Proppant Sales Signify Rising Oil Prices

Submitted by Randall Radic as part of our contributors program

Proppant Sales Signify Rising Oil Prices

By Randall Radic

Now that the price of oil appears to be rebounding, it’s a good time to begin looking at strategic investments in oil services stocks.  According to Jeffries, the Global Investment Bank, the sale and use of proppants is increasing.  Proppants are used to increase the productivity of wells.  This indicates the development and drilling of new wells.

Companies buying proppant include Halliburton, Baker Hughes, Patterson UTI-Energy, Liberty Oil Field Services, Rowan Companies, Atwood Oceanics and C&J Energy Services.

Jeffries believes Atwood Oceanics could hit $38 per share.  An offshore drilling company, Atwood Oceanics (NYSE:ATW) presently has an even dozen offshore drilling platforms and will soon be equipped to do extreme deep water drilling.  Rowan Companies (NYSE:RDC) is one of the top providers of self-elevating mobile drilling platforms that can drill in water depths up to 350 feet.  Rowan’s self-elevating platforms, commonly called ‘jack up rigs,’ are deployed all over the world.  Jeffries has indicated that Rowan could achieve a stock price of $27 in the coming months.

A number of analysts perceive Baker Hughes (NYSE:BHI) as a discounted entry point into Halliburton (NYSE:HAL).  The jumbo merger of Baker Hughes and Halliburton into the T. Rex of oil field service companies still has to pass antitrust scrutiny.  But the analysts at Morgan Stanley are betting that the merger will be approved, subject to certain divestitures.  Jeffries cites $82 as a projected price for Baker Hughes.

Proppant companies such as Carbo Ceramics (NYSE:CRR) and Hi-Crush Partners (NYSE:HCLP) have been upgraded by Iberia Capital.  Halliburton has a deal with Hi-Crush to increase its purchase of proppant through 2018. In fact, rail cars to transport the proppant are in short supply, indicating that demand is high. And since experts state that more than 90% of shale oil remains untapped, the outlook for proppant is positive.

When contacted for comment, Hunter Carren of ModuTank, said, “Right now, there is a high demand driver for oil service companies.  Proppant suppliers are having a hard time keeping up with demand.  The onshore demand should continue as drillers attempt to increase profitability on horizontal wells.”

Some exploration and production companies are utilizing raw sand to improve production, while others are switching to cheaper Chinese proppants in an effort to reduce costs.  Despite this, domestic proppant companies remain optimistic about pricing.  Most domestic companies are in the process of signing new contracts or extending existing contracts for proppant.  In the long run, ceramic proppants are more cost-efficient than raw sand, simply because production is higher when ceramics are utilized.

The health of the proppant sector of the oil industry appears to presage the rebound of oil prices.