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PLG Consulting
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Prepared for:
» 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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0
500
1000
1500
2000
2500
0
20,000
40,000
60,000
80,000
100,000
120,000
2007 Avg. 2008 Avg. 2009 2010 2011 2012
Ope
ratin
g O
nsho
re R
igs
Car
load
s
Operating On Shore Rigs All Sand Carloads Petroleum Carloads
STCC 14413 (sand) and 13111 (petroleum) Data sources: US Rail Desktop, Baker Hughes
0
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
Proppant Market Demand Trends
» Future demand trends by play
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Source: Warlick Energy, August YTD
0
1000
2000
3000
4000
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
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
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
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
40
5
Transloading to Wellhead Site
20
~1,000
160
20
50 Total Railcars
~1,200 Total Truckloads
Oil / Gas/ NGLs
Truck, Rail, Pipeline
Waste Water
~500 Total Truckloads
Based on a 30-stage well
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)
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
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
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
advantage 16
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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