The Impending Sand Industry Consolidation

Petroleum Connection 5th Annual Sand Supply & Logistics ConferenceSan Antonio, Texas

Joel Schneyer – Managing Director

jschneyer@headwatersmb.com303.619.4211

October 13, 2016

US Proppant Demand Plummeted But Is Set to Rebound

• Proppant demand fell approximately 20% between 2014 and 2015 and current run rate for 2016 is in the 25 to 30 million ton range – approximately 35% less than 2015

• Projected rebound to 50 million tons in 2017, Texas leading the way

102.9 billion pounds(51.5 million tons)

85.4 billion pounds (42.7 million tons)

26.1 billion pounds – YTD(13.1 million tons)

Return to 2015 consumption in 2017

( ~ 50 million tons)

Page | 2

Pro

pp

ant

Co

nsu

mp

tio

n (

bill

ion

lbs)

100

75

50

25

0

Source: Energent Group

2016 est. 25 – 30 million tons

Source: adapted from NavPort Presentation (April 2015), Canadian Frac Sand Logistics & Market Forecast Summit in Calgary & company websites

Top Sand Producers Embrace The Value of Innovation

Page | 3

Pe

rce

nt

of

Cap

acit

y M

arke

t Sh

are

Chieftain

Badger Mining Corp

EOG

Eagle Materials, Inc.

Hi Crush Partners

Preferred Sands

Superior Silica Sands

Santrol

US Silica

Unimin

50%

60%

70%

40%

30%

20%

10%

0%

• Atlas Resin PRC & CRC• Refugio, Texas resin coating plant

• Polymeric Proppant Line, DustPro, FloPRO PTT Proppant Transport Technology

• SandGuard & SandMaxx

• Propel SSP Transport Technology, Curable RCS, Precured RCS

• InnoProp PLT, InnoProp Python

• Unifrac RCS and DustShield

Source: Company and Private Equity press releases and websites

Private Equity Continues To Be Active In the Space

Page | 4

Files new S/1 for IPO as an “Inc” Sept 2016

Files new S/1 for IPO as an “Inc” Sept 2016

Key Point #1 : Sand Overcapacity & Innovation

Industry can produce in the range of 100 million tons of frac sand annually, with the top 10 sand producers controlling about ~2/3rds of the market capacity. The industry built big, efficient mines and distribution hubs in WI, IL, and MN to meet this growing demand …

… but in 2016 sand consumption is forecast to be in the range of 25 - 30 million tons with a rebound to 50 million tons in 2017.

Therefore sand production utilization in 2016 is a very low 25% - 30% …. with little market discipline.

Page | 5

At the same time, sand producers have embraced new products for competitive advantage and better profitability, to shift away from commodity products and pricing.

Completion Trends Create New Proppant Demand Drivers

Page | 6

Lon

ger

Late

rals

Mo

re S

tage

s

Ove

rpac

kin

g

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2012 2013 2014 2015

Average Sand per Well (Permian/ Bakken/ Eagle

Ford)

Clo

ser

Wel

l Sp

acin

g

> 2

x in

crea

se

20

16

to

20

18

0

5,000

10,000

15,000

20,000

25,000

2014 2016 2017 2018

# Horizontal Wells

0

200

400

600

800

1,000

1,200

1,400

2014 2016 2017 2018

# Active Horizontal Rigs

• Increase in frac sizes per stage

• Increased interest in utilizing finer mesh sand (40/70 & 100 mesh) & CRC

Source: Goldman Sachs Global Investment Research (July 2016), Bloomberg Intelligence 0

500

1,000

1,500

2,000

Permian Williston EagleFord

Pounds Sand Per Lateral Foot

2012 2016

Trend Shows Increasing Proppant Volume Demand Per Well

Page | 7

Source: Energent Group

Industry Average Proppant per Job

EOG Average Proppant per Job

3,000 tons

6,000 tons

To

ns

To

ns

~ 75% increase in 18 months

38 Frac Jobs In Last Year Used Greater Than 25 M Lbs. Of Proppant

Page | 8

Note: N = 209 frac jobs between October 1 2015 – October 1 2016

Source: Energent Group

Nu

mb

er

of

Fra

cJ

ob

s

Proppant Volume Used Per Job (Million Lbs)

Key Point #2: Increasing Completion Density Creates Demand

Page | 9

Shale drilling has become more efficient and the industry can drill more wells in the same amount of time…

… and average sand use per well has gone up ~40% from 2012, with industry leader EOG using 2x as much proppant per well as industry averages

… thus the rig count will not represent the ongoing demand for sand.

Source: C.L. Dake, Univ of Missouri School of Mines & Metallurgy Bul. Tech. Ser., Vol. 6, No. 1 August 1921

Sand Supply - St Peter the Patron Saint of Frac Sand

40/70 & 100 mesh : Southern White

20/40, 40/70 & 100 mesh : Northern White

Page | 10

14% > 40%

share market

$210 million

Brown sand market penetration estimated to have increased from 14% in 2014 to more than 40% currently

U.S. Silica purchased brown-sand miner NBR Sand in July 2016 with plans to double output near Texas oilfields to 2 million tons/year

Regional Sand A Growing Source of P2P Cost Savings

Page | 11

Major Northern or Whitefrac sand producing region

Major Texas Brown, Brady Brown, Hickory, and other sand types

Sources: Bloomberg Markets “The Next Shale Boom Will Be Built on Sand” (August 3, 2016), PacWest (2014)

Key Point #3: Lower Sand Specifications Drives Local Sourcing

Page | 12

If coarse 20/50 sand is no longer specifically required for well completions,

… it stands to reason that sand origin points closer to the end-user, taking advantage of point-to-point distribution are the low cost solution.

… and locally sourced Brown or Regional Sand gain market acceptance,

Eagle Ford In-Basin Delivered Cost Estimates

Page | 13Source: Headwaters MB research

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

$100.00

mining/processing outbound transload barge

rail truck rail line switch

short line inbound transload 3rd party transload fee

Co

st P

er

Ton

Regional Sand$45-49/t

Southern White Sand

$52-58/t

Northern White Sand

$60-65/t

unit train & volume discounts

Northern White Sand

$65-68/t

unit train

Northern White Sand

$71-75/t

unit train & volume discounts & rail line

switch

Northern White Sand

$82-86/t

manifest

Northern White Sand

$93-99/t

manifest & rail line switch

Northern White SandSouthern

White SandRegional Sand

Airlines Analogy: Hub-and-Spoke Versus Point-to-Point

Page | 14

Minneapolis Hub for Delta Airlines• Subject to congestion and delays at hubs• High capital investment to cope with surge hours

P2P Route Map for Spirit Airlines• Minimizes connections and travel time• Reduced interdependency of flights

Sources: Company websites

Sand producers and independent transload operators will continue to crowd each other for the same economic pie...

Key Point #4: Shift To “In Basin” Sales Is Defining Survival

… thus, capturing access to the closest point-to-point sand supplies and the lowest cost in-basin terminals (i.e. unit train & dual track service) is critical for long-term survival.

… and no clear alternatives exist for both to make profits unless they utilize the lowest cost logistics chain….

Page | 15

Supply Chain Profit Squeeze: Delivering Sand to Well Sites

Page | 16

$15 - $30 / ton

$30 - $60 / ton

$7 - $20 / ton $15 - $50 / ton

In-basin sales of frac sand is a game changer: The frac sand producer must now work into his economics all the costs of production and delivery of products through to the “Basin Transload”

Sources: Headwaters MB research

Sources: SEC Edgar, Yahoo Finance, Headwaters MB research

Industry Metrics: Transload & Frac Sand Producers

$9.50$10.75$10.50

$17.50$21.75$18.00$17.25$15.25$14.50$16.75

$20.75

$19.75$25.75

$3.75$3.00

$4.00

$10.50$10.00$9.25$7.75$10.00$9.50$10.25$9.50$13.75$16.75

$54.58$61.12

$65.35$69.26

$78.50

$93.99

$99.45$98.86

$93.20$95.25$87.87

$84.85

$59.64$63.57

-$9.57-$8.47

$7.23$8.67

$14.76

$25.28$31.34

$34.97$30.14

$27.11$26.22$28.91

$23.34

$25.94

-$20

$0

$20

$40

$60

$80

$100

$120

2016Q22016Q12015Q42015Q32015Q22015Q12014Q42014Q32014Q22014Q12013Q42013Q32013Q22013Q1

Transload Revenue / Ton Transload EBITDA / Ton

Frac Sand Producer Revenue / Ton Frac Sand Producer EBITDA / ton

FOB Mine

In Basin Sale

$ P

er

Ton

Page | 17

Sand Producers Building Out Destination Rail Terminals

Page | 18

Sources: Company websites

Key Point #5: Value Seen In Streamlining the Supply Chain

Sand producers are looking to reduce the overall in-basin delivered cost structure,

… thus, • sand producers will look to eliminate line

switching from sand origin to destination wherever possible,

• the use of unit trains will increase, and• producers will seek to control

(ownership?) the best in-basin terminals.

Page | 19

Quarterly US Proppant Demand – Texas Leading the Way

Page | 20

Pro

pp

ant

Co

nsu

mp

tio

n (

bill

ion

lbs)

30

20

10

0

Source: Energent Group

Eagle Ford Ranked #1 in Economic Returns by EOG

Page | 21

Source: EOG Presentation at JP Morgan Energy Conference 2016

Global Liquid Supply Cost Curve is Dynamic (and Getting Flatter)

Source: modified from Rystad Energy, Investing.com, Headwaters MB research

USD

/bb

lBreakeven cost curve

Page | 22

10 Year Bond YieldCanada = 1.07%USA = 1.70%Qatar = 3.06%Mexico = 6.12%Columbia = 7.28%Russia = 8.13%Turkey = 9.45%Brazil = 11.63%Egypt = 17.50%Venezuela = 21.12%

Onshore

Russia

Extra

Heavy

Oil

Ultra

Deepwater

a

Key Point #6: Risk Adjusted Returns Will Drive Drilling Activity

… with some of the best return profiles coming from the Eagle Ford & Permian basins

Page | 23

Competitive advantages are awarded to assets that can provide the greatest risk adjusted returns …

... and the return profile of North American shale is competitive globally

Source: Company and Private Equity press releases and websites

Sand Industry Update – Transactions of Interest

Page | 24

Date Target Description AcquirerTransaction

ValueOct-16 Arrows UP Purchase of interest in shipping "box" bulk transport system OmniTrax Equity interest

Sep-16 Sanjel/Terracor Court approved acquisition of three frac sand transloadterminals and undeveloped WI frac sand mine out of CCAA

OmniTrax $19.5 million

Sep-16 Hi-Crush Blair LLC Acquisition of northern white sand mine in Blair, WI with 2.86 million tons of annual capacity

Hi-Crush Partners LP ~ $166 million

Aug-16 Sandbox Enterprises LLC Acquisition of frac sand shipping "box" logistics solutions provider

US Silica Holdings Inc $218.3 million

Jul-16 NBR Sand LLC Acquisition of regional brown sand mine in Tyler, TX with T12M sales of 740,000 tons

US Silica Holdings Inc $210 million

Jun-16 Emerge Energy Services Operating LLC

Sale of Emerge's fuels business the Sunoco Parties $178.5 million

Jan-15 Preferred Sands LLC Acquisition of regional sand producer Hanson Lake in Saskatoon

Gordon Brothers Group and Hilco Industrial

~ $30 million

Date Issuer Description Owner IPO Value

Sep-16 Muskie Proppants Portfolio company of PE Wexford Capital and portfolio partner Gulfport Energy file IPO for energy services rollup Mammoth Energy Services Inc

PE Wexford Capital ~ $128 million

Sep-16 Smart Sand Inc Portfolio company of PE Clearlake Capital files IPO PE Clearlake Capital $100 million

Date Seller Description Offering Type Gross ProceedsAug-16 Emerge Energy Services LP Sold new Series A Preferred Units to institutional investor Unit Offering $20 million

Aug-16 Hi-Crush Partners LP Priced 6.5 million units at $12.35/unit Unit Offering $80.3 million

Jul-16 Fairmont Santrol Priced 25.00 million shares at $5.94/share Share Offering $148.75 million

Distance Matters: Estimated Delivered Cost of Sand To Eagle Ford

Page | 25

Source: Headwaters MB research (2016); U.S. EIA based on data from various published studies as of April 2015

Red : > $82/ton manifestOrange : ~ $60 - $75/ton unit trainsBlue : ~ $52-58/ton rail & bargeGreen : ~ $45-49/ton truck

Lower 48 Shale Plays and Major Sand Basins

Closing Thoughts ...

The impending sand industry consolidation will be driven by:

Thank you

Headwaters MB named Investment Bank of the Year for the second consecutive year

INVESTMENT BANK OF THE YEAR

INVESTMENT BANK OF THE YEAR

2015

Page | 26

• Interest in increased liquidity via:

• Asset sales

• Share offerings

Financial Health

• Curable resin coatings

• Dust coatingsInnovation

• Terminals

• Unit trains

• “Box logistics”Logistics

• Acquisition of sand mines closer to the in-basin sale (Regional & Southern White Sand)

Optimized Sourcing