The units of Hi-Crush Partners (NYSE:HCLP) fell nearly 11% in February according to data provided by S&P Global Market Intelligence. Most of that loss came after the master limited partnership reported earnings on Feb. 4. However, the units have been all over the place so far in 2019, with the year-to-date gain through the first two months of around 6% masking two double-digit spikes and two double-digit declines along the way.
There's a huge amount going on at fracking sand provider Hi-Crush. In 2018 it announced that it was going to transition from a partnership structure to a regular corporation. That's a big move, backed by the decision to shift away from the sand production space and more toward the distribution of frack sand. Such a shift would make the partnership structure less appropriate, so the change in corporate structure makes sense. However, it was never going to be easy.
For starters, it required that Hi-Crush buy its general partner. That purchase resulted in the issuance of 11 million new units. The partnership cut the distribution by 70% the day it announced that the merger had been completed, in late 2018. Not long after, in January of 2019, Hi-Crush announced it would suspend the distribution completely, citing weak industry conditions.
When it reported earnings in early February, the reason for that distribution cut was a little more clear. Long-term debt more than doubled in 2018, with interest expenses increasing roughly 95% year over year. Hi-Crush clearly needed whatever cash it was able to save from eliminating the distribution.
Management made a point of highlighting its commitment to a strong balance sheet, but a massive increase in debt levels, a big rise in interest costs, and a distribution cut are, to be conservative, not the types of things investors like to see. Add in the big transition that Hi-Crush is trying to make, and it's little wonder that investors are nervous here.
That said, the dramatic price action at Hi-Crush so far in 2019 is really nothing if you look back a little further. As the chart above shows, the units are down nearly 70% over the past year. Most of that loss has come since the partnership decided it was going to shift from a partnership to a corporation. Investors don't seem to be so pleased with this move and, so far, it looks like there's a pretty good reason for taking a negative view here.
Hi-Crush is in the middle of a big transition and is probably best looked at as a special situation investment at the moment. Most investors would be better off avoiding it until a few quarters after the change to a regular corporation is complete. Until then, expect continued volatility, with any piece of news potentially driving a double-digit price move of the kind that we've already seen in 2019.