PLG presents, "From Mine To Market: Overcoming Supply Chain Hurdles" at 3rd Frac Sand Conference an Industrial Minerals event

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FROM MINE TO MARKET: OVERCOMING SUPPLY CHAIN HURDLES

MINNEAPOLIS, MN

SEPT 1, 2015

Taylor Robinson President

PLG Consulting

3RD FRAC SAND CONFERENCE


2 Experience / Expertise / Excellence www.plgconsulting.com

I. About PLG

II. Global / U.S. energy market impacting frac sand

III. Frac sand supply chain update

IV. Small covered hopper market update

V. Conclusions

TODAY’S AGENDA




Partial Client List

About PLG Consulting

Experience

Delivering value to over 150

clients since 2001

Real-world, industry

veterans

Logistics, engineering and

supply chain experts with

operational experience

Core Expertise

Bulk Logistics

Freight Rail

Logistics Infrastructure

Design

Energy and Chemical

Markets

Investment Advisory and

Corporate Development

Services

Diagnostic assessments and

optimization

Supply chain design and

operational improvement

Investment strategy, target

identification, due diligence,

post-transactional support

Frac Sand industry advisory

Crude by rail (CBR) and rail

tank car (RTC) forecasts

Independent technology

assessment and

implementation

Hazmat training, auditing &

risk assessment




Diverse project examples

Integrated frac sand supply chain design and

implementation (unit train capable)

Frac sand supply chain optimization

Rail commercial negotiations

Rail car acquisition advising and negotiations

Comprehensive design & engineering for frac sand rail

loading and transload facilities

Transload company acquisition due diligence

Frac sand mining, trucking, and transloading due

diligence projects

Proppant intermodal container feasibility studies

Recognized proppant industry thought leader

Numerous industry presentations, articles and advising

Built on deep rail industry experience

Operational

Commercial

Design & engineering – rail and transloading

Equipment market

Broad frac sand industry client experience over

past 5 years

E&Ps

Oil Field Services

Sand companies

Transload providers

Integrated logistics providers

Investors – private equity, hedge funds, investment banks

PLG’s Frac Sand Industry

Qualifications




What a Difference a Year Makes –

September 2014 2nd Frac Sand Conf. WTI price was ~$90/barrel

U.S. crude production growth >1 mb/d in 2014

Horizontal drilling rigs approaching 1,400

Main concern was overabundance of light

crude from shale plays

Increased sand intensity driving up to 20%

Q/Q growth rate – “Gold Rush” in place

Demand growth enabling sand price increases

Small covered hopper car market “red hot”

with ~2 year backlog

Frac sand supply chain was showing signs of

stress – key questions/concerns:

Will there be enough 100 mesh sand?

Rail congestion in WI, ND, TX – When will performance

improve?

Regional trucking shortages

New market entrants throughout the supply chain FROM MINE TO MARKET: OVERCOMING SUPPLY CHAIN HURDLES

Contrasted With 2015 Key Issues

Oversupply/overcapacity throughout

supply chain

Price decreases given this year for

sand and all services

Small covered hopper market in

oversupply before backlog buildout



Global Oil Markets Are Impacted By

and Impacting U.S. Shale Oil Boom

Global oil price issue is caused by oversupply

Oversupply is approximately 1 -2mb/d globally (out of 95mb/d)

U.S. crude production grew by ~1mb/d during both 2013 & 2014

Lower prices are finally dampening U.S. crude growth in 2015 and

2016

Similar U.S. regional oversupply in gas and NGL

Global crude oversupply expected to last into

2016 at least

Oil prices not expected to recover quickly

1/3 of economists believe it will drop to $30/barrel

Price recovery continues to push to the right

August 27, 2015 Source: IEA, August 2015




Cost Reduction Has Been Main Focus for

Shale Oil Producers Since Last Fall

Producers had already been working hard on their

internal productivity – and sped up the process by: Focusing on drilling “sweet spots” only

Eliminated exploratory drilling – R&D budgets down by 30-50% for 2015

Focusing on perfecting latest, most productive fracking techniques

In Q4 2014, E&Ps asked for 25-30% price reductions from

all suppliers and the request flowed down supply chain Many suppliers have responded with 5-25% price reductions

Cost reduction push will be relentless for foreseeable future

Source: EOG Resources, May 2015




Recent Fracking Trends – “High

Intensity” and DUC

High intensity techniques producing 25-100%

productivity increases Inner “perf” distances reduced by half

Large increases in stages per well – up to 80!

Sand per lateral foot increases 2X to 5X

Slickwater technique enables higher sand intensity

Some are reducing or eliminating ceramics and RCS (<10% of

total proppant usage)

Still a growing trend over the next 2-3 years Leaders began trials in 2013

Impacted market in 2014

Adopted by 25%(?) of producers so far

Expansion at all liquid shale plays

Growth of “Fracklog” has contributed to the

volume decrease of frac sand Also called “Drilled, Uncompleted Wells” (DUCs)

Estimated in total to be 3,000 to 5,000

Producers are holding off completion of wells in the some locations

until price recovers to $65-70/barrel

Source: Whiting Petroleum, December Investor presentation

Bakken Fracklog Example

Source: North Dakota Industrial Commission, May 2015

High Intensity Fracking Visual




Well down-spacing means: Continued trend toward placing wells much closer

together

Used in conjunction with pad drilling to enhance total

volume of production from each drilling pad

Operators testing out different well spacings with different

completion techniques to optimize production

Enables infilling – drilling additional wells next to wells

that have previously been drilled

Source: QEP Resources, May 2015

Source: EOG Resources (Leonard Shale), May 2015

Fracking Technology

Refracturing Returning to an older, low producing well and

pressure pumping again

Thought to be a low cost alternative by eliminating

drilling

2015 – some activity in the Barnett and Haynesville

2016 some growth, but won’t move the needle on

overall sand volume

Major producers are focusing on maximizing

returns on new wells with the latest technology,

not refracturing




Despite Low Prices,

Production Still Remains at High Levels

Three of four largest plays have seen recent production volume decreases – a first for the shale boom

U.S. is now the global “swing producer” due to ability to quickly ramp up and down

Source: EIA Drilling Productivity Report, August 2015




Shale Supply Chain

and Downstream Impacts

Feedstock (Ethane)

Byproduct

(Condensate)

Home Heating

(Propane)

Other Fuels

Other Fuels

Gasoline

Gas

NGLs

Crude

Proppants

OCTG

Chemicals

Water

Cement

Generation

Process Feedstocks

All Manufacturing

Steel

Fertilizer (Ammonia)

Methanol

Chemicals

Petroleum Products

Petro-chemicals

Inputs Wellhead Direct

Output Thermal Fuels Raw Materials

Downstream

Products

Frac Sand has become the key upstream input material – cost and quantity

Many of the technology and productivity improvements are dependent on frac sand




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




Frac Sand Industry Has Been a

Rollercoaster Ride

2014 2015 and beyond??

Industry has never experienced a steady state…still a maturing industry with few

barriers to entry…supply chain continues to evolve

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

technology changes

Hard to track and predict as industry volume data availability is weak and

delayed…volume obscured with other aggregates/industrial sand




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




Frac Sand Supply Chain Undergoing

Significant Rationalization

Mining Processing Rail

Load-out Long Haul

Rail

Transloading

and Storage

Trucking to

Well

Mining

Current frac sand mining operations running below 50% of capacity on average

New market entrants are now challenged to find funding; consolidation continues

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 and grade

Rail Load-out

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

Future

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




Premium Frac Sand Deposit Locations

Most desired, high quality

sand is Northern White

from WI, MN, IL – has been

70-80% market share

MO is growing

Sand buyers are looking for

further cost reductions and

focusing on reducing rail costs

(~40% of total delivered cost)

MO, AR, TX mines are

gaining share due to shorter

distance to TX plays with

lower rail costs

STILL IN THE EARLY INNINGS OF THE N.A. ENERGY REVOLUTION - IMPLICATIONS FOR RAIL



Frac Sand Supply Chain Undergoing

Significant Rationalization - Continued

Rail

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

Q2 volume expected to decrease by an additional 20%+

Volume recovery not likely through 2015; significant growth not likely in 2016 either

Numerous frac sand railcars in storage – started in Q4 2014 – due to improved rail performance

Railroads under pressure to reduce rail rates

Transload

More than adequate capacity available in all shale plays; decreasing pricing

Trucking

Dramatic downturn in activity has caused 25%+ price reductions; some pricing at below/cost

Still regionalized industry with many players

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

Mining Processing Rail

Load-out Long Haul

Rail

Transloading

and Storage

Trucking to

Well




-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

CA

RLO

AD

S

UP

BNSF

CN

NS

CPRS

CSXT

KCS

Quarterly Frac Sand Volume

Handled by Railroad

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




Source: Matador, June 2015

Source: FairmontSantrol, March 2015

ROBUST PROPPANT DEMAND DRIVEN BY MULTIPLIER EFFECT

High Intensity Fracking – Major Impact

on Frac Sand Industry Now and the Future

Source: PacWest

FRAC SAND MASS PER HZ WELL

Source: PacWest

Although overall frac sand volume decreased by 15% in Q1, sand mass per well continues to increase – high intensity has blunted the industry volume drop

High intensity will be a major driver of future volume recovery in the frac sand market

Leading edge experimental wells using up to one unit train of sand per well!





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 orders have been minimal...While 2015 car production will shatter delivery

records

Current backlog (28K Cars) will take production through 2016

0

1

2

3

4

5

6

0

10,000

20,000

30,000

40,000 Q

4 2

01

0

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

15

Q2

20

15

Backlog

Orders

Deliveries

Order/Del'y Ratio

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

Cars Ratio

Small Cube Covered Hopper Market – Historical Perspective



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 – very difficult contractually

Some moving out of new-build delivery schedules

New-build production schedules are full through 2016 – many new cars direct to storage

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 may allow some small hopper

car buyers to shift orders to large covered hopper cars

Major questions surround 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 slowly move to more unit trains – improved cycle time reduces car

volume requirement

These negative factors could cause extended difficult market conditions

Small Covered Hoppers Market

in a Correction State




Frac sand industry volume is in rapid descent…short term

volume recovery is unlikely

Overall volume likely down >30% since 2014 peak

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

Excessive capacity throughout each link in the supply chain

Sand and all services in supply chain remain under heavy

price pressure

20-25% price reductions are “normal” in many areas

Logistics cost are ~2/3 of the total delivered cost of sand

Heavy focus on reducing rail costs

Small covered hopper market in a state of disarray

Longer term industry still has great growth potential due to:

Further growth seen in high intensity fracking methods

Drilling/completions will eventually return with healthier oil prices

Potential for U.S. crude export legislation

Gas is also a long term growth story driven by increased electrical generation,

petrochemical industry growth and exports

Conclusions




Thank You! This presentation is available at:

www.plgconsulting.com/

Presentations/

For follow up questions and information,

please contact:

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


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



mailto:[email protected]

Engineering

PLG presents, "From Mine To Market: Overcoming Supply Chain Hurdles" at 3rd Frac Sand Conference an Industrial Minerals event