hi crush partners lp...2015/10/31 · hi-crush partners lp (hclp) is a master limited partnership...

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Hi Crush Partners LP

October 31, 2015

EPG Commentary by Dan Steffens Hi-Crush Partners LP (HCLP) is a master limited partnership (“MLP”) that was added to our High Yield Income Portfolio over a year ago. Despite a softer market for frac sand in 2015, this MLP is well positioned to gain market share and make cash distributions to unit holders in the future. Hi-Crush is one of the lowest cost producers in the frac sand business and their distribution system gives them a strategic advantage. They have long-term supply contracts in place with several of the world’s largest oilfield services firm. By cutting their sand prices this year, they have reinforced their relationships with key customers that will pay big dividends in the future.

Demand for frac sand has softened in 2015 due to the sharp decline in well completions. Many upstream companies that are still drilling new wells have decided to put off well completions until oil & gas prices improve. Oil & gas production is now on decline in the United States and the global oil market will be tighter in 2016. This world runs on hydrocarbon based fuels and feedstock. Thousands of drilled but uncompleted horizontal wells (“DUC”) will be completed in the near future when oil prices rebound. The U.S. natural gas market is also growing rapidly and thousands of new horizontal wells will need to be completed to meet demand. Demand for Hi-Crush’s Northern White frac sand should rebound by mid-2016.

Management Robert Rasmus, Co-CEO James Whipkey, Co-CEO Jay Alston, COO Laura Fulton, CFO Mark Skolos, General Counsel William Fehr, Executive VP

www.hicrushpartners.com



October 31, 2015

Hi-Crush reported 3rd quarter results in-line with my forecast (see table below), but they decided to temporarily suspend the payment of cash distributions to unit holders. This decision sent yield investors running for the hills, but I believe using the cash to shore up their balance sheet, is the right move. If you believe oil prices will eventually rebound, then now is the time to add a full position in HCLP: This world is going to need increasing supplies of oil & gas. Development of the U.S. shale plays and other tight formations is critical to meeting future oil & gas demand. Today’s oil & gas prices are unsustainable, as we can see by the sharp decline in drilling activity. Oil & gas prices will increase in 2016 (thanks to tighter supply / demand). Upstream companies are going to need a lot of frac sand to develop their oil & gas reserves.

My Fair Value Estimate for HCLP is $14.45/unit Compared to First Call’s Price Target of $6.50

Disclosure: I have a long position in HCLP and I do not intend on buying or selling it in the next 72 hours. I wrote this profile myself, and it expresses my own opinions. I am not receiving compensation for it from the company. I have no business relationship with any company whose stock is mentioned in this article



October 31, 2015

The long-term demand forecast for high quality Northern White frac sand is still very good. I follow a lot of E&P companies. They are getting much better well results by drilling longer horizontal wells and completing them with more frac stages that require a lot more sand. More companies are moving to pad development drilling that will lower completed well costs and allow them to drill more horizontal feet for less money. Completed well costs have come down more than 30% in the large shale plays. If crude oil prices move back to $70/bbl, which I expect to happen in 2016, demand for frac sand should double from where it is today. Fracking requires special kinds of sand and Hi-Crush produces the best kind, Northern White. They have over three decades of proven sand reserves, making HCLP a high-quality long-term holding for investors seeking capital appreciation and high yield.



October 31, 2015

"We continued to gain market share during this challenging market environment as evidenced by an 18% sequential increase in our third quarter sales volumes following sequentially unchanged volumes from the first to second quarter. The reduced net income reflects the continued downward pricing pressure, which accelerated in August. While the long-term trend of more sand usage per well remains firmly in place, the near-term outlook for sand volumes is muted due to low energy prices causing reduced drilling and completion activities." - Robert Rasmus, Co-Chief Executive Officer of Hi-Crush.



October 31, 2015

Company Overview

Hi-Crush Partners LP (HCLP) is a pure play, low-cost, domestic producer and supplier of premium monocrystalline sand, a specialized mineral that is used as a proppant to enhance the recovery rates of hydrocarbons from oil and natural gas wells. Their reserves consist of “Northern White” sand, a resource existing predominately in Wisconsin and limited portions of the upper Midwest region of the United States, which is highly valued as a preferred proppant because it exceeds all American Petroleum Institute (“API”) specifications. Hi-Crush owns, operates, and develops sand reserves and related excavation and processing facilities and will seek to acquire or develop additional reserves and facilities. The company’s 651-acre facility with integrated rail infrastructure, located near Wyeville, Wisconsin (the “Wyeville facility”) enables processing and cost-effective delivery of approximately 1,600,000 tons of frac sand per year. Hi-Crush also owns a 98.0% interest in Hi-Crush Augusta LLC (“Augusta”), the entity that owns a 1,187-acre facility with integrated rail infrastructure, located in Eau Claire County, Wisconsin (the “Augusta facility”), which processes and delivers 2,600,000 tons of frac sand per year. Sand is purchased from a sponsor's production facility near Whitehall, Wisconsin (the "Whitehall facility"), a 1,447-acre facility.

The June 10, 2013 acquisition of D & I Silica, LLC (“D&I”) transformed the company into an integrated Northern White frac sand producer, transporter, marketer and distributor. At the time of the acquisition, D&I was the largest independent frac sand supplier to the oil and gas industry drilling in the Marcellus and Utica shales. D&I operates through an extensive logistics network of rail-served origin and destination terminals located in the Midwest near supply sources and strategically throughout Pennsylvania, Ohio, New York and Texas.



October 31, 2015

Range Resources (RRC) recently announced that several midstream projects will soon be completed which will significantly increase wellhead gas and NGL prices for Marcellus & Utica producers. The majority of the frac sand produced is sold to customers under long-term contracts. During the nine months ended September 30, 2015, temporary price discounts were provided to contract customers in response to the market driven decline in proppant demand. Hi-Crush has eight long-term contracts with an average remaining contractual term of 4.0 years and with remaining terms ranging from 18 to 63 months.

Third Quarter 2015 Highlights

• 3Q 2015 Revenues of $81 million vs. $102 million in 3Q 201 • 3Q 2015 Adjusted EBITDA of $13 million vs. $44 million in 3Q 2014 • 3Q 2015 $0.15 basic and diluted adjusted earnings per limited partner unit • 3Q 2015 $0.49 basic and diluted loss per limited partner unit after impairments and other

charges • Announced the suspension of quarterly distributions

"Given the energy industry`s outlook for fourth quarter activity levels, and our customers` anticipation of much greater than the usual seasonal declines across the industry, we expect the downward trend in well completion activity to continue in the fourth quarter with more pressure on pricing and reduced sequential sales volumes," said Laura Fulton, Chief Financial Officer of Hi-Crush. "As the prospects for a recovery are being pushed out, we continue to shore up our liquidity and improve our cost structure, including the temporary idling of our higher cost Augusta facility. We are expecting the remainder of 2015 and at least the first half of 2016 to be challenging with continued uncertainty in the level of well completion activity, a key driver of sand demand."



October 31, 2015

• Revenues for the quarter ended September 30, 2015 totaled $81.5 million on sales of 1.4 million tons of frac sand. This compares to revenues in the second quarter of 2015 of $84.0 million on sales of 1.2 million tons of frac sand.

• Approximately 49% of volumes were sold in-basin for the third quarter of 2015, a decrease from 58% in the second quarter of 2015 and an increase from 44% in the first quarter of 2015.

• Average sales price per ton sold decreased to $57 per ton in the third quarter 2015 from $67 per ton in the second quarter 2015, reflecting continued pricing pressure as a result of a general slowdown in market activity, particularly for well completions. The lower average sales price per ton during the third quarter also reflects the 9% drop in the percentage of volumes sold in-basin.

• Production costs for sand produced and delivered from the Wyeville and Augusta facilities was $11.32 per ton during the quarter, versus $13.45 per ton during the second quarter of 2015 and $13.89 per ton during the third quarter of 2014.

• Of the 1.4 million tons sold during the third quarter of 2015, approximately 67% were produced and delivered from the Partnership`s facilities, with the remainder being purchased from the sponsor`s Whitehall facility.



October 31, 2015

HCLP Strengths within Peer Universe

• Long-term contracted cash flow from ~6 million take-or-pay tons in 2015, with 4 years remaining • Low cost producer with more than 75% of production capacity contracted • Long-lived, high quality reserves as its northern white frac sand is in high demand • Prime portfolio of assets exploiting its strategic network in the Marcellus/Utica • Majority of 2015 capex budget of $35-55 million spent in 1H15 with focus on a strong balance sheet • Visible avenues for growth through the future Whitehall drop-down, Plant #4, and organic expansion of

terminal facilities • DJ Basin terminal set to open later in 2015, with new Permian terminal in Spring 2016

“The U.S. is now “dependent” on the shale plays. We will need to drill and complete more and more horizontal wells in these large reservoirs to meet our energy needs.” – Dan Steffens



October 31, 2015

Market Strategy

• Focus on stable, long-term take-or-pay contracts with key customers o HCLP markets the vast majority of the sand that it produces under long-term take-or-pay contracts

that significantly reduce its exposure to short-term fluctuations in the price of and demand for frac sand. This strategy mitigates HCLP’s exposure to the spot market price of frac sand and provides long-term cash flow stability.

• Expand proved reserve base and processing capacity

o HCLP seeks to identify and evaluate economically attractive expansion and facility enhancement opportunities to increase its proved reserves and processing capacity. At Wyeville and any future sites, HCLP expects to pursue add-on acreage acquisitions near its facilities to expand its reserve base and increase its reserve life.

• Competitive Advantage due to Intrinsic Logistics and Infrastructure

o The strategic location of HCLP’s Wyeville facility and logistics capabilities enable it to serve all major U. S. shale basins. HCLP’s transportation network includes three 5,000 foot rail spurs off the Union Pacific mainline that are capable of accommodating unit trains, allowing its customers to receive priority scheduling and expedited delivery. HCLP is one of the few frac sand producers capable of delivering API grade frac sand cost-effectively to all major U.S. shale basins by on-site rail.



October 31, 2015

• Low Operating Costs o HCLP’s business operations are strategically designed to provide low per-unit costs with a significant

variable component for the mining and processing of the sand. The low operating costs are made possible due to the following: Shallow earth overburden at the Wyeville facility allows the use of surface mining equipment instead of the more costly underground mining operations. The sand reserves do not require blasting or crushing to be processed. Processing and rail loading facilities are located on-site which reduces the cost of trucking sand to either facility.

Cutting Costs now to preserve long-term strength On October 9, 2015, Hi-Crush provided notice to its employees that the Partnership will temporarily idle its frac sand production facility in Augusta, Wisconsin. The sand previously produced at Augusta will be sourced at lower cost Hi-Crush plants with more favorable origin and destination pairings. The Augusta plant is capable of producing 2.6 million tons per year of 20/70 Northern White frac sand. Hi-Crush and its sponsor continue to operate the Wyeville and Whitehall facilities, with a combined production capacity of more than 4.8 million tons of 20/100 mesh sand.



October 31, 2015

As of September 30, 2015, the Partnership had $251.6 million of long-term debt outstanding, resulting in a debt to trailing twelve month Adjusted EBITDA of approximately 2.4x, below the 3.5x leverage limit defined in the company’s covenant agreement. The Partnership reiterated the guidance for capital expenditures in the range of $50-$55 million for 2015 of which $48 million was spent in the first nine months of the year. Capital expenditures for 2016 are expected to be in the range of $15-$25 million for the continued development of new terminal facilities, which compares to our cash flow from operations forecast of $55 million (see forecast attached below). Since August 1, 2015, Hi-Crush has reduced operational and administrative staffing levels by approximately 16%, including the most recent reductions at the Augusta facility.



October 31, 2015

Proven Reserves HCLP owns and operates the Wyeville facility, which is located in Monroe County, Wisconsin and, as of December 31, 2014, contained 75.5 million tons of proven recoverable sand reserves. HCLP also owns a 98.0% interest in the Augusta facility, which is located in Eau Claire County, Wisconsin and, as of December 31, 2014, contained 45.0 million tons of proven sand reserves. During the third quarter of 2014, the company’s sponsor completed construction of the 1,447-acre Whitehall facility with integrated rail infrastructure. As of December 31, 2014, this facility contained 78.9 million tons of proven, recoverable salable sand reserves and is capable of delivering approximately 2,600,000 tons of 20/70 frac sand per year. As of April 1, 2015, HCLP had contracted to sell more than 75% of production capacity in 2015 from production facilities and destination terminals, including sand to be purchased from the sponsor's Whitehall facility. Based on third-party reserve reports by John T. Boyd, the implied average reserve life is 27 years, assuming production at the rated capacity of 4,450,000 tons per year.


Net Income and Cash Flow Forecast


October 31, 2015

hi crush partners lp...2015/10/31 · hi-crush partners lp (hclp) is a master limited partnership...

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