Fairmount Santrol Wants to Play Catch-Up With Other Major Sand Producers

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This quarter has been the breakout quarter for sand producers. After more than a year of negative results, Fairmount Santrol (NYSE: FMSA) joined its peers and posted positive net income for the second quarter.  Also, like its peers, Fairmount opened up its checkbook to grow production capacity and meet the demand of America's shale renaissance. 

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Let's take a look at Fairmount's most recent earnings result. Also, let's dig into the details of Fairmount's new investment and what it could mean for the company and the frack sand market in general.

By the numbers

Metric Q2 2017 Q1 2017 Q2 2016
Revenue $233.2 million $172.6 million $114.2 million
EBITDA* $43.8 million $19.2 million ($116.2 million)
Net income $10.5 million ($11.6 million) ($87.9 million)
EPS $0.05 ($0..05) ($0.54)

Perhaps Fairmount's second quarter results aren't the most impressive ones among the frack sand producers, but this was a good report nonetheless. Total sand sales and revenue were up 22% and 35%, respectively, which implies higher sales prices and improving margins. This led to the first positive net income result since the middle of 2015 and a better than expected result for the quarter.

The driving force behind these higher prices and better margins is the lack of idle production capacity. A couple quarters ago, oil & gas producers had a lot of pricing power because there were so many idle facilities. Today, though, Fairmount and others are running at full capacity. Spot prices for sand are much higher, and producers can spread fixed costs across a larger volume of sand. 

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For the quarter, Fairmount was able to generate enough cash to pay down $50 million in debt. At the end of the quarter, the company had $178 million in cash and a net debt balance of $617 million

You get a new mine, and you get a new mine. EVERYBODY GETS A NEW SAND MINE!

These past several months have been peppered with announcements from other frack sand producers announcing new sand mines in Texas. Fairmont had been a little slow to the game, but for a good reason. The company's balance sheet was bloated, and the lack of cash flow was making it difficult just to maintain current operations. 

Now that the company is in a better financial standing, Fairmount is throwing its hat into the Texas sand mine ring. It announced in July that it was leasing a property in Kermit, Texas that has approximately 165 million tons of fine grade sand reserves. By the first quarter of 2018, the company wants to have a 3 million ton per year facility fully operational on the site. Management thinks it will cost between $100 million to $110 million for the site.

Just to keep count of all of this activity. This is the fourth sand mine announced in the past six months. These mines will add 11 million tons per year of capacity to serve the just the Permian Basin and Eagle Ford shale. 

What management had to say

Here's CEO Jennifer Deckard's comments on the most recent quarter, per Fairmount's press release. 

Our second-quarter results demonstrate our ability to capture growth, in both raw sand and coated proppants, from improving conditions in the oil & gas markets and to deliver solid, steady growth in our I&R segment. We have prudently added capacity in our Proppant Solutions segment as customer demand has strengthened and pricing has improved, and we have leveraged our logistics network to deliver strong profitability growth in the second quarter.

Here is also what she had to say about the company's new mine in Texas:

The unique characteristics of this property, which include contiguous reserves of fine mesh sand, water availability and prime access to existing roads, make this an excellent opportunity for Fairmount Santrol to expand our broad product offering by providing a low-cost, in-basin solution to meet the changing requests from some of our customers. By leasing the reserves instead of an outright purchase, we will enhance our net return on investment and ensure greater financial flexibility. The ability to expand our capacity to meet growing market demand, while continuing the progress in strengthening our capital structure, creates value for our customers, shareholders and other stakeholders.

What a Fool believes

Fairmount was a little late to the party when it comes to adding sand production capacity close to demand centers, but perhaps better late than never. There are likely going to be some fears that these frack sand suppliers are over investing like they did in 2014 and creating an oversupply. While that is certainly a possibility, the economics of Permian shale wells suggests that the region could absorb this demand.

It's refreshing to see Fairmount get back on track with a positive earnings results. Hopefully, as this new mine becomes operational and its other two idle mines get put back to work, the company's prospects will only get better from here. 

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Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.