NEW DIRECTIONAL CALL PLAYS
Emerge Energy Services LP - EMES - close: 109.36 change: +0.35
Stop Loss: 104.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below
Why We Like It:
The shale energy rush in America continues. Widespread hydraulic fracturing wells means big demand for sand. The process of hydraulic fracturing or "fracking" happens deep underground. Oil and natural gas drillers reach deep into the shale formation. Then they pump tons of water and proppants (usually sand) into the formation to fracture the rock and allow the oil and natural gas to escape and be pumped up to the surface.
Drillers use sand to prop open the tiny cracks in the shale rock formation, which allows for a better flow and larger output from the well. The demand for fracking sand is expected to grow +10% a year for the next 8 years. Drillers have figured out how to boost their production. Instead of fracturing the well just once they could do it up to 40 times. The amount of proppant used has jumped from 2,500 tons to 8,000 tons per well.
According to the EMES website,
Emerge Energy Services is a diversified energy services company that operates in two key segments of the energy industry: Sand Production and Fuel Processing and Distribution. Through its subsidiaries, Emerge Energy Services provides critical products and services to both the upstream and midstream energy segments.
Emerge Energy Services' sand subsidiary produces silica sand that is a key input for the hydraulic fracturing of oil and gas wells. While the Company is able to produce sand suited for the stimulation of both oil and gas wells, the Company has developed a strong reputation in the industry for producing sand that meets the strict requirements for use in oil wells.
Emerge Energy Services' Fuel Processing and Distribution ("FP&D") segment is primarily focused on acquiring, re-refining and selling transportation mixture ("transmix"). Transmix is received by the business from a number of common carrier pipelines that include the Explorer, Plantation, and Colonial pipelines, as well as via truck and private pipeline from independent refinery and terminal operators. Additionally, the FP&D division includes wholesale, terminal and biodiesel operations.
EMES last reported earnings on May 5th. It was their Q1 results, which came in at 77 cents a share. Wall Street was expecting 69 cents. EMES' revenues soared +80% to $274 million, surpassing estimates of $261 million.
EMES' Chairman of the Board said it was the company's strongest quarter as a public company. The Chairman also said,
"even with an industry wide shortage of railcars, we sold a company record 882,000 tons of sand, while our fuel division continues to outperform our expectations."
Analysts have forecasted EMES' 10-year earnings growth at 33%.
The company is investing over $100 million into two new sand mines that are expected to be ready for production by the end of next year. This will add 5 million tons of sand capacity, which would make EMES the largest fracking sand producer in the country.
I will note the stock's gap down on June 20th. That was a reaction to a secondary offering of 3.5 million units at $109.06 a share. Fortunately there was no follow through on the drop and shares of EMES have been drifting higher. Currently shares are hovering just below resistance at $110.00.
We are not setting an exit target tonight but the Point & Figure chart is forecasting at $133 target. More than one Wall Street firm has a $120 price target on EMES.
Tonight we are suggesting a trigger to open bullish positions at $110.25.
Investors should note that shares of EMES can be volatile. We love the story and the bullish outlook but I would probably label this an aggressive, higher-risk trade due to the stock's volatile moves.
Trigger @ $110.25
- Suggested Positions -
Buy the Sep $115 call (EMES140920C115) current ask $6.40
Option Format: symbol-year-month-day-call-strike
Entry on July -- at $---.--
Average Daily Volume = 586 thousand
Listed on July 15, 2014