Had email exchange with Caldwell Bailey at HCR IR.
His answers are pasted below.
In answer to your questions:
1. When our bonds were issued, a potential future conversion to a c-corp was contemplated and written into the indenture with a so-called “toggle”. No material changes occurred in the bonds or their terms or other aspects with the conversion.
2. One of the benefits of retiring our Term Loan B and our former revolver in August of last year, and issuance of the current senior notes, was the lack of any covenants in the senior notes. The Seeking Alpha message boards have got that just plain wrong. We are not in a position to violate any covenants on our debt, because they simply do not exist.
3. As to repurchase of debt or shares on the open market, we are not restricted from doing so, and this has been a topic we have heard a lot about from investors, particularly over the last few weeks. We are considering all options considering the trading position of our bonds and equity. [color emphasis mine]
The Indenture for the senior notes (Exhibit to an 8-K filed on 8/2/18), contains about 20 pages of covenants. So, I interpret his statement emphasized above to mean that while there are many covenants, none imposes a limitation on leverage or otherwise would require the company to do anything (or accelerate the notes) if the leverage ratio were to exceed any specified amount. (Whether any covenants would have such an effect is what I had asked.) So, apparently, the answer to my question is that the (very specific) statements by the SA poster to the contrary were just wrong.
As a corollary to the open market purchases just made by the CEO and CFO this afternoon, it would be nice if the company would make a few share repurchases, even if only symbolic in amount, if their finances would permit. Who knows, perhaps they are.
Today is reassuring. We need sand prices to allow their making a reasonable ROI and for their strategy of spending to structure the company for long term relationships with operators to be proven wise.
HCLP will soon be trading as HCR
Re: HCLP will soon be trading as HCR
Let me just remind all of you that you should be very careful with anything you read on Seeking Alpha. None of the articles are checked for accuracy. People that write for Seeking Alpha get "paid by the click" and it is well known that negative articles get a lot more clicks.
There are some very good people that write for SA and there are some very bad people that write for SA. Just double check all "statements of fact". Just think how easy it is to short a stock and then bad mouth it on SA.
Back to HCR:
> The Balance Sheet looks fine at 3-31-2019. $60 million of cash and a current ratio well over 1.
> They have more than enough cash and liquidity to fund this year's gap between cash flow from operations and their capex program.
> Even during the last two quarters Hi-Crush generated positive cash flow from operations of $1,461,000 in Q4 and $10,506,000 in Q1.
> Based on the guidance that Hi-Crush provided in May, they should generate approximately $12.5 million of positive cash flow from operations in Q2.
I have no idea what frac sand prices will be going forward, but I do know that the upstream companies MUST have a lot of frac sand to complete all of the wells needed to keep growing their production.
There are some very good people that write for SA and there are some very bad people that write for SA. Just double check all "statements of fact". Just think how easy it is to short a stock and then bad mouth it on SA.
Back to HCR:
> The Balance Sheet looks fine at 3-31-2019. $60 million of cash and a current ratio well over 1.
> They have more than enough cash and liquidity to fund this year's gap between cash flow from operations and their capex program.
> Even during the last two quarters Hi-Crush generated positive cash flow from operations of $1,461,000 in Q4 and $10,506,000 in Q1.
> Based on the guidance that Hi-Crush provided in May, they should generate approximately $12.5 million of positive cash flow from operations in Q2.
I have no idea what frac sand prices will be going forward, but I do know that the upstream companies MUST have a lot of frac sand to complete all of the wells needed to keep growing their production.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: HCLP will soon be trading as HCR
Your caution about Seeking Alpha is appropriate. While authors and commenters there often share useful information, there is also a lot of misinformation. As an example of the former, I found this site, https://fred.stlouisfed.org/series/PCU21232221232291 (hydraulic frac sand price history) there.
The debt covenant supposedly limiting leverage had been raised on SA not by an author, but instead by a commenter.
I raised it here hoping that you or another EPG member might have direct knowledge and chime in to address (refute or confirm) it. No one did. Eventually, after more digging, I found the Indenture, read it, then communicated with IR, and was able to resolve that issue. It turns out that the old (now repaid) debt did have such a covenant, but the new debt does not (which might help explain the 9.5% interest rate). (In retrospect, cautious investors might have interpreted that change as a yellow caution flag.)
I have no idea what frac sand prices will be going forward, but I do know that the upstream companies MUST have a lot of frac sand to complete all of the wells needed to keep growing their production.
Lack of focus on frac sand prices, and what drives price weakness (chiefly overcapacity, which was foreseeable), is the problem. Frac sand prices have plunged due to the combination of overcapacity of in-basin sand and operators having to live within cash flow, slowing completions and thus demand. Meanwhile, in recent years HCLP was claiming that what analysts and some investors were saying about looming overcapacity was exaggerated and not a major concern (that is what IR told me on multiple occasions). They then shifted the focus to the fact that they were going to sell "a lot of sand" and become a preferred provider (which, to their credit, they appear to have done). They were dead wrong, however, about overcapacity and prices, which has hurt their credibility. Only one analyst (John Watson from Simmons) was on the Q1 cc. Embarrassing.
HCR now has annual debt service of about $43 million. For 2019 they have guided Capex as follows: 2018 Carryover $30-35 mm, 2019 Maintenance $25 mm, 2019 Growth $30-40. So, in 2019, between debt service and capex, they have guided that they will spend about $136 million. If 2019 Ebitda were to repeat that of 2018 ($206 mm), that spending would be manageable. But apparently they will be lucky to hit $90 million in 2019, and CS, before dropping coverage, was predicting $90 million for 2020.
Meanwhile, they continue to spend on growth, confident, apparently, that overcapacity will rationalize and sand prices will recover. The current share price tells us what the market thinks about that.
Do they really have to spend another $30-40 million for Growth capex in 2019? Can any of that be deferred to a later year? I have put that question to IR.
While it is true that WS dislikes the sand industry right now (because of overcapacity and pricing), and has punished the entire sector, I would submit that HCR management additionally has a credibility problem because of their incessant spending into and through this period of overcapacity/price weakness. Yes, they are selling "a lot of sand." But they are spending more and more money to sell a lot of sand, while overcapacity is killing prices. Result is a fall in pps from $12-14 to sub $2, not a "fair valuation" in the $20s.
The notion that their goal is to restore the dividend in 2019 or 2020 is unrealistic. Doing so would be irresponsible given their overall situation. Only when sand prices recover (which will require rationalization of a lot of overcapacity and increasing rates of completion activity, which will take time) can they even begin to think about when they might be able to pay a dividend. Meanwhile, their shareholder base, formerly income-seeking investors, is likely gone.
Any investor in HCR necessarily must focus, and do so realistically, on sand prices. Not having had that focus, or being anywhere near accurate, has been very, very costly for HCR and its investors.
The debt covenant supposedly limiting leverage had been raised on SA not by an author, but instead by a commenter.
I raised it here hoping that you or another EPG member might have direct knowledge and chime in to address (refute or confirm) it. No one did. Eventually, after more digging, I found the Indenture, read it, then communicated with IR, and was able to resolve that issue. It turns out that the old (now repaid) debt did have such a covenant, but the new debt does not (which might help explain the 9.5% interest rate). (In retrospect, cautious investors might have interpreted that change as a yellow caution flag.)
I have no idea what frac sand prices will be going forward, but I do know that the upstream companies MUST have a lot of frac sand to complete all of the wells needed to keep growing their production.
Lack of focus on frac sand prices, and what drives price weakness (chiefly overcapacity, which was foreseeable), is the problem. Frac sand prices have plunged due to the combination of overcapacity of in-basin sand and operators having to live within cash flow, slowing completions and thus demand. Meanwhile, in recent years HCLP was claiming that what analysts and some investors were saying about looming overcapacity was exaggerated and not a major concern (that is what IR told me on multiple occasions). They then shifted the focus to the fact that they were going to sell "a lot of sand" and become a preferred provider (which, to their credit, they appear to have done). They were dead wrong, however, about overcapacity and prices, which has hurt their credibility. Only one analyst (John Watson from Simmons) was on the Q1 cc. Embarrassing.
HCR now has annual debt service of about $43 million. For 2019 they have guided Capex as follows: 2018 Carryover $30-35 mm, 2019 Maintenance $25 mm, 2019 Growth $30-40. So, in 2019, between debt service and capex, they have guided that they will spend about $136 million. If 2019 Ebitda were to repeat that of 2018 ($206 mm), that spending would be manageable. But apparently they will be lucky to hit $90 million in 2019, and CS, before dropping coverage, was predicting $90 million for 2020.
Meanwhile, they continue to spend on growth, confident, apparently, that overcapacity will rationalize and sand prices will recover. The current share price tells us what the market thinks about that.
Do they really have to spend another $30-40 million for Growth capex in 2019? Can any of that be deferred to a later year? I have put that question to IR.
While it is true that WS dislikes the sand industry right now (because of overcapacity and pricing), and has punished the entire sector, I would submit that HCR management additionally has a credibility problem because of their incessant spending into and through this period of overcapacity/price weakness. Yes, they are selling "a lot of sand." But they are spending more and more money to sell a lot of sand, while overcapacity is killing prices. Result is a fall in pps from $12-14 to sub $2, not a "fair valuation" in the $20s.
The notion that their goal is to restore the dividend in 2019 or 2020 is unrealistic. Doing so would be irresponsible given their overall situation. Only when sand prices recover (which will require rationalization of a lot of overcapacity and increasing rates of completion activity, which will take time) can they even begin to think about when they might be able to pay a dividend. Meanwhile, their shareholder base, formerly income-seeking investors, is likely gone.
Any investor in HCR necessarily must focus, and do so realistically, on sand prices. Not having had that focus, or being anywhere near accurate, has been very, very costly for HCR and its investors.
Re: HCLP will soon be trading as HCR - IR replies
Below are my questions (italics) and IR's (Caldwell Bailey) responses.
Capex. You guided Maintenance capex of $25 mm and Growth capex of $30-40 mm for 2019. Interest expense will be $43 mm. 2018 Carryover capex is $30-35 mm. Using midpoints, that is 25 + 35 + 43 + 33 = $136 mm in 2019 expense. That would be $46 mm over an optimistic $90 mm in ebitda. Where is that $46 mm going to come from (the facility?) without increasing leverage?
—At this point, we have spent all but 5-10mm of carryover capex, which is related to the Wyeville expansion, we have paid approx 21mm of the interest payments (February, with the next payment due in August), and growth capex is largely discretionary and not written in stone given that it would be used most likely on build out of silo systems or container crews.
At the same time, we had at quarter end about 60mm in cash and 55mm in ABL availability, and continue to generate margin. We do not plan to draw on our ABL to fund growth, and uses of cash will continue to be evaluated throughout the year.—
Growth capex. How critical is it to incur Growth capex of $30-40 mm in 2019? Can’t at least some of it be deferred until prices/margins improve?
Wouldn’t deferring all or some of it lower leverage and risk at a time when the market believes we are taking on too much risk (because sand prices are not cooperating)?
—growth of the business is to us at this point very important, but some growth could be deferred. Spending in the current environment is regularly re-examined—
I understand that the company has been doing what it believes will position it as the segment leader, but overcapacity has killed pricing and margins at a time of demand that is weaker than was anticipated, lowering volumes. Shouldn’t the company acknowledge that those unanticipated circumstances must affect the timing of both the need and ability to grow? I believe the market perception is that we are not making the right judgment in this regard, and in doing so we are elevating risk imprudently. Why is the market wrong?
—Because our business is not at risk, and in the current time period if we sit still, that could change quickly. We need to and are making changes to our business now, focusing on logistics and technology, to not only survive, but to thrive in the long-term, regardless of sand prices. If we didn’t make these moves now, and continued to be a commodity sand producer, our future would be verylimited - you can see this with some of our competitors—
Sand pricing/capacity. What are you seeing for Q3 and 4? Is capacity going to shrink; any evidence of such? What are you seeing for pricing/margin in Q3? Q4?
— we have already seen northern white capacity shrink by 20-30mm tons, and 5mm or so tons of capacity shut down in WTX. That won’t reverse all the retreat we have seen this year, but it is certainly a positive market signal that inefficient producers are feeling pain.
We have not given guidance on margins, other than to say we expect things to be largely flat, with some improvement possible in the third quarter. Q4 is always a bit of a wild card.—
Capex. You guided Maintenance capex of $25 mm and Growth capex of $30-40 mm for 2019. Interest expense will be $43 mm. 2018 Carryover capex is $30-35 mm. Using midpoints, that is 25 + 35 + 43 + 33 = $136 mm in 2019 expense. That would be $46 mm over an optimistic $90 mm in ebitda. Where is that $46 mm going to come from (the facility?) without increasing leverage?
—At this point, we have spent all but 5-10mm of carryover capex, which is related to the Wyeville expansion, we have paid approx 21mm of the interest payments (February, with the next payment due in August), and growth capex is largely discretionary and not written in stone given that it would be used most likely on build out of silo systems or container crews.
At the same time, we had at quarter end about 60mm in cash and 55mm in ABL availability, and continue to generate margin. We do not plan to draw on our ABL to fund growth, and uses of cash will continue to be evaluated throughout the year.—
Growth capex. How critical is it to incur Growth capex of $30-40 mm in 2019? Can’t at least some of it be deferred until prices/margins improve?
Wouldn’t deferring all or some of it lower leverage and risk at a time when the market believes we are taking on too much risk (because sand prices are not cooperating)?
—growth of the business is to us at this point very important, but some growth could be deferred. Spending in the current environment is regularly re-examined—
I understand that the company has been doing what it believes will position it as the segment leader, but overcapacity has killed pricing and margins at a time of demand that is weaker than was anticipated, lowering volumes. Shouldn’t the company acknowledge that those unanticipated circumstances must affect the timing of both the need and ability to grow? I believe the market perception is that we are not making the right judgment in this regard, and in doing so we are elevating risk imprudently. Why is the market wrong?
—Because our business is not at risk, and in the current time period if we sit still, that could change quickly. We need to and are making changes to our business now, focusing on logistics and technology, to not only survive, but to thrive in the long-term, regardless of sand prices. If we didn’t make these moves now, and continued to be a commodity sand producer, our future would be verylimited - you can see this with some of our competitors—
Sand pricing/capacity. What are you seeing for Q3 and 4? Is capacity going to shrink; any evidence of such? What are you seeing for pricing/margin in Q3? Q4?
— we have already seen northern white capacity shrink by 20-30mm tons, and 5mm or so tons of capacity shut down in WTX. That won’t reverse all the retreat we have seen this year, but it is certainly a positive market signal that inefficient producers are feeling pain.
We have not given guidance on margins, other than to say we expect things to be largely flat, with some improvement possible in the third quarter. Q4 is always a bit of a wild card.—
Re: HCLP will soon be trading as HCR
Good stuff. Caldwell is a sharp analyst.
Hi-Crush is expanding the segment of their business that is like SOI (last mile delivery and on-site silos). Read our profile on SOI and you will see how good that segment is.
IMO the sand business is a lot like the onshore drilling business. With the onshore drillers, each time there is a drop in rig demand most of the small-caps go out of business and the large-caps like HP and PTEN get stronger. HCR's balance sheet is strong enough that they can "hunker down" for a few quarters and come back strong when completion activity picks up. A lot of the "new kids on the block" in the sand business will not be around when that happens.
Hi-Crush is expanding the segment of their business that is like SOI (last mile delivery and on-site silos). Read our profile on SOI and you will see how good that segment is.
IMO the sand business is a lot like the onshore drilling business. With the onshore drillers, each time there is a drop in rig demand most of the small-caps go out of business and the large-caps like HP and PTEN get stronger. HCR's balance sheet is strong enough that they can "hunker down" for a few quarters and come back strong when completion activity picks up. A lot of the "new kids on the block" in the sand business will not be around when that happens.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group