Will the Frac Sand Market Resurge?

Written by Luke Burgess
Posted October 10, 2018 at 3:25PM

If you're a parent, you've heard this from your kid's mouth a million times: "I'm bored."

Turns out, children are the most bored people on the planet.

But we all said this to our own parents at one point or another.

I remember saying it to my father. His response was always the same: "Oh, lucky you."

Of course, at 40 years old, I now know what he meant. Boredom means no worries, no impending crises, no one breathing down your neck...

Boredom is a blessing.

And to value investors, boredom should be a bit of a virtue.

Here's what I mean...

The best value investments tend to be in what the market considers boring.

What's "boring" and what's "exciting" in finance?

Well, it's relative and a bit difficult to define. But a rough measurement would be media attention. "Exciting" companies and industries receive more attention than "boring" sectors do. That's why they're on TV.

Last year, cryptocurrencies were in a bubble. It was exciting. And this year, cannabis has everyone's attention. Compare these to something like the water industry, which rarely gets discussed.

But why do I say boring is a virtue for value?

It's simple: Excitement naturally adds a premium to stocks and markets that normally wouldn't exist. Excitement is the seed of speculation in stock prices

Of course, being boring alone is a bad metric to use in a valuation. There are plenty of dud companies that are face-meltingly boring. Not all boring stocks or markets are good investments.

And of course, there's plenty of value in exciting markets. The best value plays only tend to be in what the market thinks is boring.

So, boring shouldn't be a standard metric for value investors. But it should maybe be seen as more of a virtue of value in equities and industries.

With that in mind, I want to look at a pretty boring industry that has some pretty good upside...

Frac Sand Market to Resurge?

There's nothing exciting about sand. It's about as thrilling as unpainted drywall. But specialty sand has been a major market for decades.

Specialty sands are used in everything from water filtration to playgrounds. But with the advent of fracking, specialty sand found a new major application.

Frac sand is a high-grade quartz sand with durable and uniform grains. This isn't the stuff you'd find at the beach.

Compare a close-up image of typical sand (left) and frac sand (right):

This crush-resistant material is used in the hydraulic fracturing process to produce petroleum fluids. And the demand for the stuff has exploded over the past several years.

This surge of specialized drilling created a billion-dollar frac sand industry within a short time. Today, it's worth tens of billions of dollars globally.

Frac sands, along with the rest of the fracking industry, were in its heyday back in 2014 with oil prices over $100 per barrel.

As I'm sure you remember, both controversy and investment excitement surrounded fracking.

But since then, the hype around fracking has cooled along with oil prices. But the fracking industry might be in for a resurgence.

The price of oil started the year trading under $60 per barrel. It's increased to around $75 today. And with U.S. sanctions against Iranian oil nearing, many think the rally isn't over.

Lofty oil prices over the next few months could set off round two of the fracking craze. And frac sand companies are set to do business. That's because, without the sand, the oil doesn't flow. A hydraulic fracturing job on one well can require thousands of tons of sand.

Companies like U.S. Silica Holdings (NYSE: SLCA) could be set to do well.

U.S. Silica is one of the largest and most well-known domestic producers of commercial silica. The company operates 19 production facilities in America. And it controls 765 million tons of reserves of commercial silica. This reserve can be processed to make 323 million tons of finished products that meet industry standards.

Business was good for U.S. Silica last year. The company increased its total tons sold by over 50%. And as a result, it more than doubled sales revenue. The company's last Form 10-Q  (July 31th) also shows increasing quarterly and 1H sales.

But too bad for shareholders, none of this has been reflected in the share price. Shares of SLCA are down by some 66% over the past 24 months:

After looking at the balance sheet from the company's latest 10-Q, U.S. Silica looks to be a bit undervalued with a market cap at $1.6 billion.

Analysts are already expecting moderate increases to earnings per share (EPS) through 2019. And with oil prices set to at least remain strong, the company's sales will likely continue rising. Hopefully, for shareholders, that will mean a turnaround in price.

Sand might be the most boring thing I can think of. But it might also be one of the more profitable plays through the end of the year.

Have a look through the company's most recent Form 10-K and Form 10-Q for yourself. I think you'll find a little deal.

Good investing,

Luke Burgess Signature

Luke Burgess
Contributing Editor, Park Avenue Digest

follow basic@Lukemburgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets.

P.S. Disclosure: I don't own shares of U.S. Silica.

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