Hi-Crush Partners LP (HCLP), Baker Hughes Incorporated (BHI): Sand and Water, the “Picks and Shovels” of Hydraulic Fracturing

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All companies engaged in hydraulic fracturing need two basic things: water to fracture rock so as to release oil and gas, and proppants, particulates mixed in the water to keep the fractures open. The future looks bright for hydraulic fracturing as America’s demand for oil and gas relentlessly grows. Let’s see how investors can profit from water and proppants in the hydraulic fracturing world.

Total solutions for all your environmental disposal needs

Nuverra Environmental Solutions Inc (NYSE:NES) provides water and waste water disposal for drill sites employing hydraulic fracturing. In addition to water related services, Nuverra also handles so-called “restricted solid” (a.k.a. government regulated solid), fluid and hydrocarbon waste products. That is, Nuverra offers drillers one-stop shopping for all their environmental disposal needs. Nuverra also serves the general industrial market with similar waste removal or recycling services, but the bulk of its revenues come from its hydraulic fracturing related business.

This past quarterly report contained a mixed bag of results. The good news: revenues are rising, EBITDA tripled over the previous year, and the company forecasts better results for the back half of the fiscal year. The bad news: net operating losses widened compared to the previous year, and the company holds $567 million in debt compared to cash and equivalents of $18.2 million. Management acknowledges the first quarter of the year traditionally starts slow but maintains business will pick up as the year progresses.

One recent development of note involves the acquisition of a solid waste landfill in the Bakken oil play. As Foolish contributor, Matt DiLallo points out, this is a logical extension of Nuverra’s operations. Previously, Nuverra simply handled the logistics of removing solid waste; once the landfill comes online, Nuverra will also own the landfill that is the final resting place for this waste.

Sand, it’s not just for the beach

Hi-Crush Partners LP (NYSE:HCLP)

The homepage of Hi-Crush Partners LP (NYSE:HCLP) spells out its business best: “Hi-Crush Partners LP (NYSE:HCLP) is a pure play, low-cost, domestic producer of premium monocrystalline sand, a specialized mineral that is used as a proppant (“frac sand”) to enhance the recovery rates of hydrocarbons from oil and natural gas wells. Our reserves consist of Northern White sand … and [it] is highly valued as a preferred proppant due to its favorable physical characteristics.”

Hi-Crush Partners LP (NYSE:HCLP) offers investors an opportunity to profit from both distributions and capital gains. The distribution offers immediate income of around 8.4%. The stock, while expensive at about 25 times earnings, boasts an array of impressive metrics, including a return on equity of 81%, a return on assets of 24%, a profit margin of 59% and quarterly earnings growth of 75% year over year. Hi-Crush Partners LP (NYSE:HCLP) looks like it has profited well from the hydraulic fracturing boom and should continue to do so.

While Hi-Crush Partners LP (NYSE:HCLP) looks attractive in many ways, the company warrants a measure of caution. Currently, Hi-Crush and Baker Hughes Incorporated (NYSE:BHI) have locked horns in a legal dispute over Baker Hughes Incorporated (NYSE:BHI) backing out of a contract. The litigation expense and lost Baker Hughes Incorporated (NYSE:BHI) business will weigh on future earnings. To be sure, Hi-Crush Partners LP (NYSE:HCLP) learned from this experience and has modified other customers’ contracts. How much this dispute will impact earnings remains to be seen.

U.S. Silica Holdings Inc (NYSE:SLCA) also provides proppants to the oil and gas industry. Its other business activities include providing silica sand products to the glass, chemical and construction industries. The oil and gas segment provides about 60% of US Silica’s revenues.

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