It’s always important to see who has the leverage–customers or suppliers–when costs start to rise.
On the recent agreement between Pioneer Natural Resources (PXD), perhaps the dominant oil shale producer in the Permian Basin, and fracking sand producer U.S. Silica Holdings (SCLA), it’s clear the advantage lies with Pioneer.
The two companies have signed a long-term deal on fracking sand that’s to run for 15 years.
That gives U.S. Silica a guaranteed big customer for the long haul.
What does Pioneer get? A price for low-cost West Texas sand to use in getting oil out of the acres it has under lease in the very prolific Permian Basin that, according to company projections, will cut sands costs by 50%. That’s a huge deal at a time when production costs in the Permian are seeing upward pressure from rising wages, rising sand prices, rising steel pipe prices, and rising costs to dispose of fracking waste water. The reduction in sand costs, Pioneer Natural said, will produce a sustainable decline in overall well expenses starting in 2019. The first delivery of sand under the agreement is expected in the first quarter of 2019.
Pioneer Natural Resources, a member of my 50 Stocks and Volatility Portfolios climbed 1.57% today to close at $173.79. The shares are up 26.92% in 2018 to date but are still well below the $212.31 high of May 17, 2018. My position in the January 18, 2019 call options with a strike of $180 are down 60% since I added them to the Volatility Portfolio.