Fairmount Santrol Gets a Much Needed Boost to Revenue This Quarter

By Markets Fool.com

The frack sand industry finally saw the turnaround it has been waiting for this past quarter, and the results showed up pretty quickly in Fairmount Santrol's (NYSE: FMSA) most recent earnings release. A large jump in sand volumes helped give the company its first sequential gross margin increase in two years. Clearly, this was a good sign, but there are still some lingering issues at the frack sand provider for investors.

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Let's take a quick look at Fairmount's most recent quarterly numbers and see why the company may not be out of the woods yet.

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By the numbers

Results* Q3 2016 Q2 2016 Q3 2015
Revenue $134.7 $124.24 $170.9
EBITDA ($6.7) ($116.2) $13.1
Net income ($20.6) ($87.9) ($46.1)
Earnings per share ($0.11) ($0.54) ($0.29)

* Results in millions, except per-share data. Data source: Fairmount Santrol earnings release.

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While the slight uptick in revenue is encouraging, it was even better to see the increase in sales volumes. In the third quarter, sand sales volumes increased 24% sequentially as its Proppant Solutions -- the oil and gas part of the business -- sold 1.8 million tons. The reason it didn't equate to as strong of a revenue decline is because the average realized price on sand deliveries decreased by 6%. Management did note, though, that sand prices at the end of Q3 were higher than the second quarter, which bodes well for the coming quarter.

We saw some modest progress with the company's earnings per share, but one thing to keep in mind is that the company raised $161 million in cash through an equity issuance that increased total shares outstanding. This means losses are spread out among more shareholders, but when the company does start to turn a profit again, its earnings per share will be more muted.

The company was able to slightly reduce its total debt load, but not in the way one would hope. Farimount's operations continue to burn through cash, but that $161 million equity raise in the quarter helped to pay down debt. At the end of the quarter, total debt stood at $1.14 billion. Earlier in October, it completed another equity issuance of $277 million that doesn't show up in these results, but we should expect to see both a better cash position and slightly lower debt levels. This will be at the expense of shareholders, though, as it diluted shares by another 16%.

What management had to say

There were clearly some ups and downs in Fairmount's most recent results, but CEO Jennifer Deckard was much more focused on the positives in her press release statement:

Third-quarter volumes in our Proppant Solutions segment saw significant increases sequentially and over the prior-year period, as demand strengthened for both our raw frac sand and coated proppants. In addition, we instituted appropriate price increases on certain Northern White sand products late in the third quarter. As market conditions improve, we will continue to evaluate our operational footprint to ensure we are optimally positioned to quickly address upticks in demand and efficiently deliver product to both our Proppant Solutions and Industrial & Recreational customers. The third-quarter reopening of our Menomonie facility and the completed expansion of our Wedron facility earlier this year are expected to enable us to meet current demand for Northern White sand, which continues to grow.

With a few more facilities starting back up again, don't be surprised if we see costs jump a bit in the fourth quarter as these facilities ramp up.

What a Fool believes

With sand volumes starting to pick back up again, Fairmount might finally be getting the relief it needs from the market to start generating profits again and clean up its burdened balance sheet. In order to ramp up and meet demand, it needs some of that cash it has raised through equity this year.

If drilling activity were to pick up some more -- and there are signs it will as producers are adding rigs to their drilling programs -- then Fairmount will likely return to profitability soon. That being said, it won't be able to do much in terms of rewarding shareholders for a while since it needs repair the damage to its balance sheet. This is probably the most optimism we've seen around Fairmount and other frack sand producers in a long time, but there are clearly some issues the company needs to address before investors should start jumping back into its stock.

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Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.comor on Twitter,@TylerCroweFool.

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