You’re probably well aware of the fact that energy companies use vast amounts of water and sand in the fracking process. However, you might not know that sand is just one of many proppants used by the energy industry. The growing use of proppants has its producers piggybacking on the shale boom and in so doing, offering investors an interesting way to invest in the growth of oil and gas production.
As I personally dug deeper into the proppant industry I became convinced that this was a story worth owning. Last week I decided to commit some of my own capital to the industry and welcomed Hi-Crush Partners LP (NYSE:HCLP) to my portfolio. I thought I’d share with you why I felt compelled to invest in this proppant producer.
What’s a proppant?
Proppants are used by the oil and gas industry to prop up the fractures in a well to enhance the flow of oil and gas out of the well. There are several types of proppants with Hi-Crush Partners LP (NYSE:HCLP) and U.S. Silica Holdings Inc (NYSE:SLCA) both producing raw frack sand while CARBO Ceramics Inc. (NYSE:CRR) produces both a ceramic proppant and resin-coated sand.
Sand is the low-cost option for producers but it’s not always the best option. Because CARBO Ceramics Inc. (NYSE:CRR) proppants are of a uniform shape and size, it allows for more oil and gas to flow through. That being said, more than three-quarters of the proppant market is raw frack sand. It’s a market that’s projected to nearly double over the next 10 years from 16.7 million tons in 2011 to 31.5 million tons by 2021 as you can see from the following chart:
With frack sand being a volume market, I’d prefer to stick with the lowest-cost producer and Hi-Crush Partners is among the best in that department.
Why Hi-Crush Partners?
Not only is Hi-Crush Partners LP (NYSE:HCLP) a pure-play, low-cost producer of frack sand, but I’m drawn to the fact that the company is structured as a master limited partnership. As such, Hi-Crush distributes most of its earnings back to unitholders. At last count that amounted to $1.90 in annual distributions and equated to a yield of nearly 10%.
For my money, Hi-Crush Partners LP (NYSE:HCLP) is a better bet because it offers me a simple pure play on the growing frack sand market. US Silica, on the other hand, is more diversified as it boasts over 200 products and 1,400 customers. While that might appeal to other investors, it wasn’t what I was looking for. Meanwhile, CARBO Ceramics Inc. (NYSE:CRR)’s products are not expected to take market share from raw frack sand so while its overall market will grow, it doesn’t appear that it will claim much, if any, of the raw frack sand market.