Things haven't quite gone so smoothly for shareholders of U.S. Silica Holdings (NYSE: SLCA) and Tellurian (NASDAQ: TELL) since the start of 2017, although for very different reasons.
Shares of the frack sand leader have fallen 82% due to changing market dynamics and unrelenting pressure on margins. Meanwhile, the liquefied natural gas (LNG) exporter-to-be has seen its stock fall roughly 29%, but mostly due to share dilution necessitated by its slow-and-steady march toward building a massive export terminal along the U.S. Gulf Coast.
While both stocks are priced accordingly as a result of those struggles, and both companies face headwinds, investors have reasons for optimism for each business. Here's why they're two of the top stocks to buy for less than $10.
Image source: Getty Images.
Frack sand today, cool roofs tomorrow?
U.S. Silica owns a leading share of the frack sand market, but that has hardly helped the company's case with investors. Sand is pumped into tight oil formations to keep fractures in the rock open and allow crude oil and natural gas to rise to the surface, but oil and gas markets have proven volatile.
Preferences have shifted from Northern white sand trucked in from Wisconsin to local brown sand mined in Texas, which has made northern mines less valuable and tanked average selling prices (ASPs). Meanwhile, pipeline bottlenecks have resulted in many drilled but uncompleted (DUC) wells, which doesn't help sand suppliers, as steady purchases only come when wells get completed.
Those shifting market dynamics have forced the sand industry to consolidate and diversify. U.S. Silica has done that by focusing on higher-margin last-mile logistics serving oil and gas customers and strategically building out industrial applications of its sand and silica reserves, such as solar-reflecting white asphalt shingles for cool roofs, which are increasingly being mandated by states for energy conservation initiatives. It's starting to work, but Wall Street hasn't been so patient.
Oil and gas segment revenue
Industrial segment revenue
Industrial ASP per ton
Oil and gas ASP per ton
Data source: SEC filing. YOY = year over year.
Despite a poor showing for frack sand sales, U.S. Silica reported 10% year-over-year revenue growth from its oil and gas logistics services. Surging industrial segment revenue reduced exposure to oil and gas markets, which went from contributing 85% of total revenue in Q1 2018 to just 69% in Q1 2019.
Increasing diversification from high-margin industrial products should continue to make the business more resilient and more profitable in the coming years. Additionally, low margins could push many smaller, less efficient producers out of the market. On the full-year 2018 earnings conference call, CEO Bryan Shinn quipped that companies controlling as much as 20% of white sand production were "hanging on by their fingernails at this point." Shutting down that excess supply would increase ASPs and lift profits for U.S. Silica, just as its industrial segment starts to drive the bottom line.
Image source: Getty Images.
A cash cow in waiting
Tellurian is a speculative stock with a lot of intrigue. The company doesn't have any substantial operations today, but is instead working toward building an integrated natural gas production, pipeline, and export business. The vision centers on the Driftwood LNG export terminal, which is expected to sling 4 billion cubic feet per day of natural gas from the American Gulf Coast into international markets. That would make it one of the largest LNG export terminals in the United States.
There's just one catch: Driftwood LNG only exists on paper right now. To be fair, management has executed on its strategy to date. Tellurian has also received all regulatory approvals required to begin construction on the site. The company just needs to make a final investment decision, which requires additional supply agreements and equity partners in the project.
That said, Tellurian expects to make the final investment decision and start construction in 2019. Investors can have confidence in that timeline after seeing Total SA intends to invest $500 million in the project, commit to purchasing up to 333 million cubic feet per day, and make a $200 million equity investment in Tellurian once the final investment decision is made.
If all continues to go according to plan, then Tellurian expects to own 49% of the integrated Driftwood project when the first export cargo ships in 2023. That equity stake could generate up to $2 billion in annual cash flow once the project is fully ramped up, although that milestone will take years to achieve. Nonetheless, successful execution could create a healthy windfall for shareholders, especially after considering the parallels to Cheniere Energy. Investors just have to remain patient.
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