Emerge Energy Services LP Investor Presentation March 2017

Transcription

1 Emerge Energy Services LP Investor Presentation March PAGE 1

2 Forward Looking Statements & Non-GAAP Measures 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, noncash 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. Moreover, our Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies. A reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, is included in the Appendix. PAGE 2

3 Competitive Strengths High Quality, Strategically Located Assets Technology Driven New Products Significant Organic Growth Capacity Intrinsic Logistics Advantages Trusted Reputation w/ Customers and Suppliers Proven Management Team Low Cost Operating Structure PAGE 3

4 After Divesting the Fuel Business, the Sand Business Now Makes up 100% of EMES Sand Summary Leading manufacturer of Northern White silica and Texas sand, ~ 99% sold as a proppant for hydraulic fracturing Diversified customer base with an attractive mix of contracts Four dry plants backed by several mines with high quality reserves Direct rail access to four Class I railroads, with numerous logistics and transload solutions Improved capital structure and pure-play proppant focus following divestiture of Fuel business in August 2016 Balance sheet Proceeds from the sale of the Fuel business were used to pay down the loan balance during Q We issued equity in the third and fourth quarter of 2016 to further reduce the outstanding borrowings under our ABL facility Summary Balance Sheet at 12/31/16 $ in mm's Assets: Liabilities: Current Assets: Accounts Payable $ 11.2 Cash and cash equivalents $ 0.0 Accrued Liabilities 11.6 Trade & other receivables, net 25.1 Long Term Debt, net of cur Inventories 17.5 Business Acq. Obligation, net 8.1 Prepaid and other current 11.4 Other long term liabilities 30.3 Total Current Assets $ 53.9 Total Liabilities $ Property, plant & equip., net $ Preferred Units $ 6.9 Intangible assets, net 4.8 Partners' Equity: Other assets, net 25.3 General Partner $ Limited Partner 47.7 Total Partners' Equity $ 47.7 Total Assets $ Total Liabilities & Partners' Equity $ PAGE 4

5 EMES Key Actions and Path Forward We made considerable progress during 2016 in addressing our balance sheet. Although we are proud of these recent successes, we have laid out additional goals through our key next steps. 1 4/20/16: 3 5/27 6/30/16: 5 8/8/16: 8 Key Next Steps: Notified agent of Entered into five Completed Continue to prove out SandMaxX TM our credit facility amendments to private technology that we were not delay Covenant placement for Optimize mine footprint and transload in compliance Reversion Date $20mm of network for market recovery with minimum while Fuel sale Series A Build on existing and new customer availability was negotiated Preferred Units relationships financial covenant with buyer Drive down costs with efficiencies from as March 31, 2016 scale and product mix balance Q Q Q /20/16: Entered into a limited waiver for event of default under Credit Agreement 4 6/23/16: Reached a definitive agreement for the sale of the Fuel business to Sunoco LP 6 8/31/16: Closed the sale of the Fuel business (gross purchase price of $167.7mm) Amended $200mm ABL bank facility 7 Nov & Dec 2016: Raised $39mm of equity (gross) through a public offering Note: Timeline not to scale PAGE 5

6 Sand Industry Demand Robust Projections Estimates from Wall Street analysts indicate sand demand could surpass historical peak levels in The current recovery in the sand market is being driven by increased rig count and increases in drilling efficiencies, namely higher sand intensity per well and increased wells drilled per rig. Frac Sand Demand Forecast (mm tons) A 2012A 2013A 2014A 2015A 2016E 2017E 2018E Source: Equity Research Consensus TPH Estimate Jefferies Estimate GS Estimate PAGE 6

7 Driving Proppant Usage Total industry proppant consumption increased sequentially in the third quarter of 2016 across the major US basins, and the amount of proppant used per horizontal well continued its upward trajectory. The drilled but uncompleted wells backlog remains at elevated levels, which could drive future demand for proppant once those wells are fracked. Re-fracking of existing, older wells is also starting to gain momentum and could add to a proppant demand rebound. Total Proppant Consumption by Basin (tons in 000s) Proppant Consumption per Horizontal Well (tons in actuals) 5,000 4,500 4,500 4,000 4,000 3,500 3,000 2,500 2,000 1,500 1, ,500 3,000 2,500 2,000 1,500 1, Eagle Ford Northeast Permian Bakken MidCon Eagle Ford Northeast Permian Bakken MidCon 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 Source: NavPort, Management Estimates Note: Most recent quarters subject to data revisions; data includes partially completed wells Source: NavPort, Management Estimates Note: Most recent quarters subject to data revisions; data includes partially completed wells PAGE 7

8 Oil Price Breakevens by Basin The breakeven oil prices for EMES focus plays are split above and below the current WTI price range. Several plays including the Permian basin and areas of the Eagle Ford and MidCon remain viable with WTI in the mid-40 s. August 2016 Oil Breakevens by Basin (at 15% ATAX IRR) Assumes gas price of $3.00 per MMBtu ~ Source: Equity Research PAGE 8

9 Technology Driven Sand: SandMaxX TM We are excited about our new self-suspending sand, SandMaxX TM, which provides an enhanced completion design by allowing the sand to contact more fissures compared to a completion with conventional proppant. We successfully sold the product in over 20 trial wells during 2016 and have more scheduled for SandMaxX TM vs. Uncoated Sand When raw sand is coated with the proprietary SandMaxX TM polymer (we own 11 patents), the enhanced sand tends to stay suspended in liquid for extended periods of time This helps it go much further into fractures and contact more fissures during the fracking process, potentially releasing a higher amount of hydrocarbons compared to traditional raw frac sand pumped jobs Raw sand drops out of solution very quickly and can cause duning effects downhole The expected incremental hydrocarbon recovery in a well has the potential to drive a significant margin premium versus raw sand SandMaxX TM Magnified The polymer coating reacts with liquid to form a barrier around the raw sand that reduces its specific gravity This allows the particles to remain suspended in the liquid SandMaxX TM reacts the same with fresh water and with produced and/or flow back water Early reads from wells pumped with SandMaxX TM during early to mid 2016 are showing promising results PAGE 9

10 Strong Logistics Platform Our Wisconsin sand facilities have direct access to four Class One rail lines and can reach all major shale plays in North America on single-line hauls. Logistics Highlights As of 12/31/16, we had 14 transload locations positioned in seven key North American Shale plays Focus on exclusive partnerships Minimize capital investment / maximize ROIC Expanding unit train capabilities (currently in 7 locations) Emerge has approximately 5,500 customer and leased railcars We can store approximately 1,070 railcars in our facilities rail yards Approximately 70% of our fleet was active as of 12/31/16 and nearly 80% as of 2/28/17 We successfully renegotiated the majority of our railcar leases in 2016 Evaluating last mile solutions with partners and customers Wide Geographic Presence Dry Plant Transload Location Corporate Headquarters PAGE 10

11 Significant Capacity & Underutilized Assets We have approximately 8.8mm tons per year of wet processing capacity and 6.9mm tons per year of dry production capacity. Although our asset utilization is improving in the current market, we still have substantial room for growth with minimal new capital. 2016A Utilization by Facility Dry and Wet Sand Production Current Dry Plant Capacity = 6.9mm tons per year (mm tons per year) Dry Plants Wet Plants 82% % 46% 48% % % % 31% 25% 23% % % % New Auburn Barron Arland Kosse CRM FLS / Barron LP Mine TH Mine Weber (utilization) 100% 80% 60% 40% 20% 0% Act Sales Volumes = 2.2mm tons 2016A Tons Produced Capacity 2016 Utilization Q4 '16 Utilization Note: Kosse wet plant not shown 1.6mm tons per year of capacity PAGE 11

12 Initiatives Summary With the market recovery now taking hold, we are working on a number of growth initiatives while also staying focused on cost containment. New Technology Products We remain focused on driving successful trials of our SandMaxX TM product across several basins and with several key customers We are also committed to further increasing market awareness on our dustless product, SandGuard TM. Although regulatory agencies delayed the implementation of silicosis requirements on jobsites, we still have received interest in the product from customers who are looking to protect their employees Optimize Footprint Increasing Kosse Efficiencies Upgrading Logistics Network Strategic Relationships Cost Reductions The oil and gas downturn prompted some operators to accept lower quality regional sands As a means to diversify our footprint, we are evaluating options on new mining and production operations with sites closer to the key basins Customers are now keenly focused on all-in delivered prices to the wellhead Our Kosse, TX facility is strategically located near strong liquids production regions in West and South Texas, minimizing transportation costs We have invested in this facility to improve mining efficiencies and drive down production costs, and we are evaluating an expansion Customers are requesting more than just sand as a product they now want a comprehensive sand delivery and replenishment program Our logistics and sales teams have met this need by committing to transload site expansion and optimization, thereby simplifying our customers supply chain We are currently offering last mile solutions through partnerships with third party providers In December 2015, we announced a transaction with Performance Technologies, L.L.C. ( PTL ) to acquire mining rights at a high-quality reserve in Wisconsin The arrangement included a multi-year commitment from PTL where we will supply sand from our existing facilities or build a new dry plant on the new property if market conditions improve Implemented a lower-cost mining technique in the fall of 2015 and idled our higher cost wet and dry plants during parts of Activity began to ramp up in the second half of 2016, and all four dry plants were running at high utilizations to start 2017 We successfully achieved considerable rate concessions from our largest vendors, such as trucking providers, railroads, railcar lessors, and general contractors, during We continue to drive down our costs where possible. PAGE 12

13 Summary Quarterly Performance $ in thousands, except per ton Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Continuing Operations: Tons Sold (tons in 000's) ,151 1,233 Revenue $ 42,619 $ 31,285 $ 24,825 $ 29,670 $ 44,502 $ 60,654 $ 68,118 $ 96,244 $ 104,249 Average Revenue per Ton $ $ $ $ $ $ $ $ $ % of Sand Sold through Terminals 50% 67% 57% 61% 52% 51% 39% 32% 28% Adjusted EBITDA $ (10,543) $ (10,872) $ (16,028) $ (12,982) $ 665 $ 2,099 $ 12,117 $ 24,836 $ 38,631 EBITDA per Ton $ (12.76) $ (22.05) $ (40.17) $ (29.57) $ 1.14 $ 2.63 $ $ $ Discontinued Operations: Volume of Refined Fuel Sold (gallons in million) - 41,651 61,549 62,222 55,768 64,567 63,402 56,395 58,201 Revenue $ - $ 67,095 $ 101,982 $ 80,481 $ 86,004 $ 115,666 $ 132,734 $ 107,717 $ 138,313 Adjusted EBITDA $ (105) $ 2,759 $ 6,948 $ 3,469 $ 3,188 $ (1,835) $ 5,460 $ 4,175 $ (1,850) Consolidated: Revenue $ 42,619 $ 98,380 $ 126,807 $ 110,151 $ 130,506 $ 176,320 $ 200,852 $ 203,961 $ 242,562 Adjusted EBITDA $ (10,648) $ (8,113) $ (9,080) $ (9,513) $ 3,853 $ 264 $ 17,577 $ 29,011 $ 36,781 PAGE 13

14 APPENDIX PAGE 14

15 Management and Board of Directors Name Title Years of Professional Experience Senior Management Team Rick Shearer Chief Executive Officer of EMES; CEO of SSS 42 Warren B. Bonham Vice President of EMES 31 Deborah Deibert Chief Financial Officer 28 Nadya Kurani Chief Accounting Officer 12 Board of Directors Ted W. Beneski Warren B. Bonham Kevin Clark* Peter Jones* Mark Gottfredson* Francis Kelly* Eliot Kerlin Rick Shearer Victor L. Vescovo Chairman of the Board, Partner and Co-Founder, Insight Equity Vice President of EMES and Partner, Insight Equity Associate Professor, Vanderbilt University, retired CEO, Hirschfeld Industries Director, Bain & Company President and CEO, CEOVIEW Branding Partner, Insight Equity President and Chief Executive Officer, Emerge Energy Services Partner and Co-Founder, Insight Equity * Denotes Independent Board Member PAGE 15

16 MLP Structure Historical Earned Distributions per Unit $1.50 $1.38 $1.41 $1.25 $1.00 $0.86 $1.00 $1.13 $1.17 $1.00 $0.75 $0.70 (1) $0.67 $0.50 $0.25 $0.00 2Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2016 ( 1) Full quarter results based on pro rated distribution of $0.37 Simplified MLP Structure All units are Common Units Non-economic General Partner No Incentive Distribution Rights (IDRs) No Minimum Quarterly Distributions (MQD) Our Sponsor, Insight Equity, which owns approximately 24% of the Common Units, has fully aligned its financial interests with our Public Unitholders EMES pays out 100% of its Distributable Cash Flow to Common Unitholders, subject to certain restrictions under our Credit Agreement 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 PAGE 16

17 From Mine to Railcar 1) Extract 2) Wash 3) Dry 4) Ship PAGE 17

18 Asset Summary Wet Plant Location Proven Recoverable Reserves (1) Primary Reserve Composition Plant Capacity (Thousands of Tons) 2016 Production (Thousands of Tons) New Auburn, WI 15.5 mm tons mesh 2,000 - Thompson Hills, WI 40.9 mm tons mesh 1, FLS (Wisconsin) 10.3 mm tons mesh 1, LP Mine (Wisconsin) 4.9 mm tons mesh 1, Church Road (Wisconsin) 5.3 mm tons mesh 1,200 - Kosse, TX 27.1 mm tons 100 mesh 1, Total mm tons 8,800 1,665 Dry Plant Location On-site Railcar Storage Capacity Plant Capacity (Thousands of Tons) 2016 Production Volumes (Thousands of Tons) Barron, WI 650 cars 2,400 1,588 New Auburn, WI 420 cars 1, Kosse, TX N/A Arland, WI (2) N/A 2, Total 1,070 6,900 2,266 (1) Reserves are estimated as of December 31, 2016 by third-party independent engineering firms based on core drilling results and in accordance with the SEC s definition of proven recoverable reserves and related rules for companies engaged in significant mining activities and represent marketable finished product. (2) We load sand from Arland onto rail at Barron, New Auburn, and at a third rail loadout near St. Paul, Minnesota. PAGE 18

19 Current Operations Process Flow Thompson Hills FLS/Arland LP Mine Church Road Barron Arland CN New Auburn New Auburn MNNR UP BNSF, CN, CP, UP Kosse Kosse PAGE 19

20 North American Sand Markets EMES has single-line access to four Class One railroads, which provide direct rail access to every major basin in North America National Network BNSF CN/GTW CP/SOO CSX /NS KCS/KSCSM UP Basin Highest Quality Sand Source: Association of American Railroads & U.S. Geological Survey. Mine Locations SSS Transload Sites Corporate HQ PAGE 20

21 Consolidated Net Income to Adjusted EBITDA Reconciliation $ in thousands Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Net income $ (20,775) $ 5,117 $ (22,897) $ (34,215) $ (9,888) $ (11,898) $ 2,884 $ 9,491 $ 24,418 Depreciation, depletion and amortization 4,662 4,687 4,870 7,261 7,116 7,530 7,355 6,440 6,901 Provision for income taxes (220) Interest expense, net 3,448 8,458 5,969 5,191 3,528 3,271 2,630 3,125 2,385 Non-capitalized expenses from equity issuance Changes in fair value of stock warrants (885) 2, Equity-based compensation expense (204) 340 (63) ,292 2,316 Write-down of sand inventory , Provision for doubtful accounts 4 (535) 38 1, Write-off of assets & contract terminations - (25) 10 4,026 1,308 (68) 2,693 6,719 - Cost to retire an asset Accretion Reduction in force Fuel segment selling expenses - (679) Other state and local taxes Expenses for specified other obligations Non-cash deferred lease expense 2,079 2,072 1, Gain on sale of fuel segment - (31,699) Adjusted EBITDA $ (10,648) $ (8,113) $ (9,080) $ (9,513) $ 3,853 $ 264 $ 17,577 $ 29,011 $ 36,781 PAGE 21

22 Consolidated Adjusted EBITDA to Operating Cash Flow Reconciliation $ in thousands Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Adjusted EBITDA $ (10,648) $ (8,113) $ (9,080) $ (9,513) $ 3,853 $ 264 $ 17,577 $ 29,011 $ 36,781 Interest expense, net (3,001) (4,682) (4,347) (4,642) (4,094) (2,826) (2,334) (2,475) (1,832) Taxes (170) (558) (578) (642) (464) (633) (802) (879) (584) Contract and project term (3) 25 - (25) (728) - - Reduction in force (76) (362) Change in other operating assets and liabilities (3,589) (82) 5,714 18,036 5,476 5,777 (2,962) 3,505 (9,490) Write-down of sand inventory (5,394) Cost to retire assets Fuel division selling expenses (679) Expenses for specified other obligations - - (173) (35) Non-cash deferred lease expense (2,079) (2,072) (1,607) Other (1) Operating Cash Flow $ (19,491) $ (14,803) $ (10,741) $ (2,291) $ 4,762 $ 2,650 $ 10,751 $ 29,162 $ 24,875 PAGE 22