If there's one thing the Earth is not short of, it's sand.
Anyone who's ever walked on a beach or driven across a desert can
tell you that.
What you might not know is that not all sand is created
That white, powdery stuff you toss in your kid's sandbox might
be good for playing around in, but there's a reason you can get
50 pounds of it for a few bucks at your local hardware store.
It's just regular, run-of-the-mill sand.
Frac sand, though, that's a different story. This is a
durable, high-purity quartz sand with very round grains that, if
it were human, would probably look down its nose at everyone
Emerge Energy Services (
) knows all about the high perch frac sand occupies in the sand
world. The company, which operates as a limited partnership, is
one of the leading miners and suppliers of frac sand used in the
hydraulic fracturing process that produces oil and gas.
The rise of "fracking" in North American shale oil formations
in recent years has led to an explosion in demand for frac sand.
It has also driven strong sales and earnings gains at Emerge
Emerge operates two different businesses. Its sand subsidiary
produces silica sand for the hydraulic fracturing of oil and gas
wells. This side of the business operates sand facilities in New
Auburn, Wis.; Barron County, Wis.; and Kosse, Texas.
The company also operates a fuel processing and distribution
business. This unit mainly focuses on acquiring, re-refining and
selling transportation mixture, or "transmix," which is a
combination of refined products such as gasoline and diesel.
While the fuel business produces most of the revenue at
Emerge, the much higher-margin frac sand business delivers the
lion's share of net income. It is also a big reason Emerge's
stock price has nearly tripled since the company's initial public
offering last year.
"Emerge possesses a solid position within the frac sands
market, particularly the coarse frac sands utilized in oily shale
plays," JPMorgan analyst Jeremy Tonet noted following Emerge's
2013 third-quarter earnings report.
Demand for frac sand has more than tripled over the past five
years amid a sharp rise in oil and gas production in the U.S. and
One advantage Emerge has over other sand producers is its
logistics capabilities, Tonet says, particularly the rail
connections it has to both theCanadian National Railway (
) andUnion Pacific (
) rail lines at its Wisconsin frac sand facilities. These lines
provide low-cost access to many U.S. and Canadian oil and gas
"Given that production costs are one of the largest factors in
competitive positioning within the frac sands industry, Emerge's
low-cost operating structure is an important advantage," Tonet
During the third quarter, Emerge's sand segment produced $47.4
million in revenue and $19.1 million in income. That compares to
$222.8 million in revenue and $8.1 million in income from its
The reason for this wild discrepancy is that it costs a lot
less to produce frac sand. When frac sand sales rise, Emerge's
bottom line gets a huge boost.
Lately, that's what's been happening. Emerge's volume of sand
sold during the third quarter more than doubled from the prior
year to 734,000 tons. The gain was primarily due to its new
Barron operation, which produced 344,000 tons during the
The additional capacity the Barron facility brings to the
table has a couple of advantages, analysts say. One of them is
"near-term organic growth opportunities," says Citigroup analyst
John Tysseland noted.
In addition, he says, Emerge is "well positioned" to
capitalize on the current industry shift to a preferred supplier
market for oilfield logistics customers.
"That will allow them to continue to win new business away
from competitors based on their quality of sand and logistics
attributes," Tysseland noted.
In addition to Emerge, other publicly traded companies that
supply sand for oil and gas production includeHi-Crush Partners (
),Carbo Ceramics (
) andU.S. Silica Holdings (SLCA).
These companies all specialize in slightly different
Carbo produces ceramic proppant and resin-coated sand used in
fracking. Hi-Crush supplies monocrystalline sand used as a
proppant to improve the recovery rates of hydrocarbons from oil
and natural gas wells. U.S. Silica mines and processes commercial
silica used as oil and gas proppants and in industrial and
Of the four, Emerge is the biggest, with 12-month trailing
sales of $1.1 billion, though that's mainly due to its fuel
For the first three quarters of 2013 its sand segment posted
about $114 million in sales, or 17% of the total. Overall revenue
for the period rose 37% from the prior year to $627.2 million.
Net income climbed 48% to $21.2 million.
The company is scheduled to report 2013 fourth-quarter results
on March 13. Analysts polled by Thomson Reuters expect earnings
of 64 cents per unit. No prior-year per-unit earnings are
available because Emerge wasn't publicly traded during the fourth
quarter of 2012.
The company was formed in 2012 by Insight Equity, a private
equity firm based in Southlake, Texas. Emerge went public last
May at an opening price of $17. Its shares currently trade near
Analysts expect full-year earnings of $3.04 per unit in 2014
and $3.09 in 2015.