What happened

Shares of frack sand supplier U.S. Silica Holdings (SLCA 1.39%) climbed 10.4% in November. The most significant contributor to last month's gain was the company's third-quarter earnings report, which beat expectations and showed a rather promising future.

So what

2017 has so far been the year that frack sand suppliers were hoping for. In the second half of 2016, drilling activity across North America started to pick back up again, which meant growing demand for sand and other services and supplies for the oil industry. After having to idle several mines to preserve liquidity, U.S. Silica and its peers spent the next year or so reactivating idle capacity, which increased costs and ate into profitability.

Time lapse image of a sand mine at night.

Image source: Getty Images.

This past quarter, though, U.S. Silica's active mines were pretty much running at full capacity, which led to the best quarterly earnings result since 2014. U.S. Silica's management said that it increased volumes 15% compared to the prior quarter and boosted per ton margins thanks to more customers using its Sandbox last-mile logistics service. The culmination of these factors led to U.S. Silica posting a $0.50-per-share gain compared to a $0.17-per-share loss in the third quarter of 2016.

Now what

The next year or so is going to be an intriguing time to watch frack sand producers. All four of the largest independent frack sand producers have plans in the works to build new sand mines and meet the 100 million ton or so demand that all of the management teams seem to think will be the production need for 2018. At the same time, you have large oil services contractors like Halliburton saying that sand demand should slow significantly as producers optimize well designs. 

U.S. Silica is de-risking some of its new mine production by signing customers up for contracts with prepayments to fund construction. It also has the benefit of being the best capitalized frack sand producer on the market. The dynamic of the sand market potentially cooling off combined with all that added capacity is a compelling story investors should watch over the next several quarters.