Frac Sand November 2014

Frac Sand Insider

A View from the Stock Market Conference

William Blair & Company, L.L.C. receives or seeks to receive compensation for investment banking services from companies mentioned
in this presentation. Investors should consider this presentation as a single factor in making an investment decision. Please consult the
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A bit about me and what we’ll be talking about today
William Blair’s Energy Services analyst & head of our firm’s Global Services Research Group
• Energy (oil and gas equipment and services & related stocks, but not E&Ps)
• Real Estate Tech & Services
• Staffing
• Specialty Consulting
• Information Services
• Education Tech & Services
15 years as a sell-side analyst, the last 7.5 at William Blair

What Does an Analyst Do?

• Help investors understand industries and stocks
• Use industry sources, network of contacts, conversations with management to make buy,
sell and hold recommendations on stocks under coverage
• Help with the capital markets process for private and public companies

Today we’re going to talk about the frac sand industry & companies from a stock market
perspective
Frac Sand Investment Thesis
Strong Demand Growth
Increase in Wells, Stages / Well and Sand / Stage = 30%+ in 2014, 15-30% growth in 2015
Leading producers still pumping 2-10x as much sand as other producers (lots of catch up)
Sand becoming recognized as one of highest ROI growth components of completion process

Limited Supply Growth = Pricing support (or increases)

Permitting hurdles, especially in Wisconsin (# of permits down >50% since 2012)
Large tracts of Land getting hard to find (especially on rail, etc.)
Counties/towns making process more difficult
Move away from FOB-mine contracts has increased capital and operational scale requirements

Move to FOB-Destination trend dominating supply chain

Sand / Well volumes requiring Unit Trains for 1 well in some cases
need to have multiple days of supply in each basin to serve contract & spot market
Large volumes in every basin require multiple origins to drive transportation costs lower
Rail car access becoming a gating factor

>>>These dynamics will drive share to a small # of scaled providers – get big or go home
Wells / Rig – Growing influence of Hz Rigs & Pad Drilling

Wells / Rig 2012 - Present

5.40

5.20

5.00

4.80

4.60

4.40

4.20
Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314

Total Market YTD14 vs. YTD13: +0.5%

DJ/N -14%
Permian +0.9%
Utica -32%
Granite Wash +15%
U.S. Silica Volume Shipped vs Land Rigs

Year-over-year Growth, 2011 – 4th Quarter 2013

100%

80%

60%

40%

20%

0%
Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214

-20%
Sand Volumes, y/y Avg. Total Rigs, y/y Avg. Horizontal Rigs, y/y
Carrizo proppant placement well above peers
Carrizo presentation
Carrizo is–pumping
comparing sand
1,500 concentrations
– 1,700 lbs/lateraloffoot
E&Ps(5K tons/well…~50 rail cars)
In most cases this is 1.5-2x same-county peers’ volumes
Logistics Footprint & Competencies will Drive Share
US Silica Hi-Crush
~7,000+ owned/leased rail cars (9,000 next yr) ~2,700 owned/leased rail cars
~6,500+ managed rail cars ~4,500 managed rail cars
4 primary frac sand mines (will be 6 in ’16) 2 mines (+ another at sponsor level)
39 transloads (some owned, some partnered) 14 transloads (concentrated in Marcellus/Utica)
YTD have shipped 100 Unit Trains On pace for 35 unit trains this year
YTD ~60-70% of frac sand sold in-basin ~1/3+ of frac sand sold in-basin & growing

Emerge Energy Services FairmountSantrol

~4,000+ owned/leased rail cars ~8,000 owned/leased rail cars
~2,000+ managed rail cars ~1,000 managed rail cars
3 mines (will be 5 in 2015) (targeting 16,000 cars at YE16)
~13 transloads (almost all via partnership) 6 primary/API-spec frac sand mines
On pace for 100+ unit trains / yr + growing 49 transloads (32+ exclusive for FMSA)
YTD ~40% of frac sand sold in-basin Can ship unit trains from 3 mines to 3 in-basin
terminals
YTD ~80% of frac sand sold in-basin
YTD Performance

-56.74% CRR

Crude Oil
-22.80%
WTI

Energy Index
-12.13%
OSX

19.48%
HCLP

24.16%
SLCA

EMES 80.19%
Performance Since May 1st, 2014
Stock Performance Since May 1, 2014

12.13%
HCLP

7.54%
EMES

-7.39%
SLCA
Energy Index

-15.38%
OSX

-19.44%
FMSA
Crude Oil

-23.89%
WTI

-63.37%
CRR
Proppant Providers Comparable Valuations

Hi-Crush Partners Emerge Energy

2013 2014 2015 2013 2014 2015
P/E 21.10x 14.30x 10.99x P/E 67.69x 21.22x 12.10x
EV/EBITDA 33.81x 15.97x 10.66x EV/EBITDA 26.06x 16.94x 10.23x

Closest Peers P/E Closest Peers P/E

U.S. Silica 30.37x 20.74x 12.44x U.S. Silica 30.37x 20.74x 12.44x
Carbo Ceramics 13.85x 16.18x 16.74x Hi-Crush 21.10x 14.30x 10.99x

Carbo Ceramics U.S. Silica

2013 2014 2015 2013 2014 2015
P/E 13.85x 16.18x 16.74x P/E 30.37x 20.74x 12.44x

EV/EBITDA 6.58x 6.95x 6.47x EV/EBITDA 15.56x 10.00x 7.24x

Closest Peers Closest Peers

U.S. Silica 30.37x 20.74x 12.44x Carbo Ceramics 13.85x 16.18x 16.74x
Hi-Crush 21.10x 14.30x 10.99x Hi-Crush 21.10x 14.30x 10.99x
Emerge Energy 67.69x 21.22x 12.10x
U.S. Silica Valuation vs. Oil Price
110 15
U.S. Silica Holdings, Inc. - EV/EBITDA - NTM WTI Crude Oil ($/bbl)

14
105

13

100

12

95
11

10
90

85

80
7

75 6
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
EMES Yield vs. Oil Price
Emerge Energy Services LP Daily
77.32 -3.36 -4.16% 3:02:03 PM VWAP:77.69 High: 10.99 Low: 5.07 Chg: 7.66%
110 12
Emerge Energy Services LP - FE_VALUATION(DIV_YLD,MEAN,NTMA,,'') WTI Crude Oil ($/bbl)

11

105
10
9.98

9
100

95

90

85

80

77.18

75 4
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
What About Consolidation?
Only a couple acquisitions have happened yet investors keep expecting more
US Silica acquired Cadre (Hickory sand in Texas; Summer 2014)
Hi-Crush acquired D&I (distribution/storage in Marcellus / Utica; Summer 2013)
KKR recapitalized / acquired Preferred (Summer 2014)
FairmountSantrol/FMSA acquired sand assets of FTS International (Summer 2013)

Problems with Consolidation

• All Mines Aren’t Created Equal
Usually can’t “fix” a poorly constructed mine; low production costs are critical
FOB Destination selling changes/increases scope of what is “valuable”
Origin & Destination Matching key for transportation costs
• Filling Holes in the footprint (basins, grades & types of sand) isn’t as simple as it sounds
• Public company volumes are sold out; organic investments create better ROIs
• Valuation expectations bolstered by high oil prices…maybe not so much now
You know when the end is near….
Leading-edge indicators such as wells / rig and sand / well start plateauing or falling
E&Ps and Services company commentary on earnings calls & at conferences

The “average” E&P catches up to the “leaders” (EOG, Whiting, etc.) in sand / well
completion dynamics are still immature – several years of increasing intensity

Rail Car bottleneck/waiting isn’t a “thing” the sand companies talk about
2016, maybe 2017
increasing complexity pushing service companies to avoid growing rail car fleets
Thank You

Questions?
 Disclosures
Current Rating Distribution (as of 10/31/14)
Coverage Universe Percent Inv. Banking Relationships* Percent

Outperform (Buy) 65 Outperform (Buy) 16

Market Perform (Hold) 31 Market Perform (Hold) 3
Underperform (Sell) 1 Underperform (Sell) 0

*Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has received compensation for investment
banking services within the past 12 months.

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