Smart Sand just wrapped up their Q1 2024 earnings call, boasting record sales volumes and a bullish outlook for Northern White sand. On the surface, it's a familiar story. Smart Sand, a stalwart in the Northern White market, benefits from the consistent demand in basins like the Marcellus and Bakken, while exploring growth opportunities in Canada and the Utica.

But beneath the surface, a fascinating subtext emerges. Reading between the lines of the transcript, a subtle shift in strategy appears to be taking shape. While Smart Sand executives downplay their involvement in the Permian Basin, a region dominated by regional sand, there's a distinct undercurrent of interest and even anticipation.

This isn't just corporate optimism. Smart Sand executives point to a "well-documented reduction in Permian well performance," suggesting a potential inflection point. Could this be the crack in the Permian's regional sand armor that Smart Sand has been waiting for?

Key Observations from Smart Sand's Q1 2024 Earnings Call:

Increased Inquiries from Permian E&Ps: Charles Young, Smart Sand's CEO, acknowledged an uptick in inquiries from Permian E&Ps, specifically regarding the "economics of Northern White versus regional sand." While they carefully characterize this as a small percentage of the overall Permian market, the fact that inquiries are increasing at all is significant.

Focusing on Northern White's Competitive Advantage: Smart Sand isn't shying away from touting the superior quality of Northern White sand. They believe it offers a distinct performance advantage over regional sand, particularly in the context of longer laterals and Tier 1 acreage where decline curves are a concern.

Strategic Positioning for a Potential Permian Surge: While Smart Sand doesn't currently ship significant volumes into the Permian, their recent investments suggest a calculated preparation for a potential shift. Their existing 10 million ton capacity and diversified rail portfolio could easily accommodate a surge in Permian demand.

Smart Sand's Financial Performance

Smart Sand reported a contribution margin of $18.5 million in Q1 2024, a significant jump from the previous quarter's $9.2 million. This was largely driven by record sales volume (1.3 million tons). If even a fraction of that future growth originates from the Permian, where pricing could potentially be higher due to the current dominance of regional sand, the impact on Smart Sand's financials could be substantial.

Hypothetical Scenario: A Shift in Permian Sand Demand

Let's explore a hypothetical scenario to understand the potential impact of a shift in Permian sand demand towards Northern White:

Assume a conservative 5% shift in Permian sand demand towards Northern White in the next 12 months.

With current Permian sand demand estimated around 70 million tons annually, a 5% shift equates to 3.5 million tons of new Northern White demand.

Smart Sand, with its readily available capacity and logistics network, could capture a significant portion of this new demand, potentially adding 1-2 million tons to their annual sales.

At current contribution margin levels, this translates to an additional $13-$26 million in annual contribution margin.

This is, of course, a hypothetical scenario. The Permian is a fiercely competitive market, and a shift towards Northern White is far from guaranteed. However, the early signals are intriguing. Smart Sand's understated yet confident commentary, coupled with their strategic investments, suggests they are quietly positioning themselves for a potential Permian power play.

"Fun Fact: Smart Sand's Oakdale facility in Wisconsin is home to one of the largest sand processing plants in the world."

The whisper in the sand is getting louder. It will be fascinating to see how this strategic subplot unfolds in the coming quarters.

References