In a Jan. 7 research note, Raymond James analyst J. Marshall Adkins reported Hi-Crush Partners L.P. (HCLP:NYSE) decided to suspend its quarterly distribution, likely long term, due to the decreased volumes and price deterioration it is experiencing along with oil price uncertainty.
The drop in the company's volumes was 25% in Q4/18 compared to Q3/18, lower than expected. It is attributed to a reduction in the number of completions due to a declining oil price, operators maxing out their year's budget and a resulting "significant" sand oversupply, Adkins explained.
"One of the more significant investor concerns regarding Hi-Crush has been the potential for contracts to be renegotiated during the current bout of weakness," he added. For example, management is currently renegotiating its Kermit mine contracts. With margins per ton falling by about $20 per ton at Kermit, sales of Kermit sand will yield about $96 million of EBITDA in 2019, Raymond James estimates.
As for the future direction of Hi-Crush's Northern White sand margins, it remains unclear, Adkins noted. On one hand, they are decreasing due to the overall slowing. Raymond James forecasts less overall Northern White tonnage this year, at 5.6 million tons compared to 7.4 million in 2018. "Overall, we currently model in-basin sand pricing falling about 20% in 2019 year over year, compared to a roughly 40% drop in Northern White pricing," he wrote.
On the other hand, the company continues to benefit from its larger scale and nonsand offerings, including last mile and storage. Those could add further value this year, Adkins indicated, as Hi-Crush continues its expansion into "a rapidly maturing market, where displacing legacy equipment has largely ended and competition amongst silo companies is leading to more aggressive pricing from competitors." Raymond James forecasts these silo entities could contribute as much as $30 million to Hi-Crush's EBITDA in 2019.
Raymond James has a Market Perform rating on the company with a current share price of $3.86.
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Disclosures from Raymond James, Hi-Crush Partners LP, Company Comment, January 7, 2018
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