Morgan Stanley Shows Increased Conviction In Frac Sand Theme; Upgrades Fairmount

Frac sand intensity continues to trend higher, with volumes per well having grown 50 percent from the 2014 levels in certain regions, Morgan Stanley’s Ole Slorer said in a report. He added that sand could have the earliest pricing traction among onshore service verticals.

Operators Yet To Find The Upper Limit

Operators have continued to indicate that they had not as yet found “the upper limit of how much sand is too much — in terms of both physical and economical limits,” Ole Slorer mentioned. Sand pumped per well rose more than 20 percent in 2015, and could grow another ~15 percent in 2016.

“Meanwhile, we see a significant cyclical rebound playing out over the next few years: we expect well completions to increase ~55%/70% in 2017/18. Coupled with higher sand/well, we thus see sand demand rising ~70%/80% in 2017/18,” the analyst wrote.

How To Play The Uptrend

Slorer mentioned that while U.S. Silica Holdings Inc SLCA was a lower risk option, Fairmount Santrol Holdings Inc FMSA offered higher upside.

US Silica could be an industry consolidator, given its recent equity raise and clean balance sheet. Thus, accretive M&As could lend near-term upside to shares. US Silica’s net cash position versus the more levered balance sheet of Fairmount Santrol made the former “a safer play on the space,” the analyst commented.

Meanwhile, Fairmount Santrol has eliminated its debt overhang to 2018-2019, versus 2017. “A refinancing is still required, in our view, but we see reason to believe in a much more favorable capital market environment in 2017-18 vs. today,” the Morgan Stanley report stated.

Slorer upgraded the rating for Fairmount Santrol to Overweight, with a price target of $9. He reiterated an Overweight rating for US Silica, while raising the price target from $33 to $37.