Hi-Crush Update - Sept 26

[dan_s]

HOUSTON, Sept. 26, 2018 (GLOBE NEWSWIRE) -- Hi-Crush Partners LP (NYSE: HCLP), or Hi-Crush, today announced that it has temporarily idled dry plant operations at its Whitehall facility. The facility’s wet plant remains operational, and Hi-Crush continues to sell inventory from on-site storage to meet ongoing Northern White customer demand. Wet and dry plants remain operational at Hi-Crush’s other Wisconsin mines, including Wyeville, Augusta and Blair.

“Our strategic decision to temporarily idle Whitehall’s dry plant was driven by recent, temporary softness in completions activity and frac sand demand,” said Laura C. Fulton, Chief Financial Officer of Hi-Crush. “This reduced level of expected activity is reflected in our updated guidance for sales volumes of 2.8 million to 3.0 million tons for the third quarter we previously communicated. Our Kermit facility continues to run above its nameplate capacity and we anticipate strong demand for Northern White and our in-basin Permian sand in 2019 and beyond.”

“The flexibility of our operations position us to respond timely and efficiently to evolving industry dynamics, supporting our ability to best align operations with customer demand,” said Robert E. Rasmus, Chief Executive Officer of Hi-Crush. “Hi-Crush is committed to providing the supply surety that our customers require, while we work with all interested parties to minimize impacts and improve cost competitiveness through the optimization of our production operations. Despite temporary market dislocations, we continue to expect strong demand for Northern White frac sand and are continuing with the expansion of rail capacity at Whitehall, as well as our customer-driven expansion of our Wyeville plant and the construction of the second Kermit facility.”

About Hi-Crush

Hi-Crush is a premier provider of proppant and logistics solutions to the North American energy industry. Our portfolio of purpose-built production facilities is capable of producing 13.4 million tons per year of high-quality monocrystalline sand, a specialized mineral used as a proppant during the well completion process, necessary to facilitate the recovery of hydrocarbons from oil and natural gas wells. Our Wisconsin production facilities' direct access to major U.S. railroads enhances our delivery capabilities into consuming basins, while our strategically located owned and operated in-basin terminals as well as our Texas production facility positions us within close proximity to significant activity in all major oil and gas basins for advantageous truck transportation. Our integrated distribution system, enhanced by our innovative PropStream logistics solution, efficiently delivers proppant the "last mile" into the blender, providing customers surety of supply from mine to wellsite. For more information, visit www.hicrush.com.

[dan_s]

I've gotten several emails about HCLP, so I went back and updated my forecast model for the company. They did reduce slightly their sales volume guidance for Q3 and Q4.

You can find their guidance in the slides that they spoke from at the Barclays Energy Conference on September 4. The slides are on the HCLP website.

Demand for frac sand is down a bit (~5%) because of fewer well completions in West Texas, thanks to the takeaway capacity issue.
Just remember:
1. This is a short-term problem and just pushes well completions out a couple of quarters.
2. Slowing U.S. oil production growth will just add more fire to the global oil supply/demand tightening. Higher oil prices = higher sand demand.
3. Hi-Crush's superior logistics and high quality sand give it an advantage over the competition.

I checked and Reuters / First Call's forecasts and price target of $16.46 is based on 13 analysts reports. Only one is dated after their presentation at the Barclays conference on 9/4 and it is a BUY rating with a $15.00 price target. The five most recent analysts' reports have price targets that range from $14.15 to $25.00 per unit.

My updated valuation is $22.70/unit. My forecast/valuation model for HCLP has been updated and posted to the EPG website.
First Call's current Revenue, EPS and CFPS estimates are shown on my forecast model.

[cmm3rd]

This author lays out part of the bear thesis for HCLP, and most of the comments following seem to agree with him.

https://seekingalpha.com/article/420838 ... operations.

I don't recall what percent of HCLP's revenues are derived from sales outside of the Permian (I recall it being substantial), but notably this author does not address that. As well, his conclusion that (some) white sand capacity will be permanently taken offline because it will produce red ink and be unsustainable is predicated on the assumption that in-basin sand will replace it (universally?) in the Permian. That seems a bit extreme, and something that Hi Crush would know. Also, he does not address the impact (on sand volumes) of the necessity to continue completions of DUCs (everywhere, including outside the Permian) just to maintain production levels over the long term.

[ddlopata084]

A couple of additional notes:

HiCrush continues to maintain that 80% of Permian and NWS is fully contracted, including AFTER expansions of Wyeville and Kermit/Kermit2, beyond 2019.

80% of Kermit1/2 is 0.8*6=4.8 mmtons/yr.
80% of NWS post-exp is 0.8*11.1=8.9 mmtons/yr
Total : 13.7 mmtons/yr firm contract (which is more volume than their pre-expansion nameplate).

Closing Whitehall temporarily eliminates 2.86 mm, or about 24% of their NWS capacity.

I would assume they think they can cover that missing 4% (to get to 80% NWS contract capacity) by extracting a bit more volume from the remaining 3x NWS facilities, hence closing Whitehall is cost advantageous, should help maintain contribution margins.

So, it feels like the spot market is pretty much gone in the short-term, at least for NWS, as they mention Kermit continues to run at above nameplate 3.0 mmtons/yr capacity.

Supposedly, HCLP contracts do not contain reset provisions which would reset pricing to spot at some periodic interval - this said I haven't seen the contracts myself...

Contracted contribution margins, per prior HCLP comments, are ~$25/ton for NWS and ~$35/ton for Permain Brown, per some slides in prior presentations.

If the contribution margins hold, Q3 and the coming quarters should continue to show excellent DCF.

The risk is if contracts get broken and renegotiated. This thesis was calculated by Credit Suisse in a Sept 4th update, as a worst case scenario.

In the renegotiated contract scenario ($20/ton both NWS and PB), DCF drops dramatically... They project 2019 EBITDA goes from baseline $260M to $105M, and CS price target for HCLP dropped to $5/share (from $15/share).

From my perspective, I don't see how HCLP's customers, in this oil price and demand environment and with what are likely short-term issues - don't see how or why they would want to break contracts, or even justify it...

But it's good to consider what a worst case could be..., at least what CS thinks...

[ddlopata084]

For what it's worth, here's a more bullish view from an SA author.

https://seekingalpha.com/article/420842 ... -unchanged

[dan_s]

Take anything you read on Seeking Alpha with a "grain of salt". Anyone that writes for SA gets paid "by the click", so the more outrageous the title or claims made by the author, the more clicks. There are some good people writing for SA, just don't believe everything you read over there.

HCLP is going to be fine. Again, the Permian Basis slow down in completions is a short-term problem. Unless, there is a big drop in the active rig count, all I see is a 5% decline in frac sand demand for a few quarters. Then demand will come roaring back in 2019. The U.S. is "addicted" to shale oil & gas, so more horizontal wells need to be completed each year.

Spend 30 minutes going through the recent presentation slides on the HCLP website.

See my updated forecast/valuation model.
> Quarterly DCF may dip below $0.75, but HCLP has a lot of Accumulated DCF.
> The conversion to a C-Corp may or may not happen.

[ddlopata084]

On a related note CVIA announced volume reductions after the close :

Covia reduces proppant capacity capacity by 3.3M tons
Covia announced that it has reduced proppant capacity by 3.3M tons in response to changes in market demand. This morning, the company informed its employees about the idling of operations at its Shakopee, Minnesota; Brewer, Missouri; Wexford, Michigan; and Cutler, Illinois, facilities; as well as a reduction in effective capacity at its Pevely, Missouri; Cleburne, Texas; and Menomonie, Wisconsin, facilities. Following these operational changes and the commissioning of the Seiling, Oklahoma, plant, the company expects to have annual energy production capacity of approximately 32M tons. The announced changes are not expected to impact Covia's 18M tons of Industrial production capacity. :theflyonthewall.

[RTaber1]

Dan,

What percentage of HCLP's distribution will be considered tax-deferred for 2018 and projected for 2019?

Thank you.

[k1f]

This kerfluffle may explain Select Sands' last news about losing a contract.
Judging by today's mkt action, Wall St and the WH are both in deep denial
about the energy supply/demand situation. The Morgan downgrade of gassers
is breathtaking.

[dan_s]

Most of HCLP's distributions are taxable, which is one of the reasons that they have given me for wanting to switch to a C-Corp. My guess is that 80% will be taxable.

[mattreue]

Recent weakness in HCLP has me nibbling and adding some more.

[mattreue]

This weakness in HCLP price is crazy. Especially when you review Dan's analysis which has been updated with the latest guidance from the company. This resembles the mid 2016 environment when I bought pipeline MLPs with above 20% yields, thinking that even if they slash the distribution by 50% you still have a high yielding unit. What happened strangely is that when these really high yielders cut their distributions (which the market had overpriced in), then the unit price started climbing. I think this is such an opportunity in HCLP today. Now HCLP could be different. They may not have the bad news occur, and continue to cover their distributions with FCF. Then, next year when the companies are reporting increased sand usage, then HCLP shares will really rerate.

[dan_s]

Sounds like a good plan.

All of the talk of reduced sand demand is way over-blown. The U.S. cannot come close to the EIA production forecasts without completing a lot more horizontal wells year-after-year-after-year. Which will require more frac sand each year.

Well completions in the Permian Basin will definitely slow for a few months but in six months well completions sill increase.

[mattreue]

The only real issue is new supply of in-basin sand coming online . The issue there is quality. NWS is the best for its uniformity. I read different reports. Some companies having problems with in basin sand. Other companies using a mix of sand. I guess we will find out in 6 months.

[dave_n]

CEO and CFO still heavily invested.

HCLP book value is $9.74/share.

I'm hoping they reinstate the share buyback at these prices. Keep the dividend.