Frac sand companies’ earnings are driven by their production levels. Global crude oil demand and supply dynamics drive the level of production as well as oil prices. Oil prices, therefore, have a high impact on the stocks of energy companies in general and frac sand companies in particular.
The graph above shows crude oil’s price per barrel and U.S. Silica Holdings’ (SLCA) stock price over the last five years. As the graph shows, while U.S. Silica Holdings stock has largely followed oil prices, that hasn’t been the case for more than a year now. This divergence may contract over time if crude oil prices remain stable or rise.
One of the reasons for the disinterest in energy stocks, including U.S. Silica Holdings, could be their high level of dependence on oil prices, which remain volatile and unpredictable.
Demand for frac sand
The demand for frac sand is expected to be more than 100 million tons in 2018, up from 66 million tons in 2017. The demand for frac sand has partly been driven by higher frac sand usage per well to drive well economics. Nonetheless, demand basically depends on the level of drilling activity. Higher demand should benefit frac sand companies, including U.S. Silica Holdings and Hi-Crush Partners (HCLP).
Oversupply and pricing
One of the factors affecting the performances of frac sand companies has been the increased competition in the sector and the oversupply of frac sand. This oversupply has resulted in increased pressure on pricing, impacting earnings despite higher sales volumes.
Next, let’s take a look at how U.S. Silica’s sand volumes have trended over time.