In the U.S., oil and gas companies are experiencing a fracking boom, which is beneficial to both oil and gas companies and those companies that provide services to them. With the boom in fracking, more waste will be produced, benefiting companies like Waste Management (WM), one of the leading players in this industry. To grow its waste management services for oil and gas companies, Waste Management acquired two companies that remove waste in the oil and gas fields.
Another company that expects to grow with the boom in fracking is U.S. Silica Holdings (SLCA). It is increasing its silica storage facilities in the oil and gas basin of the U.S. Let's discuss how developing in the growing fracking facilities will bolster the revenue of these companies.
Saga of oil and gas
Oil production in the Bakken shale is growing at a fast pace. Over the period of January 2011 to January 2013, Bakken's crude oil production grew at a compounded annual growth rate, or CAGR, of 56.72% to 673,000 barrels per day, or bpd. In June 2013, this figure reached to 756,980 bpd. If we consider the growth rate of 56.72% to be constant, the Bakken's crude oil production is expected to be 1.05 million bpd in January 2014. The advanced drilling technology like hydraulic fracking is responsible for this fast growth. This process produces a lot of waste, which needs to be disposed of continuously. According to Waste Expo analysts, the oil and gas companies in the U.S. are expected to spend up to $30 billion per annum on hydraulic fracking waste disposal from this year onwards.
To capitalize on this attractive market opportunity, Waste Management announced the acquisition of two energy service companies, Summit Energy Services and Liquid Logistics in North Dakota, on August 1, 2013. These companies will help Waste Management remove fracking waste in the Bakken basin, located in Montana, and North Dakota.
With the acquisition of these companies, Waste Management has gained around 140 employees with expertise in waste management of oil and gas production. Besides Bakken shale, Waste Management also plans to use this increased human capital to enhance its oil and gas services in North America.
Looking at the growth perspective in the expertise of oil production, waste management, and the burgeoning Bakken shale, the company plans to provide its services to the oil and gas companies in this shale. Besides managing fracking waste, it intends to add services like tank cleaning and drill cuttings disposal. Drill cuttings are contaminants that are removed from the drilled out oil during the treatment process.
Waste Management provides services to the oil and gas companies under its waste to energy segment. This segment accounted for 7.6% of the company's total disposable volumes of 26.1 million tons in the second quarter of fiscal year 2013. We feel the above discussed development in the services to oil and gas companies is a turnaround factor for the company. Moreover, as one of the leading players in this industry, Waste Management is well positioned to gain revenue in the lucrative Bakken basin. In the second quarter, this segment did not show growth. However, we believe developing this segment in the rapidly growing Bakken basin will make it a prominent revenue driver in the future.
Another growth story in the fracking boom
Like Waste Management, U.S. Silica is also expanding in the oil and gas sector. Bakken is one of the largest oil producing basins in the U.S. As Bakken's oil production increases, its hydraulic fracking facilities are also expected to grow. Silica is used in hydraulic fracking, and with the growth of hydraulic fracking, more silica will be required, which in turn will require better storage facilities and availability.
U.S. Silica is one of the leading producers of silica in the U.S. and produces silica for a wide usage in industries like oil and gas, glass and chemicals. Its major customer, oil and gas, accounted for 59.86% of its total revenue of $129.8 million in the second quarter of 2013.
The company wants to grow its strongest revenue generating segment by enhancing its silica storage facilities in the Bakken shale. Therefore, U.S. Silica announced a multi-year agreement with Wildcat Minerals on August 26, 2013. Wildcat Materials provides materials handling and supply chain management solutions for oil fields. As per the agreement, Wildcat Materials will provide its 16 sand storage facilities to U.S. Silica, which will increase its storage facilities to 40 in the U.S.
The company's oil and gas segment grew as:
Second Quarter of fiscal year
Revenue (in $ millions)
Year over year growth (%)
If we assume the growth rate to be 50%, near to the growth rate in the second quarter of 2013, then this segment is expected to generate $116.5 million in the second quarter of 2014. This would significantly drive U.S. Silica's earnings, thereby inclining its stock price.
Waste Management and Republic Services (RSG) are among the top companies in the waste management industry based on market capitalization. When discussing the valuation of these companies, Waste Management is outperforming Republic Services in all the valuation parameters shown in the table below. Lower price to earnings, or P/E, ratio is considered better and Waste Management's P/E ratio is lower than both Republic Services and the industry, making it a preferable choice.
Generally, a low price to sales, or P/S, ratio is better, and the P/S ratio of Waste Management is lower than the P/S of Republic Services, again representing that Waste Management's stock is attractive as compared to Republic Services. Dividend yield represents how much dividend a company will give relative to the price of its stock. Higher dividend yield is better, and Waste Management's dividend yield is better than both Republic Services and the industry.
Share repurchase program
Republic Services announced a share repurchase program of $325 million for this year. In 2012, the net income of the company was $571.8 million at earnings per share, or EPS, of $1.55, amounting to 368 million shares outstanding. Assuming the company repurchases shares at the current market price of $32.38, it will repurchase 10 million outstanding shares. After the repurchase program, 358 million outstanding shares will remain in the market. Suppose net income is constant for this year; EPS will rise to $1.59, which is a growth of only 2.58% from the EPS of last year. This low growth in the EPS is not expected to significantly bounce Republic Services' stock price. The above discussed valuation factors also support the fact that the stock is not attractively priced.
The valuation of Waste Management looks good, and it is backed by strong fundamentals. The company hopes to grow with its services in the Bakken region that will impact its earnings, thereby driving its stock price. Due to its attractive valuation and strong fundamentals, we feel investors should look to buy this stock.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article