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Comments From Tudor Pickering Holt's Energy Thoughts Newsletter Of December 13, 2018

Frac Sand • Oil News • Trends

Fairmount Santrol / Unimin merger yields beefy FMSA upside (part 1) – transaction creates at least ~30-50% upside to FMSA stock (sans $170mm cash payment consideration) in our view…70%+ upside when viewed through a more bullish lens (FMSA - $5.11 – B, Unimin – Private – NR)– We won’t rehash the merger presentation here, as we endeavor to provide incremental insights in this write-up. We believe the Unimin / FMSA combo could generate ~$700-900mm in 2019 EBITDA (assumes ~$75-100mm in synergies, below $150mm targeted). Using a blended Industrial / Proppant EV/EBITDA multiple (based on public comps) of ~7.4-7.7x yields material upside for FMSA stock, excluding $170mm in cash paid to FMSA shareholders (which would add another +15% vs. current market cap). For more valuation color here, please reach out to your TPH Salesperson for our analysis and conference call notes we initially distributed yesterday.

Fairmount Santrol / Unimin merger thoughts (part 2) – We like industrial logic behind this deal. Asset geography = similar (and high-quality), cost synergies = material, and increased industrial exposure is a plus for FMSA (FMSA - $5.11 – B, Unimin – Private – NR) – To better frame Unimin vs. peers, the company generated $142mm in 2016 EBITDA, more than FMSA, SLCA, and SND combined over the same period. Note, HCLP and EMES printed negative EBITDA, so we excluded them. We firmly believe this transaction weds the lowest cost, impressively-logistically-capitalized N. White mine (Wedron) to the Industrial Sand King, Unimin, which also owns a top-notch frac sand business. The go-forward company will be the 800lbs gorilla in the overall sand mining industry and we expect further sand consolidation will occur. Potential public acquisition targets in our view: HCLP, SND, EMES...SLCA will likely be a consolidator.

Fairmount Santrol / Unimin mergerstrategic implications (part 3) – Unimin could have bought more Permian sand or another sand producer…but they went after FMSA (FMSA - $5.11 – B, Unimin – Private – NR) – This deal improves the combined company’s (“New-Co”) logistics reach across the US and substantially lowers delivered costs via increasingly efficient origin-destination pairings. It also shows that Unimin saw more value here vs. that which is potentially offered by buying multipleincremental Permian mines or a more regionally levered producer. It’s interesting to us that New-Co appears to be decelerating on Permian sand expansions (6mmtpa capacity online 2018 vs. 8mmtpa expected prior). We believe this speaks to our belief that Permian sand demand will not be fully (nor even mostly) satiated by in-basin sand. We also understand that New-Co appreciatessand demand potential outside of the Permian.

Re-hitting our sand supply-demand thoughts - plenty of demand for N. White sand will persist although Permian in-basin sand will, invariably, take share (OIH - $25) - Simply put, we don't believe we’ll see >50-60% of Permian sand being self-supplied. Frankly, we think some customers don’t want any/much of it. Even if 60% of Permian demand were self-sourced, we believe Brady/Voca sands will experience demand cannibalization first. Grade mix, completion designs, and quality will lead N. White mines / other regional mines to plug that Permian demand gap. We ballpark that gap at ~65-85mmtpa in 2018 (vs. peak annual sand demand of 54mmtpa in 2014). We'd argue this a much less disastrous scenario than the sand stocks currently reflect. That said, we do believe 2019+ sand pricing migrates lower given emerging supply-demand fundamentals…just not to as low-a-level as many foresee.



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