Sand Barn

Photo credit: Flickr/Dendroica cerulea

There's a rumor going around the energy industry that it's running low on frac sand. That sand is critically important, because it props open cracks in the rock so oil and natural gas can escape. If those rumors prove to be true, it could mean fracking sand prices are going up, which would increase the cost of drilling wells. That's actually good news for Hi-Crush Partners (NYSE:HCLP), which recently locked up some more supply of that critical fracking ingredient.

In the right place at the right time
With sand supplies at key sand distribution points in places like Chicago and throughout the Midwest rumored to be running low, this is a good time to own a growing supply of sand. That's just what Hi-Crush Partners plans to do as it recently acquired all but 2% of a raw frac sand processing facility in Augusta, Wisconsin from its sponsor. Not only does that acquisition double its production capacity, but there are already plans underway to expand the facility further. That puts Hi-Crush in a prime position to supply the industry with this critical ingredient. As the following slide shows, it has access to sand as well as strong distribution points in key basins.

Hi Crush Portfolio

Source: Hi-Crush Partners Investor Presentation (link opens a PDF)

The $224.25 million dollar deal will enable Hi-Crush to acquire control of 98% of the Augusta facility. Hi-Crush had already purchased a preferred interest in the facility for $37.5 million in cash and 3.75 million in newly issued convertible Class B units. That interest and those units will be converted to equity, which will simplify Hi-Crush's capital structure and add $30 million in incremental EBITDA to its bottom line.

Beyond this deal, Hi-Crush's sponsor is already constructing a new 1.6-million-ton production facility near Whitehall, Wisconsin. While that facility won't commence operations until this summer, Hi-Crush's sponsor is already making plans to expand the capacity of that facility by another million tons. This facility will more than likely be sold down to Hi-Crush at some point in the future, which makes it much easier for Hi-Crush to grow, as it doesn't need to compete to acquire these assets.

The future looks bright
Frac sand demand is only expected to grow from here. Hi-Crush sees both volume and prices heading higher over the long term as the following slide shows.

Proppant Demand Growth

Source: Hi-Crush Partners Investor Presentation

This trend points to a bright future for fellow frac sand producer U.S. Silica (NYSE:SLCA), as well as ceramic proppant maker CARBO Ceramics (NYSE:CRR). This is why U.S. Silica is working just as hard as Hi-Crush to position itself to meet growing demand. The company is scheduled to open a new 1.5 million ton frac sand mine in Illinois next quarter and, beyond that, it's seeking permission for a new greenfield site in Wisconsin. Meanwhile, CARBO Ceramics has four lines of capacity expansion at Millen that will be coming online during the next few years to meet demand for ceramic proppants.

Investor takeaway
Oil and gas production in America is booming, which is creating increased demand for proppants. While the industry's supply might be running a bit low, that shortfall shouldn't last too long, as both U.S. Silica and Hi-Crush are investing to ensure the industry doesn't run out of sand. Meanwhile CARBO Ceramics continues to expand ceramic capacity to ensure it can meet surging demand for its high-end proppant. That makes all three a pretty compelling way to invest in the fracking boom.

This tax loophole could help Hi-Crush Partners upset its rivals
You already know record oil and natural production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. It's a tax loophole that might make Hi-Crush Partners a better investment than its competitors. To learn more about it, you need to check out our brand-new special report, "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Compare Brokers