Emerge Energy Services' (EMES) CEO Rick Shearer on Q2 2016 Results - Earnings Call Transcript

| About: Emerge Energy (EMES)

Emerge Energy Services LP (NYSE:EMES)

Q2 2016 Earnings Conference Call

August 08, 2016 10:00 AM ET

Executives

Deborah Deibert - Chief Finanical Officer

Ted Beneski - Chairman

Rick Shearer - Chief Executive Officer

Warren Bonham - Vice President

Analysts

Selman Akyol - Stifel Nicolaus

Tom Dillon - William Blair

Sonny Randhawa - D.A. Davidson

Mark Brown - Seaport Global Securities

Brian Gustavson - 1060 Capital Management

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2016 Emerge Energy Services Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.

I would now like to introduce your host for today’s conference call Mr. Ted Beneski. You may begin, sir.

Deborah Deibert

This is Deborah Deibert. Thank you, operator. And welcome everyone to the Emerge Energy Services LP second quarter conference call. Just a quick note before we start. Our discussion today may contain forward-looking statements. These statements may include but are not limited to our estimates of future volumes, operating expenses, and capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy, distributions and other plans and objectives for future capital expenditures and operations. These statements are based on management's beliefs and assumptions.

Although, we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties. If one or more of these risks materialize or should the underlying assumptions prove incorrect, our actual results may vary materially from those expected. These risks are discussed in greater detail in our Annual Report 10-K on file with the Securities and Exchange Commission. Please also note that on this call we may use the terms adjusted EBITDA and distributable cash flow. These are non-GAAP financial measures and we have provided reconciliations to the most directly comparable GAAP measures in our earnings release published this morning.

And now I would like to turn the call over to our Chairman, Ted Beneski.

Ted Beneski

Good morning. And thank you all for joining us to discuss our second quarter results, the current market outlook for the second half of 2016, and an update on our critical business strategies including SandMaxx, our self suspending proppant product, the sale of our Fuel business, and discussions with our lending group.

Before we dive into our business and industry commentary, we would like to highlight our other press release issued this morning, regarding the issuance of new equity. We are pleased to announce that $20 million equity offering to a private placement of public units in the form of convertible preferred equity. In addition to the pending sale of our Fuel business, this capital infusion will help us further shore up our balance sheet, and provide additional liquidity through this down cycle.

While the oil and gas markets continue to present significant challenges, we did notice a small improvement in customer activity towards the end of the quarter, compared to the end of the first quarter. Like other energy companies who have recently reported earnings, it seems to be a more positive sentiment from our customer base to start the second half of the year. However, as we mentioned on our previous call, we do not foresee a meaningful recovery until early to mid-2017.

For the second quarter, Emerge Energy Services generated total adjusted EBITDA of negative 10.7 million and a distributable cash flow deficit of 17.3 million. The Sand business was adversely impacted by a decline in volumes and pricing, while the Fuel business experienced a strong quarter, driven by improved fuel prices, renegotiated supply contracts, and the beginnings of higher margin volumes after the completion of one of our hydrotreater projects at Direct Fuels in our Dallas, Fort Worth market area.

During the last call, we outlined a three point plan to improve our competitive positioning and retain upside for the eventual recovery in the oil and gas cycle. The plan consisted of; one, divesting the fuel division to reduce our debt burden; two, lowering cost across all aspects of the business, and three, developing and commercializing our technology driven proppant products. We are proud to say that we have made encouraging progress in all three areas.

On the first goal of the fuel divestiture, we announced the definitive agreement with Sunoco on June 23rd to sell the fuel business for a price of approximately 179 million on a cash free debt free basis, subject to certain customary closing adjustments. We were pleased with the valuation we received for this business, and judging by the market’s positive reaction on the same day as Brexit was announced, it appeared that the investment community was also satisfied with the outcome. Proceeds will be applied to reduce the revolving loan balance when the transaction closes, which we believe will be a mid to late August.

In connection with the closing of the fuel sale and the accompanying significant de-leveraging event for our bank group, we are working on an amendment to our revolving credit facility that will restructure our balance sheet and reset covenants. Our lenders have been cooperative through this process, and we appreciate their partner like behavior through this difficult time. We are aiming to have our amended credit agreement in place when the fuel sale closes in August.

Regarding the second goal of lowering our cost structure, we continue to diligently remove excess cost from all parts of the business. Rick will provide more commentary in a few minutes, but we have recently prioritized our focus on reducing our fixed commitments, which is primarily our railcar and other logistics related agreements.

Our railcar lessors have also been very supportive of the business, during this down cycle. And while we have made certain longer term concessions during these negotiations, we have received material and immediate cash savings on many of our current leases. We are still working through negotiations with our other contractual obligations, and expect to have them all completed in the near future. In addition to these lease renegotiations, we have not lost sight of other key areas to help improve the cost structure. We are implementing improved mining techniques, and securing more competitive rail freight rates, and trimming overheads.

Third, we made a significant leap forward on our technology driven proppant strategy during the quarter, with several large sales of our SandMaxx product. This self suspending proppant product that we described in detail on the last call was successfully pumped down hole in numerous trial wells during Q2. And we are expecting results from the field on critical well performance data in the next 30 to 60 days.

I’ll now turn it over to Rick Shearer, our CEO, who will cover the sand operations in more detail.

Rick Shearer

Thank you, Ted. Our Sand segment performance was a reflection of the ongoing unfavorable market conditions as volume and pricing headwinds continued into the second quarter. Although, our sequential sales dipped by 9% from 439,000 tons in the first quarter of 2016 to 399,000 tons, our Q2 sales outpaced the 23% drop in the average U.S. land rig count for the quarter. Adjusted EBITDA from continuing operations fell to negative $17.6 million versus negative 13 million in the first quarter. Our average selling price continues to remain considerably above what we consider to be market averages.

We echo other comments from service companies that current pricing levels are unsustainable, and in order for the supply chain to reactivate from new work prices will need to increase. We made a comment last quarter that at the time of our earnings call in early May, it appeared a low watermark was forming for the business and the industry. Judging by the rig count improving off of May’s bottom during the last two months, the trough is likely behind us and the second half 2016 could be slightly better than the first half. However, we continue to believe that a robust recovery will not occur until early to mid 2017, and until that happens we must concentrate on our innovation and cost control efforts.

Before jumping into the details around our results and initiatives, I would like to address the proppant industry trends that many of you are reading about or hearing from other industry sources. First, profit intensity per well showed another large gain in the first half of 2016, with preliminary data suggesting intensity is up 20% to 30% versus exit rates in 2015. Many operators believe this trend has room for further penetration, which should be a nice benefit to the entire proppant industry, but especially helpful to the Tier 1 sand providers with full logistics solutions.

Secondly, finer grades remain in higher demand compared to coarser grades. While this trend is a severe divergence from patterns just 12 to 24 months ago, we think that operators will ultimately migrate back to coarser grades. In fact, an informal survey of our customer base indicates a unanimous opinion that core sand demand will return, it is simply a matter of time. This obviously bodes well longer term for our significant production capacity located in Wisconsin. In the meantime, we will continue to optimize our balanced production portfolio, by changing mine feed and plant mixes to meet our customers’ specs, and do so at the most economical cost possible.

Third, the current widespread demand for lower quality local sands has aided our Kosse, Texas facility given its lower logistics cost into the Texas basins. However, the positive seen from this increase in Kosse sand driven by the emphasis on lowest delivery cost to the well head has been offset for now by the adverse impact to our higher quality deposits in Wisconsin. We continue to believe that demand for Northern White sand will return to much healthier levels when operators convert back to a more quality focused, long-term mind set when evaluating their well designs compared to the current short-term low cost mentality we see from the industry.

Now to our business results and updates on our key initiatives. Profitability ticked down in the quarter, attributable to a decline in volumes and lower realized prices FOB mine compared to Q1. While sand pricing dropped off sharply from the early part of Q1 in locked step with the oils plunged to $27 per barrel in February, pricing has largely been stable over the past few months and we do not see this going much lower given the severe financial losses in our industry.

We also recorded a large expense for a shortfall penalty on a take-or-pay transload contract. Another adverse impact of our EBITDA line resulted from operating our Wisconsin footprint to optimize cash instead of book profitability by working off of existing stockpiles. This action helps preserve our liquidity until the fuel sale closes, but once the transaction clears, we will resume pulling from our lowest cost mines and wet plants. Additionally, the number of railcars in third-party storage topped out at approximately 3,000 cars in March, but has recently declined to around 2,700. The idle cost of our excess cars remained around $2.5 million per month before lease amendments.

Speaking of railcars, let’s transition over to our cost reduction efforts. To begin, we successfully renegotiated the leases with our largest railcar lessor in June and deferred the delivery of future contracted railcars by a few years. In exchange for rate relief and the delay of new cars, we granted the lessor an $8 million unsecured note. While, we cannot disclose the specifics of the rate reductions for commercial reasons, we started to see the cash savings at the end of Q2. Unfortunately, we are not permitted to book the full amount of cash save to the P&L in the form of lower COGs, due to GAAP rules from lease accounting. But the cash savings are of significant relief for our cash burn. We are working through the remaining smaller lessors of our fleet and we hope to have all of our restructured leases in place by the end of Q3.

We continue to work with our railroad providers to achieve more competitive rates into key basins, and we have reviewed all third-party transload agreements with some early successes on the rate and lease expense reductions. We resumed mining at two of our sites in Wisconsin at the end of the quarter, albeit on a much smaller scale than past seasons given the demand outlook, and using our existing stockpiles on the ground first. Our New Auburn and Arland drive plants remain idled with no plans to bring them back online until the market shows signs of a sustainable demand.

Now, let's turn to our sighting technology driven proppant product strategy. This self suspending sand technology is brand named SandMaxx. As a refresher from our comments on the prior call in early May, we noted how we received a large SandMaxx order for 16,500 ton job across four trial wells. We’re proud to say, those tons were successfully pumped down hole in May and June and our comprehensive marketing efforts have attracted strong answers from several other customers looking to trial the product. We have fulfilled several more SandMaxx orders since our quarter ended June 30th and we look to keep the momentum going on this proprietary patented new product with a nice pipeline of orders.

We are expecting critical data from these trial wells pumped during Q2 to return to us in late Q3. And as we have noted on past calls, we anticipate that the SandMaxx completed wells could lift a typical wells’ EUR by 20% to 40% based on laboratory and competing products results. The data from the 90 day IPs will be compared to those wells completed with SandMaxx against offset control wells, some in the same pad.

Our SandMaxx commercialization game plan is unchanged from the prior investor call, yet the field results prove out with the forecasted production gains that our empirical data should help us secure commitments from regular SandMaxx buying customers. We would transition the production from our pilot plant which has a capacity of roughly 15,000 tons per month to a new 1.5 million ton per year commercial plant that would require $20 million to $30 million of new capital. We would look to raise this funding from the market once we’re confident in the field trails and once the industry has confirmed its appetite for this promising product.

Our team has done an outstanding job launching SandMaxx in relatively short order, as all parts of the organization have been working very hard to help pivot this company into a leadership position within the technology driven proppant product space. We also appreciate our customers’ willingness to experiment with a new technology that has the potential to add substantial value to their operations.

In closing for the Sand business, we will continue to fight through this challenging market and we’ll look to better days for a market recovery in 2017. However, over the next several months, we will remain focused on our near-term priorities of rightsizing the cost structure and further developing our exciting new products.

And now, I’ll turn it over to Warren to review the Fuel business. Warren?

Warren Bonham

Thank you, Rick. Before we cover the detailed fuel results, which are classified as discontinued operations in our financial statements, we wanted to take a moment to review the announced PSA with Sunoco. The 179 million price is subject to a working capital adjustment, a true-up for the cost to finish the Birmingham hydrotreater and approximately 12 million in escrow reserves. Net of these expected true-ups and the escrow hold back, we expect the net proceeds for the time of closing to be approximately 160 million all of which will be directed to pay down our revolving credit line and will result in approximately a 50% reduction.

The transaction is on-track to close by the end of August with customary legal, a counsel and other diligence in quorum now through the target date. For all of us at Emerge Energy the sale brings mixed feelings. Parting with the great asset that we operated for a number of years, including the predecessor indices prior to Emerge Energy is very difficult. We want to thank the entire fuel division staff for all of their very hard work, not only during the recent transaction but also through the many years of our ownership. We believe the business will be a great addition to Sunoco’s growing portfolio.

For the second quarter, we had a very strong performance generating 6.9 million of adjusted EBITDA versus 3.5 million in the first quarter. Total refined fuel volumes sold were essentially flat quarter-over-quarter, but our margin per gallon rose significantly as a result of higher wholesale fuel prices and renegotiated supply contracts. Also, we successfully and safely started up our hydrotreater of direct fuels in May, which enabled us to penetrate the more profitable ultra low sulfur diesel market. Rather than selling low sulfur diesel into discounted markets, ultra low sulfur diesel product is sold at a premium into the attractive on-load markets. Our other hydrotreater remains under construction at Allied Energy and is expected to be operational during the fourth quarter.

On the volume side, we sold slightly less than 62 million gallons of refined products and processed 25 million gallons of transmix in the second quarter. Total gallons sold decreased by 1%, compared to the first quarter and transmix processed increased by 2%. Our terminal put through 40 million gallons of third-party product, which was 127% higher than the first quarter at 18 million gallons attributable to strong activity at Allied Energy.

With that, I will turn the call over to Deb for a discussion of Emerge Energy’s results for the quarter as a whole.

Deborah Deibert

Thank you, Warren. Emerge Energy reported consolidated net loss of $22.9 million or a negative $0.95 per common unit for three months ended June 30, 2016. This compares to a net loss of 34.2 million or negative $1.42 per common unit for the three months ended March 31, 2016. We reported adjusted EBITDA in accordance with our credit agreement of negative 10.7 million for the second quarter compared to a negative 9.5 million for the previous quarter. Even though our adjusted EBITDA declined from the first quarter through the second, our overall net loss improved due primarily to the non-cash contact termination fee, same inventory write-down and material bad debt expense in the first quarter that did not recur in the second quarter, as well as the improved profitability in our fuel operations.

The volume of sand sales in the second quarter did decline compared to the first quarter. However, our lowest volume met within March and we have seen sequential improvements in volume since that time. As we generated a distributable cash deficit of 17.3 million for the three months ended June 30, 2016. Our Board of Directors and our general partner elected not to make a distribution for the quarter. We are also restricted under our credit agreement from paying distributions until certain financial ratios improve. Our capital expenditures for the quarter were 6.1 million, which includes 264,000 of maintenance capital expenditures. As we previously reported, we have significantly cut back our capital expenditure plans for 2016 to include only those projects that are necessary for our current operations and/or for which we are contractually obligated such as our hydrotreaters and payment on our self suspended proppant patent. We currently expect our total capital expenditures for 2016 to be below $15 million.

As you know, we’ve reached a covenant under our revolving credit facility and have been working towards the restructure of our credit agreement to provide us with sufficient liquidity into when eventually the market turns around. As Ted mentioned, our lenders have been supportive of us and appears to be very committed to our long-term success. We have continued to draw on our revolver up to a limit of 325 million including letters of credit. At June 30, 2016 we had 313 million of principal and non-linear letters of credits outstanding with $3 million of cash on-hand. Due to our due diligence on cash flows and positive cash flows from our fuel business, we will have sufficient availability for our needs until we can reduce our debt with the fuel sale proceeds and analyze the debt agreement amendment.

We’re very pleased to say that negotiations with our bank group have progressed to a point that we are confident that we will successfully execute the amendment simultaneous with the sale of our fuel business. We expect that this amendment will call for a reduced commitment level, but one that will allow us to operate our business. We expect financial covenants that reflect our post fuel sale business and that will provide us the flexibility we need to get through the downturn. As soon as the fuel sale closes and the credit amendment is closed, we should be able to quickly file our first and second quarter 10-Qs in late August or early September.

The announced 20 million equity offering will help us bridge the gap between now and the point at which our markets begin to fully recover. Although, the fuel sale will provide liquidity, we thought it was prudent to raise additional equity to strengthen the capital structure. We chose to structure the deal in the form of a private offering, since we are not fully eligible and filing an S1 could have taken up to 90 days. The capital is structured as a convertible preferred equity security with warrants. The deferred units will convert to common units in two tranches with the first 50% 10 days at our S1 is deemed effective and the remainder 90 days later.

This conversion cost will be the lower at 90% of market value on the current date and 112.5% at a press upon closing the deal. We are excited about financial flexibility that this capital will bring us and we also look forward to closing our bank amendment in the near future. Finally, given the unpredictable market conditions that we are facing, we are not providing specific guidance at this time. However, we do think it is more likely than not that we will be at or above cash flow breakeven at some point during the second quarter of 2017.

Operator, we are now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Selman Akyol with Stifel.

Selman Akyol

A couple of quick ones, first of all, so just remind me again, how many railcars in total, how many have been restructured?

Rick Shearer

We have 5,300 railcar Selman in our system and a little under 2,700 railcars are right now in storage.

Selman Akyol

Okay. And then you talked about restructuring I guess some of those, so how many of that 5,300 is covered in the restructuring?

Rick Shearer

Of the 5,300, we got rate reductions on those cars, but that’s the -- effort was really two fold, it was the lease rate reductions, as well as the new cars inbound that were pushed back for two years or more.

Selman Akyol

Got you. And then you talked about two plants remaining idle New Auburn and I missed the second one?

Rick Shearer

New Auburn and Arland, the Arland.

Selman Akyol

Okay, okay. And then in terms of if SandMaxx is successful you are going to move forward 1.5 million tons. Which plant would that end up being, that you would have to add additional capital too?

Rick Shearer

We’re planning to put the commercial SandMaxx plant at our Barron, Wisconsin facility.

Selman Akyol

And then what was debt at the end of the quarter Deb?

Deborah Deibert

313 million at principal.

Selman Akyol

Got you. And then last one for me, I guess just what are the hurdles of to -- end up closing the Fuel segment?

Rick Shearer

Excuse me, there are fairly customary things like HSR approval, which we’ve not yet received but I sure do not expect any issues there, that’s probably the single biggest closing condition that remains outstanding. Apart from that it is transition planning on the part of Sunoco, so just want to make sure they have enough runway to make sure they’ve got their teams in place and on the ground and able to take things over when the deal actually does close.

Operator

Our next question comes from Tom Dillon with William Blair.

Tom Dillon

Over the last six months or so it seems the customers have been ordering a little more sporadically, ordering in less predictable ways, if you will. So can you talk about the behavior of your customers the last few weeks and months, what changes have you seen there, what are the conversations looking right now? Thanks.

Rick Shearer

Yes, the customers are moving forward very cautiously because of the price of oil. There was more consensus of optimism in the marketplace as oil was in the high-40s, even tipping $50 a barrel. I think that has driven a lot of decisions to move in the marketplace even add crews in the second half of this year and it’s given us feeling that there could well be at least a slight improvement in the second half of 2016 as a result. More recently however with oil having dipped back down to around $40 a barrel, I think some customers not all by any means but some customers have now had second thoughts about how they should move forward in the second half. So I think we’ll see a mixed bag in the second half of some customers committing and moving forward with new crews and some additional drilling in certain basins and others will pull back and remain steady, remain level from where they were in the first half of the year. So, to us that sums up as we said in our prepared statements an expectation of perhaps a slight uptick in the second half of the year.

Operator

Our next question comes from Sonny Randhawa with D.A. Davidson.

Sonny Randhawa

On the fuel sale, how much of that would be tax, with 160 million?

Deborah Deibert

At the partnership we’re not subject to federal income taxes.

Sonny Randhawa

Okay.

Deborah Deibert

So it will be cash to us.

Sonny Randhawa

Okay. And then for the Kosse plant, when we’re looking at -- it seems like -- is it just disadvantaged in terms of location or it seems like you’re running at a lower utilization than some of your peers’ brown sand facilities?

Rick Shearer

Sonny the Kosse plant is continuing to move more tons. We’re of course happy about that, that place to kind of the regional sand operations closer to the basins. So we’re seeing advantages there, but if you compare Kosse’s performance to some of the Voca plants, some of the Brady operations that are closer yet to the Permian where a lot of the major activity is happening. There is a disadvantage in the sense that geographically we’re not as close to the basin as those operations. And we also do not have rail service directly at Kosse. So while we have some disadvantage compared to a few in the West Texas sand market, we are seeing advantages that will allow us to at least be in the region and to build our presence there. So we expect to see some continued ramp-up of Kosse well above 20,000 tons a month closer to 25 would be our hope as we head through the rest of this year.

Sonny Randhawa

Okay. And I guess my final question, if -- you saw an increase in terms of expenses per ton, was that mainly related to that contract cancellation or was that related to SandMaxx?

Rick Shearer

On the cost side?

Sonny Randhawa

Yes.

Rick Shearer

On the cost side, the increase was really volume driven.

Sonny Randhawa

I guess on a per ton basis?

Rick Shearer

On a per ton basis, technically the cost went up because of the reduced volume. If you’re talking about average selling price, yes we certainly saw an increase in ASP driven by SandMaxx sales.

Operator

[Operator Instructions] Our next question is a follow-up question from Selman Akyol with Stifel.

Selman Akyol

Just a couple follow-ups here, if I could. So is there a rate on the preferred? Are you going to pick those, or is it just flat where it was, in terms of number of units?

Deborah Deibert

Yes, the preferred do not pay dividends.

Selman Akyol

Okay.

Deborah Deibert

They will [indiscernible] very quickly.

Selman Akyol

Okay. And then you on your G&A line, I think it went up from the first quarter, so I'm trying to understand what's a good run rate there?

Deborah Deibert

Our G&A went down from the first quarter.

Selman Akyol

Okay. All right, I'll have to go back and look at that. And then you also talked about your assumptions for a cash breakeven, I'm just kind of wondering what you are assuming going into the back half of the year for that.

Deborah Deibert

We do expect to be in a cash burn position for the rest of the year. We don’t think that it will be worsening during the year.

Selman Akyol

Okay.

Deborah Deibert

But we certainly do believe that we’ll turn the corner sometime in the second quarter of 2017.

Operator

Our next question comes from Robert St, John who is a Private Investor.

Unidentified Analyst

I was just curious what the plan would be assuming the fuel sale transaction did not close?

Rick Shearer

I think, we just think that is so remote at this point. Yes it’s probably not worth going into a scenario planning on that front.

Unidentified Analyst

Okay. And have you at the management team or Board have any discussions with restructuring counsel at all?

Rick Shearer

No. No discussions at all on that front.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from Mark Brown with Seaport Global Securities.

Mark Brown

I was just wondering if you could share some of your thoughts on the proppants per well trends that we're starting to see. And you mentioned it a little bit in your prepared remarks. But do you know sort of from your own supply what sort of metrics you are seeing today, and where you think that might be going over the next 12 to 18 months in terms of proppant per well?

Rick Shearer

Yes, we are like everyone seeing proppant intensity as a real driver and another reason for our optimism in the frac sand space. As we mentioned in our remarks, even in the first half of this year it looks as though that the proppant intensity has increased 25% to 30%, just made around with a couple of major customers of ours who have test to that fact that they’ve seen a 30% increase in the first half of this year, and they’re continuing to add more and more sand down hole, because of the yield from the well certainly continues to improve based on proppant intensity. So the laterals are getting longer and that is certainly adding to it and the additional sand now probably on average, it’s a tough guess because depending on the basins the well and the sand intensity vary. But on average, you’re probably looking at 3,800 tons to 4,000 tons per well. I know, we were bragging just what was it, 12 months-14 months ago about that well that was known to take 10,000 tons of frac sand. That was a huge number, that’s getting more and more common now. I literally just did hear about a well that took 25,000 tons of frac sand. So it’s reason for optimism for sure, and we think that we’ll continue to see that proppant intensity go up if I had to guess next year, I think it’s reasonable to think that we’ll see 15% to 20% any way. Nobody is talking in the market about a saturation point being achieved at yet.

Mark Brown

That's really great color. The other thing I wanted to ask is just on the broad sense, the Northern White, you mentioned that you think that that could reclaim share. And maybe you could just explain why you think that's the case. It seems like customers prefer the sand that's closer in basin, and closer to the Permian and Eagle Ford, et cetera. What makes you think that they are going to turn back to the coarser grades?

Rick Shearer

Well Mark, I think some will turn back to both the coarser grades and the higher quality that we offer in Wisconsin and others with Northern White sand. In today’s market with these well jobs being bid out, everybody is driven to the lowest land in cost. Quality of proppant has been sacrificed and is secondary at this point. That’s driven everybody to these lesser sands that are closer to the basins of course. I think many of those brown sand operations today are probably close to being sold out as a result of this philosophy and this approach in the market. But that won’t continue, when oil does rebound and we start to see oil move back up into the 50s and into the 60s. We’ve even had customers tell us that they prefer the better quality Northern White proppant and they expect to move back and be buying more sand from us in Wisconsin as opposed to the brown sand.

Now that’s, not to say everybody is moving back in that direction, some will certainly stay at the lower price material. They’ve learned to work with it, they’ve learned to accept it. But I don’t think there is any question that a portion of the market will return to Northern White sand when economics aren’t the last driving factor in some of these decisions around these wells. So we want to be prepared for the new norm as we had talked before, not only with new technology products but also with thoughts of expanding our footprint so that we can not only meet the needs of those who want the high quality Northern White, but also meet the needs of those who want to be closer in basin.

Operator

Our next question comes from Brian Gustavson with 1060 Capital.

Brian Gustavson

I was wondering what your assumptions are when you talk about cash breakeven next year. How much better does volume or pricing need to get, to get to that breakeven level?

Deborah Deibert

Well it’s a complex mix of the volume and pricing as well as cost, so it's hard to give you a pat answer on that one. So, a lot of the answer is on SandMaxx. We had some pretty conservative estimates on SandMaxx not only is the ASP much higher but the cost is much higher. So again it's difficult to give you a pat answer on what is the number for that breakeven.

Brian Gustavson

But I mean why bring up breakeven if you won’t talk about the assumptions to get there?

Deborah Deibert

Because our liquidity is such a huge issue for us and it's also a big part of our discussions for our bank amendments.

Brian Gustavson

But you are talking about being cash breakeven, but you're not telling us how you are going to get there. And I'm just wondering what you are kind of sharing with the banks that make you think you are going to get there. Some details would be nice, I guess.

Deborah Deibert

Well, I am sorry we can’t give a whole lot of color on that one, because we don’t want to tip our hand.

Brian Gustavson

And then on the railcars, how many -- are you going to take any more deliveries this year or did you just push them out, or do you have to take any this year?

Rick Shearer

No, we pushed everything out, so that we’re not only now beginning to see lease rate reductions that are significant on our cash position, but they’ll be no more cars coming in for 18 months.

Brian Gustavson

Okay. And the $8 million note with the lessor, is there interest on that?

Deborah Deibert

That note kicks, so there won’t be any catch interest for quite a while.

Brian Gustavson

Okay. When is that note due [Multiple Speakers]?

Deborah Deibert

Everything is collaborated for that, any cash payments will be after our revolver is due.

Brian Gustavson

Okay. And the Qs, you said when will they be available?

Deborah Deibert

Either late August or early September.

Brian Gustavson

Okay. And what was the reason why the first-quarter 10-Q got delayed? Was there any issue with the auditors and just getting a fairness opinion?

Deborah Deibert

No, no. That’s not it. It was around reach on the revolver and trying to resolve the contingencies around that. And so as soon as we have the fuel sale closed and our new amendment closed, then we will catch-up our filings on everything.

Operator

And I’m not showing any further questions. At this time, I’d like to turn the call back over to our host.

Rick Shearer

Okay. Well, we’d like to thank you all for participating on our call today. We do remain excited about the future for Emerge Energy and we expect continued progress on our business strategies. We look forward to updating our investors in the market about our key initiatives when we review our third quarter in the fall. Thank you again.

Operator

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.

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