Just about everything that Emerge Energy Services (NYSE: EMES) has predicted concerning the frack-sand market has come true so far this year. Yet somehow, the company hasn't been able to turn those predictions into a profitable quarter. That's especially concerning when its competitors have already turned the corner earningswise.
Let's take a look at Emerge's most recent quarter, and try to figure out what was keeping the company's operations from turning a profit.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$82.6 million||$75.3 million||$24.8 million|
|EBITDA*||$4.7 million||($3.5 million)||($12.1 million)|
|Earnings per share||($0.20)||($0.38)||($0.95)|
|Distributable cash flow||$2.6 million||($4.2 million)||($17.3 million)|
Two underlying trends are working in Emerge's favor. One, frack-sand demand is at an all-time high. Even though the total active-rig count is well below the peak in 2014, total sand used per well is more than double what it was then and is driving incredible growth.
Two, there isn't much idle sand-production capacity anymore. Emerge and its peers have said in their recent earnings releases that most of their current facilities are running at full capacity. These high usage rates translate to better per-ton prices and higher margins.
This past quarter, Emerge sold 1.39 million tons of sand, the most in the company's history. All three of its Wisconsin facilities are running at close to full capacity and were held back by a bottleneck with rail-car shipments. Based on this information alone, one would assume that Emerge's results would be much better.
One item that appears to be holding the company back is its Kosse, Texas facility. This facility is capable of producing 600,000 tons per year of dry sand, but production there has been a slow ramp back up. In fact, production at Kosse declined compared to the prior quarter and is on pace to produce only 220,000 tons in the year. That's a bit surprising when Emerge and so many other frack-sand producers have emphasized regional sand mines that can deliver to the Permian Basin and Eagle Ford shale formation in Texas and the SCOOP and STACK formations in Oklahoma.
Management has said in prior quarters that it's working on an expansion plan for the facility, but it hasn't been able to get it up to current nameplate capacity. That has to be weighing down on overall profitability for the company.
On a positive note, Emerge recently completed the conversion of a San Antonio construction material sand mine to produce frack sand. The $20 million facility is now operational and should lead to higher volumes in the coming quarter.
What management had to say
In Emerge's press release, Chairman Ted Beneski highlighted the strength of the frack-sand market and some of the operational troubles the company faced in the quarter. He also discussed Emerge's new San Antonio mine and the potential it holds.
The frac sand industry remains one of the strongest growth areas in oil and gas completions activity. We have approached full utilization at our Wisconsin plants, so we are excited about growing the business through the expansion of our newly acquired San Antonio in-basin operation. With industry demand still outstripping supply, especially on the finer grades, prices for sand have continued to rise as we begin the second half of the year. Our volumes increased by 11.3% sequentially to 1,392 thousand tons, which reflects another record quarter. Our northern white volumes in the second quarter were partially constrained by railroad congestion from the Class I carriers due to the high volume of shipments that have surpassed prior peak periods. We are working closely with our logistics partners to resolve the bottlenecks during this period of surging demand. We are also pleased to announce that our San Antonio plant commenced frac sand operations at the end of July.
What a Fool Believes
Even the most patient investors have to be getting a little anxious about Emerge's most recent quarter. The fact that the tightening market for sand couldn't push margins high enough to produce a profit is a little discouraging when other producers are back in the black. We can give Emerge a little flexibility as it gets its San Antonio mine up to full capacity, but investors should scrutinize these next few quarters closely.