IN-BASIN SAND VS.

NORTHERN WHITE
Joel Schneyer & Anna Wall

February 6, 2019
Houston

BOSTON  DENVER
ATLANTA  BOISE  BURLINGTON  CHICAGO  DALLAS  GREENWICH  HOUSTON  LOS ANGELES  NEW
YORK ORANGE COUNTY  PHILADELPHIA  SAN DIEGO  SAN FRANCISCO  ST LOUIS  TAMPA  WASHINGTON
DC
LONDON, UK  SAO PAULO, BRAZIL
 THEMES OF DISCUSSION

Overview – Schneyer & Wall

I
Introduction to the In-Basin Sand Vs Northern White Sand Discussion

Physical Differences - Erik Nystrom (VP Strategic Marketing of Covia)

II
Understanding the Performance & Limitations of Proppant Geologies

Context & Analysis – Schneyer & Wall

III
Longer-Term Impacts of Today’s Decisions

1
I. OVERVIEW
 E&P INDUSTRY SHIFTING TO MANUFACTURING MODE

Historical E&P Structure: Risk Management Emerging E&P Structure: Process Management

• Focus on exploration: • Focus on efficiency:

mitigate risk to prove mitigate operational costs
resources / reserves • Feedback/optimization
• Unpredictable between processes
Exploration activity, Exploration • Predicable activity, based
based on discoveries on demand
• Oilfield services (and • Oilfield services (and
materials) outsourced materials) vertically
integrated or managed

Drilling

Drilling Raw Materials

Completions
Completions Raw Materials
Impact to Frac Sand Industry:

- Process optimization and cost control squeezes

suppliers: reliability & price sensitivity

- Increased vertical integration increases supply

competition: customers become competitors
Refining
Source: adapted from Source Energy Services Corporate Update Presentation May 11, 2018

3
 … BUT DATA SUGGESTS PEAK SAND INTENSITY HAS PASSED

Proportion of Child Wells Productivity Per Well Vs. Proppant Volume

80%

70%
Eagle Ford
60% 100 16
90 14
50%
80
12
40% 70

Million bod
60 10
30% 50 8

Million lbs
Proppant
40 6
20%
30
4
10% 20
10 2
0% 0 0
2011 2012 2013 2014 2015 2016 2017 2018
2012

2012

2012

2012

2013

2013

2013

2013

2014

2014

2014

2014

2015

2015

2015

2015

2016

2016

2016

2016

2017

2017

2017

2017

2018
Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1
Eagle Ford- Parent Eagle Ford - Child Proppant
Child - Eagle Ford Child - Permian
Permian
100 16
“For a resource base where production is entirely dependent on 90 14
80
fracture propagation and fracture coverage to drain the reserves, we 12
70

Million bod
have yet to understand how reservoir conditions and well 60 10
productivity change as we continue to inject billions of pounds of 50 8

Million Lbs
Proppant
proppant and billions of gallons of water into the ground each year 40 6
30
... Still, what is already clear is that unit well performance, 20
4
normalized for lateral length and pounds of proppant pumped, is 10 2
dropping in the Eagle Ford as the percentage of child wells - 0
2011 2012 2013 2014 2015 2017 2018
continues to increase.”
2016
Permian - Parent Proppant
Permian - Child
Source: Paul Kibsgaard of Schlumberger, Barclays CEO Energy-Power Conference, Sept. 4, 2018

4
 GROWING PREFERENCE FOR FINER SAND MESH SIZES

U.S. Proppant Composition by Grade

1
0
0
%

9
0
%

8
0
%

7
0
%

6
0
%

5
2014 2015
0 2016 2017 2018E 2019E
%
20/4 30/5 40/7 100 mesh Other
0 0 0
4
0 Proppants Amended S/1 of Aug 13, 2018, page 104
Source: Coras Research, June 2018 published in Vista
%
5
 LOCAL / REGIONAL SAND IS “GOOD ENOUGH”

Permian Dune Sand Texas Regional “Brown” or “Hickory” Sands Northern White Sand
Black Black
Mountain Mountain Unimin FMSA US Silica Unimin FMSA US Silica
40/70 100 40/70 40/70 40/70 40/70 40/70 40/70
Brady Texas Gold Premium Hickory Unifrac White White
Winkler, TX Winkler, TX Brady, TX Voca, TX Voca, TX
8,000-
K Value 7,000 8,000 6,000 6,000 6,000 11,000 9,000 9,000
Sphericity 0.7 0.7 > 0.6 > 0.6 0.6 0.7 - 0.9 0.7 0.6
Roundness > 0.6 > 0.6 > 0.6 > 0.6 0.7 0.7 - 0.9 0.7 0.7
Turbidity < 100 < 100 < 250 < 75 10 - 130 < 100 < 50 10 - 140
Acid Solubility < 3.0% < 3.3% < 3.0% < 2.0% 1.80% < 3.0% < 0.6% 0.80%

Majority of local/regional mines are finer grades

Source: Company websites, Capstone Headwaters research

6
 LOCAL MINE ADDITIONS DISPLACING EXISTING SUPPLY

Planned/New Mines
Existing Proppant Mine
Other Aeolian Sandstones Capacity by Capacity by
Other Potential Sands Basin Q4’18 Q4’19
Carrizo-Wilcox Outcrop
MMTPA MMTPA
Late Quaternary Permian 57.2 65
Dunes
Hickory Fm. Sandstone
Eagle Ford 8.9 24
St. Peter Fm. Sandstone MidCon & Other 7.0 16
Active Tight Oil & Gas
Play
Source: Infill Thinking, company investor presentations, USGS, EIA, Covia research NEW SUPPLY 73.1 >105 ?
7
 INFLATIONARY PRESSURES NOT SUPPORTING SAND PRICES

Quarterly Percent Change in PPI

7
.
5
%

5
.
14

15
14

14

15

15

16

16

17

17

18

18

18
14

15

16

17
17
16

18
0
20
20

20

20

20

20

20
20

20

20

20

20

20

20

20

20

20
20

20

20
Q2

Q3

Q4

Q2

Q3

Q4

Q2

Q3

Q4

Q2

Q3

Q4

Q2

Q3

Q4
Q1

Q1

Q1
%
Q1

Q1

2
.
5
%

0
.
0
%

-
2
.
5
%

Drilling - Frac Sand Truck Freight Rail Freight

5
Source: Federal Reserve Bank of St Louis .
0
% 8
 CONSTRAINTS ARE MAGNIFYING SAND OVERSUPPLY EFFECTS

Estimated Severity of Constraints in Near Term (2018-2020)

Permian Eagle Ford DJ Niobrara MidCon Power River Bakken

Oil Takeaway Yes No Soon No No Soon
Gas Takeaway Yes No Soon Soon No No
Near-term Constraint

NGL Takeaway No No Yes Soon Soon Yes

Gas Processing No No Yes Soon No Yes
Produced Water Yes Yes Soon Yes No No

Source: BTU Analytics Presentation at Enercom August 2018

9
 SO PROPPANT MARGINS MAY HAVE PEAKED FOR THIS CYCLE

 Q3 2018 EBITDA “blended” margins on old & new contracts were US $8 - 27/short ton

Adjusted EBITDA US $ / Short Tons Sold

Hi-Crush P
$110
Emerge P
$100
US Silica P
$90
FMSA/CO
n cre asing local $80 VIA P
I of
tit ution
subs $70 Smart Sand P
sand
$60 Source Energy P
$50 TUSK
(Taylor/Chieftai
$40
n) Margin: US $/Ton Sold
EBITDA
$30 WTI Ave
Q3 2018 Q2 2018
$20 Price/Barrel
Hi-Crush $18.23 $26.83
$10
Emerge $7.87 $15.22
$0
US Silica $17.89 $26.22
-$10
Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

20 1
Q3
Q FMSA/COVIA $9.68 $20.79
16

18
13

13

14

14

15

15

16

17

17

18 -$20
20

20

20

20

20

20

20

20

20

20

20

Smart Sand $26.90 $22.95

-$30 Source Energy $16.06 $21.36
-$40
Select Sands $8.58 $17.86
-$50

Source: SEC Edgar, SEDAR, Yahoo Finance, Capstone Headwaters research

10
 … EVEN THOUGH ENTHUSIASM FOR SAND CONTINUES

140
Analyst
consensus
suggests
120
US Proppant Demand (Million Tons)

~20% YOY
increase
100
Actual
80 Jeffrie
s
60 Tudor Pickering Holt
Rystad Energy
40 Consensus

20

0
2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Emerge Energy Services Presentation November 2018

11
III. CONTEXT & ANALYSIS
 WHAT IS CRUSH & CONDUCTIVITY?

CRUSH CONDUCTIVITY

} WHAT IS IT? Measure of crush resistance and overall
strength at varying stress levels
} HOW IS IT DETERMINED? A proppant is exposed to
varying stress levels and the amount of fines is
calculated and compared to manufacturer
specifications
} HOW IS IT MEASURED? The ISO test classifies a
proppant according to the stress at which < 10% fines
is generated.
i.e. 7k proppant produces < 10% fines at 7000 psi
} WHAT IS IT? Measures flow, a factor of the stress
fatigue of individual proppant grains that results from
cyclic loading
} HOW IS IT DETERMINED? 50 hour flow test
} HOW IS IT MEASURED? Changes in flow manifests
itself in 2 ways:
» generation of additional fine-grained particles
(like a crush test) and
» repacking of the proppant as more proppant
grains fail

As little as 5% added fines can reduce propped

fracture conductivity by 50% *

Source: Coulter & Wells (e.g. SPE JPT, June 1972, pp. 643-650)
13
 CRUSH STRENGTH STRONGLY TIED TO SAND TYPE

Histogram of 40/70 Sand Crush by Type/Origin

1
1
0
0
0

1
Crush

0
0
0
0

9
0
0
0

0 1 2 3 4 5 6 7 8 9
8
0 Frequency
0
0 Sand
Permian Dune Brady Brown Sand Northern White Sand

7
0
14
0
0
 ... BUT PURCHASING BASED ON CRUSH IS MISLEADING

40/70 Mesh Conductivity @ 8000 PSI (50 Hours) vs Crush Comparison

400

350
Northern White Sand
Conductivity (md-ft) @ 8000 PSI Closure Stress

300

250

200
Brady Brown Sand
150

Permian Dune Sand

100

50

0
0 2000 4000 6000 8000 10000 12000

Crush
Strength
15
 … AND CONDUCTIVITY DEGRADES DIFFERENTLY OVER TIME

Crush
- 2,000 4,000 6,000 8,000 10,000 12,000 14,000
0%
% Conductivity Reduction from 50 hrs to 5 yrs

10%

20%

30%

40%

50%

60%

70%

80%

90%

100
% 40/70 White Sand 40/70 Brown Sand

Source: Nayef Al-Sadhan, 2014, Predication of short-term and long-term baseline conductivity degradation for proppants of different sizes and types, Ph D
Dissertation, Colorado School of Mines
16
 MODELING OF ACTUAL SAND SHOWS >2X RANGE BY TYPE

40/70 Mesh Average Conductivity Comparison - 50 Hours vs 5 Years

1200

1000
Conductivity (md-ft)

800

600

400

200

0
4000

6000

8000

1000
0
NWS Ave (50 Hours) C
NWS (5 Years) Brady Brown Ave (50 Hours)
Brady Brown (5 Years) Permian lDune Ave (50 Hours) NWS 1
o
NWS 2a NWS 2b NWS 3
s
Source: Capstone Headwaters u
r 17
e
 … SHIFTING LONG-TERM WELL ECONOMICS

Cumulative Cash Flow Per Well PV By Sand Type & Price Premium
$15 PV 10 PV 15
$9

$8
$10
$7

$6

Present Value
Million USD

$5 $5

$4

$0 $3
0 2 4 6 8 10
$2

-$5 $1

$0

m
m

m
nd

iu

iu
iu

iu
iu
Sa

em

em
em

em
em
-$10
AL
REGIONAL NWS $60 Premium

Pr

Pr
Pr

Pr
Pr
ON

60

40

30

20
50
GI

NWS $50 Premium NWS $40 Premium

S$

S$

S$

S$
S$
RE

NW

NW

NW
NW
NW
NWS $30 Premium NWS $20 Premium

Source: Capstone Headwaters. Assumes 16% productivity benefit from NWS vs. regional with same IP of 700 BOE/day, $6M D&C costs with regional sand, 7,000
tons proppant per well, WTI selling price of $52/bbl, NRI = 75%, and operating costs of $15/bbl.
18
CLOSING THOUGHTS

•Sand demand is no longer a •Sand quality has direct tie to

linear projection due to long-term well performance
optimization

•New entrants have swamped •Cost controls today likely to have

the market with local sand long-reaching impacts to well
supply, squeezing margins performance

19
 WHAT HAPPENS NEXT?

• Sand producers need to do better job of providing technical specs on

their sand

• E&Ps and OFS needs better record keeping and reporting in order to
make informed buying decisions to optimize well performance

• Technology and infrastructure need to be developed and adopted for

supply chain custody (e.g. blockchain software solutions and/or
containerized storage)

20