Hi-Crush Partners LP (HCLP) Q3 Results

[dan_s]

Revenues, Net Income and DCF beat my forecast. I will update my forecast/valuation model on Wednesday. - Dan

Hi-Crush Partners LP Reports Third Quarter 2017 Results •3Q 2017 Revenues of $167.6 million vs. $135.2 million in 2Q 2017 and $46.6 million in 3Q 2016
•3Q 2017 Net income of $29.8 million vs. $16.4 million in 2Q 2017 and net loss of $(11.7) million in 3Q 2016
•3Q 2017 EBITDA of $41.8 million vs. $26.8 million in 2Q 2017 and $(3.5) million in 3Q 2016
•3Q 2017 Distributable cash flow of $37.5 million vs. $22.9 million in 2Q 2017 and $(6.7) million in 3Q 2016
•3Q 2017 $0.33 basic and $0.32 diluted earnings per limited partner unit
•Resumed quarterly cash distribution of $0.15 per unit; announced unit buyback program of up to $100 million

HOUSTON, Oct. 31, 2017 (GLOBE NEWSWIRE) -- Hi-Crush Partners LP (NYSE:HCLP), "Hi-Crush" or the "Partnership", today reported third quarter 2017 results. Revenues for the third quarter of 2017 totaled $167.6 million on sales of 2,456,195 tons of frac sand. This compares to $135.2 million of revenues on sales of 2,112,516 tons of frac sand in the second quarter of 2017. The limited partners' interest in net income was $29.8 million for the third quarter of 2017, resulting in $0.33 basic and $0.32 diluted earnings per limited partner unit.

Earnings before interest, taxes, depreciation and amortization ("EBITDA") for the third quarter of 2017 was $41.8 million, compared to $26.8 million for the second quarter of 2017. EBITDA adjusted for earnings from equity method investments ("Adjusted EBITDA") was $41.7 million in the third quarter of 2017, compared to $26.5 million for the second quarter of 2017. Distributable cash flow attributable to the limited partners for the third quarter of 2017 was $37.5 million compared to $22.9 million for the second quarter of 2017.

"The impressive third quarter performance we announced today is a direct result of our Mine. Move. Manage. operating strategy, and is underpinned by ongoing strength in oil and gas completions activity in the U.S.," said Robert E. Rasmus, Chief Executive Officer of Hi-Crush. "Over the last several months, we completed several critical projects, including the construction and commencement of operations at our Kermit facility and Pecos terminal in the Permian Basin. These projects enhance and extend our ability to service customers through our growing and integrated production and logistics network. Our sales volumes improved to approximately 2.5 million tons for the third quarter, in-line with guidance, and marking the highest quarterly volumes recorded in Hi-Crush history. We remain relentlessly focused on execution, and our results are the outcome of our team’s efforts and success. Our execution, combined with our capital return strategy to our unitholders, is driving significant value for Hi-Crush and its unitholders."

Third Quarter 2017 Results

Revenues for the third quarter of 2017 increased due to the sequential increase in sales volumes, combined with generally higher pricing. Approximately 61% of quarterly volumes were sold in-basin for the third quarter of 2017, compared to 64% in the second quarter of 2017 and 47% in the third quarter of 2016. The slight sequential decrease of in-basin sales percentage reflects the start of operations and volumes sold at the mine gate from the Kermit facility, while the increase as compared to the prior year reflects the change in mix of customer demand delivery point. Average sales price was $68 per ton in the third quarter of 2017, compared to $64 per ton in the second quarter of 2017 and $43 per ton in the third quarter of 2016, as sales prices generally improved due to continued increases in frac sand demand in excess of available supply, particularly for fine mesh sand.

Contribution margin was $19.39 per ton in the third quarter of 2017, compared to $16.73 per ton in the second quarter of 2017. The 16% increase in contribution margin per ton was primarily the result of increased pricing, as well as fixed cost absorption from higher sales volumes and increased asset utilization. This increase in contribution margin per ton was partially offset by the impact of a one-time, non-cash charge of $2.3 million, or approximately $0.90 per ton, related to the use of certain coarse material from inventory to augment the reclamation process.

"Thanks to our team’s collective and relentless focus on execution, as well as the continued improvement in demand for frac sand, we realized significant growth across the entirety of our operations, accentuated by a 57% sequential increase in Adjusted EBITDA, 16% growth in volumes sold, and the generation of attractive distributable cash flow," said Laura C. Fulton, Chief Financial Officer of Hi-Crush. "This improvement in cash generation, combined with our outlook for continued growth, has allowed us to resume our capital return program. We believe our balanced approach to capital return, comprised of quarterly cash distributions as well as a unit buyback program of up to $100 million, maximizes value and growth to unitholders over the near and long-term."

Kermit Facility

As announced previously, the Partnership commenced operations at its Kermit facility in July 2017. The facility is the first to produce and sell in-basin frac sand in the Permian, and has an annual production capacity of 3.0 million tons. Of this nameplate capacity, 90% is currently contracted with customers, including several large, blue-chip E&P companies under long-term, fixed-price arrangements. The Kermit facility expands Hi-Crush’s industry-leading production and logistics capabilities in West Texas and significantly improves customer service while reducing delivered costs to the well site.

"The opening of our Kermit facility is a game-changer for our Permian Basin operations," said Ms. Fulton. "The facility expands our product portfolio, while its proximity to significant Permian Basin activity enables substantial efficiency improvements in the delivery of sand to the well site. Volumes sold from Kermit contributed 10% of total sales volumes for the third quarter. As anticipated, we ramped operations to achieve full utilization in mid-October and we expect to see a significant increase in our financial performance from Kermit in the fourth quarter of 2017. Having completed construction and started operations two months ahead of schedule, Kermit is a clear example of our experience and expertise in constructing and operating large-scale, world-class frac sand production facilities."

Pecos Terminal

The Partnership also previously announced the commencement of operations at its new Pecos, Texas terminal, the first unit train capable terminal with silo storage in the Southern Delaware Basin. Hi-Crush is actively delivering sand via rail to the Pecos terminal, which includes 20,000 tons of vertical silo storage on-site, from its two Union Pacific-connected Northern White facilities in Wisconsin. On October 3, 2017, Hi-Crush began loading customer trucks for delivery to support local completions activity.

"We are excited to have completed construction on schedule and started operations at our third Permian Basin terminal," said Mr. Rasmus. "The completion of Pecos augments our existing capabilities in the Permian, which include our Odessa and Big Spring terminals in the Midland Basin, and extends our advantage in the region while complementing our leading network of owned and operated logistics assets. Together with our recently completed in-basin Kermit facility, these assets provide our customers with flexibility and diversity across sand product, and enhance surety of supply by mitigating potential logistical bottlenecks in these highly active areas. In addition, PropStream, our last-mile containerized delivery solution, allows us to supply our sand directly into the blender hopper at the well site reliably, efficiently, and safely. Controlling the entire logistics chain is a differentiator for Hi-Crush, particularly in an environment of significant growth, and will allow us to profitably and sustainably grow our business over the long-term."

PropStreamTM

Hi-Crush has seven PropStream crews currently operating in the Permian Basin and Marcellus and Utica plays, with the expectation to grow the total number of crews to nine or more by the end of 2017.

Liquidity and Capital Expenditures

As of September 30, 2017, the Partnership had $193.2 million of long-term debt outstanding, and was in compliance with the covenants defined in its Revolving Credit Facility Agreement. As of September 30, 2017, Hi-Crush had $82.1 million in cash and available capacity under its revolving credit facility.

Capital expenditures for the nine months ended September 30, 2017, totaled $108.1 million related to costs associated with the construction of the Kermit facility, the terminal facility in Pecos, Texas, equipment for PropStream and overburden removal, among other projects. The Partnership plans to spend in the range of $7 to $17 million on capital expenditures during the fourth quarter of 2017.

The Partnership also announced that total capital expenditures for 2018 are expected to be in the range of $35 to $45 million, related to continued investment in equipment for PropStream, normal maintenance capital expenditures, including overburden removal, and discretionary investments in logistics assets.

Distribution and Unit Buyback Program

On October 16, 2017, Hi-Crush declared a quarterly cash distribution of $0.15 per unit on all common units, or $0.60 on an annualized basis, for the third quarter of 2017. The distribution will be paid on November 14, 2017 to unitholders of record on October 31, 2017.

On October 17, 2017, Hi-Crush announced that the Board of Directors approved a unit buyback program of up to $100 million. The Partnership has authority at this time under its Revolving Credit Agreement and Term Loan Credit Agreement for repurchases of up to $20 million which, over the near-term and combined with the initial quarterly distribution and its expected growth, is well-aligned with Hi-Crush's capital return intentions. The Partnership will seek consent under the Revolving Credit Agreement and Term Loan Credit Agreement allowing for the authorized amount of up to $100 million. The repurchase program does not obligate the Partnership to repurchase any specific dollar amount or number of units and may be suspended, modified or discontinued by the Board of Directors at any time, in its sole discretion and without notice.

Outlook

For the fourth quarter of 2017, the Partnership expects sales volumes to increase to 2.7 to 2.9 million tons. Pricing is also expected to improve modestly through the end of the year, driven by ongoing tightness in frac sand supply and demand, particularly for fine mesh sand.

"We have successfully ramped utilization at our Kermit facility and expect to run all five production facilities at an average utilization of 85% in the fourth quarter," said Mr. Rasmus. "The strong existing customer relationships we have maintained over the years, combined with increasing demand for contracted and spot volumes from newly added customers, has led to strong contracted commitments for Northern White volumes, in-basin sand and sand delivered through PropStream contracted services. Achieving our targeted level of commitments decreases volume risk as we approach 2018, while retaining the flexibility needed to serve our spot customers and our growing PropStream crews. With the addition of our Pecos terminal and continued expansion of our PropStream service across our operating footprint, Hi-Crush is well-positioned to continue strong execution and customer service going into 2018 and beyond."

Conference Call

On Wednesday, November 1, 2017, Hi-Crush will hold a conference call for investors at 7:30 a.m. Central Time (8:30 a.m. Eastern Time) to discuss Hi-Crush’s third quarter 2017 results. Hosting the call will be Robert E. Rasmus, Chief Executive Officer and Laura C. Fulton, Chief Financial Officer. The call can be accessed live over the telephone by dialing (877) 407-0789, or for international callers, (201) 689-8563. A replay will be available shortly after the call and can be accessed by dialing (844) 512-2921, or for international callers (412) 317-6671. The passcode for the replay is 13671985. The replay will be available until November 15, 2017.

Interested parties may also listen to a simultaneous webcast of the conference call by logging onto Hi-Crush’s website at www.hicrush.com under the Investors Relations-Event Calendar and Presentations section. A replay of the webcast will also be available for approximately 30 days following the call. The slide presentation to be referenced on the call will also be on Hi-Crush’s website at www.hicrush.com under the Investors Relations-Event Calendar and Presentations section.

[dan_s]

Revenues should exceed $200 million in the 4th quarter. Cash flow from operations in the 3rd quarter of $0.408/unit should go to over $0.50/unit in Q4.

My valuation will go to $23/unit. HCLP is a "Screaming Buy" up to $15.00.

[dan_s]

Go to the Hi-Crush website and listen to the Q3 results webcast. Follow along on the slides.

1. HCLP will be positioned to increase its distributions to unit holders in 2018
2. Unit buyback is a big deal
3. Their sand delivery system gives Hi-Crush an advantage
4. Sales volumes and sand prices will be higher in Q4

I am updating the HCLP forecast model and will post it to the EPG website later today.

[cmm3rd]

Thanks for your comments, Dan.

Re: •3Q 2017 Distributable cash flow of $37.5 million vs. $22.9 million in 2Q 2017

Do you have any calculation re what DCF was for Q3 on a per unit basis? On the Q2 call, an analyst said it was about $.25 per unit, but I am unsure what the number of units for Q3 is in relation to Q2.

Also would be interested in your views re projected DCF in Q4 and 2018.

Finally, should we look at DCF as the pot out of which not only distributions, but also buybacks, are made?

Thanks

[dan_s]

You can find my forecast for cash flow from operations for each future period at the bottom of the forecast model, which is available on the EPG home page.

DCF = Cash Flow From Operations less maintenance capital

Maintenance capital for HCLP is less than half of their total capex.

Based on my forecast, DCF should be over $150 million for 2018 ($1.65/unit).

In my opinion, HCLP purposely set their distributions at a low level so that they could easily raise them in the future. I think distributions may double in 2018.

Frac Sand Demand: It is IMPOSSIBLE for U.S. oil and gas production to come anywhere close to EIA's forecast without using a lot more frac sand than was used in 2017. Hi-Crush is the low-cost producer of Northern White sand, which is still the best frac sand on earth. They also have the best distribution network. You should all take some time to review the new slides on their website.

[dan_s]

This is why frac sand demand is going way up. It is cut from the PXD Q3 press release.

The Company implemented a completion optimization program during 2015 in the Spraberry/Wolfcamp that combines longer laterals with optimized stage lengths, clusters per stage, fluid volumes and proppant concentrations. The objective of the program is to improve well productivity by allowing more rock to be contacted closer to the horizontal wellbore. In 2013 and 2014, the Company’s initial fracture stimulation design (Version 1.0) consisted of proppant concentrations of 1,000 pounds per foot, fluid concentrations of 30 barrels per foot, cluster spacing of 60 feet and stage spacing of 240 feet. Beginning in mid-2015, the Company enhanced its fracture stimulation design (Version 2.0), which consisted of larger proppant concentrations of 1,400 pounds per foot, larger fluid concentrations of 36 barrels per foot, tighter cluster spacing of 30 feet and shorter stage spacing of 150 feet. Beginning in the first quarter of 2016, Pioneer commenced testing further-enhanced completion designs (Version 3.0), which included larger proppant concentrations up to 1,700 pounds per foot, larger fluid concentrations up to 50 barrels per foot, tighter cluster spacing down to 15 feet and shorter stage spacing down to 100 feet.

The Company placed 59 Version 3.0 wells on production in the third quarter. These wells and the more than 200 Version 3.0 wells that were placed on production prior to the third quarter of 2017 are continuing to outperform Version 2.0 completions.

Pioneer placed 12 wells on production during the second quarter that utilized higher intensity completions compared to Version 3.0 wells. These are referred to as Version 3.0+ completions. Nine of the Version 3.0+ wells utilized increased proppant and three utilized increased proppant and water compared to Version 3.0 wells. Early production results from all of these wells are outperforming nearby offset wells with less intense completions. The Company plans to test a minimum of three additional 3.0+ wells over the remainder of the year.