Hi-Crush Partners: Well-Positioned For Growth

Author's Avatar
Jan 19, 2015

Hi-Crush Partners LP (HCLP, Financial) works as a producer and supplier of monocrystalline sand which is used as a proppant to enhance the recovery of hydrocarbons from oil and natural gas wells. The company has most of its resources predominantly in the Wisconsin basin and a limited portion in the upper Midwest region of the United States. Hi Crush Partners provides raw fac sand used in hydraulic fracturing operations in oil and natural gas wells. It also provides pressure pumping services.

The company’s business model looks strong with about 62% of the FOB plant sold to the customers directly and 32% sold to the terminal via rail. A higher percentage of sale through FOB helps in minimizing the company’s responsibilities and cost.

In the next section I will also discuss some of the key investment positives of the company and why I believe that HCLP has high upside potential.

Financials

I like Hi-Crush Partners because of various reasons. The primary reason being its strong financials with impressive growth numbers.

Revenue growth has been tremendous with 272% growth in 2012 and another 87% growth in 2013. The company has similar results for operating and net income. Historical growth has been impressive, and based on the company’s long-term contract and increasing demand for fracturing, I believe HCLP will continue to increase its top line.

Parameters Value in ‘000 2013 2012 2011
Revenue 141742 75634 20353
Revenue Growth 87% 272% Â
Operating Income 50834 47025 11173
Operating Income Growth 8% 321% Â
Net Income 58562 43528 9280
Net Income Growth 35% 369% Â

The company has also been rewarding its shareholders with returns better than the industry average.

  • Return on Equity of 67.8% above the industry average of -8.3%
  • Return on Assets of 29.5% better than the industry average of -2.8% and
  • Return on Capital of 34.7% more than the industry average of -4.8%

Even the profitability ratio looks good with Gross margin and Net profit margin of 43.5% and 36.5% respectively against the industry average of 37% and -8.3%. A better than overall sector performance with a clear vision of growth makes me believe that the stock has upside potential.

Long term Contracted Cash Flows With Visible Growth

In 2014, HCLP signed 11 new contracts with a total value of $3.8 million. This is expected to further increase in 2015 with a total estimated contract of $6.6 million with a total of 80% production capacity.

Predictable cash flow also supports a long-term annual distribution growth of double digits. Moreover, the company has high quality reserves with 7.5 million tons of annual production capacity in the Wisconsin basin. Fourteen destination terminals with a total silo storage capacity of 100,000+ tons.

In addition to the above, the company has completed 2.6 million tons per year of Whitehall facility along with developing fourth frac sand processing facilities. I believe that the growth for HCLP looks firm and the company will have good top line growth with further expansion of its distribution network.

Grossly Undervalued

HCLP is currently trading at 2015 estimated EV/EBITDA of 3.7, far less than FMSA Holding’s (FMSA, Financial) 4.9 and the sector average of 6.9.

According to analysts, an estimated growth of 41% is expected for 2015. Based on the current PE of 9.30, the company is trading at a forward PEG of just 0.2. Hi-Crush Partners therefore looks grossly undervalued and I believe this should be a good reason to invest in the stock.

Conclusion

Demand for Northern White frac sand is increasing due to increased use of fracture simulation techniques by E&P. Thus, considering an increasing industrial demand, the company’s current undervaluation and well positioned strategy to provide good returns, I believe HCLP can be considered as a long-term investment. A dividend yield of 8.3% is also a plus for income investors.