Emerge Energy Services LP. (NYSE:EMES) Q4 2016 Earnings Conference Call February 27, 2017 3:00 PM ET
Deb Deibert - Chief Financial Officer
Ted Beneski - Chairman
Rick Shearer - Chief Executive Officer
Brandon Dobell - William Blair
Arieh Coll - Coll Capital
Mark Brown - Seaport Global Securities
Good day, ladies and gentlemen, and welcome to the Emerge Energy Services Fourth Quarter 2016 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, this call is being recorded.
I would now like to turn the conference over to our host for today, Deb Deibert Chief Financial Officer, you may begin.
Thank you, operator, and welcome, everyone, to the Emerge Energy Services LP fourth 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 estimate of future volume, 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 on 10-K which we’ll be filing very soon.
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.
Thank you, Deb and good afternoon and thank you all for joining us to discuss our fourth quarter results, the current market outlook, and an update on our business strategies. After a very challenging year in 2016, we are very excited about what 2017 has in store and we expect to deliver much stronger performance for our business in 2017.
The market momentum in the frac sand space has changed dramatically over the past 60 to 90 days and our capacity is being filled quickly with corresponding price increases well underway. Our customers have provided robust outlooks for completion activity in 2017 and we are negotiating supply contracts with both new and existing customers. Given the markets recent acceleration we are extremely confident that we will generate positive EBITDA in the second quarter of 2017 and we now think that breakeven EBITDA is possible for the first quarter.
For the fourth quarter, Emerge Energy reported a consolidated net loss of $20.8 million compared to net income of $5 million for the three months ended September 30, 2016, primarily due to the gain on the fuel sale in Q3.
We generated consolidated adjusted EBITDA of negative $10.6 million versus negative $8.1 million in the third quarter of 2016 as Q4 was our first full quarter without earnings from fuel business and this [Indiscernible] of the divestiture on August 31, 2016. However, our continuing operations adjusted EBITDA improved by approximately 300,000 sequentially and this included $1.1 million in onetime railcar reaction cost, reactivation cost and a $1 million write-down of SandMaxX inventory.
The key driver of this sequential improvement was that our total sand volume sold increased by 68% in Q4, 2016 versus Q3, and it increased to an amount of 826,000 tonnes and our sand production cost per tonne improved with the higher tonnage produced and sold.
Last year we laid out a three part to navigate through the downturn. As you may recall the plan consisted of one divesting yield division as part of our overall debt reduction and bank amendment process, two, lowering cost across all aspects of the business and three developing and commercializing our technology driven profit products.
We are pleased to report that we have made significant progress on all three parts of the plan, and have fully completed the divestiture of fuel. After the fuel sale closed at the end of August 2016, we will require to fulfil certain obligations under our credit agreement to further reduce our bank debt load with an equity raise. Accordingly, we closed on our $34 million public equity offering in November. We had the [green shoe] that was exercised in December. We ended up raising over $39 million of new equity. We are about $37 million of net proceeds that we used to pay down our revolving credit line. We want to thank the investor community for the strong support we received during this final step to shore up our balance sheet and we are now in a great position to take advantage of the current market upturn. We have no plans to issue more equity in the near term.
The second part of our plan called for comprehensive cost reductions in all segments of our business. We have now completed all of our railcar lease restructurings and we have negotiated contract amendments with various vendors across our supply chain. Our mines and dry plants are running much more efficiently and we are now staffing up our plants to meet the higher roles of demand.
Although cost containment is a continual focus we are excited about adding resources to the business in 2017 to start a new growth phase. The third part of our strategy revolved round our goal to differentiate ourselves from the competition to product innovation. Most notably our SandMaxX product was launched in 2016 and we are proud of our achievements with the product during an extremely difficult environment in the oil and gas space.
We are still conducting trials with a number of E&P companies to expand sales, but we do have a regularly buying customer. [Initial reads] on the trials from early 2016 indicate the product is working down as expected and generating a substancial uplift in hydrocarbon yield. With that, I’ll now turn it over to Rick Shearer, our CEO who will cover the sand operations in more detail.
Thank you, Ted. After nearly two difficult years of downsizing and defensive moves, the tone and trajectory of our industry and business have finally swung to a state of positive momentum. We feel very encouraged about what 2017 holds for Emerge Energy and we expect that you will see dramatic improvement in our near term results.
We drove a sizeable increase in volume during the fourth quarter as our total sand volumes sold increased by 68% sequentially to 826,000 tonnes of which approximately 50% was sold in basin. This growth rate dramatically outpaced the average U.S. onshore rig count growth of 23% and we believe that we recaptured market share from some of our competitors. We think that these share gains will continue into 2017 as some sand producers were not able to build their winter stockpiles last year given financial and operational challenges, so they have not been able to sell meaningful volumes during the markets ramp up that started near the end of 2016.
We are targeting market share of 10% over the next 12 months. From a broad industry perspective, the trend for higher sand loadings for each horizontal well drilled and completed remains very favourable.
Third-party data suggest that profit intensity for horizontal well in the U.S. increased by 15% for Q3 compared to Q2, and early raids on Q4 data suggest another 10% sequential increase. We are approaching per well levels that have nearly quadrupled when compared to early 2013 data and we are hearing from our customers and various E&Ps that laterals will only lengthen and sand loadings for lateral foot have yet to reach a point of saturation.
Similar to what we discussed on our last earnings call, we are still seeing finer grades and higher demand relative to core sands; however, many operators have converted to 30/50 and even some 20/40 because the industry is capacity constrained on the fine grade sands. In fact, we are currently sold out of our hundred mesh and 47 products until our Wisconsin mines resume production in the spring. We are also seeing many operators convert back to Northern White Sands now that oil prices have stabilized around $50 per barrel.
But we think the lower quality regional sands still have a long term spot in the frac sand market for certain areas of the major shale plays. Now that the market is clearly in the early stages of a recovery in the industry’s capacity utilization is improving, prices are on the rise.
We are focussed on driving prices off of what we saw as unsustainable levels for most of 2016 and we think that the market clearing price for fine grade sands and even some core sands has increased by over $10 to $15 per ton from the trough hit during the middle of last year.
Several customers are seeking contracts to lock in supply at a fixed price, either for the full year 2017 or on a quarterly basis. We are now selectively agreeing to multiyear take or pay contracts with some of our key accounts. We believe this ensures the customers a steady supply of product in exchange for covering the infrastructure related fixed costs plus needed margins associated with operating our business after verbally negotiating two new contracts in Q1; we will have approximately 55% to 60% of our estimated volume for 2017 under take-or-pay commitments.
Looking at our Q4 performance in more detail, our adjusted EBITDA from continuing operations improved to a negative $10.5 million from a negative $10.9 million in Q3. We are very pleased with our sales volume group of 68% quarter-over-quarter, but most of the previously discussed price increases did not take effect until late in the core, so our Q4 numbers showed minimal impact from the dramatic price improvement seen as we have gotten into Q1, 17.
We certainly have more work to do in order to boost the bottom line. However, we believe that we have laid the foundation on pricing for the results to come to fruition in early 2017 and beyond.
The significant improvement in volume drove better absorption of fixed production and logistics costs. Our operations team did a great job during the quarter of restarting our New Auburn and Arland plants to run at a consistent utilization which has increased further into Q1 this year.
Currently, our three Wisconsin dry plants plus our [Indiscernible] operation are collectively running at approximately 70% utilization. We ran our Wisconsin mines until the first week of December to build our winter stockpile, although the brakes in winter weather have afforded us a few extra weeks of intermittent production to meet higher demand.
We achieved our lowest sand production cost of the year during November, when all three of our Wisconsin dry plants and three of our Wisconsin mines were producing at a strong quarter. On the whole for the quarter, our production costs improved by just under $2 a tonne sequentially.
On the logistics sand, we pulled out approximately 1000 railcars out of third-party storage bringing our storage count as of year-end to 1,647 cars compared to over 3000 earlier in the year. While we are delighted to see the utilization of our fleet improve, we experienced reactivation cost similar to what pressure pumpers see when they need to place their pumping equipment back into service.
We incurred approximately $1.1 million of onetime costs to reactivate these railcars and move them from storage yards into our circuits and the idle railcars in our fleet cost us approximately $3.5 million during the quarter, this is down from approximately $5 million in Q3.
We expect our railcar storage count to fall further in 2017 based on how our volumes have been trending as more railcars are being pulled from storage on a steady basis. In fact, currently we have 1,200 cars in storage with an expectation that all of our cars will be out of storage later this year. With this dramatic market demand improvement, we now see our railcar inventory as a clear competitive advantage going forward.
Also, on the subject of logistics, we are opening a new terminal in the southern Midland basin in early Q3 to better serve a major customer. This Permian terminal will be owned and operated by a third party but we will have exclusive use for frac sand. Additionally, we have spent a considerable amount of time working with last mile solution providers and testing out different concepts. It should be known that Emerge Energy is currently providing last mile services to our customers, who are focused on this need in the same way that we do not own any of our terminals we want to retain flexibility when it comes to certain last mile concept or equipment.
Similarly, we do not want to compete with any of our customers and some of them were involved in the provision of last mile services. After much thought and deliberation internally, we have strategically decided that betting on one last mile offering is too premature at this point in time. We are still considering partnerships and alliances which we think are less risk and less capital-intensive than an outright purchase of the concept right now.
Our core competencies are in producing sand and technologically [driven problems] but we will respond to changing conditions for the last mile logistics offerings with the help of preferred partners who have expertise in storage equipment, truck transportation and well site handling. We certainly get it regarding last mile services, but we believe it is simply too early in this supply chain development, so flexibility here is the most prudent approach.
Now turning the SandMaxX. We are starting to see well performance data trickle in from the wells that were completed during early and mid 2016. So far, the results are proving out to be as we expected. We are working closely with our customers to verify the results, which should help us market the product more broadly to the E&P Universe.
For the full year 2016, SandMaxX will successfully pump down hole in a high number of wells in four different basins as interest and demand looks more and more promising in 2017. SandMaxX has also demonstrated that using this unique technology saves on labor, power, chemicals, water and maintenance, as well as ancillary pumping costs, namely through more stages pump per day.
Since year-end, we have made further refinements to the technology with the addition of an ultrahigh salinity formulation that is able to suspend extremely high brackish water. We remain committed to further proving out SandMaxX because we think the upside is real and that the oil and gas industry will eventually embrace this high value added self suspending technology.
Given our SandMaxX success thus far in the field, it is not a matter of if this technology works, but a more a question of when. We want to be clear that this problem is not to be confused with resin coated or ceramics, which we have seen significant market share declines and they only apply to a very small percentage of the oil and gas wells drilled each year.
While resin coated and ceramic products might offer a higher crush factor for deeper, high-pressure wells. These problems do not offer higher yields like our SandMaxX technology.
Further, SandMaxX is applicable to all oil and gas wells because it fills out the well cavity better than completions that use conventional sand and then allow the problem to come in contact with more surface area and [Indiscernible] downhaul, thereby allowing more hydrocarbons to be released.
Our goal is to gain broader market acceptance of the product by the end of 2017, and then break ground on a commercial SandMaxX plant that could produce up to 1.5 million tons per year at a capital cost of $20 million $30 million.
Finally, we talked for several quarters about diversifying our mining footprint through expansion or purchase of a regional sand plant and last week the industry heated up on capacity expansion discussions. As we have said for quite some time now, we continue to believe that local or regional sands, although lower in quality when compared to northern white have a long-term place in the frac sand industry after the downturn improved but the quality is acceptable for certain types of shale geology particularly the lower pressure and shallower wells.
We still, still firmly stand by our core northern white operations but we have been actively searching for an acquisition or greenfield site situated closer to the major basins and have made considerable progress during the last 60 days. While we cannot give specifics, we think an opportunity is eminent and will be very attractive for investors. We are also evaluating a capital project to improve the performance of our Kosse operation and even expand capacity beyond the existing 600,000 tons per year due to strong demand for this Kosse product.
Between a new, local sand site and an upgraded Kosse, we expect to continue to gain share of this quickly growing market as we demonstrated in the fourth quarter. Our added capacity plans will ensure that Emerge Energy is ready to meet the increasing needs of our core customers.
Also with our belief that the top five or six frac sand producers will gain an inordinate market share as this industry evolves, Emerge Energy will license market share growth beyond their 2017 target over time. We are confident that Emerge Energy will need more capacity and were planning to have this expansion in place sooner than other producers.
Now I’ll turn it over to Deb to review the financials.
Thank you, Rick. Emerge Energy reported a consolidated net loss of $20.7 million, or $0.77 per diluted unit, for the three months ended December 31, 2016. This compares to a net income of $5.1 million, or $0.21 per diluted unit for the three months ended September 30, 2016.
We reported consolidated adjusted EBITDA in the quarters with our current credit agreements at a negative $10.6 million for the fourth quarter compared to a negative $8.1 million for the previous quarter. And looking at Q4, versus Q3 net income and adjusted EBITDA both declined due to removal of our fuel business which was divested on August, 31 last year. And we recorded a $31.7 million gain on a fuel sale in Q3.
However, our continuing operations, operating income improved by over 300,000 given the increased volume and lower production cost, offset by 1.1. million in one time cost to pull nearly 1000 railcars out of storage and place them back into service and the 1 million write-down of SandMaxX inventory.
Net income from continuing operations improved from a loss of $30 million in the third quarter to a loss of $20.7 million in Q4 due to a $3.9 million improvement into the mark-to-market adjustments on the warrants in other income. The $3.3 million debt cost write-off in Q3 and lower cash interest due to lower debt balances in Q4. We generated distributable cash or debt set at $15.2 million for the three months ended December 31, 2016.
The Board of Directors of our General Partner elected not to make distribution for the quarter. We are also restricted under our credit agreement to obtain distribution factors at this time. Our capital expenditures for the quarter was $1.3 million, which includes $1.2 million of maintenance capital.
As we previously reported, we have significantly cut back our capital expenditure plans and are including only those projects in 2017 that are necessary for our current operations and/or for which we are contractually obligated. We currently have budgeted our total capital expenditures of 2017 to be below $5 million and within the limits set by our credit agreement covenants. However if the market continue to accelerate we make seek permission from our lenders to increase the limit.
We were once again very successful in delivering our balance sheet during the fourth quarter as Ted mentioned, we completed a public offering of 3.9 million units in December and December. In November/December the [rail car] 37 million of net proceeds that were planned toward the further debt reductions.
As of December 31st, we had 140.7 million of principal outstanding and net availability of $49.6 million under our revolver, well over the $15 million minimum availability required under our current covenants.
As a reminder on our added covenant we have limitations on capital expenditures, a minimum adjusted EBITDA covenant beginning in second quarter 2017 and an interest coverage ratio beginning at 2018.
We are currently incompliance with all debt covenants and filing requirements and expected to remain in compliance in the future. Finally, given the continuing unpredictable market conditions that we’re facing we are not providing considerable guidance at this time.
However, as Ted discussed we are highly confident of achieving adjusted EBITDA breakeven by the second quarter of 2017 and now think that breakeven is possible for first quarter.
Operator, we are now ready to open the call for questions.
Thank you. [Operator Instructions] And our first question comes from Brandon Dobell of William Blair. Your line is now open.
Thanks. Good afternoon, guys. Couple of quick ones. First on SandMaxX, I guess what are the mile markers? Or what do we want to call that we should look for or look for you guys to communicate around how to gauge the trajectory of that of product. Sounds like the initial wells have gone, so how does that become a much broader part they offer in the next handful of quarters?
Brandon, this is Rick. And let me just say that we are in uncharted waters with SandMaxX. It is such a unique self suspending technology. It’s very hard to project exactly what this ramp-up is going to look like, especially as we see more data coming in and that data is showing that the uplift of yield from these wells is 20% to 40% improved. Once we get more of that data that will confirm a lot of the people that are very interested in the product, we think will start to look at the product to try worthwhile the early adopters that have already looked at the product. We’ll start to buy it on a regular basis.
Ted mentioned the rightfully so that we do have a customer that’s buying on a regular basis now and as more data comes in we’ll pick up the pace with more consistent orders from regular customers. So, we’re going to take a look to see just what that ramp-up looks like Brandon before we really make a decision to move forward with this plant that we talked about, the 1.5 million ton plant. There will be a six-month period though, six to eight months from the time we break around until we have that added tonnage. So, as we measure ourselves here we’ll take a certain leap of faith knowing that it'll take time to get the commercial plan in place.
And I would say that Brandon has the markers are what you would expect, volume increases of SandMaxX and dollar increase in sales of SandMaxX.
Yes. Okay. Just talk a little bit about, let’s call it, take-or-pay contract for negotiations, maybe a little more color there. I guess, I’m curious about how you’re balancing, what seems to be a pretty attractive pricing environment going on right now? So locking in price or not locking in price and exchange for some volume certainty, maybe what your philosophy is these days around contracts versus waiting for higher prices to maybe lock in a more attractive spot for you?
Brandon, the good news is in this market we’ve got customers coming to us now, saying that they want contracts in place. So they assured a security of supply here from one of the major players. In this case in particular from the Emerge Energy. So this really helps in the discussion, because this is something the customers recognize as they look out on the horizon that they really need to have a secure sand source at least.
So in that sense we’ve had some very good discussions. The customers also would like to have some sense of security around business, but our expectations has remain that even though prices have gone up substantially, ever since December those prices are likely to continue to trend upward as the year remain.
So, in most cases while we have signed – the contracts we have signed and put in place that our take-or-pay are two plus years on term basis. The pricing in most cases all but one is limited to quarter-by-quarter adjustments, so, that we can adjust as the market moves forward. So that's how the contracts are being lined out right now.
Okay. Thanks. That’s helpful. Then as you think about real transportation what’s been the conversation so far with the rails and I guess as part of that what’s our expectation be for you guys selling at mine gate verses in basin as we think about the rest of 2017?
We’ll probably -- it looks like we’ll stay in a range of 50% in basin sales, the balance of course been in mine gate. As far as the rails and the discussions that have gone on with the Class One railroads that we deal with. Right now, we have not absorbed any additional price increases. We’re hoping that the we don't really get into that until the second half of the year at least because it's important for the railroads and other vendors to understand that we like many other producers in the frac sand space are out of the woods yet, and not as a result it's premature to be looking at any type of price increases. Thus far the railroads have been willing to work with us on that note.
Okay. Thanks. Appreciate. I’ll turn it back.
Thank you. [Operator Instructions] And our next question comes from Arieh Coll of Coll Capital. Your line is now open.
Yes. Thank you. Appreciate you’re doing the call and hope you guys enjoy the upturn here. It’s obviously more pleasant than the reverse.
You get that right, Arieh.
Rick, there’s a question up to you. Would you be wiling to elaborate just on these price increases seen in the market since December. I know you said there up substantially a bit, any chance you’ll be willing to quantify that a little bit?
Well, I think, we were seeing earlier certainly toward the fall season of last year that the market pricing was we saw generally in a range of 20 -- low $20 per ton mine gate. There were exceptions to that of course, we saw some people selling even at cash cost basically, but if you look at the general trend in the market we were seeing things around the $20, $22 a ton in that range. And as we just mentioned in our prepared script that these prices have moved quickly up in the range north of $10 a ton from that benchmark.
Got it. So, am I interpreting correctly by saying January, February timeframe, the current quarter, the prices you’re able to sell at the mine gate now are $32 and above?
Of course, that's an average number but in that range, yes and the spot prices higher yet.
Got it. And can you just kind of clarify, obviously there’s a [balancing act] between yourself and customers, but how are you trying to negotiate the pricing adjustments on these new contracts on a quarterly basis so that customers get some certainty but you're hopefully not selling to them at too lower price because you have a 30, 60, 90 or other day delay in pricing where spots moving up, but you’re maybe selling at a contract price that's 90 days out of date and therefore below-market?
Well, I think as far as the importance of monitoring literally day-to-day the market, our customers certainly do that, of course we do that as well. And where we’ve had contracts before that were based around market pricing, I've been pleased to see and I expect this would continue that both customer and supplier, Emerge Energy in this case has a very good handle on what market pricing actually is and the discussions have actually gone very smoothly as far as an agreement move price and [sync] with the common ground where the market price really is. So, we expect to see that same format continue and shouldn't expect any problems in that regard.
Okay. And then just finally on the drilled and uncompleted wells in industries, that do you see, correct me if I’m wrong, but my understanding was the current EIA and others that there may be as many as 5000 of these wells out there that had not been completed and even with this upturn the number do you see actually is marginally moving higher not lower, so there’s a huge amount of kind of it – kind of potential demand out there that is yet to be seen?
I think that's right, Arieh, I mean, we know [those docs] are out there that works going to have to be done. There's been a small amount of that work that's been done up to this point, but there is to your point, a pent-up demand that just going to continue to move the demand curve up I think as we get into the rest of this year based on these docs now being completed and put on the project schedules.
Yes. And lastly, given the potential demand out there, are you comfortable or talking about them what sort of sequential range or volume sand growth shipments you might be able to achieve here in the March quarter?
That's really hard to predict, Arieh. So, I guess we really can't -- we can tell you that we will have more capacity come online and we will open up our plants wide-open in the spring, as we open our minds and have more feed available. So, yes, we do expect a ramp-up to some degree given our production capability come April.
Got it. So the April timeframe, I think your annual capacity is about 8 million tons per year on an annual basis and you’d be hoping to moving towards 100% of that capacity in that April/May timeframe?
The 8 million ton number is accurate, I'll remind you that is permitted tons and there are issues of course for all of us in the industry and fulfilling a full 100% permitted capacity issues with railcars and shipments, some down time availability of the plants et cetera. So we’ll be certainly doing everything we can to get every ton out we can given the demand and given the poor customer commitments that we have though, I can assure you.
Great. Well, thank you very much.
Thank you. [Operator Instructions] And our next question comes from Mark Brown of Seaport Global Securities. Your line is now open.
Great volumes, I mean, sequentially great growth there. Curious on the brown sand versus white sand and what are you seeing or what are you expecting in terms of pricing trends. And are you starting to see any of the customers that may have tried brown sand and maybe out of necessity shifting in favor back to northern white?
Mark, we are seeing some interest in going back to northern white, we predicted that. We recognize that probably about a third of the market last year did buy brown sand for obvious reasons, for the land and economics that it provides, but we were told that by some of those customers anyway that they did expect to get back to northern white. Some of that has happened already on a limited basis and we think that more that will happen as we get into the year depending on oil prices and the economics and the industry.
But we do foresee that happening. We don't want to walk away from the residual market I'll call it, whatever that number might be, 30% or less of the market that has told us they expect to stay with the brown sand product. And for that reason we’re excited about an expansion, an acquisition I should say that would not allow us to offer more capacity in the brown sand arena. So, we want to be there for the customers whether they are in the brown sand mode I'll call it or they prefer the northern white, we want to be there to take care of their needs regardless.
And did you say the brown sand pricing is starting to go higher or maybe narrowing the discount to northern white?
No, we’re not saying there.
Okay. And I was also curious you talked about some very constructive commentary around SandMaxX. What about SandGuard. I don't know if I missed it, but do you have an update in terms of how that is progressing?
I’m glad you brought that out Mark, because SandGuard is an important part of our technology proppant package being low dust sand. We still see a lot of interest in the product. We think that there is a lot of demand in waiting I’ll call it, because the OSHA requirements that reduce the dust threshold in this market will actually come into play in 2018. So a lot of people are starting to look at what options that they will pursue.
You know many people who are using the last mile box concept have seen reduce dust, but as many customers have pointed out to us that doesn't reduce the dust at every touch point in the supply chain and the only way to reduce the dust when you're handling the product at the terminals or elsewhere in the supply chain where it's not in a container is don't have the dust to begin with and that's the theory behind SandGuard where you don't have any dust at all at any point in the supply chain.
People are recognizing that more and more and as a result while we’re shipping and we have shipped units trains of SandGuard, we expect to see the interest in the demand ramp up considerably as we get to the latter stages say fourth quarter of 2017 when people have to begin to address this in the next year.
That sounds good. One other question I had on your CapEx budget for 2017, I think Deborah said $5 million, but you're also – we’re earlier discussing some other capital projects, the Kosse expansion and the a potential SandMaxX plant and I was just curious if there any restrictions in your credit agreement or how you would manoeuvre around that that any limitations in your credit agreement as it pertains to capital expenditures?
Yes, it looks pretty confident that we can work with our banks to get some relief on the CapEx covenants and that maybe require us to go out and get some other financing that we have proven over and over again that we are able to negotiate with our base, and that we are highly confident that we can do this as well.
Okay. Well, thank you.
Thank you. And our next question comes from Salman [Indiscernible] of Stifel. Your line is now open.
[Salman], are you with us.
And if your phone is on mute, please un-mute.
Sorry, I was un-mute. Hi, this is [Tim] on for Salman. Could you explain the drivers that reduce average selling price by about 20% quarter over quarter?
The drivers that – let me make sure I understand the question. The drivers that are reducing average selling price?
Yes, average selling price should be down about 19% or 20% quarter over quarter and we’re just wondering what the drivers were behind there that just maintaining market share or if there’s anything else?
On our average selling price? Yes, Deb, go ahead. Excuse me.
Yes. The main differences is that we only had about half of our sales in Basin in Q4 and as you know we have much larger markets for in basin sale in order to cut with our logistic costs. So that was the main driver where we had a little bit low percentage on the in-basin sales.
Okay. Got it. And then what was the cash balance again at the end of the year?
We intentionally keep our cash balance very close to zero. We manage it on a daily basis. So we pay down on the facility and we draw on it every single day, so we intentionally keep it close to zero.
Okay. Because we were little confused because you raise 37 million during the quarter net, but it seems like that balance only came down about 6 million quarter-over-quarter, so are we missing some then there?
Yes. We were negative on our operating cash flows.
Okay. So that ate up the other.
This is that ate up of the rest of the 30 million then.
Much of it did, for the most part we are operating much that on our cash basis.
Okay. Got it.
We do expect to drive improvement in Q1 and Q2 from that.
Got it. And then, I guess is there any kind of all win CapEx number you could provide if kind of everything goes as the plan you expand cost and then SandMaxX goes forward I think you said 20 to 30 day, how much it just like cost going to be?
Well, I nearly expect SandMaxX to be next year for building the full production plan and we’re still looking at our different opportunities for taking advantage of this market. We have several things in the works and we’ll let you know as soon as those are finalized.
Okay, great. Thanks.
Thank you. [Operator Instructions] And this does conclude our question and answer session. I would now like to turn the call back over to Ted Beneski for any further remarks.
Okay. Well, thank you everybody. And in closing we just want to reiterate that we are proud of our strong financial improvement of superior Silica Sand and Emerge Energy. We fought hard in 2015 and 2016 to make it through this downturn and now that the upswing has arrived, our efforts from last 18 months are really starting to pay off. We’re fully regaining our momentum both strategically and financially and we expect 2017 to be a dramatically better year than 2016 for Emerge Energy Services. Thank you.
Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone just have a great day.
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