Emerge Energy Services LP (NYSE:EMES) Q1 2015 Results Earnings Conference Call May 4, 2015 11:00 AM ET
Ted Beneski - Chairman
Rick Shearer - Chief Executive Officer
Warren Bonham - Vice President
Tom Dillon - William Blair
Arieh Coll - Coll Capital
Selman Akyol - Stifel
Lin Shen - HITE Hedge Asset Management
Dennis Ward - Solaris
Matt Niblack - HITE Hedge Asset Management
Good day ladies and gentlemen and welcome to the Emerge Energy Services' First Quarter 2015 Earnings Conference Call.
At this time, all participants are in listen-only mode. Later there will question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's call is being recorded.
I would now like to turn the conference over to Warren Bonham, Sir, you may begin.
Thank you, Shannon.
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 and they also include statements concerning anticipated cash flow, liquidity, business strategy, distributions and other plans and objectives for future CapEx 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 materializes or should the underlying assumptions prove incorrect, our actual results may vary materially from those expected. These risks are discussed in further 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'd like to turn the call over to our Chairman, Ted Beneski.
Thanks, Warren. Good morning and thank you all for joining us to talk about our first quarter results as well as the current market and our outlook for the coming quarters.
The first quarter was simultaneously our best first quarter ever and the reflection of the difficult market in which we and other frac sand and service companies find ourselves.
For the quarter, Emerge Energy generated an adjusted EBITDA of $28.4 million and a distributable cash flow of $24.5 million. Adjusted EBITDA was nominally higher than the first quarter 2014, but significantly lower than our fourth quarter 2014 adjusted EBITDA of $36.3 million.
In our sand segment, our volumes were down as was our average selling price quarter-over-quarter, although we continue to lower our production costs, which are at their lowest per ton level since we went public.
Rick will discuss some of the market drivers and will detail a number of initiatives both those that are recently active and those in the works that we believe will allow us to mitigate the effects of this current down market.
Our fuel segment turned in a solid quarter, well within our expected range, which was a significant turnaround from the fourth quarter of 2014. Warren will briefly recap where we are in the fuel segment and the market drivers there a little later on.
Turning now to our capital program, when we last spoke, we outlined a CapEx budget of $110 million. We now expect to spend significantly less in 2015 with some projects being pushed to 2016 and some projects now being fully terminated.
Our Independence facility had made up a large part of that capital budget. The termination of that project, coupled with the revised capital spending plan for the other 2.5 million plant that we had discussed, will significantly reduce our expected expenditures in 2015.
Our 2016 capital budget for the new plant is approximately $35 million, although if market conditions change, we could move some of that spending up to late 2015. In our fuel segment, we expect half of the capital for the hydrotreaters to be expended in early '16, which should reduce that capital by another $9 million in this fiscal year.
There are some other projects that we're moving around, but we now expect our total capital expenditures for 2015 to be $35 million, $3 million of which should be maintenance capital.
We've received a number of questions about our decision to terminate the Independence facility. So we want to make two clarifying comments. First, the press release, while short was complete, which means that our decision had solely to do with the economic liability of the project and nothing to do with the permitting atmosphere or various lawsuits to which we were not a party.
Second, the contracts that we have associated with the Independence plant in our past calls are tied to our next capacity expansion at Wisconsin. So we expect those contracts to roll to our next facility when we bring that one online.
In addition, I am sure some of you noticed our announcement this morning that Rob Lane has resigned as CFO of Emerge and Jody Tusa has joined as our new CFO. Jody will be joining us on the earnings call next quarter. We're very excited to be able to bring on someone with Jody's level of experience to join our team and assume that leadership role.
Jody has extensive experience in the MLP space and the oil and gas industry from this time as CFO of USA Compression. You can look forward to hearing from him in the coming months.
I want to turn now to our guidance. When we announced our fourth quarter distribution for 2014, we issued revised guidance of $5.25 to $6 of cash distributions per unit for 2015. As many of you recall, we were asked in the Q&A portion of the call whether or not we were being conservative and my response was that everything had to go right for us to reach those numbers.
Since that time, we have had a significant decline in frac sand demand and pricing, mostly driven by the price of oil, which has in turn led to a dramatic increase of rigs and crews in the field and a significant backlog of drilled but uncompleted wells or DUCs as we say.
Talking to our customers as well as E&P companies in the basins where our product is used many can sense that a recovery could be around the corner. However, the exact timing is hard to predict and we feel that our third quarter 2015 recovery both in the price of oil and in the market demand and pricing for sand is probably just as likely as a recovery that takes place six to 12 months after that.
In addition to market concerns, we're also keeping a watchful eye on our debt covenants. We have a maximum allowable debt to LTM adjusted EBITDA of 3.5 times, which was recently raised by our bank group. According to our covenants, we must be in compliance both before our distribution and pro forma for deducting the plan distribution from our EBITDA.
Right now we're in full compliance with our covenants and even in a down case scenario, we believe we will be well within our covenants for the remainder of the year. As we look to our second quarter, our expectation is that we could have another sequentially down distribution.
At the same time, we're working on a number of initiatives that we expect will generate additional EBITDA growth in the second half of the year. Rick will discuss some of these in a few minutes.
After all of our analysis, we've internally plotted a number of scenarios that could bring our distribution back above our revised guidance. However, in the absence of perfect knowledge, we have to assume that market conditions will remain as they are now for much or all of 2015.
As such, we're guiding to $3 per unit inclusive of the $1 per unit that we will be distributing later this next week.
I would now like to turn the call over to Rick Shearer, our CEO who will discuss the results of operations in our sand segment.
Thank you, Ted.
For the past three years, our sand segment has seen unprecedented growth. For those of us who have been in industrial minerals business as long as I have, it's probably fair to say that it was a once in a generation paradigm shift, but even paradigm shifts cannot keep increasing prices for ever without the occasional correction. So while we are in this current environment, prices, volumes, margin, demand are all engaged in what we would characterize as a correction.
As Ted said, the frictions in the market have turned the momentum against us for the first quarter and we expect some of that to bleed into the second quarter and possibly beyond. But as the saying goes, the cure for low prices is usually low prices.
As we look into our expectations for the market, producers are looking to finish out their drilling commitments while completing only the minimum number of wells that they must.
As a result, the backlog of drilled but uncompleted wells DUCs continues to grow, but so does the domestic decline rate, which should, all other things being equal, decrease supplies of oil and continue to push the price of crude higher.
This should clear out the backlog of DUCs and get producers drilling again and that should be the catalyst that we need to increase sand demand and in turn price and margin.
That being said, today’s market is the first part of that story. We now estimate the total sand demand as down roughly 30% to 40% from its peak in late 2014. Producers are finishing out their drilling programs, but well completions remain at a slower pace and while we still expect more refracting to occur it has not been at a strong pace to date.
Average frac sand prices are down about 20% to 25% as well, with most logistics gross margins thin or gone. We know the number of producers selling sand in basin at or below their cost, an unsustainable practice in the long run but a current market reality.
For Emerge Energy, we were proactive in working with most of our customers to help them in their pricing. However, not all of our customers are willing to meet us half way, which means that we remain in discussion with a few of them on how we will move forward in this market together.
That being said, about two thirds of our sand contract pricing is now indexed to the WTI economics. So as that price recovers, we should see some improvement in margins and average selling price.
Focusing on demand that too is presently down for us, but not down nearly as much as the industry at this point. Overall demand is looking more like 2013 than the unprecedented high demand seen in 2014.
As the market shrinks the demand for the finer grade frac sands has increased proportionally over the course of the products. At least for now, 40-70 and 100 mesh sand is being used more heavily in both oil and liquid gas stimulation processes.
As a result of the demand for finer grade frac sands, our operations team is doing a great job flexing in order to supply a higher percentage of finer grade products. We've talked many times about our core sand reserves being a competitive advantage. The beauty of holding these cores reserves is that we can offer whatever product mix the market dictates.
In order to produce a higher ratio of finer grade sands, we can mine a little deeper in our mines, lower our hydrosizer cut at our wet plants and adjust our screens at our dry plants. Today’s product mix demand allows us to prove our competitive advantage of adjusting our product ratios to meet the customer product needs of the day.
Of course over time, you can count on the high demand for core sands to return as it always does. The irony here is that we are selling more sand now than we did a year ago although we expected to be selling a great deal more than that.
We also had a higher adjusted EBITDA in the sand segment than we did a year ago. It's important to know that we are seeing a number of positives moves from our sales team. I want to turn now to our performance for the past quarter and then we can discuss where we see opportunities and realities for the coming quarters.
Superior silica sands generated and adjusted EBITDA of $26.3 million, which was 19% higher than our adjusted EBITDA of $22.2 million from one year ago. We sold $1.2 million tons of frac significantly higher than the $882,000 we sold in the first quarter of 2014.
On an FOB equivalent basis, our average selling price was down only slightly, while our production costs were down significantly in large part because we are now producing all the wet sand that we're processing, rather than making any third party purchases. Our Cosey Texas operations continues to be a bright spot and as we will discuss in a moment, we expect that trend to continue.
At the other end, our logistics business was a negative contributor. Our margins for our logistic offerings were at very thin levels. We continue to bring new rail car operating leases online; leases that we had committed to some ago and we have had to put some of our rail cars into storage as we flush some of our customer cars out of our system.
So what does all this mean especially in light of the current down market? For one, we are growing our market share and we're reducing our cost on the production side. At the same time, we're experiencing lower pricing on both on an in basis and mine gate basis and we have a large fixed cost component on our logistic side that we were not anticipating when we first lied down our internal projections.
More importantly, how are we addressing these issues? For one, our sales team is being very aggressive. They are in the basins, meeting daily with our customers in person and over the phone and we're starting to see a pickup in orders as a result.
We're also starting to see good results from our store front model at our transload sites where we are able to get a nice pickup in both spot sales and in contract fulfillment.
Despite the additional cost we're incurring on logistics efforts, having sand in place is proving to be a huge competitive advantage. When the customer wants the sand, they have options and waiting is not what they want to do.
Our ability to ship on one line hauls on four class one railroads is also benefitting us including increasing sales to the Bakken despite the relative slowdown in that in basin.
On the costs side, we've had some success with our railroad partners and local vendors in working with us to grant us some relief in our production and operating costs. We have also cut down on over time at the plants, but remain committed to the continued employment of our fine work force and do not intend to discard any layoffs.
Railcar expense continues to be a big part of our cost and unlike most of our operating and production cost, is inversely proportional to sand sales. In other words, the more sand we sell, the lower our fixed rail cost.
For that reason, we continue to work to slow down our in-service dates for future rail cars while as we said before, flushing customer rail cars out of our system and bringing more of our own rail cars out of storage.
Today, we have removed approximately 40% of customer cars from our system and we terminated negotiations on a 2,000 railcar order without penalty. As we continue to push on the sale side, the great thing about any incremental sales is that they gave us both additional gross margin and lower our fixed cost profile by allowing us to utilize those railcars.
But at the expense of bearing a couple of our important new programs, probably the two biggest opportunities to the expansion of Cosey Texas plant and the new expansion contract we're working on with a major pressure pump or customer.
First, at our Cosey facility, we've completed a project to debottleneck our production and potentially increase our sales of 100 mesh and 40-70 product at Cosey by 150,000 to 200,000 tons per year. Cosey sand has quickly become very much in demand in the Texas area basins because of both its high quality and its low fully delivered cost in the basins that it serves.
Separately, we're moving forward on a comprehensive set of transactions with a major service company that we hope to have assigned in the next few weeks. We look forward to sharing a more robust update when we finalize this definitive agreement.
So we continue to hunker down and prepare for a tough market for the next few quarters. As we have said time and again, we are a full cycle company and while we may not achieve last year’s EBITDA in 2015 we continue to build our market share and position ourselves to be one of the strongest players to exit the bottom of this business cycle.
With that, I will turn it over to Warren for a brief review of the fuel segment.
Thank you, Rick.
Our fuel segment turned in an adjusted EBITDA of $4.1 million, a $6 million improvement over our fourth quarter 2014 adjusted EBITDA. Our base margin is a per gallon measure of our margin for transmix and wholesales sales before any effects of price volatility or hedging, decreased approximately 30% from the fourth quarter.
This is a reflection of both the stagnant nature of the fuel prices and the effects of trying to market low sulfur diesel in a market that can increasingly only use ultra low sulfur diesel. However unlike last quarter, our earnings benefitted from inventory valuation due to the slight increase in refined product prices since the beginning of the quarter. That led to an overall per gallon margin that was at our highest level since the second quarter of 2014.
We received final quotes for our hydrotreaters from several suppliers. Pricing for the project came in slightly better than we had hoped. Emerge Energy expects to have those facilities fully operational by this time next year. We will be working with the company with whom we have worked before. So we have full faith in their ability to deliver on time and on budget.
Taking a step back to look at volumes for the first quarter, we sold 56 million gallons of refined products and processed 21 million gallons of transmix. These volumes were down from our fourth quarter 2014 volumes.
Our terminal put though of 39 million gallons of third party product, which was also lower than the fourth quarter. We expect that volumes and margins in the second quarter of 2015 will be in line with the first quarter, clearly a market improvement over the second half of last year.
Now for a discussion of Emerge Energy's results for the quarter as a whole. Emerge Energy reported net income of $9.5 million or a $0.39 per diluted common unit for the three months ended March 31, 2015. This compares to net income of $18.5 million or $0.77 per diluted common unit for the three month ended March 31, 2014.
For the same period, Emerge Energy reported adjusted EBITDA of $28.4 million compared to $28 million for the same quarter last year. The improvement is EBITDA is because of stronger performance in the sand segment, mitigated by worse year-over-year performance in the fuel segment.
The decline in net income is primarily a function of greater depreciation expense related to a number of expansion and acquisition projects as well as higher interest expense associated with an increase in debt to fund those CapEx programs.
For the three months ended March 31, 2015, Emerge Energy generated $24.5 million in distributable cash flow. Our total SG&A increased to $9.6 million from $8.5 million because of incremental expenses associated with our growth as a company.
Our interest expense for the quarter was $3.1 million compared to $1.6 million for the prior year period. The 98% increase is primarily due to higher debt levels that we incurred to build out our new sand facilities.
We ended the quarter with $236.1 million of principle outstanding on our revolving credit facility and $6.5 million of cash on the balance sheet. At the end of the quarter, we had a $105.7 million of availability on our credit facility and as of March 31, we were in full compliance with our financial covenants.
We're pleased to report that our bank group approved an increase in our leverage covenant. The new agreement allows a more liberal debt-to-EBITDA of 3.5 to 1 compared to the previous 3 to 1 requirement. We wanted to have the flexibility given our own uncertainty about the propane markets in the coming quarters.
Eagle eyed readers of our debt covenants will have notice that we actually have two debt-to-EBITDA tests. The traditional methodology as well as the pro forma calculation that includes the next planned distribution as if it had been paid at the end of the quarter.
It was this covenant that was the most in focus for us as we did not want to find ourselves in a position of passing our covenants with flying colors, but being unable to make more than just a token distribution.
Our capital expenditures for the quarter were $8.9 million, which includes 639,000 of maintenance CapEx. As Ted mentioned earlier, we've significantly paired our CapEx programs for 2015, which investors should now expect to be approximately $35 million, including maintenance CapEx for the whole year.
We declared our fourth quarter distribution of $1 on April 24 of 2015, which will be paid on May 14, 2015, to investors who are holders of record on May 6. As we stated in our distribution press release, we've issued revised guidance of approximately $3 per unit for 2015 including the $1 distribution for the first quarter.
This takes into account lower sand volumes and lower realized prices and does not include a number of the initiatives that we're working on to improve both. As investors are aware, our goal is to payout all available cash, so our Board does not anticipate smoothing this distribution through the cycle.
I also wanted to touch on our material weakness opinion from our Form 10-K. We've made a number of the hires needed to fill the positions identified in our analysis and we've made several improvements to remediate or identified efficiencies.
Although we cannot receive a new official opinion until management and our external auditor complete their respective audits in early 2016, we believe that we're well on our way to having remediated our material weakness.
We will continue to refine our staff and procedures to strengthen all areas of our accounting and information technology departments.
I now would like to turn the call back over to Ted.
Thanks Warren. Like we said many times before, all of us on the call and all of us at inside equity are long-term holder of Emerge Energy Services unit. We continue to believe that we will be one of the winners and one of the leaders amongst our peers in the propane space.
We're gaining share. We're setting up great partnerships. We're positioning ourselves well for the market recovery and while this market is testing us, we have an will continue to meet its challenges as we move through this bottom of the cycle.
We thank each of you for your continued interest in Emerge Energy.
Operator, we're now ready to take questions.
Thank you. [Operator Instructions] Our first question is from Tom Dillon of William Blair. You may begin.
Hi, yes, I was just wondering if we could talk about leading edge pricing, the spot versus contract and maybe trade-offs between volume and price in your current negotiations, thanks?
Tom, hi good morning. This is Rick, and yes, we're seeing in the marketplace opportunities for spot as well as we said fulfillment of the contracts that we do have in place, given the fact that the market is of course reduced from what the 2014 market looked like.
If you look at pricing on the spot basis, it is slightly higher than contract pricing, with typically 5% to 10% improvement in spot pricing.
I think your second question then is we look at pricing as it relates to volume, we are holding actually increasing market share, given the volume that we're tracking. You see that we're over a million tons for the first quarter. We sold 4.2 million tons in 2014. We actually expect that we will be very close to those tons when we finish out 2015. We'll see how all that plays out.
But to your point, the issue will be average selling price. We know that that average selling price is declining. We expect that over the course of the year it will probably be 20%, 25% less overall than at its peak performance of the prior year.
But our intent is to gain market share to position ourselves for the rebound, so that we come back actually stronger as a company than when we entered into this down cycle and we're well on track to doing that.
Okay. Good. Thank you.
Thank you. Our next question comes from Arieh Coll of Coll Capital. You may begin.
Yes, thank you very much. I was hoping just to kind of review the pricing mechanism you've renegotiated with two thirds of your volume going forward, which is linked to WTI prices. So let me go ahead and ask the question.
Hypothetically, if let's say in the months January, February, March, oil prices for WTI were $65 in January, $70 in February and excuse me, $80 in March, so that the average for the quarter was $75 over that timeframe. Would the contract pricing for your profit then be resent for the June quarter based on the average for the March quarter in this case, let's say at $75 and that would be a three month lag in how your pricing is determined based on the WTI average or is my understanding possibly erroneous?
No, I think what we’ve done that’s a little bit unique with our customers is we’ve negotiated with them a mechanism as you’ve just cited with over two thirds of our customers in which we wanted to be assured that if we help our customers during this down cycle and we make pricing concessions to keep them competitive that when WTI does increase there is an index scaled that assures that we get our prices up and we get them up in concert with the price of oil.
That’s been agreed to and you went through several reiterations of what that might mean if we got to pricing as you said on average of $75, then our pricing would certainly ramp up and our average selling price would increase significantly above where it is today.
We’ve got certain pressure points that go up every $10 on WTI as the general format with the idea that within 30 days the price goes up as long as the oil price held for that 30-day period. The pricing goes up in sync with the escalation of oil.
So we think that’s a little unique out in the marketplace but we’ve got this in place with the customers that assures us of one big question and that is how quickly can we recover our pricing when the market does improve? This has given us a certain level of confidence that we’ll be moving and moving quickly to get our pricing up when the rebound happens.
Great. Very creative idea and I hope it works. Follow-up question last conference call you had indicated you were in negotiations with a pressure pumper company I believe, where you were hoping to purchase the propane facility they had. Can you just give us an update on that please?
Sure. I'll give you little more insight. We certainly want to wait before we provide any in-depth detail until we get all the paperwork fully signed. We’re right on the two yard line of getting that done. We fully expect that our due-diligence will be completed and the paperwork will be signed within the coming few weeks.
But we’re excited about this project. We’re excited because even though we aborted the Independence project, we did that consciously for a reason that led us to this opportunity to expand to a much better business model.
The economics in this business model are substantially better than the economics that we saw in the Independence project. We’re doing this for all the right reasons.
That is going to allow us to solidify a partnership with a major service company, as I think we said in the prior call last quarter, this will be a contract that will commit this major service company to take 50% of the 2.5 million ton capacity that we plan to build. And it will also include take-or-pay clause in this long-term 10-year contract.
So we feel very good about this going forward. The project will be teed up. The nice thing is we already have a lot of work in place to permitting being done. Equipment that’s been on the ground at Independence will be moved to this new site.
So we’ll be able to act very quickly when we see the market continue to improve and when we make the decision to pull the trigger to build this plant and add this additional capacity we’ll be able to move this not only much quicker from a timeframe than others, but at a lesser additional 2016 capital cost, because there is already some cost and a good bit of the equipment and so forth.
I think Ted’s comment was we expect maybe $35 million additional capital when we do pull the trigger and move ahead with this project. So we got it teed up. We’re excited about it. We’re very confident in this business model. It appears that it will be the best business model of all the plant projects that we brought online so far.
Well, thank you. Best of luck.
Thank you. Our next question is from Selman Akyol of Stifel. You may begin.
Thank you. Good morning.
Let me just start off on the fuel side. Just one question, so we go back to last quarter, I think you had $20 million in your CapEx for two hydrotreaters there and now one of those is being pushed in 2016. Is there something changing in that market or is that just sort of more of a discretionary thing?
There is actually no change, so yeah we still plan on building one in each of the two locations. But the way the cash flow is timed, roughly half of the cash we spend this year and the rest spend next year timed with the completion of both of the projects. So does that clarify?
Yeah, that’s fine.
Okay. Improving in cash flow timing situation.
And the overall cost of the project has come down from $20 million to about $17 million.
Great. Thanks. Is there any commentary in around $6.7 million write down you guys took and what that was for?
Yeah, I guess the primary cost that were written off or things like engineering, permitting, cite prep type cost that could not be recovered, as Rick highlighted for Independence, that’s correct.
All independence related.
All Independence related okay.
Rick highlighted yeah we redeployed all of the equipment and it’s ready to be moved towards a new project that we’re currently working on.
Okay. I think previously you guys have been talking about going to 8,000 railcars now and clearly I guess that number is down by 2,000 so that 6,000, I guess where do see these fleet ultimately being?
Well we’re going to be ready to meet the customer demand. If you look at where we are Selman for our growth projections, just as we sit here right now with the Cosey expansion, we’re at $7 million tons a year of frac sand capacity.
Our contracts are well beyond that as you know that are already signed. When we add this new expansion, whenever the timing is, that will take us to 9.5 million close to 9.5 million tons of capacity.
We expect when the market rebounds with the contracts we have in place and the position that we hold in the market we will sell out that capacity. So we’re going to need railcars of course to meet that added demand.
Right now an issue that we’re faced with and everybody in the industry has faced with is how to manage that railcar pipeline? As you said, we book 8,000 railcars to come into the system and then very quickly, unexpectedly and we can mark the time in February the frac sand market hit the wall and demand dropped off significantly. So now we’re in a reverse mode to try to sub-let these cars to get customers cars out of the system.
We’ve been successful in doing that. We expect during the course of this year Selman, until the market begins to rebound that we will probably be paying for storage and lease cost of a 1,000 to 1,200 cars in storage monthly.
We don’t like that, but we do have to have cars in place for when the market rebounds and we do have contracts there in place of course that we will and are expected to honor. So managing these railcars are important.
But as we see the sales improve and we’re already seeing signs that the sales are stabilizing and in fact in our case improving, the good news about that is that’s fewer cars we put in storage and that’s going to minimize the cost I just spoke of.
Got you. So I know you've talked about lower operating cost and things you’re working on to do that? Do you have a ballpark how much more can be taken out is it 10%, 15%, 20%. Is there any way to put it in those terms?
Selman, we think that there’s still some low hanging fruit even though we’re one of the low cost producers already in the frac sand industry. We spoke at the last quarterly call and we should highlight this further that we had a unique mining approach that we’ve come across that we are working on in Wisconsin.
We will be moving forward with that. The equipment is in place for us to alter our mining techniques in Wisconsin. We expect to have that in place by the end of this month. If this mining technique does what we expect, we will begin saving $2 to $3 a ton immediately.
So we’re excited about this. We’re excited to prove it out. If it does what we think we can do, you’re going to see our cost drop significantly even on that basis
Yes, there is lot of other efficiencies and a lot of other improvements that our team is making. So we’re taking some small steps in that direction, but we’re very excited about this new mining approach and what it will do because this could mean big dollars to the company going forward.
Great. I appreciate that. There has been a question about, in terms of oil prices moving up and how your contracts are actually working and things kick in, certainly glad to hear that its only a 30-day lag period or at least that's what it sounded like to me.
But I guess the last earning calls, crude prices were up 20%. Have you noticed any improvement in your pricing because crude being up from the last call or is it still sort of a point above where we're at today?
No, I think there is going to be a little bit of lag. I think the good news on pricing Selman, is that we certainly see things stabilizing that’s very early news in the last couple weeks that appears that things are starting to stabilize.
We are hearing and seeing more well drilling activity coming to the table now. There is discussion of all that additional work. Some of additional work starting to happen.
We won’t see the result of that in propane orders probably for a few more weeks. So there is a little lag there, but as the demand improves and we're optimistic that it's starting to show some light in the tunnel now, as that demand improves, pricing certainly should improve and to some degree the WTI index in our agreements will push that to happen sooner rather than later.
The other issue that’s going to drive pricing is obviously demand and we'll see how quickly this happens. It might be that we stabilize and then there is a slow rebound later this year that seems to be a growing consensus in the industry more and more.
So we’ll just have to see how the market reacts and then what that means to our pricing and our average selling price going forward.
Okay, can you please talk little bit about the inventory and the basins and how that looks?
There is a lot of inventory in the basins. We’re moving more product through our terminals than I think a lot of others. You go out in those basin Selman, you’re going to see a lot of full railcars stacked up out there. I think that’s a sign of the time, it's a sign of course of the -- of the market being as soft as it is.
We’ve been very careful to manage our inventory, keep turning those railcars. We’re actually shipping now knocking right on. 50% of our sales are going through the terminals in basin now. So I think that’s only going to improve and hopefully the inventory that’s out there, will begin to come down, I would hope in the next couple months.
All right, last question for me and I appreciate all the time. Can you guys just talk a little bit about what the CapEx reserve was for you set-aside this quarter or in terms of the distributable cash flow?
Yeah, we set aside $0.03 which doesn’t sound like a lot of money, but we do again have $35 million that we're going to spend this year. So really it's just meant to contribute to the $35 million that we spoke about earlier on the call.
All right, thank you very much.
Thank you. Our next question comes from Lin Shen of HITE Hedge Asset Management. You may begin.
Hi, good morning. Thanks for taking my question. Appreciate it.
First question is that for the -- last distribution for the next three quarters this year, should we expect to earn like probably like $0.57 a quarter or maybe it's kind of volatile, depends on the crude price? And also, you mentioned that maybe second quarter we probably see the bottom of the price, so that may be second-quarter going to be the lowest distribution. Then we are going to see the growing both third quarter and fourth quarter?
That’s a great question and I guess for you and the entire audience, I think the best expectation is that it will be relatively equal over the next three quarters in terms of how that $2 gets allocated. We do expect the second quarter to be the worst quarter of the year, but that’s also the place that we’re probably likely to use all of our reserve. So that's probably the best guidance we can give at this time.
Great, that's very helpful. And also just wanted to clarify, your pricing the frac sand price to WTI press, is it two third of your clients or two third of the volume?
That would be basically two thirds of our volume.
Okay. Thank you very much.
Thank you. [Operator Instructions] Our next question comes from Dennis Ward of Solaris. You may begin. Dennis Ward, your line is open. Please check your mute button.
Hi. Good morning, fellows. Great report this morning. I appreciate all the background on what you guys are doing to cope with the cycle we're in right now and Rick, given the backdrop in Wisconsin right now with some of the mines either suspending operations completely and not operating, given others are going through layoffs from the personnel so forth and so on, I think it's amazing that you guys have not laid anybody off and continue to work on your operating expenses in the areas that you mentioned just a moment ago such as aggressive sales force, moving out customer cars and so forth and so on.
And while overall the market is down, you're gaining market share and so really my question is addressed to the price of your stock in the marketplace it seems like and of course as an investor I don't like what's happened to the stock price any more than anybody else.
But can you tell me does it seem like the stock price has been unfairly hammered and pounded on or is that just me or I would be interested in your comments about what you think about the recent drop in the stock price?
Dennis, good morning and I will just weigh in with a personal opinion and Ted maybe want to follow-up with a comment. It's been a little frustrating for us as well. Yes, we understand that the distribution did drop for the first time since we launched and we can understand there would be disappointment in that.
But let's take a look at who we are. We're a variable, great MLP and we put that variable MLP in place knowing that when you're in the oil and gas industry, this is a cyclical business. So there is going to be ups and downs in the market and as a result of that, I don't think anybody should be all that surprised when you're in an environment like we're in that the distribution would be a little lower than it was in the good times.
But we will be back and the important thing in my mind is and I would hope investors recognize this is we are a business model that is proving itself to be very competitive, in fact advantageous in this down cycle and we're positioning ourselves for the rebound to come back stronger than we were before the down cycle even happened and as a result of that, I am absolutely confident that you'll see improved performance as the market gets better and you'll see that Emerge Energy will prove itself to be one of the leading companies certainly in this industry.
So it's disappointing where we are right now with the stock price -- I'll give you a personal opinion, I think it's somewhat underserved and I'll also tell you that I think that the Emerge stock is at an extraordinary value right now, but we're going to continue to do all the right things.
As I say to our Management Team, we're going to stay focused and we're going to stay positive and we're going to prove ourselves every day. That's what we're all about. Ted, you might want to add on to that.
Yes, first of all I agree with Rick whole heartedly. We think the stock is undeservedly lower than it should be, but we believe we're doing the right things to position ourselves for the recovery and over and above that, we think of everything that we've done as being along the lines of making ourselves more resilient and more flexible for the environment in which we participate.
The way we structured the MLP to begin with was in anticipation of this possibility that we could in fact have downturns from time to time and we didn't want to put ourselves in harm’s way. So we introduced flexibility into our capital structure and our ownership structure to accommodate that and then secondly we have systematically kept our debt levels extremely low.
Through the hay day of early 2014 and mid 2014, we were hovering at or below 1X in terms of our debt covenant and one of the things that we resisted was the temptation to go out and buy units. We did resist the temptation to expand too fast and get ahead of ourselves and we've kept out capital structure very conservative and now we're reaping the benefits of that.
And because of the way that we've handled our banking relationships, they've respected and appreciated what we did and they've accommodated us in expanding our covenant to 3.5 times which gives us even more flexibility.
We certainly don't need that covenant capacity now, but if this were to be an extended downturn, without issuing new units, without diluting our existing shareholders, we have the ability to take on significant more debt to total EBITDA as a consequence of the downturn.
So we think we've made all the right moves and expect to be a long term player in this industry and to be very successful.
Well, thank you guys. That sounds like you are on the right track of doing things. I appreciate those thoughts and comments. Just keep hanging in tough in there and good luck, good work and we will see you next quarter.
Thank you, Dennis.
Thank you. Our next question is a follow-up from Lin Shen of HITE Hedge Asset Management. You may being.
Hi, this is actually Matt Niblack for Lin here. Just wanted to follow-up on these oil linked contracts and a multi part question here, so first the pressure on what the -- what was baked in, in terms of the oil price when you thought about that $3 annual guidance?
And then secondly, is there a rule of thumb at least the way the contracts are structured as of this moment that we can think of how much your cash flow or your EBITDA, your revenue or whatever it is goes up or down with the dollar movement in the crude price?
Do you want to take a shot at that Warren?
Yes, I think at this stage we would rather not give specific guidance. In terms of sensitivity and somewhat not, so I think we would rather kind of keep that internal for the time being. I think it's a great metric or a great way to build the contracts, but as the price of WTI increases as Rick indicated.
Not a long lag time between when the WTI increases when we see the results, but again we would rather not go into a lot of detail in terms of the specific mechanics.
Okay. That's fair and then I guess can you at least comment on what crude price was baked into the average 2015 crude price that was baked into the $3 distribution guidance?
Yes, so we're not forecasting any improvement over the current WTI price. So to the extent that there is improvement, yes, you should expect to see some improvement in the results. So it would be probably in the low to mid 50s as far as the WTI price.
Okay. Low to mid 50 is the average for the year. So that guidance assumes low to mid 50s average WTI, it doesn’t assume the new project you're working on that you're hoping to share more with us once it's fully ready to go and it doesn’t include the potential next trench of cost savings that you've alluded to?
That is all accurate.
Great. Thank you very much.
Thank you. I am showing no further questions at this time. I would like to turn the call back over to Ted Beneski for closing remarks.
Okay. Great. Well, we appreciate you spending all this time with us this morning. Again we believe that we are positioning ourselves for a very significant share gain throughout this down market.
We're working with our customers in partnership to help them as much as we can as long as they're reasonable and fair and as we've described today, we believe we're taking all the right actions to enable us to be a strong performer and to be a leader in this business for the long term.
So I just wanted to thank you for your time today and look forward to our next call and next communication.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.