What happened

Individual investors have endured a downright awful year for frack sand stocks, which have fallen as much as 70% since the beginning of 2018. But today will go down as a small win.

Shares of Covia Holdings (CVIA) paced the peer group with intraday gains as high as 28.7% after the company reported third-quarter 2018 earnings this morning. Investors had expected a quarter-over-quarter step backward, but it wasn't as bad as anticipated. Covia closed the day up roughly 21%. That was a dramatic reversal from a 21% fall immediately after the stock market opened this morning.

Covia's news sent shares of Hi-Crush Partners (HCRS.Q) 14% higher for the day, while shares of U.S. Silica (SLCA -0.13%) leaped as high as 11% today and closed up about 8.5%. The "good news by association" vibe is only fair considering Wall Street freaked out over the latter's earnings report earlier this month, sending all frack sand stocks sharply lower.

While today's pop is certainly welcome news for investors, each company's stock is down significantly since the beginning of the year. What happens from here?

An arrow bouncing up shelves on a wall.

Image source: Getty Images.

So what

The Motley Fool's Tyler Crowe has been all over the developments in the niche oil and gas industry this year, writing today that Covia Holdings' third-quarter 2018 operating results weren't as bad as the headline numbers might suggest.

That's because the newly merged company didn't waste time resizing the business and balance sheet, opting to record $295 million in asset impairment charges during the most recent period. That led to quarterly EBITDA of negative $68 million, although adjusted EBITDA -- most notably excluding the asset impairment charges -- came in at a much more respectable $287 million.

Although it will take time for the asset impairments to roll off the books (and out of financial comparisons), investors have immediately benefited from one of the core arguments for the merger: stable earnings from the industrial business. Consider that product sales dropped 55% for energy applications, where sand is a key consumable used during oil and gas production, in the year-over-year comparison. But sales for industrial applications, where sand is used to manufacture ceramics and specialty filters, declined only 6.5% in that span.

CVIA Chart

CVIA data by YCharts

Hints of successful diversification at Covia Holdings are making investors more confident that the same strategy will work for the rest of the peer group. It's what everyone will be watching heading into 2019. Why? Frack sand stocks have gotten hammered this year (and in past energy market down cycles) due to reduced demand from energy customers.

To be fair, most of the big sand producers had already begun to prioritize diversification efforts prior to 2018. Covia Holdings is the result of a merger between Fairmount Santrol (energy) and Unimin (industrial). U.S. Silica acquired EP Minerals for $750 million to double the size of its industrial products segment. And Hi-Crush Partners is delivering strong performance from its "last-mile" logistics business.

Now, Wall Street is waiting to see just how big of a cushion industrial businesses can provide when frack sand sales, the historical driver of excess income and above-average dividend payments, falter from weakening demand.

Now what

The situation on the ground really isn't as bad as the year-to-date stock performances indicate. Sand producers are stronger and more diverse today than during the last energy downturn in 2015. While the recent slowdown in frack sand demand is having an effect on each business, they're still delivering relatively healthy product margins. And as more pipeline capacity gets built in the Permian Basin, oil and gas producers will be able to flip 3,866 drilled but uncompleted wells into production. That bodes well for the long-term trajectory of sand producers, although more pain could be on the way in the meantime.