and Logistical Movements Per Well

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Materials

Chemicals

Clean Water/ Cement

Proppants

OCTG (Pipe)

Source to Transloading

3-5

Local source

40

5

Transloading to Wellhead Site

20

~1,000

160

20

50 Total Railcars

~1,200 Total Truckloads

Oil / Gas/ NGLs

Truck, Rail, Pipeline

Waste Water

~500 Total Truckloads

Based on a 30-stage well

Natural Sand Total Delivered Cost

Source: PLG analysis 10

»  Benchmark cost with flawless performance §  Delivered sand cost to TX can be $180/T §  Logistics drives ~60% of the total

delivered sand cost

»  Significant cost adders caused by strategic and tactical issues:

§  Sub-optimal logistics network design or infrastructure

§  Uncompetitive sand price

§  Above market rail rates

§  Manifest service vs. unit train

§  Poor planning & execution causes –  Rail or truck demurrage costs –  Performance penalties

§  Equipment/driver shortages

§  Cost of Poor Quality (COPQ)

Sand Mining Continues to Expand

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»  Proppant processing and shipping activity growing rapidly in Western and West Central Wisconsin counties §  Chippewa §  Barron §  Trempealeau §  Jackson §  Monroe §  Crawford

»  New announced projects §  Superior Silica Sand – Clinton, WI

§  $35MM main line rehabilitation by CN

§  U.S. Silica – Sparta, WI §  Smart Sand – Oakdale, WI §  Pattison – Prairie du Chien, WI

»  Minnesota areas also active §  Southeastern border along Mississippi

River §  Western Twin Cities

»  Established Illinois companies seeing significant upturns in volumes and financial returns

Source: Federal Reserve Bank of Minneapolis, July 2012; PLG analysis

New Growth Area

Changes in Rail Shipment Pricing Q3 2011 vs. Today - Sand

»  Since Q3 2011, have seen an overall rail price increase of 10 - 14% in public pricing (varies by corridor)

»  In the 600-1,300 mile range, rates vary from $0.045 - $0.074 per ton-mile for manifest shipments

»  Shippers who are willing to ship unit trains and make volume commitments have realized significant savings with longevity over public pricing

»  Western carriers are driving single line hauls to Eagle Ford via pricing differentials

»  Canadian and Eastern carriers are aggressively working to grow their

markets by providing very competitive pricing and securing sand originations §  CN/Superior Silica Sands – Poskin, WI

»  Major sand providers are establishing “in the play” transloading facilities to provide ready access to product §  U.S. Silica - East Liverpool, OH

12 Source: PLG analysis

Sand Railcar Market Conditions

»  New-build market has run its course §  Much smaller backlog –  3Q 2011: 10,000 cars, ten month wait –  Today: no significant wait

§  Significant drop off from ~15,000 new cars per year §  No new spec building by lessors – all deal specific now §  Lower pricing §  Some new cars going into storage

»  Lease market also post-peak §  Existing 286K cars available now §  Cars with sub-optimal specs (grain, <286K, cement)

are being phased out of frac sand fleet §  Creditworthiness an important criteria

»  Long-term horizon §  No sign of cement market return, easing pressure on

small cube hopper cars §  “Rational” vs. gold rush conditions

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Destination Transload / Trucking Cost & Market Trends

»  Ability to receive unit trains is dictating sizing and design of destination transload facilities §  Use of unit trains is key competitive factor §  Many facilities are sized to handle 60,000 – 100,000 tons per month

»  Destination transload facilities becoming more integrated solutions – same company transloading and trucking

»  Trucking to well sites can be most problematic area of proppant supply chain §  Driver issues §  Equipment issues §  Trucking company financial issues

»  Local trucking supply bases are ripe for consolidation by professional, financially-sound trucking management

»  End customers are willing to pay premium price for reliable, consistent service

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Future Market Drivers

»  Demand levers §  US Natural Gas prices §  Global Oil prices §  Domestic crude displacing imports §  Export of low cost refined products & plastics –  LNG –  Propane –  Polymers

§  New Natural Gas applications – CNG, liquefaction technology

§  Fracking technology & trends

»  Supply market shifts §  Further proppant market consolidation §  Development of mine-to-well supply alliances §  Vertical integration or outsourcing by large players?

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Looking Ahead: Logistics as a Key Factor in Proppants Market

»  Like other “gold rushes” before it, market is continuing to evolve and mature

§  “Survival of the fittest” material & service providers §  Margins will be rationalized as market matures §  “Continuous improvement” mindset will impact cost

»  Transportation & Logistics buying power/leverage is beginning to accrue to fewer, more efficient and sophisticated buyers §  Has become a key competitive advantage §  Who pays/controls the freight cost?

»  Opportunities still exist to establish competitive advantage §  Total supply chain view vs. fragmented approach §  Other industry best practices will give early adopters

advantage 16  

Thank You! For follow up questions and information, please contact:

Graham Brisben, CEO +1-708-386-0700 / gbrisben@prologisticsgroup.com

Taylor Robinson, President

+1-508-982-1319 / trobinson@prologisticsgroup.com

This presentation is available at: WWW.PLGCONSULTING.COM

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