Shares of frack sand provider Hi-Crush Partners (NYSE:HCLP) are down 19.1% as of 11:15 a.m. EST today, according to S&P Global Market Intelligence. The drop comes after management announced lower-than-anticipated sales volumes for frack sand in the fourth quarter and the decision to suspend its distribution.
It’s been a wild six months for Hi-Crush Partners. In the first half of 2018, oil and gas production in North America was booming. That led to record volumes of sand for fracking and high sales prices for Hi-Crush.
It’s pretty much been all downhill from there, though, as oil pipelines in the U.S. filled to capacity and transportation bottlenecks started to constrain production. As this happened, producers elected to drill but not complete wells. The completion process is when a well is fracked, and this is the part of the process that requires sand. Reduced levels of well completions have led to a significant decline in overall demand over the past few months, and a wave of new sand mines starting production means there is lots of excess supply.
This swift change in the market led to today’s announcement that fourth-quarter production came in lower than expected at 2.0 million tons compared to 2.8 million tons in the third quarter. Also, management made the difficult decision to suspend its payout to preserve its balance sheet.
Investors in Hi-Crush are likely getting whiplash from all the changes going on at the frack sand provider. Not only is the market for frack sand incredibly volatile, but management is also looking to convert the company from a master limited partnership to a more conventional C-Corporation.
While personally I think the long-term outlook for frack sand looks promising, it is a business that will go through wild fits and starts like this one. Keep in mind, too, that we have no idea what the conversion from an MLP to a C-Corp will mean for current shareholders. So for the time being, it’s probably best to wait until management completes this conversion before buying this stock despite how cheap it looks today.