With demand for frack sand growing fast, it was only a matter of time before U.S. Silica Holdings (SLCA) was able to post profits again. That time ended up being this quarter, as the company posted a modest $0.03-per-share gain.
Anyone who has followed this stock over the past few quarters would have seen this coming, though. Increased oil and gas activity has made sand a hot commodity again and it's lifting every boat in the sand supplier industry. Let's take a quick look at some of the results for the prior quarter and what investors can expect over the next several months from U.S. Silica.
Image source: Getty Images.
By the numbers
| Results | Q1 2017 | Q4 2016 | Q1 2016 |
|---|---|---|---|
| Revenue | $244.8 | $182.4 | $122.5 |
| Operating income | $13.4 | ($6.3) | ($14.3) |
| Net income | $2.5 | ($6.9) | ($11.0) |
| Earnings per share | $0.03 | ($0.09) | ($0.20) |
Data source: U.S. Silica Holdings earnings release. In millions, except per-share data.
Wall Street's reaction to last quarter was a bit puzzling. Even though U.S. Silica posted strong volume growth, it didn't translate to a swing to net profit. The issue was that the company needed to ramp up activity at idle mines so it drastically increased costs. This quarter showed, though, that those costs were well worth it. Total sand volume increased to 3.4 million tons. That's a 49% increase compared to this time last year, and another 18% gain over the prior quarter. With the fixed costs of running sand mines and U.S. Silica's logistics spread out over a wider revenue base, the company was able to swing to profit for the first time since the third quarter of 2015.
Getting back into the black is almost entirely due to its oil and gas proppants business. Throughout the downturn, its Industrial and Specialty Products line kept a constant amount of cash coming in the door that prevented any financial disaster. With both businesses improving, though, we should see material improvements in profits and cash flow in the coming quarters.
Data source: U.S. Silica Holdings earnings release. Chart by author
The highlights
One thing that management highlighted last quarter was an increased amount of in-basin sales of sand. In-basin sales indicate that customers are using U.S. Silica's logistics assets, and drive higher margins for the company. In the fourth quarter, in-basin sales were as high as 75% of tons sold. This quarter, that number slipped to 67%, which is still a respectable number when you consider the sequential growth we have seen over the past couple of quarters.
This decline could be a product of a couple of things. It could be that its logistics assets are fully utilized and the company needed to make some non-in-basin sales to meet growing demand, or it's possible that some producers and oil services companies are electing to use their respective logistics assets.
It will be worth checking the company's management calls to see why this in-basin sale slippage happened. Management has said that one of its big investment priorities is building out its logistics assets to encourage in-basin sales and reduce loading and delivery times. If those investments aren't panning out as hoped, that could be a bit of a yellow flag.
From the mouth of management
U.S. Silica's press release for its quarterly results was a pretty cut-and-dried affair, as was CEO Bryan Shinn's statement on the most recent results:
Continued industry recovery and powerful secular trends are driving record demand for our products and services in Oil and Gas while our Industrial and Specialty Products segment continues to make great progress in growing its bottom line through a combination of strategic price increases and the roll out of more higher margin products.
When sales are growing as much as U.S. Silica has seen over the past few quarters, there is little need to say more.
10-second takeaway
Oil and gas drilling has been using more and more sand per well than ever before, and that is helping U.S. Silica get back on track at a faster rate than overall drilling activity. One concern in the short-to-medium term will be whether U.S. Silica and its peers can meet this growing demand without sand prices getting out of hand. If sand prices were to increase significantly in the coming quarters, it could put a big damper on U.S. onshore drilling.
For the time being, though, things are looking up for U.S. Silica. Hopefully, once it can build a stronger cash position and pay back some debts, management will be able to restart dividend payments.
