The Key Components of the Frack-Sand Market U.S. Silica's Management Wants You to Know

By Tyler

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Any company whose fate is tied to the spending of oil and gas has had a rough year, and U.S Silica is no different. However, its non-oil and gas-related sand products helped to prop up its earnings this past quarter.

But like so many other commodities, frack sand is a cyclical product that's in the middle of a rough downturn, and this isn't the first time the company has dealt with industry cycles. In fact, despite the current market conditions, U.S. Silica's management thinks there are a few things investors should look forward to. Here are five key takeaways that U.S. Silica's management mentioned in its most recent conference call of which investors should take note.

The industry downturn isn't as bad as some thinkOver the past year, we've pretty much watched oil and gas activity evaporate in the United States. The Baker Hughes rotary rig count declined 61% as companies scaled back their spending. The immediate reaction to that sort of decline is to assume that sand suppliers such as U.S. Silica would experience a similar level of pain. According to CEO Bryan Shinn, though, the company has been able to do much better than the rig counts suggest:

The important note here is that U.S. Silica is taking market share from its peers. Things such as sand consumed per well and overall activity are out of the company's control, but if it can make an offer that others in the space can't, then that should bode well for the future.

We're cutting operational costsThe market for frack sand is pretty fragmented, which means suppliers such as U.S. Silica are price takers, and the one thing it can do to control its destiny is to control costs. Luckily for investors, U.S. Silica has done a respectable job in lowering costs not just this quarter, but so far this year. From Shinn:

Another Aspect that Shinn noted was that some of its facilities aren't running at optimum capacity, so when drilling activity picks up and sand demand increases, per-unit costs could be even lower than where they are today.

The outlook is still roughA rebound in oil and gas demand will come, and it will bring with it increased activity. However, just as so many other management teams have said recently, U.S. Silica isn't counting down the days. Rather, it's bracing for this downturn to stick around for a while. Again from Shinn:

Could we become an industry consolidator?Yes, frack sand is a pretty fragmented industry, but this downturn seems to be pushing a lot of companies to the brink. In fact, the CEO of frack-sand peer Hi-Crush Partners mentioned on its conference call that it thinks as many as 15 sand mines have closed as some of the smaller players get weeded out. U.S. Silica's management sees this as an opportunity to capture even greater market share by perhaps acquiring a mine or two from some distressed players. This is what Shinn had to say:

Pricing may not react as quickly as demandMore than anything, U.S. Silica and its peers would like to see some price relief. Smaller players that get knocked out of the market could clear some room in the market, but one thing to consider is that there's a lot of spare or idle capacity out there right now. According to Shinn:

This is an important point, because once activity starts to pick up, a decent portion of that idled production capacity might get ramped up before we see a large increase in prices. So it's entirely possible that we'll need to see a large demand response before we see the effects in U.S. Silica's bottom line.

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Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.comor on Twitter@TylerCroweFool. The Motley Fool recommends U.S. Silica Holdings. 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.

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