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Edited Transcript of EMES earnings conference call or presentation 27-Feb-17 8:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Emerge Energy Services LP Earnings Call

Southlake Feb 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Emerge Energy Services LP earnings conference call or presentation Monday, February 27, 2017 at 8:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deb Deibert

Emerge Energy Services LP - CFO

* Ted Beneski

Emerge Energy Services LP - Chairman of the Board

* Rick Shearer

Emerge Energy Services LP - CEO

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Conference Call Participants

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* Brandon Dobell

William Blair & Company - Analyst

* Arieh Coll

Coll Capital - Analyst

* Mark Brown

Seaport Global Securities - Analyst

* Tim Howard

Stifel Nicolaus - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Emerge Energy Services fourth-quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given to you at that time.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the conference over to our host for today, Deb Deibert, Chief Financial Officer. You may begin.

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Deb Deibert, Emerge Energy Services LP - CFO [2]

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Thank you, Operator. And, welcome everyone to the Emerge Energy Services LP fourth-quarter conference call. Just a quick note before we start. Our discussion today may contain forward-looking statements. These statements may include, but are not limited to, our estimates of future volume, operating expenses, and capital expenditures. They may also include statements concerning anticipated cash flows, liquidity, business strategy, distributions, and other planned objectives for future capital expenditures and operations.

These statements are based on management's beliefs and assumptions. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties. If one or more of these risks materialize or should the underlying assumptions prove incorrect, our actual results may vary materially from those expected. These risks are discussed in greater detail in our annual report on 10-K which we'll be filing very soon.

Please also note that on this call, we may use the terms adjusted EBITDA and distributable cash flow. These are non-GAAP financial measures, and we have provided reconciliations to the most directly comparable GAAP measures in our earnings release published this morning. Now, I would like to turn the call over to our Chairman, Ted Beneski.

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Ted Beneski, Emerge Energy Services LP - Chairman of the Board [3]

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Thank you, Deb, and good afternoon. Thank you all for joining us to discuss our fourth-quarter results, the current market outlook, and an update on our business strategies. After a very challenging year in 2016, we are very excited about what 2017 has in store. And, we expect to deliver a much stronger performance for our business in 2017. The market momentum in the frac sand space has changed dramatically over the past 60 to 90 days, and our capacity is being filled quickly with corresponding price increases well underway. Our customers have provided robust outlooks for completion activity in 2017, and we are negotiating supply contracts with both new and existing customers. Given the market's recent acceleration, we are extremely confident that we will generate positive EBITDA in the second quarter of 2017, and we now think that breakeven EBITDA is possible for the first quarter.

For the fourth quarter, Emerge Energy reported a consolidated net loss of $20.8 million compared to net income of $5 million for the three months ended September 30, 2016, primarily due to the gain on the fuel sale in Q3. We generated consolidated adjusted EBITDA of negative $10.6 million versus negative $8.1 million in the third quarter of 2016 as Q4 was our first full quarter without earnings from the fuel business. And, this followed the divestiture on August 31, 2016. However, our continuing operations adjusted EBITDA improved by approximately $300,000 sequentially and this included $1.1 million in one-time railcar reactivation costs, and a $1 million write-down of SandMaxx inventory. The key driver of this sequential improvement was that our total sand volume sold increased by 68% in Q4 2016 versus Q3. And, it increased to an amount of 826,000 tons, and our sand production cost per ton improved with the higher per tonnage produced and sold.

Last year, we laid out a three-part plan to navigate through the downturn. As you may recall, the plan consisted of, one, divesting the fuel division as part of our overall debt reduction and bank amendment process. Two, lowering costs across all aspects of the business, and three, developing and commercializing our technology-driven proppant products. We're pleased to report that we have made significant progress on all three parts of the plan and have fully completed the divestiture of fuel. After the fuel sale closed at the end of August 2016, we were required to fulfill certain obligations under our credit agreement to further reduce our bank debt load with an equity raise.

Accordingly, we closed on a $34 million public equity offering in November. With the greenshoe that was exercised in December, we ended up raising over $39 million of new equity, or about $37 million of net proceeds that we used to pay down our revolving credit line. We want to thank the investor community for the strong support we received during this final step to shore up our balance sheet. And, we are now in a great position to take advantage of the current market upturn. We have no plans to issue more equity in the near term.

The second part of our plans called for comprehensive cost reductions in all segments of our business. We have now completed all of our railcar lease restructurings, and we have negotiated contract amendments with various vendors across our supply chain. Our mines and dry plants are running much more efficiently, and we are now staffing up our plants to meet the higher levels of demand. Although cost containment is a continual focus, we are excited about adding resources to the business in 2017 to start a new growth phase.

The third part of our strategy revolved around our goal to differentiate ourselves from the competition through product innovation. Most notably, our SandMaxx product was launched in 2016, and we are proud of our achievements with the product during an extremely difficult environment in the oil and gas space. We are still conducting trials with a number of E&P companies to expand sales, but we do have a regularly buying customer. Initial reads on the trials from early 2016 indicate the product is working downhole as expected and generating a substantial uplift in hydrocarbon yield. With that, I'll now turn it over to Rick Shearer, our CEO, who will cover the sand operations in more detail.

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Rick Shearer, Emerge Energy Services LP - CEO [4]

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Thank you, Ted. After nearly two difficult years of downsizing and defensive moves, the tone and trajectory of our industry and business have finally swung to the state of positive momentum. We feel very encouraged about what 2017 holds for Emerge Energy, and we expect that you will see dramatic improvement in our near-term results. We drove a sizable increase in volume during the fourth quarter as our total sand volumes sold increased by 68% sequentially to 826,000 tons, of which approximately 50% was sold in basin. This growth rate dramatically outpaced the average US onshore rig count growth of 23%, and we believe that we recaptured market share from some of our competitors. We think that these share gains will continue into 2017 as some sand producers were not able to build their winter stockpiles last year, given financial and operational challenges, so they have not been able to sell meaningful volumes during the market's ramp-up that started near the end of 2016. We are targeting market share of 10% over the next 12 months.

From a broad industry perspective, the trend for higher sand loadings for each horizontal well drilled and completed remains very favorable. Third-party data suggests that proppant intensity per horizontal well in the US increased by 15% for Q3 compared to Q2, and early reads on Q4 data suggest another 10% sequential increase. We are approaching per well levels that have nearly quadrupled when compared to early 2013 data, and we're hearing from our customers and various E&Ps that laterals will only lengthen and sand loadings per lateral foot have yet to reach a point of saturation.

Similar to what we discussed on our last earnings call, we are still seeing finer grades and higher demand relative to core sands. However, many operators have converted to 30/50 and even some 20/40 because the industry is capacity-constrained on the fine grade sands. In fact, we are currently sold out of our 100 mesh and 40/70 products until our Wisconsin mines resume production in the spring. We are also seeing many operators convert back to Northern White Sands now that oil prices have stabilized around $50 per barrel, but we think the lower quality regional sands still have a long-term spot in the frac sand market for certain areas of the major shale plays.

Now that the market is clearly in the early stages of a recovery and the industry's capacity utilization is improving, prices are on the rise. We are focused on driving prices off of what we saw as unsustainable levels for most of 2016, and we think that the market clearing price for fine grade sands and even some core sands has increased by over $10 to $15 per ton from the trough hit during the middle of last year. Several customers are seeking contracts to lock in supply at a fixed price, either for the full year of 2017 or on a quarterly basis. We are now selectively agreeing to multi-year, take-or-pay contracts with some of our key accounts. We believe this ensures the customers a steady supply of product in exchange for covering the infrastructure-related fixed costs plus needed margins associated with operating our business. After verbally negotiating two new contracts in Q1, we will have approximately 55% to 60% of our estimated volume for 2017 under take-or-pay commitments.

Looking at our Q4 performance in more detail, our adjusted EBITDA from continuing operations improved to a negative $10.5 million from a negative $10.9 million in Q3. We are very pleased with our sales volume growth of 68% quarter-over-quarter but most of the previously discussed price increases did not take effect until late in the quarter, so our Q4 numbers showed minimal impact from the dramatic price improvement seen as we have gotten into Q1 2017. We certainly have more work to do in order to boost the bottom line. However, we believe that we have laid the foundation on pricing for the results to come to fruition in early 2017 and beyond.

The significant improvement in volume drove better absorption of fixed production and logistics costs. Our operations team did a great job during the quarter of restarting our New Auburn and Arland plants to run at a consistent utilization, which has increased further into Q1 this year. Currently, our three Wisconsin dry plants plus our Kosse operation are collectively running at approximately 70% utilization. We ran our Wisconsin mines until the first week of December to build our winter stock pile although the breaks in winter weather have afforded us a few extra weeks of intermittent production to meet higher demand. We achieved our lowest sand production costs of the year during November when all three of our Wisconsin dry plants and three of our Wisconsin mines were producing at a strong clip. On the whole for the quarter, our production costs improved by just under $2 a ton sequentially.

On the logistics end, we pulled out approximately 1,000 railcars out of third-party storage, bringing our storage count as of year-end to 1,647 cars, compared to over 3,000 earlier in the year. While we are delighted to see the utilization of our fleet improve, we experienced reactivation costs similar to what pressure pumpers see when they need to place their pumping equipment back into service. We incurred approximately $1.1 million of one-time costs to reactivate these railcars and move them from storage yards into our circuits and the idled railcars in our fleet cost us approximately $3.5 million during the quarter. This is down from approximately $5 million in Q3.

We expect our railcar storage count to fall further in 2017 based on how our volumes have been trending as more railcars are being pulled from storage on a steady basis. In fact, currently, we have 1,200 cars in storage with an expectation that all of our cars will be out of storage later this year. With this dramatic market demand improvement, we now see our railcar inventory as a clear competitive advantage going forward.

Also, on the subject of logistics, we are opening a new terminal in the Southern Midland Basin in early Q3 to better serve a major customer. This Permian terminal will be owned and operated by a third party, but we will have exclusive use for frac sand. Additionally, we have spent a considerable amount of time working with last-mile solution providers and testing out different concepts. It should be known that Emerge Energy is currently providing last-mile services to our customers who are focused on this need.

In the same way that we do not own any of our terminals, we want to retain flexibility when it comes to certain last-mile concept or equipment. Similarly, we do not want to compete with any of our customers since some of them are involved in the provision of last-mile services. After much thought and deliberation internally, we have strategically decided that betting on one last-mile offering is too premature at this point in time. We are still considering partnerships and alliances which we think are less risk and less capital-intensive than an outright purchase of a concept right now. Our core competencies are in producing sand and technologically-driven proppants, but we will respond to the changing conditions for last-mile logistic offerings with the help of preferred partners who have expertise in storage equipment, truck transportation, and well site handling. We certainly get it regarding last-mile services, but we believe it is simply too early in this supply chain development so flexibility here is the most prudent approach.

Now, turning to SandMaxX. We are starting to see well performance data trickle in from the wells that were completed during early and mid-2016. So far, the results are proving out to be as we expected. We are working closely with our customers to verify the results which should help us market the product more broadly to the E&P universe. For the full-year 2016, SandMaxX was successfully pumped downhole in a high number of wells in four different basins as interest and demand looks more and more promising in 2017. SandMaxX has also demonstrated that using this unique technology saves on labor, power, chemicals, water, and maintenance, as well as ancillary pumping cost, namely through more stages pumped per day. Since year end, we have made further refinements to the technology with the addition of an ultra-high salinity formulation that is able to suspend in extremely high brackish water. We remain committed to further proving out SandMaxX because we think the upside is real and that the oil and gas industry will eventually embrace this high value-added, self-suspending technology.

Given our SandMaxX success thus far in the field, it is not a matter of if this technology works, but more a question of when. We want to be clear that this proppant is not to be confused with resin-coated or ceramics which we have seen significant market share declines, and they only apply to a very small percentage of the oil and gas wells drilled each year. While resin-coated and ceramic products might offer a higher crush factor for deeper, high pressure wells, these proppants do not offer higher yields like our SandMaxX technology. Further, SandMaxX is applicable to all oil and gas wells because it fills out the well cavity better than completions that use conventional sand, and it allows the proppant to come in contact with more surface area and fissures downhole, thereby allowing more hydrocarbons to be released. Our goal is to gain broader market acceptance of the product by the end of 2017 and then break ground on a commercial SandMaxX plant that could produce up to 1.5 million tons per year at a capital cost of $20 million to $30 million.

Finally, we talked for several quarters about diversifying our mining footprint through expansion or purchase of a regional sand plant, and last week, the industry heated up on capacity expansion discussions. As we have said for quite some time now, we continue to believe that local or regional sands, although lower in quality when compared to Northern White, have a long-term place in the frac sand industry after the downturn proved that the quality is acceptable for certain types of shale geology, particularly the lower pressure and shallower wells. We still firmly stand by our core Northern White operations, but we have been actively searching for an acquisition or a greenfield site situated closer to the major basins and have made considerable progress during the last 60 days. While we cannot give specifics, we think an opportunity is imminent and will be very attractive for our investors.

We are also evaluating a capital project to improve the performance of our Kosse operation and even expand capacity beyond the existing 600,000 tons per year due to strong demand for this Kosse product. Between a new local sand site and an upgrade at Kosse, we expect to continue to gain share of this quickly growing market as we demonstrated in the fourth quarter. Our added capacity plans will ensure that Emerge Energy is ready to meet the increasing needs of our core customers. Also, with our belief that the top five or six frac sand producers will gain an inordinate market share as this industry evolves, Emerge Energy will likely see market share growth beyond our 2017 target over time. We are confident that Emerge Energy will need more capacity, and we're planning to have this expansion in place sooner than other producers. Now, I'll turn it over to Deb to review the financials.

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Deb Deibert, Emerge Energy Services LP - CFO [5]

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Thank you, Rick. Emerge Energy reported a consolidated net loss of $20.7 million, or $0.77 per diluted unit, for the three months ended December 31, 2016. This compares to net income of $5.1 million, or $0.21 per diluted unit, for the three months ended September 30, 2016. We reported consolidated adjusted EBITDA in accordance with our current credit agreement of negative $10.6 million for the fourth quarter compared to a negative $8.1 million for the previous quarter. In looking at Q4 versus Q3, net income and adjusted EBITDA both declined due to removal of our fuel business which was divested on August 31 last year. And, we recorded a $31.7 million gain on a fuel sale in Q3. However, our continuing operations operating income improved by over $200,000 given the increased volume and lower production costs offset by $1.1 million in a one-time cost to pull nearly 1,000 railcars out of storage and place them back into service and the $1 million write-down of SandMaxX inventory.

Net income from continuing operations improved from a loss of $30 million in the third quarter to a loss of $20.7 million in Q4 due to a $3.9 million improvement in some mark-to-market adjustments on the warrant and other income, the $3.3 million debt cost write-offs in Q3, and lower cash interest due to lower debt balances in Q4. We generated a distributable cash load deficit of $15.2 million for the three months ended December 31, 2016. The Board of Directors of our general partner elected not to make a distribution for the quarter. We are also restricted under our credit agreement from paying distributions at this time.

Our capital expenditures for the quarter was $1.3 million which includes $1.2 million of maintenance capital. As we previously reported, we have significantly cut back our capital expenditure plans and are including only those projects in 2017 that are necessary for our current operations and/or for which we are contractually obligated. We currently have budgeted our total capital expenditures for 2017 to be below $5 million and within the limit set by our credit agreement covenants. However, if the market continues to accelerate, we may seek permission from our lenders to increase the limit.

We were once again very successful in delevering our balance sheet during the fourth quarter as Ted mentioned. We completed a public offering of over 3.9 million units in November and December. The raise brought in nearly $37 million of net proceeds that were applied toward the further debt reductions. As of December 31, we had $140.7 million of principal outstanding and net availability of $49.6 million under our revolver, well over the $15 million minimum availability required under our current covenants. As a reminder on our other covenants, we have limitations on capital expenditures, a minimum adjusted EBITDA covenant beginning in the second quarter of 2017, and an interest coverage ratio beginning in 2018. We are currently in compliance with all debt covenants and filing requirements and expect to remain in compliance in the future.

Finally, given the continuing unpredictable market conditions that we are facing, we are not providing specific guidance at this time. However, as Ted discussed, we are highly confident of achieving adjusted EBITDA breakeven by the second quarter of 2017 and now think that breakeven is possible for first quarter. Operator, we are now ready to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Brandon Dobell of William Blair. Your line is now open.

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Brandon Dobell, William Blair & Company - Analyst [2]

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Good afternoon. Couple of quick ones. First on SandMaxx, what are the mile markers or whatever you want to call them that we should look for -- or look for you to communicate around how to gauge the trajectory of that product?

Sounds like the initial wells have gone well. How does that become a much broader part of the offering the next handful of quarters?

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Rick Shearer, Emerge Energy Services LP - CEO [3]

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Brandon, this is Rick. Let me just say that we are in unchartered waters with SandMaxx. It is such a unique, self-suspending technology.

It's very hard to project exactly what this ramp-up is going to look like, especially as we see more data coming in. And, that data is showing that the uplift of yield from these wells is 20% to 40% improved. Once we get more of that data to confirm, a lot of the people that are very interested in the product we think will start to look at the product to trial it while the early adopters that have already looked at the product will start to buy it on a regular basis.

Ted mentioned, rightfully so, that we do have customer that's buying on a regular basis now and as more data comes in, we'll pick up the pace with more consistent orders from regular customers. So, we're going to take a look to see just what that ramp-up looks like, Brandon, before we really make a decision to move forward with this plant that we've talked about, the 1.5 million-ton plant. There will be a six-month period, though, six to eight months from the time we break ground until we have that added tonnage. So, as we measure ourselves here, we'll take a certain leap of faith, knowing that it will take time to get the commercial plan in place.

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Ted Beneski, Emerge Energy Services LP - Chairman of the Board [4]

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I would say, Brandon, the markers are what you would expect. Volume increases of SandMaxx and dollar increases in sales of SandMaxx.

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Brandon Dobell, William Blair & Company - Analyst [5]

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Okay. You talked a little about -- let's call it take-or-pay contracts or negotiations. Maybe a little more color there? I guess I'm curious about how you're balancing what seems to be a pretty attractive pricing environment going on right now.

So, locking in price or not locking in price in exchange for some volume certainty. Maybe what your philosophy is these days around contracts versus waiting for higher prices to maybe lock in a more attractive spot for you?

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Rick Shearer, Emerge Energy Services LP - CEO [6]

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The good news is in this market we've got customers coming to us now, saying that they want contracts in place so they're assured a security of supply here from one of the major players, in this case in particular from Emerge Energy. This really helps in the discussions because this is something the customers recognize as they look out on the horizon that they really need to have a secure sand source [to meet] their needs.

So, in that sense, we've had some very good discussions. The customers also would like to have some sense of security around pricing. But, our expectations remain that even though prices have gone up substantially, even since December, those prices are likely to continue to trend upward as the year remains.

So, in most cases, while we've signed the contracts we have signed and put in place that are take or pay, our two years-plus on term basis. The pricing in most cases, all but one, is limited to quarter-by-quarter adjustments so that we can adjust as the market moves forward. That's how the contracts are being lined out right now.

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Brandon Dobell, William Blair & Company - Analyst [7]

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That's helpful. As you think about rail transportation, what's been the conversation so far with the rails? As part of that, what should our expectation be for you selling at mine gate versus in basin as we think about the rest of 2017?

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Rick Shearer, Emerge Energy Services LP - CEO [8]

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We'll probably -- it looks like we'll stay in a range of [50% to 60%] in-basin sales, the balance of course being mine gate. As far as the rails and the discussions that have gone on with the Class 1 railroads that we deal with -- right now, we have not absorbed any additional price increases.

We're hoping that we don't really get into that until the second half of the year at least because it's important for the railroads and other vendors to understand that we, like many other producers in the frac sand space, are not out of the woods yet. As a result, it's premature to be looking at any type of price increases. Thus far, the railroads have been willing to work with us on that note.

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Brandon Dobell, William Blair & Company - Analyst [9]

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Okay. Thanks. Appreciate it. I'll turn it back.

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Rick Shearer, Emerge Energy Services LP - CEO [10]

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Thanks, Brandon.

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Operator [11]

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(Operator Instructions)

And our next question comes from Arieh Coll of Coll Capital. Your line is now open.

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Arieh Coll, Coll Capital - Analyst [12]

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Yes, thank you. Appreciate you doing the call and hope you enjoy the upturn here. It's obviously more pleasant than the reverse. (laughter)

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Rick Shearer, Emerge Energy Services LP - CEO [13]

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You got that right, Arieh.

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Arieh Coll, Coll Capital - Analyst [14]

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Rick, a question up to you. Would you be willing to elaborate on these price increases seen in the market since December? I know you said they're up substantially, but any chance you'd be willing to quantify that a little bit?

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Rick Shearer, Emerge Energy Services LP - CEO [15]

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I think we were seeing earlier certainly toward the fall season of last year that market pricing was -- we saw generally in a range of $20, low $20 per ton mine gate. There were exceptions to that, of course.

We saw some people selling even at cash cost basically. But, if you look at the general trend in the market, we were seeing things around $20, $22 a ton, in that range. And, as we just mentioned in our prepared script that those prices have moved quickly, up in the range north of $10 a ton from that benchmark.

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Arieh Coll, Coll Capital - Analyst [16]

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Got it. So, am I interpreting correctly by saying in the January, February time frame, the current quarter, the prices you're able to sell at the mine gate now are at $32 and above?

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Rick Shearer, Emerge Energy Services LP - CEO [17]

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Of course, that's an average number, but in that range, yes. And, the spot price is higher yet.

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Arieh Coll, Coll Capital - Analyst [18]

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Got it. And, can you just clarify, obviously, there's a balancing act between yourself and customers. But, how are you trying to negotiate pricing adjustments on these new contracts on a quarterly basis so that customers get some certainty, but you're hopefully not selling to them at too low a price because you have a 30-, 60-, 90- or other-day delay in pricing where spot is moving up you're maybe selling at a contracted price that's 90 days out of date, and, therefore, below market?

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Rick Shearer, Emerge Energy Services LP - CEO [19]

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Well, I think that's part of the importance of monitoring literally day-to-day the market. Our customers certainly do that. Of course, we do that as well.

And, where we've had contracts before that were based around market pricing, I've been pleased to see -- and I expect this would continue -- that both customer and supplier, Emerge Energy in this case, has a very good handle on what market pricing actually is. And, the discussions have actually gone very smoothly as far as an agreement to move price in sync with a common ground of where the market price really is. So, we expect to see that same format continue and shouldn't expect any problems in that regard.

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Arieh Coll, Coll Capital - Analyst [20]

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Okay. And then, just finally on the drilled and uncompleted wells in the industries, the DUCs. Correct me if I'm wrong, but my understanding was according to EIA and others that there may be as many of 5,000 of these wells out there that had not been completed. And, even with this upturn, the number of DUCs actually is marginally moving higher not lower so there is a huge amount of potential demand out there that has yet to be seen.

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Rick Shearer, Emerge Energy Services LP - CEO [21]

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Yes, I think that's right, Arieh. We know those DUCs are out there. That work is going to have to be done.

There's been a small amount of that work that's been done up to this point. But, there is, to your point, a pent-up demand that's just going to continue to move the demand curve up, I think, as we get into the rest of this year based on these DUCs now being completed and put on the project schedules.

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Arieh Coll, Coll Capital - Analyst [22]

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Lastly, given the potential demand out there, are you comfortable at all talking about what sequential rate of volume sand gross shipments you might be able to achieve here in the March quarter?

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Rick Shearer, Emerge Energy Services LP - CEO [23]

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That's really hard to predict, Arieh. I guess we really can't.

We can tell you that we will have more capacity come online, and we will open up our plants wide open in the spring as we open our mines and have more feed available. We do expect a ramp-up to some degree, given our production capability come April.

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Arieh Coll, Coll Capital - Analyst [24]

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Got it. So, in the April time frame, I think your annual capacity is 8 million tons per year on an annual basis. You'd be hoping to moving towards 100% of that capacity in that April, May time frame?

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Rick Shearer, Emerge Energy Services LP - CEO [25]

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The 8-million-ton number is accurate. I'll remind you that is permitted tons. And, there are issues, of course, for all of us in the industry in fulfilling a full 100% permitted capacity. Issues with railcars and shipments, some down time, availability at the plants, et cetera. So, we'll be certainly doing everything we can to get every ton out we can, given the demand and given the core customer commitments that we have now, I can assure you.

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Arieh Coll, Coll Capital - Analyst [26]

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Thank you very much.

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Rick Shearer, Emerge Energy Services LP - CEO [27]

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Thanks, Arieh.

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Operator [28]

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(Operator Instructions)

And our next question comes from Mark Brown of Seaport Global Securities. Your line is now open.

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Mark Brown, Seaport Global Securities - Analyst [29]

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Hey, Rick.

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Rick Shearer, Emerge Energy Services LP - CEO [30]

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Hi, Mark.

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Mark Brown, Seaport Global Securities - Analyst [31]

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Great volumes. Sequentially, great growth there.

I'm curious on the brown sand versus white sand? And, what are you seeing or what are you expecting in terms of pricing trends? And, are you starting to see any of the customers that may have tried brown sand and maybe out of necessity shifting in favor back to Northern white?

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Rick Shearer, Emerge Energy Services LP - CEO [32]

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Mark, we are seeing some interest in going back to Northern white. We predicted that. We recognize that probably about one-third of the market last year did buy brown sand for obvious reasons, for the landed economics that it provides.

But, we were told by some of those customers, anyway, that they did expect to go back to Northern White. Some of that has happened already on a limited basis, and we think that more of that will happen as we get into the year, depending on oil prices and the economics in the industry.

But, we do foresee that happening. We don't want to walk away from the residual market, I'll call it, whatever that number might be. 30% or less of the market that has told us they expect to stay with the brown sand product.

And, for that reason, we're excited about an expansion -- an acquisition, I should say, that would allow us to offer more capacity in the brown sand arena. So, we want to be there for the customers, whether they're in the brown sand mode, I'll call it, or they prefer the Northern white. We want to be there to take care of their needs regardless.

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Mark Brown, Seaport Global Securities - Analyst [33]

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And, did you say the brown sand pricing is starting to go higher, maybe narrowing the discount to Northern white?

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Rick Shearer, Emerge Energy Services LP - CEO [34]

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No, we're not seeing that.

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Mark Brown, Seaport Global Securities - Analyst [35]

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Okay. And, I was also curious, you talked about some very constructive commentary around SandMaxx. What about SandGuard? I don't know if I missed it, but do you have an update in terms of how that is progressing?

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Rick Shearer, Emerge Energy Services LP - CEO [36]

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I'm glad you brought that up, Mark, because SandGuard is an important part of our technology proppant package. Being a low-dust sand, we still see a lot of interest in the product. We think that there is a lot of demand in weighting, I'll call it, because the OSHA requirements that reduce the dust threshold in this market will actually come into play in 2018.

So, a lot of people are starting to look at what options that they'll pursue. You know many people who are using the last-mile box concept have seen reduced dust. But, as many customers have pointed out to us, that doesn't reduce the dust at every touch point in the supply chain.

The only way to reduce the dust when you're handling the product at the terminals or elsewhere in the supply chain where it's not in a container is don't have the dust to begin with. And, that's the theory behind SandGuard, where you don't have any dust at all at any point in the supply chain. People are recognizing that more and more, and as a result, while we're shipping and we have shipped unit trains of SandGuard, we expect to see the interest and the demand ramp up considerably as we get to the latter stages, say fourth quarter of 2017, when people have to begin to address this in the next year.

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Mark Brown, Seaport Global Securities - Analyst [37]

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That sounds good. One other question I had on your CapEx budget for 2017. I think Deborah said $5 million.

But, you're also -- were earlier discussing some other capital projects. The Kosse expansion and the potential SandMaxx plant.

And, I was just curious if there were any restrictions in your credit agreement? Or, how would you maneuver around that -- any limitations in your credit agreement as it pertains to capital expenditures?

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Deb Deibert, Emerge Energy Services LP - CFO [38]

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We're pretty confident that we can work with our banks to get some relief on the CapEx covenants. That may require us to go out and get some other financing.

We have proven over and over again that we are able to negotiate with our banks. So, we're highly confident that we can do this as well.

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Mark Brown, Seaport Global Securities - Analyst [39]

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Thank you.

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Operator [40]

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Our next question comes from Selman Akyol of Stifel. Your line is now open.

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Rick Shearer, Emerge Energy Services LP - CEO [41]

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Selman, are you with us?

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Operator [42]

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And, if your phone is on mute, please unmute.

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Tim Howard, Stifel Nicolaus - Analyst [43]

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Sorry. I was on mute. Hi, this is Tim on for Selman. Could you explain the drivers that reduce average selling price by about 20% quarter-over-quarter?

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Rick Shearer, Emerge Energy Services LP - CEO [44]

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The drivers that -- let me make sure I understand the question. The drivers that are reducing average selling price?

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Tim Howard, Stifel Nicolaus - Analyst [45]

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Average selling price seemed to be down about 19% to 20% quarter-over-quarter. We were just wondering what the drivers were behind there? Was that just maintaining market share? Or, if there's anything else?

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Rick Shearer, Emerge Energy Services LP - CEO [46]

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On our average selling price? Deb, go ahead. Excuse me.

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Deb Deibert, Emerge Energy Services LP - CFO [47]

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The main difference is that we only had about 50% of our sales in basin in Q4. As you know, we have much larger markups for in-basin sales in order to cover the logistics costs. That was the main driver was we had a little bit lower percentage on the in-basin sales.

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Tim Howard, Stifel Nicolaus - Analyst [48]

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Okay. Got it. What was the cash balance at the end of the year?

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Deb Deibert, Emerge Energy Services LP - CFO [49]

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We intentionally keep our cash balance very close to zero. We manage it on a daily basis. We pay down on the facility, and we draw on it every single day. We intentionally keep it close to zero.

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Tim Howard, Stifel Nicolaus - Analyst [50]

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We were a little confused because you raised $37 million during the quarter net, but it seemed like debt balance only came down about $6 million quarter-over-quarter. So, are we missing something there?

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Deb Deibert, Emerge Energy Services LP - CFO [51]

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We were negative on our operating cash flows.

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Tim Howard, Stifel Nicolaus - Analyst [52]

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Okay. So, that ate up the other.

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Deb Deibert, Emerge Energy Services LP - CFO [53]

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Sorry?

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Tim Howard, Stifel Nicolaus - Analyst [54]

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That ate up the rest of the $30 million then?

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Deb Deibert, Emerge Energy Services LP - CFO [55]

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Much of it. For the most part, we are operating much better on our cash basis.

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Tim Howard, Stifel Nicolaus - Analyst [56]

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Got it.

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Deb Deibert, Emerge Energy Services LP - CFO [57]

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We do expect some drastic improvements in Q1 and Q2 on that.

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Tim Howard, Stifel Nicolaus - Analyst [58]

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Is there any all-in CapEx number you could provide if everything goes to plan that you expand Kosse and then SandMaxx goes forward, I think you said [$20 million to $30 million] there. How much would you expect Kosse to be?

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Deb Deibert, Emerge Energy Services LP - CFO [59]

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Right now, we expect SandMaxx to be next year for building the full production plant, and we're still looking at our different opportunities for taking advantage of this market upswing. We have several things in the works, and we'll let you know as soon as those are finalized.

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Tim Howard, Stifel Nicolaus - Analyst [60]

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Okay. Great. Thanks.

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Operator [61]

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(Operator Instructions)

And, this does conclude our question-and-answer session. I would now like to turn the call back over to Ted Beneski for any further remarks.

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Ted Beneski, Emerge Energy Services LP - Chairman of the Board [62]

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Okay. Well, thank you everybody. In closing, we just want to reiterate that we're proud of our strong financial improvement of superior silica sand and Emerge Energy.

We fought hard in 2015 and 2016 to make it through this downturn, and now that the upswing has arrived, our efforts from the last 18 months are really starting to pay off. We're fully regaining our momentum, both strategically and financially, and we expect 2017 to be a dramatically better year than 2016 for Emerge Energy Services. Thank you.

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Operator [63]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.