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Frack sand demand surge leads to improved expectations for oilfield services

The oilfield services sector got votes of confidence from Barclays and Jefferies analysts who see surging demand for frack sand as a clear sign that oil and gas production is on the rise.

In a Jan. 19 analyst note, Jefferies said there has been a "strong upsurge" in demand for frack sand over the past six to eight weeks. The firm noted that 226 horizontal rigs have returned to the field since May 2016, an increase of 73%.

"Our updated frac sand demand model indicates a doubling of run rate demand, as horizontal rig additions accelerated in 2H16, to nearly 60 [million tons per annum] by YE2016," Jefferies said, noting that prices for northern white sand had jumped from $18 or $19 per ton in the third quarter of 2016 to $25 or $26 per ton by year-end.

As a result of the increased demand, Jefferies said it would increase its price target for companies selling frack sand and expects gross margins to "creep a little higher to low $20s/ton" in 2018.

Barclays said frack sand supply "will likely be front and center" during earnings calls for both oilfield services and E&P companies reviewing their fourth quarters as the industry attempts to avoid the sand shortages it endured during the production spree of early 2014.

"There will be greater emphasis on the logistical capabilities of sand suppliers and pressure pumpers alike, plus their control over potential last-mile delivery bottlenecks," the firm said. "We suspect more E&Ps may seek assurance of supply by directly sourcing sand from vertically integrated suppliers … which would also afford E&Ps the option to contract smaller pumpers without sand supply-chain capabilities."

Barclays said frack sand companies are "priced for perfection" and suppliers are in an optimal position as demand rebounds. "There is plenty of tailwind for frac sand demand to outperform the US rig count as E&P laggards simply close the gap with leading-edge peers in terms of both proppant density and lateral lengths," the firm said. "The bigger concern for us is whether E&Ps will revert back to coarse sand when faced with fine sand price increases. Reopening the coarse portion of the supply stack that had fallen out of favor would effectively double capacity and put a major constraint on pricing."