For those who missed the run in U.S. Silica Holdings (SLCA), you just got another buying opportunity. It reported a Q2 EPS of $.38 versus the Street's estimate of $.40. Revenues came in at $129.8 million versus $133.94 million. The main reason for the big drop in share price after hours could have been the company's reaffirmation of its 2013 adjusted EBITDA guidance of $165 to $175 million. This was further compounded by a rise in 2013 capital expenditures to a range of $60 to $70 million. Expectations were high going into earnings, and the capital expenditure increase would have been welcomed with a higher 2013 adjusted EBITDA guidance. Either way it was a tough crowd to please, but it's a good time to start or add to your position. U.S. Silica has doubled since August of 2012. Don't let this scare you off, the stock still has value, even at these levels.
(click to enlarge)
There were some very good numbers in Q2 of 2013. Total revenues increased 24.1% year over year. Of this $25.2 million increase, oil and gas accounted for $23.2 million. Oil and gas volumes increased 44%, with overall total volumes improving 14.9%. Total oil and gas tons sold were 988120 in Q2 of 2013. This was an improvement from Q2 of 2012, which was 684992 tons. The only concerning issue in the oil and gas segment, was a slight decrease in margins. This is something to watch, as my expectations have been for margins to increase in the short term. U.S. Silica's industrial and specialty products sold 1060448 tons. This was a decrease from Q2 of 2012, for which it sold 1098425. The decrease in volumes was made up for with better margins. Industrial and specialty products is not a growth business, but U.S. Silica derives a steady income from this area.
U.S. Silica derives revenues from multiple industries outside oil and gas. It serves glass, foundry and building product busi! nesses throughout the United States. In reality, an investment here is heavily weighted to oil and gas. More specifically, unconventional oil and gas in U.S. basins. Not only is this part of the business growing quickly, it is already the source of approximately 60% of revenues. There are several reasons to believe that U.S. Silica will continue to outperform. It would be my guess that all players in this industry will do well, like Emerge Energy Services (EMES) and Hi-Crush Partners (HCLP). Emerge has been off like a rocket since its IPO in May. Estimates have the company growing over 41% next year. Hi-Crush estimates have the company growing 43% this year and 21% in 2013. Both of these companies are MLPs, so U.S. Silica offers a little different investment. Whether one company is better than the other as an investment would depend on the individual. All three of these companies offer decent growth, but I would wait for opportunities to buy on pullbacks.
In my coverage of the oil and gas industry, there are some changes taking place that will probably improve growth for most players in this space. After CARBO Ceramics (CRR) posted a good Q2 earnings report, there were still issues in the ceramic proppant space. I have seen most operators increasing usage of frac sand per well, and decreasing ceramic proppant. Now CARBO Ceramics will focus on cheap Chinese ceramics hitting the U.S. market and dragging down its sales. I could be wrong, but this is only part of the issue. I believe new completion techniques are not only making it possible to use up to a million pounds of sand per 1000 feet of lateral, but are also to use all sand fracs. My hypothesis may be incorrect (but I would like to hear differing opinions) as deeper source rock is exposed to higher pressures that crush frac sand. This is why many operators use a mix of resin coated sand, or in the Bakken (very deep) ceramic proppant. The idea is simple.
EOG Resources (EOG) is an example of an operator significantly increasing sand usage per foot. This has produced amazing results, and well costs go up minimally. To give an idea of how this completion style is changing well design, I have included the table below.
| Well | Operator | Lateral | Choke | Stages | H2O | Proppant |
| 21378 | EOG Resources | 6475 | 24/64 | 32 | 79855 | 6867099 |
| 22587 | Statoil (STO) | 9930 | 128/64 | 39 | 92489 | 3883780 |
| 22868 | Whiting Petroleum (WLL) | 8437 | 48/64 | 22 | 24731 | 1716416 |
| 21182 | Kodiak Oil & Gas (KOG) | 9304 | 34/64 | 19 | 50574 | 1546067 |
| 21884 | Continental Resources (CLR) | 9597 | 30/64 | 39 | 68090 | 3828310 |
| 21912 | Hess (HES) | 9300 | 28/64 | 30 | 36329 | 1285745 |
| 22350 | Oasis Petroleum (OAS) | 10020 | 68/64 | 28 | 66254 | 3507779 |
| 19738 | Triangle Petroleum (TPLM) | 9657 | 30/64 | 31 | 82504 | 3918293 |
The above wells were randomly chosen from some of the bigger operators in the Williston Basin. The majority of these wells are long laterals between 9000 and 10000 feet. We are starting to see the majority of wells being drilled at 9000+ feet, and it could say this is becoming the standard. The only short lateral was completed by EOG, and this well used significantly more proppant. Lateral lengths continue to get longer. Several operators are working on this, as the table shows below.
| Well | Lateral Length | |
| EOG | 20038 | 12185 |
| EOG | 19231 | 12699 |
| EOG | 19802 | 12675 |
| (QEP) | 22093 | 12141 |
| QEP | 22092 | 12537 |
| (MRO) | 19446 | 12763 |
We are beginning to see operators test lateral lengths up to 14000 feet in areas, but this has been difficult for the completion crew. Completing the toe really stresses the pump trucks, and the deeper the formation is drilled the more difficult to get good source rock stimulation. We will continue to see extra long laterals in the Bakken, but for now operators are concentrating these efforts under the lake where it is almost a necessity.
(click to enlarge)
In summary, U.S Silica had a fantastic quarter. Overly optimistic expectations are the only reason for this pullback. It missed the quarter on lower margins and increased transportation costs. Positive news is its backlog, which is at its highest ever. This is a name that Bill Costello has been on for some time now, and he first pointed me to U.S. Silica's long-term upside (one of the many reasons his fund is having such a great year). I have been trading the name for the first half of the year and bought back in early today. The long-term story is intact. Superior logistics place U.S. Silica in a very good long-term position. The one issue for U.S. Silica was Q2 margins. It allowed its contract customers to purchase more sand during the quarter at those prices. Since it didn't sell at spot prices for the over allotment ordered, later in the year any excess for the full year will be bought at spot prices. Basically, U.S. Silica let its customers buy more, but did turn down over 50000 tons of frac sand in Q2. There was also a much higher demand for lower! margin s! and as well. Margins continue to be a non-factor. U.S. Silica, Hi-Crush and Emerge Energy Services are all going to benefit from a big change through year end and into 2014. The change is not the number of wells, as I would guess this will not be appreciably higher in 2013. It is longer laterals and better source rock stimulation. Longer laterals are being drilled in all of the major U.S. basins. Noble (NBL) is drilling extended reach laterals (9100 feet) in the Niobrara. As mentioned earlier, EOG and several other operators are starting to test laterals to 12000 to 15000 feet. Pioneer Natural Resources (PXD) is drilling 10000 foot laterals in the southern Wolfcamp. Proppant per foot may be the most important, as EOG has taken the lead and produced excellent results. Whiting just used 7 million pounds of sand on a Niobrara well. Marathon has been experimenting in the Eagle Ford. There are several operators doing the same in the Wolfcamp. One thing is for sure, and that is sand will be in high demand for years to come. Companies already entrenched in the business stand to grow the most, and U.S. Silica may be the best way to play this.
Disclosure: I am long SLCA, TPLM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Additional disclosure: This is not a buy recommendation. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results, do not take in consideration commissions, margin interest and other costs, and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market or financial product does not guarantee future results or returns. For more articles like this check out our website at shaleexperts.com. Fracwater Solutions L.L.C. engages in industrial water solutions for oil and gas companies in North Dakota. This includes constructing water depots, pipelines and disposal wells. It also provides contracting services for all types of construction at well sites. Other services include soil remediation. Please contact me via email if you are interested in working with us. More of my articles and other pertinent information on the oil and gas sector, go to shaleexperts.com.
No comments:
Post a Comment