IPO Preview: Hi-Crush Partners LP

Aug. 15, 2012 10:56 AM ETHi-Crush Inc. (HCRSQ)BKR, EQT, HAL, SLCA, WFRD15 Comments
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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.

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.

Valuation Ratios

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U.S. Silica (SLCA) IPO'd January 31, 2012 at $17 and traded Friday, August 19, 2012 at $10.37. IPOdesktop didn't like SLCA prior to it's IPO: Pre-IPO SLCA report

There are substantial differences between HCLP and SLCA including

  • Quality of reserves: HCLP has high grade white sand.
  • Customers: HCLP has longer term contracts with the majors.
  • Expansion: HPCP just brought its Augusta plant on line.
  • Financials: HCLP's income statement is stronger in terms of operating & profit margins.
  • Immediate expansion possibilities: HCLP has (essentially) an option to acquire 1700 acres with 79 million tons of reserves in western Wisconsin to complete its current 561 acre facility with 48 million tons.
  • Infrastructure: HCLP has three 5000 foot rail spurs into its Wyeville facility, thus minimizing or eliminating sand truck traffic in the immediate community.
  • Corporate structure: HCLP's LP structure seems more suitable for investors than SLCA's stock structure.


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.

Demand projections

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:

  • Difficulty of finding frac sand reserves that meet API (American Petroleum Institute) specifications;
  • Difficulty of securing contiguous frac sand reserves large enough to justify the capital investment required to develop a processing facility;
  • Challenges of identifying reserves with the above characteristics that either are located in close proximity to oil and natural gas reservoirs or have rail access needed for low-cost transportation to major shale basins;
  • Hurdles of securing mining, production, water, air, refuse and other federal, state and local operating permits from the proper authorities;
  • Local opposition to development of facilities, especially those that require the use of on-road transportation, including moratoria on raw frac sand facilities in multiple counties in Wisconsin which hold potential sand reserves; and
  • Long lead time required to design and construct sand processing facilities that can efficiently process large quantities of high quality frac sand.

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.


  • Expand proved reserve base and processing capacity.
    In March 2012, HCLP completed an expansion of the Wyeville facility, increasing annual processing capacity from 950,000 tons per year to 1,600,000 tons per year by adding wet and dry plant capacity and additional sand storage silos.
  • Maintain financial flexibility and conservative leverage.
    HCLP expects to have no indebtedness at the closing of the IPO and $104.7 million of liquidity in the form of $6.2 million of cash on hand and undrawn borrowing capacity under a new $100.0 million revolving credit facility.


  • Long-term contracted cash flow stability.
    HCLP is currently contracted to sell 1,460,000 tons of frac sand annually from its Wyeville facility. As of June 30, 2012, HCLP's contract had a weighted average remaining life of 4.6 years.
  • Long-lived, high quality reserve base (see 'reserves' above)
  • Intrinsic logistics and infrastructure advantage.
    The strategic location and logistics capabilities of HCLP's Wyeville facility enables HCLP to serve all major U.S. oil and natural gas producing basins.
  • Competitive operating cost structure.
    Mining operations are subcontracted to Gerke Excavating, Inc. at a fixed cost of $2.09 per ton excavated, subject to a diesel fuel surcharge, under a three-year contract. HCLP's processing and rail loading facilities are located on-site, which eliminates the requirement for on-road transportation, lowers product movement costs and minimizes the reduction in sand quality due to handling.
  • Experienced and incentivized management team.
    HCLP's management team is incentivized to profitably grow the business and cash flows through their 39% interest in HCLP's sponsor, which will own 2.4 million common units, all of the subordinated units, plus incentive distribution rights.

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 is a Delaware limited partnership formed in May 2012 by the sponsor, Hi-Crush Proppants LLC
  • The sponsor, Hi-Crush Proppants LLC, was formed in 2010 in Houston, Texas.
  • The sponsor's lead investor is Avista Capital Partners a leading private equity firm with significant investing and operating expertise in the energy industry.

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 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.

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.

This article was written by

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During the IPO season Francis Gaskins, editor of IPOdesktop.com & director of research for Equities.com, regularly appears on CNBC TV, Bloomberg, thestreet.com & other financial cable channels. On the day of the Visa IPO he appeared on four cable TV financial shows including Bloomberg & CNBC. Over the past five years he has been quoted over 500 times by such financial media as the Wall Street Journal, Bloomberg, Reuters, Associated Press, USA Today among others. Those quotes are available at IPOdesktop.com. His varied personal interests include violin playing. For example, he is concertmaster of the Palisades Symphony. He also holds an MBA from Harvard Business School (finance) and an AB from Princeton University (economics). http://www.facebook.com/profile.php?id=100001524943912

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