Frick and Frack
September 18, 2012 8:58PM
Updated: October 20, 2012 6:03AM
D ear Mr. Berko: Please tell me about a company called Hi-Crush, which produces sand for the oil and gas exploration business. One of the fellows I bowl with always brags about the money he makes in his investments, and some of us, including me, think he’s not bragging but just telling us like it is. He has a little money invested in lots of things and seems to be doing well.
Last week, he told us that he had bought 1,000 shares of Hi-Crush at $17 on the initial public offering because he is certain the stock will pay a big dividend soon and, by the spring of 2013, trade in the high $20s. Is this guy full of gas, or does any of this make sense to you?
Dear DP: There’s a roach paste factory in Dunlap, Miss., that wants to go public. Goldman Sachs is sending a team to talk to management and thinks it’s worth about $6 billion in an IPO. Then there’s a kosher pig farm in Sty City, Mo., and there’s a company in Dry Mud, Calif., that owns a formula for making powered water. JPMorgan Chase hopes to take both public, thinking it can raise $8.2 billion and $11.5 billion, respectively.
Finally, there’s Hi-Crush Partners (HCLP — $20), a sand mining company in Wyeville, Wis., that Morgan Stanley took public. The IPO at $17 — there was no demand at $26 or $23 or $19) — raised an embarrassing $191 million last August, well below the initial $300 million Morgan Stanley promised HCLP management in November of last year. The reluctance to buy those shares is understandable, considering the failure of HCLP’s much larger competitor’s IPO in February 2012. SLCA also came public at $17, was expertly managed by Merrill Lynch/Bank of America and crashed to $10 a month later.
However, I’d consider owning HCLP, a pure play, low-cost domestic producer of premium monocrystalline frac sand, which is used to goose production from oil shale and natural gas wells.
Fracking has improved domestic oil and gas production dramatically and continues to do so. Revenues last year were $22 million, and with the help of 68 employees, the company reported $12 million in net income. In the first six months of 2012, HCLP posted $34 million in revenues.
HCLP doesn’t pay a dividend; however, management announced that it will pay its first quarterly dividend of 47.5 cents ($1.90 annually), which is a 9 percent return on the current $20 price. And some observers believe that HCLP’s dividend could rise to 55 cents a quarter soon. There can be no fracking without this silica, and HCLP’s revenues for 2013 could double, as the company has contracts for 100 percent of its capacity in 2013 and 2014.
And though your bowling friend may be bragging, it looks as if he may have thrown a strike and may be offering good advice. If you are not risk-averse, buy 100 shares.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.