PLG presents, "From Mine To Market: Overcoming Supply Chain Hurdles" at 3rd Frac Sand Conference an Industrial Minerals event

CLICK TO EDIT MASTER TITLE STYLE
FROM MINE TO MARKET:
OVERCOMING SUPPLY CHAIN HURDLES
MINNEAPOLIS, MN
SEPT 1, 2015
Taylor Robinson
President
PLG Consulting
3RD FRAC SAND CONFERENCE

2Experience / Expertise / Excellence www.plgconsulting.com
I. About PLG
II. Global / U.S. energy market impacting frac sand
III. Frac sand supply chain update
IV. Small covered hopper market update
V. Conclusions
TODAY’S AGENDA
FROM MINE TO MARKET: OVERCOMING SUPPLY CHAIN HURDLES

Partial Client List
About PLG Consulting
Experience
 Delivering value to over 150
clients since 2001
 Real-world, industry
veterans
 Logistics, engineering and
supply chain experts with
operational experience
Core Expertise
 Bulk Logistics
 Freight Rail
 Logistics Infrastructure
Design
 Energy and Chemical
Markets
 Investment Advisory and
Corporate Development
Services
 Diagnostic assessments and
optimization
 Supply chain design and
operational improvement
 Investment strategy, target
identification, due diligence,
post-transactional support
 Frac Sand industry advisory
 Crude by rail (CBR) and rail
tank car (RTC) forecasts
 Independent technology
assessment and
implementation
 Hazmat training, auditing &
risk assessment

Diverse project examples
 Integrated frac sand supply chain design and
implementation (unit train capable)
 Frac sand supply chain optimization
 Rail commercial negotiations
 Rail car acquisition advising and negotiations
 Comprehensive design & engineering for frac sand rail
loading and transload facilities
 Transload company acquisition due diligence
 Frac sand mining, trucking, and transloading due
diligence projects
 Proppant intermodal container feasibility studies
Recognized proppant industry thought leader
 Numerous industry presentations, articles and advising
Built on deep rail industry experience
 Operational
 Commercial
 Design & engineering – rail and transloading
 Equipment market
Broad frac sand industry client experience over
past 5 years
 E&Ps
 Oil Field Services
 Sand companies
 Transload providers
 Integrated logistics providers
 Investors – private equity, hedge funds, investment banks
PLG’s Frac Sand Industry
Qualifications

What a Difference a Year Makes –
September 2014 2nd Frac Sand Conf.
WTI price was ~$90/barrel
U.S. crude production growth >1 mb/d in 2014
Horizontal drilling rigs approaching 1,400
Main concern was overabundance of light
crude from shale plays
Increased sand intensity driving up to 20%
Q/Q growth rate – “Gold Rush” in place
Demand growth enabling sand price increases
Small covered hopper car market “red hot”
with ~2 year backlog
Frac sand supply chain was showing signs of
stress – key questions/concerns:
 Will there be enough 100 mesh sand?
 Rail congestion in WI, ND, TX – When will performance
improve?
 Regional trucking shortages
 New market entrants throughout the supply chain
Contrasted With 2015 Key Issues
Oversupply/overcapacity throughout
supply chain
Price decreases given this year for
sand and all services
Small covered hopper market in
oversupply before backlog buildout

Global Oil Markets Are Impacted By
and Impacting U.S. Shale Oil Boom
Global oil price issue is caused by oversupply
 Oversupply is approximately 1 -2mb/d globally (out of 95mb/d)
 U.S. crude production grew by ~1mb/d during both 2013 & 2014
 Lower prices are finally dampening U.S. crude growth in 2015 and
2016
Similar U.S. regional oversupply in gas and NGL
Global crude oversupply expected to last into
2016 at least
Oil prices not expected to recover quickly
 1/3 of economists believe it will drop to $30/barrel
 Price recovery continues to push to the right
August27, 2015
Source: IEA, August 2015

Cost Reduction Has Been Main Focus for
Shale Oil Producers Since Last Fall
Producers had already been working hard on their
internal productivity – and sped up the process by:
 Focusing on drilling “sweet spots” only
 Eliminated exploratory drilling – R&D budgets down by 30-50% for 2015
 Focusing on perfecting latest, most productive fracking techniques
In Q4 2014, E&Ps asked for 25-30% price reductions from
all suppliers and the request flowed down supply chain
 Many suppliers have responded with 5-25% price reductions
 Cost reduction push will be relentless for foreseeable future Source: EOG Resources, May 2015

Recent Fracking Trends – “High
Intensity” and DUC
High intensity techniques producing 25-100%
productivity increases
 Inner “perf” distances reduced by half
 Large increases in stages per well – up to 80!
 Sand per lateral foot increases 2X to 5X
 Slickwater technique enables higher sand intensity
 Some are reducing or eliminating ceramics and RCS (<10% of
total proppant usage)
Still a growing trend over the next 2-3 years
 Leaders began trials in 2013
 Impacted market in 2014
 Adopted by 25%(?) of producers so far
 Expansion at all liquid shale plays
Growth of “Fracklog” has contributed to the
volume decrease of frac sand
 Also called “Drilled, Uncompleted Wells” (DUCs)
 Estimated in total to be 3,000 to 5,000
 Producers are holding off completion of wells in the some locations
until price recovers to $65-70/barrel
Source: Whiting Petroleum, December Investor presentation
Bakken Fracklog Example
Source: North Dakota Industrial Commission, May 2015
High Intensity Fracking Visual

Well down-spacing means:
 Continued trend toward placing wells much closer
together
 Used in conjunction with pad drilling to enhance total
volume of production from each drilling pad
 Operators testing out different well spacings with different
completion techniques to optimize production
 Enables infilling – drilling additional wells next to wells
that have previously been drilled
Source: QEP Resources, May 2015
Source: EOG Resources (Leonard Shale), May 2015
Fracking Technology
Refracturing
 Returning to an older, low producing well and
pressure pumping again
 Thought to be a low cost alternative by eliminating
drilling
 2015 – some activity in the Barnett and Haynesville
 2016 some growth, but won’t move the needle on
overall sand volume
 Major producers are focusing on maximizing
returns on new wells with the latest technology,
not refracturing

Despite Low Prices,
Production Still Remains at High Levels
Three of four largest plays have seen recent production volume decreases
– a first for the shale boom
U.S. is now the global “swing producer” due to ability to quickly ramp up and down
Source: EIA Drilling Productivity Report, August 2015

Shale Supply Chain
and Downstream Impacts
Feedstock (Ethane)
Byproduct
(Condensate)
Home Heating
(Propane)
Other Fuels
Other Fuels
Gasoline
Gas
NGLs
Crude
Proppants
OCTG
Chemicals
Water
Cement
Generation
Process Feedstocks
All Manufacturing
Steel
Fertilizer (Ammonia)
Methanol
Chemicals
Petroleum Products
Petro-chemicals
Inputs Wellhead
Direct
Output
Thermal Fuels Raw Materials
Downstream
Products
Frac Sand has become the key upstream input material – cost and quantity
Many of the technology and productivity improvements are dependent on frac sand

Hydraulic Fracturing Materials
Inputs and Logistics Involved
Materials
Chemicals
Clean Water/
Cement
Frac Sand
OCTG (Pipe)
Source to
Transloading
2
Local source
25 ~ 100
5
Transloading to
Wellhead Site
8
~1,000
100 ~400
20
~1,200 Total
Truckloads
Oil/Gas/NGLs
Truck, Rail,
Pipeline
Waste Water
~500 Total
Truckloads
35~100+
Railcars
1 Unit train of sand=
100 railcars=
10,000 tons=
20,000,000 pounds

Frac Sand Industry Has Been a
Rollercoaster Ride
2014 2015 and beyond??
Industry has never experienced a steady state…still a maturing industry with few
barriers to entry…supply chain continues to evolve
Highly dependent on market conditions - Oil & Gas market prices…# of rigs…fracking
technology changes
Hard to track and predict as industry volume data availability is weak and
delayed…volume obscured with other aggregates/industrial sand

Five Historical Phases of
Frac Sand Market
0
500
1,000
1,500
2,000
2,500
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
U.S. QUARTERLY CARLOADS ORIGINATED FOR INDUSTRIAL SAND AND U.S. LAND RIGS
U.S. Quarterly Carloads Originated for Industrial Sand (STCC 14413) U.S. Land Rigs
High Intensity
Fracking
Shale Gas Boom
Rig Shift from
Gas to Liquids
Shale Oil Boom
Oil Price
Collapse
Note: PLG utilizes rail car origination loads as the best way to track industry volume trends

Frac Sand Supply Chain Undergoing
Significant Rationalization
Mining Processing Rail
Load-out
Long Haul
Rail
Transloading
and Storage
Trucking to
Well
Mining
 Current frac sand mining operations running below 50% of capacity on average
 New market entrants are now challenged to find funding; consolidation continues
Sand Pricing
 Sand buyers have asked for large discounts to help offset lower oil prices
 Sand companies have already given 20%+ price reductions in exchange for lengthening contracts
 Huge variation in sand pricing based on size of sand buyer and grade
Rail Load-out
 Unit train loading capability will continue to grow in importance as long term differentiator
Future
 Industry consolidation will likely increase during this drastic volume downturn – survival of the fittest

Premium Frac Sand Deposit Locations
Most desired, high quality
sand is Northern White
from WI, MN, IL – has been
70-80% market share
MO is growing
 Sand buyers are looking for
further cost reductions and
focusing on reducing rail costs
(~40% of total delivered cost)
 MO, AR, TX mines are
gaining share due to shorter
distance to TX plays with
lower rail costs
STILL IN THE EARLY INNINGS OF THE N.A. ENERGY REVOLUTION - IMPLICATIONS FOR RAIL

Frac Sand Supply Chain Undergoing
Significant Rationalization - Continued
Rail
 Q1 volume decreased by 15% vs. Q4 2014 (rail origination volume)
 Q2 volume expected to decrease by an additional 20%+
 Volume recovery not likely through 2015; significant growth not likely in 2016 either
 Numerous frac sand railcars in storage – started in Q4 2014 – due to improved rail performance
 Railroads under pressure to reduce rail rates
Transload
 More than adequate capacity available in all shale plays; decreasing pricing
Trucking
 Dramatic downturn in activity has caused 25%+ price reductions; some pricing at below/cost
 Still regionalized industry with many players
 Downturn likely to drive consolidation as cash strapped players are forced to sell
Mining Processing Rail
Load-out
Long Haul
Rail
Transloading
and Storage
Trucking to
Well

-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
CARLOADS
UP
BNSF
CN
NS
CPRS
CSXT
KCS
Quarterly Frac Sand Volume
Handled by Railroad
Source: STB, June, 2015; Note that Industrial Sand category (STCC 14413) includes other commodities beside frac sand

Source: Matador, June 2015
Source: FairmontSantrol,March 2015
ROBUST PROPPANT DEMAND DRIVEN BY MULTIPLIER EFFECT
High Intensity Fracking – Major Impact
on Frac Sand Industry Now and the Future
Source: PacWest
FRAC SAND MASS PER HZWELL
Source: PacWest
Although overall frac sand volume
decreased by 15% in Q1, sand mass per well
continues to increase – high intensity has
blunted the industry volume drop
High intensity will be a major driver of future
volume recovery in the frac sand market
Leading edge experimental wells using up to
one unit train of sand per well!

Wild swings in order/delivery ratio over last 5 years with market changes
During 2014 frenzied market, “double ordering” took place by OFS and Sand
companies for same volume - ~40k orders placed
2015 orders have been minimal...While 2015 car production will shatter delivery
records
Current backlog (28K Cars) will take production through 2016
0
1
2
3
4
5
6
0
10,000
20,000
30,000
40,000 Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Backlog
Orders
Deliveries
Order/Del'y Ratio
Source: Chicago Freight Car
Leasing, ARCI Committee of
the RSI
Cars Ratio
Small Cube Covered Hopper Market –
Historical Perspective

Current market conditions
 Lots of cars in storage starting in Q4 2014
 Market is very quiet except for some interest from cement
 Minimal outright cancellations of car orders – very difficult contractually
 Some moving out of new-build delivery schedules
 New-build production schedules are full through 2016 – many new cars direct to storage
Cement consumption is expected to grow by 8%+ in 2015
 Cement also utilizes small covered hoppers; small help to the market
 May be build/lease opportunities for cement cars with frac sand downturn
Plastic pellet cars market growing and may allow some small hopper
car buyers to shift orders to large covered hopper cars
Major questions surround small covered hopper market after
backlog build out in 2016
 Gas market growth slowed by low gas prices resulting in low gas rig count
 Oil price level will be key driver on future oil rig counts and sand usage
 Frac sand industry consolidation will further rationalize the car market
 Industry will continue to slowly move to more unit trains – improved cycle time reduces car
volume requirement
 These negative factors could cause extended difficult market conditions
Small Covered Hoppers Market
in a Correction State

Frac sand industry volume is in rapid descent…short term
volume recovery is unlikely
 Overall volume likely down >30% since 2014 peak
 Recovery not foreseen in 2nd half of 2015 – will volume level out?
 Excessive capacity throughout each link in the supply chain
Sand and all services in supply chain remain under heavy
price pressure
 20-25% price reductions are “normal” in many areas
Logistics cost are ~2/3 of the total delivered cost of sand
 Heavy focus on reducing rail costs
Small covered hopper market in a state of disarray
Longer term industry still has great growth potential due to:
 Further growth seen in high intensity fracking methods
 Drilling/completions will eventually return with healthier oil prices
 Potential for U.S. crude export legislation
 Gas is also a long term growth story driven by increased electrical generation,
petrochemical industry growth and exports
Conclusions

Thank You!
This presentation is available at:
www.plgconsulting.com/
Presentations/
For follow up questions and information,
please contact:
Taylor Robinson, President
+1 (508) 982-1319 / trobinson@plgconsulting.com

PLG presents, "From Mine To Market: Overcoming Supply Chain Hurdles" at 3rd Frac Sand Conference an Industrial Minerals event

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (19)

Similar a PLG presents, "From Mine To Market: Overcoming Supply Chain Hurdles" at 3rd Frac Sand Conference an Industrial Minerals event

Similar a PLG presents, "From Mine To Market: Overcoming Supply Chain Hurdles" at 3rd Frac Sand Conference an Industrial Minerals event (20)

Más de PLG Consulting

Más de PLG Consulting (9)

Último

Último (20)

PLG presents, "From Mine To Market: Overcoming Supply Chain Hurdles" at 3rd Frac Sand Conference an Industrial Minerals event