U.S. Silica Earnings: Blowout Results From This Frack Sand Champion

One of the best ways to invest in America's energy bonanza is with pick and shovel stocks that provide the raw materials needed for energy extraction. Investing in frack sand is one way to do this, and few companies provide this vital resource better than U.S. Silica Holdings, a fact confirmed by blowout earnings.

Aug 16, 2014 at 9:41AM

America's natural gas boom continues to set new records, with the Marcellus shale surpassing 15 billion cubic feet/day of gas production in July, according to the Energy Information Administration (EIA). 

Marcellus Production Boom
Source: EIA July Drilling Productivity Report

To put this achievement into perspective, it means that just one shale gas formation in the U.S. is the fourth largest natural gas producer in the world, surpassing Qatar, Canada, and sitting just 6% behind the entire European Union. 

According to analyst firm ICF International, that production from the Marcellus/Utica shale is set to increase 127% by 2035.

A great way to profit from this megatrend is by investing in pick-and-shovel companies, those that provide the vital raw materials that make such fantastic growth possible. One such material is frack sand, and U.S. Silica Holdings (NYSE:SLCA), the nation's oldest frack sand producer, is proving that it can ride the wave of oil and gas production to riches and take investors along for the ride. 

Blowout earnings
U.S. Silica Holdings released earnings on July 29 that explain why it's been a Wall Street darling for the last few years. 

SLCA Total Return Price Chart
SLCA Total Return Price data by YCharts

Revenues soared 59% to $205.8 million due to a 27% increase in sand volume, which resulted in a 45% increase in quarterly earnings per share. EPS was $0.55/share up from $0.38/share a year ago. 

Not only did that beat analyst estimates by nearly 20% (analysts were expecting $0.46/share), it also raised its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) guidance for the full year by 16% to $215 million to $225 million from $180 million to $200 million. 

Adjusted EBITDA for the quarter was up 43% compared to a year ago, and once more the star of the show was the company's oil and gas segment. This segment accounted for 76% of operating margins, up from 69.7% last year. Frack sand volumes were up 53% compared to industrial and specialty sand, which was up just 3.3%. 

Good news keeps getting better
Thanks to demand that's expected to rise by 25% this year alone, U.S. Silica was able to raise prices twice this year by a total of 20%.

This upward pricing pressure has resulted in energy companies negotiating longer-term contracts. For example, in the second quarter U.S. Silica signed four new contracts and renegotiated one older one. The bottom line is that the company's production is now sold out through the second quarter of 2018, according to CEO Bryan Shinn. 

Continued growth initiatives
U.S. Silica isn't resting on its laurels -- it's working hard to expand its capacity, which at 8.2 million tons of sands, makes it one of the largest industrial sand providers in the country. 

U.S. Silica is expanding its operations in two ways: acquisitions and new mines. 

In July it acquired Cadre Services for $98 million. The acquisition will increase U.S. Silica's annual production by 800,000 tons, about 10%, and was purchased at a very good value of just 4.7 times 2013 adjusted EBITDA. 

The importance of the Cadre acquisition is as much about location as it is about sand volume. Cadre is headquartered in Voca, Texas, and serves the Permian Basin. Pioneer Natural Resources estimates the Permian holds 75 billion barrels of recoverable oil; these estimates keep increasing and are up 50% since 2013. 

Size Of Us Oil Fields
Source: 2014 Hart Energy Permian conference presentation

Oil producers in formations such as the Permian and Eagle Ford are experimenting with new techniques such as longer laterals and tighter packed wells. This not only greatly increases oil production, but also requires more frack sand per well. For example, the amount of sand used per well is up from 2,500 tons to 5,000 on average, with some consuming 8,000 tons of sand.

To help meet this new demand U.S. Silica's new Utica sand mine will be fully operational and operating at maximum capacity by Sept. 1. The new mine will add 1.5 million tons of annual capacity (18.3%).  

Finally, the town of Fairchild, Wisconsin, has just granted U.S. Silica approval for a new mine that would increase its capacity by 3 million tons and begin operating at the end of 2015. Not only will this mine, once online, increase U.S. Silica's capacity to 13.5 million tons, but it is served directly by the Union Pacific Railroad. This logistical link is vital because of U.S. Silica's rapidly growing fleet of rail cars (20% growth in 2014 to 5,100 cars) necessary to service major shale oil and gas formations around the country. 

Analysts are expecting U.S. Silica's earnings growth to remain red-hot, with consensus estimates of 36% in 2014 and 55% in 2015.

Foolish takeaway
U.S. Silica Holdings' latest earnings report shows why it's one of the hottest materials stocks on Wall Street. With the megatrend of shale oil and gas production likely to continue for years to come, U.S. Silica's fast-growing capacity is likely to continue driving blowout earnings quarter after quarter. 

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Adam Galas 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers