If Fairmount Santrol's (NYSE: FMSA) second-quarter earnings looked good, then this quarter seems great by comparison. By just about every measurable metric, the company improved. While this past quarter wasn't nearly as eventful as the prior one, the company stuck to its plan for a new mine and is still taking incremental steps to improve its profitability.
Let's rummage though Fairmount's most recent quarterly earnings to see what went well this past quarter and explore some steps the company can take to get investors excited about this stock again.
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By the numbers
| Metric | Q3 2017 | Q2 2017 | Q3 2016 |
|---|---|---|---|
| Revenue | $280.1 million | $233.2 million | $134.8 million |
| EBITDA | $70.0 million | $43.8 million | ($6.7 million) |
| Net income | $34.9 million | $10.5 million | ($20.6 million) |
| EPS | $0.15 | $0.05 | ($0.11) |
Source: Fairmount Santrol earnings release. EPS = earnings per share.
Compared to its peers, Fairmount's post-oil crash recovery has been slower and steadier, but the company is now solidly back in the black thanks to higher sales volumes and better margins per ton of frack sand sold. Third-quarter sand volumes and revenue increased 42% and 108%, respectively, compared to this time last year.
Higher prices and higher utilization rates for Fairmount's mines helped to boost gross margins 42% compared to the second quarter to $30 per ton. As the company utilizes more capacity at its facilities, it spreads fixed costs across a larger base and per-ton costs decline. It also helped that the company was able to bring all of its railcars out of storage this past quarter. These factors and less interest expense led to the welcome earnings result.
On the operations side, this was a quiet quarter. The company didn't announce any major deals or significant issues with its facilities. No news can be good news, though, as it is in the middle of constructing its Kermit, Texas sand mine that will add 3 million tons annually to Fairmount's total production, and its location in the Permian Basin likely means it will have higher margin sales thanks to low transportation costs. According to management, the facility remains on track for operations in the second quarter of 2018.
The only event in the quarter worth noting was the company's debt restructuring. Fairmount paid off all of its outstanding debt and refinanced with a $700 million term loan due 2022 and a $125 million credit facility. Unlike most senior notes that companies use, this term loan will require principal payments over time and will allow the company to slowly reduce its debt over the length of the term loan.
What management had to say
With Kermit coming on line in the middle of 2018, you might expect management to give a rosy outlook for the upcoming year. During the company's Nov. 2 conference call, CEO Jenniffer Deckard did just that by providing the reasons why Fairmount expects higher demand coming down the pipe:
Market dynamics have continued to progress in line with our comments during our last call. And so, we continue to believe that 2018 proppant demand will approximate 100 million tons. This depends on a series of factors, the base of which is an industry expectation for U.S. rig counts to remain stead at approximately 850 land rigs on average for next year.
More importantly, we expect a few tailwinds to proppant demand, including an estimated 10% increase in overall proppant intensity and an expectation that the availability of completions resources will better match drilling resources, facilitating a 2018 drawdown of [DUC] inventory versus a comparative build over 2017.
What a Fool believes
Fairmount Santrol looks like it is very much back on track after a couple of years where things were looking tough for the frack sand producer. Sales are back, earnings are up, and the company has a path forward with growing production and a reduced debt profile.
Now it's all about what's next. Obviously, the Kermit facility will be a production and earnings boon for the company, but the market for sand is looking like it will start to flatten out as drilling activity levels off and some major oil services companies start to cut back on per-well sand consumption. If that were to happen, then Fairmount will need to find new ways to increase shareholder value.
Considering the company needed to issue a lot of stock to stay afloat during the downturn, a stock buyback program would be a good way to undo that shareholder dilution. With shares trading just under 1.2 times sales, it might be a good time to start chipping away at those additional shares.
