Even though the price of the unit for this proppant sand producer fell on fear of an oil drilling slowdown, the price—fueled by two pieces of news—rose again, and MoneyShow's Jim Jubak expects a gradual recovery over the next year.
On fears that falling oil prices meant an end of the US energy boom and to sales of the sand that Hi-Crush Partners (HCLP) sells for use as a proppant in fracking, the price of the unit fell to $40.68 on October 9 from the August 29 high of $69.15. That's a huge 41% plunge.
Then, as it became clear that most US producers of oil and natural gas from shale geologies would make money even if prices fell to $60 a barrel (the median break even seems to be somewhere about $57), Hi-Crush units rebounded to $51.23 as of the close on October 23. That's still well below (26% below) the August high but a good 21% above the October 9 low.
Besides the recognition that $80 a barrel oil didn't mean that everybody in the shale sector would stop drilling, the rebound in Hi-Crush units has been helped along by two pieces of news. On October 16, the master limited partnership announced that it would increase its third quarter distribution by 9% to 62.5 cents per unit. That followed the October 9 news that Halliburton (HAL), the biggest provider of services to the US fracking industry, would increase the annual minimum volume of proppant sand that it would buy from Hi-Crush on a long-term contract that runs through 2018. Halliburton has a front row seat on what's going on in the shale fields and if it feels that it's a wise move to increase its long-term proppant purchases, then that's a good sign that the bottom isn't falling out of the sector. In fact, shortly after the news of the purchase agreement with Hi-Crush, Halliburton reported its own third quarter earnings and said that it didn't see a significant near-term slowdown in demand for drilling services as a result of lower oil prices.
Working in Hi-Crush's favor is the trend to increase production from each well (which cuts costs too) by pumping more proppant down each well in order to induce more fracturing, in order to release more natural gas and oil. The average well in the Bakken geology of North Dakota uses six to seven million pounds of sand but Wall Street analysts are reporting wells using 20 to 24 million pounds in the Bakken and in other formations. That led to additional demand for one million tons of sand in the second quarter. That additional demand is as much sand as Hi-Crush sold in all of 2012.
It is reasonable to expect that the most hard-pressed shale producers might cut drilling activity. I think that's likely to be outweighed by continued increases in sand per well as producers try to reduce costs per barrel further in response to the drop in oil prices.
We'll know exactly how these two trends balance out when Hi-Crush reports its third quarter results on November 4 before the market opens in New York.
I'm keeping Hi-Crush in my Dividend Income portfolio for its 5% yield. I think it's reasonable to expect continued volatility in the energy sector to slop over Hi-Crush, but I would expect a gradual recovery back to the August high near $70 over the next year.
