Hi-Crush Partners' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Hi-Crush Partners (HCLP)

Start Time: 10:00

End Time: 10:45

Hi-Crush Partners LP (NYSE:HCLP)

Q4 2013 Earnings Conference Call

February 06, 2014 10:00 AM ET

Executives

Jim Whipkey - Co-Chief Executive Officer

Bob Rasmus - Co-Chief Executive Officer

Laura Fulton - Chief Financial Officer.

Analysts

Jeff Birnbaum - UBS

TJ Schultz - RBC Capital Markets

Marc Silverberg - Barclays

William Dobell - William Blair

Ethan Bellamy - Baird

Marc Bianchi - Cowen & Company

Operator

Good morning and welcome to Hi-Crush’s 2013 Fourth Quarter and Year-End Conference Call. As a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

At this time, for opening remarks and introductions, I would like to turn the call over to Jim Whipkey, Co-Chief Executive Officer of Hi-Crush. Mr. Whipkey, you may begin.

Jim Whipkey

Thank you, operator and good morning everyone. Thank you for joining us today to discuss Hi-Crush’s fourth quarter and year-end 2013 results. With me today are Bob Rasmus, Co-Chief Executive Officer of Hi-Crush and Laura Fulton, our Chief Financial Officer.

Before we begin, I’d like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. A number of factors and uncertainties could cause actual results in future periods to differ materially from what we discuss today. For a complete discussion of these risks, we encourage you to read the partnership’s earnings release and our documents on file with the SEC. Additionally, we will talk about the non-GAAP measures of EBITDA, distributable cash flow and production costs during the call. Again please refer to the earnings release or our public filings for definitions of non-GAAP measures and the full reconciliation of EBITDA and distributable cash flow to net income and production costs to cost of goods sold.

I am going to start today with a review of 2013 and some trends we are seeing now at the start of the New Year then Laura will run through the quarter and Bob will talk about our activities, our operations and our growth prospects.

First a quick look back at 2013 which was a landmark year for Hi-Crush in so many ways. Some of the highlights for the year. First we delivered and sold almost 2 million tons of frac sand, which is a 60% increase over what we’ve sold and delivered in 2012 from our Wyeville plant. In the fourth quarter alone, we sold and delivered nearly 600,000 tons of frac sand which represents full utilization of our nameplate capacity, record volume of production for any quarter as well as a record quarter for volumes sold from our distribution terminals.

Secondly we reduced our already industry low production costs. Our production costs fell consistently throughout the year from just short of $16 a ton for the full year 2012 now to an industry leading $12.50 per ton for the fourth quarter of 2013. We increased our customer platform from our original four core contract customers at our IPO to more than 25 customers today. And we diversified our revenues from exclusively [Applebee] plant sales under long term contracts to now sand sales at both the plant and destination terminals as well as multiple related services, such as storage and transload arrangements.

Also in the fourth quarter, our sponsor started construction at Whitehall, new sand processing facility that is essentially identical to our existing Wyeville and Augusta plants, importantly those located under new Class 1 railroads for us, the Canadian national. We also began expansion of our distribution network outside of our core Marcellus and Utica Basins into the Permian basin where our customers as well as the rest of the industry are expecting tremendous growth in 2014.

Also we’ve now increased our distribution by 7% over the original minimum quarterly distribution level and we continue to plan to deliver low double-digit annual distribution growth going forward.

Finally, last year we acquired D&I Silica, the largest independent frac sand distribution company in the country in June of last year. This was an accretive transformative acquisition that elevated Hi-Crush from a pure producer of high quality profit to an integrated producer, transporter, marketer and distributor of high quality profit. And one with an exceptional distribution and storage position in the fast growing Marcellus and Utica Basins.

So as we entered 2014 we see continued strong demand for Hi-Crush sand. We anticipate there will be continued drilling efficiencies brought about by pad drilling and 24 hour operations across the shale plays, as well as the continuing march of advances in drilling and completion technologies.

In 2014, more than ever the sand producers that can truly compete and keep up with this robust demand will need to have a flexible and far ranging distribution network. Relationships, reliability and quality will continue to be paramount. We’ll continue to leverage our competitive advantages. Our solid and growing relationships with our customers, our high quality premium white sands, our low cost business model and of course our distribution flexibility.

Going forward, the scope of our multiple customer contracts will continue to evolve toward full cycle services. In addition to just the delivery of sand these services now include mechanisms such as delivered pricing in multiple basins, transload in storage arrangements, as well as existing and new storage capacity. Since our Wyeville plant now is fully contracted and has been running at a level actually a bit higher than nameplate capacity, there may be questions regarding our future growth plans as well as the potential for the drop down of sponsor’s Augusta facility.

A little bit later Bob, will give an update on these growth plans. The Augusta, facility, you may recall is a premier state-of-the-art facility with more than 30 years of proven reserves of Northern White frac sand. We have said in the past, we would like to drop this facility down sooner rather than later and this remains our guidance today. The end of the fourth quarter and the start of this first quarter were exceptionally busy for our team in terms of selling sand and landing new business.

Just a comment about the intensively cold weather that hit the upper Midwest and the North East this winter, it has really not been much of the factor for us. We did all construction of the Whitehall facility for just a couple of days, but we are back on schedule for startup sometime in the second quarter. Our production facilities in Wisconsin have been running basically non-stop with the exception of one or two days, when it was really cold and we don’t anticipate any issues with the startup of the [White] plant to get him with the approaching spring.

In summary, last year was a great year and this year is off to a great start. We are happy with the way we positioned Hi-Crush and we are determined to continue to deliver value to our unit holders.

With that, I will hand the call over to Laura, to run through an update of our financials and our results for the quarter, Laura.

Laura Fulton

Thank you, Jim. After you’ve read our earning release filed with the SEC this morning, we plan to file our Form 10-K in the first part of March. Today, I'll give some color on our fourth quarter 2013 financial results.

Today's results show reported net income of $18.1 million or $0.63 per limited partner unit. This includes $0.13 per common and subordinated units related to the $3.75 million distribution earned for the third quarter of 2013 under the preferred interest from Augusta that was paid in November.

Revenues for the quarter were $51.5 million. This included sales of 588,000 tons of frac sand produced and delivered from our Wyeville facility or purchased under long-term supply agreement as well as revenues generated from transload and terminaling services. Roughly 60% of the sales volumes were sold at the plant under our long-term contracts. At current levels, Wyeville is fully contracted. Our average sales price on frac sand sold during the fourth quarter of 2013 was $74 per ton reflecting the mix of tons sold under our contracts with FOB plant pricing and through our distribution network with destination pricing.

Gross profit for the quarter was $20 million. Production costs at our Wyeville facility were the lowest of the year at $12.50 per ton for the fourth quarter compared to $13.10 per ton for the third quarter and $13.28 for the second quarter of 2013. The decline in production cost was the result of two factors. A greater volume of sand sold overall including our increased sales (inaudible).

G&A expense was lower at about $4.6 million compared to $5 million in the third quarter. Both quarters include non-cash expense associated with the amortization of intangibles of about $1.7 million. Third quarter G&A however included the non-recurring litigation cost of $300,000. Since we settled our litigation with Baker Hughes in October with the new six year supply agreement, we did not incur the same litigation cost in the fourth quarter.

Our guidance has been that the acquisition of D&I would add $500,000 to $625,000 each quarter, above historical G&A spending levels. And we continue to run slightly below those estimates but would expect that G&A will run closer to our guidance the next few quarters as we make key hires across our distribution network.

Our balance sheet is strong with $60 million of availability under our $200 million revolver. $138 million of borrowings under the revolving facility are at a low interest rate at 3.17%.

We had distributable cash flow of $20.4 million during the quarter and our distributable cash flow coverage reached 1.38 times during the fourth quarter. On January 16th, we declared our fourth quarter distribution totaling $14.7 million or $0.51 per common and subordinated units. This distribution represented our second increase for the partnership and was 4% higher than the previous quarter’s distribution. On an annualized basis, this equates to $2.04 per unit. As was guided before, we plan on providing a low double-digit increase in our distribution during 2014 to our unit holders.

With that I will turn the call over to Bob for an update on our growth outlook.

Bob Rasmus

Thanks Laura. I would like to talk a bit about our current operations and give you an update on the growth outlook for 2014. We continue to be focused on executing on our competitive advantages while maintaining cost discipline. As both, Jim and Laura mentioned, our operations are running smoothly. We are fully contracted at our Wyeville facility. The Augusta facility is operating at name plate capacity supporting both our contracted customers and sales through our distribution network. This underscores the industry’s confidence in Hi-Crush sand as well as in overall demand. It also reinforces our confidence in both our business model and sustainable distribution growth.

It’s clear to us that demand will likely ramp-up again in 2014 and we are well positioned for this growth. The construction at our sponsor’s new Whitehall facility is on track and we continue to target a second quarter startup. We are currently powering the foundation and laying track at Whitehall, the necessary equipment is onsite and ready for installation.

As a reminder, Whitehall is the third facility our sponsor has constructed and is a carbon copy plant of Augusta and Wyeville. It will be a 1.6 million ton per year facility with the same state of the art technology and a very course grade deposit. Also important to emphasize is that the plant will be located on the Canadian national rail line. This will give us even more flexibility in logistics and distribution.

We continue to make progress in our new distribution terminal locations and are making key hires for those locations. As the Marcellus and Utica grow, we will grow our operations along with it. We are also well positioned to meet demand growth throughout the U.S. Remember that almost 50% of our sand went to Texas in 2013. We think one of the big surprises of this year will be how rapidly the Permian expands.

Our volumes delivered to Texas and the Permian basin increased during the fourth quarter. This is a key reason we are establishing our first destination terminal outside of the Marcellus and Utica in the middle of the Permian in Big Spring, Texas. This terminal should be up and ready for operations during the second quarter.

Our business is scalable, and we continue to evaluate new opportunities to build on our distribution footprint. While we have a lot of organic growth opportunities in front of us, M&A always remains an option. There are still many private sand suppliers that we don’t think fit today’s integrated services model.

As the industry’s lowest cost producer, it’s hard to see how the small independent suppliers will continue to function effectively in the industry without high quality sand and the distribution network. There are also opportunities to take over the logistics functions for our customers or acquire other distribution locations. As we have said before, if there is an accretive opportunity that fits our portfolio, we would consider it for our unit holders.

So to wrap up, we’ve created a long-term sustainable platform that is poised for growth. We are performing well operationally. This is reflected in our earnings today, our outlook for 2014, and our sustainable distribution growth. Thank you all for your interest in Hi-Crush and for your time today. And operator, you may now open the line for questions.

Question-and-Answer Session

Operator

Thank you. We’ll now be conduct a question-and-answer session. (Operator Instructions). Our first question today is coming from Jeff Birnbaum from UBS. Please proceed with your question.

Jeff Birnbaum - UBS

Good morning everyone.

Bob Rasmus

Hi Jeff.

Jim Whipkey

Hi Jeff.

Laura Fulton

Good morning.

Jeff Birnbaum - UBS

Yeah. Congrats on the quarter. I was just -- quick question, as we start coming up mid-year this year the first contract rolls off, what kind of discussions that are you having about extending, not just settlement some of the longer dated contracts and is there any color that you think you can give there about kind of how that dynamic is working in terms of, how you are thinking about what you might if necessary will be going to kind of give to get additional volumes or extensions on those contracts and what the upside could possibly be to volumes across the various plants to (inaudible) the sponsor?

Bob Rasmus

Yeah. As we mentioned before Jeff, we don’t comment on individual contracts. We are in highly advanced discussions with all of our customers because as we mentioned before one of our competitive advantages is our strong customer relationships. We are fully contracted at Wyeville now and we expect to continue to remain so.

Jeff Birnbaum - UBS

Okay, thanks. Just more of a macro question almost. I mean, the sand industry obviously overall was very strongly in 2013, how are you thinking about that from an industry perspective over the next couple of years? And as perhaps more of E&P budgets go towards top end, how are you broadly thinking about the opportunity for Hi-Crush within space and what was that?

Jim Whipkey

Jeff, I think as we pay really close attention to what is going on in the space, obviously we come from the E&P backgrounds and service company backgrounds and we know a lot of these CEOs and talk to them frequently. And the outlook is strong. For us, it’s all about relationships. And as Bob said, we are constantly talking to our big customers, not only about existing supply contracts and extending those contracts but about adding services to those contracts. We can offer so many more things now than we were able to when we first started as a public company. So, as far as the space and the growth, you've got a handful of big companies that can offer premium product and distribute sand to where the E&Ps and the service companies need this product.

And I think we're very constructive on where proppant demand in going. When we went public, it was a hot market; it cooled off a little bit as new entrants had joined the marketplace. But then the major players diversify their offerings and are full service companies now. And those are going to be the companies that thrive going forward in this growing space.

Jeff Birnbaum - UBS

Okay. Thanks again.

Jim Whipkey

Thanks Jeff.

Operator

Thank you. Our next question is coming from TJ Schultz from RBC Capital Markets. Please proceed with your question.

TJ Schultz - RBC Capital Markets

Hey, good morning. First on Augusta, you mentioned...

Bob Rasmus

Hi, TJ.

TJ Schultz - RBC Capital Markets

How are you doing? On Augusta, you mentioned again kind of sooner rather than later on the drop. Just wondering if you can get any more specific, if it's at nameplate capacity, just what are some of the other hurdles you have to get through that process?

Bob Rasmus

I think as I say, sooner rather than later means just that we -- I'm not trying to be too sure, but we don't want to be any more of a specific on that and that remains our guidance.

Jim Whipkey

And TJ we've got a good mix of long-term contracts and now with the ability to distribute sand through the D&I network, all of that sand is finding a home. And we’re focused on doing what’s best for the unit holders. And we can’t -- as Bob said, can’t give you any more specific guidance other than pretty soon.

TJ Schultz - RBC Capital Markets

Okay. But the contract mix as it stands at Augusta now given you still have some long-term contracted volumes there; is that suspiciously contracted in your view to reside in the MLP?

Jim Whipkey

Sure.

Bob Rasmus

Absolutely.

Jim Whipkey

Yeah, I think absolutely, we don’t really look at -- we have to hit a certain percentage contracted before it qualifies for dropdown.

TJ Schultz - RBC Capital Markets

Okay. Just one quick one on Whitehall, you mentioned the Canadian national, if you could discuss just some of the benefits on that rail access provides; what new basins maybe you are potentially touching with that?

Jim Whipkey

Yeah sure, it’s -- Union Pacific has been really good to us and provides really nice service for us but it’s limiting to be on a single Class 1. And of course, you know both Wyeville and Augusta are on the UP. Having access now to a second Class 1 gives us all kinds of options in many ways, we can ship sand on the CN cheaper into specific locations in Ohio for example than we can on the UP. Texas as Bob said is a big market for us with just about half of our sand going to Texas. Well taking CN to the KCS system into South Texas is in many respects cheaper than certain UP locations. So, it really just -- it’s not just doubling our flexibility but it adds exponentially to our flexibility now being on two Class 1s.

TJ Schultz - RBC Capital Markets

Okay. I understood. Just lastly, kind of continuing the dialogue on the evolution of the contract structures that you’ve alluded to in your prepared remarks. Given this comes a time when you are certainly landing a lot new business, you have contracts to renew, you are comfortable with the intend of double digit distribution growth this year, but can you just talk in general your comfort level on long-term consistency in distribution growth as you maybe move away from some of take and pay structures on the contracts and whether this means you might want some higher level of distribution coverage under these kind of new or evolving contract structures?

Bob Rasmus

A couple of things, one we never said, we were moving away from take or pay contracts; two, that we've talked about before and want to continue to reemphasize that we have multiple visible avenues for growth. We've talked about just the organic growth of the business itself, the opportunities we have. We have the potential drop down of Augusta, we have the potential drop down of Whitehall down the road, we have potential acquisitions both in terms of production facilities as well as other distribution or distribution related businesses, so that we are very comfortable in our ability to sustain long term double-digit increases in our distributions.

Jim Whipkey

And I’ll just add to that. As we move forward with new customers who have different set of needs than our foundation customers, we’re talking to them and entering into arrangements that include not just sand supply, but transload services and storage services, silo leases. And this is all part of building the relationship; it’s different ways of building customer loyalty, customer stickiness that gives us a huge amount of confidence that consistency of distribution growth is not going to be a problem for us.

TJ Schultz - RBC Capital Markets

Okay, thanks. Helpful.

Jim Whipkey

Thank you.

Operator

Thank you. Our next question today is coming from Marc Silverberg from Barclays. Please proceed with your question.

Jim Whipkey

Good morning Marc.

Marc Silverberg - Barclays

Hi. Good morning everyone. I guess first in the past, you’ve commented on the new customer opportunities created by extending into distribution. Have you had any traction there regarding your ability to further penetrate the market and is Permian opening up that door further or any other basins as the potential good candidates to move into?

Bob Rasmus

As Jim mentioned in his remarks, Marc, we’ve extended from our original four customers to over 25 now. Some of those were as a result of the acquisition of D&I, some of those were as a result of the combination of D&I and Hi-Crush adding new customers, post the D&I acquisition. So that yes we have added new customers. We continue to add new customers. And as we continue to penetrate even further and expand our distribution network, the opportunity for service companies who are basin-specific, we are in active marketing to those companies as well.

Marc Silverberg - Barclays

Okay.

Jim Whipkey

I was going to add that it’s -- a lot of it is listening to the customer. The reason we ended up in Big Spring was talking to our customers and hearing from them where they want us to be. And we have our own internal marketing studies that indicated that that’s a great place to be on the eastern side of the Permian, looking at permits. But it’s more than just looking at permits and activity; it’s talking to the customers. And that will continue as we look at other basins where we’ll look at expanding our distribution network including the Midcontinent and the Rockies.

Marc Silverberg - Barclays

Okay, got it. Thank you. You have touch it on this fair capacity up there, I’ve got. How do you think about that capacity? I guess you’re currently are filling some of the demand for your Marcellus distribution, as well as have some portion of that under long-term. Do you prefer the long-term contracts? And is that something you are currently marketing or do you wish to maintain that capacity to offer some flexibility for the distribution business?

Jim Whipkey

Yeah, I think you hit it on the head. The flexibility is a nice thing to have. And we don’t -- there is a sweet spot, there is a right mix between long-term contracts and shorter term arrangements, pricing agreements, transload, storage and the flexibility to serve many customers, the ability to have sand available in basin to serve multiple customers.

So yeah, we like the flexibility of having some uncontracted sand which is what we have at Augusta, but obviously having no difficulty moving through our distribution network. We think that’s a good balance for us.

Marc Silverberg - Barclays

Got it, okay. And then as far as the production cost, obviously we saw those get down even further to 12.5. Do you see any opportunity to shave off additional costs there with the current state of the business or maybe with some synergies that come with expanding the business. How should we think about this going forward? Is that pretty much the maximum?

Jim Whipkey

We’re always focused on cost; our goal is always to be as efficient as possible. But we think we are doing pretty damn good right now in terms of where we are at our production cost. So I think the guidance we've given previously, vis-à-vis good production cost, I think remain the same.

Marc Silverberg - Barclays

Alright, perfect. And then lastly, just touching on the cold weather, can you comment as far as stockpiles and how those are running at your sites? I know typically you build that inventory ahead of winter and you had said you don’t anticipate any issues getting everything back up and running. But given the strong volumes that you had in Q4 and it sounds like running it to Q1 of this year, if it turns out to be an extended winter before you could get the wet operation into backup, the intensity having enough stockpile to meet everything in all grades?

Jim Whipkey

Yeah absolutely, we've got a couple of pretty big mountains of sand out there at Wyeville and Augusta and we build a significant buffer into our winter inventory so that the transition into the spring when we start our wet plant back up again is seamless. So no worries there at all. And this cold weather has been a bit disruptive for the industry; I think it's a testament to the way our plants are designed that we experienced no downtime. We've seen some problems with railcar availability in the Midwest. We've also seen some activity slowdown towards the end of the fourth quarter and talking about frac activity, which is now starting to ramp back up. So, as far as the weather goes we see no lasting effects and no interruption in our operations whatsoever.

Marc Silverberg - Barclays

Got it. Okay, great. Thanks very much for the comments everyone.

Jim Whipkey

Thanks Mike.

Operator

Thank you. (Operator Instructions). Our next question is coming from Brandon Dobell from William Blair. Please proceed with your question.

William Dobell - William Blair

Thanks. Good morning everybody.

Jim Whipkey

Hi Brandon.

Laura Fulton

Hey Brandon.

William Dobell - William Blair

Maybe focusing on the conversations with the E&Ps for a second and the first, I guess first point of view in terms of the mix or grades of sand, how the conversations going around I guess the existing contracts are you seeing people, the customers want different grades or different grades in different basins especially around 100-mesh given all we’ve heard the past several quarters about the demand there? And then maybe from an expectations point of view, do you see any particular grade or particular basin and grade mix issue being an opportunity for you guys or a risk for you, I guess average price per ton?

Jim Whipkey

No, I think we’re real comfortable with the grade splits that we are able produce and the flexibility that we have in supplying our customers’ different grades. Nothing has really changed in our mind that the [courser] grades are more valuable and will continue to be more valuable than the finer grades. But you know Brandon, I’m an old petroleum engineer who used to design fracs and a lot of these new designs that are coming out from the E&P companies whom we talk to all the time are just kind of new cooks in the kitchen who are trying 40-70 heavy fracs and having good luck with them.

Yeah, we have been surprised that 100-mesh has been more popular this quarter than prior quarters. Well at last, I don’t know. We supplied some of it, it used to be a waste product for us and we don’t include it in any of our contracts or we hadn’t even produced it for sale before the fourth quarter.

I guess I am a little bit surprised that some of the 40-70 is being used so much lately, even in Texas, even in some of the oilier basins and in the Eagle Ford and West Texas are using 40-70. But we certainly have the flexibility to follow the trends to follow the [pads] and to give our customers what they are looking for.

Bob Rasmus

And just a little bit of elaboration, 100-mesh was less than 10% of our sales in the quarter. Our contracts, our contracts were 20-40, 30-50 and 40-70 only. And as Jim mentioned, we believe the course of rates are the more valuable and that was one of the attractions for the sponsor of our Whitehall facility where we’re building the plant and that is a very course deposit.

William Dobell - William Blair

Okay. And then shifting to I guess sales from the plant versus different destinations, you had mentioned 60% of the volume in the fourth quarter was over the plant. In your conversations with people to an expectation or do you have an expectation for that percentage may look like as you go through 2014?

Laura Fulton

I think as we go through 2014, we are looking at roughly the same percentage, 60% to 70% is going to be under the long-term contract which is the FOB plant pricing. The wild card there is how much and how quickly the distribution business grows particularly as we get the big spring location at the mining.

William Dobell - William Blair

Okay. And then as a segue on that, as you think about I guess incremental spot locations from more distribution, how should we think about the capital needs with partnership versus and kind of build on your own? What's the -- I guess the preferred way of doing it given the opportunity for controlling the process as opposed to getting it up and running faster with a partnership model?

Jim Whipkey

Our preference is to do it ourselves because we therefore can control customer service, we can control cost and we control execution. In terms of the cost or the capital dollars involved in expansion, our model involves going in and exposing relatively modest dollars to initiate operations at a terminal that if that work provides a very quick payback, if it doesn’t work for whatever reason which we wouldn’t anticipate just be of very modest amounts. And then based on the performance and we can add to that in terms of larger capital dollars again with very quick paybacks.

William Dobell - William Blair

Okay. And then final one for me, around the D&I acquisition time you guys talked about some of those contracts I think maybe a little less than half the volume as they come up. Taking a look at what was best for the unitholders and for you guys other third-party sand or your own sand, how do we think about that dynamic in ‘14, especially with the ramping up the other mines that you guys have the sponsor level?

Bob Rasmus

We always have -- one of the attractions of D&I was with their network of origin terminals that it did allow us access to other rail networks. The reality is we can still produce sand cheaper than any of those others and our goal would always be to sell sand originated from our own production facilities.

William Dobell - William Blair

Okay. Thanks a lot. I appreciate it.

Bob Rasmus

Thanks Brandon.

Operator

Thank you. Our next question today is coming from Ethan Bellamy from Baird. Please proceed with your question.

Ethan Bellamy - Baird

Hey all, good morning. Congrats on a good quarter.

Jim Whipkey

Hi Ethan.

Bob Rasmus

Hi Ethan. Thank you.

Ethan Bellamy - Baird

On the M&A side, are there many facilities that are being actively marketed now? And can you (inaudible) probability of third-party deal in 2014?

Bob Rasmus

Yeah, there are a lot of facilities that are being marketed whether actively marketed or marketed, you could -- we will be opened for debate. The main thing for us is what do we get if we acquire a production facility? We’ve got extremely strong relationship with the large number of Service Company so just getting a new relationship is unlikely.

Having a new reserve base, we think we’ve got great high quality reserves with rail located onsite, which helps bring both our production and distribution cost down, so that’s a factor, maybe a long-term contract in place, a very long-term that would have some appeal.

So, it’s a very long winded answer of saying that we are always willing to look. We know what we can build and run these plants for. We are absolutely committed to fiscal discipline and how we evaluate that. So just because MLP math might work on a transaction, doesn’t mean we would enter into it.

Ethan Bellamy - Baird

That’s a good answer, thank you. I appreciate that. My intent is certainly not to lame in the parade here, but I would like to know what you think the business would look like if we were to see the down cycle scenario on crude oil pricing let’s say $70 to $75 this summer and we got there for a few month. What do you think that would do to prices and volume? And how do you think about managing through sort of a moderate down cycle like that?

Jim Whipkey

We always think about it. One of the things we always do is we want to plan for the worst and hope for the best as opposed to vice versa. And we always think about can we go through an enterprise risk assessment with our Board as well, which we just finished conducting at our last Board meeting with the scenario just as you outlined. And yes, it would have an effect on demand, but we are building, we’re here to capture steady state sustainable growth. We don't want the peaks and valleys and the variability associated with that.

And you also look at the dynamics of unconventional oil and gas production with the hydro ballistic decline curves that if you take your foot off the production accelerator for a relatively short period of time, you would have such a dramatic decline in production that you get back to equilibrium pretty quickly and the need to drill for new oil and gas wells.

Ethan Bellamy - Baird

Okay. You've extended the business into logistics. Do you or the folks have any desire to take the firm into new MLP qualifying business lines?

Jim Whipkey

We're confident in the business that we're in. We're a frac sand company and that's our nature that's what we do well that's what we focus on and we want to focus on being the best frac sand company.

Ethan Bellamy - Baird

Okay. Last thing, one kind of housekeeping question, stock price are going well, should we expect to see any lumpiness in G&A on incentive comp related to the stock price?

Laura Fulton

I don't think so. On the G&A side of things, our compensation structure is fairly well set. And so it's not based on volatility and our unit prices and we're very focused on G&A and the guidance that we gave in our Analyst Day in November I think still holds for G&A expense.

Ethan Bellamy - Baird

Okay. Thanks very much.

Bob Rasmus

All right Ethan. Thanks.

Operator

Thank you. Our next question today is coming from Mark Bianchi from Cowen & Company. Please proceed with your question. Hello Mr. Bianchi your line is now live, perhaps your phone is…

Marc Bianchi - Cowen & Company

Good morning guys.

Bob Rasmus

Hi Marc.

Jim Whipkey

Hi Marc.

Marc Bianchi - Cowen & Company

I wanted to get back to the mix question on the 100-mesh. Is there -- from what you have seen and maybe not necessarily case for you, but within the industry is the 100-mesh growth displacing courser grades or is it incremental in your estimation?

Jim Whipkey

We see it as incremental and I guess speaking from our position, we are not seeing a drop off in 40-70, in fact our 40-70 volumes are up as 100-mesh has come on the scene. You are seeing a lot of operators who are experimenting with very large volumes of 100-mesh on individual wells. We don’t see it as a long-term trend. We supply it to our good customers because as we said before, it used to be a waste product for us. But no, definitely do not see any evidence that it’s cutting into our core grades.

Marc Bianchi - Cowen & Company

Got it, okay. Okay that’s it for me. Thanks so much, guys.

Bob Rasmus

Thanks Marc.

Operator

Thank you. That concludes our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Jim Whipkey

Okay operator. Well, thank you everybody. We are very pleased to have reported on a landmark year in 2013 and we’re looking forward to continuing into 2014. We’ll see you all on the next conference call. Thanks for listening.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time. And have a wonderful day. We thank you for your participation today.

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