This week, frac sand MLP-turned-C-Corp Hi-Crush Inc (OTC: HCRSQ) opened a new chapter in its long slide, filing for Chapter 11 bankruptcy.
It’s been literally years since this company was an Energy and Income Advisor recommendation—or since we’ve rated shares anything but a strong sell. But Hi-Crush’s now total demise does offer us several key lessons, as we build positions in best in class companies to capitalize on an energy sector recovery.
First, this bankruptcy is yet another demonstration that C-Corp conversions of MLPs are no antidote to financial and operating pressures.
When Hi-Crush abandoned MLP structure in May 2019, management claimed it would “enable further diversification, enhance growth potential and expand shareholders’ rights.” Instead, former unitholders got hit with a tax bill and shares dropped another 94 percent.
Second, the days of North American midstream companies being able to survive by offering a single product or service are numbered. Years before going bankrupt, Hi-Crush proved its business model too cyclical to pay reliable dividends, cutting and later eliminating its payout in late 2015. And after briefly restoring a lower payout in late 2017, it repeated the process again a year later.
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Elliott and Roger on Jul. 20, 2020
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