Emerge Energy Services (EMES), a unique oil and gas services firm that I recommended a year ago as a potential top stock for 2014, recently reported stellar third-quarter results.
Emerge Energy Services reported $1.08 in earnings per share, which was 23% ahead of the 88 cents per share expected by the Street. Revenues came in at $296.3 million, slightly ahead of the $295.5 million expected. The report showed that EMES, which focuses both on fuel processing and frack sand production, experienced its best quarter since going public.
The frack sand production segment continued its phenomenal growth, with chief executive Rick Sherer noting that demand continues to be as strong as they’ve ever seen it, despite the recent downturn in crude oil prices. Emerge Energy Services remains sold out at all of its existing production, including sand at its newly acquired Church Road facility. You may recall that Emerge Energy Services produces no ordinary grains of sand, as companies like Halliburton (HAL) that fractur shale fields require a special and somewhat rare type of sand to get the most oil and gas out of tight formations.
Revenues in the sand segment rose 101% from a year ago, and not only did the total volume of sand sold increase, but the average selling price also rose during the quarter. Emerge Energy Services now has 8.2 million tons of sand under contract with an average remaining contract term of 4.2 years, not including two new production facilities set to come online in the next six to 12 months.
On the conference call, executives expressed that they expect demand in 2015 to be even stronger, well above what the firm currently has contracted. The quarter wasn’t without a few hiccups however, including Emerge Energy Services pushing back the completion of its new Independence dry sand facility from the fourth quarter of 2014 to a mid-year 2015 start.
Additionally, it was a challenging few months for Emerge Energy Services’ fuel segment, which experienced a revenue decline of 10% during the quarter. After exceeding expectations every quarter since going public, the fuel segment was held back by a prolonged period of backwardation in refined fuel pricing, which led to a general squeeze on per gallon margins.
Outside of an unexpected jump in fuel prices through the remainder of the year, Emerge Energy Services expects the fuel segment to perform similarly in the fourth quarter as well. When you have a dramatic drop in fuel prices such as the industry has just experienced, it can take a company a few quarters to adjust down forward prices to match current spot prices.
Emerge Energy Services, nevertheless, announced a quarterly dividend of $1.38 per share, which is an 18% increase over last quarter and an impressive annualized yield of 6.9%. Emerge Energy Services has been able to increase its dividend every quarter since inception, a jump of 273% since the second quarter of 2013.
With the sand segment continuing to become a larger part of Emerge Energy Services’ revenues, the future still remains very bright. After shares peaked above $140 in late August, Emerge Energy Services has sold off, like much of the energy sector, and is now trading around $80. This appears to represent a good buying opportunity in one of the best situated companies in the energy services industry.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
