In the short-term no one can predict share price movements of frac sand producers such as US Silica Holdings (NYSE:SLCA), Hi-Crush Partners (NYSE:HCLP), and Emerge Energy Services (NYSE:EMES) -- especially because their share prices are so strongly affected by short-term oil prices swings. However, now that these companies' share prices have come back down to earth, I think investors should consider two potential factors that might lead to these stocks rebounding later this year: an enormous supply of non-completed wells, and the epic potential of refracking to greatly increase the demand for frac sand.
Plunging rig counts don't necessarily spell doom for frac sand producers
Graphs such as this might make you think that demand for frac sand demand is going to collapse. However, while it may temporarily decrease, frac sand demand may very well increase in the coming quarters, for two reasons.
First, the collapse of oil prices has resulted in oil companies leaving many of their wells incomplete -- 2,500 to 3,500 according to energy analyst firm IHS.
This is important to frac sand producers for two reasons. First it creates a large backlog of potential projects that could quickly come online should oil prices recover. With oil wells costing as much as $8 million each -- 70% of which represents the cost of completing the well such as tubing, cementing, and fracking the rock -- each incomplete well represents a large amount of sunk capital that oil companies must eventually complete in order to recoup their investments.
That means completing the well when oil prices recover. Luckily for frac sand producers, this requires an enormous amount of sand especially because the number of fracking stages per well have doubled over the last five years.
In addition, one of the cheapest ways of increasing production from oil wells is to increase the amount of sand used.
As this slide shows, doubling the amount of sand used per foot of well has a minimal effect on overall cost, yet can increase the overall rate of return by 40%, increasing the profitability of a well by about $2 million. Economics such as this is why, according to RBN Energy, some oil producers are now fracking wells with five or even six times more sand than they used just a year ago -- as much as 15,000 tons for a single well.
Re-fracking old wells represents an enormous potential market
Meanwhile, according to Bloomberg, 50,000 old oil wells are candidates for refracking, which costs about $2 million per well. Thus, for as much as 75% less than the original cost of drilling, oil producers have a chance to increase production, cash flows, and maximize their original investments in older wells by utilizing newer and more robust fracking techniques then existed when the wells were originally drilled. Just as with fracking new oil wells, refracking requires frac sand, and the more sand used, the better the productivity per well thus creating a large potential frac sand demand growth catalyst.
Takeaway: now might be a great time to invest in frac sand producers despite the oil crash
Despite the oil crash and the devastating affect its had on rig counts in recent months, long-term income investors in these stocks have cause for optimism. America's enormous supply of incomplete and refrackable wells mean that -- when oil prices do eventually recover -- US oil producers are likely to react quickly to maximize the returns on their previous investments by completing or refracking these older wells. That in turn should cause demand for frac sand to remain strong and likely grow substantially in the years to come.