financing and investment: value propositions and refinancing in the industrial minerals space

Financing and Investment: Value Proposi7ons and Refinancing

Industrial Minerals Events 3rd Frac Sand Conference Minneapolis, USA

Joel Schneyer – Managing Director [email protected]

303.619.4211 September 1, 2015

Secular Demand Drivers for Proppants

Proppant demand is expected to increase over the next decade because:

§  Operators are using longer laterals §  Overall increase in frac sizes per stage §  Increased number of frac stages per well §  More sand per stage (overpacking), and §  Closer well spacing

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Source: C.L. Dake, Univ of Missouri School of Mines & Metallurgy Bul. Tech. Ser., Vol. 6, No. 1 August 1921

Sand Supply -‐ St Peter the Patron Saint of Frac Sand

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4

Proppant Mine Mapping State Q2 ‘15 Mine Count

Market Share %

WI 54 32%

TX 38 23%

MO 16 10%

IL 11 7%

OK 9 5%

MN 8 5%

Rest 31 19%

Sand Supply -‐ Origin Loca_ons

Note -‐ AcGve proppant mines are defined as sand mine locaGons reported to MSHA with acGve operaGng hours. If not hours are reported for the quarter, than the mine is deemed as not acGve for the Gme period.

Sand Supply -‐ Origin Detail

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109 118

122 125 132

150 154 155

149

167

0

20

40

60

80

100

120

140

160

180

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015

Coun

t of M

ines with

Ac7ve Ope

ra7n

g Ho

urs

Ac7ve Proppant Mines

§  Of the 85 million tons of sand available, about 66% of the produc_on capacity is held by the top 10 sand suppliers

§  Unimin, holding the largest market share of capacity represents 12.6% of the total market, while US Silica has recently surpassed Santrol (FMSA) to represent 11% of the total market

Sand Supplier Market Share (% Capacity)

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Source – NavPort PresentaGon (April 2015), Canadian Frac Sand LogisGcs & Market Forecast Summit in Calgary

Demand -‐ Historical Proppant Consump_on by Basin (Billions of lbs.)

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Returns for U.S. Shale Projects

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Source: EnerCom AnalyGcs (August 6, 2015) Shale ProducGon Growth Rates StarGng to Wane

§  Proppant demand is projected to drop by 30.5 billion pounds from 2014 to 2015

§  Demand forecast is predic_ng a 28% decline from 2014 to 2015, with the Eagle Ford and Bakken being most affected, Marcellus and Permian least affected

Demand – Forecast by Basin

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Source – NavPort PresentaGon (April 2015), Canadian Frac Sand LogisGcs & Market Forecast Summit in Calgary

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Sand Supply – Demand Cartoon

85.0 21.3 63.8 42.5 0

Millions of Tons (167 Mines with 85 million tons capacity)

Cash Cost $

/t (FOB Mine)

$45

$30

$15

D1 55 million tons actual 2014

D2 40 million tons forecast 2015

Note: This is not real data

25% 50% 75% 100%

Royalty SG & A Process Mine

Source – Headwaters Industry Research

American Silica test work

§  Revenue per ton for resin coated (Fairmont Santrol) peaked in Q3 2014 §  Revenue per ton for natural sand peaked in Q4 2014 §  Revenue does not equal profitability

Sand Supplier -‐ Revenue

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$57.85 $48.54

$73.16

$97.78 $103.35 $98.75 $97.34

$105.84 $94.10 $94.34

$0

$20

$40

$60

$80

$100

$120

$140

$160

2015Q2 2015Q1 2014Q4 2014Q3 2014Q2 2014Q1 2013Q4 2013Q3 2013Q2 2013Q1

Revenue / Ton of Sand Sold

Hi-‐Crush Emerge US Silica Fairmount Santrol WTI

Sand Supplier – EBITDA Margins



§  Spot sand is currently selling for +/-‐ $35 per ton FOB Wisconsin §  Sand prices down from $50 to $60 per ton less than a year ago §  Ave EBITDA/ton of proppant sold in Q2 2015 is $15 per ton, down from a high

of $35 per ton in Q3 2014

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$14.73 $24.83

$31.34 $34.97 $30.14 $27.11 $26.22 $28.91 $23.34

$25.94

$57.85 $48.54

$73.16

$97.78 $103.35 $98.75 $97.34 $105.84

$94.10 $94.34

$0

$20

$40

$60

$80

$100

$120

2015Q2 2015Q1 2014Q4 2014Q3 2014Q2 2014Q1 2013Q4 2013Q3 2013Q2 2013Q1

Adjusted EBITDA / Ton of Sand Sold

Hi-‐Crush Emerge US Silica Fairmount Santrol Average WTI

Q2 2014 = $30 EBITDA/t

Q2 2015 = $15 EBITDA/t

Sand Producer

Frac Sand Delivered Cost to Well Site

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Source: modified from Raymond James, Global Research Report, August 2014

Oilfield Trading Metrics -‐ Median TEV / EBITDA Mul_ples

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Sector Focus TEV /LTM EBITDA

E&P Companies 3.5x -‐ 6.2x

Large Cap Integrated Field Services 6.8x

Small / Mid Cap Integrated Field Services 5.3x

Contract Drillers 5.0x

Oilfield Equipment Manufacturers 6.9x

Sand & Proppant Producers 7.2x

Basin TEV /LTM EBITDA Daily BOE Produc7on

Bakken 3.5x $37,836

Eagle Ford 3.9x $32,589

Marcellus 6.2x $42,158

Niobrara 4.7x $32,148

Permian 5.2x $38,841

U_ca 5.7x $45,165

Notes – valuaGon date August 20, 2015 Source -‐ TEV / EBITDA from Cap IQ

Shale Plays -‐ Median TEV / EBITDA Mul_ples

3.5x

4.7x

6.2x 5.7x

5.2x

3.9x

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Notes – valuaGon date August 20, 2015 Source -‐ TEV / EBITDA from Cap IQ

Sand Supplier -‐ Trading Mul_ples



§  Shows average decline from 23.5x “peak” in 2Q 2014 to 6.2x in 2Q 2015 (August 15)

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6.2

8.1

9.1

13.1

23.5

18.5

14.1

0

5

10

15

20

25

30

35

2015Q2 2015Q1 2014Q4 2014Q3 2014Q2 2014Q1 2013Q4

TEV / LTM (Adjusted) EBITDA

Hi-‐Crush Emerge US Silica Fairmount Santrol Average

Notes – Q results posted within 45 days from Q end; valuaGon dates Q1 May 15th , Q2 Aug 15th , Q3 Nov 15th , Q4 Apr 15th


Valua_on Overview – Total Enterprise Value (TEV) / EBITDA

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Source – GF Data provides data on private equity-‐sponsored M&A transacGons with enterprise values of $10 to 250 million

§  The so-‐called “size premium” the reward given to larger businesses over comparable smaller ones remains high

2003 1HTEV -‐10 2011 2012 2013 2014 2015 Total N-‐

10-‐25 5.6 5.3 5.8 6 5.4 5.9 5.6 87525-‐50 6.2 6.4 6.2 6.9 6.7 7.4 6.3 65050-‐100 6.7 7.5 6.8 6.8 8.6 7.5 7.0 463100-‐250 7.2 7.7 7.4 7.5 7.8 8.6 7.5 202

Total 6.1 6.4 6.3 6.5 6.8 6.8 6.3

N = 1273 211 245 153 205 103 2190Please note that N for 2003-‐10 encompasses seven years of activity.


Valua_on Overview – Average Mul_ples and Deal Volume

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Source – GF Data provides data on private equity-‐sponsored M&A transacGons with enterprise values of $10 to 250 million

Note: 2015 1H deal volume is annualized.

§  Purchased by PE Harvest Partners June 2007; Sold to PE Harbinger Capital Partners Oct 2007; Sold to PE Golden Gate Capital Nov 2008; IPO in 2012; Golden Gate sold out its posi_on in 2013

§  Was formed by PE Insight Equity in 2012, IPO with LP structure in 2013. S_ll controlled by Insight Equity

§  Was formed by PE Avista Capital Partners in 2010, IPO with LP structure in 2012. S_ll controlled by Avista Capital Partners

§  51% purchased by PE American Securi_es in Aug 2010. IPO in Oct 2014.

§  July 2014 PE KKR leads $680 million recapitaliza_on

§  Porqolio company of PE Clearlake Capital. Filed Nov 2014 for IPO with LP structure

§  Was porqolio company of PE Denham Capital Management. 2014 sold to U.S. Silica Holdings, Inc. for $98 million. Adjusted LTM EBITDA of $11.1 million represents purchase price of 7.6x EBITDA

§  Recap by PE Energy Capital Partners July 2012

§  Owned by PE Wexford Capital and porqolio partner Gulfport Energy. Filed IPO for energy services rollup Mammoth Energy Partners LP Oct 2014

Notable Private Equity Ac_vity In the Frac Sand Space Since 2010

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Source – Private Equity Analyst as cited in Probitas Partners -‐ Private Equity Forecast & Desk Book for 2015


Commitments to U.S. Private Equity Partnerships by Sector

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Major Dynamics

Supply -‐ Demand

Mul_ples

Investors

Outlook

§  Saudis move to protect market share in November 2014. More recently, with sorness of Chinese growth and the overhang of Iranian oil flooding market, oil prices have moved to the low $40’s barrel

§  Current oversupply of sand with 167 opera_ng sand mines, NavPort is predic_ng a 27% decline in proppant consump_on from 55 m-‐tons (2014 actual) to 40 m-‐tons (2015 forecast)

§  With drop in oil prices margins and mul_ples have dropped for sand suppliers from $35 Adj EBITDA / ton sold midyear 2014 (23.5x TEV / Adj EBITDA) to current levels of $15 Adj EBITDA / ton sold (6.2x TEV / Adj EBITDA)

§  Private Equity have been major sponsors and investors to the oil services sector and have lots of dry powder

§  With the decline and poten_al lower-‐for-‐longer environment, expect increased M&A ac_vity, with a focus on ver_cal integra_on and capturing opera_onal efficiencies. U.S. Shale is here to stay

Financing – Final Thoughts

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