Frac-sand business may not recover soon
Emerge Energy Services (EMES) is an MLP engaged in mining, producing, and distributing silica sand—a key input for the hydraulic fracturing of oil and natural gas wells. Emerge Energy also stores and distributes motor fuels and provides fuel services.
The steep and sustained decline in energy commodity prices impacted the demand for frac sand. Drilling and completion of new oil and natural gas wells has been significantly curtailed in the US. As a result, frac-sand MLPs are experiencing continued and significant downward pressure on pricing.
The percentage of Emerge Energy Services’ float held by institutions decreased from nearly 48% at the end of 1Q16 to 43% currently. The number of new institutional buyers of Emerge Energy Services’ shares fell from 14 at the end of 1Q16 to 11 on June 5, 2016. This indicates reduced institutional interest in Emerge Energy Services’ stock. At the same time, the number of sellers and the number of sell-offs have also fallen since the end of 1Q16. The above table summarizes institutional investors’ activity in Emerge Energy Services’ shares.
Beneski Theodore, Goldman Sachs, ING Groep, and Castleark Management added to their Emerge Energy Services holdings since the end of 1Q16. Morgan Stanley and Bank of America reduced their interests.
Emerge Energy Services has a net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of 8.6. This indicates significantly high leverage. The company hasn’t paid quarterly distributions for the last three quarters. It hasn’t been generating available cash to distribute.
Drilling and well completion activity levels aren’t expected to recover significantly until 2017. This might result in continued weak frac-sand demand. It could put more pressure on frac-sand prices for an extended period of time. While frac-sand producers do have an irreplaceable role to play in drilling activity in the long run, investment in Emerge Energy, Hi-Crush Partners (HCLP), and U.S. Silica Holdings (SLCA) might not benefit investors in the short term.