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Sand Producer to Halt Distribution on Weakening Market Conditions
Research Report

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The reasons behind the oilfield services company's move, along with projections for 2019, are explored in a Raymond James research report.

In a Jan. 7 research note, Raymond James analyst J. Marshall Adkins reported Hi-Crush Partners L.P. (HCLP:NYSE) decided to suspend its quarterly distribution, likely long term, due to the decreased volumes and price deterioration it is experiencing along with oil price uncertainty.

The drop in the company's volumes was 25% in Q4/18 compared to Q3/18, lower than expected. It is attributed to a reduction in the number of completions due to a declining oil price, operators maxing out their year's budget and a resulting "significant" sand oversupply, Adkins explained.

"One of the more significant investor concerns regarding Hi-Crush has been the potential for contracts to be renegotiated during the current bout of weakness," he added. For example, management is currently renegotiating its Kermit mine contracts. With margins per ton falling by about $20 per ton at Kermit, sales of Kermit sand will yield about $96 million of EBITDA in 2019, Raymond James estimates.

As for the future direction of Hi-Crush's Northern White sand margins, it remains unclear, Adkins noted. On one hand, they are decreasing due to the overall slowing. Raymond James forecasts less overall Northern White tonnage this year, at 5.6 million tons compared to 7.4 million in 2018. "Overall, we currently model in-basin sand pricing falling about 20% in 2019 year over year, compared to a roughly 40% drop in Northern White pricing," he wrote.

On the other hand, the company continues to benefit from its larger scale and nonsand offerings, including last mile and storage. Those could add further value this year, Adkins indicated, as Hi-Crush continues its expansion into "a rapidly maturing market, where displacing legacy equipment has largely ended and competition amongst silo companies is leading to more aggressive pricing from competitors." Raymond James forecasts these silo entities could contribute as much as $30 million to Hi-Crush's EBITDA in 2019.

Raymond James has a Market Perform rating on the company with a current share price of $3.86.


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Disclosures from Raymond James, Hi-Crush Partners LP, Company Comment, January 7, 2018


Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.

The analysts J. Marshall Adkins and Praveen Narra, primarily responsible for the preparation of this research report, attest to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analystís compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months..

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Limited Partnerships may generate unrelated business taxable income (UBTI), which can create a tax liability that must be paid from a retirement account. To the extent that Raymond James is your IRA custodian, and there is potential tax liability for UBTI generated by the fund, Raymond James will take the necessary steps to pay the tax from the retirement account by working with a third party to compute the tax liability and prepare the IRS form 990-T for submission to the IRS.

Raymond James & Associates makes a market in shares of HCLP.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available here.

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