U.S. Silica Holdings Inc (SCLA), a Maryland-based company that provides sand to oil & gas drilling companies, is in a good position to capture additional market share over the next two years, according to William Blair Analyst Brandon Dobell.
He says only a certain type of sand – Ottawa white sand, which is found in Illinois, Wisconsin and Minnesota – can withstand the heat and pressure of the drilling process. Dobell says the market is currently underestimating the amount of sand the North American drilling market is going to need. U.S. Silica, he says, has an opportunity in front of it, not only because of its access to Ottawa white sand, but also because it has a large network of storage and distribution facilities.
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“So they can get a lot of sand from their mines in Illinois and Wisconsin into the Bakken, the Permian, the Eagle Ford, the Utica, Marcellus, Haynesville, Mid-Continent, Rockies, all the basins where you need – or where you’re doing horizontal drilling and therefore you need this special kind of sand,” Dobell says.
Smaller producers, Dobell says, will have difficulty competing with U.S. Silica, because they can’t move sand from small mines to where it is needed for drilling at a competitive price.
“It’s going to cost them way too much for transportation and storage and delivery, whereas the bigger companies, like U.S. Silica, just like any big logistics company, have a lot of scale,” Dobell says. “They do it well, they can match up orders with demand, there’s a lot of flexibility to move sand where it needs to be – those are things that will allow them to take a lot of market share the next couple of years. And I think all those dynamics are underestimated in both the valuation for the company, as well as the earnings estimates in 2014 and 2015.”