Emerge Energy Services Is a Risky Investment
Emerge Energy Services (EMES) stock is down close to 90% in the past year as a result of the massive plunge in energy prices. The drop in oil and gas prices has hurt Emerge Energy's financial performance to a great extent, even though the company is trying to keep its financials in good shape by lowering costs and offering discounts to customers.
However, its sand segment has been badly hit by the underutilization of its railcar fleet and a weaker global commodity pricing environment. But, to counter the weakness, Emerge is optimizing its cost structure by avoiding non-core expenses and accelerating growth investments.
Gaining market share
The precipitous decline in the rig count has led to a drop in the pricing and demand of frac sand. But, several analysts estimate that the rig count is approaching a trough. Now, an expected improvement in the rig count will be a positive for Emerge as the company will see an increase in demand for its products.
More importantly, Emerge Energy is already expanding its market share in a weak pricing environment. During the first quarter of 2015, the company's sand segment market share grew when compared to the four major publicly-traded frac sand providers. However, the fact remains that Emerge's volume had declined 6.7% in the first quarter as compared to the fourth quarter of 2014, whereas the consolidated volumes for all four companies in the industry fell 12%.
In addition, Emerge Energy's sand segment revenue declined by 7.7% during the first quarter of 2015 as compared to the fourth quarter of 2014. In comparison, its key competitors had witnessed steeper revenue declines as Emerge Energy continued to shift its volume towards in-basin sales. Thus, it is evident that Emerge Energy is gaining market share over its rivals in the end market.
Fundamentals and conclusion
Overall, investors are advised to hold their position in Emerge Energy Services looking at its poor growth prospects in the current oil environment. The company has a negative PEG ratio of 10.15, indicating no growth but a decline in earnings as compared to the industry's growth average of 0.54. The trailing P/E and forward P/E ratios of 7.01 and 10.98, respectively, also signify a drop in earnings in the future.
Moreover, Emerge Energy is debt-burdened with a substantial debt position of $250 million as against a weak cash position of $3.24 million. This indicates that its growth prospects will be restricted by a weak cash position, while a debt equity ratio of 2.23 indicates that it will find it difficult to service its obligations in the future. Hence, investors should avoid Emerge Energy despite its positive moves.