Well, that was quick.
In less than a year, the outlook on sand suppliers went from "holy cow how are we going to be able to keep up with this demand!" to "ummm....we're not sure what's going on right now, so we're not even going to try to guess with guidance." This uncertainty related to the price of oil and North American oil and gas drilling activity has sent shares of U.S. Silica Holdings (SLCA +0.00%) on a wild ride. Let's take a quick look at U.S. Silica's earnings for the quarter as well as its (lack of) guidance for the following year to better understand whether there are some real issues at the company or if this is just part of the natural commodity cycle.
Business update
I guess your opinion on this quarter depends on whether you are looking at the performance from previous operations or from the outlook into the future. Looking back on the quarter and 2014 as a whole, it was a great year. Total volume of sand shipped increased by 34% to 10.9 million tons, and adjusted EBITDA for the year was 53% higher than 2013. All of these things would suggest that things are really looking up.
On the other hand, all of these gains came from the sale of sand to the oil and gas industry for use in hydraulic fracturing. And unfortunately, that market just isn't looking as plump as it did this time last year. With oil prices in the $50-$60 range, much of the shale formations in the U.S. aren't economical, and it's weighing heavily on overall drilling activity. Since the outlook for oil and gas drilling is so unclear, U.S. Silica's management has decided to suspend guidance for 2015, and shares stumbled following the company's earnings release.
By the numbers: Revenue details
Fourth-quarter revenue came to a total of $249 million, just beating out the consensus estimate from S&P Capital IQ of $240.9 million. This was the second quarter in a row where sales increased 67% year-over year. For the year, revenue increased by 61% to come in at $876.7 million.
Source: S&P Capital IQ, Non-GAAP figures are normalized by S&P Capital IQ and may vary to maintain comparability with normalized estimates.
Total sand sold in the quarter came in at 3.0 million tons, which was pretty much flat for the sequential quarter but up 43% year over year. Sales to the oil and gas segment represented all of the increased shipments, but its sales through its industrial and specialty products segment improved ever so modestly to 1.0 million tons shipped. In the oil and gas segment, 66% of total volumes sold were in basin transloads, which are considered more profitable transport option.
A look at earnings
GAAP earnings for the quarter totaled $0.61 per share, a $0.12 miss on S&P Capital IQ consensus estimates for the quarter. This quarter's EPS was hurt in large part by the company realizing a $6.9 million loss on the assessment that one of its clients isn't in good credit standing and could default on a payment. The company also did a one time $6.5 million business expense that negatively affected earnings by $0.10.
Source: S&P Capital IQ, Non-GAAP figures are normalized by S&P Capital IQ and may vary to maintain comparability with normalized estimates.
Since the company is expecting a downturn from lowered drilling activity, it's reassuring to know that the company has been tucking away cash to cover expenses during these down times. As of December 31, total cash and short-term investments were $342 million and total long term debt $497 million. With that much cash on hand and a net debt to EBITDA ratio of 0.87 -- although we can expect this to decline -- the chances are pretty slim that the company will run into any liquidity or solvency issues any time soon.
As mentioned above, guidance for the company has been suspended because of market uncertainty, but that hasn't stopped others from doing it. According to S&P Capital IQ estimates, U.S. Silica is expected to see a big downturn, with earnings per share in the first quarter of 2015 dropping to $0.44 per share and revenue down to $204.5 million.
What a Fool believes
The entire oil and gas space is battening down the hatches as the storm of low prices passes through, and U.S. Silica is no different. The company's massive cash hoard is evidence that management has been preparing. With so much liquidity on its balance sheet, U.S. Silica should be able to manage this downtime quite well. Investors who own this stock should be prepared to see at least a couple rough quarters of lower earnings, but that doesn't mean that you should abandon the stock. Long term, shale drilling will be a major force in the North American energy space, and sand will remain a major component of its success. So if investors are willing to wait this rough patch out -- and maybe even pick up a few more shares in the process -- chances are they will be rewarded down the road.
