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Msg 16 of 258 at 6/3/2017 8:22:57 PM by

delt1970


Meetings With Management; Reiterate Buy
Price target $30.00
'Key Takeaway
In meetings with investors last week, HCLP CFO Laura Fulton was confident in
continued pricing gains for sand well into 2018, anchored in part by strong
suspicions that in-basin build out and trucking would be hampered, including
by limited infrastructure in West Texas. 2Q16 appears poised to beat Consensus,
in our view. HCLP remains our most attractively valued sand stock, including
our favorable Normalized margin bias; reiterate Buy.
Trucking/road access a key constraint in in-basin growth, although there are
other issues as well. HCLP detailed a list of challenges, or at least plausible sources of
delay in the West Texas mine build-out, including equipment, power, natural gas, water
and customer commitments that might be linked to getting construction financing (we have detailed this in two recent notes
Frac Sand;s New Mine Balancing Act and New Mine
Constraints Redux). Yet, HCLP seemed more concerned with the constraining impact of West
Texas roads and having enough truck drivers to move the sand. With respect to finding even
more sites, Laura suggested that no news from HCLP’s larger public peers regarding West
Texas acreage acquisition might say something regarding limited quality options, in part as some of the dunes have obstructions including oil and gas wells and pipelines.
Confidence in >$15/ton margin in 2Q.Laura reaffirmed 2Q17E cost savings coming
out of winter (~$2/ton) and from more fixed cost leverage ($3-5/ton). She noted expected
pricing improvements as well (ex-its one FoB-mine contract). Thus, contribution margin
(before D&A) could easily exceed $15/ton vs implied consensus of ~$13.50/$22MM EBITDA
(and our $17/ton/$29MM EBITDA). 3Q17 improvement can come from 1) a full quarter
of fixed cost leverage, 2) the rolling to market of the one large FoB mine contract in
September and 3) more general market pricing leverage. In its view, the only offsets may
be rail rates later this year as RRs are aware of rising volumes. Laura reaffirmed that the
margin improvement can support restarting the distribution to unit-holders; the size of the
distribution appears unset, although we heard a preference for it to be substantial yet with
a strong coverage ratio (>1.3x?) to give downside protection and more of a base for growth.
Valuation/Risks
Our $30 PT is DCF-based. HCLP trades at 3.4x/5.7x our '18/Normalized EBITDA vs. peers at
4.0x/5.2x. Risks include: (1) near term newbuild/restart execution and (2) potential industry
oversupply long term.'

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Msg #SubjectAuthorRecsDate Posted
17Big call buyer for July $12.50 last Friday, then stock is on the restricted short list today at IBdelt197006/22/2017 12:42:50 AM

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