Unfazed by slumping oil prices and battering in the stock market, firms that supply sand and guar gum for shale oil and gas companies are not ready yet to call an end to a four-year boom spurred by hydraulic fracturing technology.
Just putting on a brave face as a downturn looms? Perhaps, but the optimism could also reflect confidence that the U.S. shale industry is more resilient to retreating oil prices than investors might think.
Oil prices have fallen 30 percent since late June and shares of such firms as U.S. Silica Holdings and Hi Crush, which supply sand to U.S. drillers, followed, dumped by investors anticipating 2015 output cuts and a drop in demand.
However, the service companies say business remains as strong as ever. Furthermore, they point out that most of their supply has been bought under long term contracts meaning next year should be good too.
"We have not seen any data or had any discussions that indicate lower demand for our sand," said Robert Rasmus, Co-Chief Executive Officer of sand producer Hi-Crush after the company reported record third quarter revenues this week.
Hi Crush's share price has fallen more than 40 percent since the beginning of September, but Rasmus said almost 90 percent of the company's sand output was sold for 2015.
His comments echoed those of other firms that supply sand and other materials to oil drillers.
U.S. Silica Holdings, whose oil and gas sector revenues doubled in the third quarter of this year, remains upbeat about its outlook.
"We are actively engaged in conversations with our customers about their future growth, and none has brought down their estimated requirements," chief executive officer Bryan Shinn told investors last week.
Demand for sand and the powder-like gum made from guar seeds has soared in recent years. Both are used in what is known as "completion" of an oil well, which occurs after drilling and during fracking to keep open tiny fractures in shale rock to allow oil to escape.
REBOUND HOPES?
Analysts say that in contrast to investors who have already priced in a drop in 2015 output because of sliding oil prices, service firms may still hope for a rebound and hold off with cutting their outlooks.
Their optimism could also be a sign that the shale oil boom, which has transformed U.S. energy industry since the end of last decade, has enough momentum to keep output and service firms' business rising next year and perhaps beyond even as some drillers already start cutting their 2015 investment plans.
Industry experts say existing wells that have been drilled but not yet fracked will keep output surging for months and many have hedged next year's production well above current prices.
Furthermore, while U.S. oil prices hit a three-year low below $76 a barrel this week, several shale oil firms have indicated they would remain profitable if prices stayed above $70.
That said, a further slide and protracted weakness could force shale oil companies and their suppliers, many of which have yet to weather a downturn, to pull back.
Some clouds are already appearing.
Diamondback Energy, an oil producer in the Permian Basin in Texas, said this week that it would start 2015 with five drilling rigs and wait to see what oil prices do before adding three more rigs as earlier planned.
Other firms have also signaled potential 2015 spending cuts should oil prices remain low or slide further, eventually weighing on their suppliers' business.
Analysts are closely watching the oil rig count for any early signs of a slowdown. The number of oil rigs in North America is near all-time high, according to a weekly survey from service firm Baker Hughes.
"It all depends how low oil prices go and how long they stay there - and the jury is still out on that," said Judith Dwarkin, director of energy research at ITG Investment Research in Calgary. "We will be watching the rig deployment."
In the meantime, some firms still bet on a continued shale boom. United Guar, a Houston-based firm that supplies guar gum to U.S. drillers, plans to triple its processing capacity over the next 18 months, the company's chief executive Aamer Safraz said in an interview, confident that prices will recover.
"I don't care if fracking slows in the United States," Safraz said. "You have to take a longer term view."
Join the Conversation