Hi-Crush Partners LP (HCLP) Robert E. Rasmus on Q4 2015 Results - Earnings Call Transcript

| About: Hi-Crush Partners (HCLP)

Hi-Crush Partners LP (NYSE:HCLP)

Q4 2015 Earnings Call

February 23, 2016 9:00 am ET

Executives

Duane Scardino - Associate

Robert E. Rasmus - Chief Executive Officer

Laura C. Fulton - Chief Financial Officer

Analysts

Praveen Narra - Raymond James & Associates, Inc.

Bradley Philip Handler - Jefferies LLC

James Wicklund - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Richard A. Verdi - Ladenburg Thalmann & Co., Inc. (Broker)

Jason A. Wangler - Wunderlich Securities, Inc.

Robert F. Balsamo - UBS Securities LLC

Sonny Randhawa - D. A. Davidson & Co.

Anjali Ramnath Voria - Thompson Research Group LLC

Tom R. Dillon - William Blair & Co. LLC

Operator

Good morning and welcome to Hi-Crush Fourth Quarter and Full Year 2015 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. And at this time, for opening remarks and introductions, I would like to turn the call over to Duane Scardino, Senior Financial Analyst of Hi-Crush. Thank you. You may now begin.

Duane Scardino - Associate

Thank you. Good morning, everyone, and thank you for joining us today to discuss Hi-Crush's fourth quarter and full year 2015 results. With me today are Bob Rasmus, Chief Executive Officer of Hi-Crush; and Laura Fulton, Chief Financial Officer. Before Bob and Laura provide their prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. Please note that actual results could differ materially from those projected in any forward-looking statements.

Additionally, we may refer to non-GAAP measures of EBITDA, adjusted EBITDA, distributable cash flow, adjusted net income, and contribution margin during the call. Please refer to our public filings including our annual report on Form 10-K filed today for definitions of our non-GAAP measures and the reconciliation of these measures to net income as well as discussions of risks and uncertainties. I would now like to turn the call over to Bob, who will provide a market update along with our latest outlook. Bob?

Robert E. Rasmus - Chief Executive Officer

Thanks, Duane. And thanks to everyone for joining us on the call this morning. The beginning of 2015 started off with stable pricing and resilient demand for frac sand, but quickly shifted to an environment of increasing uncertainty. Drilling and well completion activity rapidly declined and the industry turned its focus to cost reductions and optimizing well performance.

Industry sentiment became increasingly negative in the second quarter of 2015. And while the trend of greater service and frac intensity continue to benefit the sand industry, this was more than offset by the net reduction in well completions across the U.S. In the summer, the industry saw a slight rebound in oil prices, driving an increase in completion activity as producers became more optimistic about the outlook. However, this increase in activity would prove to be short-lived, and by mid August, the realities of a persistent downturn had largely set in, hopes of a V-shape recovery faded, and the downward trend intensified.

As we headed into the fourth quarter, concerns grew about the potential for a complete industry shutdown during the final weeks of the year, the so-called fracation as E&Ps approached year-end with exhausted 2015 capital budgets and faced the impact of continued low and still declining commodity prices. Fortunately, the fears did not translate into reality, but the fourth quarter was challenging, nonetheless.

The quarter ended with year-over-year declines in rig count of 62%, and oil prices of 30%, and natural gas prices of 27%. Our average FOB mine price and in basin sales prices tracked the macro forces and declined substantially from the fourth quarter of 2014 to the fourth quarter of 2015. Like the rig count and commodity pricing, sand prices exited the year at low points.

Clearly, our business is exposed to market forces and related rig count trends, but because sand is not required until the completion phase of the process, it is not a one-to-one relationship. Other factors are important to consider, including sand intensity, drilling and completion efficiencies, and completion deferrals. Essentially, the industry is drilling more wells with fewer rigs, completing wells quicker, and more efficiently than ever before and pumping more sand downhole. The overall increased use of sand per well was illustrated by the commentary of a major pressure pumper who cited a 9% increase from the third quarter to the fourth quarter. This increase in sand intensity continues to be a partial offset to some of the pressures we are seeing today, and remains a key driver of frac sand demand over the long-term.

Despite the decline in rig count, a 49% decline in well spud, a 14% decline in wells completed, industry sand volumes were down less, in fact, far less at 15% to 20% when comparing 2015 to 2014 according to one industry report. This is clear evidence of the increase in sand intensity per well. However, the bottom line is that frac sand and its demand is all about well completions. Due to lower well completion activity, the fourth quarter was very challenging. And while we did not see the decline that many had feared, our operations were impacted by greater than normal seasonal declines.

As a result, we saw sales volumes fall by 14% sequentially, and average pricing declined by a further 9% from third quarter averages. These difficult conditions had extended into the first quarter of 2016. And while pricing has not deteriorated further, things have not improved. Against this backdrop, we anticipate that the lower levels of activity we experienced late in the fourth quarter will continue. With no improvement, we would expect reported average pricing and volumes to decline for the first quarter of 2016 as these lower prices and volumes are realized for a full-quarter period.

With current FOB mine prices approaching all-time lows, in many cases at or below the production cost level for many producers, we believe prices have little, if any, further room to fall. Our customers in E&Ps have echoed this sentiment in recent weeks, suggesting that there is not much additional pricing to take from service and sand providers, following a decline in sand prices of, in some cases, as much as 60%.

We work with our customers through lower pricing and we believe we gained market share in 2015. But we also believe current frac sand pricing for the industry is unsustainable. To address this reality, we recently began turning down orders as we focus not just on gaining market share but ensuring that we sell our sand profitably in this challenged environment, minimizing losses and maximizing cash flow today and into the future. We believe the industry's cost focus will shift to process improvements.

What does all this mean for Hi-Crush? We are committed to developing and capturing technology advancements to improve productivity, efficiency and ultimately reduce costs. As an industry-leading low-cost sand producer, we will continue to do all we can internally to take out additional cost from our operations. We are also striving to reduce expenses and enhance efficiencies by implementing process improvements throughout the entire frac sand supply chain, from the mine site, all the way to the well site. We are in a good position to translate our production cost advantage into logistics savings using our distribution network and leveraging our long-term relationships.

In response to this unprecedented downturn, we have made tough decisions. We idled our Augusta facility, closed or idled some of our low-volume distribution terminals, and closed administrative offices, reducing our workforce by 23%. We are doing more with less, and are continuing to search for ways to take cost out of our operations both permanently and in response to current needs in the market, all with an unchanged commitment to customer service and reliability.

Throughout these series of cost cuts and changes to our business, we have not lost sight of the importance and need for strategic investment in our future. We expanded silo storage at two terminals in 2015 and are investing in two more locations as we speak. We have continued to work towards the completion of our Sponsor's production facility located near Blair, Wisconsin which we believe will be our second lowest cost production facility offering even more flexibility for maximizing origin and destination pairings to reduce logistics costs.

These important initiatives along with others we are undertaking are aimed at continuing to build a world-class logistics system that allows us to reduce costs for both Hi-Crush and our customers while also positioning us to capture upside during the eventual market recovery. As the downturn continues to play out, all of our actions remain focused and maintaining our flexibility and financial position to provide every competitive advantage now and when the market turns. While we have extensively discussed the negative pressures, we still see many partial offsets that continue to benefit our company today.

We continue to expect further attrition among higher cost sand producers on top of what we have already seen. The longer this downturn extends, the more capacity we expect to see shuttered. This reduction in sand supply will have a positive impact on both pricing and volumes for larger, well-established low cost producers such as Hi-Crush.

During the fourth quarter of 2015, more than 90% of our sand volumes were sold to our long-term customers. While these sales are not at the original term of the contract, we think these volumes emphasize the importance and value of our long-term relationships, particularly in a downturn.

Our customers continue to work through vendor rationalization programs, essentially partnering with one or two main sand providers capable of meeting their increasingly demanding needs in this dynamic industry environment. We believe this vendor consolidation trend significantly benefited us in 2015 and we expect this trend to continue in our favor in 2016 as smaller competitors struggle to keep up with changing industry demands due to their higher cost structure and lack of distribution infrastructure.

Our strategy for 2016 is like that of our customers, optimizing our cost structure, controlling what we could control and being the best at what we do. For example, unit trains give us great efficiency which in the long term will be a strong driver for efficient delivery of sand. In the short term, though, using more unit trains results in the need for far fewer rail carriers, which Laura will discuss in more detail.

For 2016, we plan to run one plant on the Union Pacific and one plant on the Canadian National Rail lines. This allows Hi-Crush to efficiently meet our customers' needs and gives us more flexibility through maximizing origin and destination pairings to reduce logistics costs. We continue to work towards lowering our freight rates but optimizing our origin and destination pairings can also make significant difference in the overall cost of delivering sand in basin. We will be opening additional rail-served destination terminals in Colorado and Texas in the next few months to further enhance our in-basin offering and develop assets where our customers demand our services.

We are confident in our 2016 strategy and believe the long term fundamentals of the industry remain strong and underpin a favorable outlook for the future. However, we want to be very clear. Despite any partial offsets from positive factors we see in parts of our business today, the market remains extremely challenged for all, visibility remains low, and competition remains high.

Now, I would like to turn it over to Laura to provide further detail on our operational and financial performance. Laura?

Laura C. Fulton - Chief Financial Officer

Thanks, Bob. Our fourth quarter 2015 reported basic and diluted earnings were $0.30 per limited partner unit. EBITDA for the quarter was nearly $18 million. Included in our fourth quarter results were a few one-time items, I would like to highlight.

During the fourth quarter 2015, we reached a mutual agreement with a customer regarding a contract dispute and received a cash settlement payment in the amount of $22.5 million for past and future obligations under the customer contract. This settlement payment is non-recurring income, and $10.2 million was recognized as other revenue related to make-whole payments, with the remainder as other operating income. Because we received the payment in full and in cash, the full impact of the settlement payment equal to $0.61 per unit is reflected in our net income, adjusted EBITDA and distributable cash flow.

We also recognized $1.9 million of impairments and other expenses associated with the write-down of assets acquired from D&I Silica in June of 2013, including about $200,000 in costs associated with reducing head count. These impairments and other expenses negatively impacted our fourth quarter earnings by $0.05 per limited partner unit. The impairments and other expenses is excluded from adjusted net income, and the non-cash portion is excluded from adjusted EBITDA, consistent with the treatment of similar impairments and other expenses in the third quarter of 2015. Excluding the non-cash portion of the impairments and other expenses, adjusted EBITDA for the fourth quarter was $19.7 million.

Getting to the base business, we sold 1.2 million tons of frac sand during the fourth quarter, in line with the volumes sold in Q1 and Q2 of 2015, but down from 1.4 million tons sold in the third quarter of 2015. For the full year, we sold a total of 5 million tons of frac sand, an increase of 9% over the 4.6 million tons sold for the full year 2014.

Sand volumes sold in-basin in the fourth quarter made up 52% of our total volumes, up slightly from the 49% in the third quarter of 2015. We expect our percentage of in-basin sales to continue to increase over time. All else being equal, the shift to in-basin sales should be beneficial going forward.

Average sales price was $52 per ton for the fourth quarter of 2015, down from the $57 per ton in the third quarter of 2015 as pricing continued to fall with ongoing pressure from our customers for cost reductions. As pricing remained under pressure during the quarter, our contribution margin fell from $14 per ton in the third quarter of 2015 to $9.66 in the fourth quarter. This represents a year-over-year decline of 72% from the fourth quarter of 2014 during which we generated $34.59 of contribution margin per ton. And I'll provide some color on the change in contribution margin per ton in a moment.

Total revenues for the fourth quarter of 2015 were $72.1 million, including other revenue resulting from the make-whole payments. This compared to $81.5 million in the third quarter of 2015. Excluding the nonrecurring income from the contract settlement payments, the base business realized an adjusted EBITDA loss of approximately $3 million. So what drove the underlying results? Well, sales prices were down from the third quarter resulting in a reduction of approximately $6 million on our bottom line. Total sales volumes also continued to decline as we went through the fourth quarter, further reducing our adjusted EBITDA by about $3 million quarter-over-quarter.

The lower overall sales volumes also had knock-on effects across the entirety of our operations. Starting with our production costs, the variation in production schedules to meet the grade mix demand increased our production cost per ton. Add to that, the normal additional costs we have in the winter associated with the shutdown and winterizing of the wet plants and related maintenance, we had nearly a $3 per ton increase in production cost and reduction of contribution margin per ton in the fourth quarter compared to the third quarter. Our freight costs vary depending upon the basin and the use of manifest or unit trains.

On a per-ton basis, our freight cost increased as we shipped more volumes to the Permian Basin for a total impact of nearly $0.5 million. And while we carefully manage our inventory and distribution network, in this environment and with the constant shift in market dynamics, invariably, it is challenging to match the mesh size of the inventory to the demand in a particular location efficiently. The write-down of this slow-moving inventory in areas with less activity than expected or due to temporary shifts in demand for lower cost mesh sizes, combined with the related storage and other costs, was a negative impact of nearly $2 million in the quarter or $1.50 reduction in our contribution margin per ton.

Another important consequence of the reduced sales volume is lower utilization rates on our rail cars. By selling less sand overall, and more sand at the mine gate, we have less ability to leverage the fixed costs required to operate our logistics system such as leased costs for railcars. And as we have previously commented, this railcar cost has not impacted all-industry participants equally.

Many of our competitors have been dealing with significant levels of empty railcar storage costs throughout much of 2015. By contrast, we had no cars in storage in either of the first or second quarters of 2015, and only 250 cars in storage at the end of the third quarter. However, we exited the year with just over 1,900 railcars in storage as the December slowdown had a somewhat greater than expected impact on railcar utilization.

We expect that the number of cars in storage will remain at these levels until activity picks up. Our results for the fourth quarter included approximately $1.5 million of costs from storing empty railcars further reducing our contribution margin by more than $1 per ton. Last, the reduction in head count resulted in severance costs of about $200,000.

To summarize, our contribution margin per ton for the fourth quarter includes the positive impact of collection of the make-whole payments but was reduced by the decline in pricing, higher freight costs and the railcar storage costs. Going forward, our contribution margin per ton should not continue to be impacted by the inventory write-down, winter impacts in our production costs and severance.

In addition, as Bob is fond of saying, we are laser-focused on cost reductions. The completion of construction in April of our Sponsor's Blair facility will offer important storage cost mitigation as we will be able to utilize the facility's track space for storage at no cost. We also will not be renewing railcar leases as they expire during the year which will help lower leasing and storage costs.

Another major action we took to reduce cost includes idling our highest cost facility, the Augusta facility, during the fourth quarter. In addition to operational cost savings and adjusting our operations to match the current needs of the market, we believe the idling of Augusta lowers the available supply in the market and should help to stabilize pricing. We have also begun to turn down orders that are not profitable. While we can operate Augusta to produce sand for our customers, we will not do so to the detriment of profitability given our focus on both cash flows and capital flexibility.

Since August of 2015, we've reduced operational staffing levels at Augusta and certain distribution terminal facilities, including administrative staffing by approximately 23%, which is expected to drive additional cost savings.

Turning to the balance sheet, during our third quarter earnings conference call last October, we discussed that we are proactively working with our banks on a revolver covenant amendment. On November 6, we announced the completion of an amendment that among other things raised the leverage compliance ratio through June of 2017 and allows for borrowings of up to $100 million, approximately $40 million of which remains as available liquidity today.

The amendment also establishes certain minimum quarterly EBITDA covenants. The amendment requires at least $2 million of EBITDA over the cumulative six-month period ending March 31, a level we expect to achieve given our fourth quarter results.

Throughout 2016 and during the first two quarters of 2017, our six-month EBITDA minimums are just higher before our leverage ratio covenant phases in over time. And it will decline from 5 times in June of 2017 to its previous level of 3.5 times in March of 2018 and beyond.

With our focus on filling the most profitable sales orders, and the cost reductions we have identified and targeted, we saw a positive EBITDA in January. We believe the investments we are making for the development of terminals in the Permian and DJ Basins will begin to generate positive cash flows or increased margins in the second quarter. Combining those investments with our actions to-date, we believe we will continue to remain in compliance with the EBITDA minimums contained in our bank agreement.

The amendment with our bank group does limit our amount of spending on CapEx for 2016 to $28 million in excess of our previously disclosed 2016 CapEx budget of $15 million to $25 million. Our 2016 budget, which remains flexible based on market conditions, includes the strategic build-out of the terminals in the Permian and DJ Basins. We remain committed to carefully managing our balance sheet and will be prudent, yet opportunistic, in our spending plans.

Our distribution suspension remains unchanged for the fourth quarter of 2015 and the foreseeable future as we focus on retaining cash flow and improving the position of the partnership. Our revolver amendment allow for distribution of up to 50% of our distributable cash flow less principal payments.

This is flexibility and optionality that we'd like to have. Our board will continue to evaluate the distribution on a quarterly basis. However, we require sustainable signs of improvement and greater visibility into market activity and cash flow before distribution payments are resumed.

The amendment with our bank group demonstrates their support to the business as well as the management team and provides us with the flexibility and liquidity we need to manage our business over the next several quarters.

Before we open up the line for Q&A, I'll turn it back to Bob for some closing comments. Bob?

Robert E. Rasmus - Chief Executive Officer

Thanks, Laura. I am extremely proud of our employees and how they have responded through their resiliency and creativity in maintaining low production costs and enhance the efficiency companywide. While I would love to tell everyone that there is good news around the corner, we believe that 2016 will be another challenging year as we do not foresee a recovery until the second half of the year at the earliest.

We are well-capitalized and have best-in-class assets and logistics capabilities, and we are strategically investing for the future. With the actions we have taken in 2015 and we'll continue to take through the year, we are in a good position to take advantage of the recovery, particularly if any part of the recovery falls in 2016.

We thank you for your time today, and we'll now open it up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question comes from the line of Praveen Narra from Raymond James. Please go ahead.

Praveen Narra - Raymond James & Associates, Inc.

Hi. Good morning.

Robert E. Rasmus - Chief Executive Officer

Good morning, Praveen.

Praveen Narra - Raymond James & Associates, Inc.

I know you mentioned turning down orders, but I guess, could you give a sense of would those orders have been – would they have covered fixed costs? I guess, basically, can you give us a sense of what you're unwilling to take at this point?

Robert E. Rasmus - Chief Executive Officer

What we're unwilling to take is orders that aren't profitable. When we look at what our costs are on a fully loaded basis, not just the cost of production but adding on SG&A and support, that when we look at those orders, we want to ensure they're profitable for us.

Praveen Narra - Raymond James & Associates, Inc.

Okay. Okay. That's helpful. And then, when we think about the storage costs, you mentioned in 4Q that you guys had $1.5 million of storage costs. If I look at the presentation, it shows quarterly storage cost of $1 million to $1.5 million, does that include the Blair facility and the 900-ish cars you guys can store there for free or...

Robert E. Rasmus - Chief Executive Officer

No – sorry, Praveen. Go ahead. I didn't mean to interrupt.

Praveen Narra - Raymond James & Associates, Inc.

No. No. Is it just excluding the Blair facility or is that inclusive of the free storage you guys get there?

Robert E. Rasmus - Chief Executive Officer

We begin moving cars to Blair this week, so that does not include cars that we can store for Blair for free. During the year, we will be having some additional cars come online to the tune of about 50 cars a month for the next six months for the – that basically covers the remainder of the year. But we also have a couple of hundred cars coming off lease, and we also will be returning customer cars, some customer cars to our customers. And so, we think we're at the high point in terms of out-of-pocket storage costs.

Praveen Narra - Raymond James & Associates, Inc.

Okay. Perfect. And then, you guys have mentioned that you guys have been pretty consistent around 1.2 million tons per quarter. Obviously, visibility is low, but where do you think that stabilizes for 2016? Or is there any way to really call that at all?

Robert E. Rasmus - Chief Executive Officer

No, there's very limited visibility for 2016. One, since the beginning of the year you've had a continued decline in the rig count. You've had a continued decline in oil and gas prices. You've had a continued decline in well completions. You've had a continued decline week over week in terms of new well permits. So that gives a fairly low visibility for 2016.

Praveen Narra - Raymond James & Associates, Inc.

Okay. Perfect. Thank you, guys.

Operator

Thank you. Our next question comes from the line of Brad Handler from Jefferies. Please go ahead.

Bradley Philip Handler - Jefferies LLC

Thanks. Good morning.

Robert E. Rasmus - Chief Executive Officer

Good morning.

Laura C. Fulton - Chief Financial Officer

Brad.

Bradley Philip Handler - Jefferies LLC

I guess I'll focus questions around the production and production costs, please. In the fourth quarter, maybe you can help me understand something, maybe it's a question of timing, but it sounds like you've produced something like ballpark 800,000 tons in the fourth quarter. And I'm trying to reconcile that with having closed Augusta very early in the quarter. But, perhaps, you can help just quickly tie me out there how is it that you were able to produce as much as you did if Augusta was closed for most of the quarter?

Laura C. Fulton - Chief Financial Officer

Sure, Brad. A couple of things. One, we've been continuing to run Wyeville, which is our lowest cost plant, full-out and to deliver sand to the destinations that are on E&P lines. Augusta did actually run more in the fourth quarter than what you may expect. We announced that we were shutting that down and laying off employees in early October. We kept people through, I believe, it was November 9 and continued filling orders, continued running the dry plant to a certain extent with a smaller crew there. And it really wasn't until, really, fairly recently early in 2016 that we've completely shut down Augusta at this point. So you still had some volumes.

So, I think, your estimate of how much we produced out of Wyeville and Augusta about 800,000 tons is correct. And that does include probably in excess of the rated capacity for Wyeville but then, still quite a few tons for the Augusta facility.

Bradley Philip Handler - Jefferies LLC

Got it. That makes sense. Thank you. So if we forward now to the early part of 2016, and I full recognize, with my question, that the challenge is you don't know the volumes yet. So that's an important variable, if not the most important variable. But, I guess, what – if you can help us reconcile a little bit of where production costs might go early on in 2016, obviously the winter, correct me if I'm wrong, it sounds like generally speaking the absorption is even lower in the first quarter than it is in the fourth quarter. So that's a negative impact or higher cost impact. But if Augusta is actually finally closed for the full quarter or from much of 2016, what impact does that have?

Laura C. Fulton - Chief Financial Officer

Since Augusta is our highest cost facility, theoretically, the production cost per ton should come down in the first quarter when you pull that out of the averages. The concerns that we have are over the production scheduling. And it depends upon what the customers are demanding. If they're demanding more of the lower-grade mesh sizes, or the smaller sizes, more of the coarser-grade mesh sizes, and depending upon what that mix is from week to week, that can really have an impact on our production costs.

And you're absolutely right. Normally in the winter months, we have higher production costs because it's just harder to even run the dry plant. During the wintertime you incur more in the natural gas and things like that to dry the sand. So, in one respect, we would expect our production cost per ton to go down. In another respect, it might actually go up a little bit just because of the normal first quarter impacts.

Robert E. Rasmus - Chief Executive Officer

One thing I would like to mention for everyone about our Augusta facility, it is our highest cost facility. But in and of itself, we still believe it's well into the top quartile in terms of lowest cost, in terms of production cost for the industry.

Bradley Philip Handler - Jefferies LLC

Understood. And if I could steal one more and I'll call it a related follow-up. The fast forward to Q2, and you're opening up Blair, presumably that's an even lower cost facility than Augusta, and you have the seasonal benefit of coming out of winter, again, volume specific. But can you give us some ballpark perhaps on how you might see production cost per ton coming down in 2Q? We've seen it drop several dollars a ton in prior years. Might we think about it in the same ballpark this year?

Laura C. Fulton - Chief Financial Officer

Brad, that's where you get into the difference in how we report the production cost per ton which is on the assets that are owned by the partnership versus the transfer pricing where we're repurchasing tons from the Sponsor's facility. So, the Blair facility will be under the transfer pricing. And what you'll really see I think is the impact of whether or not we're producing out of Whitehall or Blair as far as the volumes that we have available to us less so on the cost side because of the transfer pricing that we use.

Bradley Philip Handler - Jefferies LLC

Right. Of course. Right, that makes sense. Okay. Thank you. I'll turn it back.

Laura C. Fulton - Chief Financial Officer

Thanks, Brad.

Operator

Thank you. Our next question comes from the line of Jim Wicklund from Credit Suisse. Please go ahead.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Good morning, guys.

Robert E. Rasmus - Chief Executive Officer

Hey, Jim.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Laura, you're saying that your positive EBITDA in January was a ray of sunshine. Is February so far looking somewhat similar? Are we still positive in February?

Laura C. Fulton - Chief Financial Officer

Well, of course, we're only a few weeks in to February, so there's still a little bit of time to go. But I think we're seeing some of the same impacts in February from the actions that we took in the fourth quarter, and really focusing on reducing costs and we're hoping that that will continue on. As Bob said, with the rig count coming down further, with the oil price declines coming down, February is challenging from a volume standpoint and that may continue into through the rest of the first quarter. But certainly, the cost reductions that we've put in place, we're seeing the benefits from that here.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

I was going to say it was coming down in January and you were positive, so that's very good. If I could, you talked about pricing had gone from $57 per ton in Q3 to $52 per ton in Q4, can you give us an idea of what the exit pricing was for the quarter? It's obviously in the high $40s.

Laura C. Fulton - Chief Financial Officer

And the exit pricing in the fourth quarter is kind of flat in the November/December timeframe and has continued to be relatively in line with that in the January and early February timeframe where we really saw the drop was from October to November. So the exit pricing shouldn't be too much different from the average in the fourth quarter. Of course, it all depends upon how much we're selling FOB mine versus in-basin. But we would expect maybe a 5% drop in the pricing on the average because you're backing out that that higher month of October pricing.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Okay. And my related follow-up, if I could, the Blair facility, what will be the production capacity of Blair? I understand that it's owned by the Sponsor in transfer pricing. But in terms of volume, what should it contribute on a quarterly basis?

Robert E. Rasmus - Chief Executive Officer

It's 2.6 million tons per year is the rated capacity that we – the nameplate. But essentially it can do about 15% more than that. So somewhere between 2.6 million tons and 3 million tons.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

So, between the three facilities, you don't have any concerns with volume over the next year or two considering the current outlook.

Robert E. Rasmus - Chief Executive Officer

Absolutely not.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Okay. Thank you, all, very much. Appreciate it.

Robert E. Rasmus - Chief Executive Officer

Thanks, Jim.

Operator

Thank you. Our next question comes from the line of Richard Verdi from Ladenburg Thalmann. Please go ahead.

Richard A. Verdi - Ladenburg Thalmann & Co., Inc. (Broker)

Good morning, everyone. Nice quarter especially given the environment. And thank you for taking my call. A lot of good information given here. Just a few follow-up questions. First on the housekeeping front, on the railcars, of the 1,900 cars in storage, how many of those are leased and how many of those are owned?

Laura C. Fulton - Chief Financial Officer

We really have very few owned railcars. I think it's 50 railcars or around that number. The majority of the cars in our fleet are ones that we leased from the railcar manufacturers. And then, we have a number of customer cars. And so, some of the cars that we have in storage are customer cars and then, the rest of them are leased cars.

Richard A. Verdi - Ladenburg Thalmann & Co., Inc. (Broker)

Okay. Great. Thank you, Laura. And then, just one other housekeeping question before I move on to my others. Laura, could you give me what transload revenue was in Q4 please?

Laura C. Fulton - Chief Financial Officer

That's disclosed in our 10-K. I don't have the number off of the top my head. It's mixed in there with the make-whole payments that we recognized as part of the settlement agreement. But I'll just have to direct you to the 10-K for that disclosure.

Richard A. Verdi - Ladenburg Thalmann & Co., Inc. (Broker)

Okay. Maybe I overlooked it. I had three other companies report this morning; I'm trying to juggle them all. Okay. And then, for the discussions you're having with customers pertaining to 2016, and how they've evolved with commodity prices in recent months, more specifically, I guess, at the end of last year, at the beginning of this year, customers are clearly going through a number of different budget initiatives. Could you maybe just talk a little bit about what customers are communicating and what they're seeing in the second half? And I know visibility is limited, but is there any sort of visibility that you do have?

Robert E. Rasmus - Chief Executive Officer

Sure. You're right, visibility is limited. We were in constant discussions with our customers on the outlook and what their customers' capital spending plans are. And there's clearly concern over the current level of oil and gas prices and what the impact is for the marketplace and the announced substantial percentage declines for 2016 versus 2015 for the E&Ps.

Now, that being said, that in the past a lot of the E&P spending budget has been spent on things like leasehold acquisition, acreage acquisition which they are doing now, science projects, if you will, trying some new acreage, trying to delineate that acreage. What we are seeing is that more and more of the CapEx spending that is going to occur on the part of E&Ps is going to be spent on completions. Now, that should benefit us and the other sand companies, in to what extent? Time will tell.

Richard A. Verdi - Ladenburg Thalmann & Co., Inc. (Broker)

Okay. Great comment. Thank you. And then just one last one, if I may, could you just be kind enough to discuss what you're seeing in the way of FOB plant versus in-basin sales?

Laura C. Fulton - Chief Financial Officer

Our percentage of the buy-ins was roughly half and half here in the fourth quarter. And I think that still is continuing here in the first quarter, although the in-basin sales volumes are picking up as a percentage. And I think our expectation is, is that will continue to grow.

As far as sales prices, again like I mentioned with Jim Wicklund earlier, our sales pricing is roughly flat with exit rates out of the fourth quarter. In-basin pricing obviously still commands a premium, and on an FOB mine equivalent, generally, it's still a little bit more profitable for us.

Richard A. Verdi - Ladenburg Thalmann & Co., Inc. (Broker)

Okay. Great. That's it. Thank you, guys. I appreciate it and a good quarter here.

Laura C. Fulton - Chief Financial Officer

Thank you, Richard.

Robert E. Rasmus - Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Jason Wangler from Wunderlich Securities. Please go ahead.

Jason A. Wangler - Wunderlich Securities, Inc.

Hey, good morning. Maybe just kind of dovetailing on that question. As far as your long term contracts that you're still running, are you seeing them continue to take their contracted volumes or are you seeing some work on those contracts as well in terms of volume perspective?

Robert E. Rasmus - Chief Executive Officer

90% of our sales were to our contract customers. Our customers are generally not taking their contracted volumes because it is a challenging environment. And we've been working with our customers to be able to modify the contracts and to push back volumes, push back maturities, some price flexibility to be able to work with our relationships and generate long-term relationships.

Jason A. Wangler - Wunderlich Securities, Inc.

Sure. And Laura just curious about the facility. On the EBITDA minimum, does the payment that you guys received in the fourth quarter still count as you look at the first quarter numbers? And so looking back, will that still be part of that?

Laura C. Fulton - Chief Financial Officer

Yes. For the first quarter minimum, it's a six months cumulative EBITDA test. And so, it'll include the fourth quarter results and that definitely benefits us.

Jason A. Wangler - Wunderlich Securities, Inc.

Perfect. I just want to make sure. Thank you very much.

Laura C. Fulton - Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Robert Balsamo from UBS. Please go ahead.

Robert F. Balsamo - UBS Securities LLC

Hey. Thanks for taking my call. Just most of my questions have been answered. But I was wondering if you could just talk a little bit about the Northeast. We're hearing similar stories about some other midstream operators, well shut-ins, wells not being completed, certainly driving down volumes while the capacity constraints are still there until they get alleviated towards the end of the year, beginning in 2017. Do you see that, so this demand, this weak demand impacting volumes throughout 2016? Or are you getting any – how do you look at that basically? Do you just expect that it would be (40:53) lower until the capacity is alleviated?

Robert E. Rasmus - Chief Executive Officer

Yeah. Certainly during the dry gas areas of the Marcellus are areas that are facing more difficulty. And if you just look at rig count and well completions have declined dramatically year-over-year. And as Laura mentioned, the terminal shutdowns and idling, those have been exclusively in the northeast portion of the Marcellus and Utica. So we are preparing for that to last in that area for longer in 2016 than shorter. And as you say, hopefully some of that will be alleviated when the additional takeaway capacity comes online.

Robert F. Balsamo - UBS Securities LLC

That's really all I had. My other questions were answered. Thank you.

Laura C. Fulton - Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Sonny Randhawa from D.A. Davidson. Please go ahead.

Sonny Randhawa - D. A. Davidson & Co.

Good morning. Thanks for taking my call. I had a question in terms of the settlement payment. What was the volume and term associated with that?

Robert E. Rasmus - Chief Executive Officer

We don't disclose those details in our customer contracts, and we never have on that. We'll say it was not one of our larger customers on that. And so, that's the most information as relates to volume and size that we feel comfortable giving.

Sonny Randhawa - D. A. Davidson & Co.

Okay. So, I guess in terms of non-core customers, I guess, what would the breakout be for non-core customers relative to your core customers in terms of your previous contract coverage? I'm just looking at it from the standpoint of how we should look at the next few quarters, are there other opportunities for settlements with non-core customers?

Laura C. Fulton - Chief Financial Officer

I think on discussions with customers, each customer is a little bit different. But this was a rather unique situation. This was a mutual agreement that we reached with a customer where they wanted to give us the payment in settlement of their past and future obligations. As far as the volumes associated with the contract, as Bob said, we haven't ever talked specifically about individual contract but it was not a customer that was taking significant volumes from us in the past and we weren't expecting significant volumes going forward. But this settlement is not something we really see as a trend in the industry. All of our other customers have been working with us, and as Bob mentioned, trying to push out term or work with us on the discounted pricing and volumes to work through the downturn.

Sonny Randhawa - D. A. Davidson & Co.

Okay. I was just looking at it from, I guess, for the EBITDA hurdles in your – it seems like over the next quarter, you're fine, but then for the second quarter of 2016, I guess, currently, where consensus is and directionally where you guys have indicated, it seems like you might have to have another conversation there?

Laura C. Fulton - Chief Financial Officer

Well, I think when we look at the second quarter minimums for the EBITDA, it increases to $5 million for the six months ended June 30. We look at all the specific actions that we've already taken so far, and think we'll be in good position. We're continuing to focus on freight reductions through better origin and destination pairing as well as using unit trains, turning away orders that are not profitable to us and then looking at cost in every aspect of the business, I think that will definitely help it. Very importantly, Bob mentioned the investments in the terminals in the Permian and the DJ Basins, those will both come online one right here towards the end of the first quarter, the other in the second quarter. And we really do expect additional cash flows and increased margins coming from those investments starting in the second quarter. So, all of that combined should help us remain in compliance with our EBITDA minimums going forward.

Sonny Randhawa - D. A. Davidson & Co.

Okay. If I could have just one more, I guess, unrelated follow-up. For origin and destination pairings, what would be, I guess, the advantage or disadvantage of getting tons to the Permian on the UP versus the BNSF?

Robert E. Rasmus - Chief Executive Officer

It's always look at what rates are and see which one offers the opportunity for destinations both in terms of railways and in terminaling locations. So we believe we're in a better position to negotiate with the rails by showing that we are the alternatives rather than to shift to sites that aren't profitable for us. It also factors into the equation whether we operate those terminals or we have to pay a third-party charge.

Sonny Randhawa - D. A. Davidson & Co.

Great. Thank you.

Laura C. Fulton - Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line from Anjali Voria from Thompson Research Group. Please go ahead.

Anjali Ramnath Voria - Thompson Research Group LLC

Good morning. Good morning. My question with regards to your sales that were in-basin. During 2015, some of your peers saw in-basin sales decline while you guys are seeing in-basin sales increase, and I was wondering why you think those trends differ. And what are you doing differently to raise that exposure to selling in-basin as opposed to FOB mine?

Robert E. Rasmus - Chief Executive Officer

I think it's a couple of things. One is the depth and breadth of our distribution network. It's part of the reason we're making the strategic investment in the terminals. And everything that we do is with a focus to lowering costs for our customers and the ultimate end user of the frac sand. And so, I think as we seek to capitalize on our lower production costs, and translate that into savings throughout the logistics chain, I think that's why you've seen that trend towards in-basin sales become favorable for us.

Anjali Ramnath Voria - Thompson Research Group LLC

Okay. Thank you. And this is more of a general industry question, but when you're discussing these orders that you've turned away, who is fulfilling those orders, if anyone? Are they smaller peers trying to get rid of inventory, or I mean, where do you think those sales are going? And how is that sort of impacted the supply-demand dynamic of the industry?

Robert E. Rasmus - Chief Executive Officer

They're certainly going to people who are pricing it lower than we are. And, I think, in some cases, we are seeing evidence of smaller producers who are just working through their inventory, trying to dump sand on the market to raise cash, with the idea that they will use that cash to pay bills, to pay debt service, what have you but then, do not have an intention of restarting their wet plants or then their dry plants once the weather turns up in the north. So we're seeing some evidence of some market capitulation, if you will, on the part of the smaller players. And that's part of what we see as kind of the 15 million tons to 20 million tons of capacity that is coming out or will come out in the marketplace.

Anjali Ramnath Voria - Thompson Research Group LLC

Okay. Very good. Thank you.

Operator

Thank you. Our next question comes from the line of Tom Dillon from William Blair. Please go ahead.

Tom R. Dillon - William Blair & Co. LLC

Hi. Maybe on the flip side of that, have you seen any evidence that competitors' mine/plants that you thought were going to be shut down forever or just waiting for warmer weather?

Robert E. Rasmus - Chief Executive Officer

We have not seen that at all.

Tom R. Dillon - William Blair & Co. LLC

Okay. And then how many shifts are you currently running at your Wyeville plant?

Laura C. Fulton - Chief Financial Officer

The Wyeville plant is running, as I mentioned, really full out. So, it's – all the different shifts, two to three a day pretty much seven days a week making sure that we can fill the orders for our customers. We still ship a significant amount of our sand to the Permian and the Eagle Ford which is better served from a UP-origin mine. And then, with Wyeville being our lowest-cost production facility as well as probably the lowest cost in the industry, it makes all the sense in the world to run that plant 24/7.

Tom R. Dillon - William Blair & Co. LLC

Okay. Thank you.

Operator

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to Bob Rasmus for closing remarks.

Robert E. Rasmus - Chief Executive Officer

Thank you, Adam. As mentioned, the outlook for 2016 remains challenging. And we remain intensely focused on cost, both production and logistics. Our goal is to provide sustainable, structural cost reductions, not just cyclical to frac sand users while profitably increasing Hi-Crush's market share now and when the market turns.

Thank you for your time today and your interest in Hi-Crush. And have a good day.

Operator

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!