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Hi-Crush Expanding Permian Sand Business in $275M Deal

Houston-based Hi-Crush Partners LP, which reported a sharp increase for proppant sand during the fourth quarter, is slapping down $275 million to buy out a Permian Basin sand supplier in its biggest deal ever.

In a series of agreements worth a total of $475 million, Hi-Crush also is consolidating its stakes in Wisconsin fracture sand facilities, where most of its sand reserves are located. In the $275 million agreement it is taking over Permian Basin Sand Co. LLC, which owns a 1,226-acre fracture sand reserve consisting of more than 55 million tons of 100 mesh sand. The acquisition, set to be completed in March, includes rights to purchase additional reserves.

"In our largest acquisition to date, the Permian Basin Sand purchase transforms Hi-Crush by establishing a presence in the regional sand market, while supplementing and amplifying our ability to deliver sand at the lowest cost directly to the well site," said CEO Robert E. Rasmus. "As we continue to execute our strategy, we're evolving our production mix and growing our portfolio with the addition of one-of-a-kind, high-quality reserves."

Hi-Crush plans to construct an on-site processing plant at the facility capable of producing 3 million tons/year at a cost of $45-50 million, with an in-service date planned later this year

"Location is critical, and nobody will be closer or better positioned to efficiently serve the Permian Basin," Rasmus said. "Further, with the ability to design and construct a state-of-the-art, purpose-built production facility, we are able to make this facility uniquely Hi-Crush, while maintaining our low-cost strategy and commitment to quality service."

The partnership also acquired from sponsor Hi-Crush Proppants LLC a sand facility in Whitehall, WI, as well as the remaining 2% interest in Hi-Crush Augusta LLC, also in Wisconsin. Hi-Crush Whitehall has 80.7 million tons of sand reserves on 1,447 acres, with annual processing capacity of 2.86 million tons. Total consideration for Whitehall was $140 million in cash and an agreement to pay contingent earn-out consideration over a two-year period.

During the second half of 2017, Hi-Crush expects to operate 13.4 million tons of production across sand grades and types, Rasmus said.

"Given the growth in demand we're seeing across our business, we expect to restart the Whitehall facility in March or early April 2017," he said. "Combined with the completion of construction of the Permian Basin plant in the second half of 2017, our ability to deliver the grades and quantities of sand demanded by our customers is greatly enhanced.”

Hi-Crush during 4Q2016 reported a 25% sequential increase in the sand volumes sold.

"Reflecting the change in mix in customer demand, approximately 57% of the volumes were sold in-basin for the fourth quarter of 2016, an increase from 47% in the third quarter of 2016 and from 52% in the fourth quarter of 2015," the partnership said. "Average sales price per ton sold was $49 per ton in the fourth quarter of 2016, compared to $43 per ton in the third quarter of 2016 and $52 per ton in the fourth quarter of 2015, reflecting a higher pricing environment and the mix of greater in-basin sales volumes."

Pricing for sand generally rose more than 5% sequentially, with most of the jump in finer mesh sand and in-basin delivery.

"We saw pricing improve in the fourth quarter, especially late in the quarter," Rasmus said. "The pace of increases has accelerated rapidly in the first quarter. We expect pricing improvement to continue throughout the year."

Of the 1.36 million tons of fracture sand sold during the fourth quarter, 91% was produced and delivered from the partnership's facilities, with the remainder being purchased from its sponsor's Whitehall facility.

"Our customers are seeking surety of supply as crews get back to work, and we expect we'll need to fully utilize our existing mines, as well as the capacity of our sponsor's mine, in order to meet those demands as the cycle progresses," Rasmus said.

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