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U.S. Silica (SLCA)

EPS estimates for this silica company are moving up, with 14 analysts raising their forecasts in the past 30 days. Barclays just initiated coverage on the shares with an ‘Overweight’ rating and a $50 target.

U.S. Silica (SLCA)
From BI Research

U.S. Silica (SLCA) recently released Q2 results and the stock soared 12%. The company reported an adjusted loss, as expected, but at $.17, it was less of a loss by $.03 than was expected. Revenues declined $30 million to $117 million on sand volume that was only down 1%, to 2.2 million tons, in Q2 vs. a year ago, due to price concessions.

The thumbs up from investors was also due to, the company’s increase in green shoots- customers looking for longer term contracts again. SLCA’s 30-day order book is up substantially. Q3 volume is expected to be greater than Q2’s, the strongest it has been in a long time. There are certain areas in the oil patch where sand demand for particular finer grades might allow for some price increases—not to mention the mega-trend of using much more sand per well than in the past.

But I think what also commanded investors’ attention was the company’s acquisition of Sandbox, which was recently announced. Sandbox has a sand delivery system that utilizes 22.5-ton steel, weatherproof containers to deliver sand to the site of a well completion, rather than the industry standard of using pneumatic trailers which require expensive power take offs units, blowers and related equipment, and cause dust and congestion at the well site due to long unloading time (30 minutes vs. 5 minutes for these sandboxes, which hold the same amount).

I think this quote from the end of the conference call will give you a good taste of the opportunity here.

“If you look at Sandbox, all of Sandbox’s customers today are well service companies. And as part of our acquisition due diligence, we actually went out and talked to most of their customers. And I have been on a lot of customer interviews in my career, and I don’t think I have ever heard more positive comments about a Company. People basically said things like, we tried other solutions, and this is the only commercially viable one. Operators love it. Customers ask for it. Probably my favorite quote was somebody who said, it is bulletproof, idiot proof, it is great. So it feels to me like there is a lot of positive energy out there.

And another one of the customers said, look, we have a plan to move to 100% boxes for our sand. And so it is kind of a double value proposition, one being improved efficiency, reduced cost, all that. And second being, there is not a lot of viable solutions out there today to resolve the coming compliance issues with the new OSHA dust regulations. So it feels like Sandbox is kind of a double home run because it does both of those.”

This also diversifies the company a bit away from just selling sand. In fact, one analyst asked if this would be a third business segment. It won’t be, but it would be a promising one.

The acquisition will be paid for with $75 million in cash and 4.2 million shares, in all, $218.3 million. The acquisition is expected to be modestly accretive to 2016 EPS, but should add $.20 - $.30, conservatively, in 2017. This barely touches on synergies, the company said; it’s pretty much the current run rate.

Tom Bishop, BI Research,, August 4, 2016