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Pioneer Natural to Buy U.S. Silica’s Sand for Permian Wells


Pioneer Natural Resources Company PXD recently agreed to buy a stake in Lamesa, TX sand reserves of U.S. Silica Holdings, Inc. SLCA. Under the terms of the long-term sand supply deal, Pioneer Natural will receive processed sand from the reserves for 15 long years. The financial details of the deal are yet to be disclosed.

The sand from Lamesa will reach Pioneer Natural’s oil and natural gas wells in the prolific Permian Basin, for usage in hydraulic fracturing. Its Midland Basin acreage will likely benefit from the “low-cost West Texas sand” for a significant period of time. The company expects the deal to reduce its sand costs by 50% and further lead to a sustainable decline in overall well expenses from the next year. The move will help the company earn more profit, courtesy of rising output from the basin.

The sand reserves of U.S. Silica are situated around 60 miles north of Midland, where it expects to produce about six million tons of fine grade 100 mesh per annum along with 40/70 mesh sand. Output at the site is expected to commence in the last quarter of 2018. The timeline for the first delivery to Pioneer Natural is projected around first quarter of 2019. Pioneer Natural is expected to obtain around 1.4 million tons of initial supply, which will likely grow to 2 million tons in 2020.

As far as U.S. Silica is concerned, the deal is in line with its strategy of generating significant free cash flow yield from its sand mining operations.

Price Performance

Dallas, TX-based Pioneer Natural, an independent oil and gas exploration and production company, has gained 25.4% over a year compared with 12.9% collective growth of the industry it belongs to.

Zacks Rank and Stocks to Consider

Currently, the stock carries a Zacks Rank #3 (Hold). Investors interested in the energy sector can opt for some better-ranked stocks like Magnolia Oil & Gas Corp MGY and Petroleo Brasileiro S.A. or Petrobras PBR, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Houston, TX-based Magnolia is an exploration and production company. The Zacks Consensus Estimate for the company’s full-year earnings is pegged at $1.50.

Rio de Janeiro, Brazil-based Petrobras is an integrated energy company. The company’s top line for 2018 is likely to improve 7.5% year over year. In the last four reported quarters, it delivered an average positive earnings surprise of 10.4%.

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