Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Emerge Energy Services LP (NYSE:EMES) took a 17% plunge today as the entire energy sector fell victim to yet another major sell-off, spurred by a drop in oil prices to $63 per barrel.
So What: Of all the oil and gas equipment and services companies out there, those such as Emerge Energy Services that supplying frac sand to drillers looking to access shale resources in North America are likely to get stung more than any other. If today's prices were to continue for an extended period, many of the potential shale wells will not be economical and won't be drilled, and a lack of drilling activity means less demand for frac sand. Add to that the several other frac sand suppliers that are bringing on new mines to accommodate the recent drilling boom, and many investors are afraid that the sand market will be oversupplied and prices will decline.
Emerge has taken it on the chin a little harder than some of the other frac sand suppliers because it is set up as a variable-rate master limited partnership, and its distribution changes with the amount of free cash flow brought in each quarter. In the event that prices and overall volumes of sand were to decline, it could significantly eat into those quarterly cash numbers, and investors who bought under the guise of a high-yielding investment might find themselves with a much lower payout then they bargained for.
Now What: For those with a weak stomach for volatility, it's probably best to stay far away from Emerge and other frac sand suppliers right now. There are several investors and Wall Street people in a panic right now, and some of this sell-off could be bordering on irrational. If you are looking long term, though, shale oil and gas will probably play a role in the global energy markets for several years to come, and you could possibly pick up shares in a strong sand supplier at a steep discount.