The market has not been kind to U.S. Silica Holdings (NYSE:SLCA) in recent quarters. Drilling activity has been on a long decline now and the oil and gas industry isn't using as much sand as it was back when oil was at $100 a barrel. Even though the market has been brutal, U.S. Silica's management team has done a bang-up job of keeping the company afloat during these tough times. The company expects to report earnings on Aug. 2 after the market closes. When it does, here are three things that investors should watch.
Any signs of life from oil and gas producers?
For several quarters in a row, U.S. Silica's earnings have relied on its industrial and specialty products segment to carry the load while its oil and gas proppant business continues to reel from low prices. Last quarter, more than 95% of the company's operating margin came from industrial and specialty products. While this side of the business has kept the company from the abysmal results that its peers have produced in recent quarters, it hasn't been enough to generate any real profits.
For the company to turn things around, it will need some sort of improvement from the oil and gas side of the business. Oil and gas prices have been creeping up ever so slowly to the point that other oil service providers have been fielding calls from producers, but we still haven't seen an increase in active rigs or completed wells as of yet. Hopefully, management will provide a little more color on this part of the business so we have a better idea when the company expects to see an uptick in demand.
Mentions of market share
Capturing market share has been a major goal of management over the past couple of quarters. So far, the company has looked to achieve greater market share by producing more sand volumes today and taking the hit on margins in the process. This quarter, the comapny made an $210 million acquisition of privately held New Birmingham's NBR sand unit. The deal was made with 57% cash and 43% restricted stock. We should have expected a deal like this. After all, the company did do an equity raise last quarter with the very intention of using that cash to make a potential acquisition.
Management says that the deal will add about $0.20 to $0.30 to full year earnings in 2017, but there was no indication what this deal might mean for U.S. Silica's overall market share. So keep an eye out in either this coming earnings release or an upcoming investor presentation to see what the combination of this deal and the organic efforts translate to in terms of market share.
Keeping capital discipline?
So far, U.S. Silica's management team has done a decent job of keeping the company's debts in check. At the end of last quarter, the company had almost as much cash on hand as long-term debt. Keep in mind, though, that it has been burning through cash over the last few quarters, and that acquisition will draw down its cash reserves by about $120 million. So we should see some deterioration of the balance sheet, but not too much beyond that recent purchase. If there are any larger declines than that, then it may be worth digging a little deeper to figure out why.
Chances are, there won't be too many fireworks when U.S. Silica reports earnings, but it will be worth checking in on these three things to see if the company is at least hitting its own targets and is not falling victim to a bloated balance sheet like so many other frack sand suppliers have in recent quarters.