The Bottom Is In For Hi-Crush's Stock

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About: Hi-Crush Inc. (HCR)
by: Trent Welsh
Summary

Insider buying and a new buyback authorization could be a clear signal that Hi-Crush's bottom is in and better times are ahead.

Hi-Crush has the liquidity to outlast the downturn as the industry consolidates and restructures.

C-Corp conversion will open new doors as Permian bottlenecks abate and sand pricing bottoms out.

Hi-Crush Inc. (HCR) continues its aggressive strategy by combining recent insider purchases in front of a much-needed brand new share buyback program. Hi-Crush has the finances to outlast the current market downturn as takeaway capacity is expected to ease in the back half of 2019. The company's successful C-Corp conversion begins a new chapter for the company as it could refinance its high rate debt down to a lower rate during the next upturn in the industry.

Hi-Crush management just launched a new $25M share buyback program which should bring some much-needed relief to highly undervalued shares of this Permian frac sand player. In an industry known for wild swings in volatility, buying shares in overdone downturns make much more sense than instituting a dividend would have. Hi-Crush now trades at a paltry 2.38 trailing P/E with a sub $200M market cap as the sand industry, along with most of the oil industry, has had a very hard year so far.

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However, better times are being signaled not only by the newly announced share buyback program but also by management front-running the announcement with some key insider buying. The only open market insider trades so far in 2019 for Hi-Crush have just recently happened on June 7, 2019, with 100,000 shares bought by Chairman and CEO Robert E. Rasmus and 25,000 shares bought by the company's CFO Laura C. Fulton. These are key signals because management has the best visibility on if and when the downturn in the market will be happening along with their confidence in the business as a whole going forward.

Cash is always a concern for those in the frac sand industry as it continues to be hit with volatile swings in earnings with repeating boom and bust cycles. This has led to consolidation among some of the leading companies in and around the U.S. frac sand market including the formation of Covia Holdings Corporation (CVIA) from the combination of the former Fairmount Santrol and Unimin companies. The most recent downturn has also led to the planned restructuring of Emerge Energy Services LP (EMES) which I recommended selling Emerge Energy to buy Hi-Crush after its announcement.

Hi-Crush is sitting in a far better position than many of its peers according to the company's latest earnings call. Hi-Crush currently has $115.6M in current liquidity including over $60M in cash along with a $200M asset-backed revolving credit facility with no current borrowings on it. Its main debt concern is the $200M term loan it entered into in December of 2017 due in December of 2024. With $444M in total net debt, Hi-Crush will eventually have to address its debt in the coming years, but it should be able to at better interest rates, now that it is a C-Corp, once the sand industry rebounds. The key here is that the debt isn't due until the end of 2024 with management expressing no covenants of concern associated with it currently even as sand prices in the Permian are sitting around historical lows according to the Producer Price Index for frac sand.

Even as the Permian bottleneck issues and takeaway concerns are peaking, with relief expected to start coming in the back half of 2019, Hi-Crush only had a net loss of ($6.2M) on almost $160M in revenues during its last quarter. Even at this industry bottom, Hi-Crush has approximately 10 quarters worth of cash to deal with any other quarterly losses without even touching its revolving credit facility. In a cyclical industry like this, this should be more than enough liquidity to get through the downturn as Hi-Crush had over $50M in earnings on over $210M in revenues in October of 2018.

Hi-Crush's successful conversion to a C-Corp should open up some new avenues of growth for the company as access to debt should come cheaper once the industry is in an upswing again. It would not surprise me to see Hi-Crush refinance its debt in the coming years at much better rates than its current loan made under the master limited partnership umbrella. Once a rebound in the industry is signaled by pricing increases and revenues across the industry, I'd also expect to see a whole new lineup of potential investors start to gain interest as individuals and institutions not interested in K-1 tax forms now have a chance to buy into the company.

Hi-Crush continues to aggressively forge on ahead by pushing the chips aggressively when the market is down to reap the rewards during the upswings. Instituting a new share buyback program when most frac sand investors are panicking could result in a nice shareholder return as millions of shares could be taken off the market at prices that I would construe as bankruptcy prices. Management is doing its part by front-running the company's buyback with insider buybacks of its own as it reiterates forward guidance during these troubled times. Consolidation and restructurings could hit many smaller players during this downturn, but Hi-Crush should be fine with cash and available credit to sustain it for years even as prices sit at near historical lows. Patience is required with investments like this as I continue to try and buy dips and sell the rips in the market. All the signals are pointing to a bottom for the stock with a nice recovery in the industry coming in 2020. I continue to own an oversized position of Hi-Crush stock in my portfolio with no plans to sell anytime soon. Best of luck to all.

Disclosure: I am/we are long HCR. 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.