Hi-Crush Inc.: Turning A Corner

Summary

• The picture for Hi-Crush, in its latest earnings release, was rather mixed, with poor pricing and an expectation of falling volumes impacting the firm.
• However, the big story appears to be that the firm should be cash flow positive next year, plus it is seeing some contribution margin improvements today.
• Add to this the firm's progress on its buyback and it makes for a compelling long-term prospect to consider.
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Hands down, one of the most attractive prospects in the energy space today, especially if you exclude E&P (exploration and production) firms from the list, is Hi-Crush Inc. (HCR), a provider of frac sand and related services. After completing its conversion into a C-Corp from being a pass-through entity earlier this year, there was some uncertainty, driven in part by a weakening in the energy space, regarding what kind of prospects the company will offer to investors. But in its latest earnings release, the management team at the business provided some data that illustrates why the firm might still make a lot of sense for energy bulls to own.

The good and the bad

In the volatile energy space, there are few companies that have only good news to report, and Hi-Crush is not one of them. According to management, for instance, one piece of news that was not at all great related to revenue. During the latest quarter, Hi-Crush reported revenue of $178 million, down materially from the $248.52 million the firm reported the same period last year. Even so, there are bright spots within the firm. One such example is the company’s Last Mile program, where it seeks to deliver its offerings directly to E&P firms in places like the Permian Basin. During the quarter, Last Mile loads were up 36% compared to just one quarter earlier, and total volumes sold directly to E&P firms constituted 66% of the firm’s overall volumes for the quarter, up from 63% three months earlier.

Due to weak revenue, some of Hi-Crush’s bottom line results also managed to suffer. According to management, for instance, EBITDA during the quarter came out to $24.06 million. This represents a roughly three-quarters slash over the $81.64 million seen the same quarter last year, even though it was higher than the $17.22 million seen in the first quarter this year. For the full first half of 2019, EBITDA came out to $41.28 million, down from $145.70 million seen in the same time frame of 2018. Operating cash flow, meanwhile, has come out to just $8.98 million in the first half of 2019 compared to the $140.72 million seen the same time of 2018, and that disparity alone might be the most stark.

One contributor to Hi-Crush’s problems appears to be lower sales volumes of frac sand. During the latest quarter, volumes sold came out to around 2.66 million tons. This represents a decrease of about 12.5% compared to the 3.04 million tons seen in the second quarter last year, but one positive for investors to keep in mind is that it’s still higher than the 2.41 million tons seen in the first quarter this year.

Although this was painful on a year-over-year basis, perhaps harder on Hi-Crush wasn’t the amount of frac sand sold, but the price at which it sold it. During the latest quarter, frac sand retailed by the firm for about $47 per ton. This is down from $48 per ton a quarter earlier, but it’s down hard from the $58 per ton seen just during the fourth quarter last year alone. The amount generated per ton seen over the past few quarters can be seen in the image below. In it, you’ll see that pricing hasn’t been this low in at least the prior four quarters covered and that has worked to draw the contribution margin of its sand sales down considerably (even though the second quarter did see some improvement over the first).

*Taken from Hi-Crush Inc.

Heading into the rest of this year, management said that the end of the third quarter might cause some problems. This is because of capex exhaustion among E&P firms, where they essentially front-loaded their spending for the current fiscal year and are likely to cut spending back materially as 2019 draws closer to an end. We do know that management expects volumes in the third quarter to average between 2.4 million and 2.7 million tons in all, but they did not give any sort of indication as to what fourth quarter figures might look like. We do know that a similar thing happened with the firm last year, and between the third and fourth quarter, volumes dropped from 2.78 million tons down to 1.98 million, so it’s not unreasonable to expect a similar crash.

For all the roadblocks hit by management, there are positives to keep in mind. In 2020, for instance, management said that free cash flow should be positive, though by how much is anybody’s guess. We also know that with $390.4 million in net debt, the TTM (trailing twelve month) net leverage ratio for the business should be about 3.8. Though this would be considered high for E&P firms, it’s not bad for a business with such low maintenance capex and where said firm can easily grow should the opportunity present itself.

Recognizing that its share price (around $2 per share as I type this) may be irrationally low, driven down by growing pessimism in the energy space and by concerns that the current market may be the new normal for anything tied to oil and gas, management has decided to focus some on share buybacks. This shouldn't come as any surprise since on June 10th of this year management announced the $25 million share buyback, but now that the latest quarter is over, we have some idea how things are going. Through June, management acquired 1.18 million shares on the open market for $3.2 million in cash, leaving $21.8 million worth of repurchases left on the authorization.

Takeaway

At this moment, Hi-Crush is a fascinating company with a plan to reward shareholders already in place and the expectation that next year will see the firm generate positive free cash flow. Yes, volumes of frac sand sold have been less-than-stellar, and this, combined with weak pricing, is hurting the business now, but if the firm truly can see positive free cash flow in 2020 and beyond and if it can continue to expand its direct-to-client offerings, then the picture long-term should look quite nice.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.