by Jon Markman | December 22, 2013 11:50 pm
Editor’s note: This column is part of our Best Stocks for 2014 contest. Jon Markman’s pick for the contest is Emerge Energy Services LP (EMES).
If you’ve been reading financial headlines at all recently, you’re surely aware that the stock market has undergone a massive bullish run in 2013. But now I would like to shift your view to the horizon and consider a position that I suspect has a shot at being very successful in 2014 and beyond.
I sense that the drilling of “unconventional” oil and gas formations in the U.S. will continue to gain steam, and feel that traders and investors alike should be looking for ways to participate. With that in mind, my idea for you is Emerge Energy Services LP (EMES).
EMES is a $930 million oil and gas services company headquartered in Fort Worth, Texas. What differentiates it from many of the other public companies in the energy sector is its unique dual focus on sand production and fuel processing.
Yes, I said sand. Bear with me while I explain.
Emerge’s sand production unit mines silica sand, which is a key input in the hydraulic fracturing process of oil and gas wells. This process, which is commonly known as “fracking,” is the primary reason we now have an enormous new supply of natural gas in the United States. Just last month, the Energy Information Administration noted that the U.S. now leads the world in producing natural gas from shale formations, and that it now accounts for nearly 40% of all natural gas produced domestically.
The recent boom in natural gas production, which is up by more than a third since 2005, is primarily a result of fracking technology. A rudimentary description of the process is that large volumes of water, mixed with sand and chemicals, are blasted underground to break apart rock, which allows the natural gas or oil to flow from the shale rock into the drilling well.
That’s where Emerge Energy comes into play — as the sand that the firm produces meets the stringent requirements necessary for both the oil and natural gas wells. EMES’ sand facilities are located throughout Wisconsin, while its headquarters and another facility are located in Texas.
The sand facilities are strategically located to provide clients with direct rail access to every major drilling basin in North America. A single well can require as much as 3,000 tons of frac sand, and according to the U.S. Geological Survey, more than 45 million tons of frac sand was utilized in 2012. This amount continues to rise annually, and demand is expected to double by 2021.
The second segment of EMES is its fuel processing and distribution (FP&D) operations, which is focused on acquiring, re-refining and selling various petroleum products. Transportation mixture, commonly known as transmix, is produced when refined petroleum products like gasoline, jet fuel and diesel are mixed together during pipeline transportation.
Emerge Energy, through its subsidiaries, processes and converts transmix back into various grades of gasoline and diesel so they can once again be utilized as transportation fuel. The company owns two of the 19 transmix plants in operation in the U.S., which are strategically located in Dallas, Texas, and Birmingham, Ala.
The company receives transmix through pipelines and trucks, converting and storing the resulting petroleum product for between seven and 10 days before selling it to customers for commercial use. Currently, the FP&D segment represents about 82% of the firm’s total revenues, although the sand segment is the more explosive of the two, having more than doubled year-over-year in its most recent quarter.
Emerge Energy was formed by private equity firm Insight Equity in 2012, which is based in Southlake, Texas, and owns a portfolio of different companies. It merged several into Emerge Energy in May 2013. Superior Silica Sands, Allied Energy Company and Direct Fuels were combined in a series of transactions that lead up to the initial public offering of Emerge Energy.
EMES has been led by chief executive Rick Shearer since April 2012, about a year before the company went public, and had spent the two previous years as president and chief executive of Superior Silica Sands — the frac sand processing division of the new company.
Emerge Energy is set up as a simplified master limited partnership, or MLP, with all units designated as common units and a general partner with no economic interest. The company pays out 100% of its available cash to common unit holders, which means enormous payouts — right now, EMES stock currently yields north of 8%.
EMES stock has been on a tear in 2013, up 145% with a couple weeks to go. However, there’s still a ton of room for Emerge to grow, both organically and through acquisitions.
The great thing about this Best Stocks for 2014 pick is you can collect a hefty quarterly distribution in the process.
Jon Markman is the editor of Trader’s Advantage. As of this writing, he was long EMES in his Trader’s Advantage portfolio.
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