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This Stock Will More Than Double in the Medium-Term

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Crude oil prices are less than 50% of their 2014 levels but the US shale oil drillers continue to add oil rigs and increase their production. As a result, the Energy Information Administration expects the US crude oil production to reach 10 million barrels per day in 2018. We want to be a part of this shale oil boom.

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Key highlights

  • We want to take part in the shale oil boom through FMSA
  • Frac sand use per well has more than tripled in the last few years
  • US oil producers are adding rigs at a fast pace, which is good news for frac sand companies
  • The demand is expected to grow further until 2022
  • FMSA is a turnaround story and is highly rated by the analysts
  • We believe that the selling is overdone and the stock is ripe for a sharp rebound
  • In the medium-term, FMSA can turn into a multibagger

A direct shale oil play might not be the best way because crude oil prices are stuck between the range of $40 per barrel on the lower end and $55 per barrel on the upper end.

If price drops below $40 per barrel, OPEC jawbones prices higher announcing various measures to curtail supply. On the other hand, as soon as prices cross above $50 per barrel, the US shale oil drillers start drilling at a frantic pace, keeping prices under check.

The producers are therefore unlikely to make a hefty profit. Hence, we shall look for companies that supply items to the shale oil drillers. In this group, we like Fairmount Santrol (FMSA). At the current levels, the stock is a good buy with low downside risk and a huge upside potential. FMSA can turn into a multibagger in the medium-term.

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About FMSA

FMSA mainly supplies high-performance sand and sand based products that are used in the oil and gas exploration industry. They also cater to foundry, building products, glass and sports and a few other markets. However, their main income comes from their sand business.

What is frac sand and why is it used by the shale oil drillers

Frac sand is a high-purity quartz sand that has uniform round grains. It is a tough material, hence, is used by the petroleum industry in the fracking process while producing oil and natural gas from rock formations.

In order to free the oil and gas trapped inside the shale formations, frac sand is pumped into the wells along with water mixed with chemicals and thickening agents. This creates fractures in the rocks through which oil and gas flow into the well.

In this article, we shall also use the term proppant for frac sand.

How much frac sand is used in each well

In 2014, in the Bakken, producers used about 400 pounds of proppant per foot of completed hole. However, in 2017, the proppant use is expected to skyrocket to 1,500 pounds per foot of completed hole. Similarly, in the Permian, in 2014, operators used 800 pounds of proppant per foot, which has increased to 1,900 pounds of proppant per foot in 2017.

As technology advanced, the producers observed that by increasing the proppants, they were able to increase the access to the reservoir resulting in higher oil and gas production.

As a result, the overall consumption of proppant has increased over the past four years and is likely to grow further till 2020. The chart above confirms that the demand for frac sand is here to stay and is only likely to increase further. But, with crude oil prices ruling at less than half of 2014 levels, is the demand sustainable?

US shale oil producers are adding oil rigs

The US shale oil drillers have been undeterred by the range bound crude oil markets. In fact, they have more than doubled the oil rig count to 765 in the week ended August 4, 2017, from the lows of 316 hit in end-May 2016. However, this is still way below the peak oil rig count of 1609, in October 2014.

Nonetheless, due to increased use of proppants per well, the total consumption of sand in 2017 is likely to overtake the peak consumption of sand in 2014, when oil prices were above $100 per barrel. Expectations are for the consumption to continue its uptrend for the next five years, though analysts don’t expect crude oil prices to reach $100 per barrel anytime soon.

Therefore, the visibility for demand is clear. But why do we like FMSA?

FMSA is a turnaround story?

We like the company because it is turning around for good. It has got its act together, reduced its debt and is likely to strengthen further as the year progresses.

In Q2 2017, the company had a net income of $0.05 per diluted share, compared to a net loss of $0.05 per diluted share in Q1 2017 and a net loss of $0.54 per diluted share in Q2 2016.

The company had a huge total long-term debt of $1 251.5 million as of September 30, 2014. However, after reducing its total long-term debt to $845.1 million in Q1 2017, FMSA has further reduced its long-term debt to $796.1 million in the latest quarter. Considering the cash and cash equivalents of $178.5 million, the total net debt of the company is $617.6 million as of June 30, 2017. The company wants to further reduce the net debt to $500 million to $550 million by the end of 2018. This is a positive sign confirming that the company is serious about strengthening its balance sheet.

In the latest quarter, the company has posted impressive growth on all fronts. When compared to the previous year’s quarter, the growth numbers are even more impressive. In Q2 2016, the company had a revenue of $114.2 million and a net loss of $87.8 million.

The company’s performance is improving every quarter.

Expectations of the company for the third quarter and beyond

The company expects to increase raw frac sand prices by $5 to $7 per ton in the third quarter of this year, assuming a constant mix. FMSA expects proppant demand to increase in 2018 to 100 million tons as the producers complete the drilled but uncompleted wells.

In order to capitalize on the increasing demand, the company will launch a capacity expansion at Kermit, Texas to cater to the Permian. They have also reactivated the Shakopee facility, which should begin full production by the end of Q3 2017. With these two facilities coming on line, FMSA’s annual frac sand capacity will increase from 11.9 million tons to a nameplate 15.6 million tons.

What do the analysts think about FMSA?

The consensus 12-month price estimate on the stock is $7.5, with forecasts ranging from $3.7 to $17. Even if the stock reaches the most conservative estimate, it will be a rise of 34% from the current levels.

What are the risks to our investment

No investment is without its risks. Here, the risk is on two fronts. If OPEC and allies don’t extend the production cuts beyond March 2018, crude oil prices can again fall to $40 per barrel. Sustained low prices will affect the drilling activity of the US shale oil producers.

Another concern is overcapacity. With the boom in frac sand demand, many companies are expanding their operations. Therefore, analysts expect the supply to overshoot demand, which will affect the pricing power of the companies.

What do the charts forecast?

The stock is in a free fall, since reaching a high of $13.12 in end-January. From its highs of the year, the stock is down a whopping 80%. We believe that the market has been too harsh and has priced in a very bearish scenario, which is unlikely to play out.

At the current levels, though the stock is in a water fall decline, we expect some sort of support to kick in soon. However, we would prefer to go for a staggered investment approach in this stock. We shall buy 50% of the allocation at the current levels and buy the remaining 50% over the next few weeks, once the stock stops falling and changes its trend from down to up.

This is a medium-term play; therefore, the investors should be ready to hold this stock for more than a year to realize strong gains in it.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 8 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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9 Comments

9 Comments

  1. gullyfoyle

    August 14, 2017 at 8:17 am

    thanks Rakesh this is a good summary. I don’t have the expertise to delve much further than the information presented here but the chart does indeed look like a bottomt to me. Thank you for putting it on my radar.

    I’d love to see more of this analysis. Crypto has become a crap-shoot right now and I think a lot of us should be diversifying out of bitcoin.

  2. gullyfoyle

    August 14, 2017 at 8:18 am

    * to specify more of this type of analysis mixing fundamental and technical of stocks with major upside and potentially little downside 🙂

    • Rakesh Upadhyay

      August 14, 2017 at 9:28 am

      Hello gullyfoyle….

      I am glad you liked the piece…..I shall try to search for more such stocks in the future…..

  3. tadej

    August 14, 2017 at 11:46 am

    on which platform i can buy this stock ?

    • Rakesh Upadhyay

      August 14, 2017 at 2:48 pm

      Hello tadej,

      The stock is listed on the NYSE. You can buy it from an account that allows you to trade on the NYSE. Any reputed stock market broker should do.

  4. Inverstor Clouseau

    August 14, 2017 at 10:57 pm

    Nice analysis. I like the mention of the downsides. This one is a buy and forget about it for a while stock.

    • Rakesh Upadhyay

      August 15, 2017 at 7:46 am

      Hello Inverstor Clouseau,

      Thank you. Yes, this should be a good investment over the medium-term.

  5. kyenneti

    August 14, 2017 at 11:04 pm

    Rakesh,
    Thanks for a very detailed post. Would love to see follow-up posts later to this recommendation.

    • Rakesh Upadhyay

      August 15, 2017 at 7:47 am

      Hello Kyenneti,

      Thank you.

      Yes, as and when there is any change in the fundamentals of either crude oil or the stock, I shall update on this recommendation.

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Trade Recommendation: Monero

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The Monero/Dollar (XMR/USD) pair ignited its uptrend on November 22, 2017 when it breached resistance of $150. The breakout attracted momentum traders, and that pushed the price to as high as $477 on December 20. In about a month, the market grew by over 218%. However, the pair was in extreme overbought territory at this level. Breakout traders used this opportunity to take profits.

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Faced with heavy selling pressure, the pair went as low as $151.26 on December 22. As market participants sensed that a higher low was in place, they bought positions, which sparked a rally that saw the the market reach $449.18 on January 15. Unfortunately, $449.18 was a higher low, and bears responded by sending the pair to as low as $150 on February 6. At this point, XMR/USD was back at its breakout price level. It quickly rallied since there was no more sellers.     

Technical analysis shows that the Monero/Dollar pair is creating a bullish higher low setup at $270. Bulls appear to respect this support level as the market has been consolidating around $270 for about a week now. This could be the base that launches XMR/USD to the resistance level of $415.  

The strategy is to buy as close to $270 as possible. Once bulls successfully claim this level, the pair will likely resume its march to our target of $415. The process may take a month.

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Daily Chart of Monero/Dollar on Bitfinex

As of this writing, the Monero/Dollar pair is trading at $276.12 on Bitfinex.

 

 

Disclaimer: The writer owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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2 votes, average: 5.00 out of 52 votes, average: 5.00 out of 52 votes, average: 5.00 out of 52 votes, average: 5.00 out of 52 votes, average: 5.00 out of 5 (2 votes, average: 5.00 out of 5)
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4.3 stars on average, based on 67 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Trade Recommendation: Litecoin

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The Litecoin/USD (LTC/USD) pair launched its bull run on December 1, 2017 when it breached resistance of $90. The momentum it carried was so strong that it went as high as $370.78 on December 19. In less than three weeks, the market grew by over 311%. This rapid growth was exploited by those who bought the breakout as they dumped positions.  

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As selling commenced, the pair went as low as $150 on December 22. On the same day, however, it closed at $248.38. The price action created a long wick under the daily candle’s body indicating the presence of buyers. This created momentum, which pushed the market up to $306.85 on January 6, 2018. Unfortunately for buyers at this area, the bears took control of the market, and sent it down to as low as $106.52 on February 6.

Technical analysis show that the Litecoin/Dollar pair broke out of a bullish reversal pattern when it went as high as $216.89 on February 14. The breakout was validated by heavy volume. More importantly, the pair appears to be in the process of creating a higher low at $190.    

The strategy is to buy as close to $190 as possible. Once bulls successfully defend this level, the pair will likely resume its uptrend and reach our target of $360. The process may take less than three months.

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Daily Chart of Litecoin/Dollar on Bitfinex


As of this writing, the Litecoin/Dollar pair is trading at $195.27 on Bitfinex.

 

 

Disclaimer: The writer owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3 votes, average: 5.00 out of 53 votes, average: 5.00 out of 53 votes, average: 5.00 out of 53 votes, average: 5.00 out of 53 votes, average: 5.00 out of 5 (3 votes, average: 5.00 out of 5)
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4.3 stars on average, based on 67 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Trade Recommendation: Zcash/Ethereum

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The Zcash/Ethereum (ZEC/ETH) pair ran out of steam on November 13, 2017 when it generated a lower high of 0.829034. Things went from bad to worse for the market when it broke support of 0.70 on December 9. The price action triggered the bearish head and shoulder pattern that validated the downtrend.

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With a reversal pattern in place, the market created a series of lower highs and lower lows. It eventually bottomed out on February 1, 2018 at 0.32924. In less than two months, the market lost over 60% of its value. While this decline might scare investors, it is actually a good time to buy positions.

Technical analysis show that the Zcash/Ethereum pair has achieved the target of the head and shoulders pattern that was triggered on December 9. It appears that other market participants have also taken notice as they bought positions as soon as the pair hit the target. The renewed momentum carried ZEC/ETH to as high as 0.5859279 on February 10. While the market dipped, it appears to be creating a bullish higher low setup at 0.48.    

The strategy is to buy as close to 0.48 as possible. If bulls successfully defend this new higher low, the pair will likely resume its climb to our target of 0.70. The process may take less than a month.

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Daily Chart of Zcash/Ethereum on Poloniex

As of this writing, the Zcash/Ethereum pair is trading at 0.49862928 on Poloniex.

 

 

Disclaimer: The writer owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 67 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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