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Emerge Energy Services Earnings Don't Matter Until This Happens

By Tyler Crowe - May 7, 2018 at 10:20AM

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With its new sand facility just starting up, it seems premature to judge Emerge Energy Services stock.

Sometimes there are things that will impact a company's earnings that management can't control. This past quarter reflected that for Emerge Energy Services (NYSE: EMES). Even though the company sold more sand than ever before, earnings results didn't follow suit because of lower selling costs and some logistics issues railroad companies had moving frack sand to demand centers. 

Fortunately for Emerge, it has a new facility up and running that should fundamentally change its results from here on out. So let's take a brief look at this quarter's results and see what's in store for the rest of the year.

By the numbers

Metric Q1 2018 Q4 2017 Q1 2017
Revenue $106.7 million $103.1 million $75.3 million
EBITDA $16.9 million $17.0 million ($3.5 million)
EPS (diluted) $0.05 $0.18 ($0.38)
Distributable cash flow $8.7 million $13.4 million ($4.2 million)

Data source: Emerge Energy Services earnings release. EPS = earnings per share. EBITDA = earnings before interest, taxes, depreciation, and amortization.

If we were to judge this past quarter on sales alone, this was a good performance from Emerge. Total sand volumes were up 20% compared to this time last year to 1.5 million tons. Unfortunately, the average selling price per ton declined slightly, which compressed margins. Management noted that continued issues related to congestion and delays on Canadian National Railway's network had a significant impact on pricing, so it elected to ship more on other networks to make it less reliant on a single freight operator. 

To make things a little tougher, overhead costs and interest expenses were up significantly compared to the prior quarter as the company ramps up operations at its new sand facility in San Antonio. This 2.4 million ton per year facility started up at the end of the April and should lead to even larger volume and revenue gains in the coming quarters. It will be worth watching to see if margins can rebound as this new facility ramps up.

Sand mine in operation.

Image source: Getty Images.

What management had to say 

In the press release, Chairman Ted Beneski gave an overview of the company's current situation and the profound impact that this new facility will have on earnings and guidance for the year:

The demand for frac sand remains strong, and the market continues to face supply shortages due to constrained railroad service and construction delays for several new in-basin plants. We are proud that we delivered on our construction timeline for the new San Antonio plant, and our customers value our dependability as they have signed new contracts. In response to the constructive supply and demand picture, prices for frac sand increased in the first quarter, and we have implemented further price increases for the second quarter. We are highly confident that we will achieve the 2018 full year guidance of $120 million in Adjusted EBITDA and $60 million in net income. Our newly opened San Antonio plant will drive volume and margin growth while we expect the demand for northern white sand will remain resilient.

EMES Chart

EMES data by YCharts.

Investor takeaway

With the new sand mine starting up in the past month, Emerge's first-quarter results aren't a great barometer for the company's stock. Not only will this new facility add sand volumes, but its close proximity to the Eagle Ford shale basin means lower transportation costs and higher realized prices for each ton sold. The Eagle Ford may not be getting the same amount of attention as other shale basins, but sand demand in the basin is projected to increase 36% annually this year and next.

So for now, it looks like Emerge should get a pass for this less-than-stellar earnings report. If it continues to post middling results with this new facility up and running, though, then it's hard to see the value here when other sand producers are doing much better.

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