When I recommended Emerge Energy Services (EMES) in late 2013 for the Best Stocks for 2014 contest, EMES stock was already up 140% from its initial public offering a few months earlier.
Yet, I still figured the master limited partnership’s units had room to advance further due to its unique place in the U.S. energy ecosystem. And that certainly has come to pass, as the units were up as much as 210% in 2014 through mid-September and are still up 150% following the recent broad-market correction — taking the company from a market cap of $900 million last year to more than $2.5 billion today.
The source of EMES’s success is its dual focus on fuel processing and distribution, and its production of a special type of sand that is critical for the hydraulic fracturing process, or fracking, that has opened up shale fields in North Dakota, Texas and Pennsylvania.
First, let’s take a look at the larger fuel processing division, which represented 75% of revenues in first half of the year. Emerge Energy is no ordinary refiner. You see, very often gasoline, jet fuel and diesel are all sent through the same pipeline by refiners to storage terminals. EMES acquires, re-refines, and then sells this goo as a substance called “transmix.”
Emerge Energy then converts transmix into various grades of gasoline and diesel. Revenue growth in this segment jumped 48% in the first half of the year as EMES refined more than 64 million gallons of transmix, a gain of 160% from 2013.
Yet, the most explosive segment of EMES is its sand division. EMES mines and produces a unique white sand that oil and gas services companies prefer in their effort to frack and blast oil and gas out of unconventional fields.
Emerge Energy has three facilities that produced 1.9 million tons of this specialized frack sand, up 90% from a year ago. This resulted in a revenue jump of 113% in the first half of the year alone. The sand unit went from 18% of total revenues at the end of 2013 to 25% of total sales at the end of the second quarter this year.
The sand division has been wowing investors with triple-digit growth and impressive operating margins of 28%. There are only a handful of companies that produce the type of sand that meets the stringent specifications of the fracking process, and EMES now has over 7 million tons under long-term contract with suppliers at an average contract length of over four years.
In fact, demand from exploration and production firms is so strong that chief executive Rick Shearer has already stated that EMES is completely sold out at its existing facilities and that it has another plant scheduled for startup in the fourth quarter of this year. Additionally, there’s no sign of demand slowing down, as PacWest Consulting Partners expects frackers to use up to 95 billion pounds of sand in 2014, a 30% increase from a year ago.
To help keep up with this increased demand, Emerge Energy recently acquired all the assets of Midwest Frac & Sand LLC, which has been a regular supplier of some of EMES’ higher quality wet feed. With more facilities coming on line the next two years, Emerge Energy’s operating margins will continue to improve from the already impressive levels.
Analysts are forecasting 93.8% earnings growth for EMES next year, which compares favorably to the 11% growth expected in the oilfield services sector as a whole. Remember, Emerge Energy is structured as a master limited partnership, which means it must pay out much of its earnings as dividends.
After the most recent record quarter, the company increased its distribution guidance for 2014 by 23% to an average of $3.90 per unit, which currently amounts to a 4.1% annual yield.
Bears contend that E&P companies will find alternatives to EMES and its peers produce if prices rise too much. That may be the case on the horizon, but for the coming quarter at least, EMES remains a good bet following its recent pullback.
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