Emerge Energys First-Quarter Results Highlight Strong Market PositionRaymond Billings (Author) Published Date : Jun 19, 2014 05:30 ET
Emerge Energy's first-quarter results and commentary highlighted the company s strong market position, positive demand dynamics, relevant supply levels, and improving pricing trends. We remain bullish on the investment opportunity for frac sand providers but recognize 2015 and 2016 expectations are materially higher for the three publicly traded companies now than they were to start the year, so a bit more discipline around entry points in the stocks is probably warranted.
We are raising our 2014 EPS estimate by $0.51 (from $2.93 to $3.44), mostly because we are building in more volume (roughly 400,000 more tons) at a higher revenue per ton impact in the sand segment offset by slightly higher cost of goods sold (on a percentage basis) as a result of more volumes being sold FOB basin/destination. We are projecting revenue of $1,137 million versus $1,025 million previously, and EBIT of $91 million (up from $85 million previously). We increased our distribution estimate from $4.54 to $4.79 in 2014, implying annual distribution growth of roughly 53% versus 2013.
We fully expect cost of goods sold as a percent of revenue to continue creeping up as the mix of FOB plant versus FOB destination continues to move toward destination, but we view this as a positive and a strategic move. Our 2014 estimates should prove conservative in light of the opportunity for volumes to ramp up faster than we have projected, higher spot pricing as the market is tightening (especially for coarse grades), and for Barron to drive better utilization (mostly driven by needing to purchase less third-party sand for processing). We also expect Emerge to continue building out its transload and storage network, which will open up more end=markets and drive increased transportation/logistics-related revenues.
We believe the company s logistics investments will continue to drive cost advantages and market share higher, even as well counts and footage drilled push proppant market volume growth far faster than horizontal rig count growth would imply. Our new 2015 estimates are for EPS of $4.49, previously $4.32, driven by our estimates for revenue of $1,330 million, $1,295 million previously, and adjusted EBITDA of $154 million, previously $165 million (up from $115 million in 2014).
Our full-year distribution estimate is $6.15, $6.64 previously, and up 46% from the 2014 estimate. Our revenue estimate embeds 73% volume growth, and down 2% revenue per ton (RPT), based on an assumption that spot pricing will be lower in 2015 than this year (although recent trends point toward the opposite) and the mix of sand sold in-basin versus FOB mine does not change.
Emerge Energys First-Quarter Results Highlight Strong Market Position