Shares of Fairmount Santrol Holdings Inc. (NYSE: FMSA) sold off on Thursday and were down more than 10% by 2:30 p.m. EDT, after two analysts downgraded the frack-sand producer's stock.
This year has been an abysmal one for investors in Fairmount Santrol Holdings, which is now down 70% after another double-digit sell-off today. Fueling the latest bout of selling is a double dose of analyst downgrades, which are adding insult to injury. One of the downgrades came from Goldman Sachs, which sees more downside ahead for the company. Not only did the bank cut its rating from neutral to sell, but it slashed its price target all the way from $11 to $2 per share. Meanwhile, Credit Suisse threw in the towel by cutting its rating from outperform down to neutral. Incidentally, that wasn't the only frack-sand producer it downgraded today.
Driving these downgrades is the view that Fairmount Santrol's financial results will remain under pressure. First of all, oil prices are about $10 a barrel below what the industry expected this year, which will likely lead to fewer wells getting completed than anticipated, curbing demand growth for frack sand. Meanwhile, Fairmount Santrol's rivals have announced three new sand mines in Texas to supply the red-hot Permian Basin. That puts the company at a disadvantage, since it costs an extra $40 to $60 per ton to bring its sand in from Wisconsin by train. That one-two punch will likely result in lower volumes and pricing for the company in the near term.
Investors expected that Fairmount Santrol's margins would expand this year as volumes and prices recovered along with oil prices. Instead, oil has fallen, which will likely result in weaker frack-sand demand later this year. Worse yet, the industry is expanding capacity, and those mines are right in the heart of the Permian, which gives them a competitive advantage over Fairmount's mines. That could have a significant impact on its margins, which could send the stock price even lower in the months ahead.