FROM MINE TO MARKET: OVERCOMING SUPPLY CHAIN HURDLES

Transcription

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

2 CLICK TO TODAY S EDIT MASTER AGENDA TITLE STYLE 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 2

3 CLICK About TO EDIT PLG MASTER Consulting TITLE STYLE 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 Partial Client List 3

4 PLG s Frac Sand Industry Qualifications 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 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 4

5 WTI price was ~$90/barrel What a Difference a Year Makes September nd Frac Sand Conf. 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 5 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

6 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 August 27, 2015 Source: IEA, August

7 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

8 Recent Fracking Trends High Intensity and DUC High intensity techniques producing % 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) High Intensity Fracking Visual 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

9 Fracking Technology 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 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 Source: EOG Resources (Leonard Shale), May 2015 Source: QEP Resources, May

10 Despite Low Prices, Production Still Remains at High Levels Source: EIA Drilling Productivity Report, August 2015 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 10

11 Shale Supply Chain and Downstream Impacts Inputs Wellhead Direct Output Thermal Fuels Raw Materials Downstream Products Generation All Manufacturing Steel Proppants OCTG Chemicals Water Gas NGLs Home Heating (Propane) Other Fuels Process Feedstocks Feedstock (Ethane) Byproduct (Condensate) Fertilizer (Ammonia) Methanol Chemicals Petroleum Products Cement Crude Other Fuels Petro-chemicals Gasoline Frac Sand has become the key upstream input material cost and quantity Many of the technology and productivity improvements are dependent on frac sand 11

12 Hydraulic Fracturing Materials Inputs and Logistics Involved Materials Source to Transloading Transloading to Wellhead Site Waste Water Frac Sand 25 ~ ~400 ~500 Total Truckloads OCTG (Pipe) Chemicals 5 1 Unit train of sand= 100 railcars= 10,000 tons= 20,000,000 2pounds 20 8 Clean Water/ Cement Local source ~1,000 Oil/Gas/NGLs 35~100+ Railcars ~1,200 Total Truckloads Truck, Rail, Pipeline 12

13 Frac Sand Industry Has Been a Rollercoaster Ride 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 13

14 160,000 Five Historical Phases of Frac Sand Market U.S. QUARTERLY CARLOADS ORIGINATED FOR INDUSTRIAL SAND AND U.S. LAND RIGS 2,500 U.S. Quarterly Carloads Originated for Industrial Sand (STCC 14413) U.S. Land Rigs 140, ,000 2, ,000 High Intensity Fracking 1,500 80,000 Shale Oil Boom 60,000 Rig Shift from Gas to Liquids 1,000 40,000 Shale Gas Boom Oil Price Collapse ,000 Note: PLG utilizes rail car origination loads as the best way to track industry volume trends

15 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 15

16 Premium CLICK TO Frac EDIT Sand MASTER Deposit TITLE Locations STYLE 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 16

17 Frac Sand Supply Chain Undergoing Significant Rationalization - Continued Mining Processing Rail Load-out Long Haul Rail Transloading and Storage Trucking to Well Rail Q1 volume decreased by 15% vs. Q (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 Q 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 17

18 CARLOADS Quarterly Frac Sand Volume Handled by Railroad 70,000 60,000 50,000 40,000 30,000 20,000 UP BNSF CN NS CPRS CSXT KCS 10,000 - Source: STB, June, 2015; Note that Industrial Sand category (STCC 14413) includes other commodities beside frac sand 18

19 High Intensity Fracking Major Impact on Frac Sand Industry Now and the Future 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! Source: Matador, June 2015 FRAC SAND MASS PER HZ WELL ROBUST PROPPANT DEMAND DRIVEN BY MULTIPLIER EFFECT Source: PacWest Source: FairmontSantrol, March 2015 Source: PacWest 19

20 Cars 40,000 30,000 Small Cube Covered Hopper Market Historical Perspective Ratio 6 5 Backlog 4 Orders 20,000 10, Deliveries Order/Del'y Ratio 0 0 Source: Chicago Freight Car Leasing, ARCI Committee of the RSI 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

21 Current market conditions Lots of cars in storage starting in Q Small Covered Hoppers Market in a Correction State 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 21

22 Conclusions 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 2 nd 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 22

23 Thank You! This presentation is available at: / Presentations/ For follow up questions and information, please contact: Taylor Robinson, President +1 (508) / trobinson@plgconsulting.com 23