Frack sand suppliers such as U.S. Silica Holdings (SLCA -1.72%), Emerge Energy Services (NYSE: EMES), and Hi-Crush Partners (HCRS.Q) have been some of the hottest stocks of the past 18 months:
SLCA Total Return Price data by YCharts.
In a previous article, I explained the concept of "growth at a reasonable price," or GARP, which uses the price/earnings/growth metric as a rule of thumb to determine if a high-flying (and often high-priced) stock is a reasonable investment.
| Company/MLP | P/E Ratio | 5-Year Projected Earnings Growth Rate | 5-Year Projected Dividend/Distribution Growth Rate | PEG Ratio |
| U.S. Silica |
44.85 |
23.33% | 26.35% | 1.92 |
| Emerge Energy Services | 85.91 | 59.08% | 26.44% | 1.45 |
| Hi-Crush Partners | 25.86 | 27.50% | 19.95% | 0.94 |
| Eagle Materials |
41.12 |
8.00% | 4.98% | 5.14 |
| S&P 500 | 1.89% | 12.54% | 5.05% | 1.57 |
Sources: Multpl.com, Fast Graphs, Yahoo! Finance.
As this table shows, even though many sand suppliers for oil and natural gas fracking operations are trading at high valuations, a bullish case can be made based on their strong long-term growth prospects. This article will examine three reasons that U.S. Silica Holdings, which is planning on increasing its production capacity by 102% over the next two years in an effort to become the largest frack sand supplier in America, might soar in the years to come.
Demand for frack sand is soaring and expected to keep growing
Thanks to such hyperprolific shale formations as the Marcellus and Utica, demand for frack sand soared 33.57% annually from 2002 through 2012 and is expected to grow 10.29% through 2022.
Source: EIA July Drilling Productivity Report.
According to Kinder Morgan, the United States' largest pipeline company, the Marcellus and Utica shales are expected to increase gas production by 112% through 2024 as overall U.S. gas output increases by 26%.
The heavy increase in demand means increased pricing power for U.S. Silica (which expects demand to rise by 25% this year) and its competitors. For example, this year the company has raised prices twice, an average of 20% in total, and seen its average contract length increase to the point that production through mid-2018 is sold out.
New drilling techniques mean more sand per well
"On our first quarter conference call in April, it was great to announce that Range has just drilled what we believe is the highest rate Marcellus well ever drilled by any company in the southwest portion of the play. That will had an initial 24 hour rate of 38.1 million equivalent per day. This well had its 7,065-foot lateral completed with 36 stages." -- Jeffrey Ventura, president and CEO, Range Resources (RRC -0.66%)
This quote from Range Resources' last conference call illustrates that oil and gas companies are experimenting with more frack sand-intensive drilling techniques in order to boost production, including deeper, longer laterals and more frack stages.
This can be seen by the average use of frack sand per well, which has increased from 2,500 tons to 5,000, with some wells consuming 8,000 tons.
This beneficial trend is also confirmed by Eagle Materials, which claims new wells are able to frack 330% more area but require 360% more sand.
Production is expanding to meet demand
Currently, U.S. Silica has an annual production capacity of 8.2 million tons of frack sand, but the company plans on expanding this immensely over the next few years.
For example, it recently bought Cadre Services, a frack sand supplier in the red-hot Permian Basin, where, according to Pioneer Natural Resources, 75 billion barrels of recoverable oil (an estimate that is up 50% in the last year) are waiting to be extracted.
Source: Pioneer Natural Resources, Permian Basin investor presentation.
The Cadre Services acquisition increased U.S. Silica's production by 800,000 tons per year, but the company isn't stopping there.
It just finished scaling up its new Utica mine to full capacity of 1.5 million tons per year. It is also constructing a new Wisconsin mine with 3 million annual tons of capacity that will be operation by the fourth quarter of 2015, and has acquired permission for a second mine, also with 3 million tons of capacity, which will be completed in mid-2016. Finally, it plans on increasing production at its Pacific, Mo., plant by an additional 800,000 tons per year by the third quarter of 2015.
Foolish takeaway
U.S. Silica Holdings and other frack sand suppliers represent a great way for long-term investors to profit from America's historic oil and gas boom. As a fast-growing dividend growth stock, I believe U.S. Silica has a good chance to outperform the market over the coming years. Meanwhile, Hi-Crush Partners and Emerge Energy with their attractive yields of 3.7% and 4.2% respectively, are similarly well positioned.
