Making An Economic Assessment of Frac Sand

Making An Economic Assessment of Frac Sand

The North American Frac Sand Exhibition & Conference 2016 Minneapolis, MN

Joel Schneyer – Managing Director

[email protected] 303.619.4211 April 19, 2016

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State Q2 ‘15 Mine Count

Market Share %

WI 54 32%

TX 38 23%

MO 16 10%

IL 11 7%

OK 9 5%

MN 8 5%

Rest 31 19%

Sand Supply - Origin Locations

Northern White

Brady Brown

Note - Active proppant mines are defined as sand mine locations reported to MSHA with active operating hours. If not hours are reported for the quarter, than the mine is deemed as not active for the time period.

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109

118 122 125

132

150 154 155

149

167

0

20

40

60

80

100

120

140

160

180

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015

Coun

t of M

ines with

Ac9ve Ope

ra9n

g Ho

urs

Sand Supply – Active Proppant Mines

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Source: adapted from NavPort Presentation (April 2015), Canadian Frac Sand Logistics & Market Forecast Summit in Calgary & company websites

Sand Suppliers Pushing the Technology Envelope

. . . resin coated sand and dust suppressants

•  Atlas Resin PRC & CRC •  Refugio, Texas resin coating plant

•  Polymeric Proppant Line, DustPro, FloPRO PTT Proppant Transport Technology

•  SandGuard & SandMaxx •  Propel SSP Transport Technology, Curable RCS, Precured RCS •  InnoProp PLT, InnoProp Python

•  Unifrac RCS and DustShield

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Source: Company and Private Equity press releases and websites

Notable Private Equity Activity In the Frac Sand Space Since 2010

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Sources: NavPort Presentation (April 2015), Canadian Frac Sand Logistics & Market Forecast Summit in Calgary Years 2015 & 2106 HIS/PacWest website published Dec 11, 2015

Demand – Forecast by Basin Concurrent with the drop in oil price in 2015, proppant demand fell from 110.1 billion pounds (55.1 million tons) consumed in 2014 to an estimated 79.6 to 85.2 billion pounds (39.8 to 42.6 million tons) in 2015

Breakeven Oil Prices (WTI $/Bbl): US Onshore

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Source: Company Reports, Raymond James research March 2016

Proppant demand is expected to increase over the next decade because:

•  Operators are using longer laterals •  Overall increase in frac sizes per stage •  Increased number of frac stages per well •  More sand per stage (overpacking), and •  Closer well spacing

……. also there seems to be more interest in utilizing finer mesh sand (40/70 & 100 mesh) & CRC

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Secular Demand Drivers for Proppant

North American Historical Completion Trends

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Source: EIA “Trends in US Oil and Natural Gas Upstream Costs” March 2016, IHS Oil and Gas Upstream Cost Study Commissioned by EIA

Source: C.L. Dake, Univ of Missouri School of Mines & Metallurgy Bul. Tech. Ser., Vol. 6, No. 1 August 1921

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40/70 & 100 mesh

20/40, 40/70 & 100 mesh

Sand Supply - St Peter the Patron Saint of Frac Sand

American Silica test work

•  Revenue per ton for resin coated (Fairmont Santrol) peaked in Q3 2014

•  Revenue does not equal profitability and does not tell the full story!

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Sources: SEC Edgar, Yahoo Finance, US Energy Information Administration

$41.95 $46.42 $57.85

$48.54

$73.16

$97.78 $103.35 $98.75 $97.34 $105.84 $94.10

$94.34

$0

$20

$40

$60

$80

$100

$120

$140

$160

2015Q4 2015Q3 2015Q2 2015Q1 2014Q4 2014Q3 2014Q2 2014Q1 2013Q4 2013Q3 2013Q2 2013Q1

Revenue / Ton of Sand Sold

Hi-Crush Emerge US Silica Fairmount Santrol WTI (average)

Sand Supplier - Revenue

Sand Supplier – EBITDA Margins

Sources: SEC Edgar, Yahoo Finance


•  Increasing amounts of sand coupled with lower demand has reduced sand margins

•  EBITDA margins has dropped 80% from “peak” $35 per ton in Q3 2014 to $7 per ton Q4 2015

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$6.85 $8.67

$14.73 $24.83

$31.34 $34.97 $30.14 $27.11 $26.22 $28.91 $23.34 $25.94 $41.95 $46.42

$57.85 $48.54

$73.16

$97.78 $103.35 $98.75 $97.34 $105.84

$94.10

$94.34

$0

$20

$40

$60

$80

$100

$120

2015Q4 2015Q3 2015Q2 2015Q1 2014Q4 2014Q3 2014Q2 2014Q1 2013Q4 2013Q3 2013Q2 2013Q1

Adjusted EBITDA / Ton of Sand Sold

Hi-Crush Emerge US Silica Fairmount Santrol EBITDA / Ton Sold (average) WTI (average)

FOB MINE Q3 2014 = $35 EBITDA/t

Sand Producer

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Source: modified from Raymond James, Global Research Report of August 2014

IN BASIN SALE Q4 2015 = $7 EBITDA/t

Frac Sand Delivered Cost to Well Site

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Sand Suppliers Building Out In-Basin Rail Terminals

Source: Company websites

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Diaz, UP/BNSF $58/ton

Lacrosse CP/BNSF $62/ton

Mankato UP $52/ton

Lacrosse CP/BNSF/+ $62/ton

$66/ton

$69/ton

Shift in Sales From FOB Mine to “In Basin” Sale is Defining Moment

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Sector Focus # Companies TEV /LTM EBITDA

E&P Companies 7.3 – 8.6x

Large Cap Integrated Field Services 4 11.6x

Small / Mid Cap Integrated Field Services 10 7.3x

Contract Drillers 7 5.1x

Oilfield Equipment Manufacturers 9 7.7x

Sand & Proppant Producers 5 10.2x

Basin TEV /LTM EBITDA Daily BOE Produc9on

Bakken 12 7.3x $34,118

Eagle Ford 15 7.9x $30,557

Marcellus 14 7.9x $34,243

Niobrara 17 6.8x $28,356

Permian 16 8.6x $28,582

U\ca 14 7.8x $29,025

Notes: valuation date March 10, 2016 Source: TEV / EBITDA from Cap IQ

Oilfield Trading Metrics - Median TEV / EBITDA Multiples


•  TEV multiples have dropped 75% from 23.4x “peak” in 2Q 2014 to 5.8x “trough” in 3Q 2015

•  The TEV multiple in Q4 2015 stands at 9.0x

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9.0 5.8 6.1

8.1 8.7 13.2

23.4 18.4

15.5

0

5

10

15

20

25

30

35

2015Q4 2015Q3 2015Q2 2015Q1 2014Q4 2014Q3 2014Q2 2014Q1 2013Q4

TEV / LTM (Adjusted) EBITDA

Hi-Crush Emerge US Silica Fairmount Santrol TEV / LTM (adjusted) EBITDA Multiple

Sand Producer - Trading Multiples


•  The Implied Frac Sand Industry TEV has dropped 87% from $33.0 billion “peak” in 2Q 2014 to $4.2 billion “trough” in 3Q 2015 •  The Implied Frac Sand Industry TEV in Q4 2015 stands at $4.4 billion

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9.0 5.8 6.1 8.1 8.7

13.2 23.4

18.4 15.5

$4.4 $4.2 $6.6

$13.4 $17.1

$25.4

$33.0

$21.1 $15.6

$6.85 $8.67

$14.73

$24.83

$31.34 $34.97

$30.14 $27.11 $26.22

0

5

10

15

20

25

30

35

40

2015Q4 2015Q3 2015Q2 2015Q1 2014Q4 2014Q3 2014Q2 2014Q1 2013Q4

TEV / LTM (adjusted) EBITDA Multiple Implied Frac Sand Industry TEV (USD Billions) EBITDA / Ton Sold (average)

Sand Producer - Metrics

Source: Private Equity Analyst as cited in Probitas Partners - Private Equity Forecast & Desk Book for 2015


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Commitments to U.S. Private Equity Partnerships by Sector


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Fundraising reached record level in 2015, with 62 funds raising a total of $62.6 bn

Sources: Preqin Natural Resources Online

Annual Natural Resources Fundraising


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Energy-focused funds continue to be the main driver of fundraising with 76% of all funds closed (47) and 91% of total aggregate capital raised

Sources: Preqin Natural Resources Online

Breakdown of Natural Resource Fundraising in 2015 by Strategy


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Valuation-to-EBITDA multiples at the very high level

M&A Transaction Multiples (All Industries)


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Source: GF Data

The so-called “size premium” the reward given to larger businesses over comparable smaller ones remains high

5.0

6.0

7.0

8.0

9.0

2011 2012 2013 2014 2015 TEV 10-25 TEV 25-50 TEV 50-100 TEV 100-250

Valuation Overview – The Size Premium (All Industries)


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Source: GF Data

•  Buyers continue to place premiums on size, on above average financial performance, and on institutional ownership prior to purchase

•  The reward is much greater though for larger business (at $100-250 mm TEV 24% pickup in valuation 9.0x to 11.2x)

Valuation Drilldown – 2015 (All Industries)

In response to the oil downturn . . .

Final Observations

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Sand producers (and Oil Producers) have idled their high cost production

Transportation costs have been reduced by utilizing “plus size” unit trains

Sand Producers have developed in-basin terminal distribution networks

Sand Producers and Stimulation Companies have pushed the technology envelope and expanded their product platforms

Head counts and $ flowing to the hinterlands are down, well costs are down & type curves continue to show incremental improvements

Average Drilling and Completion Costs Have Declined Since 2012

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Source: EIA “Trends in US Oil and Natural Gas Upstream Costs” March 2016, IHS Oil and Gas Upstream Cost Study Commissioned by EIA

~ 30%

Type Curve Productivity Increases – Bakken Example

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Source: March 22, 2016 Fed Notes of Board of Governors of the Federal Reserve System

Global Liquid Supply Cost Curve is Dynamic (and Getting Flatter)

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Source: modified from Rystad Energy

USD/bbl cost curve

Closing Thoughts •  Shift in sales from FOB mine to “in-basin” sale point is a defining moment

•  TEV / EBITDA multiples have dropped 75% from 23.4x “peak” in 2Q 2014 to 5.8x “trough” in 3Q 2015

•  Private Equity likes the “Alternative Investment” space and has lot of dry powder

•  Size (>$100 mm TEV) and quality do matter and are rewarded M&A premiums

•  Core areas of onshore US shale plays are competitively globally, shale is here to stay!

Headwaters MB named Investment Bank of the Year for the second consecutive year

INVESTMENT BANK OF THE YEAR

INVESTMENT BANK OF THE YEAR

2015

Economy & Finance

Making An Economic Assessment of Frac Sand