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HCLP Misses On Earnings, Suspends Distribution

She moves through the darkness, one leg in front of the other, silently across the floor. The cool air wafts around her legs as she begins to climb the stairs. One, two, three… the stone makes hardly a sound; the clattering of footsteps cannot be heard.

The wood does not creak as she steps onto the landing. A light at the end of the hall peaks out of a doorway. She passes through it.

The foot rests in front of her, beneath the desk. Softly, she passes next to it, at the last moment letting her body rest against the flesh, rubbing slowly.

She purrs – a deep loud sound – then soundlessly arrives in Cain’s lap, flexing her claws one of the next before letting his hand stroke her head and long body.

I pass my fingertips through her long hair, ending by twirling the lynx shaped tufts with my forefinger and thumb. Then I turn back to what I was reading.

4:26 pm Hi-Crush Partners misses by $0.04, reports revs in-line; announces temporary distribution suspension (HCLP) :

Reports Q3 (Sep) earnings of $0.15 per share, excluding non-recurring items, $0.04 worse than the Capital IQ Consensus of $0.19; revenues fell 20.3% year/year to $81.5 mln vs the $80.9 mln Capital IQ Consensus.
The Partnership reiterated the guidance for capital expenditures in the range of $50-$55 million for 2015 of which $48 million was spent in the first nine months of the year.
Capital expenditures for 2016 are expected to be in the range of $15-$25 million for the continued development of new terminal facilities.
Since August 1, 2015, Hi-Crush has reduced operational and administrative staffing levels by ~16%, including the most recent reductions at the Augusta facility.

Distribution Temporarily Suspended

The Partnership announced a temporary suspension of its quarterly distribution due to challenging market conditions.
Co paid distributions of $2.40 per unit on all common and subordinated units for 2014, $0.675 per unit for the first quarter 2015, and $0.475 per unit for the second quarter 2015.

I had expected something like this, particularly after EMES withdrew guidance. While I had hoped they would only reduce to a more normal percentage, suspending the entire distribution until fairer weather is perfectly acceptable. SLCA and EMES are going to do the same.

The most recent HCLP filing is out and it shows the story: accounts receivables have declined by 35% as business dries up. But the business is hardly over leveraged with Debt/Equity still holding below 2X. Cash levels increased by over 8% and now with the distribution halt, they are staking out the long winter.

HCLP has moved to shrink the business aggressively, cutting staff by 16%. Admittedly this is nothing like one of the services companies or some of the smaller oil drillers. But then again…they don’t have that kind of problem, now do they?

HCLP took a loss this quarter of ($0.49) a share, which was entirely driven by one time write downs. The company is in a similar (though less dire) process as other companies in this industry, cutting dead weight operations and consolidating around profit centers. They are also writing down and taking losses where applicable. In this case, HCLP wrote down some of their long term supply contracts (presumably because the customers aren’t going to live long enough to fill them).

Cash from HCLP’s operations only declined by about 11%. HCLP already spent about $48 million this year on investments in equipment and facilities, but they are looking to pair that back next year to $15-25 million.

Without the distribution and with the lower capital expenditures, HCLP will have expenses of inside $30 million per year. Cash flow is $67 million which even if we continue to impair, should more than cover the costs of doing business.

If HCLP was forced to go the BAS route and write off all goodwill and intangible asset value, they’d still have about $2 per share of equity to work with. That leaves another $69 million of equity as a buffer.

This line in the filing does concern me:

Under the terms of the Revolving Credit Agreement, our leverage ratio (total debt to trailing four quarter EBITDA) may not exceed 3.50. While our leverage ratio as of September 30, 2015, is below this threshold, if current market conditions persist, our leverage ratio will likely exceed this threshold during 2016, which could result in a breach of covenant event and an event of default under the Revolving Credit Agreement. If such a default were to occur, and resulted in a cross default of the Term Loan Credit Agreement, all of our outstanding debt obligations could be accelerated. The Partnership is currently in discussions with the lenders to amend the Revolving Credit Agreement to, among other things, waive the leverage and other compliance ratios. The Partnership makes no assurance that an amendment will be obtained.

So the question becomes, how willing are lenders to play ball? Promise of money is better than no money, no? It’s not as if bankers could run HCLP better than HCLP is. But these things always get messy.

In principle, there’s plenty of time here to ride out the storm. But we need oil markets to stabilize. BAS’ CEO Patterson says he sees signs of oil production going offline and was talking about operations idling after Thanksgiving. It sounds like companies have spent their budget this year and aren’t going to bother asking for more money.

Patterson also said he’s seen competition spike in his local markets, with thirty or more competitors entering to submit bids. In his anecdote, he said about twenty of them are left now.

Although it may not feel like it, the weak are being driven out. The industry is getting their cost to drop and they are learning to compete with the cheaper oil levels. This hurts but the survivors will probably be built to last. Provided, of course, that you are a survivor.

Budgets are being frozen in December. The oil producers are going to take a little recess. We’ll see what oil prices do in response.

Then things will get started again in January.

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