I recently wrote about how US Silica's (NYSE:SLCA) latest quarterly earnings exemplified why this company is likely to outperform the market in the next decade. In a follow-up article, I explained why, despite soaring 157% in the last year, US Silica remains a strong buy. In this article, I'd like to highlight five quotes from President and CEO Byran Shinn that exemplify why the proppant market (frac sand in particular) is set to remain one of the hottest markets of the coming decades.

Demand from the energy sector is insatiable
During its second-quarter conference call, US Silica reported total sand volume was up 27%. Given that its industrial sand (non-energy related) increased just 3%, almost all of this growth was driven by the ravenous demand from oil and gas companies.

Oil and gas volumes surged in the quarter to a record 1.5 million tons, a 53% improvement on a year-over-year basis, and 13% up sequentially, further evidence that a growing number of energy companies are increasing the amount of proppant that they're using per well.

In fact, new fracking techniques such as horizontal drilling and longer laterals mean each rig can frack a 330% greater area, which boosts demand for frac sand by 360%, up to 5,000-8,000 tons/well.

Soaring demand means strong pricing power

Pricing was also up across the company, driving enterprise contribution margin per ton to an all-time record high of $28.68 [...] The market for frac sand remains extremely tight, and we continue to be sold out of all frac sand grades. We increased prices further in the second quarter and believe that there is still pricing upside for future oil and gas spot sales.

The surge in demand has allowed US Silica to raise its price by 20% on average thus far this year, and the above quote indicates that additional price increases are in the cards. What's more, the increase in frac sand pricing power is having a beneficial effect on the company's non-energy industrial sand business as well: "Increased demand for finer grades of frac sand continue to have a positive impact on pricing and margins in our ISP business."

Contract lengths are increasing, which helps US Silica grow faster

We've been approached by several of our oil and gas customers to negotiate new long-term supply contracts. I'm pleased to report that during the quarter, we signed 4 new take-or-pay contracts and modified 1 take-or-pay supply agreement with terms expiring between 2015 and 2019. The volume weighted average roll-off date of our contract portfolio is now in the second quarter of 2018. For one such take-or-pay contract, we received from the customer a $100 million prepayment, which will be netted against future sales.

With demand for frac sand having grown 28.3% annually and expected to continue growing at over 10% through 2022, oil and gas companies are frequently willing to pay large amounts of money up front to lock in supplies from mines that aren't yet complete. This helps US Silica finance further growth and improve efficiencies and margins due to economies of scale. 
Some of the new contracts have volume escalators allowing us to pre-sell a portion of the new Fairchild plant, which we expect to come online in the fourth quarter of 2015. Locking in more volumes under long-term contracts also enables us to be more efficient from a production and supply chain and logistic standpoint.

Continued strong growth from America's two largest shale oil formations

Demand for high-quality premium frac sand is being driven by increased drilling activity, especially in fast-growing basins like the Permian and the Eagle Ford. In addition to the rise in activity, a growing number of energy companies are experiencing tremendous success with longer laterals and closer stages.

Size Of Us Oil Fields 

Source: Pioneer Natural Resources Permian Basin Conference.

As this chart from Pioneer Natural Resources illustrates, the Spraberry and Wolfcamp shale of the Permian Basin, together with the Eagle Ford shale, contain over 100 billion barrels of technically recoverable oil. What's more, the Permian Basin estimate is up 50% in just the past year, indicating that the potential demand for frac sand could outperform analyst expectations for many years to come. This is not just great news for US Silica, but also its major competitors such as Hi-Crush Energy Partners (NYSE:HCLP) and Emerge Energy Services (NYSE:EMES), both of which are expected to crush the market over the next decade because of their aggressive expansion plans. 

Company/MLP Yield 10-Year Projected EPS Growth Rate 10-Year Projected Annual Dividend/Distribution Growth Rate Projected 10-Year Annual Total Return
US Silica Holdings 0.80% 29% 31.65% 32.45%
Emerge Energy Services 4.20% 20% 23.54% 27.74%

Hi-Crush Partners

3.70%

25.40%

22.35%

26.05%

S&P 500

1.88%

 

 

9.20%

Source: Fastgraphs, Yahoo! Finance. 

US Silica has two avenues for growth

The accretive acquisition aligns with our strategy to increase market share by expanding our footprint and product offerings in one of the fastest growing basins in the country, and provide our customers with a high-quality, regionally produced proppant, which effectively meets the demands of many of the Permian oil and gas wells.

This quote is in reference to US Silica's recent acquisition of Permian frac sand supplier Cadre Services, which increased its production capacity by 800,000 tons annually (about 10%).

In addition to accretive acquisitions, US Silica is growing through opening new mines and expanding existing ones. For example:

  • Its new Utica mine will be at maximum capacity by September 1 and produce 1.5 million tons/year (increase of 18.7%).
  • The new Fairchild mine in Wisconsin will be operational by Q4 2015 and produce 3 million tons/year (37.5% increase).
  • It will expand its Pacific, Mo., plant by 800,000 tons/year capacity by the third quarter of 2015, increasing its capacity an additional 10%.
  • It's planning on constructing a second Wisconsin mine, also with 3 million tons of annual capacity, to be completed in mid-2016 (37.5% capacity increase).

In total, US Silica will increase its annual production to 16.6 million tons of frac sand, a 102% increase in just two years. The company also just raised its EBITDA (earnings before interest, taxes, depreciation, and amortization) for the year from $215 million-$225 million to $230 million-$240 million, because of its expanding capacity and increased pricing power.

Foolish takeaway
As these five quotes show, US Silica is firing on all cylinders, and with a major energy trend to fuel its growth, long-term investors could be set for market-beating total returns for years to come.

Adam Galas 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.