Stronger Oil and Gas Sales Fuel United States Lime & Minerals Inc.'s Results

By Matthew DiLallo Markets Fool.com

After two challenging years, oil and gas drilling activity in the U.S. finally seemed to start bouncing back as a result of stabilization in the oil market after OPEC cut its production. Those improving market conditions provided a boost toU.S. Lime & Minerals (NASDAQ: USLM), which benefited from increased sales to its oil and gas services customers. Meanwhile, higher natural gas prices helped return the company's natural gas production interests back to profitability.

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U.S. Lime results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$36.2 million

$33.6 million

7.6%

Net income

$4.6 million

$4.1 million

13.6%

EPS

$0.83

$0.73

13.7%

Data source: U.S. Lime & Minerals.

Image source: Getty Images.

What happened with U.S. Lime this quarter?

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Oil and gas fueled the quarter.

  • Revenue from the company's lime and limestone operations rose 7.1% to $35.5 million thanks to higher sales volumes to oil and gas services customers. That's a reversal from last quarter, when weaker sales to those customers negatively affected results. Meanwhile, those strong sales helped the company overcome a decline in the average realized price of lime and limestone products.
  • The company also benefited from improving revenue at its natural gas interests. Overall, sales surged 47.2% to $0.6 million. Fueling that improvement was an increase in gas prices, which rose from $2.69 per MCF to $4.35 per MCF, helping to more than offset a decline in production.
  • The higher revenue from the gas interests helped fuel profit growth. That's because the gross profit from the company's lime and limestone interests was essentially flat at $8 million. Meanwhile, the company's natural gas interests reversed a year-ago loss of $0.1 million by reporting a $0.2 million gross profit.

What management had to say

CEO Timothy Byrne commented on the quarter by saying:

We are pleased that our first quarter 2017 revenues and operating results improved over last year's strong first quarter as we saw a rebound in demand from our oil and gas services customers, as well as continued strong demand from our construction customers.

After a brutal oil market downturn that lasted more than two years, oil-field service companies experienced a significant increase in activity levels during the first quarter. For example, Halliburton's (NYSE: HAL) U.S. land revenue grew nearly 30% in the quarter, fueled by a rebound in shale drilling. Likewise, Schlumberger (NYSE: SLB) noted that the North American land market strengthened in terms of both pricing and activity during the quarter, causing the company to accelerate the deployment of some of its idle capacity. This rebound in drilling activities helped drive sales for U.S. Lime's products to the industry, products that service companies use as conditioning agents for drilling muds as well as to stabilize the soil around oil field roads and drilling sites.

Looking forward

That rebound in the U.S. oil and gas market should continue at least over the near term. In fact, Halliburton's president said that he "love[s] the opportunity that is developing in North America." Meanwhile, with Schlumberger restarting idled capacity, it suggests that the company expects the drilling recovery to gain steam in the coming quarters. As long as all of that drilling doesn't ding commodity prices, especially for natural gas, it should continue to fuel U.S. Lime's results in the coming quarters.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends U.S. Lime and Minerals. The Motley Fool has a disclosure policy.