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Market Update – 18 Months In Review

2014 began with an intense implosion of overpriced tech stocks that destabilized players and set us up for nasty knock off effects. Months afterwards, energy names began to turn downward and started an at first slow descent; a black omen for anyone looking for a forward indicator.

Saudi Arabia decided to play the world’s worst move (effectively maiming OPEC), spiked the oil markets when they could least handle it, and sent oil into the abyss touching off a second massive sector implosion in oil and gas names. But not just oil & gas, as the market became terrified of economic stagnation led by fears out of Europe and Asia, and the entire energy sector followed oil down the hole.

We are now experiencing what I view as the third wave of the same phenomenon that began in early 2014, more than a year later, as the entire stock market collapses 10% in a short span of time, led by China’s markets and the intensely poor decision making of a command/control economy trying to have their cake and eat it too.

That being said, I haven’t yet seen any indication that the real economy is retracting.

Job growth seems present and in my own local markets where I have a good ear to the ground concerning hiring and pay policies, I am actually hearing talk of wage hikes. The last five years, our local job market at least was terrified of the HR monsters that were federal regulations (chiefly PPACA), not to mention we are still reeling from 2009 in some respects. But I think as we clear away from the implementation of these federal regulations, especially with rigid conservatives now holding fast against, we are going to start to see some wage growth. Employees are actually demanding it now, voting with their feet when they can.

This should do wonders for the economy.

With regards to oil specifically (which is chiefest of my concerns) the EIA is suggesting that the current imbalance between consumption and production of oil is 2 million barrels per day. This is the cause of our stockpiling and the foremost reason oil has sunk so far. Saudi Arabia’s move to curtail US production has been a failure and so far the long feared wave of insolvencies has held to a slow drip, even from the most precarious of businesses.

A 2 million barrel imbalance is not all that bad and I believe that, barring some sort of real demand destruction, we’ll just float along at these levels until the market becomes more comfortable with oversupply. I don’t think oversupply necessarily will force pricing lower as it would take a very specific set of circumstances which include not having a merger & acquisition brokerage occur. Yet we see M&A activity is very healthy in this current time period and I have to believe that if oil goes much lower you would see US markets consolidate aggressively.

Besides this, the global imbalance is equivalent to about one major oil producer globally. And in this current environment, we also should be aware that civil unrest is a powerful destabilizer of oil production (via civil war) with positive likelihood.

Sources of new supply are questionable. New well development at these oil prices are unprofitable and only large state sponsored development is probable. Yet, economic weakness is harming state budgets and may make it difficult to attain approval for unprofitable ventures. The largest foreign state controlled sources of oil are also some of the most sensitive to this oil price shock.

Altogether, I continue to believe that the most likely outcome in oil markets is unknowable yet still predictable production locations going offline from internal unrest. Venezuela is pegged as the most likely location for such an event, do to the extreme nature of their current state of affairs, and because their leadership is proven incapable of handling the situation. But Venezuela is hardly the only candidate; just the best.

Outside of that, the economic uncertainty that hit everyone’s radar earlier this summer is now coming back under control. Bond yields continue to subside across all major foreign issuers, and I would not be surprised if the EU crisis in particular remains hidden from view for another full two years.

Domestically, I expect monetary policy to remain accommodating, but would not be surprised if Yellen raises interest rates some token amount, to try and claim some victory for the Federal Reserve. I cannot expect how the market will react to his, but believe the raise will be mostly symbolic anyway, so any effects should be temporary in nature.

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Look what fracking company just landed another long term supply contract

HCLP just amended another supply agreement to jack up the amount of sand one of their customers is obligated to buy every month. This is the third one this year.

Per MarketWatch
:

Houston, Texas – April 8, 2014 – Hi-Crush Partners LP (NYSE: HCLP), or Hi-Crush, today announced the entry into of an amendment to the supply agreement between Hi-Crush Operating LLC, a subsidiary of Hi-Crush, and FTS International, LLC, or FTSI, a leading provider of well completion services. The amendment significantly increases the number of committed volumes under the agreement, extends the term of the supply agreement and requires FTSI to pay a specified price for a specified minimum volume of frac sand each month. “Hi-Crush is excited to further extend and strengthen our relationship with FTSI by entering into this amendment,” said James M. Whipkey, Co-Chief Executive Officer of Hi-Crush. “We consider FTSI a valuable partner as we continue to expand our market presence, and fulfilling our customers’ needs is a top priority for Hi-Crush.”

And when they say “requires FTSI to pay a specified price for a specified minimum volume of frac sand each month.”…question? Do you suppose that would mean a higher “specified price”?

I would suppose it would.

This follows the news yesterday that HCLP was going to have themselves an offering to completely buy out any competing interests in their Augusta facility.

Read here:

Houston, Texas – April 8, 2014 – Hi-Crush Partners LP HCLP +2.31% (“Hi-Crush” or the “Partnership”) announced today that it has entered into a contribution agreement with Hi-Crush Proppants LLC (the “Sponsor”) to acquire certain equity interests in Hi-Crush Augusta LLC (“Augusta”), the entity that owns the Sponsor’s raw frac sand processing facility located in Augusta, Wisconsin. As previously announced, Hi-Crush acquired a preferred interest in Augusta on January 31, 2013.

“We are delighted to announce this acquisition, which we expect to be immediately accretive,” said Robert E. Rasmus, Co-Chief Executive Officer of Hi-Crush. “With this transaction, we will double the Partnership’s production capacity to 3.2 million tons per year. The Augusta plant has a current capacity of 1.6 million tons of coarse Northern White frac sand per year. Beyond that, we have the capability to expand the Augusta plant by an additional 800,000 tons per year and have started the process to obtain the permits required for this expansion. The expansion will bring total rated capacity at the Partnership to 4 million tons per year. We expect the expanded capacity to come on-line in the second half of 2014.”

Under the terms of the transaction, the Partnership will pay cash consideration of $224.25 million. At the closing of the acquisition, the Partnership’s preferred equity interest in Augusta (currently providing $3.75 million in distributions per quarter) will be converted into common equity interests in Augusta, and the Partnership will own 98% of Augusta’s common equity interests. “We expect that the acquisition of common equity interests in Augusta will contribute more than $30 million of incremental annual EBITDA to the Partnership, before any expansion to the Augusta plant,” said Mr. Rasmus. The acquisition is expected to close by mid-May 2014, subject to regulatory approvals and other closing conditions. In connection with the acquisition, Hi-Crush expects to refinance its existing revolving credit facility.

We need to follow the sand. Where the sand goes, the profits will go also. No buyouts – if these guys enter into a cash offer for my units on my behalf, I’m going to blow a gasket.

These moves are going to double HCLP’s revenue immediately. That will play into the hand of existing investors as bigger operations allow the executives of HCLP to leverage their logistics operations and gain market share.

I’m not even going to look to see if HCLP is paying top dollar premium on this deal – I’ll spare you the time, the answer is “I don’t care.”

This trend in the economy is only growing. These guys survived Aubrey McClendon blowing up the natural gas sector, and together with targeted well services like BAS, they’re going to dominate.

The shares aren’t even phased at the announced dilution yesterday to pay for the acquisition. Have a look.

04-09-14 HCLP 18 Months

Here’s the tagline:

HCLP – This Shit Is Going Higher

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MAA Completes Merger With CLP

CLP shares are now delisted, exchanged for a stake in MAA. The blood sucking law firms, looking to elbow their way into ill gotten gains, were defeated by the valiant.

The company rallied more than 2% today.

I ended the day green, barely.

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