Emerge Energy Services LP (EMES)
Posted: Wed Mar 12, 2014 5:25 pm
Merrill Lynch issued a new report on EMES. You can find my profile on the company under the MLP Tab. I was able to meet with the management team at the InvestFest Conference in Nashville. I was very impressed and I will be adding this one to our High Yield Income Portfolio. My profile does not do this company justice. We will be updating the profile in April and you will see a big jump in my Fair Value Estimate. - Dan
Maintain Buy; raising NTM distribution estimate and PO
We are raising our 2014 distribution estimate to $4.30 per unit for Emerge Energy
(EMES). This is above guidance of $3.80-$4.00 given our forecast for accelerating
frac sand demand growth (bullish news for HCLP also).
Potential pricing power for frac sand provides additional upside.
We forecast 79% capacity utilization for the 2.4mn tpa Barron, WI plant in
2014 vs EMES’ 70% implied assumption (57% in 3Q13). EMES previously
announced a 4Q13 distribution of $1.00 per unit, including $0.05 of distributable
cash flow reserved in 3Q13. Our PO increases to $50 from $42 assuming an 8.6%
yield, in line with the average since October 2013 when EMES announced its first
distribution and range of 7.7%-9.6%.
Frac sand market tightening
We calculate about a 15% increase in frac sand capacity from major players
between end of 2013 and end of 2014 vs forecasted average industry demand
growth of 20% yoy in 2014. We estimate 10-15% demand growth is reasonable
even under a flat rig count scenario. However, the US horizontal rig count has
improved 125 rigs, or 12% since July 2013. Moreover, some leading-edge E&P
companies are significantly increasing proppant usage (proppant/well), which may
provide further upside to demand. All told, we have an upward bias to current
pricing at the mine of $50-$60/ton.
NOTE: If the price of natural gas pushes over $5.00/mcf, I believe there will be an increase in drilling activity this fall. That will increase the demand for frac sand in an already red hot market. - Dan
Line of sight growth
With robust demand growth, we expect utilization at the Barron, WI plant to increase
from 57% in 3Q13 to about 90% by the end of 2014. This implies about an
incremental $20mn of EBITDA annually assuming gross profit of just under $30/ton.
A new wet plant at Sioux Creek is expected to come online in late-spring 2014. This
plant will feed the Barron, WI plant and reduce third-party purchases and operating
costs by $5-$9/ton. Utilization at the Kosse, TX facility is expected to increase from
20% to 33% given increasing demand for 100 mesh sand. Lastly, a new facility is
being evaluated for 2015.
Maintain Buy; raising NTM distribution estimate and PO
We are raising our 2014 distribution estimate to $4.30 per unit for Emerge Energy
(EMES). This is above guidance of $3.80-$4.00 given our forecast for accelerating
frac sand demand growth (bullish news for HCLP also).
Potential pricing power for frac sand provides additional upside.
We forecast 79% capacity utilization for the 2.4mn tpa Barron, WI plant in
2014 vs EMES’ 70% implied assumption (57% in 3Q13). EMES previously
announced a 4Q13 distribution of $1.00 per unit, including $0.05 of distributable
cash flow reserved in 3Q13. Our PO increases to $50 from $42 assuming an 8.6%
yield, in line with the average since October 2013 when EMES announced its first
distribution and range of 7.7%-9.6%.
Frac sand market tightening
We calculate about a 15% increase in frac sand capacity from major players
between end of 2013 and end of 2014 vs forecasted average industry demand
growth of 20% yoy in 2014. We estimate 10-15% demand growth is reasonable
even under a flat rig count scenario. However, the US horizontal rig count has
improved 125 rigs, or 12% since July 2013. Moreover, some leading-edge E&P
companies are significantly increasing proppant usage (proppant/well), which may
provide further upside to demand. All told, we have an upward bias to current
pricing at the mine of $50-$60/ton.
NOTE: If the price of natural gas pushes over $5.00/mcf, I believe there will be an increase in drilling activity this fall. That will increase the demand for frac sand in an already red hot market. - Dan
Line of sight growth
With robust demand growth, we expect utilization at the Barron, WI plant to increase
from 57% in 3Q13 to about 90% by the end of 2014. This implies about an
incremental $20mn of EBITDA annually assuming gross profit of just under $30/ton.
A new wet plant at Sioux Creek is expected to come online in late-spring 2014. This
plant will feed the Barron, WI plant and reduce third-party purchases and operating
costs by $5-$9/ton. Utilization at the Kosse, TX facility is expected to increase from
20% to 33% given increasing demand for 100 mesh sand. Lastly, a new facility is
being evaluated for 2015.