With the recent drop in oil and pull-back in fracking rigs, I have started to look into frack sand producers (such as EMES, HCLP etc). The investment thesis behind this industry is a turn around in oil, and the fact that existing hydraulic fracturing rigs are actually using more sand per well in order to make up for the drop in production. Most of these companies are still booked into the next few years, offer strong dividends (12%+ in some cases b/c they are MLPs) and have decent balance sheets. I think they have been hit hard with the drop in oil and their valuations look attractive given the potential upside and limited downside.
These companies look favorable (at least based off of my brief due diligence) and I was wondering what you guys thought about them?
There will be more cuts to E&P budgets as oil stagnates. Those contracts for sand will continue to get chiseled at this year, IMO. Well production itself continues to be strong which bodes well for the sand co's since wells will need to be restimulated, but even that should slow soon. I think the play is over and you're better off thinking of secondary/tertiary long/short ideas if you're still interested in sand (what moves the sand, where is it mined, where is it stored before/after fracking, etc.)
Lots of areas across the value chain you can invest in if you want to play an oil recovery. Don't think sand producers are necessarily a bad way to play, but my main concerns are:
Backlogs are a lot less meaningful when you have customer who are potentially facing bankruptcy. Also, customers will do whatever they can to delay payments so you can expect cash flow to get hit faster than earnings. Do they have the balance sheet to withstand this?
New shale projects aren't being financed, and won't be until oil has stabilised (restimulations can't carry all the demand). When you consider the fixed costs, are they still profitable in a scenario where new well count drops off dramatically? (Drill rig counts haven't bottomed yet, and one would expect rig counts to lag oil price significantly because a lot of rigs were already contracted when oil began to drop)
Dividend yield isn't a support if there isn't operating cashflow behind it
There is very little downside protection. The only use for their product is North American fracking. It's not like a deep sea rig where you could at least salvage some value by reducing pricing and contracting the rig to someone who can drill profitably in a different location (not that I think deep sea drillers are a good investment now).
SLCA is spending a ton of cash, doing acqusitions, with not much coming back to shareholders. Sure the industry is consolidating, but i'd rather get in once the business is done spending.
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