U.S. Silica Holdings: A Multi-Year Secular Growth Play

When thinking of 'secular growth' investments, the very cyclical sector of oil and gas rarely comes to mind. However, ignoring oil and gas these days also means ignoring the 'shale revolution,' which may just be the greatest growth story of our decade. This article covers the biggest player in the nascent frack-sand industry: U.S. Silica.

Apr 21, 2014 at 2:34PM

Growth is important for long-term investors. Investors in their 20s or 30s, or even investors with children who may one day inherit, would be wise to find a few secular growth stocks for their portfolios.

'Secular growth' refers to companies that grow earnings considerably faster than the S&P 500 does, and can do so for a long time. Secular growers are not tied to any cyclical trends. Think Apple on the cusp of the smartphone revolution, or Chipotle back in 2006.

And not surprisingly, when looking for secular growth companies, retail investors often look first into tech names or smaller, regional retail stores ready to expand nationally. But in this market, looking for secular growth in those traditional sectors means overlooking one very big trend that could be the most important growth story of our decade: The growth of shale oil production within the U.S.

Today I won't cover a producer of oil and gas but will cover a provider of fine, high-grade frac sand, which is a necessary and surprisingly scarce commodity. U.S. Silica (NYSE:SLCA) is the largest sand processing and logistics company in the U.S. Think of U.S. Silica as a sort of 'arms dealer' for upstream companies. 

Demand for fracking sand increases along with horizontal rig counts, wells drilled per rig, lateral length, stages per lateral and proppant per stage. As the shale revolution continues, all of the above categories are expanding. Not only that, but numerous reports have also estimated that the better shale plays in the U.S. have about twenty years worth of drilling inventory with today's technology. U.S. Silica is, therefore, a solid secular growth stock here in 2014. 

Growth curve of a tech company

Slca Rev

Courtesy of Investor Relations

This chart shows a solid trend of revenue growth from 2009 to 2013. Revenue increased from $192 million to $546 million in five years, a compound annual growth rate of about 23%. 

Scla Ebitda

Investor relations

As with many secular growth stories entering a more mature phase of growth, U.S. Silica's earnings before interest, taxes, depreciation, and amortization, or EBITDA, has outpaced revenue growth. This is because the company is becoming more profitable and is improving margins, a very good sign. 

Notice also that earnings growth seems to have tapered off in 2013. All indications, however, show that is temporary. Much of the stagnation comes from order cancellations due to an unusually cold winter in North America, which severely affected drilling operations in West Texas, North Dakota, and Pennsylvania. 

Larger forces at work
Consider for a moment some of the most recent trends in shale drilling. According to some of the biggest players in the shale, such as EOG Resources (NYSE:EOG), ultimate recovery estimates are steadily rising, well declines are becoming shallower and operators are adding more and more stages to lateral wells. As production declines shallow out, operators will be in the shale for longer than originally expected. As laterals get longer, more sand will be needed per well. And downspacing will add more wells. For frac sand providers, these trends have a multiplier effect on revenue and earnings. It's not hard to see how U.S. Silica and others will continue to grow. 

Finally, and perhaps most importantly, the fracking sand industry is consolidating. When all the dust settles, there will be fewer suppliers, and those suppliers will be larger, with lower cost bases and multiple-basin capabilities. As a long-established sand processor for industrial companies, U.S. Silica is already one of the big names and is present in all of the big basins. 

Bottom line
Taking a look at any chart of U.S. Silica, it is apparent that the company has run up a lot over the last nine months or so. The company is no longer the well-kept secret that it was last year. However, I believe U.S. Silica is worth adding to on any meaningful pullback, and pullbacks do happen. For example, earlier this year U.S. Silica lost almost a quarter of its value on news of cancellations due to an unusually cold winter. As with many small- and mid-cap companies, U.S. Silica stock can be volatile. Use that volatility to your advantage. 

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Casey Hoerth has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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