Temporary Troubles in the Shale Fields Mean a 5.65% Yield for Disciplined Investors on Hi-Crush Partners

11/11/2014 5:15 pm EST

Focus: MLPS

Jim Jubak

Founder and Editor, JubakPicks.com

Though he doesn't see this sand producer bouncing back while the slump in the price of oil continues, MoneyShow's Jim Jubak does think it might be an income investor buying opportunity, but also a holding that tests patience and discipline over the next year.

I don't think we'll see Hi-Crush Partners (HCLP) return to the near $70 a unit price it saw in August until worries about the continued slump in oil prices—and their potential effect on drilling activity in US shale geologies—go away. And I don't expect those worries to go away quickly. Sometime in 2015? But I'm guessing, I admit.

In the meantime, this master limited partnership is doing what an income holding is supposed to do: produce a rising amount of income on steady fundamentals that say those increases in income can go on for a while. (Hi-Crush Partners is a member of my Dividend Income portfolio.)

On November 4, Hi-Crush reported third quarter earnings of 83 cents a unit. That missed the Wall Street consensus projection by 2 cents a unit. But it was an increase of 65% from the third quarter of 2013. Revenue climbed to $102.3 million versus the $90.11 consensus. Revenue grew by 92% year-over-year. About 91% of the sand sold by the company for use as a fracking proppant was sold under long-term, fixed-price contracts.

Here's the most important stuff for income investors: distributable cash flow rose to $32.3 million; that amounts to 1.4 times the $23.1 million in distributions scheduled to be paid to unit holders of record on October 31 on November 14. (In other words, the company has got plenty of room to pay and to increase distributions.) The third quarter distribution declared on October 16 comes to 62.5 cents a unit (for a distribution of $2.50 on an annual basis). The November 14 payment will be a 9% increase from the distribution paid in the second quarter.

In its conference call, Hi-Crush argued that the long-term trend in the US energy boom was still intact and justified new investment in sand production capacity and in Hi-Crush's delivery and storage network. Hi-Crush is in the permitting process for a fourth Northern White sand production facility. Costs remain the lowest in the sector, management said, at $13.89 a ton during the quarter. The company already has contracts for the delivery of 6 million tons of fracking sand in 2015, which compares very favorably with the 1.2 million tons sold in the third quarter.

I never like to see the price of a dividend income stock or master limited partnership fall and units of Hi-Crush are down 6.37% since I added them to the dividend income portfolio on May 23, 2014. But the important question is whether that decline is a permanent impairment of capital or merely a chance to pick up an income stream—currently a 5.65% yield—at a good price. To me, this seems a solid buying opportunity for income investors, but I do think this will be a holding that tests patience and discipline over the next year.

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