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Frac Sand: White Gold?

07/10/2014 8:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Frac sand is used in drilling for oil and gas to boost recovery rates. Horizontal drilling takes 15 times as much proppant as frac sand to stimulate flow from a well, observes Mark Skousen, editor of Forecasts & Strategies.

Not surprisingly, demand for frac sand is increasing dramatically. Some call it the “new white gold.” Emerge Energy is taking full advantage of the fracking energy boom.

Emerge Energy Services (EMES), a rapidly expanding frac sand supplier based in Southlake, Texas, saw its revenues jump 41% in the past year to $948 million while earnings rose 86%. Profit margins are rising and ROE is an incredible 50%.

EMES only recently went public, but it already is paying out substantial cash distributions. It paid 37 cents in August, 86 cents in November, $1 in February, and $1.13 in May. Clearly, it has adopted a rising dividend policy and it now is yielding 4.6%.

Emerge Energy has risen in price sharply during the past year, but it has been volatile along the way. It fell sharply on the news that a large insider sold 3.5 million units to private investors last month for $109 a share.

Fortunately, the issuance of these shares did not dilute the stock and EMES has made a comeback. But the stock is incredibly volatile and may not be for everyone.

An analyst at RW Baird raised the price target on Emerge Energy to $137, citing its excellent balance sheet, strong fundamentals, and rapid payback on capital deployment. The analyst forecasts that EMES will outperform other energy stocks.

The fracking boom is just getting started, and fracking sand suppliers like EMES are one of the best pick and shovel methods for investors to cash in on the new white gold rush.

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