The Past Year’s Hottest IPO Is …
The hottest initial public offering from 2013 isn’t a cloud technology stock, or a biotech company with a promising cancer drug.
The company behind the top-performing IPO in the past 18 months digs sand.
Through Friday, sand-mining company Emerge Energy Services LP has rallied 462% since its debut on May 8, 2013, for the biggest share-price gain since its IPO among companies that went public last year, according to Dealogic.
Emerge Energy has been enjoyed brisk profit growth, selling sand to the oil and gas drillers behind America’s shale energy boom.
In techniques such as hydraulic fracturing, drillers keep cracks in shale formations propped open with coarse-grained sand, allowing the oil or gas to through.
“We would credit it to strong industry fundamentals as well as the fact that our businesses themselves have performed well and generated significant cash flow and returns for investors and continue to look pretty strong,” Emerge Energy Chief Financial Officer Robert Lane said of the share performance.
The company is among a small handful of frac-sand producers that have gotten a warm reception from investors lately.
Peers Hi-Crush Partners LP and U.S.
Silica Holdings Inc. have both seen their shares climb more than 120% the past year.
“They’re a pure-play bet on that industry and that industry has taken off, sand being used for drilling,” said Hinds Howard, head of MLP research at asset-management firm CBRE Clarion Securities.
More broadly, shares of many of companies involved in U.S.
energy production have outperformed broad-market benchmarks.
Energy shares in the S&P 500 are up 6.4% this year, ahead of the overall index’s 3.8% advance. While much of the economy remains stuck in first gear, companies involved in the drilling of oil and gas in the U.S.
have posted healthy top-line growth and had sufficient demand to hire and build new facilities.
Emerge Energy’s dividend-liked distributions have been part of its appeal. For the first quarter, it paid out $1.13, up from $1 in the fourth quarter.
If annualized, the latest quarter’s payout would give Emerge Energy a dividend yield of 4.8%.
The company is structured as a master limited partnership, paying out much of its cash to investors each quarter.
But unlike most of energy MLPs, which tend to make very stable payouts, Emerge Energy’s distributions can vary widely from quarter to quarter because it doesn’t manage its business with an eye toward keeping them stable.
Emerge Energy trades at a relatively rich 28-times forward earnings, according to FactSet—not exactly the low multiple investors expect from dividend-oriented plays, many of which are seen as safe, defensive investments.
Analysts caution that Emerge doesn’t fit into the mold of defensive MLPs.
“Sand pricing and supply is the Wild West of the energy sector,” Baird analysts wrote in an April note to clients.
Baird has the equivalent of a “buy” rating on Emerge Energy and a price target of $92, arguing in the recent note that distributions could at least double next year.
But the analysts warned investors they should prepare for volatility driven by fluctuations in energy prices and uncertain supply-and-dynamics in the sand market.
CBRE’s Mr. Howard also sees risks with Emerge.
“If sand prices all of a sudden went down, their distribution and their unit price would go down,” said Mr.
Superior Silica LLC
Howard. “It’s designed to be volatile and it’s designed to be tied to production and prices of that stuff.”
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