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Shares of frack sand producer Hi-Crush Partners (NYSE: HCLP) are down 11.7% as of 1:00 p.m. EST Friday after the company announced that it would be issuing equity.
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Hi-Crush's management announced today that it would be issuing 25 million shares (23 million if the underwriter elects to take shares) to raise capital. The goal of the equity raise is to fund the acquisition of three sand production facilities it announced on Feb. 23. Those facilities are being dropped down from Hi-Crush's parent company for a total of $415 million.
Raising equity has been a pretty common occurrence in the frack sand industry over the past couple years. In the years leading up to 2014, the industry was growing at a breakneck pace that required lots of capital. Much of that was fueled with debt. Then, when the price crash came and drilling activity dried up, these frack sand companies were left with little cash flow and large debt loads. This led to dividend and distribution cuts and issuance of shares.
Now that the industry is back on the upswing, Hi-Crush is actually using this issuance to grow the business, which is much more promising than any debt-for-equity swaps. The hope is that the earnings power from these facilities will more than make up for the shareholder dilution.
As a master limited partnership, the value thesis for Hi-Crush Partners is to pay a decent-sized distribution to shareholders. This hasn't been the case for the past several quarters as the industry got whacked, but now it's looking like things are improving. The addition of these new sand mines should boost cash flows and allow for a distribution to happen again, but the share issuance also means that the per-share distribution will be smaller. Investors should watch the next couple quarters to see if the company can get back to throwing off distributable cash flow and returning it to shareholders.
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