Go Sand-Combing for Big Dividends & Returns

by Aaron Levitt | December 11, 2013 6:00 am

Go Sand-Combing for Big Dividends & Returns

sand 150x150 Go Sand Combing for Big Dividends & Returns[1]Hydraulic fracturing, or fracking, is a pretty complicated process — one that involves plenty of high-tech components. From technically advanced horizontal drilling rigs to specialized pressure pumping equipment, the technique that is sweeping our shale is truly a complex endeavor. All of these high-tech components have to work in perfect concert in order for E&P firms like Range Resources (RRC[2]) to produce the most from their wells.

However, one particular low-tech ingredient in the process is making a name for itself and could provide investors with some hefty portfolio gains in the years ahead.

In this case, we’re talking about sand — and not the playground type. Demand for pure frac-sand is growing by leaps and bounds, putting pressures on current supplies. Yet, the miners of this necessary fracking ingredient are seeing some huge profit increases as the energy industry goes gaga for all things silica.

For investors, playing the purveyors of frac-sand could give your energy portfolio a big boost — along with big dividends[3] – in the years ahead.

Nearly 60 Billion Tons

As the main ingredient in “proppant” — which is injected along with various fluids into the well to hold open the fractures so hydrocarbons can flow properly — the demand for both natural and synthetic sand is exploding. A recent Wall Street Journal article[4] reports that the hydraulic fracturing-happy energy stocks like EOG Resources (EOG[5]) used a record 56.3 billion pounds of sand this year. Putting it another way, that’s the equivalent of 4 Great Pyramids, 200 Eiffel towers & 45,000 Chevy Tahoe SUVs. Overall, it takes about 25 rail cars to frack a single well.

And that amount is growing.

Since 2011, demand for frac-sand has surged nearly 25% to reach this year’s record tonnage. Perhaps more importantly for investors, as fracturing continues to spread across the North America — and now the world[6] – analysts predict that frac-sand demand will pop another 20% higher over the next two years. Essentially, by pumping more sand down a well, you can more than double its potential output. This makes the additional costs worth it when oil is trading in $90 per barrel range.

That’s all well and good, except that regular beach sand just won’t do for fracking a well. Hydraulic fracking requires a specialized quartz sand, because its shape fits better in shale’s fissures. The bulk of this sand is found in the Mid-West, near the Great Lakes. This rising demand has set off a virtual “Sand Rush” across Midwestern states like Wisconsin and Minnesota where this Northern White monocrystalline sand is located in vast amounts.

And since there is only so much of this sand, prices for ingredient hit a record $75 per metric ton earlier this year. Higher prices could be on the way as supplies remain constrained. Additionally, health concerns[7] from residents near plants have prompted bans on new frac-sand mine permits in these producing states.

All in all, it’s looking like the frac-sand miners could be a portfolios best friend over the next few years. Here are three of the best, for dividends and growth.

Hi-Crush Partners LP

Since it began trading in August of 2012, shares of master limited partnership (MLP) Hi-Crush Partners LP (HCLP[8]) have popped a whopping 59%. And there’s good reason for that gain. HCLP is premier and “pure-play” producer of high quality monocrystalline sand via its 561 acre facility in Wisconsin. That mine allows the company to process and deliver nearly 1.6 million tons of frac sand each year — the bulk of which is accounted for under various supply contracts with oil service firms Baker Hughes (BHI[9]) and Halliburton (HAL[10]).

However, Hi-Crush isn’t resting on its laurels. HCLP has recently purchased an interest in a new frac-sand mine as well as expanded its distribution network, giving it a chance to move sand into in the prolific Marcellus and Utica Shales.

And as a MLP, Hi-Crush is delivering all of that growth and cash flows back to HCLP stock investors as hefty dividends. HCLP stock currently has a dividend yield of 6.4% and has managed to grow that dividend since its recent IPO.

Emerge Energy Services LP

While it does provide energy transportation and processing services, the real story at Emerge Energy Services LP (EMES[11]) is frac-sand. EMES owns and operates four silica mines with around 6 million tons of worth of annual production capacity. More importantly, it produces Northern White sand — with more than 60% at 50 mesh or coarser. That means EMES is able to charge top dollar for its product.

And those top dollars have padded the new firm’s bottom line.

On its latest earnings report, EMES saw a nearly 82% increase in profits and a 104% jump in revenues at its sand operations. That was significantly more than analysts had expected. And like HCLP, EMES is structured as a MLP[12] – meaning those high profits will be making their way into investor’s pockets as frac-sand demand continues.

Already, EMES stock has paid two increasing dividends in its short history and currently yields 9%. However, the firm’s own distribution guidance is for dividends totalling $3.80 to $4.00 per share for all of next year. That’s a 10% to 10.5% dividend yield at today’s prices.

U.S. Silica Holdings

While it provides all sorts of sand and aggregate — including the sand that makes Apple’s (AAPL[13]) iPhone faceplates – U.S. Silica (SLCA[14]) has seen tremendous growth in its energy divisions over the last few years. During the third quarter alone, SLCA managed to ship 37% more frac-sand versus the third quarter of 2012. Those shipments came at higher margins and prices as well.

And like HCLP and EMES, U.S. Silica continues to expand its operations. The company recently partnered with BNSF Railroad to build a sand distribution terminal in the Eagle Ford shale[15]. Overall, SLCA will ship more than 1 billion pounds of sand each year to the hot-bed of shale oil activity. That should help move SLCA stock higher over the longer term.

The only downside is that SLCA isn’t structured as a high paying MLP. So the firm’s dividned only yields 1.5%. However, that dividend is growing and should still provide SLCA stock investors plenty of “oomph” over the years.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2013/08/sand.jpg
  2. RRC: http://studio-5.financialcontent.com/investplace/quote?Symbol=RRC
  3. big dividends: http://investorplace.com/2013/11/dividends-ato-xom-cvx-ed-ugi/
  4. article: http://online.wsj.com/news/articles/SB10001424052702304868404579194250973656942
  5. EOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=EOG
  6. world: http://investorplace.com/2013/11/ceo-snp-ptr-chie-china-energy/
  7. health concerns: http://blogs.cdc.gov/niosh-science-blog/2012/05/23/silica-fracking/
  8. HCLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=HCLP
  9. BHI: http://studio-5.financialcontent.com/investplace/quote?Symbol=BHI
  10. HAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAL
  11. EMES: http://studio-5.financialcontent.com/investplace/quote?Symbol=EMES
  12. structured as a MLP: http://investorplace.com/2013/11/mlps-sxl-wpz-acmp-paa-mmp
  13. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  14. SLCA: http://studio-5.financialcontent.com/investplace/quote?Symbol=SLCA
  15. Eagle Ford shale: http://investorplace.com/2013/11/dvn-devon-eagle-ford-eog/

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