3 Frac Sand Companies For Next Energy Rally

by: Matthew D. McCall

Oil sell-off creates frac sand opportunities.

Three frac sand names to buy on weakness.

EXP expanding into frac sand.

The energy stocks have taken a beating over the last few months with the SPDR Energy ETF (NYSE: XLE) falling 9.5 percent during the third quarter versus a gain of 0.7 percent for the SPDR S&P 500 ETF (NYSE: SPY). There are several factors affecting the sector, however a muted demand for oil has weighed heavily on related stocks and ETFs.

A secondary play on the energy boom in the U.S. and in particular the fracking craze has been frac sand producers. The proppant is used to help extract the oil and gas from the rocky shale formations. The few stocks that produce the frac sand in the U.S. have been some of the best performers in the market until a recent sell-off.

Based on the fact that the fracking boom has staying power and that frac sand is an integral part of the process, the related stocks are now trading at attractive long-term levels. Three such stocks that have their tentacles in the frac sand business worth taking a look at are listed below.

Hi-Crush Partners LP (NYSE: HCLP) produces and supplies monocrystalline sand to oil and natural gas companies. The stock has struggled lately and is down 35 percent from the all-time high set on 8/29/14. The company has distribution capabilities throughout North America with a focus on the Marcellus and Utica shale regions. The company is expected to generate $3.10 in earnings per share this year with a 34 percent increase to $4.17 in 2015. With the recent pullback the stock is trading with an attractive P/E ratio of 10.9 based on the 2015 earnings estimates.

Research firm Wunderlich upgraded the stock from hold to buy a couple of weeks ago, but the sell-off has yet to subside. At this point the chart shows some support at the $43 area if the selling continues this week.

U.S Silica Holdings, Inc. (NYSE: SLCA) produces and sells silica in the U.S through two segments of the company, oil and gas proppants and industrial and specialty products. Silica is a chemical compound used in a vast amount of industrial products, and is essential in the recovery of oil and natural gas. SLCA sold 8.4 million tons of sand in 2013 and is expecting an increase of 30-35 percent for 2014. CEO Bryan Shinn says "some customers are using 10,000 tons of sand just for one well, a mile long train of sand, to just frac one well". Similar to the others in the sector, SLCA has fallen on hard times, down 25 percent from the 9/2/14 high.

Earnings are expected to come in at $2.53 per share this year with a 56 percent increase to $3.68 in 2015. Based on the 2015 number the P/E ratio for the stock is 14.5. While higher than HCLP, the earnings growth estimates are higher. From a technical view the stock is trading near price support at the $53.50 area and could start to garner some buying attention.

Eagle Materials Inc. (NYSE: EXP) manufactures and distributes building materials for all types of construction in the United States. They operate in four segments cement, gypsum wallboard, recycled paperboard, and concrete and aggregates. The company is well known for supplying materials to the construction business, but they are now becoming a major player in frac sand. Last year the company completed its first frac sand facility in Corpus Christi, Texas and during the quarter that ended June 30 it received the final permit for its Utica, Illinois facility. The company expects to begin selling from the Utica facility by the end of the year.

While the frac sand division of the company remains small at this time, the growth potential is huge. The company's CEO noted that the frac sand division could become a "material contributor" to the cash flow by the end of the fiscal year, which ends in March 2015. Because EXP is not a pure play on the fracking business the stock will continue to rely heavily on demand for its materials that are used in the construction business. During the company's fiscal 2015, which began in April 2014, the earnings per share estimate is $3.72 with a bump of 44 percent to $5.73 next fiscal year. Based on fiscal 2016 the stock is trading with a P/E ratio of 17.2. The current valuation is higher than the first two stocks mentioned, however earnings growth estimates are higher.

The bottom line is that if the fracking trend in the U.S. continues, which appears to be the case, the need for frac sand will continue to expand. The exact bottom of the current pullback is anyone's guess, however based on the long-term outlook and the valuations; the stocks are now trading at attractive levels.

Disclosure: The author is long HCLP, EXP.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.