U.S. Silica (NYSE:SLCA) recently increased the size of its buyback program from $25 million to $50 million. If fully executed, the buyback should remove approximately 3% of the float at current market prices.
Management increasing the size of the stock buyback shows that the long-term EBITDA growth plan of the company is still on track (although the end result of doubling EBITDA by 2017 could be delayed by a year or two). The move should instill more confidence in skittish shareholders who have been selling because crude prices have been falling. Although the buyback program is moderately sized, I believe the modest size of the buyback program is prudent, as U.S. Silica's primary goal should be to preserve its balance sheet so that it can make it to the crude price recovery with everything intact.
I continue to believe that while there is considerable short-term downside, the long-term picture is promising. In the short term, shares of U.S. Silica could go lower. When crude falls, everything related to crude falls. It doesn't matter if the fall is justified or not. From the perspective that everything is correlated, given that it's impossible to call the bottom of crude, it's impossible to call the bottom for U.S. Silica as well. In the long term, I believe crude prices should rally by the end of 2016 or the beginning of 2017. The global economy should recover by that time, and the supply and demand imbalance will resolve itself. When that occurs, U.S. Silica should deliver outsized EBITDA. I have a price target of $60 per share by 2017.
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