US Silica: Valuation Out of Whack

02/11/2015 8:00 am EST

Focus: STOCKS

Tom Bishop

Founder, BI Research

This featured recommendation is one of the largest domestic producers of commercial silica, a specialized mineral that is a critical input into the oil and gas proppant’s end market, explains small-cap expert Tom Bishop, editor of BI Research.

US Silica (SLCA) has 15 facilities in all and uses 5,000 railcars to transport material to 36 transload facilities in oil and gas basins and to other customers. 

Business has been very, very good heretofore, with the company barely able to keep up with demand. And then oil prices crashed.

However, US Silica has been benefiting from the trend toward longer laterals being drilled, more sand being used per frac stage, and more stages per well, with some firms doubling or tripling their sand usage because of the excellent payback in terms of increased production.

Management believes primarily due to the decline in rig count, growth next year will be more like 10% than the 25-30% it was previously anticipating.

But it is still expecting growth. And with demand only forecasted to grow in the future, the company is still proceeding with all of its capacity expansion projects.

Also, close to 80% of its sand is currently under multi-year take or pay contracts. So these contracts will run their course.

In addition, the company also processes ground and unground silica sand for a variety of industrial and specialty product end markets such as glass, fiberglass, foundry molds, municipal filtration, etc.

Some 36% of its sales go to the industrial market for use in paints, glass, you name it, which is unaffected by oil prices.

The company's outlook is nowhere near as dire as the picture faced by the energy companies themselves. Yet SLCA has been punished at least as hard.

I think this is out of whack, but hey, let the directors and officers of the Company tell you. It seems like most of them bought stock in the open market in the second half of December…$875,000 worth in all, near $26.

Finally, SLCA recently topped the Forbes annual listing of America’s Best Small Companies. For allthese reasons, I think these shares are a Buy.

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