Based in Houston, TX, Hi-Crush Partners LP (HCLP) scheduled a $226 million IPO with a market capitalization of $546 million at a price range mid-point of $20 for Thursday, August 16, 2012.
IPOdesktop doesn't expect HCLP to pop on the IPO, partially because IPO investors started their 'IPO holiday' at the end of last week.
There is, however, a hunger for high-yielding securities that have favorable prospects for higher cash payouts. Therefore, we believe HCLP is a good stock to hold into the fall IPO season after Labor Day.
HCLP filed an updated S-1 August 7, 2012
Manager, Joint Managers: Barclays; Morgan Stanley; Credit Suisse; UBS Investment Bank.
Co Managers: Raymond James; RBC Capital Markets; Baird.
HCLP is a very clean limited partnership that provides high quality proppant sand material for fracking.
In the frac sand business, there is disparity between demand and supply (see below). HCLP positioned itself as the low cost, high quality industry leader. HCLP's longer term contracts with industry leaders ensures top line revenue visibility: competitors face considerable barriers to entry.
HCLP's high quality white sand reserves are located in Wisconsin in a relatively unusual, unique geological formation.
The current expected minimum payment is $1.90 per year, or 9.5% annualized at the price range mid-point of $20. In the roadshow, management repeatedly emphasized its objective of sustained double digit growth in annual distributions.
COMPARE WITH EQM
EQM Midstream Partners, LP (EQM) is a growth-oriented limited partnership formed by EQT Corporation (EQT) to own, operate, acquire and develop midstream assets in the Appalachian Basin.
EQM IPO'd June 26, 2012 at $21. As of August 10th EQT was up 25% from its IPO price. At the IPO price of $21 EQM's minimum expected annual payout was $1.40 or 6.7%, or $1.40
At the price range mid-point of $20 HCLP's minimum expected annual payout is 9.5% or $1.90.
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Glossary of financial terms
There are substantial differences between HCLP and SLCA including
HCLP is a pure play, low-cost, domestic producer of premium monocrystalline sand, a specialized mineral that is used as a proppant to enhance the recovery rates of hydrocarbons from oil and natural gas wells.
Reserves consist of "Northern White" sand, a resource existing predominately in Wisconsin and limited portions of the upper Midwest region of the United States, which is highly valued as a preferred proppant because it exceeds all American Petroleum Institute ("API") specifications.
HCLP owns, operates and develops sand reserves and related excavation and processing facilities and will seek to acquire or develop additional facilities.
HCLP's 561-acre facility with integrated rail infrastructure, located near Wyeville, Wisconsin, enables HCLP to process and cost-effectively deliver approximately 1,600,000 tons of frac sand per year.
HCLP expects to have the opportunity to acquire significant additional acreage and reserves currently owned or under an agreement to be acquired by HCLP's sponsor, Hi-Crush Proppants LLC, including 1,700 acres of additional land and associated reserves in western Wisconsin.
Substantially all of HCLP's frac sand production is sold to leading investment grade-rated pressure pumping service providers under long-term, take-or-pay contracts that require customers to pay a specified price for a specified volume of frac sand each month.
North American demand for proppant has increased rapidly, growing at an average annual rate of 28.0% from 2006 to 2011, with total annual sales of $3.7 billion in 2011, according to The Freedonia Group, a leading international business research company.
HCLP believes that the market for raw frac sand will continue to grow based on the expected long-term development of North America's unconventional oil and natural gas reservoirs.
HCLP believes that while demand for raw frac sand has increased dramatically in recent years, the supply of raw frac sand has failed to keep pace, resulting in a supply-demand disparity.
While existing and new competitors have announced supply expansions and greenfield projects, HCLP does not expect the magnitude of these expansions to meet expected demand, for several reasons:
Current customers includes subsidiaries of four of North America's largest providers of pressure pumping services: Baker Hughes (BHI), FTS International, LLC, Halliburton (HAL) and Weatherford (WFT).
Spears and Associates estimates that these four companies controlled 47% of North American pressure pumping fleet in 2011 and accounted for greater than 50% of the North American pressure pumping market, based on 2011 revenue.
For the year ended December 31, 2011, sales to Halliburton and Weatherford accounted for 64% and 36% of total revenues, respectively. Sales under contracts with Baker Hughes and FTS International commenced in May 2012.
HCLP's Wyeville facility contains 48.4 million tons of proven recoverable coarse grade reserves as of December 31, 2011, based on a third-party reserve report by John T. Boyd and has an implied 33-year reserve life at currently contracted production rates.
HCLP expects to pursue accretive acquisitions including through a right of first offer to acquire an aggregate of 1,700 acres of additional land in western Wisconsin with 79.2 million tons of proven recoverable reserves of frac sand according to John T. Boyd, as well as from third-party frac sand producers.
Main competitors include Badger Mining Corporation, Fairmount Minerals, Ltd., Preferred Proppants LLC, Unimin Corporation and U.S. Silica Holdings.
HCLP expects to make a minimum quarterly distribution of $0.4750 per common unit and subordinated unit: $1.90 per common unit and subordinated unit on an annualized basis -an annualized return of 9.5% at the price range mid-point of $20
In the road show management repeatedly emphasized a long term objective of double digit increases in annual distributions.
HCLP's general partner owns a non-economic general partner interest in HCLP, which does not entitle it to receive cash distributions.
INCENTIVE DISTRIBUTION RIGHTS
Incentive distribution rights are owned by the sponsor, Hi-Crush Proppants, LLC and represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) of quarterly distributions from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. See page 75 in HCLP's S-1 filing.
HCLP does not have any employees. All of the employees that will conduct the business will be employed by Hi-Crush Proppants LLC or a wholly owned subsidiary of Hi-Crush Proppants LLC.
As of June 30, 2012, Hi-Crush Proppants LLC had 74 employees. In addition, HCLP contracts out excavation operations to a third party, Gerke Excavating, Inc., and accordingly HCLP has no employees involved in those operations.
USE OF PROCEEDS
All proceeds go to selling shareholder, Hi-Crush Proppants LLC.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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