There’s a new master limited partnership in town, and it’s not an E&P company or a midstream entity. It’s Hi-Crush Partners LP (NYSE: HCLP), which owns and operates a plant that excavates and processes high-quality Northern White sand used in hydraulic fracturing. Its facility in Wyeville, Wisc., has annual capacity of 1.6 million tons per year and more than 48 million tons of proved reserves, for a reserve life of more than 30 years.
It went public Aug. 16, raising $179.5 million in net proceeds by selling 11.3 million units at $17 each.
HCLP transferred these proceeds to its sponsor, Houston-based Hi-Crush Proppants LLC, in exchange for ownership of the Wyeville plant, and the right of first offer related to its sponsor's two other frac-sand plants in Augusta and Tomah, Wisc.
Raymond James & Associates has initiated coverage with an “Outperform” rating and a $25 price target, saying the pure-play MLP offers an attractive yield of 8.9% on a 2013 cash distribution per unit estimate of $1.90.
“One of Hi-Crush's major differentiations is its low-cost structure relative to its peers,” analysts Marshall Adkins and James M. Rollyson said in a recent note to clients.
“With production costs in the high-teens per ton, versus its peers with costs in the low 30s, Hi-Crush has a clear operational advantage. With its peers' higher cost structure, this should provide a floor on the price of sand at least in the $45-$50 price range, if not higher, to justify new supply.”
MLPs must maintain stable cash flows, the analysts point out. Because Hi-Crush sells virtually all its sand on long-term, take-or-pay contracts with an average term of 4.6 years, cash flows remain very stable. Major customers are Halliburton, Baker Hughes and Schlumberger.
“Obviously, our $65-per-barrel call on 2013 WTI oil prices and anticipated 17% decline in drilling activity do not bode well for frac sand demand growth relative to recent trends. However, we think underlying trends in proppant use (i.e., further increases in efficiencies and increased proppant use per well completion) are likely to continue.”
Analysts at Baird also initiated with an “Outperform,” citing the fact that HCLP is expected to evaluate an acquisition of the Augusta frac-sand plant now owned by its sponsor, in first-quarter 2014.
“Drop-down of this plant, which began operation in late July, could potentially double HCLP's footprint and, in turn, lead to a material step-up in distributions to unitholders,” according to Baird.
The sand is shipped via rail cars, primarily unit trains, from Wisconsin. HCLP has contracted for 91% of its current capacity through 2Q14 and 71% thereafter through 2Q16 [with its major customers].
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