With Hi-Crush Partners LP (HCLP, Financial) likely to pay out more than 80 cents a share over the next 12 months, it is a dividend play, pure and simple. Now that the stock has been cut in half over the last month, it trades at a multiyear low and is worth taking a flyer on.
Hi-Crush is a leading supplier of sand used in hydraulic fracturing of oil and gas wells. The company extracts Northern White sand from its mines in Wisconsin and Texas, then delivers it through an extensive logistics network. A significant portion of the sand is sold to customers through long-term contracts with an average term of four years.
Just last week, the company reported solid numbers, beating on revenue but missing on earnings. The stock has been unfairly punished, down 16% since the Oct. 31 release. Fracking is highly profitable, especially with crude trading above $60 per barrel and moving up. Despite Wisconsin electing a Democrat for governor, any regulation on sand mines may still be years out and not top priority considering the state's public school system.
Going back to the company's earnings report, revenue was up 27% year over year, coming in at $214 million for the quarter. This is a high-margin business where Hi-Crush earned 12.3% net on that revenue turnover. Analysts are still anticipating the company will earn close to $2 per share this year and next. Tariffs may eat into some of the earnings, but oil and gas fracking is here to stay. It's necessary and it has put the U.S. back in the driver position while we (as a nation) look to pivot into other forms of energy use.
For the next several years, investors should be happy with the double-digit dividend yield and the potential for a 100% total gain from its current price.
For one, the company expects demand to increase in 2019 thanks to expansion in pipeline capacity and budget resets at high levels will drive more spending. The risk is that Hi-Crush may continue to see lower pricing as volumes increase, and only time will tell if that comes to fruition. For now, the average selling price during the latest quarter is the lowest in the last year, which has many spooked on the stock.
More importantly, on valuation metrics alone, the stock should be priced much higher. If Hi-Crush just had parity with industry average price multiples, the company would be valued above $1.4 billion, a big adjustment from the current market capitalization of $627 million.
Disclosure: I am not long or short HCLP.Â
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