Although natural gas prices are on a rocky uphill climb, the 2 silica producers we recommended last year have gone gangbusters in 2013…
Last year, I wrote about two silica producers that I believed were on the cusp of a breakout. I predicted that silica companies were capable of profiting no matter which way natural gas prices swung.
And, I was dead on…
US Silica Holdings (NYSE:SLCA) gained 190% and Hi-Crush Partners (NYSE:HCLP) gained 59%.Both have soared to new all-time highs in 2013.
Of course, the case for these investments was pretty simple.
As a critical component of the hydraulic fracturing process, silica sand or frac sand as it’s known, helps drillers in their quest to extract as much gas as possible from America’s tight shale formations.
In a nutshell, when a well is drilled in shale rock, frac sand is used in circumstances where trapped oil and gas doesn’t flow easily to the well for extraction.
When this is the case, a mixture of water and frac sand is then injected at high pressure into the wellbore to create a series of fractures in the rock.
When pressure is turned off, the fractures stay propped open by the billions of grains of sand, thus allowing the tight oil and gas to flow freely out of the rocks and into the well.
This technology has been around for more than a half-century, but it’s only become common recently with the shale oil and gas revolution that has exploded all over the US and Canada.
Earlier this month, the US Energy Information Administration (EIA) forecasted gas production in 2013 to increase by 0.82 bcf/d to 70.0 bcf/d from September’s estimates.
If their estimate holds true to the end of December, then it would mark the third consecutive year of record domestic output.
The EIA goes on to predict that production in 2014 would be at another all-time high.
With increasing production, demand for frac sand has launched through the roof – benefitting our companies immensely over the last year.
Furthermore, their performance was also boosted in part by an ongoing bottleneck to efficiently transport frac sand to well sites.
You see, a single well is capable of using 7 million pounds of sand, which can take up to 35 railcars to transport.
At the end of 2012, the Railway Supply Institute recorded 60,244 railcars on backorder. As of October 1, 2013, that number now stands at 73,848.
With the log jam getting increasingly worse, demand for silica will continue to trend upwards.
Although it’s not fully certain that what the EIA forecasts will ring true for natural gas, there’s no reason not to believe that production will remain brisk through to the end of the year.
And for these reasons, it’s a safe bet to stay bullish on SCLA and HCLP.
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