Wall Street's Crush on Frack Sand Left This 1 Company Behind in August

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What happened

August was another great month for frack sand stocks, as shares ofU.S. Silica Holdings(NYSE: SLCA),Hi-Crush Partners(NYSE: HCLP),Emerge Energy Services(NYSE: EMES), andFairmount Santrol(NYSE: FMSA) all posted double digit gains. The one exception to this frack sand rally wasCARBO Ceramics(NYSE: CRR), which saw shares decline more than 10% last month.

SLCA data by YCharts

So what

It has been one heck of a rally for U.S. Silica, Hi-Crush, Emerge, and Fairmount Santrol in 2016. Year to date, all four of these stocks have more than doubled. That may sound great, but those gains are in part because all of 2015 and most of 2014 were miserable for them as drilling activity across the U.S. declined. The slightly peculiar thing about this years stock price rally has been that drilling activity across the U.S. hasn't exactly rebounded. The number of active rigs in the U.S. today is about 490. That's up a bit from the lows back in May, but still very low.

There are two things working in these companies favor: One is that sand used per well has continued to rise, so the decline in total sand use has not been as severe as the decline in drilling activity and completed wells. The other thing is that because of this prolonged decline, smaller companies have either gone out of business or have been absorbed by these larger companies, so each have been gaining market share in what has been a very fragmented market. When drilling activity does pick back up to more robust levels again, this suggests that U.S. Silica, Hi-Crush, Emerge, and Fairmount Santrol will have larger slices of the pie.

The one exception here is CARBO Ceramics. Even though technically CARBO Ceramics is in the same business of selling proppant to the oil and gas industry, it sells a fundamentally different product with its ceramic proppant versus the traditional sand or even resin coated sands that so many others produce. CARBO's products do lead to some improvement in well performance, especially in higher pressure wells. Unfortunately for CARBO, most companies aren't as keen on tapping these harder to access shales in lieu of cheaper options that can use lower price sand instead. Because of this, CARBO will continue to struggle a bit more than its commodity product peers.

Now what

Looking back on the past few months, shares of U.S. Silica, Hi-Crush, Emerge, and Fairmount Santrol have done exceptionally well. There are two questions that this raises, 1. Does this suggest that these companies are out of the woods, financially speaking? Probably not. With the exception of U.S. Silica, each are dealing with some pretty large debt loads considering their size that need to be adequately addressed before these companies could be truly considered worthwhile investments. 2. Is there a lot more room to run for these stocks after large gains this year? Absolutely. Keep in mind that these large gains are still just a drop in the bucket compared to the declines over the past few years.

SLCA data by YCharts

Chances are slim that these stocks will reach the outrageous valuations they saw during the frenzy of shale drilling in 2013-2014, but increasing oil prices will likely lead to more drilling and greater sand demand that will hopefully push these companies back to profitable operations and higher stock prices. Until we start to see some of those profits come in the door, and some debt reduction for a few companies here, it's still a little bit speculative to be buying shares of any of these stocks.

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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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