Increase to Fairmount Santrol's Fair Value Estimate
The boost reflects our reconsideration of the North American frac sand market.
We are raising our fair value estimate for proppant supplier Fairmount Santrol (FMSA) to $5.25 from $3.50. This change is essentially unrelated to the March 9 earnings results, and instead reflects our reconsideration of the North American frac sand market. As we described in more detail in our recent note on frac sand peers Hi-Crush and U.S. Silica, we have revised upwards our forecast for midcycle in-basin frac sand pricing. This revision brings the spread between mine-gate and in-basin pricing to a level that more appropriately covers the costs to transport sand from Northern White mines to major oil and gas basins. As we forecast that Fairmount will sell over three fourths of its frac sand volumes in-basin by 2020, this revision has a very large impact on the company’s share price.
While the announcement of the company’s fourth-quarter results, combined with the sharp drop in oil prices, sparked a large sell-off for the shares of all proppant suppliers, we don’t think the results merit a revision in our outlook for either Fairmount in particular or the proppant market as a whole. While the 5% uptick in the company’s average proppant selling price perhaps disappointed investors, the company noted that many of its pricing increases did not take effect until midway through the quarter. Management also noted that the company has achieved about a 15% cumulative pricing increase from the third-quarter trough through today, which is right in line with our expectations. The two key factors that will sustain higher frac sand pricing--full absorption of logistics capacity and the re-entry of higher-cost Northern White producers--have yet to play out.
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Preston Caldwell does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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