After fourth quarter's results came in, it seemed that it was only a matter of time before Hi-Crush Partners (OTC:HCRS.Q) started turning a profit again. But it appears that, based on the company's recent results, that amount of time is more than one quarter. High reactivation costs and some big plans to add a new sand mine are still eating away at all the gains in sales.
Based on management's projections, though, this coming quarter will be the one in which Hi-Crush finally turns the corner and gets back into producing sand and profits at the same time. Here's a look at the company's most recent results and how management expects to get back into the black throughout the rest of the year.
By the numbers
|Results||Q1 2017||Q4 2016||Q1 2017|
|Revenue||$83.4 million||$67.3 million||$52.1 million|
|EBITDA||$1.3 million||$0.1 million||($44.9 million)|
|Distributable cash flow||$0.05 million||($4.4 million)||($13.8 million)|
It's nice to see that Hi-Crush is seeing significant upticks in revenue, but investors do have to wonder a little why those revenue increases aren't turning into stronger bottom-line results. One explanation could be that the company is incurring unusually high expenses today as it brings its idle facilities on line. In the first quarter, its Augusta sand mine was only partially utilized and its Whitehall facility restarted operations in March.
Management expects that by the end of Q3 2017 both of these facilities will be fully utilized. Keep in mind that these two Wisconsin facilities represent more than 50% of Hi-Crush's total production capacity, so bringing them on line will have a large impact on revenue. In fact, management estimates that second-quarter unit sales should increase 50% to 60% sequentially, so Hi-Crush is still very much in the early stages of its rebound.
So as far as profitability, we can give the company a mulligan on this quarter, but it will likely be the last one. If the company can deliver on that large increase in unit sales, and sand prices remain at these elevated levels, then Hi-Crush should be able to turn a decent profit next quarter.
Debt reduction has been a priority for management over the past year or so. The goal is to satisfy creditors that want to see the company lower its leverage ratio to below 3.5 by Q1 2018. With only $1.3 million in EBITDA coming in the door and a total debt load of $193 million, it is in no way able to meet that goal. But we should start to get a clearer picture as to whether that target can actually be met in the next quarter or two.
2017 has been a rather active year for Hi-Crush. Prior to releasing its fourth-quarter earnings, management announced that it had acquired all remaining equity interest in its Whitehall and Augusta mines from its parent company. As a result of consolidating ownership under one company, investors will have an easier time understanding the income statement.
Another part of that purchase was acquiring the rights to a potential sand mine site right in the heart of the Permian Basin. Hi-Crush has already started investing in this new facility in Kermit, Texas, and expects to have a 3-million-ton-per-year facility up and running by the end of the year. The development of this mine has drastically increased Hi-Crush's capital spending for the year.
Additionally, Hi-Crush is spending heavily on the growth of its PropX logistics services. To create differentiation, sand producers have been focusing on factors like logistics, last-mile delivery, and reducing loading and unloading times, and so Hi-Crush is making sure it doesn't get left behind with investments in these assets.
From the mouth of management
CEO Robert Rasmus summed up Hi-Crush's quarterly results and what investors can expect in the coming quarters:
The first quarter results were in line with our forecasts and represent the logical progression in recovering margins as we experience significant and sustainable increases in demand for frac sand, which are expected to drive a 50-60% sequential increase in our volumes for the second quarter. We are pleased with our progress toward achieving full utilization on our 10.4 million tons per year of existing Northern White capacity and bringing our new 3.0 million ton per year in-basin Kermit facility to market in the third quarter of 2017. We remain intensely focused on executing our plans using the basics that have made Hi-Crush an industry leader in cost structure and logistics flexibility, now on our expanded asset base and service offering.
What a Fool believes
Personally, I think the jury is still out on the potential of this new sand mine in Texas. While there is certainly an opportunity there to grow sales, a couple of Hi-Crush's better-capitalized competitors likely looked at building a facility in the same place but elected to pass. It's also worth considering that the company more than doubled its share count over the past year to pay for this new mine and its development, so there is an onus to generate superior returns. How that mine performs after a quarter or two after coming on line will be an important indicator.
Based on the company's ramp-up schedule, this should be the last quarter for which the company posts a loss. If sales can grow 50% to 60%, as management claims, and still not turn a profit, then something is seriously wrong with its operations, and investors will want to reconsider any potential investment in this stock.