Emerge Energy Services LP. Investor Presentation January PAGE 1

Transcription

1 Emerge Energy Services LP Investor Presentation January PAGE 1

2 Forward Looking Statements This presentation contains forward-looking statements. These statements can be identified by the use of forward-looking terminology including may, believe, will, expect, anticipate, or estimate. These forward-looking statements involve risks and uncertainties, and there can be no assurance that actual results will not differ materially from those expected by management of Emerge Energy Services LP. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in our annual report on Form 10-K filed with the SEC. The risk factors and other factors noted in our Form 10-K could cause our actual results to differ materially from those contained in any forward-looking statement. Except as required by law, Emerge Energy Services LP does not undertake any obligation to update or revise such forward-looking statements to reflect events or circumstances that occur after the date hereof. In this presentation, we present Adjusted EBITDA, a non-gaap financial measure. Adjusted EBITDA is used as a supplemental financial measure by our management and external users of our financial statements, such as investors and commercial banks, to assess the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets; the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities; our liquidity position and the ability of our assets to generate cash sufficient to make debt payments and to make distributions; and our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure. We believe that Adjusted EBITDA provides useful information to investors because, when viewed with our GAAP results and the accompanying reconciliations, it provides a more complete understanding of our performance than GAAP results alone. We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses in evaluating the results of our business. We define Adjusted EBITDA generally as: net income plus interest expense, income tax expense, depreciation, depletion and amortization expense, non-cash charges and losses that are unusual or non-recurring less interest income, income tax benefits and gains that are unusual or non-recurring. We report Adjusted EBITDA (which as defined includes certain other adjustments, none of which impacted the calculation of Adjusted EBITDA herein) to our lenders under our revolving credit facility in determining our compliance with the interest coverage ratio test and certain senior consolidated indebtedness to Adjusted EBITDA tests thereunder. Adjusted EBITDA should not be considered as an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP. PAGE 2

3 Partnership Overview Sand Fuel Leading manufacturer of Northern White silica sand, ~ 99% sold as a proppant for hydraulic fracturing Diversified customer base with an attractive mix of contracts Four (1) sand plants backed by several mines with high quality reserves Advantaged rail access on three Class I railroads, with numerous logistics and transload solutions Primarily consists of processing & selling transportation mixture ( transmix ) Also includes wholesale, terminal, and biodiesel operations Operations in Dallas / Fort Worth and Birmingham, Alabama Located adjacent to major common carrier pipelines Together, these segments provide significant EBITDA scale and balance, while giving EMES diversification benefits as the market evolves (1) EMES is in the late stage of permitting a fifth dry plant with 2.5 million ton per year of capacity PAGE 3

4 Investment Considerations High Quality, Strategically Located Assets Stable Cash Flow Significant Organic Growth Capacity Intrinsic Logistics Advantages Strong Reputation w/ Customers and Suppliers Experienced Management Team Low Cost Operating Structure PAGE 4

5 SAND SEGMENT PAGE 5

6 From Mine to Railcar Extract Wash Dry Ship PAGE 6

7 Demand / Supply Still Favorable [Despite] new pressure from OPEC... U.S. energy companies... probably won t slash American oil output anytime soon, experts said this weekend. Some companies have oil-price hedges that will buoy profits even if crude is trading at four-year lows TPH analyst Jeff Tillery believes production growth will pick up in 2016 as prices and demand recover. Some analysts believe U.S. companies will attempt to outlast OPEC, whose resolve to let the market move oil prices may be weakened by the suffering of member countries... whose economies depend on higher oil prices. Erin Ailworth, Despite Glut, U.S. Firms Aren t Likely to Slash Oil Output, Wall Street Journal, Nov Customers have executed contracts and are still seeking additional sand Customer have indicated that all wells drilled in 2015 will require more frac sand per well Transition from vertical to horizontal drilling still a work in progress Re-fracking existing wells remains the hidden catalyst There are 1.1 million active gas and oil wells in the United States as of February This number does not include the many wells that are inactive and potentially ready to be re-fracked. - Shelby Goldberg, Fracking Opens up an Entire New Industry, Wall Street Daily, Sept 15, 2014 Supply of Northern White continues to be constrained Permitting remains difficult Recent M&A multiples (10-14x EBITDA) exceed recent public market valuations Existing and announced capacity is well below actual utilization Announced Dry Capacity Successfully Permitted Operational Fully Utilized Logistics capabilities are critical, while railcar availability is still constrained Current order backlogs for new covered hopper railcars are approximately two years PAGE 7

8 Frac Sand Demand Still Growing Longer Laterals More Stages per Well Transition from Vertical to Horizontal Closer Well Spacing More Wells per Drilling Pad Historical & Projected US Land Proppant Demand More Sand per Stage / Overpacking millions of tons Increased Drilling Efficiency P 2015P 2016P Sand Resin Coated Ceramics Source: PacWest Consulting Partners PAGE 8

9 Proppant Usage is Expanding Emerge Energy s key plays have increased sand usage The primary driver has been increased sand intensity Total Frac Sand Consumption (mm of pounds) Frac Sand Consumption per Well (mm of pounds) 8, ,000 6,000 5, , ,000 2,000 1, Eagle Ford Appalachia Permian Bakken Eagle Ford Appalachia Permian Bakken 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 Source: Cowen and Company 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 PAGE 9

10 The Strong Are Getting Stronger Taking the Lead Customers are gravitating to the top 6-8 frac sand producers: Consistent high quality and more reliable delivery Railcar availability Stronger financial position, leading to... Broad footprint of storage and transload terminals near the drilling sites Lowest cost production and logistics economics Solid Long-Term Sales Long-term contracts for 87% of pro forma capacity of 9.4 million tons per year We sell to the largest pressure pumpers in North America, which we believe significantly reduces any counterparty risk Highly rated by customers for sand, service, and reliability Improving Contract Profile Millions of Tons Under Contract Increasing N. White Market Share % E (1) 2015E (2) EMES 7.0% 7.8% Rest of Market 13.2% (1) EMES 9 months YTD annualized; projections from Cowen and Company (2) EMES contracted sales; projections from Cowen and Company PAGE 10

11 High Quality & Low Cost The Right Sand Emerge Energy sand exceeds API and customer specs Over 60% of Emerge Energy s Northern White sand is a mesh size of 50 or larger One of only four companies with commercial quantities of 16/30 sand The first sand in, and the last sand out Full Weather Operations Fully enclosed dry plants for yearround operations, regardless of weather Multiple mines and wet plants supplying feed for dry plant operations $150 $100 $50 $0 Low Capital Costs EMES Per Ton Capacity Addition Capex vs Peers Lean Cost Structure Designed from the ground up as a frac sand operation Low-cost operations that preserve market flexibility Arland dry plant came online in December 2014 and was fully operational in 48 hours Minimal SG&A Source: competitor press releases and presentations PAGE 11

12 Diversified Sales Portfolio Sales by Basin Sales by Customer (52 Total Year to Date) Eagleford Permian Marcellus Canada Bakken Haynesville Mid Con Rockies Barnett Other Includes sales from January 1, 2014 through September 30, 2014 Basin and customer listed in order of largest to smallest Cust A Cust B Cust C Cust D Cust E Cust F Cust G Cust H Cust I Cust J Cust K Other (41) PAGE 12

13 Economics By Basin Emerge Energy focuses on basins with strong economics WTI Oil Breakeven Price ($ per Bbl) at $3.60/Bbl Natural Gas $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 EMES Focus Plays Source: Credit Suisse PAGE 13

14 Strong Logistics Platform Our Wisconsin sand facilities have advantaged access to three Class One rail lines and can reach all major shale plays in North America Emerge Energy currently has 13 transload locations positioned in six key North American Shale plays Focus on exclusive partnerships Minimize capital investment / maximize ROIC Expanding unit train capabilities (currently in 6 locations) Emerge Energy has over 5,400 customer and leased railcars Over 5,000 more railcars scheduled for delivery over next several quarters Storage at Wisconsin facilities for over 1,100 railcars PAGE 14

15 The Future Is Global As the US shale revolution is transforming hydrocarbon production, Emerge Energy is positioning itself as the supplier of choice Northern White sand is only available in North America, and the coarsest Northern White is only in Wisconsin and Minnesota We have already shipped Northern White sand into Mexico and Canada, and are preparing for shipments elsewhere in Latin America Eastern Europe and even China are potential markets in the longer-term PAGE 15

16 Wet Plant Location Sand Asset Summary Proven Recoverable Reserves (1) Primary Reserve Composition Depth of Reserve (Feet) Lease Expiration Date Mine Area (Acres) Plant Capacity (Thousands of Tons) New Auburn 20.0 mm tons mesh March (1) 2,000 FLS / Arland 12.0 mm tons mesh July ,200 LP Mine 8.7 mm tons mesh March ,000 Church Road 7.5 mm tons mesh N/A (Owned) 80 1,200 Kosse, TX 28.2 mm tons 100 mesh 100 N/A (Owned) 225 1,500 Thompson Hills 39.5 mm tons mesh December ,600 Independence (2) N/A mesh NA NA NA 2,000 Dry Plant Location On-Site Rail Infrastructure On-site Railcar Storage Capacity Plant Capacity (Thousands of Tons) 2013 Sales Volumes (Thousands of Tons) Barron, WI 5.4 miles 675 cars 2,400 1,205 New Auburn, WI 3.4 miles 430 cars 1,400 1,331 Kosse, TX N/A N/A Arland N/A N/A 2,500 N/A Independence (2) N/A N/A 2,500 N/A (1) Reserves are estimated as of December 31, 2013 by third-party independent engineering firms based on core drilling results and in accordance with the SEC's definitions of proven recoverable reserves and related rules for companies engaged in significant mining activities and represent marketable finished product. Estimates for Wisconsin reserves exclusive of sand smaller than 65-mesh. (2) Currently under development; expected to be operational in mid PAGE 16

17 Pro Forma Operations Process Flow Thompson Hills FLS/Arland LP Mine Church Road Barron Arland New Auburn New Auburn Independence Independence Kosse Kosse PAGE 17

18 North American Sand Markets By mid-2015, EMES expects to have single-line access to four Class One railroads, which provides direct rail access to every major basin in North America National Network BNSF CN/GTW CP/SOO CSX /NS KCS/KSCSM UP Basin Source: Association of American Railroads & U.S. Geological Survey. Highest Quality Sand Mine Locations SSS Transload Sites PAGE 18

19 Sand Segment Growth Opportunities Contracts and Customers Logistics International Emerge Energy has 8.2 million tons per year under contract with an average life of 4.0 years In negotiations for additional tons through multi-year, fixed price/volume contracts, including take-or-pay contracts Expanding and extending contracts with existing customers Able to capture higher margins by delivering within 60 miles of the the wellhead Leasing and contracting on an exclusive basis with transload facilities that can serve our customer drilling areas New proposed facilities and connections would allow us to reach four Class One railroads Western Canada has significant need for frac sand; Barron has strong logistics solution with single-line haul on the Canadian National Railroad Other international efforts underway Organic / Acquisition Opportunities Three new 2.5 mm tpy facilities under consideration Significant additional resource potential adjacent to current reserves Several parties have approached EMES to partner or acquire their facilities and/or reserves PAGE 19

20 FUEL SEGMENT PAGE 20

21 Fuel Segment Operations Fuel Segment provides a stable base with meaningful growth opportunities (millions of gallons) Transmix Processing Capacity Fuel from Transmix Sold in Terminal Tankage Capacity Wholesale Fuel Sold in Biodiesel Refining Capacity Dallas Fort Worth, TX NA Birmingham, AL Pipeline Connectivity Explorer/Eagle/ Proprietary Refiner Colonial/ Plantation Transmix Refining Distillation of comingled refined products Primarily sourced from pipelines Minimal commodity exposure (typically one week on average) Terminalling Fixed-fee revenue for storage and/or transfer to truck rack Revenue enhancement through blending and vapor recovery Wholesale Distribution Diesel and gasoline sales to local customers Product sourced from terminal customers and connecting pipeline Minimal commodity exposure (typically less than 2 weeks) Biodiesel Refinery Blending biodiesel with petroleum diesel to create higher margin fuel blends Generates 1.5 Renewable Fuel Credits (RINs) per gallon 2 1 Direct Fuels includes all gallons sold during the calendar year 2 EPA regulation Section PAGE 21

22 Overview of Fuel Segment Business Fuel segment revenue comes from a diverse mix of stable margin and fixed-fee activities Product Source EMES Consumer Wholesale and Terminal Gasoline Diesel Vapor Recovery Unit Pipeline Transmix Gasoline Gasoline Diesel Truck Distillation Diesel Terminalling Truck Rack Facility Trains Truck Biodiesel Blending Gasoline Additives Automobiles Biodiesel Facility Gasoline Additives EMES uses throughput contracts, indexed pricing, and hedging to minimize spread volatility EMES holds product for 7-10 days to minimize exposure to price fluctuations PAGE 22

23 Refined Product Pipelines in the US Transmix facilities are primarily located along major refined products pipelines Direct Fuels AEC Refined Products Pipeline Transmix Facilities EMES FP&D Facilities PAGE 23

24 Per Gallon Fuel Margins 2H 2014 backwardation has compressed fuel margins $0.200 Aggregate per Gallon Fuel Margin $0.150 $0.100 $0.050 $ $(0.050) Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Blending Costs & RINS Effect of pricing volatility Base Margin PAGE 24

25 Fuel Segment Growth Opportunities Transmix and Throughput Leverage strong relationships and existing pipeline connectivity Expand into adjacent geographies Birmingham facility has significant unused capacity Biodiesel Biodiesel facility recently restarted Renewable Identification Numbers ( RINs ) provide significant value potential Terminalling Opportunities Organic Growth and Acquisitions New additive systems in place at both terminals, allowing us to terminal and sell branded as well as unbranded petroleum products Shipper status on Colonial and Plantation provides additional gross margin opportunities Opportunity to acquire additional transmix operations and terminal sites Space for expansion at both sites Focus on additional cost reductions PAGE 25

26 FINANCIAL OVERVIEW PAGE 26

27 Recent Financial Results Unaudited Financial Results for Emerge Energy Three Months Ended Sep 30, 2014 Three Months Ended Jun 30, 2014 Three Months Ended Mar 31, 2014 Three Months Ended Dec 31, 2013 Revenue $ 296,338 $ 298,273 $ 274,081 $ 246,030 Cost of Goods Sold 251, , , ,927 DD&A 6,421 5,711 5,770 6,362 SG&A 9,559 8,994 8,475 9,439 Income from Operations 28,592 22,173 20,040 15,302 Interest Expense 1,479 1,943 1,584 1,279 Other 775 (23) (119) (58) Provision for Income Taxes Net Income (Loss) $ 26,083 $ 20,092 $ 18,486 $ 13,991 EPU (Diluted) $ 1.08 $ 0.83 $ 0.77 $ PAGE 27

28 Pro Forma Capitalization EMES has a $350 million revolver with an undrawn revolver capacity of $125 million EMES Capitalization as of September 30, 2014 ($ in millions) Cash (Unrestricted) $3.4 Revolving Line of Credit $189.0 Other Long-Term Debt / Capital Lease 4.0 Partners Equity Total Book Capitalization $355.0 Debt / LTM Adjusted EBITDA 1.7x LTM Adjusted EBITDA / LTM Interest Expense 19.0x PAGE 28

29 Selected Historical Sales Volumes Sand Sales by Quarter Fuel Sales by Quarter Tons of Sand Thousands of Gallons 700,000 80, ,000 70, ,000 60, , ,000 50,000 40,000 30, ,000 20, ,000 10, Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2014 Barron New Auburn Kosse Wholesale Terminal Transmix* * Volume of transmix processed; finished product is sold as wholesale fuel PAGE 29

30 Our MLP Structure We have a simplified MLP structure All units are Common Units No Incentive Distribution Rights (IDRs) Non-economic General Partner No Minimum Quarterly Distributions (MQD) Our Sponsor, Insight Equity, which owns 30% of the Common Units, has fully aligned its financial interests with our Public Unitholders EMES pays out 100% of its Available Cash to Common Unitholders We seek to capture cash flow stability through long term contracts, a low-cost operating structure, and indexed pricing Unlike a typical variable rate MLP, our gross margins are not based on the spread between two commodities that may or may not be correlated Our current credit facility allows us to borrow at favorable rates, and we are well within our financial covenants We anticipate that our near term growth opportunities can be financed through modifications of our current credit facility $1.50 $1.25 $1.00 $0.75 $0.50 EMES Distribution History (60% CAGR from Pro Forma First Distribution) $0.37 (1) $0.86 $1.00 $1.13 $1.17 $1.38 $0.25 $0.00 2Q Q Q Q Q Q 2014 (1) Pro rated distribution; full quarter distribution equivalent of $0.70 per unit PAGE 30

31 Investment Considerations High Quality, Strategically Located Assets Stable Cash Flow Significant Organic Growth Capacity Intrinsic Logistics Advantages Strong Reputation w/ Customers and Suppliers Experienced Management Team Low Cost Operating Structure PAGE 31

32 Closing Thoughts Frac sand demand is booming and well outpacing supply Emerge Energy has become a leader in the market because of high quality assets, customer relations, customer service, and logistical capabilities We believe we are better positioned to thrive throughout the oil & gas business cycle than any other frac sand company Emerge Energy is doubling its capacity while working to drive down costs As the United States drives toward energy independence, Emerge Energy is a critical part of that movement We aren t done yet! PAGE 32

33 APPENDIX PAGE 33

34 Management and Board of Directors Name Title Senior Management Team Years of Industry Experience Rick Shearer Chief Executive Officer of EMES; CEO of Sand Division 40 Warren B. Bonham Vice President, Fuel; President of Fuel Division 29 Robert Lane Senior Vice President, Chief Financial Officer & Treasurer 20 Richard DeShazo Chief Accounting Officer 40 Board of Directors Ted W. Beneski Warren B. Bonham Kevin Clark * Peter Jones * Francis Kelly * Eliot Kerlin Kevin McCarthy * Rich Shearer Victor L. Vescovo Chairman of the Board, Partner and Co-Founder, Insight Equity Vice President, Fuel and Partner, Insight Equity Associate Professor, Corporate Strategy and Accounting, Vanderbilt University Independent Advisor President and CEO, CEOVIEW Branding Partner, Insight Equity Managing Partner, Kayne Anderson Fund Advisors President and Chief Executive Officer, Emerge Energy Services Partner and Co-Founder, Insight Equity * Denotes Independent Board Member PAGE 34

35 Non-GAAP Reconciliation The following table presents a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measures for each of the periods indicated. Reconciliation of net income to Adjusted EBITDA: Three Months Ended Sept 30, 2014 Three Months Ended Sept 30, 2013 Nine Months Ended Sept 30, 2014 Nine Months Ended Sept 30, 2013 Net income $ 26,083 $ 15,404 $ 64,661 $ 21,179 Depreciation, depletion and amortization expense 6,421 6,390 17,902 14,466 Provision for income taxes Interest expense 1,479 1,645 5,006 9,308 Loss (gain) on extinguishment of debt Equity-based compensation expense 2,396 2,300 6,726 3,521 Provision for doubtful accounts Accretion of asset retirement obligations IPO transaction-related costs ,966 Loss (gain) on disposal of equipment (15) (4) 4 1 Other income 775 (118) 624 (277) Adjusted EBITDA $ 37,439 $ 25,971 $ 95,555 $ 60,570 PAGE 35

36 Emerge Energy Services LP Investor Presentation January PAGE 36