Hi-Crush: Sky-High Expectations Create A Great Buying Opportunity

About: Hi-Crush Partners LP (HCLP)
by: Trent Welsh

The market isn't happy with the company's outstanding performance on almost every metric that matters.

Kermit plant's strategic advantage could be huge in Q4, along with the new Pecos terminal.

PropStream is a future growth driver for the company.

Distribution growth, unit buybacks, and CapEx considerations.

Hi-Crush Partners LP (HCLP) did a great job on improving performance on pretty much every key metric that investors look at for the company. Almost all of these numbers look to improve in the following quarter as the company starts to fully realize the Kermit plant's strategic advantages. The company's PropStream crews look to add growth and value added services to the company's customers other sand companies cannot match. The market can only ignore the upside potential of this stock so long as distributions grow, the company acts on opportunistic unit buybacks, and CapEx shrinks next year freeing up additional distributable cash as shareholder returns take the forefront of consideration in 2018.

Here is a table showing just how well the company performed over the last quarter, according to its Q3 2017 earnings call:

Hi-Crush Q2 Q3 Growth
Sand Volume (Million Tons) 2.1 2.5 19%
Sand Price per Ton $64 $68 6.3%
Revenues (Millions) $135 $168 24%
Adjusted EBITDA (Millions) $26.5 $41.7 57%
Contribution Margin (Per Ton) $16.73 $19.39 16%
Distributable Cash Flow (Millions) $22.9 $37.5 64%

Table by Trent Welsh

The market was not ecstatic about these results as expectations were sky high, even though the stock is still trading at about an 85% discount to its 2014 highs. Also, look at how it is comparing to Emerge Energy Services (EMES) after that company beat easy estimates though it underperformed Hi-Crush in many areas and didn't even initiate a distribution.

Chart HCLP Price data by YCharts

Hi-Crush is gaining a strategic advantage from its near full utilization of its now fully operational Kermit facility in the Permian Basin. Here is what the facility and the new Pecos terminal look to bring to the table in Q4 as the first mover in the Permian Basin:

  • Improving utilization numbers as Kermit runs at near full capacity for the full quarter. (Get all the kinks and bottlenecks worked out).
  • Switching from temporary generator use to permanent connections to the power grid. (Cost savings will help improve contribution margins).
  • Pecos terminal operational now as the first unit train capable terminal with silo storage in the Southern Delaware Basin. (12th terminal overall 3rd in the Permian Basin extending Hi-Crush's regional advantage).
  • September 1st repricing of a large primary FOB (free on board mine price at the site not including freight/shipping and insurance costs) mine customer for a significant portion of volumes. (Significantly higher sand prices will be realized for this volume for the full fourth quarter where they were only part of third quarter numbers).

Hi-Crush's PropStream initiative is growing nicely as it has the ability to add a lot of value for customers willing to pay up for last mile enhanced logistic's capabilities. PropStream also differentiates the company from its competition by offering customers fully trained crews and equipment specifically designed to reduce emissions, deliver a higher tonnage per truck, precise 20% faster delivery to the blender, and a reduction or elimination of trucking demurrage (costs associated with delays). The company is looking to have approximately 9 of these crews up and running by the end of 2017, and it is projecting to double the amount of crews it operates by the end of 2018. Being not only just another sand company, but the best sand company, in the Permian and other areas, is a strategy that will help Hi-Crush attract and keep customers that are willing to pay up for exceptional services above and beyond their own capabilities.

With distributable cash flow up 64% for the quarter, look for the distribution before Q4's earnings report to grow nicely, especially since the company initialized a conservative distribution before its Q3 report. Also, look for upcoming information about lenders granting Hi-Crush permission for unit buybacks over its currently permissible $20 million up to the $100 million program recently approved by the board.

One final consideration of interest is the CapEx expenditure for the year so far sits around $108 million with full year 2017 looking to come in between $115 million to $125 million as the company spent a lot to finish up its Kermit plant along with the Pecos terminal. Now, consider that initial thoughts on 2018's CapEx budget come in around $35 million to $45 million mostly centered on routine maintenance and training and outfitting additional PropStream crews. This projected CapEx reduction, in itself, should result in significant additional distributable cash flows for shareholders in 2018.

The market was not overly enthused about Hi-Crush's last earnings report, which might help reset expectations for the upcoming Q4 report, perhaps increasing odds that Q4's report will meet or exceed expectations and the company's great performance will be rewarded with a long overdue unit appreciation. I love all that the company is doing and look forward to upcoming earnings reports featuring great company performance along with growing distributions, while the market takes its time fully appreciating the company again. Best of luck to all.

Disclosure: I am/we are long HCLP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.