What happened

By most accounts, drilling activity is picking back up again in America's oil patch. But don't tell that to Smart Sand (NASDAQ:SND), Emerge Energy Services (NYSE: EMES), and Fairmount Santrol Holdings (NYSE: FMSA). All of these companies saw share price drops of more than 10% last month. 

A sand pit

Image source: Getty Images.

So what

If you want to point to a single event that impacted the share prices of these stocks last month, the best guess is when Fairmount Santrol announced its earnings on March 9. The company reported a modest increase in volumes and revenue on both a sequential and year-over-year basis. This was a disappointment considering that so many of its peers were reporting sequential volume gains of 20% or more. That said, just about every frack sand company that reported earnings recently saw large price drops afterward as those gains in volume didn't translate to bottom-line results.

One reason those higher revenue numbers haven't yet translated to profits is because these companies are spending extra money to bring previously idle facilities back on line. The combination of increasing drilling activity and more sand used per well means that sand demand is growing at a rapid pace.

According to The Wall Street Journal, the price for a ton of sand is now approaching $40, more than double what it was in the second half of 2016. As these facilities are brought back on line and start running at full capacity again, don't be surprised if we see a decent spike in profits.

Now what

This recent price drop seems more like a case of stocks not meeting short-term expectations rather than the longer-term potential. After seeing rig counts grow across America, Wall Street assumed that frack sand producers would have a banner quarter. That wasn't quite that case, however, as those price gains have not yet hit the income statement and high costs keep profits down. As these two trends play out, don't be surprised if all frack sand stocks produce much better results in the upcoming quarters.

The three companies mentioned here are some of the marginal players in the business, though. Smart Sand just went public in November 2016 and produces about 800,000 tons of sand a year. Compare that to the largest player in the business -- U.S. Silica Holdings -- which sold more than 10 times that in 2016.

Also, Emerge and Fairmount are two companies in this industry with weak balance sheets. Emerge ended the most recent year with a debt-to-capital ratio of 72% with no operational earnings to cover interest payments. Fairmount is in a similar position, with a debt-to-capital ratio of 76% and a net debt-to-EBITDA ratio of 431 times. Of course, a quick rise in volumes and sand prices could alleviate these issues, but there are other companies in the industry today in much better shape. 

For investors in this industry in general, the best thing to do today is to hold tight. The North American oil and gas industry is on the upswing, but recoveries are never linear. Unless we see a sharp downturn in prices and producers start to retreat from their upticks in spending, frack sand producers should look much better over the coming quarters. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.