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Emerge Energy Services: Economic Factors Indicate Deep Value

Nic Harvey profile picture
Nic Harvey


  • Economic factors should push EMES over $10/share short term.
  • $120 million adjusted EBITDA and $60 million Net Income guidance for 2018.
  • Price is suppressed trading at a P/E of just 3.
  • Price/ton and demand are both on the rise.

Now that we have all had some time to take in the earnings call for Emerge Energy Services (NYSE:EMES), I believe it is the perfect time to add some clarity to the 2017 annual performance, including Q4 as well as the future outlook described in the call. These are exciting times for this company, and I would even go as far as to say this is the best position the company has been in since the drastic oil decline that began in June of 2014. If you have not listened to the earnings call yet, you definitely need to (download here). EMES posted Q4 revenue of $103.14 million, missing estimates by $11.25 million and EPS of $0.18/share missing estimates by $0.11. Although the company missed on top and bottom line, Q4 represents the second consecutive profitable quarter for the company.

Looking Back on 2017 and Q4

For those that listened and reviewed the transcripts there were two very clear explanations to the management provided. The first reason for earnings miss was due to the "widely documented service issues from the Class 1 railroads impacted" which directly impacted the company's ability to ship their hottest selling product, Northern White frac sand. The second reason provided was extreme winter weather, on top of the holidays, affected the ability to complete frac jobs. So, if we examine both of these factors that impacted the EPS negatively, one common denominator can be derived: both factors were out of the control of management. It is an important point to denote because an earnings miss of $0.11 for a company this size could easily be misconstrued. However, in the next breath of the earnings call Chairman Ted Beneski is very deliberate in citing that the "small decline in volumes is by no means a reflection of any market

This article was written by

Nic Harvey profile picture
I am/we are focused on finding deep value investments to propagate buy and hold strategies.My investing experience spans over the last decade and is primarily focused in equities in the mining & materials sectors, among others.My work history broadly spans the finance industry.  I am pursuing CFA charter currently.

Analyst’s Disclosure: I am/we are long EMES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (23)

PipelineDancer profile picture
Well, someone liked that earnings report!
Oil And Gas Interest profile picture
I just bought more. Patience will be rewarded. Once San Antonio is operational, they will be able to start paying down their debt in a significant manner.

The stock pattern is quite erratic. In the last year, it had three clear attempts to climb to $10, each time dropped around current levels. At an EV of about $450M; with an expected EBITDA of $120M (adjusted downwards following train-related mishaps), it is hard not to see compelling value. With oil now firmly back above $60, and knowing that sand price contracts typically have WTI-related adjustments, I am a firm believer of having a significant margin of safety, despite the high debt levels.
Agreed-long EMES.
I find it reassuring that their debt covenants will force them to be somewhat responsible with their cash flow, at least in the near to middle term.
Bag holding but I see much skies aheadbritghter brighter
Oil And Gas Interest profile picture
The planned excess capacity of in-basin 100 mesh in the Permian confirmed this morning by FMSA's management team on their CC does point to the strategic value of going for the EF instead of the Permian...I honestly did not see $6.85 as a possibility with oil still above $60 and global markets near all time highs...this is very cheap...
Oil And Gas Interest profile picture
They have been announcing a partnership for more than the past six months...in the last CC, they finally unveiled a bit more by saying they would make some sort of partnership with SOI with the San Antonio mine. Not quite sure why only the San Antonio mine? But that is the only thing we have to go by...it would indeed be good. In terms of relative valuation, SOI could almost buy EMES and then secure its access to sand, a bit like what TUSK did in the last few years...but I am not sure how the market would reward this for SOI...
Oil And Gas Interest profile picture
That would indeed be a very nice analysis. I rarely see it done on SA in this space. But that would indeed put to rest some of the fears out there. The lack of major capex needs for HCLP is really its advantage right now. The OCF can freely flow to FCF and not be eaten up by massive capex needs.

SOI, Solaris, just announced very strong results. Yet another data point that the demand for sand is through the roof in North America. Rail issues is also plaguing Canadian oil producers who need to ship to the US their oil due to a lack of pipeline capacity. These bottlenecks are a real problem, but a nice one to have I guess...
I thought SOI results looked great, too--and expected to see at least a little market recognition today; instead, your comments about the toxicity of any thing oil or gas appear right on.

I'd love to see some sort of relationship between SOI and EMES, might help with the RR issues EMES is having, and would feed right into the synergies [hopefully] created for SOI by the Railtronix acquisition.
PipelineDancer profile picture
Nice article, thanks. What I think would have really improved it is if you did a cash flow model for the next 2-3 years, showing how their balance sheet would transform as they completed their capex, started selling sand at the various production levels, and paid off debt at opportunistic times. I think it would more credibly demonstrate that/if this little MLP will not only survive under likely scenarios, but thrive and upon resumption of a distribution, potentially soar.
Oil And Gas Interest profile picture
They probably wouldn't but $10 a share would be hard to resist. They got themselves in this pickle with extremely poor disclosure to the market. They have been talking about a partnership with SOI for the last mile since Q2's CC last summer. Now they mention they might partner with them once San Antonio has reached their first major capacity hurdle. Not impressed. Worse, promise an EBITDA of $140-$160 reiterated three times, last time in January...then a significant cut back to $120M...why reiterate the initial range when the problems were well known already in January? Again, not impressed. Valuation is dirt cheap. The whole sector got under a giant cloud after the "big short" of Dan Loeb last year. I am sure he has moved on since but the negativity remains. The dramatic drop from $10 to $7 is completely overdone if one believes they are only affected in the short-run by these issues. But they need to instill confidence and missing forecasts is not the way to go. At this point, either a peer or a major upstream producer should consider buying them. The assets are there, and they will be in demand for years to come...I will add below $7, to cheap to ignore.
Oil And Gas Interest profile picture
Devious business idea: EOG buys EMES for $500M (30% premium for the equity, including debt). Short change for them. Guarantees fracking sand for them, in particular in EF with the largest leasehold position and jacks up prices $20 per ton for everybody else in the play overnight for everything not yet contracted out. Brilliant, no?
Nic Harvey profile picture
Definitely an interesting and entertaining play to ponder! The question for me is, would EMES board accept such an offer? Not a bad offer based on today's price, but maybe not the best offer for the growth this company has ahead of them. Thoughts?
BigAlpha78 profile picture
20s will come...
BigAlpha78 profile picture
In for 16k @7.20. Feeling greedy for more:)..
Ruben123 profile picture
As long as they are making lots of money and their product is in very high demand, i am not worried about shareprice. they will follow sooner or later.
Oil And Gas Interest profile picture
I meant mines not wells of course!
Oil And Gas Interest profile picture
Well, some of those mines are well on the way. For instance, Atlas, private operator. And SLCA and FMSA both have big Permian wells coming online. But EMES is going to be the king of the EagleFord. Really low valuation assuming somehow only a short time in the sun...shale demand for sand should give a multi year stream of revenues. Prices keep increasing. In basin supply is relevant for Permian, but it is beyond necessary in order to meet the crazy high demand. Buy low.
Regarding supply: What is the rationale for someone investing in a new sand mine, when you can invest in one of four or five publicly traded companies for pennies on the dollar? (two to five times cash flow)? The risks are lower and payback period is incredibly shorter.

As Buffet says compare the value on wall street with main street. If that would be the case in this industry, no one in their right mind would start a new sand mine. Seems to me the energy sector fosters a lot illogical investment decisions--but I'm a novice in this area.
You cannot ignore lower commodity prices as a third risk to be considered for the short to medium term. They promote selling and shorting of wide baskets of stocks in the E&P and Oil Services sectors and make it difficult to gather momentum.
wsnelling profile picture
Information seems to be anecdotal at best for now but what are y'alls projections for when the sand market become over supplied? My best guess would be 2Q of next year at the very earliest. Is there any reason to believe that it could happen sooner than that? I'm trying to figure out how long I can hold EMES... I think eventually sand will become too commoditized.

Manoj Madhavan profile picture
Agreed - highly undervalued and continues to become more undervalued as I write this!!
Agreed this is drastically undervalued and if they execute could be a multibagger in next 12-18months. Sentiment is so bad today on everything oil related especially sand, but should shift. Crazy this stock traded over $100 a few years back.
What the market is missing is EBITDA was $18.6 million, and available cash for distribution - this quarter $14 million, or $0.43 per share. Though management is using the money to finish Texas, when that ramps the cash will be available.

Back-of-the-napkin analysis is 75% of EBITDA is available, for the year $120 of EBITDA = $90 million available for distribution, take off an additional 25% for a "fudge factor" (very conservative) = $67.5 to be end-of-year loaded = $2.25 per share.

Assuming an 8% - 10% yield, the stock price should hit $22.50 - $28 -- and if Canadian railway pulls their heads out, and Texas permits 4 million tons, add another $0.50 in distributions, and $5 - $6 per share = $27.50 - $34 !!!

"In conclusion" we have 3x to 4x of probable upside (as long as Trump's action today does not start a trade war and slow the global economies).
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