What happened

Shares of frack sand producer Smart Sand (NASDAQ:SND) were falling on Thursday morning and were down more than 15% at 11 a.m. EDT following an analyst downgrade.

So what

That downgrade came from an analyst at Credit Suisse who cut the bank's rating on the stock from outperform to neutral while also slashing the price target from $20 to $8.50. Driving the decision to downgrade is that regional sand volumes in Texas are expanding much faster than anticipated. These volumes will likely bring about lower pricing and demand for frack sand from mines outside of the state.

A sand mine.

Image source: Getty Images.

So far this year three frack sand producers, including U.S. Silica (NYSE:SLCA) and Hi-Crush Partners (NYSE:HCLP), have announced new frack sand mines in Texas to feed the red-hot Permian Basin. U.S. Silica is building a $225 million mine that can produce 4 million tons of sand per year, while Hi-Crush Partners spent $275 million to buy Permian Basin Sand, which is building a 3-million-ton-per-year facility. Given the proximity of these mines to drilling sites for oil and gas, it will save producers in the region $40 to $60 per ton because they won't need to bring the sand in by train from mines in Wisconsin, which is where Smart Sand operates. Because of that, Smart Sand will be at a competitive disadvantage and would likely need to cut its prices to make up for the transportation costs just to compete.

Now what

With today's sell-off, Smart Sand's stock is now down nearly 40% for the year. However, that sell-off appears justified given that oil prices remain well below expectations, and the company's competitors are building out new capacity where most of the drilling is happening these days. Those two factors suggest that Smart Sand's volumes and profitability could remain under pressure, at least until oil prices move higher and drive more sustainable demand for frack sand.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.