WASHINGTON, August 28, 2012 – Things continue to get interesting in the specialty sand patch. In addition to a few minor players, one major player, U. S. Silica (SLCA) went public earlier this year, and another new kid on the block—Hi-Crush Partners LP (HCLP), offered its IPO a bit earlier this month.
Headquartered not too far from Washington, DC, in Frederick Maryland, and with a major mine across the Potomac River in relatively nearby Berkeley Springs, West Virginia, U.S. Silica is a real, longstanding sand mining company with a good business track record whose IPO was well received but whose stock has been in the doldrums lately.
Hi-Crush, on the other hand, after being priced down for its IPO, got a nice pop and is still handily ahead of its offering price, sitting at $19 and change per share as of today’s close.
The more aggressive pricing of Hi-Crush may have had a little something to do with this. Unlike the unrelated Facebook debacle, Hi-Crush’s less greedy offering syndicate left a little something in the stock to make new investors happy. But another reason for Hi-Crush’s success might just be its upcoming dividend. It will allegedly be in the 7-9% range, depending on the stock’s price at the time, with the first dividend to be distributed sometime this fall. Hi-Crush Partners noted in its prospectus that it expected to pay a minimum quarterly distribution of 47.5 cents per common unit and subordinated unit to investors, although those usual prospectus weasel phrases don’t flat out promise this rate of return.
In any event, in this bizarre, thinly traded, and rather volatile market, a juicy dividend generally helps a stock price hold up under downside onslaughts. Because new Master Limited Partnerships or REITs often can’t publicize their likely first dividend number in advance, however, most of these kinds of IPO offerings tend to sink after they’re listed.
Hi-Crush’s IPO, however, did not take this fairly predictable track, possibly because it mentioned its likely yield number up front, more or less. That leads us to what’s probably reason number two behind HCLP’s opening pop: With only one brand new mine, located in Wisconsin, Hi-Crush is also what investors call a “pure play” in what might be the hot investing idea of the fall. The sole product of HCLP’s mine—a premium monocrystalline sand—is perfect for deployment in the fracking process. (See photos from HCLP’s prospectus at the top of this article.)
As we wrote in our earlier U.S. Silica article, the actual term “fracking” is shorthand for “’hydraulic fracturing,’ and it refers to the rock splitting procedure increasingly employed to extract America’s vast, newly discovered deposits of oil and natural gas. Despite all the misleading nonsense we read about in the newspapers, specialized sand products are the primary additives to fracking fluids, which generally consist of 98-99% water.” (For more information on this needlessly controversial process, please follow the link to our U.S. Silica article.)
Such sands are known in the industry as “proppants,” so-named for the quality they possess that enables them to help keep the fractured rock formations “propped” open so that gas and/or oil can be extracted horizontally.
Fracking sand is all that Hi-Crush currently produces at its single mine. U.S. Silica, a much larger company, has many different mines producing a variety of specialty sands used not only in fracking but in many other applications including glass and fiber optic cable. Since SLCA’s output is more diverse, it’s entirely possible that many investors are missing the fracking connection here. That said, if investing in a fracking connection is your bag, and if you need to make a choice, HCLP is what’s known as a pure play, and its alleged big dividend likely can’t hurt either.
Fracking plays of all kinds, however, may very well be held hostage to the fall election cycle here in the U.S., not to mention the risk of constant attack by eco-fanatics who’ve already decided in advance that fracking is a threat to the existence of the planet. In short, if Obama wins a second term, the currently relatively robust fracking action in the U.S. might very well be stifled either via damaging new rules from the EPA, or via this president’s favorite Congress-skirting maneuver, the executive order.
But, should Mitt Romney win the White House, it could very well be full speed ahead for stocks with a stake in the fracking process. We’ll have to wait to find out in early November.
But there’s yet another new wrinkle in the fracking universe. We discovered, roughly a week ago, the existence of a tiny, publicly traded company that claims to have developed a “dry fracking” procedure that allegedly avoids the real or imagined issues that surround water- and sand-based fracking. The company’s name: Chimera Energy Corporation, symbol CHMR. (Not to be confused with another Chimera, CIM, a high-yielding REIT that we rather like but that’s currently having problems with its accounting data.)
According to CHMR’s web site, the company “acquires, develops, licenses and sells new energy technology and products that are designed to profit from the current domestic shale oil boom.” In addition to competing with SLCA and HCLP, CHMR “competes in an industry sector that includes Chesapeake Energy Corporation (NYSE: CHK), Continental Resources, Inc. (NYSE: CLR), Heckmann (NYSE: HEK), Exco (NYSE: XCO) and Xylem (NYSE: XYL).” XCO and XYL are small companies, as is water treatment company HEK, occasionally touted on Jim Cramer’s “Mad Money” program on CNBC. CHK, a highly leveraged and controversial major producer of oil and gas is already well known to most investors.
We are frankly a little skeptical of CHMR’s claims to possess a superior, safe fracking technology. Further, to the best of our knowledge, it hasn’t been deployed yet in a massive way, so the jury is still out. But CHMR’s concept is interesting. They talk about it here in their own video, which, while blatantly self-promotional as one might expect, is also interesting and informative as far as it goes:
Sounds interesting, but investors should be wary. CHMR is what’s known in the trade as a “penny stock,” in this case, one that closed today at less than a dollar, 42 cents to be exact. Further, it’s traded in a treacherous patch in the stock market universe, the “over-the-counter bulletin board” (OTCBB). We suppose that an occasional big-time jackpot can happen on the OTCBB, but in our long experience, that sort of thing is rarer than hitting a massive payout by feeding quarters into an out-of-the-way slot machine in Vegas. So we’ve taken a look here but will stand aside.
Our conclusions: The Prudent Man has contemplated a position in SLCA for a while, but hasn’t yet jumped, given the stock’s steady meander downward. However, he did get in on a small position in HCLP on the IPO for fun and for the alleged dividend. We’ll let you know how this turns out. If there is interest, investors are best advised to wait for a pullback, which might occur in September after HCLP has logged a month of shelf life.
Hopefully, any return that folks might get on HCLP will better than the hit we took during our brief (detailed in our other column), tragicomic dalliance with Facebook (FB). The fall elections, as we mentioned, will likely influence the ultimate outcome in HCLP. Only a genuine, obvious profit, however, will lift the still sinking shares of Facebook.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He recently took a small position in HCLP via that firm’s August IPO.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
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