Fracking Services Are Heating Up

Hydraulic fracturing sand companies have been incredibly volatile during the ups and downs of oil prices in recent years. The master limited partnership (MLP) Emerge Energy Services (NYSE: EMES) illustrates this volatility quite well. It debuted in May 2013 at $17, and by August 2014 units had soared to $144.

Then the bottom fell out of oil prices, and in early 2016 units of EMES had fallen all the way to $3. It went from one of the hottest MLPs of 2013 to mid-2014 to become the 2nd worst performing MLP of 2015. But oil prices recovered somewhat in 2016, and EMES once again soared, ending the year with a total return of 166% – good for 4th best among MLPs. 

Competitors in the space include fellow MLP Hi-Crush Partners (NYSE: HCLP), and C-Corps U.S. Silica Holdings (NYSE: SLCA) and Fairmount Santrol Holdings Inc (NYSE: FMSA). All have experienced similar ups and downs over the past three years. All should soar if oil prices head to $60/bbl. Shale producers are drilling more wells, and using more sand per well than they did a few years ago. Thus, the market for fracking sand is growing exponentially. Nevertheless, the sand producers are all susceptible to a downturn in oil prices.

A new sand producer recently hit the market with the debut of Smart Sand Inc (NASDAQ: SND). The company started trading last November at $11 a share, and by early January had reached $19. But concerns about high crude oil inventories and OPEC’s commitment to maintaining production cuts dropped oil prices back under $50/bbl in early March. Smart Sand shares dipped back to under $13. 

Many analysts were awaiting the first financial results from a full quarter as a publicly traded company, and those (impressive) results were delivered last week. Smart Sand reported:

  • 4Q 2016 revenues of $29.4 million, an increase of 170% sequentially
  • 4Q 2016 tons sold totaled approximately 274,500, an increase of 19% sequentially
  • 4Q and Full year 2016 Net Income of $12.4 million and $10.4 million, respectively
  • 4Q Adjusted EBITDA of $26.9 million increased 145% sequentially
  • Full-year 2016 Adjusted EBITDA of $37.8 million 

The company further noted that it is now essentially debt-free, and has approximately $70 million in cash available to support growth initiatives.

I looked at the share price a week ago as it fell back below $13, and the temptation to buy was strong. Sure enough, the next three days saw shares close higher by 5.2%, 6.5%, and 9.6%. In my previous article for The Energy Strategist I mentioned a fracking sand company that “seems to be rising above the others.” It is Smart Sand, as they appear to be making all the right moves. 

For now, this is one to watch. It may turn into a recommendation, but it has to beat out the other portfolio holdings, as I am currently in the process of trimming those back to the absolute cream of the crop. I am not yet sure it meets that criteria, but it bears watching. 

Stay tuned, as I am taking a closer look at Smart Sand as well as recent hydraulic fracturing services IPOs Propetro Holding Corp (NYSE: PUMP) and Keane Group Inc (NYSE: FRAC). There are also potential IPOs on the horizon for Select Energy Services, and Canadian companies STEP Energy Services Ltd and Source Energy Services Canada LP (Canada’s largest distributor of fracking sand).

Generally, I stay away from IPOs until the dust settles, but I will investigate to see if any of these companies offer a compelling value.

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