U.S. Silica Holdings (SLCA - Get Report) said after the markets closed on Monday that it agreed to purchase regional sand producer NBR Sand from privately held New Birmingham Inc. for $210 million, its second acquisition this year.
The Frederick, Md., provider of sand for hydraulic fracturing in the oil and gas industry expects the deal to close next month and will fund it with cash on hand (57%) and restricted stock (43%).
The business, in Tyler, Texas, operates a single sand mine and plant on 1,400 acres with the capacity to produce 2 million tons of fine-grade frac sand per year and 20 years of quality reserves, U.S. Silica said. The facility has 12 storage silos with capacity of 10,000 tons. It sells its products FOB, or free on board (meaning it loads the products onto trucks at no cost) through five load-out lanes. Its customers are primarily drilling and completing wells in nearby oil and gas basins.
Once integrated into U.S. Silica's operating, sales and distribution platforms, the facility is expected to boost the company's earnings by 20 cents to 30 cents per share next year.
U.S. Silica CEO and president Bryan Shinn said in a statement that the acquisition adds to its capacity and product offering for the expanding regional sands market and increases its ability to effectively satisfy its customer's needs.
"We expect to unlock the full potential of this excellent mine by utilizing our strong customer relationships and powerful distribution network," he said. "We believe demand for regional sands will continue to grow as a cost effective proppant option for many completions and this is another important step to position U.S. Silica as a leader in the regional sand market."
Shinn said management continues to work to identify and close more attractive acquisitions aligned with its corporate strategy. "We have a strong pipeline of opportunities that will help our customers meet their goals in an environment with potentially surging sand proppant demand as energy markets recover," he said.
The deal follows U.S. Silica's purchase of a 327-acre parcel of land next to its silica sand mine and plant in Ottawa, Ill., in May from a privately held mining company, adding 30 million tons in proven reserves.
Jefferies analyst Brad Handler said the deal seems expensive based on this year's Ebitda, given that the facility's activity based on mine hours appears to be down around 45% since the fourth quarter 2014 peak, but looks more reasonable at 6.6 times next year's expected Ebitda. The facility doesn't have access to West Texas' robust Permian market, which U.S. Silica can help with by installing rail loading facilities next to the existing Union Pacific line to transport the sand to customers who need it, Handler noted.
Handler added that the deal offers a nearer term earnings boost than smaller northern white acquisitions given better margins today in regional sands and therefore less dependence on future improvement in oil and gas prices. He has a buy rating on the stock with a price target of $41.
RBC Capital Markets analyst Kurt Hallead likes the company's addition of high-quality, low-cost production using its strong balance sheet for "opportunistic M&A" and sees the potential for pricing power, share gains and additional acquisitions as the cycle matures. "The transaction highlights the increasing demand for low cost regional proppants (brown sand) in the current challenging oil price environment," he said.
Hallead increased his earnings estimates for the company to a 65 cent per share loss this year, versus an estimated 68 cent loss previously, turning into a 64 cent per share profit next year (versus 39 cents) and a $1.51 per share profit in 2018 (versus $1.26). He has the stock at outperform with a $44 price target.
Tudor, Pickering, Holt & Co. said the facility is lower cost than many Texas sand mines and believes it is best positioned to sell into the Haynesville, the Scoop/Stack in Oklahoma and South Texas' Eagle Ford Shale. The firm prefers Fairmount Santrol Holdings (FMSA) for long exposure to the theme.
Seaport Global Securities analyst Mark Brown suggests the deal could benefit the stock of Emerge Energy Services (EMES) , as it represents a rich valuation for fine sand and a $725 million valuation for the company versus $531 million at the closing of trading yesterday. He has Emerge at a buy with a $14 price target.