Frick and Frack

Dear 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?
DP, Indianapolis
   
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 powdered water. JPMorgan Chase hopes to take both public, thinking it can raise $8.2 billion and $11.5 billion, respectively. And I hear that Merrill Lynch is talking to Earon, a hearing aid company in Ethiopia that has developed designer hearing aids for people who want to hear underwater. Merrill reckons it can raise more than $4 billion via an IPO. “
“There’s a sucker born every minute,” P.T. Barnum declared, “and an IPO born every day to make sure no sucker is spared!”
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 (U.S. Silica Holdings, SLCA-$12) 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. HCLP dredges more than 1.7 million tons of this prehistoric stuff from a 560-acre sand mine in western Wisconsin. Frac sand is fine-grained silica that’s forcefully injected by a high-pressure pumping to pry open fractures in multibillion-year-old shale seams, permitting gas and oil to be extracted without the sand.
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, producing $22 million in net income, and that’s a 65 percent net profit margin. For the full year, those numbers could easily double as demand for frac sand continues to increase as fast as it can be scooped.
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. HCLP is structured as a limited partnership, so most of its dividend payout will be nontaxable.
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.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.
© 2012 Creators Syndicate Inc.