WASHINGTON, March 31, 2017 – Having endured a relatively boring week during which the stock market remained solidly tentative, we’ve been wracking our brains trying to discover some investments we could get excited, and we may have stumbled upon a trio of them that you might find surprising. Our “big three” bright ideas today are all companies whose specialty is mining sand.
Sand, you say? Seriously? Indeed we are. That’s because we’ve discovered over time a not very obvious fact. Sand isn’t just sand. There are different kinds and different grades and varieties of sand. One grade, for example, is favored for use in the manufacture of fiber optic cable.
But it’s another specialty sand that we’re interested in today: fracking sand—the sand that companies involved in drilling for shale oil and/or natural gas use as a key element in proprietary fracking fluids that get the job done.
In political discussions revolving around the notion of “fake news,” one topic that’s rarely-mentioned is the insistence by radical environmentalists that fracking fluid—the composite liquid injected into shale formations at high velocity to frack-ture the rock formations containing oil and gas—is horribly toxic and will kill us and all our children.
That hysteria misses the mark considerably. Most fracking fluid (aka, proppant) is a liquid mix whose primary ingredient is water. Although proprietary formulas of fracking fluid do include roughly a 2-4 percent volume of various chemicals, the remaining secret ingredient is sand. I.e., mostly water, an almost trace amount of chemicals, and plain old sand. Or rather, those special varieties of fracking sand we’ve just mentioned, including Northern White and similar varieties.
We’re not exactly qualified geophysicists, so we can’t exactly explain the details. But suffice it to say that the kind of sands favored in fracking possess properties that fracture those recalcitrant oil-rich rock formations better than other varieties.
Fracking sand isn’t scooped up off beaches, however. It exists in various U.S. locales—like Wisconsin—and it has to be mined. Several companies are involved in this business. But three in particular are important for our purposes here. One of these companies, U.S. Silica (SLCA) mines a variety of sands, while the other two, FMSA (FMSA) and High-Crush Limited Partners (HCLP) exclusively mine fracking sand.
The recent news on these three companies is encouraging for two rather different reasons:
- Due to the 2015-2016 international oil price-war/market share war, U.S. fracking activities took a swan dive, with many marginal, over-leveraged domestic fossil-fuel exploration companies going bankrupt, subsequently causing new fracking activities to tank as well. Obviously, no fracking meant little to no need for fracking sand. The results were severe for all three of our companies, with High-Crush getting close to life support and eliminating entirely its once juicy MLP dividend. The other two companies’ balance sheets were gushing red ink as well, though for reasons we’ll explore shortly, U.S. Silica was in considerably less trouble. Bottom line: each company’s shares took a Wile E. Coyote cliff jump in FY 2016.
- But, as Little Orphan Annie says, “The sun’ll come out tomorrow!” While our three sand companies are not exactly coining money, companies whose primary business involves drilling wells in major U.S. shale formations by means of fracking are back in business again, big time, meaning that sales of fracking sands are once again in demand. But wait! There’s more! The most innovative drillers, like EOG (corporate name and symbol are the same), have figured out that refining the “recipe” for their fracking fluid to include even greater amounts of fracking sand results in cheaper, deeper, more efficient and higher-producing wells, bringing their break-even points down to the point where a crude oil sales price of $40 bbl., or even a bit less, can still make them money.
As a result of this oddly juxtaposed pair of events, all three of our sand companies could be in line for a substantial boost in earnings this year, which is what is getting us interested. Here’s a brief rundown on each one.
U.S. Silica (SLCA). We’re most familiar with this company, the largest of the three by far. SLCA has been around a long time, although it only went public a few years back. The reason for this familiarity is quite simple. We have a weekend place in Berkeley Springs, West Virginia, just down the road from what used to be SLCA’s national HQ, which is also the location of a huge, decades old sand mine whose product is the kind of sand most frequently used as the key material in fiber optic cable. (After going public, the company moved its HQ across the Potomac to nearby Frederick, Maryland, due to that city’s greater access to the DC and Baltimore transportation hubs.)
SLCA has numerous mines around the country, whose products include various specialty sands. Reading material on their website, it appears that their primary mine for fracking sand is located near Columbia, South Carolina. All this is important because SLCA does not entirely rely on fracking sand for its viability, giving them the kind of protection that the other companies essentially lack.
We were in and out of SLCA for a nice profit last fall when we noted a severe price anomaly. After we exited, the stock dropped again. It’s now poised to recover a second time.
High-Crush Limited Partners (HCLP). We actually got in on the IPO of this Wisconsin-based company, which is located virtually on top of a gigantic deposit of Northern White sand. We made a nice profit on these shares as well, hanging around for quite some time after the IPO and collecting a couple of the outsized dividends this master limited partnership (MLP) was paying at the time.
HCLP’s high-flying days came to an abrupt end, however, when that nasty oil price dive occurred, sending dollar-per-barrel prices for WTI crude down as low as $26 at one point. To survive this crash and subsequent drying-up of business, HCLP eliminated its stellar dividend, which has yet to return. But, like SLCA, HCLP managed not only to survive, but to clean up its balance sheet considerably. It, too, is now poised to regain lost ground and perhaps even begin to restore that once wonderful dividend.
Fairmont Santrol (FMSA) is the smaller kid on the block, but was also doing well until the roof fell in on the crude oil market. It, too, was beginning to recover until a recent, poorly received Q4 report and call when management tried to defend its larger-than-expected profit deficit—a problem worsened by the company’s tradition of not giving out forward earnings guidance for FY 2017.
In a twinkle, FMSA shares dropped nearly 17 percent in just one trading day, a performance so bad that it also spilled over into HCLP and SLCA, which plummeted 15.6 percent and 6 percent respectively.
All three companies are curently in recovery mode, although FMSA has the most ground, percentage-wise to regain from its recent bottom.
We are carefully watching all three, looking to find a good entry point at the moment. Hopefully, if we get a relatively predictable down day on Monday, that might be the time we enter orders for one or more of these companies’ shares.
One caveat: If the Saudis decide to stop curtailing their own oil output temporarily, which action thus far has stabilized and increased oil prices world wide, we could have Round 2 of the Great U.S. Fracking Shutdown, which would once again put all three of our highlighted sand companies in jeopardy.
In short, if we do this in any way, shape, or form, it will be an informed trade rather than an investment.
Note, there are at least two more sand companies we don’t follow, but we’ll be giving them a look. If they appear interesting, we may post on them at a later date.
Our only other item was a small investment yesterday in little-known Texas-based utility firm Spark Energy (SPKE). For no apparent reason at all, the stock fell off the cliff Wednesday, so, due to its high yield (5 percent) we picked up a partial position and are already up nearly 7 percent as a result of the stock’s bouncing back. We’ll see how it goes before we consider buying more. We might just trade it for the surprisingly easy profit.
See you next week with hopefully more substantial news. This week, for the most part, was a snoozer.