Stifel Downgrades Emerge Energy Services: Here's Why

• Emerge Energy Services LP EMES shares are treading a downward path, declining 70 percent in the last three months.
• Stifel’s Selman Akyol downgraded the rating on the company from Hold to Sell, while establishing a price target of $8.
• Suspension of the company’s distribution guidance and continued headwinds make investment in Emerge Energy Services unattractive, Akyol said.

Emerge Energy Services has withdrawn its distribution guidance for 2015 due to difficult market conditions in its Sand and Fuel segments owing to pressure on oil and natural gas prices. Although the company can “work through this uncertain commodity environment, we expect further downward pressure in EMES units,” analyst Selman Akyol stated.

The EBITDA estimates for FY15 and FY16 have been reduced from $80.4 million to $72.8 million and from $81.4 million to $59.6 million, respectively. The distribution estimates for FY15 and FY16 have been reduced from $2.65 to $2.35 and from $2.57 to $1.74, respectively.

The partnership’s debt covenant restricts distribution payments if the company’s trailing twelve month debt-to-EBITDA ratio exceeds 3.5x, Akyol said. Although the ratio is expected to improve in 2016 and the partnership may receive covenant relief from the banks, “we cannot rule out the partnership suspending its distribution,” the Stifel report added.

A lower pricing environment and increased competition continue to impact the performance of oil field service participants. Akyol commented that these issues, along with the uncertain comments made by the management make investment in Emerge Energy Services unattractive.