Digging Deeper Into Hi-Crush Partners' Earnings

Frack sand producer Hi-Crush Partners 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
For the quarter, Hi-Crush 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 backed out of its contract. The company is still locked in a legal battle with Baker Hughes, and if Hi-Crush 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 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 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.

Foolish bottom line
Overall, it was a very solid quarter for Hi-Crush as it continues to build its frack sand business. The amended customer contract and acquisition are important pieces that will help to stabilize the revenue base, which should keep the company's nearly 10% distribution on very solid ground for years to come.

Hi-Crush is one of the many domestic oil and gas service and supply companies supporting the natural gas and oil drilling boom of the last couple of years. It's not without risk which is why investors might want to look at a more diversified service provider. That's why investors would be wise to consider Halliburton, one of the top companies in the business and one of those most in tune with the domestic market. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.

The article Digging Deeper Into Hi-Crush Partners' Earnings originally appeared on Fool.com.

Motley Fool contributor Matt DiLallo has the following options: Short Jul 2013 $17.5 Puts on HI-CRUSH PARTNERS LP UNIT LTD PARTNER INTS. The Motley Fool owns shares of HI-CRUSH PARTNERS LP UNIT LTD PARTNER INTS. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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