Hydraulic fracturing, or fracking, is a pretty complicated process — one that involves plenty of high-tech components. From technically advanced horizontal drilling rigs to specialized pressure pumping equipment, the technique that is sweeping our shale is truly a complex endeavor. All of these high-tech components have to work in perfect concert in order for E&P firms like Range Resources (RRC) to produce the most from their wells.
However, one particular low-tech ingredient in the process is making a name for itself and could provide investors with some hefty portfolio gains in the years ahead.
In this case, we’re talking about sand — and not the playground type. Demand for pure frac-sand is growing by leaps and bounds, putting pressures on current supplies. Yet, the miners of this necessary fracking ingredient are seeing some huge profit increases as the energy industry goes gaga for all things silica.
For investors, playing the purveyors of frac-sand could give your energy portfolio a big boost — along with big dividends – in the years ahead.
Nearly 60 Billion Tons
As the main ingredient in “proppant” — which is injected along with various fluids into the well to hold open the fractures so hydrocarbons can flow properly — the demand for both natural and synthetic sand is exploding. A recent Wall Street Journal article reports that the hydraulic fracturing-happy energy stocks like EOG Resources (EOG) used a record 56.3 billion pounds of sand this year. Putting it another way, that’s the equivalent of 4 Great Pyramids, 200 Eiffel towers & 45,000 Chevy Tahoe SUVs. Overall, it takes about 25 rail cars to frack a single well.
And that amount is growing.
Since 2011, demand for frac-sand has surged nearly 25% to reach this year’s record tonnage. Perhaps more importantly for investors, as fracturing continues to spread across the North America — and now the world – analysts predict that frac-sand demand will pop another 20% higher over the next two years. Essentially, by pumping more sand down a well, you can more than double its potential output. This makes the additional costs worth it when oil is trading in $90 per barrel range.
That’s all well and good, except that regular beach sand just won’t do for fracking a well. Hydraulic fracking requires a specialized quartz sand, because its shape fits better in shale’s fissures. The bulk of this sand is found in the Mid-West, near the Great Lakes. This rising demand has set off a virtual “Sand Rush” across Midwestern states like Wisconsin and Minnesota where this Northern White monocrystalline sand is located in vast amounts.
And since there is only so much of this sand, prices for ingredient hit a record $75 per metric ton earlier this year. Higher prices could be on the way as supplies remain constrained. Additionally, health concerns from residents near plants have prompted bans on new frac-sand mine permits in these producing states.
All in all, it’s looking like the frac-sand miners could be a portfolios best friend over the next few years. Here are three of the best, for dividends and growth.