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Swimming Upstream

By Elliott H. Gue on Dec. 11, 2013

Emerge Energy Services LP operates two business segments: mining specialized silica sand for use in hydraulic fracturing, and fuel processing and distribution.

Oil and gas producers use American Petroleum Institute (API)-grade sand as proppant in oil and natural gas shale wells; these crush-resistant granules prop open the fissures that hydraulic fracturing creates in the reservoir rock, enabling the hydrocarbons to flow into the well.

As upstream operators hone their production techniques, many have discovered that increasing the amount of proppant and increasing the number of fracturing stages on each lateral segment help to improve a well’s productivity. (We discussed these trends at great length in the May 31 article, Bucking Tradition.)

Units of Hi-Crush Partners LP (NYSE: HCLP), a pure play on booming demand for fracturing sand, have soared by 55.5 percent since we spotlighted the stock at the end of May. Over the same period, the Alerian MLP Index has eked out a meager 3.2 percent gain. Emerge Energy Services’ stock has also fared well since its initial public offering, surging by 132 percent.

Strong year-to-date returns aren’t the only qualities that the two master limited partnerships (MLP) share.

Both companies own and operate mines in Wisconsin, the state that boasts the largest reserves of API-grade silica sand. Bore tests conducted by Emerge Energy Services suggest that its reserves contain a higher percentage of the coarse grains that oil producers prefer; the high quality of its silica sand reduces the expense of sorting out fine-grained silica sand.

Like Hi-Crush Partners, Emerge Energy Services also owns lengthy rail spurs that can accommodate unit trains–long strings of railcars dedicated to a single shipper and enjoy priority access to a railroad’s network, reducing shipping times and costs.

The newly minted MLP’s mines connect to Union Pacific Corp (NYSE: UNP) and Canadian National Railway Company’s (TSX: CNR, NYSE: CNI) rail networks, ensuring that proppant producer can deliver its wares to the major unconventional oil and gas plays in the US and Canada.

However, two major differences make Emerge Energy Services a far riskier investment than Hi-Crush Partners: Emerge Energy Services pays a variable distribution and sells a significant portion of its output on the spot market.

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