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Atlas Cementing Position as Top Frac Sand Supplier with $450M Hi-Crush Deal

Natural Resources
0 min read

Texas-based Atlas Energy Solutions announced a definitive agreement this week to acquire major frac sand producer Hi-Crush in a deal valued at $450 million. The acquisition will expand Atlas’ production capacity and logistics capabilities, cementing its position as the largest integrated frac sand provider in the vital Permian Basin oilfields.

The upfront payment includes $150 million in cash and $175 million in Atlas common stock. An additional $125 million deferred cash payment was also agreed in the form of a seller’s note. The deal is expected to close within weeks, likely before the end of Q1 2024.

For oilfield services provider Atlas, the purchase significantly bulks up its presence across the Permian, where the majority of US shale oil production is centered. Atlas gains Hi-Crush’s sand mining and processing facilities in the basin as well as its advanced logistics services.

Most notably, Hi-Crush operates the OnCore processing network, which uses mobile sand mine and coating units that can be quickly deployed near well sites. OnCore’s distributed approach minimizes transportation costs and complex logistics getting sand to customers.

Hi-Crush also owns the Pronghorn logistics business, which provides sand delivery and wellsite storage services across multiple shale basins. Pronghorn will complement Atlas’ own Dune Express last-mile trucking operations in the Delaware Basin portion of the Permian.

Combined, the deal creates a frac sand production and delivery juggernaut with true basin-wide coverage. Atlas CEO Bud Brigham called the deal “transformative for our industry, employees, customers, and shareholders.”

Doubling Down on the Permian

The Permian Basin is the epicenter of US shale, accounting for over 40% of total oil production. With activity rebounding amid higher energy prices, reliable local sources of frac sand are in high demand.

Atlas says the acquired assets will boost its total sand production capacity to around 28 million tons per year. Over 80% of its expanded capacity is already contracted, guaranteeing strong cash flow.

Management expects Hi-Crush to contribute $110-125 million in additional EBITDA in 2024 alone. The valuation of about 3 times EBITDA is seen as attractive by Atlas.

Combined operations across its Midland and Delaware Basin hubs will also drive significant cost efficiencies. Optimized logistics and asset utilization could yield over $20 million in annual savings by 2026 according to Atlas projections.

The single largest driver of well productivity gains in shale has been using more sand per frack. Sand volumes have doubled over the past decade. Reliable regional sand mines and efficient last-mile delivery offered by the merged Atlas-Hi-Crush will be key to this trend continuing.

Deal Could Kickstart Consolidation

The Atlas-Hi-Crush deal is the largest merger in the frac sand space since Covia Holdings combined Fairmount Santrol and Unimin Corporation in 2018. It could mark the return of consolidation for an industry that remains fragmented.

With sand demand direct correlated to drilling activity, the sector saw major distress when oil prices cratered during the pandemic. A wave of sand mine closures and bankruptcies ensued.

Now with activity resurging, the remaining suppliers are ripe for consolidation. As the new clear capacity leader, Atlas will be a prime mover in any forthcoming deals. The company could look to expand beyond its Permian base into other major shale basins like the Eagle Ford and Bakken.

Competitors will also look to bulk up to remain competitive. Smaller players reliant on 3rd party logistics may need to team up to match the integrated model that Atlas has now assembled via M&A.

Another motivator for deals is the large capital investments needed for next-generation sand mines and processing plants. Building greenfield capacity from scratch is challenging, making acquiring existing assets logical. Larger players can also negotiate better long-term customer contracts.

What’s Next for Atlas

For Atlas leadership, executing the integration of Hi-Crush assets and personnel will be the top priority in coming months. Realizing projected synergies through joint logistics operations will be vital.

The company will also continue building out its Dune Express trucking fleet and last-mile transloading facilities. Completing this Permian-wide sand delivery network remains core to its strategy.

With sand capacity now exceeding demand, maintaining a cost advantage will be crucial if drilling activity slows. Optimized logistics and Basin-wide scale gives Atlas flexibility to withstand any turbulence ahead.

Thanks to its ample cash reserves and still-prudent balance sheet, the company also has latitude to continue pursuing acquisitions or invest in new technologies that widen its moat. More deals to bolster Atlas’ capabilities beyond frac sand provision could be in the cards.

Take a moment to take a look at Noble Capital Markets’ Senior Research Analyst Mark Reichman’s coverage list.
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