We have been laser-focused on the oil industry for many of the recent ‘bear of the day’ articles, but now it is time to take a look at some of the market segments which have been negatively impacted by oil’s slide outside of the energy industry. One often-overlooked segment, but one that has been extremely profitable in recent years is undoubtedly companies which producer sand and silica for use as proppants in fracking.
This sand is a key part of the fracking process as it helps to force oil or gas out of the ground, allowing producers to extract more hydrocarbons from a particular site. And as fracking became more and more in demand, so did these proppants, sending shares of companies specializing in this market sharply higher.
However, with the crash in oil prices, demand for these types of products has dried up, leading to a crash in many companies in this segment. A great example of this trend is US Silica Holdings (NYSE:SLCA), a top proppant producer that added 150% in the first eight months of 2014, but has fallen by close to 50% in the past six months.
SLCA’s return over the past six months has a pretty strong correlation with oil prices over the same time frame, as a popular oil-tracking ETF, USO has also plunged about 50% in the past six months. So with plunging oil pricesmany investors sold off SLCA and other proppant-focused stocks over fears on future demand.
And while oil prices have come back a bit from the doldrums in recent trading sessions, few are predicting a return to oil in the triple digits or even the low$80s/bbl. And without a return to these levels many energy projects are unprofitable, dulling the demand for proppants in the process.
Thanks to this trend, analysts haven’t been revising their estimates upward, as many believe that more pain is ahead despite this recent rally. In fact, in the last month, just a single estimate has gone higher for any of the time periods we study, and that was just for the next year time frame. Compare that to four lower for the same period, or three lower for the current quarter and then two lower for the full year, both against zero analyst revisions higher.
This means that analysts nearly universally agree regarding the company’s prospects over both the near and long term. And though estimates haven’t really moved too much for the current quarter or current year, the next year EPS estimate has crashed from $3.46/share 60 days ago to just $2.56/share today, baking in a growth rate of just under 7% y/y.
Given this bearish trend and the poor outlook for the oil industry, one shouldn’t be too surprised to note that SLCA has a Zacks Rank #5 (Strong Sell). This means that we are looking for more underperformance from the company in the near term, and that SLCA will likely struggle if oil prices remain subdued.
Currently, the mining-miscellaneous industry is ranked in the bottom 25% of all the ones we study so there are few better choices in the space. However, there are a few Zacks Rank #2 choices in the segment, so at least a few buys out there.
These tend to be a bit more specialized though as firms like Cameco (CCJ) deal with uranium, while Platinum Group (PLG) focuses on precious metals. So if anything, investors should probably just avoid the proppant and sand market in the near term, and focus on other areas of the industry if they are looking for better mining performers right now.