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Tudor Pickering Holt's Energy Thoughts On October 17 Related To U.S. Silica

Frac Sand

SLCA update part 1 – we recently caught up with the company to discuss evolving market dynamics and continue to believe this geographically diversified sand producer sits well undervalued ($27.81 – B)– As completions cadence continues to ramp in the US and proppant/horizontal well sits >12mmlbs (vs. ~5-6mm lbs/well in 2014 or ~8-10mm lbs in 2017), we continue to believe Permian sand fears are overblown. We realize our belief likely falls on deaf ears until meaningful quantities of Permian sand begin to push into the market (Q1 or Q2 2018) and sand gross margins don't end up smoked down to <$15/ton, but here are some sign posts that bolster our confidence: (1) folks continue to contract for new N. White frac sand (e.g. SLCA's Pacific Missouri Plant 5-year contract) including material multi-$mm pre-payments; (2) multiple sources indicate design / complexity is coming back into the equation (i.e. coarser grades of sand, chemicals/gels, etc.); (3) Permian sand is largely a 100-mesh product (much of the 40/70 is toward the finer end of the spectrum); and (4) less Permian sand will be built than headline figures imply. SLCA is also pushed to join the TCP (dunes dagebrush lizard protection) and while we're far from environmental experts, they're not joining the organization for fun...there is some legit concern out there.

SLCA update part 2 – SLCA remains focused on enhancing its asset footprint, growing the highly profitable SandBox business, and acquiring strategically attractive businesses...both Industrial and in Oil & Gas ($27.81 – B)– SLCA continues to expand both organically and inorganically and we believe the company could achieve more than $100mm in pre-payments for its ongoing mine expansions (both regional and N. White). Demand continues to ramp for the SandBox system with SLCA now at >50 systems out in the market (TPHe) and growing as customers replace incumbent last-mile solutions. We also expect SLCA to remain active on the M&A front with both oil & gas, industrial sand, and other industrial opportunities on the table. The industrial business provided stable/growing cash flow to the company during the painful oil & gas downturn and we get the sense the company wants more of this stead-eddy cash flow that they (and we) believe is under-appreciated in their stock. We continue to see upside for the name to $45/sh+.

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