What happened
Frack-sand producers Fairmount Santrol Holdings (NYSE: FMSA), Hi-Crush Partners (HCRS.Q), and U.S. Silica Holdings (SLCA 3.10%) are all getting crushed on Monday and were down double digits by the mid-afternoon. Fueling today's sell-off was Fairmount Santrol Holdings' decision to join its rivals and open a new sand mine in the Permian Basin of Texas.
So what
Fairmount Santrol Holdings announced today that it had signed a 40-year lease to develop a frack-sand mine in the Permian Basin. The company expects to complete construction of the facility in the second quarter of next year, which should produce about 3 million tons per year and cost $100 million to $110 million. Further, the company said that it plans to reopen its Shakopee sand mine in Minnesota due to increasing customer demand.
Image source: Getty Images.
The decision to expand in the Permian Basin makes sense on the surface considering that it costs $40 to $60 a ton to ship sand into the region by train from the upper Midwest, where Fairmount operates several mines. However, the company is now the fourth producer to announce plans to open a mine in Texas this year, which could lead to overcapacity when all the mines come online in the coming months.
For example, U.S. Silica is investing $225 million in building a mine in the region that can produce 4 million tons per year and should be operational by the end of the year. Hi-Crush Partners, on the other hand, spent $275 million to buy Permian Basin Sand, which is building a 3 million ton per year facility. Hi-Crush will invest an additional $50 million in capital expenditures to bring the mine online by the end of this year. Meanwhile, the industry is bringing additional capacity online elsewhere by restarting idle mines and expanding existing facilities.
The concern is that all this incremental capacity is on pace to come online over the next several months, even though shale drillers are "tapping on the brakes," according to comments earlier today by oilfield-service-giant Halliburton (HAL -0.34%). Evidence of that, according to Halliburton, is that the rig count is showing signs of plateauing, which suggests that demand for services, as well as frack sand, will likely follow. That scenario could put tremendous downward pressure on sand prices if demand drops while the industry is in the process of ramping output.
Now what
Frack-sand producers are tripping over themselves to add capacity this year to capture the noticeable uptick in demand they've experienced. That said, this drilling boom appears to be short-lived because weaker-than-expected oil prices have caused drillers to start slowing down their activities all across North America. Because of that, frack-sand producers could end up with a glut of sand on their hands in the coming months, which could pulverize prices and send their stocks even lower.
