Crude Prices Rise As Inventories Drop

Oil prices gained 8.6% last week, which marked the largest weekly increase since last December. Brent crude climbed back above $50/barrel (bbl) last week, while West Texas Intermediate (WTI) surpassed that mark earlier this week. Crude oil inventories in the U.S. have fallen steadily since April, and are now 50 million barrels lower than the levels of early spring. 

Natural gas prices fell 5% to reach a five-month low, as the summer is projected to be cooler than normal at least through the first half of August. Natural gas inventory levels have returned to nearly the seasonal average, after spending all of 2016 at record seasonal levels.

Sand Demand Setting Records

A recent report by Credit Suisse analyst James Wickland projects that the resurgence in U.S. shale oil drilling will cause demand for hydraulic fracturing sand to reach all-time highs this year and next. Last fall the same analyst had projected:

“We expect sand volumes to surpass 2014 levels with less than half the rig count by 2018. Sand will be the fastest growing sub-segment of the oilfield services market. We estimate that frac sand demand will be 33.2 Mtons/49.5Mtons/62.8 Mtons in 2016/2017/2018 up 48.6%/27.1% YoY in 2017 and 2018.”

It looks like his 2017 estimate was low, as the new report predicts 2017 sand demand to be 73 million tons, which would be 30% higher than the previous peak levels of 2014. 

Growth in sand consumption is being driven by a surge in drilling activity since last fall, as well as greater sand intensity per well. In 2014, the average well consumed about 1,500 tons of sand. This year that number is projected to reach 4,200 tons, and then rise to 4,500 tons in 2018.

Most of the new demand is from the Permian Basin, which has historically relied on Northern White sand mined in Wisconsin and Minnesota. However, some new mines are opening in Texas to compete with the more expensive, but higher quality sand from the north. 

Earnings Roundup

Earnings are coming in at a fast pace. Here are the highlights of three noteworthy companies in the energy sector.

Oilfield services bellwether Schlumberger (NYSE: SLB) beat consensus estimates with a loss of $74 million, compared to a $2.2 billion loss a year ago. Revenues were up 4% year-over-year, while pretax operating income rose 27% to $950 million. The big news for Schlumberger was in North America. From the company’s earnings release:

“North America revenue increased 18% following our rapid deployment of idle hydraulic fracturing capacity as land activity further accelerated during the second quarter, partially offset by further weakness offshore in the US Gulf of Mexico. In US land, revenue grew 42% sequentially, a rate almost double that of the 23% increase in land rig count, driven primarily by hydraulic fracturing revenue that grew 68% as completions activity intensified and pricing continued to improve. Directional drilling revenue in US land was also higher as longer laterals requiring rotary steerable systems and advanced drillbit technologies continued to drive drilling intensity.” 

Schlumberger shares are down 18% year-to-date, but the latest quarterly results show that the company’s businesses are starting to heat up. Importantly the company said that the outlook for the remainder of 2017 looks strong.

US Silica (NYSE: SLCA), the largest publicly traded hydraulic fracturing sand producer, announced net income of $29.5 million for the second quarter compared with a net loss of $11.8 million for the second quarter of 2016. The company reported revenue of $290.5 million compared with $117.0 million for the same period last year, which represented an increase of 148% on a year-over-year basis and an increase of 19% sequentially over the previous quarter. Overall tons sold totaled 3.638 million, up 63% compared with 2.237 million tons sold in the second quarter of 2016 and an increase of 7% sequentially from Q1 2017.

Portfolio holding Alliance Holdings GP (NASDAQ: AHGP) soared 12.6% higher on news that it would increase its quarterly distribution by 32.7% in the wake of its earnings release. Overall, earnings were down year over year, but for the first half of the year, cash flow increased from $211 million in 2016 to $293 million this year. This demonstrates that even though coal’s growth years are in all likelihood finished, some companies will continue to benefit from ongoing demand for coal for many years to come. Since being added to the portfolio of The Energy Strategist in June 2016, AHGP has returned 58.5%.  

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