U.S. Silica Holdings Expands Oil And Gas Operation

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Improved hydraulic fracturing techniques have made it easier to pull oil and natural gas out of the earth, as long as you have the right ingredients to do the job.

One of those ingredients is high-purity silica sand, also called frac sand. It is used in the fracturing (or "fracking") process, which is a technique to pull petroleum fluids from shale formations that don't have enough space for fluids to flow freely to a well.

Because these formations aren't located near large frac sand deposits, the sand has to be shipped in from elsewhere.

One of the companies that supplies the sand,U.S. Silica Holdings (SCLA), has spent much of its time recently figuring out how to get the sand to the formations as quickly and efficiently as possible.

U.S. Silica is the second largest domestic producer of commercial silica, a mineral that was once mainly used to make glass and other industrial products. Now, it's being used for proppants in oil and gas extraction.

During the third quarter, oil and gas proppants accounted for more than half of U.S. Silica's total sales. As recently as 2009, proppants made up only 19% of sales.

One reason the percentage has grown is that U.S. Silica has overhauled its storage infrastructure to make it easier for oil producers to access its sand.

Sand For Pick Up

The company used to sell its silica sand at its plant, where oil and gas customers would pick it up and transport it to their wells. But that was a time-consuming process.

To help make it more efficient, U.S. Silica has located its storage facilities closer to well sites.

"Mother Nature isn't kind," U.S. Silica Chief Executive Bryan Shinn told IBD in a recent interview. "Our sand comes from Illinois, Wisconsin and Minnesota. But the wells are in the Dakotas, Texas and Pennsylvania."

To help address the problem, his company has taken a series of steps to move sand closer to the wells.

In June, U.S. Silica signed a multi-year deal withCanadian Pacific Railway ( CP ) to ship frac from a new mining and processing facility U.S. Silica is building in Sparta, Wis.

The facility will produce frac sand for use in shale basins in the U.S. and Canada. It should be up and running next quarter.

Under the agreement, Canadian Pacific will become the exclusive rail service provider at the Sparta plant for the movement of U.S. Silica's frac sand to destination markets. The facility will produce and ship three different grades of dry sand.

Also in June, U.S. Silica Holdings announced an alliance with BNSF Railway to build a new silica sand storage facility in San Antonio, Tex., for use at the Eagle Ford shale.

The San Antonio facility is expected to store three to four shipments a month of frac sand from U.S. Silica's Ottawa, Ill., sand mine. The shipments will include three different grades of dry sand. They also will include resin coated proppants from U.S. Silica's new facility in Rochelle, Ill., which is expected to be fully operational in the first quarter of 2013.

In October, U.S. Silica announced an agreement with S.H. Bell, a warehouse and distribution company, to open a new silica sand storage facility to support oil and gas customers in the Utica and Marcellus Shales in New York and surrounding states.

Under terms of that deal, U.S. Silica will ship barges and railcars of premium Northern White frac sand to the new transload facility in East Liverpool, Ohio, from its network of sand plants.

The company's emphasis on oil and gas markets makes sense, considering how much those markets have contributed to its recent sales and earnings.

During the third quarter, oil and gas revenue came in at $64.5 million. That was up 166% from the prior year and accounted for 56% of total revenue.

The company sold 769,000 tons of sand into the oil and gas services markets during the quarter, up from 459,000 tons a year earlier.

Consistent Results

Those robust results provide "a striking contrast" to other firms in the North American oil services market, Dahlman Rose analyst Doug Garber said in a Q3 earnings report.

"We attribute the company's consistent results to high-contract coverage; good management execution; low-cost, high-quality white sand; and the build-out of distribution/logistics capabilities," Garber noted.

Total revenue for the quarter rose 58% from the prior year to $115.9 million. Earnings gained 89% to 36 cents a share, topping Wall Street estimates of 33 cents.

The company's industrial and specialty products segment logged Q3 revenue of $51.3 million, a year-over-year gain of 4%.

"U.S. Silica saw increasing demand in the industrial segment from homebuilding-levered glass making customers during 3Q," noted Ole Slorer, analyst at Morgan Stanley.

Meanwhile, U.S. Silica's stock price has been trending higher since bottoming out at 9.02 in late July. The stock debuted at 17 in February and went as high as 22.14 a month later before slumping. Shares currently trade near 16.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

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