Energy Prospectus

I listened carefully to the HCLP conference call and so should all of you. This MLP has a ton of upside for us. They did a great job of providing details on the CC and I now have an even higher level of confidence in my forecast/valuation model. There were lots of analysts listening to the call, so I think there are going to be a lot of upgrades and increased price targets.

FBR has already issued a new report this morning with a BUY recommendation and a $16/unit price target. < Others will be higher.

Key points of the CC:
> Q4 results were fantastic thanks in large part to their first mover advantage in the Permian Basin.
> Q1 sales volumes will be down a bit due to weather related delays, but sand prices will be up ~10%. Sand prices are expected to continue to drift higher in 2018.
> Weather related delays, primarily for the railroads, will be resolved soon. So, Q2 revenues should spike up.
> 90% of Kermit mine capacity is now contracted to large-caps and major service companies. 80% of their Northern White capacity is also contracted.
> "Last Mile Advantage" is HUGE for HCLP. They now have 10 PropStream crews running and s/b up to 20 by year-end.
> Selling sand through PropStream increases their profit margin.
> My SWAG is that the unit repurchase program will be completed by Q3 and then free cash flow will be used to pay down debt.
> Balance Sheet is in great shape, with $110 million of liquidity. < They don't need it because cash flow from operations will exceed capex in 2018 by over $180 million
> Distributions will increase by AT LEAST 10% EACH QUARTER. This was said on prepared remarks and during the Q&A. < Analysts on the call will love this.
> HCLP is the low cost provider of Northern White sand and there is still lots of demand for NW, even in the Permian Basin. < Over 50% of sand used in Permian is Northern White.
> Proppant intensity per well keeps increasing and the industry's forecast of 100 million tons of frac sand demand in 2018 may be too low. On Q&A Laura said that demand may exceed 120 million tons in 2018.
> Half of the new mines in the Permian Basin are facing significant delays and showing signs of not knowing what they are doing. < HCLP's experience is paying off.

I have updated my forecast/valuation model for HCLP adding Q4 actuals and line item changes based on what I heard during the CC. On the forecast model, I show how my forecasts for Revenues, Earnings Per Unit and Operating Cash Flow Per Unit compare to what First Call is showing today (2/20). It is very important to note that First Call numbers have not changed since before the earnings release and Q4 CC. I have built in some "cushion" for the Operating Cash Flow Per Unit calculation, which you can see by moving your curser over the cash flow cells on row 49 of the Excel spreadsheet.

My valuation for HCLP is now $25.00/unit, which compares to First Call's price target of $15.92 (which has yet to be updated).

Dan - I listened to the call and agree is was a very positive call.

One question, then a couple comments :

1) the 10% increase QoQ in pricing (71 (Q4) goes to 78+ I assume) - how does that translate given 90% of Kermit and 80% of Northern White is already contracted, at I assume fixed prices?

Did they mean their average blended selling price will actually be increasing by 10%, including the contracted tons? I couldn't tell from the call.

This quarter, average price only went from $68 in Q3 to the $71 in Q4, so I'm a bit puzzled on how to use the 10% comment? Thoughts?

Comments:

They expect 18Q2 to come back up to 17Q4 volumes, so close to 3MM tons, if not above.

Contribution margin per ton sounds like it will move up to at least $25 in Q1 based on their comments (kermit running on gas and electric grid, lower costs for Northern White, etc), perhaps higher as pricing continues upward through Q1 and Q2 before slowing beyond Q2, per their comments.

They mentioned spot prices running >$20 above their contracted prices, which means up to 10% of Kermit and 20% of Northern white could claim spot pricing (limited of course by how much they can ship of Northern White by volume limited rail)

CapEx with be dramatically lower in 2018 - $122M going to mid-guidance of $40M, an $82M reduction that of course opens up additional buyback, dividend raise, debt reduction, expansion opportunities.

They need to pay the earnouts for the the last 2x dropdowns, $25M will be paid in 18Q1.

Should also note that I believe the SEC rule for buybacks is 48 hours after CC, so in theory they could start buying stock on Thursday at the open.

Without seeing the individual contracts, which will never be discussed on a CC and may not be disclosed anywhere, I think they meant that their price per ton would be going up by 10% Q over Q.

My forecast/valuation model is only as good as the assumptions, but I have much more confidence in it today than I did a week ago. Take a look at "Gross Profit" on row 15. It is not like I am "way out there" with this forecast.

They should easily generate close to $200 million in DCF this year. Current dividend of $0.20/Q adds up to $70 million, even before more unit buybacks. Personally, I'd rather see debt repayment and increased distributions than unit buybacks, but it is all good.

I think their statement that distributions will go up by 10% per quarter is the "low end" of what will really happen. Laura is super smart and she knows it is much better to "under-promise and over-deliver".

Unless the active rig count drops by A LOT, this is going to be a big year for frac sand demand.

Thanks Dan. On the dividend, I'm holding to my own belief that they go to 25c next quarter, even though they say 10% QoQ is plan.

Will be interesting to see what they do. I would actually think they like the share price lower until they're done with the $100M.

If they really hit $78/ton blended average and fall right in the middle of guidance at 2.8MM tons, then they're sitting at $218M revenue and contribution margin would be higher than Q4.

Real good story. If oversupply concerns of in-basin sand diminish, I would expect share price to move up faster. Probably takes all of 2018..

I urge all of you to listen to the Hi-Crush CC call. It will really clarify the potential that we have here.

With small-caps there are people who invest ahead of the quarterly reports hoping for a bounce. Many of them sell for a small profit without even digesting the numbers. Hi-Crush's Q4 numbers were outstanding and everything points to very strong 2018 results.

Frac sand Shortage Threatens Shale Boom:

https://oilprice.com/Energy/Crude-Oil/F ... -Boom.html

From the article at the link above: In 2018, frac sand demand is expected to top 100 million tons, according to Rystad Energy. “Right now, the market is really stretched thin,” says Thomas Jacob, a senior analyst at IHS Markit, told the FT in December. “Everyone is running at full capacity.”

On the HCLP conference call, Laura Fulton said they think frac sand demand to increase to 120 million tons this year. If so, my guess is that sand prices will continue to drift higher. One of the slides on HCLP's Q4 presentation shows that ~50% of the sand mines announced in Texas will not be online until after 2018 and some will never be completed.

Today there are 975 active drilling rigs operating in the United States and 839 of them are drilling horizontal wells that be completed with lots of frac sand. This compares to 624 horizontal rigs drilling a year ago.

There are 318 rigs working in Canada and ~half of them are drilling horizontal wells.

And a couple more thoughts - with pipeline capacity gradually responding to basin needs, especially Utica/Marcellus, which should lead to better differentials and a lot more drilling due to LNG, export, NGLs going overseas, etc, as well as likely inability to ship Permian based sand out of basin - it just seems sand, including Northern White, is a much better story than many seem to think. Interesting to see how this develops.