Over the past three months, U.S. Silica (NYSE:SLCA) continued its buying binge by adding more frack sand mines to its already industry-leading production. If all goes according to plan, U.S. Silica's results will be very different next year.
Here's a look at the frack sand producer's latest quarter, some of the details for its most recent investments, and what this could mean for the company in 2018.
By the numbers
|Metric||Q3 2017||Q2 2017||Q3 2016|
|Revenue||$345 million||$290 million||$137 million|
|Operating income||$62.8 million||$43.4 million||($17.3 million)|
|Net income||$41.3 million||$29.5 million||($11.3 million)|
|Earnings per share||$0.50||$0.36||($0.17)|
U.S. Silica delivered on every metric this past quarter. Volumes and revenue were up 15% and 19%, respectively, compared to the prior quarter thanks to both higher prices and the addition of recently acquired sand mines. The company was also able to boost profitability as it sold more sand in-basin and its Sandbox service grew for more last-mile logistics. The company's non-frack-sand sales were also up 11% compared to the prior year thanks to higher volumes and better product mix.
This quarter's results were so strong that management announced a $100 million share repurchase program. I'm assuming that part of the reason for this is to claw back some of the shares it sold in 2016 to shore up its balance sheet. Now that it has a stronger financial position, it looks like U.S. Silica is in a position to do this without compromising its finances.
After an acquisition and announcing a greenfield sand mine earlier this year, many investors assumed that U.S. Silica was done expanding its operations. That wasn't the case, though, as the company went on another shopping spree this past quarter.
The first deal was the acquisition of Mississippi Sand, which owned a 1.2 million ton per year sand facility in Missouri, a 1 million ton per year dry plant in Texas, five barge terminals, and three rail terminals that have a combined throughput of 2.2 million tons per year. U.S. Silica paid $95 million in cash for the whole company. According to management, it can upgrade the facility to produce 1.6 million tons with modest capital investments and will play a critical role in expanding U.S. Silica's sales in the Haynesville and Marcellus/Utica shales. The dry plant doesn't really add to Mississippi Sands' operations, but it could serve as an asset for U.S. Silica's other Texas operations.
The second mine announcement this quarter was a green light for a 2.6 million ton per year facility near Midland, Texas. This is another play on booming Permian Basin shale production and is on top of the 4 million ton in-basin facility management announced last quarter. This second facility near Midland will cost about $150 million to complete. What's even more surprising is that at the time of the announcement, management said it has already secured 1.2 million tons' worth of long-term customer contracts that include cash pre-payments to help fund the mine and commitments for four of its Sandbox logistics crews to deliver direct to site.
The addition of these facilities means that management estimates total capital spending for the year to be around $375 million.
What management had to say
Management's statements about the prior quarter were of the "we're executing our plan" variety and didn't give much insight. Management did, however, give its 2018 outlook. Here are the highlights.
- Total frack sand demand in the 90 million to 100 million ton range assuming a flat rig count, a 15%-20% increase in sand per well, and completion of several DUC (drilled, uncompleted) wells.
- Heavy investments in its Sandbox logistics service and targeting over 100 crews. At the end of the third quarter, there were 52 active Sandbox crews in the field.
- Contribution margin for industrial and specialty products will maintain its growth rate of 10% annually on higher margins from new products.
What a Fool believes
U.S. Silica's management team has gone on the record saying that the recent expansion of frack sand production isn't an overreaction from sand producers, but is needed to meet anticipated demand. After adding 9 million tons to its own production in the past several months and announcements from its competitors about new mines, you do have to wonder if there is a little too much sand production about to hit the market. If that is the case, then it was smart for U.S. Silica to lock in customers with contracts that ensure those new facilities will be used.
All said, this was a good quarter for U.S. Silica, and it looks like even better times are just around the bend. Adding another 9 million tons of production to its existing base will be a huge uptick in earnings for the company. If it can execute on this plan and not see significant margin contraction, then 2018 could be a big year for U.S. Silica stock.