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By: Ahmed Ishtiaq

Heckmann Corporation (HEK), an environmental services company, offers a variety of services to oil and gas companies. Even though, Heckmann provides many services, water treatment continues to be its core business. Environmental services industry is growing at an incredible pace and provides an excellent opportunity for the participants to achieve phenomenal growth. While organic growth can be more stable and sustainable, it is especially important and even more feasible to achieve growth through acquisitions. Heckmann Corporation has been extremely aggressive when it comes to acquisitions. Recently, the company closed its merger with Power Fuels, which now makes it one of the biggest players in the market.

Acquisitions have helped the company to grow into an extremely important member of this rapidly growing market. Although, the revenue of the company is heavily dependent on the drillers in the shale plays; it stands to benefit a great deal from increased activity in the region. The company has contracts with more than 10 top drillers in the area. Merger with Power Fuels with be extremely beneficial for the company, as it will give the company much needed geographic diversity.

Stock Profile:

Since the start of November, the stock has appreciated substantially. HEK was trading close to $3.4 per share at the start of November; however, it has gone over $4 at the moment. The rise is not temporary, and I believe the stock can hold its position above $4. I do not believe that the stock has already absorbed the complete effect of the merger with Power Fuels. There is still potential for HEK to go up. In the long term, I can see HEK go up significantly. During 2013, the results from the combined company will be extremely impressive. The combined company will be able to achieve EBITDA margin of around 30%, and revenue growth of close to 100%. As a result, the stock should appreciate substantially.

What does the Future Hold?

The industry is in a high-growth stage, and Heckmann has funded large capital expenditures to build the infrastructure necessary to capitalize on this trend. However, the company will have to carry on its capital spending during the coming year. These expenditures will be mainly discretionary and should decrease over time. Furthermore, I do not believe the company will stop its merger and acquisition activity soon. As a result, the funds will be spent on attractive opportunities, which may leave low or negative free cash flows for the company. Investors should not expect heavy free cash flows soon as HEK is in the growth phase and most of its funds will be reinvested.

If the company identifies another attractive acquisition target; it may have to borrow again. However, its current debt levels are under control, and the majority of Power Fuels transaction was financed by the share issue. I do not believe Heckmann faces any problems concerning its debt at the moment. For detailed analysis of the debt, please refer to this article. Heckmann recently increased its credit facility to $325 million, which will serve the dual purpose. The company drew from its credit facility to complete the Power Fuels transaction, and it will also help the company meet its increased working capital requirements. Heckmann Corporation is in a solid position concerning its liquidity. In addition, the rating agencies have increased the ratings for its debt, and changed the outlook to stable. Recently, S&P increased the rating for the debt of HEK from "B-"to "B".

Comparison with Peers:

Heckmann operates in a unique industry, and at present, it is the lone pure water services company. However, there are other players in the market offering services. Waste Management (WM) offers services in the solid waste management segment of the industry. Another player in the sector is Veolia Environment S.A. (VE).

HEK

VE

WM

P/E

76.9

N/A

18.5

P/B

1.40

0.60

2.50

P/S

2.20

0.10

1.20

EPS Growth

N/A

N/A

-2.30%

Operating Margin

-3.30%

4.50%

14.10%

Net Margin

-1.20%

-0.90%

6.30%

ROE TTM

-0.90%

-3.70%

14.00%

Debt to Equity

0.60

2.20

1.50

Source: Morningstar.com

The comparison with its peers shows that the stock is trading at a premium. However, the potential in the industry and the business makes it an attractive investment.

Summary:

Heckmann Corporation is making all the right moves, and the Power Fuels merger have set the company for incredible future growth. Heckmann has become the leading player in the environmental services industry. I expect the company to have a stellar year due to its increased market penetration. Activity will increase in the shale plays during the coming year, which will bode well for the company. The company has moved into liquids business, which would provide stability to its revenues. Low natural gas prices will not have a profound effect on Heckmann due to its diversification activities. It is an astute long term investment with limited risk, and I would recommend holding it for impressive returns.

Source: Heckmann Corporation: An Exciting Year Ahead