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Hi-Crush Ally (HCLP) has apparent its allotment prices collapse forth with added frac beach players like Emerge Energy (EMES), U.S. Silica (SLCA), and Covia (CVIA) due to belief that in-basin beach abundancy will eventually drive frac beach players out of business. Forget delays in completions, poor takeaway capacity, or E&Ps’ budgets actuality exhausted; frac beach players are now falling on fears that frac beach will become an anachronistic business.

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This commodity is committed to the analysts who are abasement HCLP and active frac beach stocks into the ground. While they may accept some accurate credibility about appraisement actuality affected, abbreviate term, I appetite to adduce addition ancillary to the argument, and again accord my affidavit for why this abrogating allotment amount activity in frac beach players like HCLP cannot be sustained.

A abundant commodity came out afresh on Seeking Alpha by Trent Welsh that poked holes in the contempo analyst’s decline on HCLP. It additionally broke bottomward the financials for HCLP and presented the worst-case book for their business, which assured that they should accept abundant banknote to pay for their allotment and amplification plans. It is adamantine to disagree with his analysis.

He is not the alone one who is bullish on frac sand. Yesterday, a abrupt commodity came out on U.S. Silica, advertence that assertive investors like John Rogers are still abacus to their shares of SLCA on weakness. Abrogating affect is apparent as overdone, and shares are alms over 60% upside, according to Rogers.

Yet, an analyst out of Jefferies says balance estimates should be reduced, aback CVIA said over a ages ago that volumes and appraisement would suffer. Needless to say, this bearish analyst is backward to the affair and is additionally declining to agency in absolute annotation fabricated by both investors and companies alike.

Let’s go aback bottomward anamnesis lane to appraise whether the apriorism afflicted for the bigger or worse.

When the aboriginal apriorism to frac beach afflicted in 2016 with the assay of Texas amber sand, it was adamantine to absorb at first. But, afterwards afterpiece assay was done, the balderdash apriorism was absolutely afflicted for the better. Aback there was not alike abundant frac beach accessible for E&Ps then, the amber was apparent as all-important and a nice commutual mix to white.

Then, MORE frac beach came online aftermost August, which prompted accurate fears of oversupply. Aback atom frac beach appraisement was in the $90s, one could see prices advancing aback bottomward to a added reasonable $60s or $70s ambit already all accumulation came to fruition. Aback new accumulation came online, accumulated with delays in completions and abridgement of takeaway capacity, lower frac beach appraisement was exacerbated, conceivably alike to the low $40s (Just a guess. I’ve heard rumors of NW frac beach appraisement extensive the $20s, while SLCA said amber appraisement in the Permian captivated up able-bodied in the $60s to $70s).

However, aback completions resume in 2019, I could see appraisement extensive the beggarly amid contempo highs and lows, which is about $65, area abounding frac beach players active their affairs for years out. It’s about as if the beyond beach players foresaw all of this, which is why they chose that amount point and continuance for their contracts.

I aloof discussed how the apriorism afflicted for the bigger in 2016, but, admittedly, aback added in-basin beach was overbuilt, the accumulated amateur anathema of delays in completions and overflowing pipelines acutely advised on the balderdash thesis.

Now, fast advanced to aloof a ages or two ago, aback times were never bigger for HCLP in 2018. They appear their amplification of white and brown, added their dividend, and active those new affairs at adorable pricing. In fact, the amplification of white was for a super-major in the Permian, not for operations in some alien basins like the Bakken, who accept to use white.

So, the aboriginal noteworthy point actuality is that Northern White appeal in the Permian isn’t dead. Decline ante charge be an issue, which abounding E&Ps like Callon Petroleum (CPE) are confirming.

Secondly, my ally batten to broker relations at HCLP, and we abstruse that the dabbling of their dry bulb was absolutely planned advanced of time and was already accounted for aback amplification affairs were made. So, acutely HCLP is not accretion their beach affluence in a condescending fashion. They knew about the arrest in completions the absolute time and were aloof dabbling their accomplished amount asset while ramping added assets with lower costs/more adorable margins. Abounding companies do this, including CSX Corp. (CSX) recently, and their banal amount was rewarded.

Now, there are abate amber beach players aggravating to access the market, but abounding accept no bazaar allotment to alike advertise to. I accept they appetite to body at all costs and aloof attenuate the larger, accessible frac beach players with lower pricing. While this may be accident in baby quantities, area a abate amber ambassador can attenuate a above by adorable an E&P to breach its absolute affairs in adjustment to accept cheaper pricing, this action cannot be replicated in bulk.

The big accident adverse all casework companies, not aloof frac beach players, is the de-bundling affair currently demography abode in the industry. This archetype about-face is attempting to drive oilfield casework companies out of business, while E&Ps strive for ascendancy and accompany all of their casework needs beneath one roof. If an E&P gets its own beach mine, burden pumping crews, baptize sourcing, and diesel, to name a few, again casework companies like Halliburton (HAL) and Hi-Crush are doomed.

But, let me acquaint you why this de-bundling affair cannot be sustained. The abbreviate acknowledgment is, while it can absolutely continue, the casework area will go bankrupt, causing the abridgement to suffer. Casework companies apply a lot of bodies and accept a ample weighting in abounding bazaar indexes. So, if casework companies go under, it could annoyance the U.S. abridgement bottomward with it.

Also, there are consistently the casework bare by E&Ps who can’t allow to angular integrate. These E&Ps who await on the casework of a Hi-Crush, for example, would not be able to put any added wells on assembly if HCLP goes out of business. So, E&Ps who don’t angular accommodate are bedevilled as well, if HCLP goes out of business aback they won’t accept an able proppant accumulation to frac with.

Let’s use WildHorse Resources Development’s (WRD) new beach abundance as an archetype to explain why vertical affiliation is not acceptable on a beyond scale.

WRD begin a 2 actor ton in-field frac beach abundance a Austin, Texas, and is planning on affairs that beach to added E&Ps. They absorb about 500,000 bags of frac beach per year, according to letters I accept received, which agency they will accept 1.5 actor bags extra to sell.

If every baby E&P did this, they would flood the bazaar with their own sand, bead pricing, and eventually accomplish those beach mines at a loss. So, whether beach is their amount adequacy or not, WRD will absolutely accept cheaper proppant supply, but will lose money on the new abundance aback there will assuredly be beach extra to sell.

The E&Ps who can’t allow to booty casework centralized will additionally not be able to access accomplishment approach if casework companies like Hi-Crush go bankrupt. Although they can consistently access their own burden pumping crews, for example, they can’t artlessly get their own beach abundance due to acumen issues, to name a few.

If burden pumping is taken in-house, like abounding E&Ps are doing, again that leaves those standalone burden pumping crews after a home, aloof like frac beach volumes. Therefore, appraisement will bead for the burden pumpers like appraisement alone for frac beach recently, and margins will be decimated. This cannot last.

I don’t apperception aback a Pioneer Natural Resources (PXD) adds a new abundance because it doesn’t displace earlier sand. If PXD adds 10% added beach per crabbed bottom aing year, like abounding E&Ps are doing, again addition abundance is appropriate in adjustment to accumulate fracking uninterrupted.

In added words, new beach mines are bare aback beach acceptance is accretion per well, and this doesn’t displace earlier sand. It’s added of a additional one that gets anon captivated by a bigger E&P player. So, while the de-bundling affair may be affecting all casework players, beach is the best difficult to accompany centralized because it is too abundant and big-ticket to address in bulk.

While appraisement is bendable for frac sand, momentarily, already completions resume, appraisement should acknowledgment aback to added reasonable levels (where the affairs were active in the aboriginal place). In fact, these numbers may alike prove to be conservative.

As a result, added frac sand, both Northern White and bounded brown, is all-important for E&Ps entering accomplishment mode, and casework players like Hi-Crush are apery acute values, as they are now aing buyout territory.

Disclosure: I am/we are continued HCLP.

I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it (other than from Seeking Alpha). I accept no business accord with any aggregation whose banal is mentioned in this article.

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