Frack sand company Hi-Crush Partners LP (NYSE: HCLP) entered a series of deals Feb. 23, including the acquisition of a Permian Basin mine. The announcement came just as possible fears of an oversupply of grit roiled the sand market. Overall, sand stocks “took a beating” Feb. 23 over fears of frack sand surplus.

Still, U.S. Silica (NYSE: SLCA) said it would expand its capacity to about 20 million tons per year from 12.5 million tons annually, John Daniel, senior research analyst for Piper Jaffray & Co., said in a report.

The market’s knee-jerk reaction appeared to disregard U.S. Silica’s own temperance, chiefly that it could only bring, at most, 2 million more tons of capacity online by the end of 2017.

“A bit more gasoline was thrown on the fire after the close as [Hi-Crush] announced … the acquisition of sand reserves in Texas with plans to build a 3 million ton per year facility,” Daniel said.

Hi-Crush, which touts its Northern White sand and various grades of premium monocrystalline proppant, said it will purchase the Permian Basin Sand Co. LLC as well as dropdown deals from its sponsor Hi-Crush Proppants LLC in transactions totaling $415 million.

The company has also restarted idle mines, but won’t do so until March and April to meet customer demand in high-activity areas.

Analysts also noted that executives at U.S. Silica had said they would seek to double capacity over the next 12 to 18 months, said Kurt Hallead, an analyst at RBC Capital Markets. Adding 1 million to 2 million tons of sand capacity by the end of 2017, as the company suggested, wouldn’t get close to outpacing demand.

“This means they will only be able to increase capacity by 10% to 20% over the course of the year in an environment where frack sand demand is growing by 15% to 20% per quarter,” Hallead wrote in a Feb. 27 report.

U.S. frack sand demand was about 40 million tons in 2016, Cowen & Co. said in report. Assuming slight service intensity improvement over fourth-quarter levels and average 2017 and 2018 rig counts of at least 800 rigs, demand is modeled to improve to up to 80 million tons in 2017 and up to 110 million tons in 2018.

Hallead added that if demand doesn’t support additional capacity in 2018, “the supply won’t hit the market.”

Hi-Crush said it will pay $275 million for Permian Sand, funded with cash as well an offer of units to the public and the seller.

Hi-Crush said the Permian Sand deal:

  • Adds more than 55 million tons of high-quality 100 mesh reserves;
  • Addresses potential Permian Basin supply shortfall of 25 million tons by 2018;
  • Operator within a 75-mile radius in which 2,700 horizontal well permits have been filed since January 2016; and
  • Eliminates rail transportation costs and significantly reduces order lead times.

The Permian Sand transaction is expected to close by March.

Darren Barbee can be reached at dbarbee@hartenergy.com.