Why Sand Is the Oil Industry’s Bellwether

Sand miners’ rebound boosts evidence that fracking and oil and gas market have bottomed

By  Spencer Jakab   Updated July 26, 2016 2:19 p.m. ET  wsj.com

Analysts taking the pulse of the energy market need to dig deep. All manner of indicators from rig counts to supertanker rates and refinery utilization are analyzed to gauge the direction of crude’s price, which still is less than half what it was two years ago. Last week, the world’s two largest oil-field-services companies, Schlumberger and Halliburton, both suggested that the market had bottomed.

But, if a turning point is indeed at hand, it may have been companies in the business of digging holes around America that offered the earliest clue.  Four publicly traded miners of sand have seen their share prices rally by an average of 320% from their 52-week lows. The largest, U.S. Silica Holdings, announced last Monday that it was buying an unlisted competitor operating a single mine for $210 million.

Investing in sand is a bet that hydraulic fracturing, or fracking, will rebound. The production technique is the marginal supply source for crude in the world both because it is at the edge in terms of cost and also because it has by far the quickest turnaround time. Wells drilled today can be producing in a matter of several months. Hundreds already drilled but uncompleted, so-called DUCs, can be brought online even faster. Both require sand—lots and lots of it.

During the fracking boom, sand became big business. An average well at the time required some 3,000 tons or so as a “proppant”—a material to hold open tiny cracks in the rock that allow oil and gas to flow out of it. These days industry experts use about 50% more sand per well, but they use less sand overall as activity has collapsed. Companies in the proppant business, while they have struck a more optimistic tone, haven’t seen a fundamental recovery quite yet and their share prices still are down by between 40% and 90% over the past two years.

While it is unlikely that the glory days of 2012 and 2013 will return when privately financed sand mines popped up everywhere, the proppant market looks good for low-cost, well-capitalized companies. It used to be the case that higher-quality “white sand” found in places like Minnesota or man-made ceramic particles sold by companies such as Carbo Ceramics were most desirable. But as companies have ratcheted down costs, transport expenses for sand have become an issue, so-called brown sand from locations closer to oil fields—mines such as the one bought by U.S. Silica—appear more promising.

After two years of belt-tightening, a leaner energy industry may be on the cusp of a rebound at lower prices. Manufacturers of sand, who have done the same, are acting as the bellwether.