Frac Sand Miner U.S. Silica Trading Down Post-IPO

The sand used in oil and gas well fracturing didn't cause much excitement among investors Wednesday, with shares of U.S. Silica Holdings Inc. (SLCA) sticking close to its IPO price in early trading.

The company's stock opened at $17.25 on the New York Stock Exchange, up 1.5% from its initial-public-offering price of $17, but soon sank lower, changing hands recently at $16.93 a share, down less than 1%. A total of 11.8 million shares were sold at the midpoint of its $16-to-$18 price range.

Two other offerings expected to begin trading Wednesday, biopharmaceutical developer Merrimack Pharmaceuticals Inc. and oil and gas production company Dynamic Offshore Resources Inc., were postponed after failing to price Tuesday night.

U.S. Silica specializes in commercial silica--essentially, sand--that is used in a variety of industries, the most prominent being oil and gas. The company's "frac sand" is used to stimulate oil and gas wells that are in shale formations, and it claims to be one of the few commercial producers capable of rail delivery of large quantities of the material to each of the major U.S. shale basins.

Strong demand for frac sand has led U.S. Silica to invest in expanding its production by 75% over 2010 levels and to build a new facility that makes resin-coated sand, another area of market growth. The company plans to use a portion of its IPO process to help build the facility and to fund future capital spending at the firm.

U.S. Silica is the second-largest domestic producer of commercial silica, and while frac sand accounts for nearly half of its business, the company also makes silica for glassmaking, chemical manufacturing, solar panels, wind turbines, specialty coatings and geothermal energy systems.

U.S. Silica says it has a low-cost operating structure because it owns most of its sand reserves and locates its processing facilities close to its mines. It expects demand to rise for its frac sand as more horizontal wells are drilled using fracturing techniques, well length increases due to advances in drill technology, and more frac sand is used per foot.

The economic downturn of 2008 and 2009 did decrease demand for commercial silica products, particularly in the glassmaking, foundry, specialty coatings and building products. Since 2010, as the general economy has continued to recover, demand has once again begun to grow in most of these end markets, and the company has seen more new demand in products ranging from solar panels to polymer additives.

One positive effect of the economic downturn is that decreased demand for commercial silica from various industries put a lid on any significant supply expansion. When demand grew for frac sand and rebounded in other markets beginning in 2010, supply failed to keep pace with demand, a condition that has persisted for the last 18 months. U.S. Silica and other producers have begun to expand, but the industry faces capacity constraints, ranging from finding silica reserves that meet frac sand standards, to finding reserves that are large enough and located close enough to transportation to justify development.

As a result, prices have increased at an average annual rate of 9% between 2000 and 2009; if demand for frac sand continues to rise, and if the general economic recovery continues to result in increased demand from other industries, U.S. Silica expects prices to go even higher.

In the first nine months of 2011, sales increased 14% to $212 million, and profit more than doubled to $20 million.

The company's growth through frac sand is not without its risks. If oil prices contract, high-tech hydraulic methods to drill wells in shale may prove too expensive, and demand for frac sand would fall. Other methods that use different materials to stimulate wells could replace frac sand.

Three-quarters of U.S. Silica's IPO shares were sold by previous owners, so the company won't receive those proceeds. The major seller was private equity firm Golden Gate Capital.

Morgan Stanley (MS), Bank of America Merrill Lynch and Jefferies Group Inc. (JEF) were joint bookrunners on U.S. Silica's offering.

-By Lynn Cowan, Dow Jones Newswires; 301-270-0323; lynn.cowan@dowjones.com

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