US Silica could be a 5 bagger in the next 3 years

Over the past few years we have profiled a number of development,  exploration,  drillers as well as  oil & gas companies in the Bakken region.    Some of these have been prolific gainers for investors such as Brigham Exploration (bought by Statoil),  Northern Oil & Gas (NOG: 0.7373 -4.7170%) and Kodiak Oil & Gas (KOG: N/A +0%).    In looking at the next round of potential superstars in the region,  we see that the most promising stock,  US Silica (SLCA: 28.13 +1.15%)  actually has never harvested a drop of oil in it’s history.  It is neither a driller or producer,  in fact,  they make sand, specifically, fracking sand to be exact.     As boring as that sounds,  sand,  or silica is a critical in the fracking process.  Fracking sand refers to sand and similar  materials that serve as “proppants” — which are blasted under pressure into a shale gas well along with large quantities of water and industrial fluids to stimulate gas production. Proppants are used to “prop” open the underground cracks from which natural gas is harvested during hydraulic fracturing.

The company is also a leading producer of industrial minerals,  whole grain silica, ground silica, fine ground silica, calcined kaolin clay and aplite clay.  They have 200 products in these categories and the variety of industries and applications served by U.S. Silica includes oil and gas, glass, chemicals, foundry, building products, fillers and extenders, recreation, industrial filtration and treatment, and testing and analysis.  In other words,  their products are also used in a number of industries outside of Oil & Gas

US Silica had an IPO back in February of this year and has been largely under the radar of major investment houses.  In looking at a current chart below,  the stock is bottoming around $10 and is forming a triple bottom in that range.   In addition,  the stock is currently at the lower end of its Bollinger band indicating there could be a bounce towards $12 in the next few weeks.    There are only 3 investment houses that follow the stock,  Merrill Lynch, Morgan Stanley and Dahlman Rose & Co and they have an average price target of $25 on the stock which expects a reasonable forward PE slightly below 10.     The current forward PE is below 5,  yes, you read that right,  below 5 and the company expects to earn 2.06 per share in 2013.   Based on its 30% yoy growth and recent catalysts like the deal with Berkshire Hathaway’s BNSF Railways could easily push 2014 earnings to $2.8 – $2.9 per share which corresponds to a PE closer to 3 (note that industry peers have a PE closer to 12-15).      The company recently opened an office in Russia (which recently had a large shale find) and has a focus on capitalizing on fracking sand needs all over the globe.    Expect to see more offices open near large shale finds.     The stock has been currently plagued by thin trading with 100,000 shares causing 5% swings in the stock,  but as institutional investors start to track this stock, we expect the volume to start aligning with other Bakken plays and providing stability to the stock.   At current levels, the stock is extremely attractive and we wouldn’t be surprised to see the stock be an easy double by the end of 2012 to $20. In addition, if the stock can maintain 25-30% growth rates, and its PE multiple shows some improvement,  the company could easily grow to a $2.5 billion company with $850 million in Revenue by 2015 and a stock price around $45-50.    We’ll continue to track this stock over the coming months to see if investors have finally caught on.


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