With oil prices crashing in recent months and rig counts falling off a cliff, it's no surprise that oil services stocks like U.S. Silica Holdings (NYSE:SLCA) are struggling. The company just reported an enormous earnings miss. Despite disappointing Wall Street, though, the news isn't all that bad. Here's what long-term investors need to focus on.
|Metric||Analyst Estimates||Actual Results||Miss|
|Revenue||$207.4 million||$204 million||-1.6%|
|Earnings Per Share||$0.43||$0.27||-37%|
As this table shows, U.S. Silica missed sales expectations slightly, but whiffed horribly when it comes to actual earnings per share.
Sales increased 13% on a year-over-year basis -- usually the best means of comparing revenue and earnings -- but declined 18% from the fourth quarter. That's because last quarter's record results came before the full effects of the oil crash became apparent on rig counts and frac sand demand. This quarter's sharp decline gives a more accurate picture of how the company's oil and gas segment will fare in a world of cheaper oil.
U.S. Silica's net income of $14.8 million represents a 21% decline over last year's figure, however, this result includes $8.3 million in one-time charges. These included a $7.6 million hit due to an arbitration ruling against the company, and incurred $1.4 million in restructuring expenses designed to bring the company's business model better in line with the current weaker oil market.
The news wasn't all bad. For example, excluding the one-time charges earnings where of $0.39 per share, and if we break out U.S. Silica's results by business segment we can see that its diversification is somewhat helping it to weather the current downturn.
Industrial and specialty sand: A silver lining
The company's industrial sands division reported $55.2 million in sales, up 12% year over year and 3% higher than last quarter. Interestingly, the increased revenue seems to indicate stronger pricing power because U.S. Silica's industrial sand volume year over year increase was just 1%.
However, as nice as it is for the company to have 27% of its sales diversified into industrial sand, the fact is that 77% of the company's contribution margin comes from frac sand and the oil and gas division saw sales drop 24% compared to last quarter as sand volumes declined by 15%.
The fact that, as a percentage, sales declined faster than volume indicates frac sand prices are coming under pressure, a fact that was confirmed by U.S. Silica CEO Bryan Schinn:
Given the magnitude of the reduction in drilling and completions activity, we expect that volumes and pricing of frac sand will remain under pressure, resulting in lower profitability in the second quarter.
Once more this quarter, management chose not to speculate on specific guidance for the next quarter or rest of the year, save for that it expects capital expenditures for the year to come in at $60-$80 million -- up to 50% lower than the 2015 capex outlook announced last quarter.
Given that the oil industry is inherently cyclical and deeply hurting right now, I think long-term investors should largely ignore this quarter's sales and earnings figures and instead focus on U.S. Silica's balance sheet, which will determine how easily the company rides out this oil storm.
Strong balance sheet will see U.S. Silica through the downturn
As of this quarter U.S. Silica has $328 million in cash and cash equivalents on its books and along with $47 million in untapped credit lines the company has $375 million in total liquidity, down just $14 million from last quarter.
Investors should take comfort in the fact that at the rate U.S. Silica's cash is diminished the company has 27 quarters -- 6.75 years -- before its liquidity is exhausted, and by that time, oil prices, oil drilling, and frac sand demand is likely to recover.
Another key factor investors should consider is U.S. Silica's rock solid current and quick ratios of 3.84 and 3.17, respectively. The current ratio is the amount of short-term assets to short-term liabilities and the quick ratio is the amount of short-term liquid assets compared to short-term liabilities.
A number larger than one indicates that a company isn't likely to face short-term difficulty paying its bills and U.S. Silica's bank-vault-like ratios means that the company should be able to easily ride out the downturn with little risk of defaulting on its obligations.
Oil crashes are just a part of the game when investing in oil stocks, however, U.S. Silica's business model is more diversified than most of its competitors. With its balance sheet built like a Volvo, long-term investors should find comfort that the company will pull through current market conditions and prosper once oil prices recover and frac sand demand, prices, and margins start to increase once more.
Adam Galas has no position in any stocks mentioned however he leads The Grand Adventure dividend project which owns US Silica in several portfolios. The Motley Fool recommends U.S. Silica Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.