2nd UPDATE: Frac Sand Miner U.S. Silica Trades Down Post-IPO

The sand used in oil and gas well fract7uring didn't cause much excitement among investors Wednesday, with shares of U.S. Silica Holdings Inc. (SLCA) declining on their first day of trading.

The company's stock closed at $16 on the New York Stock Exchange, down 5.9% from its initial-public-offering price of $17. 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.

Demand for the company's IPO was said to be strong ahead of the launch, and company President and Chief Executive Bryan A. Shinn said the offering was well oversubscribed, with an enthusiastic reception from attendees at road shows.

"We think a lot of (the stock's initial trading performance) has to do with technical trading issues," said Shinn during a telephone interview with Dow Jones. "We believe it was well-priced in the middle of the range. The stock is not something we are going to watch on a minute-by-minute basis."

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.

Silica prices 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 isn't 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

Silica (NYSE:SLCA)
Historical Stock Chart
From Jun 2024 to Jul 2024