Emerge Energy Services (NYSE: EMES) followed the trend of several other frack sand providers this past quarter: Big bumps in volumes of sand sold, but still not a lot of that sales number growing earnings or cash flow. With the frack sand market poised to grow immensely in 2017, Emerge should be able to return to posting decent profits, but there is one thing that makes this particular company a little behind the curve compared to its peers.
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Here's a break down of Emerge's most recent quarter as well as why the company has some catching up to do in the frack sand industry today.
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By the numbers
|Results*||Q4 2016||Q3 2016||Q4 2015|
|Earnings per share||($0.77)||$0.21||($0.41)|
|Distributable cash flow||($15.2)||($13.3)||($0.9)|
*in millions, except per-share data.DATA SOURCE: EMERGE ENERGY SERVICES EARNINGS RELEASES.
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There are a couple discrepancies within these numbers to consider before jumping to too many conclusions. The first is that the company sold its fuels business segment in the third quarter of 2016. This was a high volume, low margin business that added some modest profits to the bottom line this time last year. Without that business in tow, revenue would have been closer to $44 million, which puts it much more in line with this past quarter's result.
From an operations standpoint, total volumes of sand grew meteorically. Fourth quarter sand sales were 825,700 tons compared to 493,000 tons in the prior quarter. While it has been pretty common to see large upticks in sand volume from other frack sand producers, this was an exemplary gain. What is peculiar about those large gains in volume, though, is that it didn't really lead to much of a gain in revenue. Management says that part of it has to do with lower prices in the quarter, and that new price contracts are coming up with more favorable rates. This is something to watch in the coming quarters.
The other thing that is slightly concerning is that we haven't seen an uptick with the bottom line, either. This one is a little easier to understand, though, because Emerge still has a lot of costs associated with bringing several of its assets back online after being idle. Its three dry sand facilities in Wisconsin are now operating at 70% utilization rates. This means that there is quite a bit of room to grow sales at these facilitieswith minimal cost additions, the higher fixed costs with these facilities mean they have to run at very high utilization rates to generate decent margins.
From a balance sheet perspective, the company raised equity to the tune of about $37 million to repay borrowings. Much of that had to do with its fuels business sale in the prior quarter and some debt covenants related to total assets. It's not great news, but it was necessary. Emerge ended the quarter with a total bank loan balance of $141 million. According to management, that is low enough that the company can focus more on improving operations rather than debt reduction.
What management had to say
Chairman of the board Ted Beneski on the company's most recent results:
The fourth quarter was our first full quarter without the fuel business, so we are now a pure-play frac sand company. Our sand volumes increased by 68% sequentially to 825,699 tons, and our continuing operations Adjusted EBITDA improved by $0.3 million sequentially. Small price increases started to take effect near the end of the quarter, but we are now realizing significant upward pricing movements to start 2017. We further strengthened our balance sheet with a $36.9 million net equity raise, which lowered our bank loan balance to approximately $141 million at Dec. 31, 2016, and we are now well positioned to take advantage of the current upswing in the North American shale markets as frac sand demand has rebounded significantly with higher drilling and completion activity.
What a Fool believes
When compared to its competitors, Emerge is a little behind the curve. While most others have already shored up their balance sheets and are looking to expand, Emerge is still putting the finishing touches on its debt reduction plan. It certainly has plenty of room to grow volumes and revenue with its existing assets as they aren't being fully utilized, but beyond that it may struggle to find ways to grow in an industry that is poised to see fast increases in demand.
We'll call this past quarter an incomplete, as there are still some things that need to be worked out both debt and operations-wise. If the company can't translate those rapid gains in volume into bottom line results, though, then investors will probably want to start looking at other companies in the frack sand industry.
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