Image source: U.S. Silica Holdings.
You would be hard-pressed to find a subset of the oil and gas industry that has been more stricken than frack sand suppliers. U.S. Silica Holdings (SLCA 1.63%), the most resilient of the larger sand suppliers, has seen its shares tumble more than 70% since trouble started brewing in the shale patch about two years ago.
With oil and gas drilling activity still drying up across North America, the expectations for U.S. Silica in the coming quarters are quite low. For those looking beyond this extended lull in the business, though, there are still some components worth watching when U.S. Silica reports earnings on Feb. 23. Below are a few things to be on the lookout for this time around.
A little love from industrial sales?
Although using sand for hydraulic fracturing is a relatively new commercial endeavor, U.S. Silica has been around for over 100 years supplying sand. For most of that time, sand went to industrial manufacturers for things such as glass and chemicals. With another market to sell to unlike most of its oil and gas industry-focused peers --one that has very different business drivers -- this gives U.S. Silica an additional outlet for sales.
This proved very useful last quarter, as its industrial solutions segment posted its best ever quarterly result. The contributing margin of this segment helped to make up for some of the declines from its oil and gas products market. For the market, it is part of the reason why shares of U.S. Silica have held up slightly better than those of its peers. Longer term, though, it's helping to keep the company's financial house in better order during the downturn. This suggests that when the market does improve and drilling activity picks back up again, U.S. Silica will be in the best position to pick up its own spending and grow sales.
So this coming quarter, investors should look to see if the company's industrial segment can help keep cash and some semblance of earnings coming in the door while the oil and gas proppants business remains in the doldrums. Any signs of strength here would be a welcome sign.
Preserving the balance sheet
Keeping a tidy balance sheet is a tough endeavor in a market like this, but U.S. Silica has done a decent job thus far of maintaining a decent balance sheet because of its more diverse offerings. At the end of last quarter, the company had about $300 million in cash and short-term investments and a current ratio -- a measure of its ability to pay off immediate expenses with cash or assets that can be quickly converted to cash like inventory -- of 3.91 times, meaning U.S. Silica has plenty in liquid assets lying around to cover any short-term issues.
Remember, though, that was last quarter, and the market for sand hasn't improved much over the past quarter. So watch for any signs of a deteriorating balance sheet such as a higher debt-to-EBITDA ratio and lower current ratio. We can expect these metrics to deteriorate a little, but we don't want to see large declines that would suggest financial trouble ahead.
Capturing market share
Last quarter, CEO Bryan Shinn noted that the company was keeping its sand volumes sales a little higher at lower prices because it was deliberately looking to capture market share from its peers. Again, it is able to do this because it has that industrial proppant segment to lean on in these tough times.
The frack sand industry is still rather fragmented; about 30% of its supply comes from several small players that are struggling much more than U.S. Silica, and the other 70% comes from the top 10 that are also finding themselves in a bit of financial distress. This gives U.S. Silica an immense opportunity to push other players out of the market. So this quarter, be on the lookout for any comments from management about actually gaining overall market share.
What a Fool believes
U.S. Silica is in better shape than its peers, but that doesn't necessarily mean that it is in great shape right now. To make it through this downturn in the oil and gas industry without too much damage to the business, the company needs to be able to preserve some financial strength. If U.S. Silica can get some help from its industrial segment again, that should help keep it from taking too big a hit to the balance sheet. So investors should keenly watch how the company is able to perform on these two metrics. At the same time, there is an immense opportunity to gain market share, so the company needs to balance immediate needs with possible future returns.
