美国二氧化硅和Covia：两个巨人的故事

U.S. Silica and Covia are the largest publicly-traded companies that serve both the US proppant and, separately, industrial raw materials and specialty products space.

Both businesses are under incredible pressure because of their exposure to the US oil field services sector.

U.S. Silica has evidenced more focus and execution advantages across multiple metrics, while Covia is struggling to show a single profitable quarter in 2019.

U.S. Silica (SLCA) and Covia (CVIA) are two behemoths in the oil and gas (O&G) proppants and industrial raw materials industries. The former has been around for decades and went IPO in early 2012 as fracking was picking up steam. The latter went public as a combination of Fairmount Santrol (initial IPO late 2014) and Unimin (not formerly public) in mid-2018.

It is worth noting that SCR-Sibelco NV (a Belgian public company) owns over 60% of Covia common stock (see this news release). Section 5.2 of the 6/1/18 Shareholder Agreement between Covia and SCR-Sibelco outlines an ownership cap of 80.1% of outstanding common stock unless otherwise approved by the independent directors.

Although U.S. Silica and Covia have industry-leading exposure in their respective industrial raw materials and specialty products (ISP) segments (reference their 2019 presentations below), both companies have experienced immense share price pressure due to their even greater exposure to the O&G/oilfield service sector (OFS) by way of their proppant businesses.

The following article will present a fair and balanced, apples-to-apples comparison of both companies' strengths, weaknesses, and fundamentals.

The two images below depict the North American footprint for U.S. Silica and Covia, respectively. These are large companies with dozens of operations across multiple states (plus Canada and Mexico for Covia).

U.S. Silica's footprint, pictured in the first image, includes references to Sandbox, which is the proppant service portion of their business. Covia's footprint is notably absent from a proppant service offering. This will be discussed in further within the O&G segment section.

(Source: U.S. Silica Slide Deck from Jeffries Industrial Conference, August 2019)

(Source: Covia Website)

U.S. Silica pays a token of $0.06 quarterly dividend (which, at current share prices, actually amounts to a >3% yield), while Covia does not pay a dividend. Immediately below are some other high-level comparables for both companies from Seeking Alpha's Key Stats Comparison and Key Data features. I downloaded and formatted the data for your ease of reference:

Peruse the following two industrial segment infographics and you could easily be led to believe that both U.S. Silica and Covia hired the same graphics designer.

(Source: Covia Q2 2019 Earnings Presentation)

Critically, these images fail to show exactly how individual parts of each company's ISP business compare with their competitor. To that end, I have created a chart of my own design that provides some illumination. Please note that I had to synthesize some categories and homogenize some range-format percentages to make the graphic a true comparison.

Using the comparison chart, we can easily see that nearly half of Covia's industrial segment focuses on glass, while U.S. Silica devotes only 4% to glass and no more than 23% of their overall industrial segment to any single category.

Industrial segment sales (TONS) and contribution margin (CM)/segment gross profit is the next piece of the puzzle. Here's how that stacks up for U.S. Silica and Covia:

(Source: SEC Filings. In its most recent 10-Q, Covia started reporting segment contribution margin once again and essentially said that segment gross profit and segment contribution margin are now being using interchangeably.)

As you can see, Covia sells about 3.5x more industrial tonnage than U.S. Silica; however, Covia also earns approximately 3x less margin per ton. I am not an industrial materials expert, but my educated guess as to the stark CM difference is directly related to Covia's dedication to ingredients for glass.

There seems to be very little news about Covia's industrial's segment, but when it comes to U.S. Silica, there is a relatively consistent string of news bites and mentions throughout the year. More than one comment on Seeking Alpha has referenced a June 22 Motley Fool article that highlighted the potential for cool roof granule technology as an "unlikely growth opportunity" that savvy investors should not overlook. Nobody should overlook the industrials business at U.S. Silica, but we should all be honest with ourselves about the diversification of the segment.

I would be remiss if I did not include the St. Louis Fed's PPI graph for industrial sand over the 1- and 5-year periods. You will note that the PPI keeps going up. U.S. Silica has demonstrated CM growth during these periods, while Covia's CM performance is less convincing. Higher CM means more profit and better chances at free cash flow growth.

With the exception of Covia's 2018 YoY performance, proppant sales have generally been growing for publicly-traded companies in the OFS space since 2016. US proppant demand in 2018 was estimated at 114,000 tons and the 2019 forecast is 123,000 tons. Rystad Energy updated their proppant demand forecast in February 2019 (see below). That Rystad presentation includes a myriad of other interesting data points including trends for proppant intensity, mesh size, proppant transportation needs, wells fracked, oil production, etc.

Given marginal US proppant demand growth between 2018 and 2019, increasing market share is a viable explanation for increasing proppant sales from U.S. Silica and Covia. Data from the first two quarters of 2019 evidence trending toward a ~10%+ increase in tons sold by both companies.

Source: SEC Filings

N.B. 1 - 2016, 2017, and 2018 contribution margin figures for Covia are based on adjusted gross profit calculated by the author. Covia will publish revised contribution margin figures for those years with their 2020 annual report (10-K).

N.B. 2 - As of Q2 2019, Covia switched to reporting segment contribution margin instead of segment gross profit. Fairmount Santrol switched to reporting segment gross profit in their 2017 annual report and stated the switch "

. Somewhat confusingly, the current switch by Covia to report contribution margin actually results in "an increase in reported segment profitability" because it excludes overhang from idled facilities (plants) and excess rail cars. This means better-looking contribution margin vs. gross profit figures for the O&G segment, but identical figures for the industrials segment which has full utilization of existing assets. Gross profit is essentially gross revenues minus the cost of goods sold. Thanks to Matt Schlarb from Covia's IR team for providing clarifications.

Just as with industrials, the Covia's O&G segment contribution margin is dramatically lower than U.S. Silica. Why? One major factor is that U.S. Silica made a bold choice in 2016 to acquire Sandbox logistics. By incorporating Sandbox, U.S. Silica not only supplies the proppant necessary for fracking but also provides an end-to-end logistics solution with a myriad of crews. In fact, U.S. Silica estimates their Sandbox unit commands over 25% of last-mile logistics market share based on comments from their CEO in May. All told, O&G contribution margin for U.S. Silica is a combination of profitable logistics services and raw materials vs. only raw materials for Covia.

The St. Louis Fed publishes PPI data for hydraulic fracturing sand (proppant). Unlike its industrial PPI counterpart, proppant has been in decline over the last 1- and 5-year periods, with some fluctuation over that time. Note the recent uptick between August and September. Q2 earnings calls from multiple companies informed us that NWS pricing is making a comeback; however, the overall pricing trend appears to be negative if we take a wider view.

While PPI data show historical trends, we can look once again to Rystad Energy and their proppant price forecast updated in May 2019. If Rystad has it right, whatever NWS pricing rebound we've heard about in 2019 is unlikely to manifest substantially improved contribution margin for proppant producers. If you compare both charts (granted the first is specifically Permian in-basin focused), you will note the pricing forecast is, as of 2019, almost identical and on a downward trajectory.

U.S. Silica and Covia are behemoths in both the O&G proppant sector and the industrial raw materials and specialty products sector. Beyond that, however, the companies are extraordinarily different. U.S. Silica averages significantly higher contribution margin per ton across the board and does so with fewer employees, less infrastructure (as estimated by depreciation and amortization in Q2 2019), and relatively flat SG&A as compared to Covia. You may wish to read my article An Objective Comparison of 5 Publicly-Traded Proppant Producers to review more detailed financial comparisons between these two companies. There you will find that U.S. Silica also bests Covia in terms of metrics like EBITDA, EBDA, etc.

While Covia's share price has collapsed further on a percentage basis vs. U.S. Silica, the latter is simply the best horse in this race. U.S. Silica has what appears to be an excellent executive leadership team with a clear vision for how they plan to move the company forward over the next few years, but I can't say the same for Covia.

The company presentations I referenced early in this article are quite telling from a vision standpoint. U.S. Silica clearly identifies a 3-5 year strategy and a goal for each segment. The best Covia can do is discuss improvements YoY and tell us that long-term executive compensation is tied to net debt reduction. Sorry Covia, you're just not up to par on the vision front.

Shares of both U.S. Silica and Covia are going to trade up and down with the price of oil because that's simply how it tends to work for OFS companies. You should not be surprised by wild share price swings up or down based on the movement in the rest of the industry. VanEck Vectors Oil Services ETF (OIH) helps keep a pulse on the OFS space, but heavy weighting (over 30% total) of Schlumberger (SLB) and Halliburton (HAL) shares distort the overall view.

Cheap can always get cheaper, but long-term investors should consider the value of U.S. Silica below the $8 (all-time low) threshold. I remain unconvinced that even ~$1.50/share adequately portrays the incredibly underwhelming performance for Covia.

Last but not least, please do your own homework before making your own investing decisions. This article is intended as a way to synthesize useful information, not as a recommendation for any particular stock.

I am/we are long SLCA, CVIA, HCLP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure:

The author makes frequent long and short equity and options trades related to public companies and ETFs in the oil and gas services space.