NEW YORK ( TheStreet) -- U.S. Silica ( SLCA) makes sand, a commodity which you might think is abundantly available virtually everywhere -- but this is not just any sand. This company is the biggest local producer of commercial silica sand, a special type used in drilling for shale oil and gas.
Silica sand, which is already in short supply, is used by energy companies as a cheaper alternative to expensive ceramics such as those produced by CARBO Ceramics (CRR) . Other companies such as Emerge Energy Services (EMES) and Hi-Crush Partners (HCLP) are also producing this sand.
100-year-old U.S. Silica has been supplying the silica sand to the makers of a variety of products like glass and building products, as well as to foundries. However, the shale boom opened up a new market, as the company started selling the sand to some of the biggest names in the energy space, including Schlumberger (SLB) and Halliburton (HAL) . These oilfield services companies use the silica sand during fracking, the process of extracting oil or gas from shale rocks.
Moreover, U.S. Silica's transportation assets allow it to deliver its product to customers quickly and efficiently. The company has a fleet of more than 4,200 railcars, which is forecast to grow to over 5,100 by the end of this year.
U.S. Silica has predicted that it would double its adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, from 2012 to 2016, crossing $300 million over the next couple of years.
In an email to TheStreet, U.S. Silica's director for investor relations and corporate communications Mike Lawson has said that the company is currently "on target" to meet this goal.
Shares of fracking sand producers have soared this year, and U.S. Silica is no exception. U.S. Silica's stock has nearly doubled for the year to date to nearly $72, priced more than 45 times its trailing earnings. Bargain hunters should wait for a dip before buying this stock, as the company's shares have traded below 35 times its trailing earnings throughout most of the last two years.
The increasing production of shale oil and gas has driven the growth of U.S. Silica over the last few years. In 2010, U.S. Silica got more than half of its revenue and contribution margins (similar to adjusted operating income) from its Industrial & Specialty Products segment. However, in 2013, the company generated more than 60% of its revenues and contribution margins from the oil and gas segment.
During this period, between 2010 and 2013, U.S. Silica's revenues and adjusted earnings more than doubled on the back of strong demand for fracking sand. Analysts have said that the demand for the commodity could nearly double by 2016 from 2013, while the supply will remain short. And Lawson said that the "oil and gas side of the business will continue to drive the lion's share of the growth."
The favorable demand-supply fundamentals have also allowed U.S. Silica to increase its prices twice this year. Fearing any additional pricing pressure, U.S. Silica's customers are going after long-term contracts, thereby creating reliable revenue streams going well into mid-2018 for around 60% to 65% of its production.
U.S. Silica has made heavy investments to ramp up its production, building on organic growth as well as acquisitions. Its average annual capital spending has climbed significantly from just $14 million in 2009 and 2010 to more than $77 million in the subsequent years and is forecast to touch around $100 million this year.
These investments have enabled U.S. Silica to ramp up its production capacity. The company has recently started its new fracking sand mine and plant at Utica, Ill. The facility will start working at its full capacity of 1.5 million tons per annum by the beginning of September, bringing U.S. Silica's total annual capacity to 7.5 million tons.
Additionally, U.S. Silica has recently completed the $98 million acquisition of its peer Cadre Services, which improves the company's annual capacity by 800,000 tons and gives it exposure to Texas's prolific Permian Basin region. Moreover, U.S. Silica is also planning to construct a new 3 million ton per annum fracking sand plant at Fairchild, Wisc., by the third quarter of 2015.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates U S SILICA HOLDINGS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate U S SILICA HOLDINGS INC (SLCA) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations, solid stock price performance, growth in earnings per share and expanding profit margins. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."
- You can view the full analysis from the report here: SLCA Ratings Report