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Can Hi-Crush Partners (HCLP) Provide an Energy Boost to your Portfolio?

Tuesday, February 13th, 2018

Energy has been a sector we have been excited about. Oil prices have begun to recover, and the long-term fundamentals now look better balanced. There are still many companies well below their all-time highs, but it is crucial to find ones that have strong balance sheets.

Hi-Crush is a unique energy company as it is in the basic materials sector and industrial metals and minerals industry. The company does not drill for oil or refine it, but rather it produces, transports, and distributes monocrystalline sand. This sand enhances the recovery rates of hydrocarbons from oil and natural gas wells. HCLP should benefit from the increase in US production as the sand should see an increase in demand.

The company is based in Houston, Texas, but it appears its excavation and processing facilities are based in Wisconsin. One area of concern would be if this company has all its sand facilities and a major natural disaster struck, would the company be able to recover in an efficient manner. One other area of understanding which would be crucial, is finding out who Hi-Crush supplies sand to. It is important the business is not concentrated with one large company as that could provide major business disruptions over the long term.

The current price for HCLP is $11.80 and the 52-week range is $7.25 - $23.30. The stock price is close to 50% from its 52-week high. While we like companies that have temporary problems which are fixable, it is important to make sure the decline in stock price was not the result of a permanent problem.

The current Price/Earnings Ratio is 37.6, which is above the industry average of 22.9. Price/Sales of 2.4 is the same as the industry average; Price/Tangible Book Value of 1.4 is favorable against the industry average of 11.8; and Price/Cash Flow of 18.4 is below the industry average of 20.0. The current P/E is the only valuation which is a concern, but if the company can grow its earnings moving forward that would reduce the valuation measure.

Hi-Crush pays a nice dividend of 6.7%. While this looks attractive, it would be prudent to further explore this dividend policy to make certain the company has the cashflow to cover the dividend.

Sales have risen by 259.96% quarter over quarter versus the industry average which has seen growth of 6.62%. Sales have seen an increase of 116.75% year over year versus the industry average which has risen by 9.92%. It is important to understand where this sales growth came from and if the sales growth is sustainable moving forward.

EPS growth looks interesting as it has risen 252.47% quarter over quarter. This far outpaces the industry average which declined 7.06%. Year over year, EPS growth also looks strong as it grew 120.14%, far outpacing the industry average which declined 30.04%. Like the sales growth it is important to understand where the growth occurred and if it is sustainable.

Crucial to these energy companies is a strong balance sheet and Hi-Crush has a great one. The current ratio of 1.77 shows the company has liquidity and a Debt/Equity of 24.6% shows the company does not have too much leverage.

Looking forward to December 2018 and using a forward multiple of 16.5, estimated GAAP EPS of $2.26 gives us a target sell price of $37.29. While this looks very attractive, I am concerned by the large growth from December 2016 when the company lost $1.64/share. This business has some great potential, but it is also a limited partnership which creates complexities. Before investing you must understand these complexities and how it affects you as a shareholder.

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