Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Selling sand to Arabs is, as the saying implies, a challenge. But OPEC's freeze 2.0 talks in Algiers next week could mean Arabs actually helping to sell some sand themselves.

It's still hard to believe anything tangible will actually come of those talks, especially as OPEC's biggest frenemies, Saudi Arabia and Iran, don't seem to have reached an understanding this week in Vienna.

But if something does transpire -- or even the promise of something transpiring eventually -- it would benefit one set of companies: U.S. exploration and production companies. Anything that lifts oil prices will alleviate pressure on balance sheets and help fund more fracking.

And fracking needs sand. Lots of sand.

When drillers fracture shale rock, they pump in sand to prop open the cracks formed so that the oil and gas down there can escape to the surface. As you can see here, U.S. drillers couldn't get enough of the stuff when oil was trading in triple digits, but that feels like a long time ago now:

Sandpits
By April, frack sand demand had dropped by almost two-thirds from its peak in October 2014
Source: Bloomberg Intelligence

As E&P firms laid off workers and held off completing wells, they didn't need that sand. But something else also happened: They started using a lot more sand in the wells that they did complete.

Mad Props
Average proppant usage has soared across major U.S. shale plays
Source: Rystad Energy
Note: 2016 data are through August

In some shale regions such as the Permian Delaware and the Utica, the amount of sand per well has roughly doubled or tripled since 2013.

This makes sense. Apart from forcing E&P companies to focus on their best acreage, the squeeze on cash flow has pushed them to experiment with longer wells and more-intense fracking to get more oil and gas out of each well more quickly.

And falling sand prices mean using more of it doesn't necessarily push up the overall cost. In the Eagle Ford, for example, proppant cost has stayed flat since 2013 at about $200 per lateral foot of a well, despite the amount of sand per foot jumping more than 50 percent in that time, according to data from Wood Mackenzie.

Drilling intensity is likely to keep increasing as E&P firms try to adapt to lower oil and gas prices. But any increase in prices from here -- perhaps helped along by OPEC rhetoric or even action -- will also boost the number of wells drilled and completed.

There are tentative signs of this already. The number of horizontal rigs in operation, at almost 400, remains roughly 70 percent below the peak in late 2014, but has been rising since May. And the large backlog of drilled-but-uncompleted wells has started to be worked off:

You Complete Me
A drop in the number of uncompleted wells translates directly to more fracking and sand demand
Source: Energy Information Administration, Bloomberg

The multiplier effect of more wells, drilled to greater lengths and with more proppant per foot, bodes well for a recovery in demand for sand -- even if well completions don't get back to the frenzied levels of 2014.

Earlier this week, Fairmount Santrol Holdings, one of the biggest sand providers to the oil industry, announced it had raised prices for Northern White, a premium grade it mines in the upper Midwest.

Like its competitor, U.S. Silica Holdings, Fairmount's stock has rallied hard already from the trough earlier this year, though it remains far below its IPO price.

Digging Out
These two big frack sand stocks have rallied a lot this year already
Source: Bloomberg
Note: Performance indexed to 100.

That rally is one reason for caution on sand stocks. Another is that, as with everything fracking-related, E&P companies have been experimenting with cheaper grades of sand in their quest to lower costs. Jonathan Garrett, a principal analyst at Wood Mackenzie, cites Pioneer Resources and EOG Resources as two companies doing this, but adds it's too early to tell if this will become a broader trend.

Cheaper sand is, after all, likely to garner inferior results from fracking; and even if E&P companies use more of it, they may still mix it with higher-quality proppants such as Northern White or resin-coated sand to boost their yield per well.

Even so, provided the current $40-a-barrel range for oil is the bottom for the market, sand providers should remain beneficiaries of the E&P industry's continuing efforts to wring further efficiencies from their operations.

OPEC members could even provide a helpful nudge by freezing production -- which is one more reason why doing so wouldn't be in their best interest.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net