Flood of Low-Cost Supply Swamps Our Frac Sand Valuations
We've reduced our long-term pricing forecasts.
We have lowered our fair value estimates for the frac sand companies we cover to reflect recent industry developments, most notably deteriorating pricing in the face of continued low-cost sand additions. Our fair value estimate for U.S. Silica (SLCA) moves to $15.50 per share from $24.50, for Covia (CVIA) to $7 per share from $15.75, for Smart Sand (SND) to $3 per share from $6, and for Hi-Crush Partners (HCLP) to $8.50 per unit from $11.50. Our no-moat rating for all of these companies remains in place. We also increased our fair value uncertainty rating for U.S. Silica to extreme. After the revisions, each company looks approximately fairly valued, in our view.
The lower fair value estimates are the result of lower long-term frac sand pricing forecasts. Our midcycle (2022) Northern White mine-gate price is now $26 per ton, down from $28 per ton previously, reflecting a lower marginal cost of production due to a reduction in our midcycle Northern White supply forecast to 36 million tons from 40 million tons. The reduction in Northern White supply is caused by an increased forecast for lower-cost regional sand supply. In an astounding reversal of the situation several years ago, when Northern White supplied around 75% of all North American frac sand demand, we expect it to supply less than 30% of our total midcycle forecast frac sand demand of about 128 million tons.
Preston Caldwell does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.