Hi-Crush Partners (NYSE:HCLP) set the bar for second-quarter earnings incredibly high last week when it announced several game-changing moves for the business. While the company delivered impressive increases in revenue and earnings, they didn't quite live up to Wall Street's expectations.
For longer-term-minded investors, the earnings miss probably isn't that big of a deal. What does matter, though, is management's plan to eventually change Hi-Crush's corporate structure from a master limited partnership to a more conventional C corporation. Let's take a look at the company's most recent earnings results to see what a conversion means to investors now and down the road.
By the numbers
|Metric||Q2 2018||Q1 2018||Q2 2018|
|Revenue||$248.5 million||$218.1 million||$135.2 million|
|EBITDA||$82.6 million||$65.6 million||$26.8 million|
|Distributable cash flow||$66.6 million||$56.4 million||$22.8 million|
This was another good quarter for the company as some of the logistical issues that hurt Hi-Crush in the prior quarter abated. Volumes of sand increased 44% compared to this time last year, and the contribution margin (similar to gross margin) increased from $16.73 per ton to $30.94 per ton.
Big changes coming
Last week, Hi-Crush announced a bevy of news, all on the same day, that sent shares soaring more than 26% for the day. Among the announcements were the acquisition of a sand logistics company, a major supply agreement that will support construction of a new mine, and a distribution increase. Another item that investors should pay attention to in the future: Management talked about the possibility of converting from a master limited partnership to a more conventional C corp.
Management noted that the recent distribution hike to $0.75 per unit was part of an incentive distribution rights (IDR) reset provision with its parent company. The gist: If Hi-Crush can pay four consecutive quarters of distributions exceeding $0.7125, it will be able to convert to a C corp. That also means that this extremely high yield -- 19.7% at today's stock price -- may not last if management does elect to convert to a C corp a year from now.
The good news is that Hi-Crush's business is on relatively stable footing such that it can support a high payout over a relatively short period of time. Management anticipates record volumes between 3 million and 3.2 million tons, and its increasing footprint in last-mile logistics services will likely increase per-ton margins.
What management had to say
In Hi-Crush's press release, CFO Laura Fulton went over management's decision to drastically increase its payout and what that means for a potential corporate change.
Given the Partnership's strong cash flow generation and completion of new financings during the quarter, the decision was made by the Board of Directors to distribute a large portion of available cash generated during the second quarter to unitholders. We expect that a higher portion of distributable cash flow will be paid out for the foreseeable future, however, the Board of Directors has not determined a set policy that will guide our distribution amounts or coverage in the near term. As we continue to evaluate conversion from an MLP to a C-Corp, this increase in the distribution for the second quarter also enables us to begin heading down one path of several that can facilitate a corporate structure conversion.
Here's some walking-around money while you wait
Even before last week's blockbuster news, Hi-Crush was looking like an attractive investment. The company was already running a low-cost operation that provided the essential last-mile logistics services that give a significant uplift to per-ton margins, which made it well-positioned to profit from the resurgence of North American shale drilling. The addition of a long-term supply contract with a customer that can support expanding its operations to 17 million tons annually goes to show that its business is on the right path.
The conversion to a C corporation is likely going to come with significant changes to its payout and its ownership structure. Ultimately, though, converting to a C corp is in the company's best interest. The changes to corporate tax rates make the MLP structure less appealing than it used to be, and a business highly exposed to commodity prices rarely makes for a good, stable income investment. What Hi-Crush's conversion means for current investors is anyone's guess. The nice thing for investors is that they will likely enjoy some fat distribution paychecks for the next year until management presents its conversion strategy.