The U.S. shale boom offers investors incredible opportunities to profit from its growth. While the exploration and production companies get most of the press, investors shouldn't look past those companies piggybacking on the boom by providing a critical product or service. Like the pick and shovel purveyors of yesteryear, those serving the industry often offer a very compelling opportunity.
Take Hi-Crush Partners (HCRS.Q) for example. Structured as an MLP, its units are yielding north of 10%. The company is a pure-play and low-cost producer of premium monocrystalline sand. This specialized mineral is used as a "proppant" (i.e. frac sand) to enhance the recovery rates from oil and natural gas wells. This frac sand is an important ingredient in the fracking process, and because of its low cost, it is expected to remain around 75% of proppant market by volume.
The sleepy proppant industry has witnessed excellent volume growth over the past decade. From 2001 to 2006, the industry grew 24.9% annually while recent growth picked up speed, as it's been growing 28% annually from 2006-2011. While that growth is expected to taper off over the next decade, according to Hi-Crush, it'll still be clocked in at an annual rate of 6.4% from 2011-2021.
Even though rig counts are down, proppant demand isn't likely to suffer as the two are not directly correlated. Drillers instead are using more proppant per well as it increasingly drills more wells per rig. This will keep the proppant market growing.
Hi-Crush Partners isn't the only company operating in the industry. It currently owns a single facility from which it sells to four main customers. One of those customers, Baker Hughes (BHI), recently provided the company with a notice that it was terminating its supply agreement with Hi-Crush. While Hi-Crush believes that this is a wrongful termination on the part of Baker Hughes, it's something investors need to watch closely.
Another option for investors is US Silica Holdings (SLCA -1.87%). It not only competes in the frac sand market, but with over 200 products and 1,400 customers, it operates a much more diverse business. Its commercial purpose sand is sold to a variety of industrial customers; it's a key ingredient in auto glass, building products, and even solar panels.
While frac sand, is a less-expensive option, it's not the only proppant option. Ceramics represented 9% of the proppant market in 2011, and for good reason. According to CARBO Ceramics (CRR) the "uniform size and shape of ceramic grains provide maximum porosity and allows more oil and gas to flow through the proppant pack." The company believes that its proppants increase a well's profitability by 20%-30% when compared to other proppant types.
Think of proppants as the picks and shovels of the U.S. shale boom. They are the true heavy lifters as they prop open the fissures to keep the oil and gas flowing. In so doing, they offer investors one more way to profit by piggybacking on the boom.
