U.S. frack sand supplier shares dive on oversupply worries

HOUSTON (Reuters) - Shares tumbled on Friday for miners that supply sand to U.S. shale producers for use in fracking, as investors worried about a possible glut of the material the day after a major supplier announced a big new mine in West Texas, home to the Permian Basin, the largest U.S. oilfield.

Shares of Fairmount Santrol Holdings Inc, Hi Crush Partners LP and Smart Sand Inc each fell more than 10 percent. U.S. Silica Holdings Inc fell nearly 9 percent and Emerge Energy Services LP lost nearly 8 percent.

On Thursday, privately held Unimin Corp, the third largest supplier by capacity of so-called frack sand, said it would open a new mine in West Texas and produce up to 5 million tons of sand annually, beginning early next year. Fracking is short for hydraulic fracturing, a technique in which sand and water are forced into wells at high pressure to free up trapped oil and gas.

Unimin’s proposed Permian Basin mine would bring total new sand supplies recently announced for West Texas to about 32 million tons a year, said Brad Handler, oilfield services analyst at Jefferies LLC.

Sand sales, and prices, have been rising this year because shale producers are using more sand per well and drilling more wells. Sand-mining capacity nationwide today is about 85 million tons, but Handler projected that producers will need about 100 million tons in 2018.

“Investors are fearing that this onslaught of supply and lower-than-expected oil prices will leave demand a lot less than 100 million tons,” he said, referring to Friday’s market sell off.

Prices for frack sand obtained at the mine is between $35 a ton to $38 a ton, up from a recent bottom of about $18 to $19 a ton, Handler said. Much of the sand supplied to West Texas comes from mines in Wisconsin and Illinois, and transportation adds about $90 a ton to reach the Permian Basin.

The price of sand is a key factor in shale wells. The material represents about 12 percent of the cost of drilling and fracturing a well, he said. With oil prices under $45 a barrel, producers are eager to cut sand supply costs.

“Investors are looking at all the new mine capacity in the Permian and that threatens the pricing outlook for sand from existing companies,” located farther away, Handler said.

Reporting by Gary McWilliams; editing by Ernest Scheyder and David Gregorio