Morningstar | U.S. Silica Posts Solid First-Quarter Results, Considering Industry Headwinds
U.S. Silica posted solid first-quarter results, considering industry headwinds. Revenue increased 6% sequentially thanks to a 7% increase in proppant segment sales and a 4% increase in industrial segment sales. Adjusted operating margins improved to 1% from negative 2% in the prior quarter thanks to improving proppant segment margins as well as a decrease in corporate-level expenses (which include startup costs associated with the company's new West Texas mines). Our fair value estimate and no-moat rating are unchanged.In the first quarter, proppant segment contribution margin increased to $59 million from $54 million in the prior quarter due to a 4% increase in sales volumes and an increase in margin per ton to $15.20 from $14.70. The increase in profitability per ton was due mostly to increasing SandBox volumes (U.S. Silica's last mile logistics business). Outside of SandBox, margin per ton was probably flat, as a recovery in Northern White pricing offset weakness in West Texas pricing (with the latter due to the oversupply of 100 mesh sand).
As a reminder, U.S. shale well completions have fallen in past quarters due chiefly to temporary pipeline bottlenecks in the Permian Basin. Cumulatively, the U.S. horizontal well completions count fell by about 18% from the third quarter of 2018 to the first quarter of 2019. This has pushed frac sand demand down about 20% since the second quarter of 2019 (when demand peaked), by our estimates. However, frac sand demand should rebound along with U.S. shale completions through the rest of 2019, owing to the alleviation of the pipeline bottlenecks.
U.S. Silica has fared relatively well despite these industry headwinds. The company's volumes have actually increased by 400,000 tons, or 12%, since the third quarter of 2018, in stark contrast to peers. This was caused by the opening of two new West Texas mines in mid-2018, which reached about 1 million tons of production in the first quarter, allowing U.S. Silica to grab market share.
U.S. Silica Holdings is a holding company. Through its subsidiaries, the company is a performance materials company and a producer of commercial silica used in industrial applications and in the oil and gas industry. The company is also engaged in the production of products derived from diatomaceous earth, perlite, engineered clays, and non-activated clays. The company's segments include: Oil and Gas Proppants, which serves the oil and gas recovery market by providing and delivering fracturing sand; and Industrial and Specialty Products, which provides products and materials for building and construction products, fillers and extenders, filtration, glassmaking, absorbents, foundry, and sports and recreation.
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