Back in 2014, crude prices were north of $100 per barrel and energy stocks were soaring.
Then there was the massive oversupply glut that sent oil prices crashing, and oil and energy stocks right along with them.
After falling to under $30 per barrel in 2016, oil prices have made a comeback and are now approaching $70. And with oil prices climbing, investors are again getting excited about energy stocks.
But not all stocks in the sector are created equal. Here’s why this stock is my energy pick right now.
U.S. Silica (NYSE: SLCA)
A few years ago, investors had bid up frack sand stock U.S. Silica (NYSE: SLCA) to an incredible high. Then when oil prices sank and demand for sand plummeted, SLCA was hammered alongside other sand suppliers.
Cut to today, and the company’s prospects look a whole lot brighter.
Shale producers have become a lot better at drilling, lowering their break-even oil price substantially which means drillers will better be able to manage the ups and downs of the market.
At the same time, drillers are using more sand per well, which has sent demand through the roof. And according to U.S. Silica, total demand for sand will be in excess of 100 million tons this year – 59% higher than the peak reached in 2014.
To meet the demand, SLCA has been ramping up production at several new sand mines and recently acquired EP Minerals, a company that specializes in products made from diatomaceous earth and other clays which U.S. Silica hopes will balance out its operations since it isn’t as closely tied to the oil and gas industry.
Currently, despite demand being high and cash coming in the door, the share price of SLCA is still near all-time lows. But according to U.S. Silica’s CEO, Bryan Shinn, the company is just scratching the surface of what it can deliver to investors.
Shinn believes that by next year, the company will be raking in unprecedented amounts of cash.
“We’re completing the previously announced doubling of our oil and gas volumes to meet customers’ going needs for frack sand, and we expect to start accreting cash in the second half of the year and quickly generate significant cash flows in 2019, delivering free cash flow yield approaching 15% next year,” Shinn said in the company’s last quarterly report. “We can deploy these substantial cash flows into M&A, paying down the debt or repurchasing shares, as we did in the second quarter as part of our new $200 million share repurchase program.”
With a cash flow yield around 15%, it’s no wonder why the average twelve-month price target for SLCA is $34.78, indicating possible upside of nearly 74% from the price as of this writing. Last month, Seaport Global Securities reiterated its Buy rating on the stock with a price target of $46 – 130% higher than the current price.