What: Shares of U.S. Silica Holdings (SLCA 4.20%) bounced all over the place in December with large gains and losses, but ended the month 13% below where it started. The up and downs were mostly related to a further weakening of onshore U.S. oil and gas activity and some bullish calls from analysts.
So what: So let's start with the bad news. As oil and gas prices continue to creep downward and now trade in the $35-$40-per-barrel range, there aren't a whole lot of oil and gas producers that can make money, especially those looking to extract from shale. Without much drilling and fracking activity, there isn't much need for U.S. Silica's frack sands. This waning demand has been going on for a few quarters now, and will likely continue for a while longer until we start to see a rebound in prices.
That being said, a couple analysts have started to change their opinion on the company. Last month Credit Suisse initiated coverage on the stock with an outperform rating. The reasoning behind it seems to be that analysts see the company currently undervalued based on the company's position in the frack sand market and the chances of a rebound in the market on the horizon.
Now what: There is no real way of knowing if we will see a significant change in oil prices in 2016. There are just too many factors to consider. The one thing that suggests oil prices will rise eventually is that hundreds of billions of dollars in new production projects have been cancelled, and as declining production from existing fields continues, that lack of investment will lead to an undersupplied market.
When that does happen, chances are that U.S. shale producers will be some of the companies to jump on the opportunity to produce more, and with that will come increased demand for U.S. Silica's sand. With probably the best balance sheet among its peers and a secondary revenue source from selling sands for industrial and specialty products, U.S. Silica seems to have the legs to outlast this downturn, so investors may want to start putting this stock on their radar as a way to play the rebound in energy.