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.

[cmm3rd]

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.

[dan_s]

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.

[cmm3rd]

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.

[cmm3rd]

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.—

[dan_s]

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.