I don’t think it is a stretch to say that most of us that follow energy markets agree on one thing: The U.S. shale oil and gas business may be down at the moment, but it isn’t going away. You cannot stuff the genie back in the bottle, no matter how hard you try. Oil and gas are finite resources and, even though there is a movement towards alternatives, fossil fuels are still essential to developed economies. Now that the reserves held “tight” in shale are considered recoverable, they will be recovered.
The problem with that for investors, of course, is that it isn’t about to happen tomorrow. We can nibble at some stocks that look undervalued in the belief that, when the day comes, they will appreciate considerably, but tying up a lot of money in investments that could well be static at best for some time is not a smart thing to do. That is why when I read the words “free option for investors” in reference to a company’s frac sand business in a recent research report from a large Wall Street firm it piqued my interest.
The prospect of an investment that offers the possibility of a return without a recovery in the fracking business, while also positioning to benefit from that when it comes, is an enticing one. That is what Eagle Material Inc. (EXP) offers.
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Eagle Products is a Dallas, Texas based building products company. Their core business is, and has always been in aggregates (sand and stone used in concrete), cement and wall boards. That exposure to sand and their geographic location made branching out into specialist sand for fracking operations an obvious move during the shale boom. That doesn’t look so smart right now as that business unit is losing money, but the company is already committed to expansion of their facility and will continue with that plan for one basic reason…they can afford to. Despite the struggling frac sand business they have positive free cash flow and are profitable.
Earlier this week Eagle reported earnings and they showed a profit equal to $0.75 per share. That missed expectations, but an upbeat guidance for the core building products business ex-oil resulted in the stock quickly recovering the initial losses and trading higher than it was going into the numbers.
Regular readers will be aware that my dealing room background has left me with one overriding rule, however. No matter how compelling the case for any investment, things can, and sometimes will, go wrong. Having a plan to account for that possibility in terms of a pre-set stop loss level is a smart thing to do, even for a potentially long term investment such as this. Fortunately the 52 week low close for EXP, just below which constitutes a logical level for stops, is at $69.80. That represents a potential loss of around 12 percent.
The upside to the trade is harder to figure. In the long term, it depends very much on when the shale oil business begins to recover and how fast that recovery is. In the shorter term, pricing and demand for wallboard, cement and other building products will determine the outcome. Most analysts have a positive outlook on those fronts, though, so EXP offers the chance for an investment in the recovery of fracking that could still offer a positive return while you wait. To my mind that is worth the risk involved.