I Wouldn't Bet On Frac Sand Going Parabolic

| About: U.S. Silica (SLCA)
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Summary

Frac sand is highly elastic and unlikely to go parabolic.

New supplies, new alternatives and recycling are likely to keep a lid on frac sand prices.

Other fracking related investment ideas are likely to outperform frac sand.

I recently read an article on Seeking Alpha about "frac sand" having the potential to go "parabolic."

The data above is bullish frac sand pricing. Producers have a good outlook as completions continue to use more proppant per lateral foot. This is why I believe frac sand pricing could go parabolic. It benefits companies like U.S. Silica Holdings . Over the past 2 years, SLCA has grown significantly. In the short term, my expectations were for a better number. The combination of increased sand supply and decreased demand has proven difficult for Silica. This is a buying opportunity.

While the author did a very good job defending his thesis for US Silica (NYSE:SLCA), he overlooked some very basic economic principles. For items to go "parabolic" it usually require a monopoly, patent, shortage and/or high barriers to entry. Water will never go parabolic, nor will air. Things like Bitcoin or RINs go parabolic because of their limited supply for an increasing demand. Sand, even specialized industrial sands, are relatively abundant, and far more like water than Bitcoin. That doesn't mean SLCA isn't a nice investment, I'm just saying frac sand won't be going parabolic.

Barriers to entry are very low for refining sand, it simply requires expanding capacity within the existing factory or mine. Even if a firm has a patent on its unique process to process sand, other firms will have similar patents. At the end of the day, sand is sand, regardless of how it was refined. There are countless ways to manufacture sand to meet the specs for fracking.

The USGS figures that sand mining is up 60% in two years to nearly 50 million tons a year.

Another problem for the "parabolic" theory is that surging prices in sand is choking off demand from other buyers. Sand buyers in the foundry business are attempting to recycle sand, which will partially offset the increasing demand from fracking. Ironically, the recycling of sand may also provide a new supply of frac sand further increasing sand's elasticity.

Moyer, the Pennsylvania Foundry Association vice president, said the surge in sand demand from fracking operations has only just started.

Recycling sand "in the next few years, they expect it to more than triple," he said. "It is one of those things that happen when you have a boom industry."

He estimated that Pennsylvania foundries purchase 500,000 tons of sand each year. The association, he said, wants to work closely with the sand supply industry to make sure foundry needs are met.

Unlike fracking, which uses sand in a such a way that it can never be recovered, the casting processes employed by foundries often allow sand to be used over and over.

Arthur R. Vaughn, chairman of Fairmount Foundry Inc. in Hamburg, said his business uses about 600 tons of sand a week to create the molds into which it pours molten iron. Only about 30 tons of that total are newly purchased; the rest is reused sand, derived from breaking apart molds used in previous casting processes.

But foundries may wind up creating sand that the oil and gas drillers want to purchase.

When foundries use the same sand over and over, the grains become round. That, said Moyer, is the grain shape desired most for fracking operations.

For something to go "parabolic," the item needs to have an inelastic supply. Sand in itself is highly elastic, and its elasticity is increased because there are substitutes and alternatives. Farmland on the other hand is relatively inelastic. I sometimes teach economics and am always looking for capitalist "feel good" stories, and I also often defend fracking. One of my favorite examples I use is how fracking is making once dirt poor farmers in India extremely rich. A bean called "Guar" grows in India and is ideal for thickening fracking water so that it can push sand horizontally through the pipes. Guar is relatively inelastic, and has already proven itself to be highly price sensitive to shifts in demand. I would be willing to bet farmland used to grow Guar in India is likely to go parabolic long before fracking sand will. Unfortunately I don't have any suggestions on how to invest in Guar farmland.

Halfway around the world, earnings are down for an oil services giant, Halliburton, because prices have risen for guar, the bean that Mr. Singh and his fellow farmers raise.

Halliburton's loss was, in a rather significant way, Mr. Singh's gain - a rare victory for the littlest of the little guys in global trade. The increase in guar prices is helping to transform this part of the state of Rajasthan in northwestern India, one of the world's poorest places. Tractor sales are soaring, land prices are increasing and weddings have grown even more colorful.

"Now we have enough food, and we have a house made of stone," Mr. Singh said proudly while his rail-thin children stared in awe.

Guar, a modest bean so hard that it can crack teeth, has become an unlikely global player, and dirt-poor farmers like Mr. Singh have suddenly become a crucial link in the energy production of the United States.

While investing in Indian Guar farmland may be out of reach, there is an interesting investment related to fracking that has been doing extremely well lately. Power Solutions International (OTCPK:PSIX) makes natural gas powered generators. Upcoming EPA regulations are going to force frac wells to either capture or use the "flare" gas. Right now drillers truck in diesel fuel to power diesel powered generators, while they waste "flare" gas. By upgrading to a PSIX natural gas powered generator, drillers can now only comply with future regulations, they can also save on their fuel costs.

Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.