Pioneer to Buy Carmeuse's Sands Biz

Pioneer Natural Resources Company (PXD - Analyst Report) has reached an agreement with Belgium-based Carmeuse Holding SA to acquire the latter’s U.S. industrial sands business—Carmeuse Industrial Sands (“CIS”)—for approximately $297 million.

The deal, which will likely close late in the first quarter or early in the second quarter of 2012, is expected to be funded from the available cash and signifies a strategic move for the company to support its fracturing requirements while reducing execution risk and controlling costs.

CIS is considered to be the leading producer of Hickory frac sand, known as Brady Brown, which is being applied as proppant for fracture stimulating oil and gas wells in the U.S. Hence, this move will eventually aid Pioneer in accelerating its drilling program around three of its four core Texas growth assets—the Spraberry vertical, horizontal Wolfcamp Shale and Barnett Shale Combo plays—through securing premium, low-cost and logistically privileged brown sand supply. The sand mine of CIS unit in Brady, Texas has a proven brown sand reserve life of 30 years.

Irving, Texas-based Pioneer estimated that its annual demand for proppant will boost to 1.6 million tons in 2015 from 1.2 million tons in 2012 with the continuous ramp up of drilling operations. The company said 70% to 80% of its forecast proppant demand is brown sand and will save $65 million to $70 million a year through the latest acquisition.

Other relevant assets of the CIS unit include two channels (Bakersfield, California and Colorado Springs, Colorado) for other grades of sand, two sand mines in Ohio (Glass Rock and Millwood) that manufacture oilfield and industrial sands, one sand mine in California, Orange County, which generates construction and recreational sand, and an oilfield cement material processing plant in Riverside, California.

Recently, Pioneer reported better-than-expected fourth quarter 2011 results, aided by about 28% production growth, mainly attributable to production growth in liquid-rich assets in Texas, Spraberry field, Eagle Ford Shale and the Barnett Shale Combo.

With a ramp-up in activity at its three core liquids-rich growth assets in Texas with significant cost control initiatives, Pioneer has set a goal to increase production at a compounded annual growth rate of more than 20% through 2014, which we believe must move the needle toward better earnings and free cash flow visibility. On the basis of the drilling plans, the company expects to deliver production growth of 23% to 27% in 2012.

However, we think that these factors are adequately reflected in the present valuation, leaving little room for meaningful upside from current levels. We expect Pioneer, which competes with EOG Resources, Inc. (EOG - Analyst Report) and Newfield Exploration Company Co. (NFX - Analyst Report), to perform in line with the broader market, as corroborated by our Neutral recommendation.