By Karim Rahemtulla
No one in the oil market was spared from a tough year.
But this company's fortunes may not be as damaged as many investors believe…
You see, a new, cheaper, and more-efficient fracking method has put U.S. Silica's products in high demand.
And as the industry starts to recover, this company already has a head start on everyone else.
Journey to the Top
U.S. Silica is a once-sleepy company that specializes in silica, a chemical compound made out of silicon that typically comes in sand form. The company started out selling its "sand" to various companies as an added ingredient in plastics, rubber, polishes, cleansers, paints, fiberglass, and a host of other products.
This made for a stable and slow-growing sales model. As the second-largest producer of silica in the United States, the company noted sales of around $250 million in 2010.
But by 2012, sales had jumped to $440 million. Something had changed…
Now, sand or silica is one of the key materials used in fracking. It's forced through shale along with liquids at a high pressure to dislodge oil and gas from the cracks.
In mid-2012, investors could've picked up shares for around $10. Then, the market caught wind of where U.S. Silica was selling much of its product, and why its sales were increasing at such a rapid pace.
Two years later, just before the crash in oil prices, shares of U.S. Silica were trading north of $73, a seven-fold gain. Sales in 2014 came in at $876 million. Revenue had almost doubled again between 2012 and 2014.
Of course, today shares are trading at around $30. The stock has come crashing down along with all the other companies that are connected to shale.
Making matters worse, there will be less demand as companies cut back on replacing depleted wells and focus on projects with more prolific production. And with rig counts falling, it's safe to assume that future drilling will be more selective and less prolific.
And while shale production is slated to grow this year and oil production is predicted to jump by 8%, revenue will likely be under more pressure due to lower pricing, as most industries that are connected to shale have to adjust to "keep business going" in the oil patch. Oil services companies are already slashing retail prices by 30% or more.
However, that doesn't automatically translate into a complete meltdown in sales…
Fracking of the Future
You see, the industry is self-adjusting. And it's adopting a new methodology as part of that. This new methodology will push silica sales through the roof.
The industry has found a way to increase production from existing wells by pumping in more silica than it did before. This is less costly than establishing new wells to meet production demand.
And, as operators are trying out this new method, it's proving to be very efficient. Pioneer Natural Resources (NYSE:PXD) has reported that production increases of more than 30% are achieved when more sand is used.
Even better, there are few more economical alternatives to sand and silica for this process.
Insiders have taken note of this new development and have been buying their own shares at levels in the low- to mid-$20s, about 20% below where the shares trade today.
These companies are trading with the price of oil for now, and that means you should expect volatility.
However, when the price does finally recover, they'll likely produce outsized gains compared to the other companies in the exploration and production sector.
U.S. Silica shares won't rise to the same meteoric levels unless the price of oil moves higher, but it won't require a move to $100 for investors to come out smelling like a rose.
Considering that 90% of all shale oil is still in the ground, the future for companies that mine fracking sand is quite solid, indeed.