HCLP will soon be trading as HCR

[dan_s]

Hi-Crush Partners LP Unitholders Approve Conversion to a C-Corporation to Be Named Hi-Crush Inc.
4:19 PM ET 5/22/19 | GlobeNewswire

Hi-Crush Partners LP Unitholders Approve Conversion to a C-Corporation to Be Named Hi-Crush Inc.
-- Conversion expected to enable further diversification, enhance growth potential and expand shareholders' rights
-- Hi-Crush Inc.'s common stock to begin trading under the ticker symbol HCR on the New York Stock Exchange on June 3, 2019

HOUSTON, May 22, 2019 (GLOBE NEWSWIRE) -- Hi-Crush Partners LP (NYSE: HCLP), "Hi-Crush" or the "Partnership", announced today that unitholders approved the proposed Plan of Conversion (the "Conversion") at the Special Meeting of Unitholders held on May 22, 2019.

Pursuant to the Conversion, after the market close on May 31, 2019, the outstanding common units representing limited partner interests in the Partnership (the "Units") will each be exchanged for one share of common stock, par value $0.01 per share, (the "Common Stock") of Hi-Crush Inc. (the "Corporation"). Unitholders will receive, in exchange for their Units, 100% of the Common Stock to be outstanding immediately following the Conversion. Beginning on June 3, 2019, the Corporation's Common Stock will be listed on the New York Stock Exchange under the symbol "HCR". As of May 20, 2019, there were 101,105,766 Common Units outstanding, and upon completion of the one-for-one conversion, Hi-Crush expects to have the same number of Common Shares outstanding.

"We thank all unitholders who voted and appreciate the overwhelming support we received in favor of Conversion," said Robert E. Rasmus, Chairman and Chief Executive Officer of Hi-Crush. "The Conversion remains critical to the future success of Hi-Crush, enables diversification and enhances growth potential, while better aligning our corporate structure and evolving business model. The conversion to a C-Corp will also streamline corporate governance, delivering benefits to our shareholders through enhanced protections and rights commonly associated with the traditional structure. In addition, we believe that the Conversion will increase Hi-Crush's access to, and lower the cost of, capital through an expanded field of potential investors."

Following completion of the Conversion on May 31, 2019, the business currently conducted by the Partnership will be conducted by the Corporation, with no change to operating management or the board of directors.

About Hi-Crush

Hi-Crush is a fully integrated, strategic provider of proppant and logistics solutions to the North American petroleum industry. We own and operate multiple frac sand mining facilities and in-basin terminals, and provide mine-to-wellsite logistics services that optimize proppant supply to customers in all major oil and gas basins in the United States. Our PropStream(R) service, offering both container- and silo-based wellsite delivery and storage systems, provides the highest level of flexibility, safety and efficiency in managing the full scope and value of the proppant supply chain. Visit HiCrush.com.

[cmm3rd]

Dan,

Below are excerpts from investor comments to HCR's most recent quarterly call. Bottom line: apparently there is concern over the company's ability to meet its bond covenant, such that a restructuring of some sort will have to occur, putting common shareholders at risk. Their 9.5%, $450mm bonds due 8/1/26 (CUSIP U4322HAA0) most recently traded at 66.1 cents on the dollar and carry a Moody's rating of B3 (which does not inspire confidence).

What is your current view as to whether HCR will survive without wiping out common shareholders?

Thanks.

First, forget about 2018. The past two quarters this company has generated EBITDA of 16.2mm and 10.2mm with negligible DCF. The outlook for next quarter is flat pricing and a slight uptick in volume. Personally I don't see things getting better anytime soon looking ahead as any pricing recovery will quickly be met with new in basin supply as there are no barriers to entry.

Anyway, lets be generous, and say this company can achieve a quarterly run rate of $20mm of ebitda...or $80mm annually. That would equate to a leverage ratio vs their 450mm of debt of 5.6x. (FYI I believe the covenant on that bond is 3.25x...which is trouble coming soon.) With their bond carrying annual interest of around $43mm....and the company needing to spend about $20-25mm of annual maintenance capex....there is only going to be about 10-15mm of leftover free cash flow to pay down debt. (let alone almost zero chance to ever get a dividend again.)

The bottom line is the current level of profitability is going to end up in re-structuring for this company. If you are long any shares here you better have a well thought investment thesis that moving forward they can dramatically increase their volumes while at the same time also receiving a nice bump higher in average prices. Personally I just don't see it with this not being a good industry...buying this now reminds of buying the upstream MLP's back in 2015 as they were coming down from $20 bucks a share to $2.50 per share on their way to $0 per share. I will remain on the sidelines with zero position in any sand stocks.

For HCLP specifically, the one saving grace is their debt is termed out to 2026...so the comparison to the upstream MLP's is a bit unfair as those entities mostly also had significant first lien debt that wanted out and pushed them under earlier than the unsecured maturities and hedging profiles might have indicated at first glance.

That said, that covenant (which of course can be adjusted) will start to come into play unless these guys manage to get themselves back up into volumes closer to 3.0 from the projected 2.5-2.7 for next quarter....and get their contribution margin back up closer to $15 from this past quarter's $12.19.

Getting long here you are taking a lot of risk and really hoping the macro backdrop is going to be super strong.

[k1f]

<<What is your current view as to whether HCR will survive without wiping out common shareholders?>>

Thanks. After Dan's frequent reassurances about the co, it could be someone's largest position. Let's see
what Dan says.

[dan_s]

My forecast/valuation model for HCR starts with top line revenues that are below the current First Call revenue forecasts for the next three quarters. They are looking at another tough quarter, but unless oil prices remain depressed and upstream companies stop completing wells Q3 and Q4 should get better.

Keep in mind that in addition to increasing sand volumes being sold from Kermit 2, Hi-Crush continues to deploy more silos and container systems for sand delivery. To see how much profits can be made in the well-site sand management part of their business, read our recent profile on SOI.

Just remember that there is NO WAY that U.S. oil production can grow without a heck of a lot of frac sand. If Hi-Crush goes under, so will a whole lot of the new sand companies.

Now go to their March 31st 10-Q. On 3-31-2019 Hi-Crush had over $60 million in cash and a current ratio of 1.53. Nothing on the balance sheet looks like a company on the brink of bankruptcy.

In 2018, Hi-Crush generated $189.6 million in cash flow from operations. In Q4 and Q1 they generated enough cash flow to pay all of the interest on their debt and generate about $12 million more to partially cover there capex spending. Based on my forecast model, cash flow from operations will not cover capex this year, but the $60 million cash on 3/31 should more than cover the difference.

Per their May presentation: "Maintain strong liquidity position and flexibility; $115.6mm in liquidity exiting Q1 2019."

Do I think they will start paying dividends again? Probably not this year, but I do think it is their goal.

If you are worried about Hi-Crush, I recommend you get a list of questions and call Caldwell Bailey at 713-980-6270. He's their Investor Relations contact person. Caldwell is very sharp and good guy that answers all questions. I'm sure he has gotten every question that you can come up with already.
First:
1. Read their Q1 earnings release.
2. Read the transcript of their Q1 conference call.
3. Go through their most recent PowerPoint presentation. Take a hard look at slide 10.
4. Spend some time going through the 10-Q. Looking specifically at the parts about loans and liquidity. The Cash Flow Statement is the most important financial statement.
5. Download my forecast/valuation model and see if it looks reasonable. It is based on the guidance that they provided on May 8. They have a very simple and straightforward income statement.

Bottomline: If you don't feel comfortable owning HCR, sell it.

[cmm3rd]

Sorry, Dan, for not being more explicit in my question. Obviously there is nothing on the balance sheet (or elsewhere) to indicate that "the company is on the brink of bankruptcy." Imminent bankruptcy is not what I am concerned about. It is, instead, their ability to meet their bond covenant and the consequence if they fail to do so.

As the commenter I quoted made clear, there apparently is a covenant relating to the leverage ratio of their $450 mm debt requiring it to be no more than 3.25; and, at an annual ebitda run rate of only $80 million, the ratio would be 5.6.

Since you apparently are unconcerned about any possible default (you would have said so if there were such a concern), either the commenter is incorrectly analyzing things, or he is misinformed (e.g., maybe the ratio doesn't have to be 3.25 or less, or maybe it is adjustable by HCR at will, or maybe a violation of the covenant would not be grounds to accelerate the debt, or maybe and $80 million annual ebitda going forward is unrealistic).

I'm just looking for whatever the commenter is missing on this issue and that you obviously have figured out to your satisfaction.

Thanks.

[dan_s]

Go to Hi-Crush's website and then pull up the most recent 10Q. On page 17 they discuss the Senior Notes. I don't see an the ratio requirement mentioned. Let us know if you do.

In the real world, debt holder don't want to call the debt on a company that they lend money to. They want to collect interest payments and Hi-Crush is definitely making enough cash flow to pay their quarterly interest.

If you are still concerned, contact Caldwell Bailey. I'm sure he can give you a better response.

[dave_n]

I just sold my Hi Crush. So it should start going up now...

[cmm3rd]

The 10Q contains only a brief discussion of the senior notes, noting that it is accompanied by an indenture containing customary covenants.

Issuance of the notes is said to have occurred on 8/1/18. An 8-K issued on 8/2/18 contains, as an exhibit, the Indenture, which includes a section for Covenants. The covenant section is very technical, using terms with which I am unfamiliar (I have no accounting training), and also very long. My uneducated, cursory review yielded nothing about leverage, but I could easily have missed language that could amount to such.

I have sent a detailed email to Caldwell and will share any response.

At the last EPG presentation given by Laura Fulton, I asked a question from the floor about post conversion leverage, and her reply was that their target was about 3x, reducing it over time. I followed up with her 1:1 after the presentation and did not hear anything that caused me to think that there could be a problem with the covenants, though I did not expressly ask about them.

[cmm3rd]

In the real world, debt holder don't want to call the debt on a company that they lend money to. They want to collect interest payments and Hi-Crush is definitely making enough cash flow to pay their quarterly interest.

Was Gastar in the "real world"?

[dan_s]

Good point. Gastar screwed up by not selling their Utica assets when they could have gotten $200 million for them. Instead they waited until they got into a bind and were forced to sell their "core of the core" Utica assets for $80 million.

In the real world debt holders seldom win by forcing a company into Chapter 11 because the lawyers drag out the process and end up being the only winners. With Hi-Crush's senior debt not due for several years, as long as they keep paying the interest the debt holders should be happy.

If you really think Hi-Crush is heading down the Chapter 11 path you should sell it. Go to their office here in Houston and speak to them face to face.