North American Frac Sand Conference 2015

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Logistics Engineering Supply Chain

Frac Sand – New Volume Impact

The North AmericanFrac Sand Exhibition & Conference 2015

George R. Brown CenterHouston, TXJune 29, 2015

Taylor Robinson

PresidentPLG Consulting

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Boutique consulting firm with team members throughout North America

• Established in 2001

• Over 90 clients and 250 engagements

• Significant shale development practice since 2010

Practice Areas• Logistics

• Engineering

• Supply Chain

Consulting services • Strategy & optimization

• Assessments & best practice benchmarking

• Logistics assets & infrastructure development

• Supply Chain design & operations

• Hazmat training, auditing & risk assessment

• M&A/investments/private equity

Industry verticals• Energy

• Bulk commodities

• Manufactured goods

• Private Equity

About PLG Consulting


Partial Client List

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Frac Sand Industry Has Been a Rollercoaster Ride


2014 2015 and beyond??

Why?

• Maturing industry with few barriers to entry…supply chain is evolving…has not experienced a steady state

• Highly dependent on market conditions - Oil & Gas market prices…# of rigs…fracking technology changes

• Hard to predict as industry volume data availability is weak and delayed…USGS historical numbers are in arrears

by a year+…volume obscured with other aggregates/industrial sand…forecasting is quite difficult

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Five Historical Phases of Frac Sand Market

0

500

1,000

1,500

2,000

2,500

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

U.S. Quarterly Carloads Originated for Industrial Sand and U.S. Land Rigs

U.S. Quarterly Carloads Originated for Industrial Sand (STCC 14413) U.S. Land Rigs

High Intensity

Fracking

Shale Gas Boom

Rig Shift from

Gas to Liquids

Shale Oil Boom

Oil Price

Collapse

Note: PLG utilizes rail car origination loads as the best way to track industry volume trends

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Frac Sand Supply Chain Undergoing Significant

Rationalization

Mining Processing Rail

Load-outLong Haul

Rail

Transloading

and Storage

Trucking to

Well

Sand Capacity

Industry in an over capacity state based on current volume requirements

New market entrants are now challenged to find funding

Unit train loading capability will continue to grow in importance as long term differentiator

Sand Pricing

Sand buyers have asked for large discounts to help offset lower oil prices

Sand companies have already given 20%+ price reductions in exchange for lengthening contracts

Huge variation in sand pricing based on size of sand buyer

Future • Industry consolidation will likely increase during this drastic volume downturn – survival of the fittest

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Premium Frac Sand Deposit Locations

Most desired sand still Northern White

from WI, MN, IL

MO is growing


During industry downturns, buyers revert to only

highest quality sand –marginal quality sand mine

volume will be hit first

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Frac Sand Supply Chain Undergoing Significant

Rationalization - Continued

Mining Processing Rail

Load-outLong Haul

Rail

Transloading

and Storage

Trucking to

Well

Rail volume

Q1 volume decreased by 15% vs. Q4 2014 (rail origination volume)

Q2 volume expected to decrease by an additional 20%+

Numerous frac sand railcars in storage – started in Q4 2014

Will Q3 / Q4 volume flatten out?

If/when oil prices are above $65 WTI, how fast can/will volume increase?

Trucking

Still regionalized industry with many players

Downturn likely to drive consolidation as cash strapped players are forced to sell


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-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Ca

rlo

ad

s

Quarterly Data of STCC 14413 (Industrial Sand)

UP

BNSF

CN

NS

CPRS

CSXT

KCS

Quarterly Frac Sand Handled by Railroad


Source: STB, June, 2015; Note that Industrial Sand category (STCC 14413) includes other commodities beside frac sand

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Updated Processed Sand Total Delivered Cost per Ton

Source: PLG analysis using BNSF public pricing – does not include fixed assets at origin or destination

Current average sand price per ton = $40

“Benchmark” unit train example – Illinois to South Texas

Single-line haul (one rail carrier)

Private railcars

Railcar fleet achieving two round trips per month

Origin sand facility has direct rail load-out

Destination trucking is less than 100 miles

Unit train operations include efficient origin/destination handling

24 – 36 hours per train

Manifest service would increase rail-related costs by 17%

Increased freight rate (12% higher)

Railcar fleet only achieves one turn per month, on average

Additional trackage required to accommodate larger fleet

Delivery patterns are more variable, requiring additional

destination storage and inventory


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Growth of “Fracklog” has contributed to the volume

decrease

Also called “Drilled, Uncompleted Wells” (DUCs)

Producers are holding off completion of wells in the some locations

until price recovers to $65-70/barrel

Refracking…lots of hype… but not widely growing

High intensity techniques producing 25-100%

productivity increases vs. traditional methods

Inner “perf” distances reduced by half

Large increases in stages per well – up to 80!

Sand per lateral foot – 2X to 5X more – little to no ceramics

Increased use of fine sand, especially 100 mesh

Slickwater technique enables higher sand intensity

High intensity fracking is more cost effective on a per

barrel basis, so will continue to grow in share even in

low price oil environment

Early adopters continue to increase share of high intensity wells

Followers are quickly adopting the method

Only a few smaller players are reducing sand volume to “save”

money

Fracking and Technology Trends

Source: Whiting Petroleum, December Investor presentation


Source: North Dakota Industrial Commission, May 2015

Balkken Fracklog Example

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Hydraulic Fracturing Materials Inputs and Logistics Involved


Materials

Chemicals

Clean Water/Cement

Frac Sand

OCTG (Pipe)

Source to Transloading

2

Local source

25 ~ 100

5

Transloading to

Wellhead Site

8

~1,000

100 ~400

20

~1,200 Total Truckloads

Oil/Gas/NGLs

Truck, Rail, Pipeline

Waste Water

~500 Total Truckloads

35~100+ Railcars

1 Unit train of sand=100 railcars=10,000 tons=20,000,000 pounds

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Small Cube Covered Hopper Market – Another Roller Coaster Market

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

Q4

20

10

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

11

Q1

20

12

Q2

20

12

Q3

20

12

Q4

20

12

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

13

Q1

20

14

Q2

20

14

Q3

20

14

Q4

20

14

Q1

20

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Orders

Delieveries

Order/Del'y Ratio

Source: Chicago Freight Car Leasing, ARCI Committee of the RSI

Wild swings in order/delivery ratio over last 5 years with market changes

During 2014 frenzied market, “double ordering” took place by OFS and Sand companies for same

volume - ~40k orders placed

2015 Q1 orders were only 131 cars!....….While 2015 car production will shatter delivery records

Current backlog (34K Cars), if filled, will take production through 2016 – where will they be used?

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Current market conditions

Lots of cars in storage starting in Q4 2014

Market is very quiet except for some interest from cement

Minimal outright cancellations of car orders

Some shifting of new-build delivery schedules

New-build production schedules are full through 2016

Cement consumption is expected to grow by 8%+ in 2015

Cement also utilizes small covered hoppers; small help to the market

May be build/lease opportunities for cement cars with frac sand downturn

Plastic pellet cars market growing and will help builders to utilize some capacity

Major questions on small covered hopper market after backlog build out in 2016

Gas market growth slowed by low gas prices resulting in low gas rig count

Oil price level will be key driver on future oil rig counts and sand usage

Frac sand industry consolidation will further rationalize the car market

Industry will continue to move to unit trains – improved cycle time reduces car volume requirement

How long until the “double buying” of rail car phenomena of 2014 will be worked out?

Small Covered Hoppers Market in a Correction State


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Frac sand volume is in a free fall…future?

-15% in Q1

15-20% down in Q2?

Recovery not foreseen in 2nd half of 2015 – will volume level out?

Excessive capacity throughout the supply chain

Reduction of Fracklog and high intensity fracking will have short and long

term implications on frac sand volume

Frac sand buyers have negotiated 20%+ price reductions – is

this the new “normal” price level?

Logistics accounts for 2/3 of the total delivered cost of sand

– largest opportunity for further cost reductions

Small covered hopper market in a state of disarray due to:

Double ordering during overheated 2014 market

And rapid decrease in drilling starting in Q4 2014

How long will it take to be worked out after backlog built out in 2016?

Summary Slide


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Thank You!This presentation is

available at:www.plgconsulting.com/categories/presentations

For follow up questions and information, please contact:

Taylor Robinson, President+1 (508) 982-1319 / [email protected]


http://www.plgconsulting.com/categories/presentations

http://www.plgconsulting.com/categories/presentations

mailto:[email protected]