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Hi-Crush Partners Returns to Profitability in a Big Way

Investors had unreasonably high hopes for Hi-Crush Partners (NYSE: HCLP) coming into 2017. Rig counts were rising fast, and we all assumed that would translate to higher revenue and earnings for the frack sand producers. Up until now, only one part of that equation was true. In its most recent quarter, all of the pieces finally came together as the company posted a profit and even hinted at starting to pay a distribution again.

Let's take a look at Hi-Crush's Q2 to see how everything seemed to fall the company's way, and what we can expect in the coming quarters.

Image source: Getty Images.

By the numbers

Metric Q2 2017 Q1 2017 Q2 2016
Revenue $135.2 million $83.4 million $38.4 million
EBITDA $26.8 million $1.3 million ($3.4 million)
EPS $0.18 ($0.07) ($0.26)
Distributable cash flow $22.8 million $0.05 million ($6.2 million)

Data source: Hi-Crush Partners earnings release. EBITDA = earnings before interest, taxes, depreciation, and amortization.

For the past couple of quarters, Hi-Crush has been selling a lot more sand. More and more oil and gas producers have found that they can increase their rates of return on a well by increasing the amount of sand they pump into the well during the fracking process. This has lowered breakeven costs for oil and, as a result, increased overall drilling activity. 

One would immediately assume that higher sales volumes would translate to higher revenue and earnings, but a couple of things were holding Hi-Crush back. First, there was loads of excess sand production capacity out there, which meant the average selling price per ton sold was low. Also, Hi-Crush was spending an inordinately large amount of money to get its idle production facilities back up to capacity.

This past quarter, these two factors went away, and you can see the impact it had on the bottom line. Total sand sold for the quarter increased to 2.1 million tons as all of its existing facilities were fully utilized. In fact, it sold more sand than it did in any quarter before the oil crash in 2014. It also helped that Hi-Crush's contribution margin per ton sold increased from $8.15 to $16.73 in just three short months.

Another notable accomplishment this past quarter was the start-up of its Kermit sand facility two months ahead of schedule. This 3 million ton per year facility is right in the heart of the Permian Basin and should lead to even better margins since transportation costs will be much lower than shipping sand down from its other mines in Wisconsin. 

Perhaps the thing that has investors excited the most is the return of a distribution. The company's results already started generating distributable cash flow again, and the addition of the Kermit facility should add to that number as well. Management said in the press release that it now feels comfortable it can restart a distribution again in the latter half of the year. 

What management had to say

Hi-Crush CEO Robert Rasmus and his management team earned the right to puff out their chests after this impressive quarterly report. In the press release, he highlighted the speed at which the team completed the Kermit facility and how that will impact guidance for the year.

We are extremely proud of our construction team, who quickly mobilized to design and construct our fifth world class facility in record time. The completion of the Kermit facility two months ahead of schedule and under budget is a testament to our execution ability as well as the unique relationships we have with our contractors.

...

The development of our strategic assets in the heart of the Permian Basin, together with our industry-leading sand facilities in Wisconsin, diversifies our service offerings and positions us to meet the evolving demands of the industry at a critical time. We expect Hi-Crush to operate near full utilization on its 13.4 million tons of annual capacity which, coupled with our advantaged logistics capabilities and holistic service offering to customers, positions us as a clear industry leader.

What a Fool believes

What a difference a few months make. Hi-Crush has gone from a company struggling to make ends meet to posting one of its best quarterly earnings reports ever. With its new Permian Basin sand mine slated to run at full capacity by the end of the third quarter, we could be in store for even better results for the rest of the year if the current oil and gas market maintains its course.

You have to wonder what has been going on with Hi-Crush's stock in recent months. The fundamentals of the business have markedly improved throughout 2017, but its stock is down more than 57% over that time. Perhaps this earnings report will be the wake-up call that Wall Street needs to realize what's going on with this frack sand producer.

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Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.