America's oil and gas boom has been staggering and is likely to continue for decades to come. Consider this:
- The US is estimated to contain 223 billion barrels of shale oil and 2,421 trillion cubic feet of shale natural gas (last year's record production was 30 trillion cubic feet).
- The Wolfcamp and Spraberry shale formations of Texas' Permian basin are estimated to contain 75 billion barrels recoverable with today's technology.
- The above estimate is up 50% from just one year ago.
- The Marcellus shale of Pennsylvania, New York, and Ohio, is estimated to contain 410 trillion cubic feet of gas; production has increased 14-fold since 2007 and is estimated to double again by 2035.
There are several ways for long-term investors to cash in on this bonanza, whether it be with oil and gas producers, pipeline and logistics companies, or so called "pick and shovel" oil and gas service providers. This article highlights three companies in a little-known niche of the oil service industry and explains why this may be one of the best industries to invest in over the coming years.
Proppants: fueling the oil boom
To achieve the incredible growth in oil and gas production seen today, oil and gas companies are turning to new applications of techniques such as fracking, enhanced oil recovery, and downspacing.
A major challenge with these techniques is the severe pressures -- as high as 10 tons per square inch.
To keep the cracks in the rock open and allow oil and gas to reach the surface, proppants (which "prop" open cracks) are used in ever increasing quantities. In fact, the latest techniques can frack 330% more land/well, a good thing considering each well's $4 million-$12 million cost.
Proppants come in two varieties -- sand (which is cheaper) and ceramics (more advanced and can withstand greater temperatures and pressures). Demand for proppants has been growing 28.3% annually since 2009 and is expected to to grow 10.25% CAGR through 2022.
With oil companies increasing their usage of proppants from 2,500 tons/well to 5,000-8,000 tons/well, prices for frack sand have soared to $110/ton -- more expensive than iron.
Analysts estimate profit margins of $40/ton for frack sand, which requires specialized quartz found mainly in Minnesota, Wisconsin, and Illinois, providing a moat against cheap and low-cost competition from China and Russia.
Three proppant dividend growth stocks
US Silica Holdings
) has been in business over 100 years and supplies high-quality sand to both industrial and energy companies, though 72% of profits come from its oil segment.
US Silica sold 8.2 million tons of sand in 2013 and is currently sold out of all grades of sand. In fact, due to an expected 45% increase in demand US Silica recently raised prices on its non-contracted sand by an average of 20%. Future growth will be fueled by new mines such the Utica Illinois mine (1.5 million tons of capacity) which comes online Q3 2014.
) is the world's largest producer of ceramic proppants and the technology leader in its industry. Its new Kryptoshphere product is the most advanced proppant ever developed, capable of conducting 100% more oil and gas and at pressures four times greater than competitors products.
Compared to sand, CARBO Ceramics' proppants result in 20%-30% better oil and gas flows and 30% improvement in total lifetime well extraction (with field reports of 20%-100% better flows/well).
CARBO is expanding its capacity by 29% with the addition of two new production lines (one in Q2 2014, the other first half of 2015) with eventual plans for four new lines that will increase capacity by 57%.
Emerge Energy Services
) is a new variable distribution MLP that is investing $110 million into two new mines in Wisconsin (to be completed by early 2015). These two mines will add 5 million tons of capacity (68% increase) and make Emerge Energy the largest provider of frack sand in America (total capacity 12.3 million tons). With 11 distribution centers and a fleet of 4,700 tanker cars (set to grow 36% within a year), Emerge Energy Services is well positioned to supply this new capacity to all of America's major shale regions.
||Projected 10 year Dividend/Distribution Growth
||Projected 10 year earnings growth
||Premium to historical PE
|US Silica Holdings
|Emerge Energy Services
Source: S&P Capital IQ
EMES Total Return Price data by YCharts
As seen above, all three companies are expected to grow earnings and dividends immensely over the next decade; however, this potential has resulted in very strong share price appreciation that leaves all three historically overvalued. I would advise buying in thirds (opening small position and adding on dips) for investors who are interested in profiting from the immense potential of proppants.
Long-term dividend growth investors should seriously consider adding Carbo Ceramics, Emerge Energy Services, and US Silica Holdings to their portfolios (or, given the recent run up, at least their watchlists). The megatrend that is America's oil and gas boom is sure to drive demand for these companies' proppants for decades to come, providing income investors with market-beating total returns -- especially if investors buy during times of price weakness.
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