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Hi-Crush Partners LP (HCLP): Taking A Longer Look

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Frack sand producer Hi-Crush Partners LP (NYSE:HCLP) is out with first-quarter earnings that came in a little light. Analysts were expecting earnings of $0.50 per limited partner unit, but the company only delivered $0.40 per unit. Though when you factor in the company’s interest in its sponsor’s Augusta, Wis., facility, which wasn’t received until the current quarter, earnings would have been $0.54 per unit. So, while the company didn’t crush the earnings number, it was a very fine quarter for the company.

Digging into the numbers
Hi-Crush Partners LPFor the quarter, Hi-Crush Partners LP (NYSE:HCLP) delivered revenue of $19.6 million as it sold 312,730 tons of frack sand at an average price of $62.76 per ton. Because of its low-cost operations the company was able to deliver distributable cash flow of $14.5 million in the quarter. That was more than enough to cover the company’s $13 million quarterly distribution, which provided the company with a coverage ratio of 1.12 times.

It was a strong quarter for a number of reasons. Not only did customers meet their contracted terms in the quarter but volumes throughout the quarter trended higher. When combined with the company’s spot sales, it resulted in record shipping volumes out of its Wyeville, Wis., plant in the month of March. Overall, the first quarter was the company’s second-highest volume quarter since it built that plant.

Customer contracts
While its customers met contracted volumes in the quarter, this is one area to keep watching. One of the main risks is losing a key customer, which has happened in the past when Baker Hughes Incorporated (NYSE:BHI) backed out of its contract. The company is still locked in a legal battle with Baker Hughes Incorporated (NYSE:BHI), and if Hi-Crush Partners LP (NYSE:HCLP) loses it could mean that future revenue is less secure than originally thought. That future revenue, currently secured by fixed-price, volume-based contracts has an average of 2.9 years left.

Hi-Crush Partners LP (NYSE:HCLP) knows this and, in order to strengthen its bonds with one of its customers, the company amended a supply agreement in the quarter. The contract included a price reduction in exchange for an increase in the contracted volume. That enabled Hi-Crush to shift some of the supply volume to its Wyeville facility from its sponsor’s Augusta facility, which will sell out the volumes at Wyeville for this year. What it’s doing here is taking away price risk from having to sell that volume on the spot market.

Strategic plans
Earlier this year, Hi-Crush Partners LP (NYSE:HCLP) announced that it had acquired an interest in its sponsor’s Augusta facility for $37.5 million in cash and 3.75 million units. In exchange, Hi-Crush will receive $3.75 million in cash each quarter; it received the first payment this month. This was the first of what could be many drop-down transactions from its sponsor, which has been very supportive of the company since taking it public.

Hi-Crush made another acquisition in the quarter as it signed a deal to pick up privately held D&I Silica, an independent distributor of frack sand. The company paid a total of $125 million in cash and units and expects the deal to close in the second quarter. This is an interesting deal for the company as it moves up the value chain by acquiring a distributor; however, the deal is highly accretive and provides a clear path to future distribution growth.

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