I like my investments simple. I also like my investments lucrative. Fortunately, the two concepts are not mutually exclusive. A perfect illustration of that fact is Hi-Crush Partners LP (HCLP).
Hi-Crush mines sand. Not just any sand, mind you, but monocrystalline sand. This sand (and don't blame me for what follows) is used as a proppant to enhance the recovery rates of hydrocarbons from oil and natural gas wells. What prose. To a layman such as me, it's frack sand, and it helps draw the oil out of those hard to reach places in shale.
Hi-Crush mines this commodity for an obvious reason, the sand is valuable. It's valuable because not only is it needed in the burgeoning shale oil industry, it's also precious in regards to its availability. This sand, you see, is found primarily in Wisconsin and limited portions of the Upper Midwest. HCLP even has a name for the stuff. They call it "Northern White." Good name.
I must admit to a distinct advantage over many of you when it comes to researching Hi-Crush as a possible portfolio addition; I live in Wisconsin. In fact, the two mines that HCLP currently operates, one near Wyeville, Wisconsin and the other by Augusta, Wisconsin, are less that a hour from my home. There are several other mines even closer to my residence that are operated by private companies.
Mining companies are inhaling land around here, making millionaires of local farmers and rural landowners. I've heard the princely sum of $10,000 or more an acre being bandied about. Such sums of money lead me to what I think is a very important point when considering Hi-Crush as an investment, and that point is the miner's financial brawn.
First of all, HCLP carries no debt. They have over $10 million in cash and boast a current ratio of 5 to 1. These resources will prove invaluable when future opportunities present themselves. I believe most of these opportunities will come in the form of repossessed properties. To paraphrase the old entertainer Jimmy Durante, "Everyone wants to get into the act." He could've been describing the present scene in Wisconsin sand mining. People both well-heeled and otherwise are looking to jump into the monocrystalline sandbox. They want to play too. Many of these would-be sand barons are using leverage to purchase land and equipment. The mining industry is particularly sensitive to the economic cycle and when the lean times come, which they invariably will, more than a few of these fledgling miners will experience the viciousness of leverage gone bad. Enter Hi-Crush LP. Using a degree of judiciousness, HCLP should be able to pick up some quality tracts of land at bargain prices.
Some monitions are in order before an investment decision on HCLP can be reached. Here are a few.
Hi-Crush went public in August of 2012. In November, the company announced that it had lost Baker Hughes (BHI) as one of its customers. investor reaction was swift and merciless. The angle of descent exhibited by the MLP's stock price rivaled that of a World War 2 dive bomber. Trumpeting their concern for duped shareholders, law firms ad naseum filed suit. (Does a pack of hyenas come to mind, or is it just me?) Baker Hughes has deep pockets, much deeper that HCLP's. The last thing Hi-Crush needs is a lengthy and expensive lawsuit.
Another thing brought into question by the Baker Hughes desertion is the credibility of HLCP's business plan. The company touts stable cash flow gurgling from long term contracts with established companies. If Baker Hughes can decide breaking up isn't that hard to do, couldn't other Hi-Crush clients make the same determination? It's not a pleasant thought.
The impact a sand mine brings to the environment of a community is another caveat to ponder. First of all, these mines aren't pretty to look at. Secondly, many mines are located far from railheads so the material must be trucked, thus raising concerns of traffic safety. Thirdly, health issues linked to the dust raised by these mines have been suggested.
SLCA, a diversified supplier, caters to many industries other than drilling, and would seem to pose the lesser threat to Hi-Crush.
CRR, however, might prove to be a tougher adversary. Supplying sand to fracture drillers is CRR's primary source of revenue. CRR's sand is resin-coated, and is more efficient than monocrystalline in releasing trapped oil. Carbo Ceramics could definitely make things interesting.
Before I chase everyone off with all this doom and gloom, I want to state here and now that I'm long Hi-Crush Partners. Despite lawsuits, government regulations, environmental entanglements, tough competition and obstacles as yet unknown, I'm confident of the miner's success.
Several things bolster my faith in HCLP. The balance sheet has a $10 million backbone. They eschew debt. The company's profit margin is a luxurious 58%. The payout ratio on the stock's 10% dividend is a miniscule 15%. Hi-Crush, at around $19 a share, is expected to grow earnings at a 46% clip over the next 3 to 5 years - now that's a PEG ratio you can sink your teeth into. And finally my personal favorite, institutional ownership is at a relatively low 46%.
HCLP's earnings for the fourth quarter of 2012 came in at an eyelash over $9 million, representing a 50% increase over the same quarter in 2011. Their first acquisition, the aforementioned Augusta facility, is expected to replace the revenue lost due to the Baker Hughes desertion.
For all that, everything is not sunshine and buttercups. Because of an industry slowdown and the loss of the Baker Hughes contract, HCLP experienced a drop in sales for 2012. Also, the company is trying to navigate through a blizzard of lawsuits. (There I go, scaring you again).
I'd like to leave you with one thought. Dynamics. Hydraulic fracture mining is here to stay. At present, shale oil contributes 1 million barrels a day to this country's production. That figure is expected to double in 2 years and grow to 5 million barrels a day by 2020. Due in no small part to shale oil production, the U.S. is expected to become energy independent in ten years. The sheer momentum being generated by this industry is almost palpable. That very momentum will leave many in its wake. But for the company that is savvy and well capitalized, the future is bright indeed. Such a company is Hi-Crush Partners.
Grab your shovel and do some digging. Let me know what you turn up.