Hi-Crush Partners LP (HCLP) Robert E. Rasmus on Q2 2016 Results - Earnings Call Transcript

| About: Hi-Crush Partners (HCLP)

Hi-Crush Partners LP (NYSE:HCLP)

Q2 2016 Earnings Call

August 02, 2016 8:30 am ET

Executives

Duane Scardino - Associate

Laura C. Fulton - Chief Financial Officer

Robert E. Rasmus - Chief Executive Officer

Analysts

Marc Bianchi - Cowen & Co. LLC

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

Praveen Narra - Raymond James & Associates, Inc.

Tom R. Dillon - William Blair & Co. LLC

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

Jason A. Wangler - Wunderlich Securities, Inc.

Bradley Philip Handler - Jefferies LLC

Sean Michael Milligan - Coker & Palmer, Inc.

Operator

Good morning, and welcome to the Hi-Crush Second Quarter 2016 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 Mr. Duane Scardino, Senior Financial Analyst of Hi-Crush.

Duane Scardino - Associate

Thank you. Good morning, everyone, and thank you for joining us today to discuss Hi-Crush's second quarter 2016 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 the non-GAAP measures of EBITDA, adjusted EBITDA, distributable cash flow, and contribution margin during the call. Please, refer to our public filings for definitions of our non-GAAP measures and the reconciliation of these measures to net income as well as a discussion of risks and uncertainties.

I would now like to turn the call over to Laura to discuss our second quarter earnings before Bob reviews our outlook for the industry and the remainder of the year. Laura?

Laura C. Fulton - Chief Financial Officer

Thanks, Duane, and thanks to everyone for joining us on the call this morning. Today, we reported second quarter results with the loss of $10.9 million or $0.26 per unit compared to a $51.5 million loss in the first quarter of 2016, which, as you will recall, included a goodwill impairment of $33.7 million and a one-time bad debt expense of $8.2 million. For the second quarter of 2016, we reported EBITDA of a negative $3.4 million compared to $44.7 million last quarter, which includes the previously mentioned goodwill impairment and bad debt expense. Q2 EBITDA was sequentially lower than Q1 adjusted EBITDA by just over $700,000 despite a 12% decrease in volume sold and continued pressure on frac sand pricing, both of the mine gate and in-basin.

The math to calculate the profitability of our operations is straightforward, so it is relatively easy to see to second quarter margin degradation coming from a combination of lower volumes and slightly lower pricing. While our quarterly results clearly reflect the challenges faced by the industry due to lower completion activity across the U.S., our second quarter results also reflect the clear progress we are making to operate a leaner organization with lower costs and greater efficiencies. We remain relentlessly focused on taking additional costs out of the business, both through financial and operational means.

We believe contribution margin represents one of the best report cards on how we're doing to manage costs and operate efficiently, particularly in the current environment, as we look to capture any and every opportunity for savings. For the second quarter of 2016, we are pleased to report our contribution margin remained positive, at just below $2 per ton, compared to $2.41 per ton last quarter. We attribute these positive contribution margins to the numerous targeted and strategic actions taken over the course of the previous year, including the consolidation of our production footprint through the temporary idling of our higher-cost plants such as Augusta, optimizing our origin and destination pairings, making further progress in managing our railcar fleet, and streamlining some of our administrative functions, which reduced our already low G&A base.

The enhancement of our extensive logistics network, with the completion of terminal assets in the Permian and DJ basins with their lower operating costs, has also helped in keeping our contribution margin positive. And as we stated before, by building and operating our own terminal assets rather than utilizing third parties, we're able to capture significant per ton cost savings on our delivered tons. While we continue to operate at contribution margin levels below where we'd like to be, we know there is significant profitability available to leverage from volume improvement alone, as higher utilization rates will result in higher fixed cost absorption.

We entered the second quarter with the same headwinds as we experienced throughout the first quarter, but did see a gradual yet steady improvement in activity and volumes throughout the second quarter following a low in April. That is to say, April volumes were the lowest of the quarter, while May was sequentially better, with a further increase in June. While activity and volumes may not increase every month for the rest of the year, the second quarter trend was finally to the positive, and represents an encouraging dynamic for the partnership.

While any change in month-to-month volumes can often be due to customer mix or other factors, we believe the majority of this improving pattern is the direct result of the continuation of greater sand intensity. We've had continued discussions with our customers on the benefits of higher-intensity completions, and we hear the same commentary from producers discussing the positive impacts of more sand on their quarterly investor calls. The trend of more sand per lateral foot is real. It's impactful. It's rig-count-neutral and, along with the completion of the drilled but uncompleted wells, it's one of the most important drivers of support for our business.

For the second quarter, we sold approximately 49% of our volumes in-basin. The decline from the 59% sold in-basin last quarter was mostly due to a shift in customer mix. Pricing fell to an average of $45 per ton from $54 per ton in the first quarter. While some of this decline was owed to continued pressure on frac sand pricing during the second quarter, we want to be clear that a majority of the average sales price change was due to a higher percentage of lower-priced volumes sold at the mine gate.

Moving to the balance sheet, in June, we announced our second common unit offering in about as many months, bringing total equity capital raised to over $100 million. The first equity raise in April was defensive in nature and, along with the concurrent revolver amendment, strengthened our liquidity and positioned Hi-Crush well to navigate challenges and potential uncertainties. The June equity offering was more offensive. It allows Hi-Crush to be proactive and opportunistically build upon the stability established with the April transactions. And it adds an even greater arsenal of available, flexible, and deployable capital. With the net proceeds raised, we paid off the entire $52.5 million outstanding balance on our revolving credit facility. We now have a revolver balance of essentially zero and a cash balance of around $35 million, positioning us to react quickly and efficiently as future opportunities arise, and to selectively invest in areas that further reduce the cost of getting frac sand to the well site.

We believe logistics continues to lead and drive the industry through its evolution. Our success in closely managing our costs was in large part owed to the progress we've been making in optimizing our logistics footprint and leveraging our relationships. During the second quarter, we lowered lease rates and pushed out railcar deliveries, have received some freight rate reductions on certain routes, and continue our discussions with rail providers in an attempt to lower the all-in delivered cost of our sand.

Hi-Crush has always been in the top tier of low-cost producers, and we continue to proactively manage our business to maintain and improve upon this position. Our low cost advantage also extends to our large and increasingly diverse owned and operated distribution network in the Marcellus, Utica, Permian, Eagle Ford, and DJ basins. Our goal at Hi-Crush is to provide our customers with the highest value frac sand supply chain and the most reliable service, in both markets of strength and challenge. Owned and operated transload terminals are a pivotal part of our strategy, both today and over the long term, as the market increasingly competes on deliverability, reliability, and all-in pricing.

Since our first quarter earnings call on May 5 of this year, we have completed the construction of storage silos at our Odessa terminal in West Texas. Our competitors talk about their logistics network, but few can say they own and operate as many dedicated frac sand terminals as we do. In addition to reducing costs, the silos at Odessa allow us to have more sand available for our customers in the heart of the Permian for so much of the current and forecasted well completion activity is expected to occur. Additionally, we have made further advancements in our efforts to manage our railcar fleet, reducing the number of railcars that we have in paid storage to less than 1,200 cars today, down from the 1,900 that were in storage at the end of the first quarter, a 37% reduction. We are now revising our estimate of the cost for paid storage to range from $0.5 million to $1 million per quarter, down from a high of approximately $1.5 million per quarter.

At Hi-Crush, we continue to be proactive and execute our plan, reducing costs, being more efficient with our operations, opportunistically investing our resources, and ensuring we have the balance sheet and liquidity we need for success. We remain committed to this plan and are positioned well for the recovery.

I'd now like to turn the call over to Bob, who will discuss the state of the industry and our outlook for the remainder of the year. Bob?

Robert E. Rasmus - Chief Executive Officer

Thanks, Laura. And thanks, everyone, for joining us on the call this morning. We said before that the downturn's impact on frac sand was expected to continue in the second quarter. While the rig count has slowly started to stabilize and even increase in certain areas, the higher well completion activity that comes from increased rigs may take some time to surface in the sand industry due to the normal and expected time lag between rig activity and completions. So with the recent stabilization and even uptick in frac sand activity that we have seen, we are exiting the second quarter with relative volume strength as we head into the second half of the year and would expect any increase in well completion activity to be reflected in our results late in the third quarter or in the fourth quarter.

We continue to see some frac sand producers selling sand at what we consider to be unprofitable and unsustainable prices, even for those with industry-leading cost structures. As demand for sand picks up, we expect to see pockets of short supply, which will help shore up pricing, moving to overall tight supply as demand increases with greater completion activity and sand intensity. We are operating on a much leaner, more efficient platform than we were prior to the downturn or even just a few months ago. As prices increase, we believe there is significant upside over the current contribution margin levels for Hi-Crush with our lower than $15 per ton production cost. We believe that the eventual recovery in sand pricing is driven by the long-term fundamentals for frac sand that remain strong, and we're encouraged that supply/demand balances appear to be improving. We've all heard in recent months and more recently on the latest round of earnings calls that more sand used per stage and per well equates to better well results.

We have corroboration of that statement from recent pronouncements from E&Ps like Pioneer and Matador. While this message is more prevalent today than even just a few months ago, we are still in the early innings of this trend. In addition to growing sand intensity, increasing the completion of DUCs during the second of 2016 has been a focus of E&P commentary, and we are now seeing that activity come to fruition. DUCs and the completion of their backlog represent pent-up sand demand that is rig count-neutral and offers E&P attractive returns on new capital, even at current hydrocarbon prices. These sand intensity and DUC trends are tailwinds specific to sand demand. When combined with new activity across the U.S., this supports our view that the frac sand industry will lead the energy sector recovery.

The supply side of the equation continues to see more mines exit the market, either permanently or temporarily. There's also a natural limitation on Northern White sand supply as we get closer to winter. If sand companies do not invest significant working capital to prepare for normal winter demand, they will not have adequate wet sand inventory required to effectively operate their dry plants in the winter. That timeframe is effectively behind us. In the case of idled facilities, that investment and time to market may be even greater if the facility requires refurbishment of equipment that was not properly maintained during the downturn. As far as new supply, we do not see more capacity being added in the near-term. Over the long term, permitting continues to get tougher and, most importantly, the availability of sites that offer the prospects of a competitive cost structure is very limited.

In thinking about the construction costs for a $1 million ton per year plant, $25 million to $30 million might be reasonable for just the equipment. However, this alone does not position you to compete as it does not include the acquisition costs of the reserves themselves, onsite rail, or other infrastructure necessary to compete in the market, let alone be a low-cost producer. A standalone production facility without the onsite mining, processing, and logistics is not going to be a low-cost player in the increasingly competitive environment in which we operate. Customers remain focused on reducing costs. To really compete, a frac sand business must possess some structural advantage to attract and retain customers. At Hi-Crush, we are working with our customers to provide structural, not just cyclical, cost reductions.

Our goal at Hi-Crush is to extend our low cost production advantage through the logistics chain all the way to the well site. We will do this by utilizing our low-cost unit-trained capable production facilities in combination with our existing and growing owned and operated unit-trained capable in-basin terminal network to further extend our logistics reach. This is another area where scale, liquidity, capital flexibility, and strong customer relationships further enhance Hi-Crush's competitive position and advantage. Our plan has always been to remain flexible, both operationally and financially. This has been important when steering through the downturn and is still the case, while positioning for the recovery and selectively investing for the long term. We have executed on this strategy as we said we would.

For those best-positioned like Hi-Crush, the future for frac sand is bright. The additional capital we raised in the quarter increases our ability to profitably capture market share by streamlining, expanding, and enhancing our supply chain offerings to meet the ever-evolving in-basin needs of our customers. We are able to react quickly and efficiently as future investment opportunities arise, especially as they relate to further developing our logistics capabilities with the goal of reducing the all-in costs of sand to the well site. We will be proactive as the sand industry continues to evolve. We will continue our focus on reducing costs and optimizing our business wherever we can. Some of our focus areas of cost reduction include working with the Class 1 rails to reduce freight rates, targeting operational efficiencies, continuing our origin-destination pairing focus, and leveraging our expansive footprint and asset base. With our recent moves and enhanced capital strength, we're a far different partnership today than six months ago. We're stronger; we're better capitalized; we're more efficient; and we're prepared to seize opportunities as the market returns.

Thank you for your time today. And now, we can open it up for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Marc Bianchi with Cowen. Please proceed.

Marc Bianchi - Cowen & Co. LLC

Thank you. Good morning.

Robert E. Rasmus - Chief Executive Officer

Good morning.

Marc Bianchi - Cowen & Co. LLC

I guess, first question on – as you talk about the volume output, I appreciate that there is a little bit of a lag between the new well drilling and the completion activity. But you guys significantly outperformed the rig count during the second quarter. So just wondering if you're thinking about that as the starting point. So if the rig count is up 10%, does that mean that your volumes could be up 15% to 20% and then there's a benefit from completion activity on top of that? Just curious how that fits into the context of the outlook.

Robert E. Rasmus - Chief Executive Officer

I don't think it's a linear relationship between rig count and our volumes. As we mentioned, April was the low point of the quarter; May was better than April; and June was better than May. And we think July will be at least as equal to in terms of volumes to June. I think there are two things that work here. One is that you've got over 3,500 DUCs in excess of the normal inventory. I think there's some working down of that backlog of DUCs. Those – roughly, 60%, 65% of those are concentrated in the Permian, the Eagle Ford, and the Niobrara, areas of particular strength of Hi-Crush as well as it aligns well with our owned and operated distribution systems.

And I think the rig count – and when I say, it's not quite as linear, because I think there's a little bit of a lag and maybe even greater than normal lag between the wells being completed and those wells coming online. And I realize that goes against the efficiency gains with the current rigs and has nothing to do with that. But the current decline, as you see, specifically in the Permian and other areas where you go to pad completions or batch completions, you may drill one well or – as opposed to drilling one well in the future, may drill 4 wells or 8 wells and complete them in a batch. So I don't think it's going to be as linear as a increase with the rig count, but we expect a benefit from the increased rig count, as well as the drawing down of the DUC inventory.

Marc Bianchi - Cowen & Co. LLC

Okay. Sure. That makes sense. And then, you mentioned the volumes bottomed in April and improved sequentially. Would you say the same is the case for your margin? Or are there maybe some other factors affecting that?

Laura C. Fulton - Chief Financial Officer

I think that probably is the case for our margins. I mean, we've seen that our contribution margin per ton stayed positive, and we certainly saw that we had some pricing declines during the quarter that impacted that. As well as with the lower volumes, our fixed cost absorption was a little bit less. But we did see improvements in our production cost per ton and in the terminal operations. As we've mentioned many times before, the Odessa terminals with the silos coming online in the middle of the second quarter, as well as the Evans Terminal that we built in the first quarter, both of those give us some significant savings on a per-ton basis. And we certainly saw that impact our bottom line contribution margin per ton. So I think we're seeing a number of different things. But overall, we're expecting better results as we go through the back half of the year.

Marc Bianchi - Cowen & Co. LLC

Okay. And is that – can you put some kind of quantity around the benefit or the change in margins from the bottom to where the exit was? Are we talking about a couple dollars per ton here, or is it not even that much?

Laura C. Fulton - Chief Financial Officer

No, I think it could be as much as a couple dollars per ton. The production costs per ton probably changed by $2 per ton to $3 per ton from the first quarter to the second quarter. Certainly, as we shut down the Augusta facility, that had an impact, concentrated more of our production to the Blair and to the Wyeville facilities that are more efficient. And we've seen some relief on the freight savings, that should continue as we go through the remainder of the year. And then, the terminals themselves, even though the volumes that we're putting through those two that I mentioned, Odessa and Evans, aren't a big portion of our overall volumes, that saving certainly translates to maybe $0.50 or $1 per ton overall on our contribution margin.

Marc Bianchi - Cowen & Co. LLC

Okay. Thank you. I'll turn it back.

Laura C. Fulton - Chief Financial Officer

Thank you, Marc.

Operator

Thank you. Our next question comes from Jim Wicklund with Credit Suisse. Please proceed.

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

Good morning, guys.

Robert E. Rasmus - Chief Executive Officer

Good morning, Jim.

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

There has been a great deal made lately of the more regional brown sand companies out there, obviously, Silica made an acquisition in Tyler. One of your slides points to the fact that while brown sand makes up only about 25% of a number of volumes, it's over 40% per 100 mesh, and we've all been hearing about how 100 mesh went from being almost a waste product a couple of years ago to being the fastest-growing sand size. Can you give us a view on your view of regional sand and realizing how much shuttered capacity you have already with Northern White, your strategic view going forward of Hi-Crush's participation in regional sand?

Robert E. Rasmus - Chief Executive Officer

Sure. Brown sand certainly has a place in the profit market. Its geographic position near the Permian has made it a natural choice for those operators wanting to complete their wells that are at shallower depths and lower pressure. We're also looking to save costs. But I think it's important not to lose sight of the fact that brown sand is geologically inferior to Northern White sand, which is to say it crushes at lower stresses, and that limits its effectiveness in more geologically complex locations. Some of the E&Ps we've talked to have actually referred to brown sand as brittle sand, further emphasizing it doesn't hold up under a – certain crush strength needs. But that being said, there's certainly an application in shallow areas like the – in shallow completion portions of the Permian.

In terms of your question as to how we participate in this market dynamic, or how we address it, it really highlights two other themes that we're focused on at Hi-Crush, which is, we're going to selectively invest for the future, and we want to enhance our logistics capabilities. And one of the ways we're looking at pushing or playing this industry evolution (24:07) is by investing in ways that we can increase the efficiency and lower the cost of, not just sand delivery, but just all delivery of sand, whether it's white or brown sand, to the well site. And we believe one of the most significant bottlenecks in the entire energy industry supply chain is in the delivery of sand to the well site. We think there's significant room for improvement, and we also think that investments in this area or these types of investments will allow us to further increase market share and not just increase market share, but profitably increase market share and allow us to transport and store volumes that even might not even be produced at Hi-Crush mines like brown sand mines.

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

When you talk about the quality of brown sand, I'm reminded how CARBO Ceramics has been telling us for years that their product is superior to even Northern White, yet their volumes have gone down dramatically as investors – excuse me, as operators focus more on cost than the value. So it will be interesting to see how that plays out. On...

Robert E. Rasmus - Chief Executive Officer

No. I agree – sorry, go ahead, Jim. No, I was just going to say, no, we absolutely agree that there is a place for brown sand, and that market share has grown. I don't think it's going to grow exponentially. But as I say, I think that there are ways of becoming more efficient in terms of delivering both Northern White and brown sand to the marketplace and to the well site, and we want to be able to take advantage of using our logistics footprint and owned and operated terminal network to move both products. Because people are going to buy brown sand and not white, we want to be able to make a profit from it in, one way or another.

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

But we would assume that Hi-Crush won't be mining brown sand at any time soon, right?

Robert E. Rasmus - Chief Executive Officer

We have no plans in the near-term to do that.

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

Okay. My second question is on logistics. And you talk about the transload terminals and the silos, all of which are positive. If I look at a map of transload facilities by your two larger public competitors, they have several years of advantage in terms of time on you. And so, they've got a more developed infrastructure. Of course, a lot of that developed infrastructure was for basins that aren't the focus of today. Can you talk about how yours might be more efficient or better strategically located? Can you kind of compare your logistics capability and how fast you plan to grow it relative to the embedded infrastructure by a couple of your competitors?

Robert E. Rasmus - Chief Executive Officer

I think a couple of things there, Jim. And it's important to look at apples-to-apples rather than apples-to-oranges. When you look at our investor presentation in our website, we only have those terminals that we own and operate. We have access to and utilize a larger number of terminals than we have listed on our website, again only owned and operated. And if you look at some of our public competitors, they look at – they have in their charts what they have access to, not what they own. And as a big point of emphasis in my remarks and in Laura's remarks is talking about our owned and operated terminaling network because there is a large profit contribution to be had by owning and operating your own terminal network. And so, that, I think, is the area of differentiation in terms of what we own and operate versus our other public competitors, and that will continue to be an area of emphasis because it allows us to be the priority at those sites. It allows us to provide and control customer service because we are the priority and allows us to substantially reduce costs by operating those facilities ourselves as opposed to contracting with a third party.

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

Bob, that's very helpful. Thank you very much.

Robert E. Rasmus - Chief Executive Officer

Thanks, Jim.

Operator

Thank you. Our next question comes from Praveen Narra with Raymond James. Please proceed.

Praveen Narra - Raymond James & Associates, Inc.

Hi. Good morning, guys.

Robert E. Rasmus - Chief Executive Officer

Good morning.

Praveen Narra - Raymond James & Associates, Inc.

With regard to the logistics commentary and the expansion or the investment in further logistical capabilities, I guess, from your standpoint, it sounds like you're talking about more than just investing in further terminals. It sounds like the last mile trucking kind of infrastructure bottleneck that we had seen in 2014 is more what you are targeting, at least getting it straight to the well site. Am I reading too much into that, or is that...

Robert E. Rasmus - Chief Executive Officer

I think it's a variation on a theme of what you just mentioned. One, we look to expand and become more efficient in our means of getting sand in-basin. And we are also looking at ways at being more efficient at getting sand from the basin – in-basin terminals to the well site.

Praveen Narra - Raymond James & Associates, Inc.

Okay. So instead of going from the kind of supermarket in the basin, going to well site delivery in a more all-inclusive package?

Robert E. Rasmus - Chief Executive Officer

Correct.

Praveen Narra - Raymond James & Associates, Inc.

Okay. That's helpful. And then, I guess, just going into the numbers just a little bit, we saw the decline in in-basin sales this quarter. Is that a function of customer mix, or was there something else going on there?

Laura C. Fulton - Chief Financial Officer

Praveen, it really was a function of the customer mix. I think we've seen our percentage of in-basin versus FOB mine sales change every quarter, but the long-term trend is still towards the in-basin sales. And we would still expect over the long term that, that would be 60%, maybe even 65% of our sales. There still are customers that want to buy FOB mine, and this quarter, they just happened to purchase more of our volumes than the customers that were buying in-basin. A lot of that could be just due to timing of their jobs that they're working on. It could be due to another – a number of different factors but clearly just customer remix.

Praveen Narra - Raymond James & Associates, Inc.

Okay. That's helpful. And if you could, just one last one. Could you give an idea of how much were sold through your long-term relationships versus new – non-long-term relationships?

Laura C. Fulton - Chief Financial Officer

And still, substantially, all of our volumes are through the long-term relationships. I don't know the exact percentage, but it's always been around 90% of our volumes going through those long-term relationships.

Praveen Narra - Raymond James & Associates, Inc.

Okay. Perfect. Thank you very much, guys.

Laura C. Fulton - Chief Financial Officer

Thank you.

Robert E. Rasmus - Chief Executive Officer

Thanks.

Operator

Our next question comes from Tom Dillon with William Blair. Please proceed.

Tom R. Dillon - William Blair & Co. LLC

Hello.

Robert E. Rasmus - Chief Executive Officer

Hi, there.

Tom R. Dillon - William Blair & Co. LLC

I was wondering, how many unit train destinations are you currently utilizing? And then, what basins are those destinations in as well? Thanks.

Laura C. Fulton - Chief Financial Officer

We ship unit trains mostly to the Permian but also the Marcellus and Utica and to the DJ basins. It's probably 6, 7, maybe 8 different terminal locations that we are consistently shipping the unit trains to. And that really has been a key differentiation for Hi-Crush is, not only our ability to ship unit trains from all of our production facilities but also having those destination terminals that can receive the unit trains. And our percentage of cars being shipped, even in a quarter where we weren't shipping as much volume-wise, still around 40% and continuing to increase.

Tom R. Dillon - William Blair & Co. LLC

Okay. Thank you.

Operator

Thank you. Our next question comes from Richard Verdi with Ladenburg. Please proceed.

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

Hi. Good morning, guys. Thanks for taking my call here. I had a few quick questions here. One, is there an internal target metric, maybe, the price of oil, rig count, what have you that Hi-Crush follows, where the company believes when that metric reaches a certain level, then volumes will start to climb rather substantially? And if there is that metric, what would be the target level for that, and how does the Company arrive at choosing?

Robert E. Rasmus - Chief Executive Officer

There really isn't a specific target saying at this level of nat gas prices or oil prices, there's going to be increased volumes or decreased volumes. Partly some of that is – relates to, well, are oil prices at $50 or $55 because there's an excess of supply, or supply and demand are relatively in balance? So it's an entire variety of factors. But I think the one unmistakable trend is that it's clear, as we mentioned, from Matador, Pioneer, and others that the more sand you use per well, the better the well results. So we think that tailwind is going to significantly benefit the low-cost producers like Hi-Crush. But there isn't a specific hydrocarbon price where we say this is the Holy Grail in terms of – or the tipping point in terms of production and, therefore, sand demand.

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

Okay. Okay. That's helpful. Thank you. And I'm sorry if you addressed this. I had connection issues and jumped on the call late. I'm wondering, with the discussions you're having with customers currently, what's the feel Hi-Crush is taking away from these conversations? Are they (33:29) and are they increasing? Are they giving the impression orders picking up late this year or into next year? Are the conversations kind of suggesting things are a little rough and solid order flow may not return for a few years?

Robert E. Rasmus - Chief Executive Officer

Yeah. I think the tone and nature of the conversations continues to improve. There is a lot of talk about increasing activity, particularly late in the third quarter and in the fourth quarter. I think people, in general, both the E&Ps and the service companies feel strong that – strongly, I should say, that 2017 is going to be better than 2016 and that the back half of 2016 is going to be better than the front half of 2016.

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

Great. That's very helpful. Thank you. And then, just a last question, kind of on a high-level basis. I guess, internally (34:25) Hi-Crush, the basins the company operates in, what would the cadence be for recovery each of those basins? I guess, what would you say is the expected order of the basin recovery, maybe?

Laura C. Fulton - Chief Financial Officer

I think we would start, obviously, with activity levels in the Permian, which is why we invested so much in the silos in Odessa. But also with the nat gas prices where they are right now, we can see the Marcellus and Utica coming back. We don't have an owned and operated terminal in the Mid-Con, but we're seeing activity levels increase, and we have third parties that we can work with. But I think it's along the lines of what most analysts are expecting, is that you would see the Permian and the Eagle Ford coming back and then the Marcellus and Utica, then Mid-Con, DJ. And the Bakken is probably the last one to come back, but that's where we have really the least exposure because of the rail lines that we're located on and our terminal situation.

Robert E. Rasmus - Chief Executive Officer

And as it relates to the Permian and the Eagle Ford, those are UP destinations. And, obviously, at the partnership we've got Wyeville and Augusta, which are located on the UP. Wyeville is essentially sold out. In fact, we're turning down orders as we mentioned before. We've turned down unprofitable orders, and we've also turned down orders which in a normal environment would be profitable, just because we have Augusta temporarily idled and so that they would not be profitable at the low percentage of capacity that we would be operating on with those orders. But as we continue to see volume increases in the Permian and Eagle Ford, that will help Hi-Crush with our UP-based destinations.

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

Okay. Great. That's it for me. Thank you very much for the time, guys. I appreciate it.

Operator

Thank you. Our next question comes from Jason Wangler with Wunderlich. Please proceed.

Jason A. Wangler - Wunderlich Securities, Inc.

Hey, good morning. Was curious, you talked a couple times about (37:00) seeing the increased sand intensity in some of these wells, and I think they're mostly targeted in the oil side. Are you seeing similar discussions or similar activities up in the Utica and Marcellus, given your exposure up there?

Robert E. Rasmus - Chief Executive Officer

We are. And that's why, one of the reasons we're encouraged by the increase in nat gas prices, because given our extensive footprint in the Marcellus and Utica, and owned and operated terminals, that's going to help Hi-Crush. We've seen some wells, three in particular that we know of, that have used over 60 million pounds of proppant on those wells, and those wells have been absolutely gangbusters in terms of their performance results, just almost shocking in terms of the production results relating from that. So long-winded way of saying, we are seeing similar results by increased sand usage and increased number of stages on the nat gas wells in addition to the oil-based wells.

Jason A. Wangler - Wunderlich Securities, Inc.

Great. Thanks. And then, just on the railcars, just looking at – I believe it's slide 16, (37:36) the quarter is the first quarter or the second quarter, lowered the car fleet by a bit, but the in-storage really came down a lot. And I think you mentioned that, Laura, at the beginning of your comments. Just curious that extra variable there, was that just putting more cars into service, maybe with unit trains or something, just trying to kind of rectify how those numbers all flow?

Laura C. Fulton - Chief Financial Officer

It really is a combination of things. We've continued to return cars that have come up for lease or return our customer cars. Overall, our fleet is down around 250 cars. That certainly helped us reduce the number of cars in paid storage. But we still use all the customer cars and the other cars in our fleet, whether we're selling FOB mine or in-basin, the sand still has to move from the production facilities. So I think it's a combination of things. But one factor is just excellent management of the fleet, making sure that we're utilizing them as best as we possibly can, even in a low-volume environment here. But certainly, as volumes picked up throughout the quarter, I think that helped bring some of the cars out of storage towards the end of the second quarter.

Jason A. Wangler - Wunderlich Securities, Inc.

Great. Thank you. I'll turn it back.

Laura C. Fulton - Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Brad Handler with Jefferies. Please proceed.

Bradley Philip Handler - Jefferies LLC

Thanks. Good morning, everybody. A couple of quick questions, I think, for me. Are you able to calibrate for us, quantify for us, how much June was up over April in terms of volume?

Laura C. Fulton - Chief Financial Officer

I'm trying to do quick math in my head. I would say it was up a good percentage. As we mentioned before, April was the low of the quarter. And so it might have been up 25% or so, maybe even more than that. And clearly, the trend was going in the right direction during the second quarter.

Bradley Philip Handler - Jefferies LLC

Okay. Thank you for that. Maybe two more quick ones, or relatively quick ones. Do you think you can get to break-even EBITDA in 3Q, just kind of based on the best view you have on volumes and some continued cost savings?

Laura C. Fulton - Chief Financial Officer

I think the cost savings certainly help us. And as volumes pick up, we've got so much leverage to the upside. As I mentioned before, when you look at our contribution margin per ton, that's still positive. But we do need more volumes month-over-month in order to really have better fixed cost absorption and also keep our production costs low. Pricing would also have a big impact there. So any impact that we've gotten from pricing certainly would help as well. And then, as I mentioned, the savings with freight, if we're able to see more savings there, that might allow us to push even more volumes and see more profitability coming through, something we're very, very focused on. But whether that comes in the third quarter or the fourth quarter is still to be seen.

Bradley Philip Handler - Jefferies LLC

Okay. Understood the variables. All right. And if I could steal just one more, please.

Laura C. Fulton - Chief Financial Officer

Sure.

Bradley Philip Handler - Jefferies LLC

We were certainly struck by your $7 a ton production cost. It was really striking and great. Could you speak a little bit about to, how you got that, and the sustainability of that? I don't think that's your new long-range Wyeville production cost outlook, but please tell me I'm wrong and just speak to them in general, please.

Laura C. Fulton - Chief Financial Officer

Well, I think what you're seeing with our production cost is the fact that we were producing from the partnership solely out of the Wyeville plant and so, you don't have any of the mix with the Augusta plant. On the average for the complex, so including the Blair facility, we're still sub-$15 per ton on production cost, approaching an average around $11 per ton, which is, I think, a record for the company as a whole. And clearly, you've seen the decreases from Q1 to Q2 because of the cost reductions, the efficiencies that we're seeing at Blair, because it is our newest facility, as well as idling Augusta. So long term, I think we are looking at maintaining those kind of production costs per ton. Obviously, there's some variability when you get back into the wintertime, when we do more of our maintenance. And, of course, it's all very much volume-independent. But in a low-volume quarter like this one, I think the production cost is a testament to our team in Wisconsin. They just do a fabulous job, quarter-in, quarter-out.

Robert E. Rasmus - Chief Executive Officer

And I want to echo what Laura said. I mean, being the low-cost and the highest-quality producer is an area of intense focus for the Company. One of our mottos internally is to do basic better. You need to pay attention to all aspects of basically running the business. And I think that has inculcated and spread throughout the entire corporation. And as Laura mentioned, it's really a testament to the quality of the management and our workers in our facilities.

Bradley Philip Handler - Jefferies LLC

Yeah. That's terrific. And if I'm hearing you, in other words you're telling us that Wyeville costs, barring some maintenance that happens seasonally, can be in that $7 per ton range. Am I hearing that correctly?

Laura C. Fulton - Chief Financial Officer

That is correct. It's a dredge operation, and it's just incredibly efficient.

Bradley Philip Handler - Jefferies LLC

Yeah. That's terrific. Okay. Thanks. I'll turn it back.

Laura C. Fulton - Chief Financial Officer

Thanks, Brad.

Operator

Thanks. Our next question comes from Sean Milligan with Coker & Palmer. Please proceed.

Sean Michael Milligan - Coker & Palmer, Inc.

Good morning, guys.

Robert E. Rasmus - Chief Executive Officer

Good morning.

Sean Michael Milligan - Coker & Palmer, Inc.

Can you – would you be willing to kind of address how much of your volumes were delivered to the Permian in the second quarter?

Laura C. Fulton - Chief Financial Officer

Sean, I don't have that statistic in front of me. But traditionally, we have been shipping around 50% of our volumes into Texas. And I think that, that is probably still the case in the second quarter. We were still shipping a number of volumes to the Marcellus and Utica and some obviously to the DJ with the opening of our Evans facility there. But I want to say still around 50% of our volumes are going into the Permian.

Robert E. Rasmus - Chief Executive Officer

And, typically, we have not broken that down because some of the destinations that we go to serve both the Permian and the Eagle Ford.

Sean Michael Milligan - Coker & Palmer, Inc.

Okay. Thanks. And then, you were asked earlier about regional sands. Do you have an outlook or an opinion of the utilization of regional sand assets that could deliver into the Permian?

Laura C. Fulton - Chief Financial Officer

Right now, our estimate is that a lot of the brown sand mines are operating close to 100%. And some of them are still kind of ramping up their operations and so, they may be more 50% or 60%. And our expectation is that they really have increased their reach because of the overall cost structure right now. Over time, don't know if that completely holds steady just because the production cost of the brown sand is typically much higher than the white sand, because you just don't get the same kind of yield. So it'll be interesting to see how that plays out as the dynamics in the field change.

Sean Michael Milligan - Coker & Palmer, Inc.

Okay. In terms of – I guess, is there any sense in terms of how much incremental brown sand or regional sand could be delivered into the Permian if some plants are fully utilized and some are still ramping? I guess, I'm just trying to get a read on how much longer you could see regional sand be a runway into the Permian before you would have to go to white?

Robert E. Rasmus - Chief Executive Officer

Yeah. I think what you're saying is brown sand is really topping out. As I mentioned, it certainly has applications for the shallow areas. Some people have chosen to use it because it is cheaper. As Laura mentioned, its production costs are higher, but it's been offset by geographic proximity, therefore, cheaper to get it to the basin or the well site. But we also know that some people have not been enamored with the performance characteristics they've seen in using brown sand and are moving back to white. So I think the current levels of market share are probably the high point for brown sand.

Sean Michael Milligan - Coker & Palmer, Inc.

Okay. Thanks. Perfect. Thank you, guys.

Operator

Thank you. We have a follow-up question from Marc Bianchi with Cowen. Please proceed.

Marc Bianchi - Cowen & Co. LLC

Thank you. Maybe just following up on the utilization discussion, thinking more broadly about all the types of sand. How would you characterize kind of the current state of industry utilization? And how do you think about the cost curve to bring more tons back to the market? Wondering sort of how much might be priced out of the market at what level right now.

Robert E. Rasmus - Chief Executive Officer

It's a little bit of a question of how long is a ball of string. But if you look at the marketplace now, I think the larger producers are clearly the low-cost producers. And I think the marginal cost of adding capacity is well above $25 a ton or even $30 a ton. And we think the vast majority of even current capacity, when I say current capacity, that which is either producing or idled in the marketplace is well into the $20s in terms of cost of production. So that's why we think there's significant potential for contribution margin improvement as sand continues to increase in volume and utilization in the industry continues to increase.

Marc Bianchi - Cowen & Co. LLC

Okay. Do you have an estimate, though, of how much kind of current utilization – for the capacity that's not idled, what the utilization rate might be?

Laura C. Fulton - Chief Financial Officer

For the white sand mines, I think our estimate is that they're probably being utilized around the 60%, 65%. If you look at our own facilities, the Wyeville facility is operating at full capacity. And the Blair facility has been ramping up and was probably around 50% during the second quarter. And I think that's probably where a lot of the facilities are as they're operating at this point. And so, there is some additional capacity that could come back into the market just from those underutilized facilities.

Marc Bianchi - Cowen & Co. LLC

Okay. That's helpful, Laura. Thanks. Maybe just one more, as it relates to Blair and, I guess, not so important right now about Whitehall. And thinking about the sponsor transfer pricing that exists, right now, I suppose that that's coming through at a pretty healthy margin for you. But previously to the downturn, it was more of just a tolling or a very low margin, so one, maybe correct me if I've got that wrong. And two, if I have it right, what's the mechanism to resetting to the earlier agreement?

Laura C. Fulton - Chief Financial Officer

Sure. I think you may have said that a little bit backwards. So let me just clarify. The past history was that we used something that was closer to the market price less a discount. This was back in 2014 when market prices were pretty strong for sand. In the downturn, we moved more towards a cost basis, so making sure that we were covering the cost of producing the sand at the sponsor level. And our expectation is that as the market prices increase over the next several months and years that there would be some amount of sharing of profitability between the partnership and the sponsor. And so, we'd kind of be between the two models of the past history and the most recent cost-plus that we used in the downturn. And, of course, all this is still subject to governance by the Conflicts Committee to make sure that the transfer pricing is fair and reasonable to the partnership. And so, again, going forward, I think our expectation would be some amount of sharing of profitability as market prices increase.

Robert E. Rasmus - Chief Executive Officer

And I think, just to clarify there in terms of – I think the genesis of your question is looking at future profit potential at partners itself, specifically, that we currently have Augusta, which is owned by the partnership, idled, and Whitehall, which you mentioned, is owned by the general partner. As I mentioned earlier, we've turned down orders that would have gone to Augusta. And given the expected increase in activity in the Permian and Eagle Ford over time, we would expect to see Augusta open before Whitehall, and that would more directly and fully benefit the partnership.

Marc Bianchi - Cowen & Co. LLC

Sure. That makes sense. Thanks very much.

Robert E. Rasmus - Chief Executive Officer

Thank you.

Operator

Thank you. I would now like to turn the floor back over to Bob Rasmus for closing comments.

Robert E. Rasmus - Chief Executive Officer

Thank you, Stacy. Progress is being made. We're exiting the second quarter with relative volume strength. And then, as I mentioned previously, we're a far different partnership today than we were six months ago. We're stronger; we're better capitalized; we're more efficient; and we're prepared to seize opportunities as the market returns. Our strategy during the downturn has been very clear and focused – to manage the near-term and to win long-term. Thank you for your investment and time today and for your interest in Hi-Crush.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

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