Now that it's freezing cold in the East and natural gas prices are rising, it's time to look at potential energy plays.
Investors should take a close look at core infrastructure plays on fracking – not the drillers or oil companies or refiners, and there are five outfits standing to benefit supplying goods and services to companies exploiting shale formations.
Fracking – the cracking open of shale formations to yield high quality oil, natural gas and natural gas liquids – is boosting domestic energy production to the point where the U.S. is now the world's largest producer of natural gas and is a next exporter of refined petroleum products.
Simply put, this is the hottest growth area in the U.S. – not tech, not organic foods – and to invest in fracking is to invest in double-digit growth.
That approach paid off. Here is how the five stocks have performed since July 15:
And now the key question for investors: Are they still good investments?
Read the outlook for these key 5 fracking stocks:
Suburban Propane
Suburban Propane (SPH) does one thing – it distributes propane – and while the stock is down because sales are booming and profits are not. Revenue in 2012 was up almost 65% I 2012 (in part due to an acquisition), and will be up another 10% or more in 2013 despite the fall in most prices. I expect this to turn around this year, in part because of increased supplies of propane from shale fields.
The second part of the equation is in a refinery outside of Philadelphia opening this year or next that will refine natural gas liquids, (NGL), reducing some of SPH's costs. A third factor is the current shortages of propane in many parts of the USA. SPH sports a 7.8% dividend and is worth a look right now.
US Silica Holdings
You need sand to frack and US Silica Holdings (SLCA) sells sand, within the industry known as commercial silica.
US Silica Holdings sales were up 50% in 2012, they should be up another 20% or so in 2013 when fourth-quarter results are available. And unlike many other super growth companies in the fracking space, SLCA makes money. It earned $79 million in the third quarter on $441 million in sales, terrific margins for what is essentially a commodity mining company.
The P/E is modest for this kind of growth at 20-21. The stock has put in a near-term bottom and may be ready to run. It is definitely worth a look.
Nuverra Environmental Services
Nuverra Environmental Services (NES) revenue more than doubled to $351 million in 2012 and will come close to doubling again in 2013 once earnings are reported. Nuverra trucks water and provides water-related services to clean up after a shale field is fracked. That said, Nuverra is over-leveraged and while this was acceptable as it was growing and growing, it is beginning to feel competitive pressure from pipelines and other water trucking companies.
The stock has more than quadrupled since I wrote about it six months ago. If you own it, it may be time to take profits. If you don't own it, look at other fracking plays.
USA Compression Partners
For USA Compression Partners (USAC), it is all in the name – the company provides natural gas compression services to the extraction industry.
This is a volume-dependent business and volume is booming. USA Compression Partners' revenue was up 20% in 2012 and will be up that much or more when final numbers from 2014 come in. Third=quarter results were terrific: revenue was up almost 24% year over year and adjusted cash flow, the basis of the dividend, was up more than 29% year over year. The yield is currently 6.7% and will probably go higher. Ignore the P/E. This is a growth and dividend story. Take a look.
C&J Energy Services
C&J Energy Services (CJES) grew more than 25% in 2012, after tripling in 2011, but has stalled in 2013 and will come in with near-zero growth. Part of the reason is the softening of oil prices and the shuttering marginal fields – C&J Energy Services provides fracking-related oil field services on a spot basis with prices defined under long-term contracts.
It is a well-managed company with a solid future – but investing in fracking should be about finding double-digit growth. It is hard to see this happening for CJES in 2014 without a sharp spike in oil prices that is not on the horizon. Keep it on your radar, but there are better places to invest in growth right now.
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