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Emerge Energy's Sell-Off Was Overdone, Shares Are A Buy

Todd Akin profile picture
Todd Akin


  • Emerge Energy reported a strong quarter, despite transitory issues weighing partially on earnings.
  • Emerge’s share price consequently plummeted, but for reasons that are inconsistent with other frac sand company’s reports. Hence, construction, completion, and dividend delays can't be the culprit behind the selling, and are actually a good thing for the industry.
  • All delays in the events stated above are pointing, instead, to a fracking boom in 2019, especially in the 2H, where most current pipeline projects and regional mine builds are scheduled to be finished.
  • I attribute the sell-off to profit taking from the recent run-up, and consider the drop in share prices as an opportunity to add to long positions.

When Covia Holdings (CVIA) reported delays in construction of their regional sand mine in Texas, the stock didn’t plummet nearly 20% like Emerge Energy's (NYSE:EMES) did on its last earnings announcement. Halliburton (HAL), however, cited takeaway issues as delaying completions activity, and saw its stock drop precipitously in similar fashion; so, maybe the delayed completions activity bear argument holds some weight.

Except, why do investors feel that delayed construction and completions activity are a bad thing for services companies like Emerge? Sure, even better earnings get delayed a quarter or two, but not through any wrong doing of the company. Rather, completions are slowing because the fracking industry is TOO strong, and volumes are bottlenecking major oil & gas supply hubs.

Construction of frac sand plants, as well as completion activity, is being delayed due to exhausted labor forces being stretched too thin, and heavy frac sand construction overwhelming supply chains. This is a good problem to have for investors, ultimately, assuming that companies execute on their plans, which Emerge said it is doing.

So, Emerge Energy’s sell-off was unwarranted for three reasons:

  • Construction delays at their San Antonio plant have been widely foreshadowed by the industry, and are actually exacerbating shortages of frac sand (which is good for pricing).

The two month construction delay has pushed down our timeline. We still expect San Antonio to drive a substantial improvement for the second half of the year, and margin should expand materially in the fourth quarter with San Antonio achieving full utilization post NSR permit upgrade.

  • The dividend not being reinstated (which some investors thought could have been the culprit behind the sell-off) was no surprise, and not even possible in 2018. Fortunately, the dividend is still on track to be reinstated in early 2019, which is going along just as the company planned.

This article was written by

Todd Akin profile picture
Graduated from the University of Houston- Downtown with a degree in Finance. My site, Wallstreetstocksolutions.com, focuses on portfolio management and unique investment opportunities.

Analyst’s Disclosure: I am/we are long EMES, HCLP. 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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