U.S. Silica Holdings
(SLCA, $18.96): SLC Ya Later?
By: Christopher Barry, AIM Student
at Marquette University
Disclosure: The AIM
Equity Fund currently holds this position. This article was written by me, and
it expresses my own opinions. I am not receiving compensation for it and I have
no business relationship with any company whose stock is mentioned in this
article.
Summary:
·
U.S. Silica Holdings (NYSE: SLCA) provides commercial silica products
and operates through the following segments: oil and gas proppants and
industrial and specialty products segments.
·
In
the second quarter of 2018 SLCA completed the acquisition of EPM in an attempt
to diversify revenue streams.
·
Well
sites located in the Permian Basin have not only continued to increase for the
past three years, but are projected to increase until 2022.
·
Increase
in the demand for proppant has been met with an increase in suppliers located
in the Permian Basin resulting in a decrease in net income.
Key Points:
The
Permian Basin, located primarily in Texas, holds some of the most bountiful
oilfield reserves in the entire United States. These bountiful reserves have led
to a steady increase in well sites throughout the basin for the past three
years. This increase is projected to continue to climb until 2022. Due to the
increase in horizontal wells, which require more proppant per square foot, the
demand for proppant has increased.
The
experienced oil tycoons are aware of this business opportunity and have
capitalized on it. As the demand for proppant increases, the number of
suppliers has also increased. The increase in market suppliers has negatively
affected SLCA’s market share and consequently their pricing power.
On May 1,
2018 SLCA completed the acquisition of EPM, which is a producer of engineered
materials from industrial minerals. Since this acquisition was completed, the
integration between these two companies has not gone according to plan. The
acquisition was made with the goal of diversifying revenue streams for SCLA.
Investors have not been patient with this strategy as is seen with the current
stock price relative to the price prior to the acquisition.
Upon
comparing the second quarter earnings for 2018 to the same period in 2017, we
see a more than 40% decrease in net income. Management explains this drop as
the result of an increase in depreciation & amortization and interest
expense, which are explained through the acquisition of EPM. The 10-Q also
describes a decrease in operating income, which is a result of sales increasing
at a slower pace than the increase of the cost of these sales.
What has the stock done lately?
Over the
past year SLCA has been stuck in a constant state of volatility. Unfortunately,
the initial investment thesis with which the company was purchased did not come
into reality. The stock is currently trading near its 52 week low.
Past Year Performance:
Since
being added to the AIM portfolio in February, the price of SLCA has been
steadily decreasing. The price has dropped from $33.29 to $18.96, or a decrease
of 43%. Reviewing the first three of the past four quarters in terms of actual
EPS relative to expected EPS leads to an optimistic view of the company’s
growth only narrowly missing earnings once. However, in Q2 of 2018 they missed
earnings by 6%.
Source:
Factset
My Takeaway:
SLCA has
been proactive in attempting to diversify their revenue streams. This move
comes as a necessary response to the increase in proppant supply in the Permian
Basin. However, as their current primary source of income remains providing
proppant to the Permian Basin, the weakening of their pricing power has had a
material impact on their net income. While I believe the stock price will
recover in the future, it is unclear to what extent the price will continue to dip
before the recovery begins.
