PLG 2nd proppants summit

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1 PLG Consulting 1 Prepared for:

description

Taylor Robinson, president of PLG Consulting, presents at the 2nd Proppants Summit.

Transcript of PLG 2nd proppants summit

Page 1: PLG 2nd proppants summit

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PLG Consulting

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Prepared for:

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»  Boutique consulting firm specializing in logistics, engineering, and supply chain §  Established in 2001 §  Over 80 clients and 200 engagements §  Significant shale development practice since 2010

»  Headquarters in Chicago USA, with team members throughout the US and with “on the ground” experience in: §  North America / Europe / South America / Asia / Middle East

»  Consulting services §  Strategy & optimization §  Assessments & benchmarking §  Transportation assets & infrastructure development §  Logistics and Supply Chain operations §  M&A/investments/private equity

»  Specializing in these industry categories: §  Energy §  Bulk commodities (Proppants, Chemicals, Plastics) §  Manufactured goods §  Private Equity

About PLG Consulting

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Correlation of Operating Rig Count with Sand and Crude Shipments

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500

1000

1500

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20,000

40,000

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2007 Avg. 2008 Avg. 2009 2010 2011 2012

Ope

ratin

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nsho

re R

igs

Car

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Operating On Shore Rigs All Sand Carloads Petroleum Carloads

STCC 14413 (sand) and 13111 (petroleum) Data sources: US Rail Desktop, Baker Hughes

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5,000  

10,000  

15,000  

20,000  

25,000  

30,000  

35,000  

40,000  

2008   2009   2010   2011   2012  

Carlo

ads  

Quarterly  Data  

BNSF  

UP  

NS  

CN  

CPRS  

CSXT  

KCS  

All Sand Handled by Railroad

4 STCC 14413 Source: US Rail Desktop

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Proppant Market Demand Trends

»  Future demand trends by play

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Source: Warlick Energy, August YTD

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SAND   CERAMIC   OTHER  

$USD

 (MM)  

US  Proppant  Demand  

2006   2011   2016  

Data Source: The Freedonia Group, Inc

»  75% demand growth expected over next 5 years

»  Big 4 plays have over 80% of activity

§  Bakken, Eagle Ford, Permian –  Continued growth expected –  Major new wells continue to be

drilled

§  Marcellus –  New activity depressed by gas price & infrastructure –  Utica is still very early – tremendous potential for

liquids & crude

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Technology Trends Impacting Proppants Market

»  Factors influencing increasing demand §  Increasing lateral drilling length and increased

focus on liquid-rich plays could impact proppant demand

§  Trend towards “monster wells” and expanded staging

»  Opportunities for increasing efficiency §  Increased focus on improving completion and

fracturing programs, e.g. Schlumberger HiWAY

§  Tagged, detectable “engineered” proppants allow for smarter use of proppant supply

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Source: Schlumberger

Source: CARBO

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Proppant Industry Trends

»  Consolidation & acquisitions in the supply base §  Fracking fluid companies acquiring proppant suppliers (Rockwater Energy, Southwest

Proppants) §  Major US suppliers acquiring international facilities (Saint-Gobain in China) §  PE firms continue to be interested in this space

»  Partnerships & alliances – Class I railroads & sand suppliers §  BNSF & US Silica §  CN & Superior Silica Sands

»  International expansion examples §  Investments in China supply market §  Demand market growth - Argentina

»  Local market uniqueness §  Trend toward proppant selection on a well-by-well basis

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Proppant Shipping Flows

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Major Frac Sand Mining Areas

Frac Sand Transloading Clusters

Foreign Ceramics Import Sites

Major Frac Sand Rail Traffic Lanes

Import Ceramic Traffic Lanes

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Hydraulic Fracturing Materials Inputs and Logistical Movements Per Well

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Materials

Chemicals

Clean Water/ Cement

Proppants

OCTG (Pipe)

Source to Transloading

3-5

Local source

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Transloading to Wellhead Site

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~1,000

160

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50 Total Railcars

~1,200 Total Truckloads

Oil / Gas/ NGLs

Truck, Rail, Pipeline

Waste Water

~500 Total Truckloads

Based on a 30-stage well

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Natural Sand Total Delivered Cost

Source: PLG analysis 10

»  Benchmark cost with flawless performance §  Delivered sand cost to TX can be $180/T §  Logistics drives ~60% of the total

delivered sand cost

»  Significant cost adders caused by strategic and tactical issues:

§  Sub-optimal logistics network design or infrastructure

§  Uncompetitive sand price

§  Above market rail rates

§  Manifest service vs. unit train

§  Poor planning & execution causes –  Rail or truck demurrage costs –  Performance penalties

§  Equipment/driver shortages

§  Cost of Poor Quality (COPQ)

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Sand Mining Continues to Expand

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»  Proppant processing and shipping activity growing rapidly in Western and West Central Wisconsin counties §  Chippewa §  Barron §  Trempealeau §  Jackson §  Monroe §  Crawford

»  New announced projects §  Superior Silica Sand – Clinton, WI

§  $35MM main line rehabilitation by CN

§  U.S. Silica – Sparta, WI §  Smart Sand – Oakdale, WI §  Pattison – Prairie du Chien, WI

»  Minnesota areas also active §  Southeastern border along Mississippi

River §  Western Twin Cities

»  Established Illinois companies seeing significant upturns in volumes and financial returns

Source: Federal Reserve Bank of Minneapolis, July 2012; PLG analysis

New Growth Area

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Changes in Rail Shipment Pricing Q3 2011 vs. Today - Sand

»  Since Q3 2011, have seen an overall rail price increase of 10 - 14% in public pricing (varies by corridor)

»  In the 600-1,300 mile range, rates vary from $0.045 - $0.074 per ton-mile for manifest shipments

»  Shippers who are willing to ship unit trains and make volume commitments have realized significant savings with longevity over public pricing

»  Western carriers are driving single line hauls to Eagle Ford via pricing differentials

»  Canadian and Eastern carriers are aggressively working to grow their

markets by providing very competitive pricing and securing sand originations §  CN/Superior Silica Sands – Poskin, WI

»  Major sand providers are establishing “in the play” transloading facilities to provide ready access to product §  U.S. Silica - East Liverpool, OH

12 Source: PLG analysis

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Sand Railcar Market Conditions

»  New-build market has run its course §  Much smaller backlog –  3Q 2011: 10,000 cars, ten month wait –  Today: no significant wait

§  Significant drop off from ~15,000 new cars per year §  No new spec building by lessors – all deal specific now §  Lower pricing §  Some new cars going into storage

»  Lease market also post-peak §  Existing 286K cars available now §  Cars with sub-optimal specs (grain, <286K, cement)

are being phased out of frac sand fleet §  Creditworthiness an important criteria

»  Long-term horizon §  No sign of cement market return, easing pressure on

small cube hopper cars §  “Rational” vs. gold rush conditions

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Destination Transload / Trucking Cost & Market Trends

»  Ability to receive unit trains is dictating sizing and design of destination transload facilities §  Use of unit trains is key competitive factor §  Many facilities are sized to handle 60,000 – 100,000 tons per month

»  Destination transload facilities becoming more integrated solutions – same company transloading and trucking

»  Trucking to well sites can be most problematic area of proppant supply chain §  Driver issues §  Equipment issues §  Trucking company financial issues

»  Local trucking supply bases are ripe for consolidation by professional, financially-sound trucking management

»  End customers are willing to pay premium price for reliable, consistent service

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Future Market Drivers

»  Demand levers §  US Natural Gas prices §  Global Oil prices §  Domestic crude displacing imports §  Export of low cost refined products & plastics –  LNG –  Propane –  Polymers

§  New Natural Gas applications – CNG, liquefaction technology

§  Fracking technology & trends

»  Supply market shifts §  Further proppant market consolidation §  Development of mine-to-well supply alliances §  Vertical integration or outsourcing by large players?

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Looking Ahead: Logistics as a Key Factor in Proppants Market

»  Like other “gold rushes” before it, market is continuing to evolve and mature

§  “Survival of the fittest” material & service providers §  Margins will be rationalized as market matures §  “Continuous improvement” mindset will impact cost

»  Transportation & Logistics buying power/leverage is beginning to accrue to fewer, more efficient and sophisticated buyers §  Has become a key competitive advantage §  Who pays/controls the freight cost?

»  Opportunities still exist to establish competitive advantage §  Total supply chain view vs. fragmented approach §  Other industry best practices will give early adopters

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Thank You! For follow up questions and information, please contact:

Graham Brisben, CEO +1-708-386-0700 / [email protected]

Taylor Robinson, President

+1-508-982-1319 / [email protected]

This presentation is available at: WWW.PLGCONSULTING.COM

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