Smart Sand (NSDQ: SND) is a producer of Northern White Sand used as a proppant for hydraulic fracturing (i.e., it helps hold the fractures open). The company went public in an IPO last November and has been on my radar since. A slide in the share price over the past week has presented an attractive entry point.

Energy Strategist Portfolio Update

• Smart Sand (NSDQ: SND) added to the portfolio for aggressive investors. Buy below $16 with an initial Target Price of $22. Set a Stop Loss for $9.60, which is 30% below Monday’s closing price of $13.70.  

Trade Rationale

Producers of sand used in hydraulic fracturing have been notoriously volatile in recent years. The MLP Emerge Energy Services (NYSE: EMES), for instance, jumped more than 700% in the year following its 2013 IPO, only to fall more than 90% when oil prices collapsed. Competitors U.S. Silica Holdings (NYSE: SLCA) and Fairmount Santrol Holdings (NYSE: FMSA) also experienced huge swings in price over the past three years. 

But sand producers should thrive as oil prices recover. Shale oil and gas producers are drilling more wells and using more sand per well than they did a few years ago. Before the oil price collapse in 2014, revenues of the major fracking sand producers had been growing at annual rates of 40-60%, as demand for sand grew exponentially.

But Smart Sand’s financials distinguish it from its competitors. Last month the company reported financial results for its first full quarter as a publicly traded company. Smart Sand reported:

• 4Q 2016 revenues of $29.4 million, an increase of 170% sequentially
• 4Q 2016 tons sold totaled approximately 274,500, an increase of 19% sequentially
• 4Q and Full year 2016 Net Income of $12.4 million and $10.4 million, respectively
• 4Q Adjusted EBITDA of $26.9 million increased 145% sequentially
• Full-year 2016 Adjusted EBITDA of $37.8 million 

The other major players in the fracking sand space reported negative income and/or negative free cash flow for 2016. Further, all have significantly higher relative debt than Smart Sand, which is essentially debt-free and has approximately $70 million in cash available to support growth initiatives. Smart Sand has an enterprise value (EV) of $511 million but had more EBITDA in 2016 than any of its competitors (two of which have EVs of at least $2 billion). 

I tread carefully around the hydraulic fracturing sand space due to the high degree of sensitivity to oil prices. I also always warn investors to invest in this space only if they have high risk tolerance, and even then not to bet too heavily. But if OPEC does what I expect next month and extends the production cuts enacted last November, I think oil prices will end the year closer to $60/bbl. This will spur more drilling and more consumption of fracking sand.  

Twice since its IPO I have watched shares of Smart Sand dip below $15, and each time I later regretted not buying them at that price. In fact, Smart Sand was going to be my special stock pick at this year’s Wealth Summit, but shares rallied ahead of the summit. During my presentation, I identified Smart Sand as a company I like, but one that I would like to pick up at under $15 a share.

The past week has seen the share price decline back below that point, and the third time is the charm for me. Smart Sand closed on Monday at $13.70, but it has bounced off that level quickly in the past. Buy Smart Sand below $16.