Smart Sand: Value in Fracking
04/17/2017 2:50 am EST
In a hunt for value, I’ve been poking around in some beaten up sectors. This search led me to the oil patch where I found a recent IPO that makes a specialized sand used in fracking, asserts growth expert Linda McDonough, editor of Profit Catalyst Report.
Smart Sand Inc. (SND), a November 2016 IPO, makes high-quality Northern White raw frac sand. Demand for this sand, a critical ingredient used in hydraulic fracking, has been surging.
In fracking, sand is mixed with water and chemicals and then blasted at high pressure into wells. The propellant breaks open fissures in the rocks, releasing oil and gas that would not have been accessible otherwise.
Prices for fracking sand are almost double what they were in the latter part of 2016. Industry experts Spear & Associates estimate that demand for fracking sand will increase 29% in 2017 and another 20% in 2018. Any price increases would be layered on top of this volume burst.
The decline in oil prices has forced oil and gas developers to justify the expense of new wells. Costly offshore drilling platforms and deep vertical wells are simply too expensive with oil bouncing around $50. This has led most producers to employ fracking more frequently and in larger wells.
A shift to larger horizontal wells, which require significantly more sand to release oil and gas, is increasing the amount of sand required per well.
Due to its shape, strength and chemical properties, the Northern White sand produced by Smart Sand is one of the most efficient types of fracking sand.
Smart Sand, which came public in November at $11, is one of the few fracking companies to remain profitable during the oil wipe out in 2014 and 2015. Current estimates look for flat earnings in 2017 and then a 240% jump in 2018.
My target conservatively uses a Price to Earnings (P/E) multiple of 20 on 2018 estimates for a target of $22. As Smart Sand proves itself over the next few quarters that target may increase.