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Bull of the Day: Hi-Crush partners (HCLP)

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On March 17 Baker Hughes announced that U.S. oil and natural gas producers added another 21 rigs bringing the total count to 789 active rigs.  The current active rig count is up 313 total rigs from last year.  These new wells need sand to gather the oil and gas, and that is where our Zacks Bull of the Day, Hi-Crush Partners comes into the equation.  

This Zacks ranked #1 (Strong Buy) company engages in the production of monocrystalline sand, a specialized mineral that is used as a proppant to enhance the recovery rates of hydrocarbons from oil and natural gas wells. The Company reserves consist of Northern White sand, a resource existing in Wisconsin and limited portions of the upper Midwest region of the United States. It owns, operates and develops sand reserves and related excavation and processing facilities. Hi-Crush Partners LP is based in Houston, Texas.

Recent Earnings Results

Management announced Q4 16 earnings in late February where they missed the Zacks consensus earnings estimate, but handedly beat the Zacks consensus revenue estimate.  On a quarter over quarter basis, management saw gains in the following; sales +44.4%, tons of frac sand +25.4%, and EBITDA improved to $0.1 million from -$2.9 million.  Management also raised prices by about 5% in Q4, and they expect a +15% or better increase in pricing power in Q1 17.  

New Acquisitions

To meet the increasing demand, management recently acquired Permian Basin Sand, and dropdown of the GP-held Whitehall mine for a total cost of about $525 million.  The acquisitions will increase production capacity to 13.4 million tons.  Currently is it expected that the Whitehall facility will be sold out of fracking sand by Q3 17.

Management’s Take

According to Robert E. Rasmus, CEO, “Activity for our business continued to improve and gain strength as reflected in the 25% sequential increase in the volume of sand we sold during the fourth quarter. In addition to an increase in volumes, our profitability continues to improve, as we achieved positive quarterly EBITDA for the first time since the fourth quarter of 2015.  We have a significantly improved Hi-Crush platform - one with lower costs, greater efficiencies and an expanded service offering, including our PropStream last-mile integrated logistics solution.  This benefits us as proppant intensity increases continue, well completion activity picks up momentum and customer focus remains on surety of supply.”

Mr. Rasmus went further to state, “We saw pricing improve in the fourth quarter, especially late in the quarter.  The pace of increases has accelerated rapidly in the first quarter. We expect pricing improvement to continue throughout the year.  Customer demand continues to strengthen and our production facilities are effectively sold out for the first quarter," said Mr. Rasmus. "We plan to operate Wyeville, Blair and Augusta near full capacity beginning as early as the second quarter, benefiting our production cost and contribution margin per ton.”

Price and Earnings Consensus Graph

As you can see in the graph below, HCLP’s value peaked in mid-2014, and then fell for the next year and a half.  Due to the positive Q4 earnings report, estimates for 2017 have significantly improved.

Hi-Crush Partners LP Price and Consensus

Hi-Crush Partners LP Price and Consensus | Hi-Crush Partners LP Quote

Increasing Earnings Estimates

Due to the increased volumes, prices, and production capability earnings estimates for Q1 17, Q2 17, FY 17 and FY 18 have all seen upgrades over the past 30 days; Q1 17 improved from -$0.06 to -$0.01, Q2 17 rose from $0.02 to $0.14, FY 17 rocketed up from $0.20 to $1.08, and FY 18 more than tripled from $0.99 to $3.28.

Bottom Line

As new oil and gas rigs come online, they will need more and more sand to extract the precious commodity.  Hi-Crush is well positioned to take advantage of this increase in production, and with the addition of two more facilities, the company has more leverage specifically in the Permian Basin, one of the most active regions in the U.S.   2017 looks to be a big rebound year for this company.

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