) -- 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


(RES) - Get Report

dependent on increased supply, and finally, to exploration and production companies like

Whiting Petroleum

(WLL) - Get Report

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


, 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.

Carbo Ceramic's earnings, revenue and margins keep moving higher, but market demand and the market multiple afforded to its shares still got ahead of the reality of mining production and supply dynamics, the analyst said.

Wangler said sand for fracking can cost as little as 5 cents a pound, but the sand refined by Carbo Ceramics can cost as much as 45 cents a pound. It's required in some oil and gas basins based on the geology, such as the Haynesville, and yet it's also being used in basins where 5-cent sand would do just fine, because sand is in such short supply.

After the third quarter, Whiting Petroleum told analysts that its costs had increased significantly because the only sand it could buy was more expensive, even though it was a high-grade sand it didn't even need in its Williston oil basin.

"I recently met with an E&P company, and they told me that the fracking crew showed up and said, 'Here's all our equipment but we don't have any sand,' " Wangler remarked.

The other big issue for Ceramic Carbo, and a key issue in its earnings miss, is that the out-of-favor Haynesville has been among its big money makers. With many E&Ps pulling out of the Haynesvillle due to natural gas prices, a key market for its premium sand has been hit hard, and it has to transition like the E&Ps and service companies to the liquid-rich basins, a logistical and marketing challenge. In basins where premium sand is not a requirement, Carbo Ceramics faces increased competition from cheaper alternatives, including Chinese ceramic proppant (sand) companies.

As E&Ps are pulling out of the Haynesville (rig count was down 35% year over year as of year-end 2011, and Stephens expects a 40% decline this year), the movement of oil service companies can trail the trend.


migration from natural gas basins to liquids-rich basins is also impacting the cost of fracking logistics. The wind may blow sand, but when it's millions of pounds of sand, it's not going to blow the grains from the Haynesville basin in Texas to the Bakken in North Dakota. The SunTrust analyst said it takes more than 100 truckloads to move enough sand for one well.

In earnings reports from


(HAL) - Get Report


Baker Hughes


, the oil service heavyweights both talked about the migration to the liquids-rich basins and away from the natural gas plays.

However, the

migration will be a messy one for many companies when it comes to short-term financials, and sand is part of the pain.

With natural gas moving down to

historically low price points this year, going from the mid-$3 range to the mid to low-$2 range this month, the existing migration away from natural gas basins where oil services companies and the sand has been located will lead to some hits in first-quarter results as well.

"Fracking companies are reluctant to move crews and equipment. It takes lots of money, and people are hard to come by, and if you take a crew working in Louisiana and say we are moving to North Dakota, they may not go," SunTrust's Wangler said.

Fracking companies are also trying to hold onto as much business as possible in the out-of-favor natural gas basins before making the decision to up and make costly moves: The Haynesville may be uneconomic now, but will exist as a producing basin for decades to come. The rising cost of sand as a raw material is compounded by the costs of moving it across the country.

Dahlman Rose noted in a research note on oil service company RPC, "Technical Service EBIT margins of 25.7% were significantly below expectations for 28.0% and were the lowest since 3Q10's 24.3%. Raw material shortages of coarse sand and guar contributed to the weaker quarter than expected, and we believe these issues will persist as the supply chain struggles to keep pace with growing fracturing activity, which should negatively impact utilization."

RPC shares were down 4% on Thursday after the company reported. Its peer group of companies, including

C&J Energy Services



Basic Energy Services

(BAS) - Get Report

(-5%) and

Key Energy Services

(KEG) - Get Report

(-5%), were all on the losing side of the tape on Thursday.

"Getting supply closer to the customer is important because that

distance only compounds the problem. You're paying more for the sand than you thought you would, and then you have to move it around more," noted energy analyst Phil Weiss or Argus Research, who said that Halliburton recently has talked about the need to move supply closer to demand.

"Sand has been a more quiet issue in the past, and I didn't know it would hit the fracking guys so hard," SunTrust's Wangler said.

The shale drilling boom received

a major endorsement this week, from President Obama in his State of the Union address, who remarked on the 600,000 jobs it may create in this country.

Playing in fracking's sand box is critical, and right now, costly, so maybe at least a few of those 600,000 jobs will go to smoothing out the rougher grains in the market.

-- Written by Eric Rosenbaum from New York


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