Last quarter, there wastangible evidence that more drilling activity led to better results for Hi-Crush Partners (NYSE: HCLP). Those trends continued in the fourth quarter as well, but they have yet to give way to profits and the ability to return cash to shareholders through distributions.
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While there are some promising signs that Hi-Crush is making the right moves to capture the upswing in America's oil and gas industry, one does have to wonder if the price it paid to make those moves was too much. Here's a look Hi-Crush's most recent results and what needs to happen for the company to deliver value to its shareholders again.
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By the numbers
|Results*||Q4 2016||Q3 2016||Q4 2015|
|Earnings per share||($0.11)||($0.21)||$0.30|
|Distributable cash flow||($4.4)||($6.7)||$15.6|
* IN MILLIONS, EXCEPT PER-SHARE DATA. DATA SOURCE: HI-CRUSH PARTNERS EARNINGS RELEASE.
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There are a couple of things worth unpacking in this recent earnings report, so let's start with the good stuff. The first is its the quick rise in revenue and total volume of sand sold in the fourth quarter. That 45% increase in revenue was in large part due to the increase in volume sold. In fact, total sand produced and delivered in the fourth quarterof 2016 was 1.23 million tons compared to 794,000 tons in the fourth quarter of 2015.
The reason that those higher amounts of sand didn't translate into better bottom-line results is that the margin on sand sold this past quarter -- $3.45 per ton -- was much lower than in 2015 -- $9.66 per ton. This has been a pretty common theme among other frack sand producers. While demand is increasing rapidly, there is still a lot of idle capacity and excess inventory out there. As demand continues to grow, that excess capacity and inventoryshould be drawn down and prices for sand should go up.
It's also worth noting that costs were a bit higher this past quarter for a couple of reasons. One is that the company wasn't able to produce all the sand necessary to fulfill all its sales, so it had to buy some sand from a mine owned by its parent company Hi-Crush Proppants. This is set to change, however, as the company recently announced it would be buying the parent company's remaining assets. There were also some ramp-up costs associated with bringing some idle facilities back up to capacity. As demand increases, these costs should diminish or at least be spread over a larger sales base.
Theother decent news in this report was that the company'sdebt levels continued to decline. Total debt outstanding ended the year at $196 million, and it reduced its amount due to its parent sponsor company from $100 million this time last year to just $1.1 million. Most of the debt reduction in the past several quarters has come from equity issuance, though, so it's not as though this is coming from robust operations.
There were two important things that happened since the last time the company reported earnings. The first was the company'sannouncement that it was making an investment in PropX, which manufactures equipment for last-mile logistics of frack sand to the wellhead. This equipment includes hoppers and conveyor systems that should significantly lower total unloading times for sand. Hi-Crush isn't the only one to make these kinds of investments, either. U.S. Silica Holdings (NYSE: SLCA) has made similar investments in SandBox, a company that does the same thing as PropX. Transportation and logistics are proving to be differentiating factors among frack sand providers, and these two companiesare tackling them in a very similar fashion.
Also, Hi-Crush Partners announced that it was acquiring the Whitehall sand mine from its parent company. This will put the entire corporate entity's sand mines into a single company that will prevent that weird situation of cross-selling. Hi-Crush recently issued shares to pay for the acquisition, but it wasn't very well receivedby the market because Hi-Crush has used equity raises frequently, to the chagrinof shareholders.
What management had to say
As part of his press release, CEO Robert Rasmus highlighted the gains the company has made operationally toward becoming a more profitable company, as well as its investment in PropX:
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.
What a Fool believes
Like so many other oil and gas services companies, Hi-Crush's prospects have started to look brighter, but this quarter was another bump in the road as it brings its assets back up to full working capacity. As oil and gas drilling activity continues to rebound in the U.S., sand is going to be a hot commodity again, and Hi-Crush is positioning itself to best meet that demand by bringing all of its assets under one roof and expanding its logistics services.
The big question remaining is whether all of that shareholder dilution was worth it for investors. While issuing shares is a common occurrence for master limited partnerships, Hi-Crush's use of equity issuance stands out. For a company that is structured to deliver value to shareholders with distributions, those per-share distributions are going to be much smaller in the future as it has so many more proverbial mouths to feed. Perhaps the rapid growth in sand demand will alleviate these concerns, but we'll have to see how the next few quarters play out to make that determination.
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