U.S. Silica (SLCA -1.84%) surprised investors with a somewhat profitable quarter, and it all seems to be thanks to diversification.
In this video segment, energy analyst Sean O'Reilly, Fool contributor Tyler Crowe, and Fool Canada analyst Taylor Muckerman will also tell you why Royal Dutch Shell (RDS.A) (RDS.B) might still be staying afloat offshore, and how the rest of the industry performed. The trio also examined a surprise that outperformed the rest of the sector.
A full transcript follows the video.
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Sean O'Reilly: First off, I'm anxious to get your guys' thoughts on what companies have impressed you so far this earnings season.
Taylor Muckerman: I was talking with Tyler before the show about sand producers, and I had gotten my companies mixed up. I thought it was Carbo [Ceramics] (NYSE: CRR), and it turns out it was U.S. Silica. So I went back and looked, and yes, indeed, one sand producer did actually do fairly well this quarter despite a terrible quarter for their energy and materials sector.
O'Reilly: The sector itself.
Muckerman: Yeah. They had the best quarter in 115 years for its industrial and specialty products distribution line. So it just shows the advantage that you have with diversification. Sort of like we've discussed looking at oil majors in a supremely down market because they offer natural hedges. Whereas this company seems to be doing quite all right, even though you look at the 52-week chart and you think the manager is probably hiding in a hole somewhere. They've been performing outside of their biggest segment, which is obviously oil and gas.
O'Reilly: What about you, Tyler?
Tyler Crowe: I think "performing well" under certain conditions.
Muckerman: Right. You look at the high-cost partners, and Carbo Ceramics, which is what I was thinking was this company, and it turns out those companies are still doing fairly poorly.
Crowe: One of the things that U.S. Silica has going for it in relation to its others is just that it's got a much cleaner balance sheet. If you look at some of the other guys, their interest payments are going to get a little heavy in this coming year if we don't see a big uptick in oil and gas activity anytime soon, that's for sure.
O'Reilly: Yikes. What segment were you talking about that's 115 years old? You're talking about U.S. Silica Holdings, and they make the sand for fracking stuff, right?
Muckerman: Yeah. They have a specialty-products segment which has a deeper variety of customers. It's not nearly the same top-line number that we're talking about. It's outside the oil and gas sector.
O'Reilly: Got it. Have any of the oil majors surprised you guys at all to the upside?
Muckerman: We talked about Shell last week when they reported. They continue to surprise to the downside by writing off...
O'Reilly: We don't know how they're doing this badly.
Crowe: In talking about this Shell thing; it's one of those ripping off some Band-Aids that have been there for a very long time. The hard thing you have to try to wrap your head around with Shell is they're trying to reshape themselves for this upcoming BG merger that's supposed to finalize in a couple of quarters. What they're saying is, they want to shed a lot of things that they were doing previously that they no longer see as profitable. With this BG merger, they're making this huge push into LNG.
If you look at their LNG portfolio with BG on board, they're more than double any other oil major in the space. With that much leverage there, they're really trying to push that. They've got a huge tie to deep offshore, mostly related to Brazil. That's going to be a big push for them. They're one of the ones where, yes, things are going to get rough and anybody looking at this probably needs to wait until we see what happens post-BG merger because it's making so many moves right now that it's hard to take a pulse on what you want this company to be, in terms of investment.
O'Reilly: I'm glad we went this direction. We talked about Shell a bit last week, but we didn't get your thoughts because you were busy down in Houston. Do you think that's a good move, given that the cleanliness of natural gas as a fuel, and the push toward being a greener planet, and the cost -- it is a very cheap fuel right now -- is this smart, given their bungling of the oil sands and Antarctica?
Crowe: If you look at the anticipated demand for LNG, it looks like the right idea. The only question is if they can bring on enough profitable ventures in which to do it. It's one of the things that the CEO mentioned a couple quarters ago in their conference call. He said, "We think this is great, but we can't simply invest on the fact that it's a greener alternative. It actually has to make some money for us."
One of the things that they're really looking at with investing in this end is not just the terminals, but they're also looking at the marketing, because it's going to be a huge issue to deal with. If you look at prices, which have declined significantly because we've brought so many new projects online in the coming years, they're going to have to find that effective way of finding the markets that need it the most and will be able to actually pay a premium.
The thought was that it was going to be China, but it may not be that way. It's going to be interesting. It's worth watching, because you don't know exactly how it's going to turn out yet.
