RADNOR – A management team led by Michael O’Neill has gone from running a real-estate development firm to heading one of the country’s largest suppliers of sand used in hydraulic fracturing.
Preferred Sands LLC owns six sand mines; employs 640, including about 65 in its headquarters in Radnor; and is on pace to generate $400 million in revenue this year, according to O’Neill.
That, he said, makes it the largest producer of frac sand in Canada and the second or third largest in the United States.
As a point of comparison, the only company that’s publicly traded and solely in the business of producing frac sand, Frederick, Md.-based U.S. Silica Holdings Inc., had $295.6 million in revenue last year. When U.S. Silica went public in January, an article on the website of Oil and Gas Investments Bulletin, a newsletter by Keith Schaefer, said the company was the second-largest frac sand producer in America.
Hydraulic fracturing is the process of obtaining oil and/or natural gas from a rock formation by injecting a mixture of water, chemicals and proppant into the formation to create fractures, or fissures, in it. The water and chemicals come out but the proppant remains to prop open the fissures so the oil and/or gas can flow through them. The treated sands Preferred sells act as the proppant.
Because hydraulic fracturing is an unconventional drilling method that was only made technologically viable last decade, oil and gas produced by it is called unconventional oil and gas. Similarly, the formations, such as the Marcellus Shale, are called unconventional oil and/or gas plays.
The explosion in drilling in those areas has caused a commensurate explosion in the demand for proppant, which is typically sand or a similar material, including man-made ceramics.
In 2001, 1.47 million metric tons, or 5 percent of the total output, of U.S. silica sand was used for fracking, according to the U.S. Geological Survey. Last year, the comparable numbers were 12.3 million tons and 41 percent.
“I think it’s going to be one of the biggest associated oil-and-gas markets we’ve ever seen,” said Chris Faulkner, the CEO of Breitling Oil and Gas Corp., a Dallas-based exploration-and-production company that specializes in unconventional oil and gas plays.
O’Neill’s journey into the frac-sand industry is a somewhat convoluted one.
He started Preferred Real Estate Investments in 1991 by spinning it off from a real-estate development firm run by his brother, Brian O’Neill. It became best known for doing brownfield developments, such as converting factories into office parks, but by the middle of the last decade it was exiting that business and getting into other ones.
O’Neill and his team still knew real-estate best, however. So they decided to start buying quarries with the idea of running them for a few years and then developing them.
They bought one in Florida and the person they hired to run it suggested they get into the frac sand business. So in 2007 they did, buying a mine and processing plant in Genoa, Neb., that has 80 million tons of sand accumulated over 75 years from dredging the Loup River.
It since has acquired five other mines, including one in Blair, Wisc., and one in Hanson Lake, Saskatchewan, which it got when it bought Winn Bay Sand for more than $200 million in January. The company financed the purchase with a $376 million debt offering that was secured through J.P. Morgan and run by Barclays Capital and KeyBanc Capital Markets.
Having specialized in developments that utilized environmental remediation as Preferred Remediation, O’Neill and his team are taking a somewhat similar tack with Preferred Sands.
The sand used in fracking has to stay in the formation it’s pumped into. If it comes out, the fractures in the formation close and the well’s oil and/or gas production drops or ceases.
Left to itself, the sand would be crushed under the intense pressure inside a well and break into small enough pieces that it would be carried back to the surface. So it’s coated with resin that holds it together, much like the coating on a windshield that keeps the windshield from shattering when the glass is cracked.
The temperature inside some wells is hot enough to cure the resin, O’Neill said. But in others, it isn’t, so chemicals have to be added to the well to cure the resin.
Preferred Sands, O’Neill said, has developed a resin that cures solely as a result of pressure, instead of a combination of pressure and heat. As a result, he said, the resin doesn’t contaminate the water used in fracking.
The company also is working on other products that use clean technology in fracking.
“We think fracking is sustainable and will be sustainable if you do it in a sustainable and responsible way and our products fall into that line,” he said.
BYLINE: Peter Key