Emerge Energy Services (NYSE: EMES) is emerging as a compelling MLP option for income investors. While it's not the pure-play on frack sand found at Hi-Crush Partners (HCLP +0.00%), that's not necessarily a bad thing. In fact, the diversity found at Emerge Energy Services just might be what keeps its distribution on solid ground.
Digging into Emerge Energy Services
In 2013 Emerge Energy Services emerged onto the scene after its private equity sponsor put a frack sand producer together with two fuel companies and sent the combined entity public. As a combined entity it offered income investors better scale and balance than a pure-play frack sand producer like Hi-Crush Partners. Further, it came with built-in growth as the company is in the late stages of permitting two additional sand facilities.
While the two fuel businesses add a cushion of diversity to the mix, Emerge Energy Services is really about the growth of frack sand. As the slide below notes, sand continues to be the dominant proppant used in fracking and its usage is expected to continue growing over the next few years.
Source: Emerge Energy Services Investor Presentation (Link opens a PDF)
As the chart in the lower right-hand corner notes, frack sand demand is expected to grow from around 80 million tons this year to more than 90 million tons by 2016. That growing marketplace is behind the company's current expansion plans to build two additional sand facilities.
Overall, there are a lot of similarities between Emerge Energy Services' sand segment and Hi-Crush Partners. Both have high quality sand supplies, access to rail and strong pricing. Both companies are working to expand capacity and increase distribution. The only real difference between the two companies is the fact that Emerge Energy Services owns two fuel companies.
The right fuel for growth?
Emerge Energy Services' fuel segment is sort of an odd pairing for a frack sand producer. Its business primarily consists of processing and selling transportation mixture, or transmix. It also owns a biodiesel refinery, which creates higher margin blends and generates Renewable Fuel Credits or RINs. The company has an overview of this segment, which can be seen on the following slide.
Source: Emerge Energy Services Investor Presentation
It's a segment that doesn't have the same visible organic growth as the sand segment. While both of its sites have room for expansion, there aren't currently any expansion plans. If Emerge Energy Services does expand the segment, that growth will more than likely come from acquiring additional transmix operations or terminal sites.
Overall, there aren't a whole lot of synergies between the sand segment and the fuel segment. In fact, it almost seems like the private equity sponsor decided that the easiest way to monetize these portfolio companies was to package them with its sand business and send the combined entity public as an MLP. Because of that, the segment is basically being used as a cash cow to fuel a stronger distribution to investors. It's not a bad idea as adding additional cash cow assets like these to the portfolio is one easy way to keep the distribution growing without being completely reliant on frack sand.
Investor takeaway
While Emerge Energy Services is an odd pairing of a growth-focused frack sand business with a low-growth fuel segment, that's not necessarily a turn off for investors. In fact, its current distribution yield of 4.25% is more compelling than Hi-Crush Partners' 3.5% yield. That's why Emerge Energy Partners really is an emerging MLP worth a closer look for income seeking investors.
