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Last week, rather than just the usual deaths and declines, the oil industry actually saw a filing for an initial public offering.
In this clip from Industry Focus: Energy, Sean O'Reilly and Taylor Muckerman explain where Smart Sand comes from, what it does, and how the company already pretty much has the fracking industry wrapped around its little finger. Also, the hosts talk about how Smart Sand compares to its peers, how much growth the fracking sand space has seen recently, and some significant risks investors should consider before buying in.
A full transcript follows the video.
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This podcast was recorded on Sept. 22, 2016.
Sean O'Reilly: The energy sector is getting an IPO! What's going on?Taylor Muckerman:Yeah! It's not abankruptcy, it's a birth!O'Reilly:This is amazing to me.Muckerman:We'readding to the crop rather than subtracting.O'Reilly:Yeah. The company is calledTudor, Pickering & Holt...Muckerman:No.O'Reilly:Oh,Smart Sand, I'm sorry. Tudor, Pickering, & Holt is the investment firm doing the offering.Muckerman:Yes, that's right.O'Reilly:So, Woodlands-based company thatproduces sand for hydraulicfracturing plans to go public. You sent this over kind of like an "LOL" kind of thing, but then we were like, "Wow, this is actually a big deal! What does this mean?"Muckerman:The LOL wasjust the fact thatan energy company is going public right now. Not so much this particular business.O'Reilly:Yeah. We talked about that company that IPO'd a year and a half ago, the Permian player. It is what it is. Why are these guys going public right now?Muckerman:I mean,when you look at what's happening in the U.S. with shale production, natural gas, and oil, sand has been a major driver of the ability to extract these tight oil and natural gas reserves, because after you inject the water and fracture these wells, the sand has been used as a proppant to keep those fissures open, enough for oil and natural gas to flow through. And you've seen the level of sand used in these wells rise dramatically.O'Reilly:As I understand, sand has been a really big component in the last couple years,as these companies became more and more efficient.Muckerman:Yeah,you're looking at millions of tons of sand used on an annual basis,millions of pounds used per well.EOG(NYSE: EOG) said they're using 700% more sand per well than they were in 2010.O'Reilly:(laughs)Muckerman:700%. And that's the largestindependent U.S. producer. That'smoving the needle. This isn't some tiny little regional mom-and-pop shop. This is the largest U.S. independent oil and gas producer, 700% in six years.O'Reilly:That's crazy.Muckerman:Yeah. And youlook at companies that are averaging around 8-11 million pounds per horizontal well, across the board.O'Reilly:So, "Smart Sand operates" -- I'm just reading from the article you sent me -- "two whitesand processing sites inWisconsin with a combined 344 million tons ofproven recoverable" --there's that word again.Muckerman:Yeah, proven, just like oil,that's the best kind of reserve, proven. Then you haveprobable, and then you have possible.O'Reilly:Right, 344 million tons of recoverable sand reserves!Muckerman:Yeah. That might be a couple years' worth. Maybe the year, for the entire industry.O'Reilly:So,these guys are not large.Muckerman:No, they're not. They havecompetitors that are somewhat larger. But when talking about their sites being inWisconsin, some of the focus on other playershas been to find more regional sand, so,Texas, Arkansas, places that are going to be cheaper to transport it to these major basins. Wisconsin, obviously closer than Texas to North Dakota.O'Reilly:Are they putting all this sand on the back of trains and sending it to Texas?Muckerman:Yeah, they are. They'reloading up these trains. That's exactly what they're doing,sending this sand southfrom Wisconsin.O'Reilly:"Look, Mommy! That train has a bunch of sand!"Muckerman:You have a couple other players:U.S. Silica(NYSE: SLCA),Hi-Crush Partners(NYSE: HCLP), those might be two of the biggest in the industry. And then,CARBO Ceramics(NYSE: CRR) is a proppantproducer, but theymake their own silica proppants,so they're not necessarily a sand miner. Butthey were the industry darling during the peak of this fracking,because you couldcreate custom pellets,basically, to optimize the well. But when you look at pure sand plays, you're looking at U.S. Silica, Hi-Crush Partners, and possibly Smart Sand, as they IPO fairly soon.O'Reilly:Have youconsidered these names possible ways to playthe oil industry without being an actual producer? Because it sounds like they need the sand.Muckerman:Yeah. They do. And they're talking about...Credit Suissehad a report on this saying that they expect demand to go up 50% in 2017 for frack sand. And then, even with the depressed rig count, they're going to need that much or more than they were needing in 2014, which was the peak of fracking and rig count. So, yeah, you're looking at more sand per well. The fact that wellsaren't being drilled at the same alarming rate,sand is still needed. U.S. Silica's stock has more than doubled this year.O'Reilly:Wow.Muckerman:Impressive. A very leveraged play,because they're selling sand strictly to frackers.O'Reilly:Those guys go under, game over.Muckerman:Yeah. Fracking cuts back again, then these guys are hosed, again.O'Reilly:Buton the other hand, more sand is being used per well,so that's something, too.
Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.