Source: US Silica
Despite the recent recovery in oil prices, crude remains down over 60% since its mid 2014 highs. Not surprisingly this has caused stock prices in oil dependent firms such as frack sand producers US Silica Holdings (SLCA), Fairmount Santrol (NYSE: FMSA), Hi-Crush Partners, and Emerge Energy Services (NYSE: EMES), to get crushed over the past year.
Yet, as you can see US Silica, while down sharply, faired far better than its competitors. To understand why let's examine US Silica's 2015 earnings results to see what makes this frack sand giant not just likely to survive the worst oil crash in 50 years, but more importantly, poised for extremely strong growth once crude finally recovers.
Weak 2015 but silver lining does exist
| Metric | 2014 | 2015 | Change |
| Total Sand Sold (Tons) | 10.927 Million | 10.025 Million | (8.3%) |
| Revenue | $876.7 Million | $643.0 Million | (26.7%) |
| Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) | $246.2 Million | $109.5 Million | (53.5%) |
| Oil and Gas Sales | $662.8 Million | $430.4 Million | (35.1%) |
| Industrial and Specialty Products (ISP) Sales | $214.0 Million | $212.6 Million | (0.7%) |
| Oil and Gas Contribution Margin | $256.1 Million | $88.9 Million | (65.3%) |
| ISP Contribution Margin | $61.1 Million | $70.1 Million | 14.7% |
| Annual Dividend Per Share | $.50 | $.25 | (50%) |
Source: 10-K
As oil and gas companies slashed capital spending on new drilling US Silica saw demand for frack sand fall which resulted in sand prices collapsing 35.1% between Q1 and Q4 of 2015, from $88.12 per ton, to $57.21.
Luckily its Industrial sand volumes remained stable thanks to ongoing growth from the construction, auto, and glass industry. New higher margin products helped to lift the ISP segment's profitability to a record high. Better yet, US Silica recently announced that, as of February 1 it will be raising its ISP prices 4%-6% and expanding its production capacity in the face of ongoing strong industrial demand.
Unfortunately, this silver lining wasn't enough to save the quarterly dividend, which was cut in half, from $0.125 per share to $0.0625 per share as the company wisely focuses on preserving cash in the face of ongoing uncertainty about when energy prices will recover.
Strong balance sheet means company well positioned for future
Despite a weak 2015 long-term investors know that in cyclical industries such as energy, crashes such as this present great future growth opportunities.
| Metric | US Silica | Fairmount Santrol | Hi-Crush Partners | Emerge Energy Services |
| Cash | $299 Million | $77 Million | $10 Million | $21 Million |
| Debt | $493 Million | $1.252 Billion | $254 Million | $296 Million |
| Net Debt/EBITDA Ratio | 2.2 | 6.1 | 4.3 | 8.6 |
Sources: Morningstar
As you can see US Silica has a far stronger balance sheet than its competitors. That's mainly due to two things. First, US Silica and Fairmount Santrol are structured as corporations instead of MLPs, as is the case with Hi-Crush Partners and Emerge Energy.
Since MLPs are designed to payout the vast majority of cash flow to investors their business models involve inherently larger debt loads because they rely on it for much of their growth capital needs.
However, as you can see Fairmount, despite its c-Corp status, has by far the most debt of the big four frack sand producers. This shows the danger of an over aggressive management team who took out too much debt when oil prices were over $100 per barrel in order to expand its capacity and transportation infrastructure too quickly.
US Silica on the other hand, being over 116 years old, used a more conservative, long-term focused growth that kept in mind that oil prices are inherently cyclical and very unpredictable. Thus its management grew at a slower pace and made sure to retain a large quantity of cash for the kind of lean times we are now experiencing.
This has left US Silica with a distinct competitive advantage over its peers. The highly fragmented frack sand industry is currently in crisis, with big producers such as Hi-Crush and Emerge forced to renegotiate their debt agreements with creditors to stave off possible bankruptcy.
Meanwhile, US Silica, thanks to its stronger share price, just announced its selling between eight and 9.2 million shares to raise as much as $190 million in order to fund "the potential acquisition of complementary businesses or assets."
After its stock sale US Silica will have up to $489 million in cash available to go hunting for distressed competitors. With Hi-Crush and Emerge trading at respective market caps of just $203 million, and $126 million, its even possible that the company might end up acquiring one of them, which would greatly increase its market share and dominance in the industry.
Risks to Watch in 2016
While US Silica's balance sheet is the cleanest of the big four, be aware that Moody's just downgraded its credit rating from investment grade to junk with a negative outlook due to concerns with declining leverage ratios and continuing uncertainty about when demand for frack sand will recover.
This means that, until energy and frack sand prices rise, US Silica's borrowing costs will rise from their current 5.5% average, potentially making profitable growth more difficult.
Bottom Line
While investing in US Silica isn't without its risks -- and should only be done as part of a well diversified portfolio, -- the company remains the strongest of the major frack sand producers. While painful in the short-term, the recent dividend cut only further strengthens its ability to snap up competitors at fire sale prices. This would ensure an even larger market share for frack sand, whose greatly increasing importance in US oil production should make US Silica one of the best long-term oil and gas investments of the next decade.
