A Case for US Silica


I started a 10% position in US Silica (SLCA) today. I managed to pick some shares up on the lows to benefit from a nice gain by the close of the market. However, I am hoping that it does not run away from me in the short term because I am willing to stuff my cash from other names into this company. The PPT is suggesting a short term rip higher may be in the works, as it was oversold on the 3 month time frame after yesterday’s session.

I found the company after reviewing the Fly’s GARP watchlist. They sport a quarterly revenue growth of 20% and a low PEG multiple of .30. The revenue growth should be expected due to the known boom in the demand for proppants used in horizontal drilling, and the low PEG multiple represents the hesitations surrounding the industry as a whole. Is growth tapering off? Is supply meeting demand? Isn’t fracking terrible for the environment? Going forward, I think that we should go with the trend. Fracking is going to continue whether you have environmental reservations about it or not. Oil and gas will have their way in the long run, and if you want to bet against that, then you are going to lose money. Volts, Leafs, and Teslas are not going to flood America overnight. Oil needs to be accessed, and the use of silica to obtain it will grow through the course of time. Coupling that with a potential bottoming in natural gas, the industry becomes much more appealing.

Within this industry, transportation costs lead to the fragmented isolation of markets. Silica sand is far too bulky and heavy to transport without paying a high fee. Subsequently, this results in barriers to entry. Pricing then boils down to who is the closest to the specific job site, and how much they can supply. Due to this, a lot of smaller guys will pop up and attempt to take their stake in a small market. US Silica recently partnered with BNSF to transport their products via rail. Through this, the company has greater access to markets and can actively compete in a manner that the smaller guys cannot afford to. While there are claims that frac sand supply is meeting demand (if they are true), I do not think that this will have an immediate effect on the company itself. Growth can be found through increasing its customer base through the utilization of rail. Sure, they cannot have every market, but why not grab the largest share that you can?

US Silica operates in two different business segments: the oil and gas proppant space and the industrial/specialized product space. Compared to the prior year, the company’s oil and gas proppant sales grew by an impressive 37%, whereas the industrial/specialized sales were hardly changed. Viewed together, that is an increase of 19.7%. The benefit of the dichotomy is the inherent diversification. The uses of silica sand are still being realized, and thus I would not discount the ability of the the industrial/specialized segment to grow in the long term.

The reason I started a position was because of the recent pull back from the highs of the stock price. I think that this would be a good time to add, and it is worth noting that most shares have traded right at this level. This suggests that fair value, from a volume perspective, is right upon us. Depending upon the price action, I am willing to increase this position size to 20% of my assets. I think the price can rise to about $26 a share if the market sentiment becomes bullish again.

A competitor to note is HCLP, which pays a 10% dividend. The company suffered a drawdown in its share price after losing its largest customer. It has since recovered. I think that US Silica is safer in that regard, as they have managed to maintain longer term contracts with their biggest buyers. Prices in these contracts are set at a fixed rate, and are adjusted should transportation costs warrant. I know this is a rather brief write up as to why I am so bullish. I have more reasons, just not enough time to pen them. I will try to follow up with more work on this name as time goes on.

3 Responses to “A Case for US Silica”

  1. Thanks Fly. Means a lot coming from you. And Surf, I am looking for price to start reacting before the next earnings report. I will most likely hold through it, and re-assess after I have data available. Overall though I think this could be a 1-2 year play if you are patient.

  2. Appreciate the well thought out analysis. What trading timelines do you see for this stock?

    Found this article to be interesting in the context of a ‘long term/no specific company recommendation’ approach.

    Dizard, J. (2013, May 3). Pipeline is the key to fossil-fuel future. The Financial Times, online. Retrieved from http://www.ft.com

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