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In Fracking Boom, Oil and Gas Companies Boxed In by Sand

NEW YORK ( TheStreet) -- Every grain of sand is critical in the shale drilling boom of North America, literally.

For companies involved in the hydraulic fracturing boom, from the miners of the sand like Carbo Ceramics (CRR - Get Report) to the oil service companies like RPC (RES - Get Report) dependent on increased supply, and finally, to exploration and production companies like Whiting Petroleum (WLL) that are paying increasing costs, sand is a critical raw material.

Sand is mixed with water and chemicals in the fracking process to extract oil and gas trapped in shale rock, and most of that sand comes from mines in the Wisconsin/Minnesota area.

The most important commodity in the shale drilling boom isn't oil or gas: it's sand.

The subject of fracking sand as an environmental issue was recently explored by The Associated Press, but it wasn't until recent earnings in the oil and gas sector that sand became a primary financial issue across all companies involved in the fracking process.

More than 6.5 million metric tons of sand worth $319 million was sold or used in 2009, according to the U.S. Geological Survey, and that likely doubled in 2010, the USGS told the AP, though the 2009 data is its most recent public report on fracking sand.

In particular, two reports this week from the only publicly traded sand miner, Carbo Ceramics, and from oil service company RPC, show the two increasingly important economic sides of the sand story.

Carbo Ceramics was one of the market's biggest losers on Thursday, down 20% after it reported earnings that missed Wall Street's consensus view. Over the past three years, as the land drilling boom has intensified, Carbo Ceramics shares have gained 200%.

Analysts had expected earnings of $1.70 per share in the fourth quarter; the company reported earnings of $1.32. At a share value of $131 before its report, Carbo Ceramics was trading at a trailing price-to-earnings multiple of 22 based on the fiscal 2011 estimate of $5.88 a share.

"The issue is how much sand Carbo can sell, and while it has slowly ticked up, the market demand has been multiple times higher," said Jason Wangler, analyst at SunTrust Robinson Humphrey. "It takes a year or two before a miner can increase production meaningfully," Wangler said.
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