What happened

Despite all the signs that the frack sand stocks should be riding a big wave of optimism, May was a pretty mixed result month for the industry. While Carbo Ceramics (NYSE:CRR) posted an impressive 15% gain, every other major frack sand stock declined, with Emerge Energy Services (NYSE: EMES) and Smart Sand (NASDAQ:SND) posting double-digit losses.

So what

May was a tale of two markets. The first half of the month rode the optimistic waves that came after frack sand producers posted earnings results. Pretty much across the board, companies were reporting substantial gains in volumes sold. Emerge reported that first quarter sales volumes increased 50% for the second quarter in a row, Smart Sand's volumes were up 103% sequentially, and Carbo Ceramics production volumes more than tripled compared to the prior year. 

Sand mining facility

Image source: Getty Images.

None of those big production gains translated into bottom line results except for the industry's largest player U.S. Silica Holdings (NYSE:SLCA), though, and that likely has some investors a little vexed. One reason that revenue and net income results haven't been able to keep up with production gains is that all of these companies are spending a lot of money to bring idle plants and mines back into service. Once these facilities are back to running at capacity, those start-up costs will go away, and fixed costs for the facilities will be spread over larger production levels. Once this starts to happen, it's pretty likely that net income results will improve. 

After that optimism had worn off, though, many of these stocks began to decline as news started to break that OPEC was going to maintain its current production levels into 2018. Many investors were hoping that the organization would cut production levels even further to prop up prices, but that wasn't the case. As a result, prices for oil started to decline modestly. 

EMES Chart

EMES data by YCharts.

There are also growing concerns that U.S. shale drilling activity will start to plateau in the next couple months as service costs -- namely the cost of frack sand -- starts to eat into producers margins. At today's oil prices, oil companies can make a modest profit, but the margins are terribly thin and can ill afford higher service and equipment costs.

Now what

Investors that are selling these stocks because oil and gas drilling could be at a plateau haven't been paying attention to the frack sand market. Even though rig counts are at half the level they were at the peak in 2014, total sand consumption today is higher than it was in 2014 because per well sand use and per rig efficiency is that much better. Emerge and Smart Sand are running at capacity and are looking to expand operations just to meet current demand. The same is happening at U.S. Silica and Hi-Crush Partners (OTC:HCRS.Q) as they all scramble to meet the demand of drilling hotspots like the Permian Basin. 

Once all these start-up costs wind down, and these expansion facilities come online, we could be in store for a string of strong earnings results from all of these companies. The top players, U.S. Silica and Hi-Crush, have an opportunity to do better thanks to their logistics and last-mile delivery services that improve margins, but all stand to benefit from this trend.

The one company with a question mark is Carbo Ceramics. The company's strong suit is selling manufactured fracking proppant rather than traditional white sand. It is a higher performance product -- especially in higher pressure wells -- but most producers are electing to use regular white sand instead. Even in Carbo's most recent results, all of those volume gains came from traditional sand sales while its ceramic proppant sales are actually on the decline. It will be hard to justify all of those ceramic proppant manufacturing assets if the bulk of its sales are just regular sand.

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.