Chesapeake Energy (stock ticker: CHK) has signed up with Hi-Crush Partners LP (stock ticker: HCLP) for a new, long-term frac sand supply agreement for the in-basin purchase of Northern White frac sand to support Chesapeake’s completions program in the Marcellus and Powder River basins.

Hi-Crush will Supply Northern White Frac Sand to Chesapeake’s Marcellus and PRB Ops

Hi-Crush Partners announced a long-term contract with Chesapeake Energy to supply Northern White sand to Chesapeake’s Marcellus and PRB Ops.

Hi-Crush sells a substantial portion of its frac sand on long-term contracts which have current terms expiring between 2018 and 2024. “As of October 1, 2018, the average remaining contract terms of our long-term contracts was 2 years with remaining terms ranging from 3 to 75 months,” Hi-Crush said in a Q3 filing.

Hi-Crush will Supply Northern White Frac Sand to Chesapeake’s Marcellus and PRB Ops

Hi-Crush Partners’ frac sand plants.

As of September 30, 2018, Hi-Crush owned or operated 12 terminal locations throughout Colorado, Pennsylvania, Ohio, New York and Texas, of which three were idled and seven were capable of accommodating unit trains. Hi-Crush said its terminals include approximately 110,000 tons of rail storage capacity and approximately 140,000 tons of silo storage capacity. “We are continuously looking to increase the number of terminals we operate and expand our geographic footprint, allowing us to further enhance our customer service and putting us in a stronger position to take advantage of opportunistic short-term pricing agreements,” Hi-Crush said in the filing.

Hi-Crush will Supply Northern White Frac Sand to Chesapeake’s Marcellus and PRB Ops

EnerCom Snapshot: Hi-Crush Partners

Nothing wrong with Northern White

At the end of September, Hi-Crush and Covia Holdings (stock ticker: CVIA), two of the larger frac sand providers for the U.S. shale industry, temporarily idled some of their Northern White frac sand plant operations. Hi-Crush idled some operations at its Whitehall facility in Wisconsin, while Ohio-based Covia idled plants or trimmed production from a number of its Wisconsin plants. Covia said it reduced its proppant capacity by 3.3 million tons “in response to changing market demand.”

Oil & Gas 360® interviewed Hi-Crush CFO Laura Fulton about the company’s announced pullback in Wisconsin frac sand production.

“The demand for sand is still growing and the proppant intensity is still strong, the well completion activity is strong, but the supply growth is overtaking that demand growth and that’s why we think it really is a fairly temporary issue because when you go into 2019, E&Ps will refresh their CapEx budgets and are likely to start going and completing again, this time anticipating the greater efficiencies and the sand demand that goes along with that.

“The pressure pumpers had inventory of sand built up in the basin and they needed to move that before they could order more sand,” Fulton said. “The other dislocation is coming from the in-basin mines whereas you’ve got new supply coming on, now the Northern White sand is being rebalanced to different basins,” Fulton said at the time.

Not everyone on a ‘frac holiday’

This week’s announced contract would indicate that some operators are not on a frac holiday, as some Permian Basin producers have been in the wake of takeaway constraints in the basin. In fact, Hi-Crush reported record frac sand sales in Q3.

Chesapeake Energy produces oil and gas from multiple U.S. basins, and it has recently announced the planned acquisition of WildHorse Resource Development (stock ticker: WRD), which will increase the Eagle Ford position for Chesapeake.

This WildHorse acquisition is part of Chesapeake’s overall shift toward oil production, which the company is rapidly accomplishing. Chesapeake is currently producing 89 MBOPD, but plans to increase this to 160-170 MBOPD in 2020. Oil will make up 30% of total production in 2020, compared to 19% now. Chesapeake expects this will allow the company to grow its EBITDA margin by about 50%.

Chesapeake has turned to the Powder River Basin and the Eagle Ford for its primary growth opportunities, and the company is content to let its gas assets generate cash flow. Chesapeake said its Marcellus assets should generate $350 million in free cash flow in 2018.

Chesapeake is currently running five rigs in the PRB, and it placed 13 wells on production in the play in the third quarter. One of these was the company’s best Turner well to date, which reached a 24-hour IP rate of 3,133 BOEPD. The company is planning to significantly ramp up Turner drilling in the coming year. Chesapeake anticipates bringing 65-70 Turner wells online in 2019, which is more than double the company’s current inventory of wells in the Turner.

Hi-Crush will Supply Northern White Frac Sand to Chesapeake’s Marcellus and PRB Ops

Chesapeake’s Powder River Basin opportunity.

Chesapeake will also utilize one PropStream® container crew and related logistics with the option to expand, Hi-Crush said in a statement announcing the contract with Chesapeake.

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