U.S. Silica Holdings Inc Continues to Outperform

With its latest earnings, U.S. Silica Holdings Inc shows how it is benefiting from rising industry demand for frac sand.

May 4, 2014 at 10:16AM

A rising tide lifts all boats.  In the case of U.S. Silica Holdings (NYSE:SLCA), the company is benefiting from the rising tide that is the U.S. shale revolution. Sand demand from horizontal drilling has surged in recent years and taken shares of U.S. Silica Holdings with it. The sand miner's shares are up 32% year to date and 125% in an one-year span, handily beating the S&P 500.  Shares of fellow sand miner Hi Crush Partners (NYSE:HCLP) have also done well, rallying 129% in a one-year span. 

First quarter results
With U.S. Silica Holdings' most recent quarterly earnings out, it seems that the tide is not done rising. 

For the quarter, the company reported that demand for sand from energy companies rose 45% year over year to 1.3 million tons. Total sand volume shipped increased to 2.3 million tons, rising 22.5% year over year. 

The increased demand for sand led to revenue rising 47% year over year and profits rising 6% year over year to 34 cents per share.

As for guidance, the company expects demand to grow by 25% this year and adjusted EBITDA to be in the upper end of the range between $180 million and $200 million. 

The bottom line
With the Energy Information Administration predicting that U.S. shale oil production will not peak until 2021, demand for sand will likely continue to grow for several more years.

U.S. Silica Holdings is doing its part in making growth possible by adding to its total sand production capacity. The company expects to bring a Utica, Illinois mine with 1.5 million tons of raw frac sand capacity online in the second quarter of 2014. It is also in the permitting process of launching a Wisconsin facility that could add up to 3 million tons of new capacity by late 2015. 

When complete, the planned projects should add nearly 54% more capacity to the company's current capacity of 8.2 million tons of sand per year.  

Management has also said they may do accretive M&A deals in the future that further increase the company's production capacity. The accretive deals may lower the company's forward P/E and give the company better pricing power.  

Given all the good news, there are still doubters. Some investors -- most notably the short investors who make up 13% of float -- believe that U.S. Silica Holdings cannot earn superior margins in the long run because the company makes a commodity product. If margins rise above a certain point, new entrants will enter, buy sand mines, and sell sand at lower prices. The shorts also believe that the company is overvalued given the company's forward P/E ratio of 17.7 versus Hi Crush Partners' forward P/E ratio of 14.8.

While all this is true,  U.S. Silica Holdings is benefiting from a rising trend that is unlikely to reverse anytime soon. Horizontal drillers are using more and more sand because it increases the total amount of oil produced.  The total number of horizontal drilling rigs continues to increase and the company's customers continue to ask for more sand. As long as the U.S. shale revolution continues to boom, the tide will continue to rise and take U.S. Silica Holdings with it. 

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Jay Yao has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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