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Unknown Winners from the Frac Sand Boom

One of the beneficiaries of America’s shale boom has been the frac sand industry.

You see, sand is a key ingredient in hydraulic fracturing. Basically, sand is mixed with water and chemicals, then pumped down a well to crack open rocks, which allows oil and natural gas to escape.

Energy companies are expected to consume 95 billion pounds of sand this year, which is a remarkable 50% increase from just last year.

The increase is due in large part to new methods, such as “superfracking,” that use more sand in the process. Energy companies have found that they can increase output by up to 30% with these methods… And this hasn’t escaped investors’ watchful eyes.

In fact, frac sand companies have been among Wall Street’s biggest winners this year. For example, Emerge Energy Services LP (EMES) is up more than 550% since its IPO last summer, while competitors U.S. Silica Holdings (SLCA) and HiCrush Partners LP (HCLP) are closing in on triple digit gains in the last 12 months.

These numbers all sound great… But we haven’t even gotten to the real opportunity yet.

Planes, Trains, and Automobiles

The niche we’re interested in is the rail industry, which is busy shipping more than just oil.

This year, rail companies will provide shipment for 25% of the sand sent to oil and gas companies. That’s up from a mere 5% last year.

In fact, western U.S. rail companies like Union Pacific (UNP) are now shipping more than 20 million tons of silica sand annually to oil service companies that provide fracking services for the oil and gas firms. Union Pacific itself hauled almost 200,000 railcar loads of frac sand in 2013. That is a 26% jump from the prior year.

The sand comes from mining companies like Emerge Energy, which now routinely loads 100 rail cars filled with sand from its silos.

These silos are becoming more commonplace, particularly near drilling sites. For example, U.S. Silica and Union Pacific are jointly constructing a $12-million sand storage facility in Odessa, Texas.

In 2015, industry observers – including U.S. Silica – forecast that half of all frac sand will be shipped by rail. Add to that a forecast of at least a 15% increase in demand, and the outlook for the western rail companies is bright.

And “the chase” continues,

Tim Maverick

Tim Maverick

, Senior Correspondent

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