Heckmann Q3 Results Confirm Shale Strategy


I have written about Heckmann Corp. (HEK) before (here and here) so I will not go into a long dissertation on the company’s history and management. Suffice to say that Heckmann Corp. is in the business of providing water services to oil and gas exploration companies primarily for the extraction of oil and gas from shale.

The company operates in some of the most prolific and high growth areas of the country, including the Eagleford, Barnett, Haynesville, Marcellus, and Utica shales. Heckmann provides water for the initial frack job on the well and then provides disposal of both the flowback water and produced water from the well.

This is a very lucrative business, because without substantial amounts of water, the well cannot be fracked properly. For example, the company estimates that on average 6.3 million gallons of water are used per fracking job. The company in its most recent presentation assumes that nearly 11,400 shale wells will be drilled in 2011, so that amounts to 71.8 billion gallons of water needed for fracking of wells.

Heckmann not only supplies water, it also provides disposal of water. It has disposal wells in various shale plays along with a pipeline in the Haynesville shale. With this capacity the company owns a fleet of several hundred semis and frack tanks, along with portable pipeline that can be used at customers' sites.

The disposal business is very important in light of the increased attention that environmentalists are paying to shale fracking and the water issues associated with the business. The company understands this and has as a strategy of offering turnkey, one-stop shopping for oil and gas exploration companies.

Before Heckmann’s entry into the business, the business was populated by undercapitalized mom-and-pop outfits that did not necessarily have the scale or capital to be a one-stop shop that could provide consistent, safe, and environmentally compliant service to the drillers. The large oil and gas companies would rather deal with a large player that has a focus on environmental, health, and safety than deal with multiple players in different shale plays with unknown levels of compliance. This is especially important with all of the scrutiny on the industry in recent months.

The company is in a big growth phase, and the third quarter reflected this, with revenue of $47.8 million compared with $1.9 million in the third quarter of 2010. Net income from continuing operations grew to $2.6 million, or $0.02 per share, compared with a net loss of $2.2 million, or ($0.02) per share, in the third quarter of 2010.

This growth has translated into a big increase in employment. At the end of the third quarter of 2011, Heckmann's domestic employment increased to approximately 1,050 employees from less than 30 employees in the third quarter of 2010. (Are you listening, Mr. Obama?)

On the conference call, Mr. Heckmann said that the company had hired nineteen former managers from Siemens Water, and that these managers had worked for him when he was building US Filter into the multibillion-dollar company that it became.

In conclusion the company continues to ride the shale oil and gas wave by providing a solution to the industry that is highest on the priority list, the supply and disposal of water for shale fracking. The results are beginning to show through, and the expectation is that this fantastic growth will continue, barring any slowdown due to environmental concerns.

Disclosure: I am long HEK.