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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 money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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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: XMR/BTC Pair Throwback

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The XMR/BTC market (Monero) has been in downtrend on the hourly chart after posting a high of 0.0225 on December 6 and failing to hold critical support at 0.02. It went to as low as 0.0145 on December 8 before respecting RSI at 32 where it established support. The market used the new support level to rally and generate one higher low after the other. It recently attempted to reclaim support at 0.02 but was repelled by bears. Currently, the market is trading around 0.019 levels where it appears to have created another higher low.

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Technical analysis shows a large reversal pattern in the hourly chart that can take the XMR/BTC pair to 0.025. Even though the market failed to breach resistance at 0.02, investors should not see it as a failed breakout. What we’re seeing is a throwback which is a temporary retreat in price. Throwbacks are common in breakout plays and are often seen as a bullish signal. The next time the market attempts to breach 0.02 resistance, it has a much better chance of breaking it with conviction.

The strategy is to buy breakout at 0.02 with immediate stop at 0.0189.

Hourly XMR/BTC Chart on Poloniex

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As of this writing, XMR/BTC is trading at 0.018714 on Poloniex.

Summary of Strategy

Buy: breakout at 0.02

Target: 0.025

Stop: move below 0.0189 after buying breakout at 0.02.

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 money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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Trade Recommendation: FCT/BTC Bullish Reversal

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The market reach its all-time high back in June this year when FTC/BTC (Factom) reached 0.01463162. Unfortunately, the pair wasn’t able to sustain its momentum. It created a lower high several days later at 0.01066744 which signalled investors to take profits or cut their losses. As a result, the market tumbled and lost 93.17% in value from its all-time high. Such a tremendous loss would have created an atmosphere of despair in the market. Usually, that’s when the savviest traders come in.

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Technical analysis reveals that the worst is behind the pair. FCT/BTC touched support at 0.001 on the daily chart twice and respected it on both occasions. This is a good indication that the market has found a reliable support level. In addition, hourly chart shows that a large reversal pattern is underway. The pair may have retreated when it nearly touched 0.002, but it generated a new higher low in the process at 0.00156566. The throwback is a bullish signal that enables the pair to gather momentum to break resistance at 0.002.

The strategy is buy on breakout at 0.002. Breach that level and the market reclaims 0.003. Sell that level because it is a strong resistance.

Hourly FCT/BTC Chart on Poloniex

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As of this writing, FCT/BTC is trading at 0.001738 on Poloniex.

Summary of Strategy

Buy: breakout at 0.002

Target: 0.003

Stop: move below 0.0018 after buying breakout at 0.002.  

 

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 money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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Trade Recommendation: NZDJPY

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The daily chart gives us a sell signal. The price is at the possible reversal zone formed by the resistance level and SMA100. RSI is going to confirm price reversal in the overbought zone. The 4H gives us a trend reversal signal based on a bearish divergence. RSI confirms price reversal from the resistance zone. MACD supports downward movement. DMI allows opening short trades. Pending orders for sell should be placed at 78.70 with stop at 79.25 level. Profit targets are 78.25 and 77.60 support levels. Don’t risk more than 3% from your deposit in this trade.

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Market: NZDJPY
Sell: 78.70
Stop: 79.25
Profit Targets: 78.25 and 77.60

Disclaimer: The analyst does not have investments in NZDJPY.

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