expert perspectives on the frac sand market and supply chain

Expert Perspectives on the Frac Sand Market and Supply Chain

DEMAND DRIVERS & LOGISTICS SUPPLY DRIVERS & INVESTMENT

Taylor Robinson

President

Joel Schneyer

Managing Director

Over 25 years industrial supply chain executive experience with

5 years as PLG President

30 years as an international investment banker, financial analyst,

and metals trader, with degrees in Mineral Economics and Geology

Agenda for DiscussionAgenda For Discussion

I. Frac Sand Industry DriversWhat is behind movement in the market?- Oil Prices: The Reign of Tight Oil & Gas- Intensity: Oilfield Sand Demand- Resource Acceptance: Quality vs. Proximity- Logistics: Location, Location, Location

II. Market Expectations for Frac Sand BusinessesHow is competition changing?- Margins: The End to Growth at Any Cost- Moats: Regionalized Value, Distance Matters

III. ImplicationsWhere will the money go, and when will the party end? - Volume growth in sand demanded even at $50 oil- Quality/size no longer a selling point- Regionalization will intensify

I

II

III

Page | 2

I. Frac Sand Industry Drivers

Onshore Middle East

Offshore Shelf

Extra Heavy

Oil

Deep water

Onshore Russia

Onshore rest of world

Oil Sands

North American

ShaleUltra

deepwater

Tight Oil Is Here To Stay: US Competitive At New Breakeven Price

Page | 4

Source: Rystad Energy research and analysis, cited in: IMF. World Economic Outllook - Gaining Momentum? April 2017

Continued adoption of technology and streamlining of the manufacturing process

Oil Production (million barrels / day)

Oil

Pri

ce (

USD

)

Drilling Activity Is On The Upswing, Focused In Sweet Spots

Page | 5

0

500

1,000

1,500

2,000

2,500

Tota

l Nu

mb

er

of

Rig

s

Weekly Rig Count by Basin

Source: Baker Hughes, North America Rotary Rig Count Current Week Data, as of May 12, 2017

0%

20%

40%

60%

80%

100%

Pro

po

rtio

n o

f R

igs

in U

se

Others Fayetteville Granite Wash Haynesville Mississippian

Barnett Utica Cana Woodford Arkoma Woodford Ardmore Woodford

DJ-Niobrara Eagle Ford Marcellus Permian Williston

OPEC initiated crude price increase has re-energized rig count and drilling & completions Producers utilizing

improved completion techniques and cost structures from downturn

DUC inventory still available for quick production bursts if oil price surges

Permian is the place to be due to: Significantly more

reserves Six layers of shale Thicker shale layers

Higher productivity via pad drilling

Great infrastructure already in place, with more coming

Permian

Eagle Ford

Horizontal Wells in Southern Plays Are Driving The Boom

Page | 6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2/4

/20

11

4/4

/20

11

6/4

/20

11

8/4

/20

11

10

/4/2

011

12

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011

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/20

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/20

12

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12

10

/4/2

012

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/4/2

012

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/20

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10

/4/2

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/4/2

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6/4

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8/4

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10

/4/2

015

12

/4/2

015

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8/4

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10

/4/2

016

12

/4/2

016

2/4

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17

4/4

/20

17

Proportion of Active Rigs by Trajectory

Horizontal Directional

> 90% Horizontal & Directional Wells as of May 2017 …. 20% increase since 2011

Source: Baker Hughes, North America Rotary Rig Count Current Week Data, as of May 12, 2017

Texas & New

Mexico plays have ~ 60% of

rig activity

0

100

200

300

400

500

600

700

800

900

05/12/17

Horizontal & Directional Wells

Permian

Haynesville

Eagle Ford

Williston

Marcellus &UticaDJ Niobrara

Efficiency Will Squeeze Areas For Long-Term Productivity

Productivity increases have continued beyond expectations due to:

• Exclusively drilling sweet spots (i.e. known high-production areas)

• Utilizing pad drilling and high intensity fracking in growing scale

• Learning-by-doing from horizontal drilling, leading to a continuous improvement “manufacturing” methodology

Producers will face some headwinds to further improve productivity because:

• Oil field services suppliers still are operating at break even/negative margins – price increases are being demanded by OFS suppliers

• Pressure pumpers capacity could be limiting factor for crude production growth this year

• Increased penetration of high efficiency techniques leave fewer areas to improve productivity

- 100 200 300

400 500 600

-

200

400

600

800

Jul-

08

Mar

-09

No

v-0

9

Jul-

10

Mar

-11

No

v-1

1

Jul-

12

Mar

-13

No

v-1

3

Jul-

14

Mar

-15

No

v-1

5

Jul-

16

Mar

-17

Rig

Co

un

t

Bar

rels

/ D

ayPermian New Well Oil Production per Rig

Production per rig Rig count

0.00.51.01.52.02.53.0

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7Mill

ion

Bar

rels

/ D

ay

Total Oil Production by Shale Play

Bakken Eagle Ford Niobrara Permian

Source: EIA Drilling Productivity Report, as of May 15, 2017

Page | 7

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

Rig

s

Car

load

s O

rigi

nat

ed

U.S. CLASS 1’S QUARTERLY CARLOADS ORIGINATED FOR INDUSTRIAL SAND AND U.S. LAND RIGS

U.S. Quarterly Carloads Originated forIndustrial Sand (STCC 14413)

U.S. Land Rigs

Source: STB, Baker Hughes, March 2017

Shale Gas Boom

Rig Shift from Gas to Liquids

Shale Oil Boom

Oil Price Collapse

High Intensity Fracking

Frac Sand Entering the Sixth Inning: Game Won’t Be Nine Innings

Frac Sand Frenzy 3.0

Page | 8

Completion Trends Create New Proppant Demand Drivers

Lon

ger

Late

rals

Mo

re S

tage

s

Ove

rpac

kin

g

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2012 2013 2014 2015

Average Sand per Well (Permian/ Bakken/ Eagle

Ford)

Clo

ser

Wel

l Sp

acin

g

> 2

x in

crea

se

20

16

to

20

18

0

5,000

10,000

15,000

20,000

25,000

2014 2016 2017 2018

# Horizontal Wells

0

200

400

600

800

1,000

1,200

1,400

2014 2016 2017 2018

# Active Horizontal Rigs

• Increase in frac sizes per stage

• Increased interest in utilizing finer mesh sand (40/70 & 100 mesh)

Source: Goldman Sachs Global Investment Research (July 2016), Bloomberg Intelligence

0

500

1,000

1,500

2,000

Permian Williston EagleFord

Average Pounds Sand Per Lateral Foot

2012 2016

Page | 9

0

2,000

4,000

6,000

8,000

10,000

May

-20

15

Jun

-20

15

Jul-

20

15

Au

g-2

01

5

Sep

-20

15

Oct

-20

15

No

v-20

15

Dec

-20

15

Jan

-20

16

Feb

-20

16

Mar

-20

16

Ap

r-2

01

6

May

-20

16

Jun

-20

16

Jul-

20

16

Au

g-2

01

6

Sep

-20

16

Oct

-20

16

No

v-20

16

Dec

-20

16

Jan

-20

17

Feb

-20

17

Mar

-20

17

Ap

r-2

01

7

Raw Resin Ceramic

Trend Shows Increasing Proppant Intensity Per Well

Source: Energent Group as of May 2017

Industry Average Tons Proppant /Job

YTD: 4,039 tons/jobN = 8,061 jobs

Ton

s

High intensity fracking

trend will continue to

expand sand volumes

per well

• 20 to 25% YOY increase between 2015 and 2016, and projected 15 to 20% YOY increase during 2017

• Technology leaders have been advancing the next generation of this technique for the last 2-3 years in both gas and oil well fracks

• “Followers” are still experimenting with optimization and are 1-3 years behind the leaders in implementing latest techniques

Page | 10

Technology leaders average ~6,000 tons of proppant/job (50% greater than average) over the

same time period

Strong Regional Variation In Proppant Demand Exists

• Proppant demand fell 17% between 2014 (52 mm tons) and 2015 (43 mm tons) and 2016 (35 mm tons) was 19% less than 2015

• Permian Basin is most active… because it has the best economics

Page | 11

Source: Energent Frac Report, data as of May 2017

-

1

2

3

4

5

6

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/20

13

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/20

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/20

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/20

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/20

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/20

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/20

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/1/2

013

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/1/2

013

12

/1/2

013

1/1

/20

14

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/20

14

3/1

/20

14

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/20

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/20

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/20

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/20

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/1/2

014

11

/1/2

014

12

/1/2

014

1/1

/20

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/20

15

3/1

/20

15

4/1

/20

15

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/20

15

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/20

15

7/1

/20

15

8/1

/20

15

9/1

/20

15

10

/1/2

015

11

/1/2

015

12

/1/2

015

1/1

/20

16

2/1

/20

16

3/1

/20

16

4/1

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10

/1/2

016

11

/1/2

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/1/2

016

Pro

pp

ant

(Mill

ion

To

ns)

Other Barnett Granite Wash Fayetteville MidCon Mississippian Haynesville

DJ-Niobrara Williston Utica Marcellus Permian Eagle Ford

Northern White Sand

Southern White Sand

Late

Quaternary

Sand

Dunes

Hickory Sandstone

Haynesville

Eagle

Ford

Permian

DJ

Bakken

Marcellus

- Utica

Source: EIA, US Geological Survey, Headwaters MB Research

Page | 12

Major Sand Basins Sit Between Lower 48 Shale Plays

Page | 13

Source: Company websites, Headwaters MB research

Permian Dune Sand Texas Regional “Brown” or “Hickory” Sands Northern White Sand

Black Mountain

Black Mountain Unimin FMSA US Silica Unimin FMSA US Silica

40/70 100 40/70 Brady

40/70 Texas Gold

40/70 Premium Hickory

40/70 Unifrac

40/70 White

40/70 White

Winkler, TX Winkler, TX Brady, TX Voca, TX Voca, TX

K Value 7,000 8,000 6,000 6,000 6,000 11,000 8,000-9,000 9,000

Sphericity 0.7 0.7 > 0.6 > 0.6 0.6 0.7 - 0.9 0.7 0.6

Roundness > 0.6 > 0.6 > 0.6 > 0.6 0.7 0.7 - 0.9 0.7 0.7

Turbidity < 100 < 100 < 250 < 75 10 - 130 < 100 < 50 10 - 140

Acid Solubility < 3.0% < 3.3% < 3.0% < 2.0% 1.80% < 3.0% < 0.6% 0.80%

Regional Sand Is “Good Enough”

If Regional Sand works in Texas, why wouldn’t it work in the other plays?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2016

Proppant Demand by Mesh Size

100 mesh 40/70 30/50 20/40

Finer Grades Are No Longer Shunned, Creating The Hot Market

> 70% of

total demand

Regional Sand Market Share

16%

2014

Northern White Regional Sands

34%

2016E

+• Trend toward “In-Basin” sales

versus FOB Mine• Acceptance of lower quality sands

=

Source: PacWest, IHS, US Silica, as of December 2016

Page | 14

Late

Quaternary

Sand Dunes

Source: EIA, US Geological Survey, Energent Group (May 2017), Headwaters MB research

Hickory

Sandston

e

Transload Terminal

Kermit TX to:

Pecos TX = 48 mi

Carlsbad NM = 90 mi

Big Spring TX = 110 mi

Lubbock TX = 155 mi

Sweetwater TX = 172

mi

Page | 15

No Shortage Of Current And Future Activity In Texas…

1 slide: Energent,

transloads, and

rail only – activity

only

2 slide: change

overlay in

obnoxious color

Transload Terminal

Kermit TX to:

Pecos TX = 48 mi

Carlsbad NM = 90 mi

Big Spring TX = 110 mi

Lubbock TX = 155 mi

Sweetwater TX = 172

mi

Source: EIA, US Geological Survey, Energent Group (May 2017), Headwaters MB research

Hickory Sandstone

Transload Terminal

Page | 16

… And No Shortage Of Regional Sand In Texas

Late Quaternary Sand Dunes

Frac Sand Supply Chain – Lowest Total Delivered Cost Wins

Source: Headwaters MB research, PLG Consulting

The frac sand supplier must balance the economics of all stages: from production through to the “Last Mile” of delivery

Operating Costs = $15 - $30 / ton

(depends on mine quality)

Transload Facility Fees = $7 - $20 / ton

(depends on regional

competition and product)

Freight + Railcar Leases + Fuel Surcharges + Logistics =

$30 - $60 / ton

(depends on basin delivered to and unit train capability)

“Last Mile” Trucking Costs = $15 - $50 / ton

(dependent on distance from

transload facility to well site, driver availability, and

truck demurrage)

Mining Processing Rail

Load-outLong Haul

Rail

Transloading

and Storage

Trucking to

Well

Note: Transloading may be required for trucking over ~150 miles from sand mine to wellhead

Northern White

X X X X X X

Regional Sand

X X ? X

Regional Sand is a game changer

Page | 17

Source: Bloomberg Markets “The Next Shale Boom Will Be Built on Sand” (August 3, 2016), PacWest (2014), Headwaters MB Research

Page | 18

Regional Sands Are Closer… Sometimes Removing Rail & Transloading

REGIONAL SANDS

• Mostly Truck• Some Rail

SOUTHERN WHITE

• Barge• Rail• Truck

NORTHERN WHITE

• Rail• Manifest• Unit Train

Frac Sand Sources Quickly Changing For the Permian Due to Cost

Source: Headwaters MB research (2016); U.S. EIA based on data from various published studies as of April 2015

Lower 48 Shale Plays and Major Sand Basins

Page | 19

Directional Total Delivered

Cost

RegionalSand Direct

Truck

RegionalSand Rail

NorthernWhite Unit

Train

NorthernWhite

Manifest

Current Issues …

• Slime settling ponds are unsightly and create leakage/water quality concerns

• Dust from sand mining causes silicosis for workers & neighbors, resulting in tightened air quality standards

EHS Challenges Remain for Frac Sand Industry

…. Expected Responses

• Increased use of dry stack tailing using filter presses

• Increased use of dust suppression sprays and covered transfer points

Page | 20

II. Market Expectations

Source: SEC Edgar, SEDAR, Yahoo Finance, Headwaters MB research

Proppant Margins Are Improving …

$ P

er

Ton

Page | 22

-$60-$50-$40-$30-$20-$10$0$10$20$30$40$50$60$70$80$90$100$110$120

Adjusted EBITDA US $ / Ton Sold

Hi-Crush P Emerge P US Silica P Fairmount Santrol P WTI Ave Price

• Q1 2017 EBITDA “blended” average margins were $0-12/ton• Q2 2017 EBITDA margins on new Northern White contracts in the $10-20/ton range

Q1 2017 EBITDA US $/Ton Sold

Hi-Crush $1.38/tEmerge $0.05/tUS Silica $11.09/tFairmount $6.97/tSmart Sand $6.65/tSource Energy $11.82/t

Source: SEC Edgar, Yahoo Finance, Headwaters MB research

… But Company Valuations Are Still At Unsustainable Levels

Page | 23

23.79.1

5.86…8.08.512.621.216.914.3

-200

-150

-100

-50

0

50

100

150

200

250

300

350

400

450

500

550

600

2017Q12016Q42016Q32016Q22016Q12015Q42015Q32015Q22015Q12014Q42014Q32014Q22014Q12013Q4

TEV / LTM (Adjusted) EBITDA

Hi-Crush Emerge US Silica Fairmount Santrol Average

Historical Middle Market M&A Transaction Multiples

Middle Market M&A Transaction Multiples - Enterprise Value / EBITDA

Even though multiples were generally down in 2016, a quality premium is still observed where acquirersare willing to pay as much as 15% above comparable sellers for above-average financial performance

We have also seen a premium and accelerated timelines in sponsor-to-sponsor transactions

_____

Source: GF Data, February 2017

5.6x5.8x

6.0x

5.6x5.8x

6.0x6.2x 6.2x

6.8x6.6x 6.6x

6.4x

6.8x 6.7x 6.8x

8.4x

7.8x

7.3x7.3x 7.4x 7.5x7.8x

9.0x 9.0x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

2003-2011 2012 2013 2014 2015 2016

$10M - $25M $25M - $50M $50M - $100M $100M - $250M

Page | 24

Source: Energent Frac Report data & company SEC disclosures as of May 2017

Large Overhang Of Capacity Has Been Sitting On The Sidelines

• ~ 108 million tons of industry capacity equates to 27 million tons per quarter of sand available for sale

• 4 public companies provide 50-60% of the industry’s current sand demands (note that numbers still coming in for Q1 2017)

Page | 25

0

2

4

6

8

10

12

14

16

20

16

Q4

20

16

Q3

20

16

Q2

20

16

Q1

20

15

Q4

20

15

Q3

20

15

Q2

20

15

Q1

20

14

Q4

20

14

Q3

20

14

Q2

20

14

Q1

20

13

Q4

20

13

Q3

20

13

Q2

20

13

Q1

Pro

pp

ant

Sold

(M

M t

on

s)

Other Companies Hi-Crush US Silica Fairmont Santrol Emerge

Shifting Sands Marketplace Favors Local Sources

$210 million: July 2016U.S. Silica purchased brown-sand miner NBR Sand with plans to double output to 2 million tons/year

$275 million: Feb 2017Hi-Crush purchased Permian Basin brown-sand deposit with plans to produce 3 million tons/year at additional cost of $50 million

$20 million: April 2017Emerge purchased brown-sand mine from Osburn Materials to add 300,000 tons output near San Antonio, expand to 3 million tons/year by 2018 at additional cost of $40-60 million

Legend

Existing Frac Sand Mine

Recent Concentrated Drilling

Recent Acquisition Mine

Source: PLG Analysis

Recent Planned Mine Sites

Planned New Mines (as of May 2017)

• Winkler County, TX: Black Mountain’s 2 x 4 million tons/year facilities, pending air permits• Winkler County, TX: Wilks Brothers’ facility, pending air permit• Culberson County, TX: Former NBR Sands LLC management, pending air permit• Ector County, TX: Preferred Sands’ Letterkenny Ranch, initial air new source permit complete• Ector County, TX: Preferred Sands’ Mullingar Ranch, initial air new source permit complete• Clovis, NM:Delaware Sands LLC, completing engineering & financing

Page | 26

Page | 27

… But Water Scarcity May Be Barrier For Regional Sand Growth

Source: WRI Aqueduct 2014

Recent Sand Transactions Show a Developing Pattern

Notes:

Margin assumes 30% effective tax rate & 10% NPV

* with contingency payout based on performance

** assume $50 mm build out cost per HCLP press release

Date Buyer TargetAmount

(MM)Annual Tons Capacity

(‘000)$ / Ton

EBITDA MarginNotes

July 2016 SLCA NBR $210 2,000 $17.62 Regional Sand

August 2016 HCLP HCLP Blair $170 2,860 $8.65 Northern White

August 2016 HCLP HCLP Blair $180 * 2,860 $9.16 Northern White

February 2017 Source SP Blair $45 1,400 $5.43 Northern White

February 2017 HCLP HCLP Whitehall $140 2,860 $7.50 Northern White

February 2017 HCLP HCLP Whitehall $205 * 2,860 $11.00 Northern White

February 2017 HCLP Permian $325 ** 3,000 $20.62 Regional Sand

March 2017 TUSK Chieftain Sand $35 1,500 $3.94 Northern White

April 2017 EMES Osburn $20 300 $10.15 Regional Sand

$0

$5

$10

$15

$20

$25

0 500 1,000 1,500 2,000 2,500 3,000 3,500

EBIT

DA

Mar

gin

($

/To

n)

Annual Nameplate Capacity - Thousand Tons

$10/ton

Source: Company press releases, Headwaters MB research

Page | 28

III. Implications

High Intensity Drilling

Expanding

… Driving More

Development with Finer

Sand

… Enabling Regional Sand Market to Grow

… and Increasing the

Role of Trucking in the Supply Chain

• Latest generation of high intensity can add 25-40% recovery per well

Tying Trends Together Showcases Market Shift

• Sands nearby active basins will become the lowest delivered cost, displacing some current mines and transloading

• Trucking volume growth will drive innovation in storage solutions at well site

… Growing Focus on Last Mile Logistics

• 100-mesh sold out/in short supply for foreseeable future

• Minimizing resin-coated sand and ceramics usage

Page | 30

Increased Shale Oil Production

Flattens/Shrink Oil Prices

… Which Limits 2018+ Sand

Volume Growth

Shale oil is a victim of its own success for a second time

BUT

Shale Operations Are Logistics-Intensive –Challenges Pushing Downstream

Materials

Chemicals

Clean Water

Proppants

OCTG (Pipe)

Railcars to

Transloading

5

From local

reservoir /

well

Avg - 55

Largest - 240

5~8

Trucks to

Wellhead Site

20

~300,000

barrels

water / job **

Avg – 220

Largest - 960

20~32

Avg – 260

Up to 1,000

Truckloads

Oil / Gas / NGLsPipeline, Truck, Rail

-Note: A majority of

crude is still moved by

truck for some distance

at some plays

Waste Water Initially 2 barrels of

produced water per

barrel of Crude

increasing to 5 barrels

on average

Avg – 65

Up to 250

Railcars

Page | 31

* Example is for rail-delivered supply chain ** Horizontal/Directional well average in last 6 months (Energent Group)

Each well drilled requires:

Permian Activity – Shale Extent and Current Rigs

Legend

Permian Shale Layers

Active Permian Rig

Source: PLG Analysis, Baker Hughes, May 2017

Page | 32

Permian Activity – With Transload Locations

Legend


Active Permian Rig

Sand Transload

Page | 33


Permian Activity – With Existing Sand Mines

Legend


Active Permian Rig

Existing Sand Mine

Sand Transload



Page | 34

Legend


Active Permian Rig

Existing Sand Mine

Sand Transload

Announced Sand Mine

Permian – With Announced Mines


Page | 35

Permian Sand Trucking Will Grow Considerably Over Next 2-3 Years…

Legend


Active Permian Rig

Existing Sand Mine

Sand Transload

Potential Sand Mine

Frac Sand Truck

Movement

Page | 36

If Permian sand volume reaches 30M Tons/Year…• 1,200,000 truckloads/yr sand (if all are pneumatic trucks)

• Requires over 1,000 truck fleet

+ At 3M barrels/day of crude production…• 27,000,000 truckloads/yr produced water and crude hauling


…But With Growth Will Come With Growing Pains

Legend


Active Permian Rig

Existing Sand Mine

Sand Transload

Potential Sand Mine

Frac Sand Truck

Movement

Page | 37

Potential Impact/Concerns:

Access: • Limited routes in some areas• Truck congestion at major

intersections, in towns, and near high intensity well locations

Supply:• Are there enough

truck/trailers of the right configuration?

• Are there enough drivers?Price:• Inflation on trucking services

If Permian sand volume reaches 30M Tons/Year…• 1,200,000 truckloads/yr sand (if all are pneumatic trucks)


+ At 3M barrels/day of crude production…• 27,000,000 truckloads/yr produced water and crude hauling


Page | 38

• Increasing their product lines into resin coated sands to get out of commodity space

• Expanding and buying available capacity, and investing in regional sands

Diversifying

Product Lines

• Building out or partnering with transload operators to have “storefronts” in the shale plays

• Looking at “shipping box” and providing the last mile solution

Squeezing Value from

Logistics

What Are the Sand Companies Doing To Respond?

Minneapolis Hub for Delta Airlines• Subject to congestion and delays at hubs• High capital investment to cope with surge hours

P2P Route Map for Spirit Airlines• Minimizes connections and travel time• Reduced interdependency of flights

Source: Company websites

Airlines Analogy: Hub-and-Spoke Versus Point-to-Point

Page | 39

Will Boxes Replace Transloading And Pneumatic Trucks?

Utilize standard flatbed trucks which

eliminate pneumatic trucks

Allow more truck turns per day

Gravity fed into blender

Pooling model

No complex belt systems

No upfront capex or obsolescence risk

Significantly reduce exposure to air

particles

Reduce shrinkage of product due to

fewer transfers

“Shipping boxes” may offer advantages to the rail – trucking limbo for regional mine

shipments > 150 miles …

? Forklifts required at the well sites to

move boxes

? Safety concerns

? Truck turns will be limited by traffic

regardless of turnaround at well pad

? Space required for boxes at large,

high intensity fracks may create

unforeseen site permitting

constraints

? Boxes don’t maximize shipping

volume compared to bulk trucks

? Do they lower total delivered cost?

… but boxes also present other challenges

Page | 40

Proppant Demand Boom Is Widely Acknowledged And Optimistic

• Projected proppant rebound to ~ 61 MM tons in 2017, followed by ~ 78 MM tons in 2018

• Oil price trajectory suggests proppant markets may be optimistic

Page | 41

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Goldman Sachs Wells Fargo RBC Oil Price - EIASource: • IHS Markit, Energy Blog, May 3 2017• Rich Shearer (President & CEO) Superior Silica Sand presentation at the Industrial Minerals 4th Frac Frac Sand Conference in Minneapolis Sept 13, 2016• Wells Fargo, Oil Service Statistics and Valuation Handbook, January 6, 2017• RBC Capital, Frac Sand Supply Demand Update, December 5, 2016• Energy Information Administration, Short-Term Energy Outlook, as of January 10, 2017, and Annual Energy Outlook, Table: Petroleum and Other Liquids Prices

Overall Proppant Demand Whips Behind Oil Price Changes

Page | 42

Source: Energent Frac Report, data as of May 2017; Energy Information Administration, Cushing, OK WTI Spot Price FOB (USD per Barrel) as of May 2017

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• Proppant demand covaries with oil price with approximately a six month lag

Check The Numbers: No Free Lunch

Page | 43

• US proppant demand is set for a rebound… but the proppant forecasts seem too optimistic and do not appear to reflect the oil price, supply-demand feedback loop

Source: • Energy Information Administration, Short-Term Energy Outlook, as of January 10, 2017, and Annual Energy Outlook, Table: Petroleum and Other Liquids Prices • Headwaters MB research, correlation of historical proppant, oil price, and production• Energent, Frac Report data as of January 2017

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Oil&Gas Production - actualreported

Oil&Gas Production - Inferred fromProppant Correlation

Continental Onshore USA Tight Oil & Gas Production

The Frac Sand Industry Scorecard

Page | 44

LONG TERM WINNERS

“Point-to-Point” Regional Sand

Suppliers

(lowest delivered cost)

Big “Hub & Spoke” Northern White Mines

(unit train loading on Class I rail, storefront

access in-basin)

Movable In-Basin Storage Solutions

(last mile solution)

Regional Truckers

(replacement of long-distance railcar supply)

Mixed

Rail-to-Truck Transloads

(could be overbuilt as regional sands become

more available)

Destination Short-line Railroads

(loss of market share to regional truckers)

Southern White Sand Mines in MO & AR

(proximity to highest demand basins)

LONG TERM LOSERS

×Marginal Northern White Mines

×(need to truck to outbound transload)

Class I Railroads

(reduced market share to trucking)

Origination Short-line Railroads

(extra layer of costs is challenge to competition)

×

×

×

… What Are Your Thoughts?

Questions or comments for the experts?

Taylor Robinson

President of PLG Consulting

[email protected]

aaaa

Joel Schneyer

Managing Director Headwaters | MB

[email protected]

DEMAND DRIVERS & LOGISTICS | SUPPLY DRIVERS &

INVESTMENT

mailto:[email protected]

expert perspectives on the frac sand market and supply chain

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