Heckmann Corporation (HEK) had a sensational Tuesday. The stock went up almost 40%. The stock made its big move up after the news hit the market that Heckmann has reached an agreement for a merger with Power Fuels, Inc. a closely held environmental company in the Bakken Shale area, North Dakota. In my previous articles about Heckmann, I have maintained that Heckmann is going to be a massive success and this recent deal just goes on to confirm my belief in the company. This new merger changes the landscape for the company, as it gives the company a stronger presence in the oil rich Bakken Shale areas. Let's look at what this merger will bring to the table for Heckmann Corporation.
What Does The Merger Mean for Heckmann?
Badlands Energy, LLC (Power Fuels) is a North Dakota based environmental company. It is the biggest environmental company in the Bakken Shale area. Power Fuels is focused on providing transportation, disposal, treatment and environmental services to the Energy companies. It has a strong foothold in the rich oil shale areas and is the leading market share holder in the region. Moreover, the company has a strong revenue history and solid growth prospects with new wells permits in the area.
The merger with Power Fuels will bring top customers such as Statoil (STO), Whiting Petroleum Corp (WLL), and Hess Corporation (HES) to the customer portfolio of Heckmann Corporation. These top customers will be a welcome addition to an already impressive collection of customers. Furthermore, Power Fuels has strong operations and a solid assets base, the company has a fleet of almost 500 tankers and vacuum trucks. There are 19 saltwater disposal wells in the core areas of the Bakken Shale. Additional permits for new wells will be added to an already large disposal well portfolio. Power Fuels will expand Heckmann operations significantly with its more than 2,500 frac tanks, 1600 other fluid handling tanks, solid waste tanks and other environmental services equipment.
As I have explained in my previous article in detail, this new industry is developing fasts and it represents a great growth opportunity for the relevant companies. Heckmann seems to carry on with its strategy to compliment organic growth along acquisitions in the industry. As a result of this merger, the firm will generate more than 70% revenues from the shale oils and liquid basins. Moreover, Power Fuels is a premier services provider in the Bakken shale area and has a unique market position. It will provide the company with significant entry barriers and ensure that Heckmann can exploit the growth opportunity in the region and become the leading player in the market. It is also worth noting that Heckmann is expected to move its corporate headquarters from Pittsburgh to Scottsdale after the completion of the merger with Power Fuels.
Heckmann Corporation will pay $125 million in cash and $95 million in stocks, which are based on the closing price of Friday 31, 2012. Based on that price, Heckmann will pay $256 million in stocks which takes the cumulative value of the deal to $381 million. Heckmann will also assume $150 million of Power Fuels' debt. Shares issued by Heckmann in the deal will have two years lockup period; the firm values enterprise value of Power Fuels at $531 million. Power Fuels had an EBITDA of $154.7 million; the deal implies a multiple of 3.4 times. Upon completion of the merger, the firm ownership will be divided between Heckmann and Power Fuels share holders; Heckmann shareholders will hold 62% and Power Fuels shareholders will claim 38% of the ownership. There will be a total of 247 million pro forma shares outstanding. After the customary regulatory and shareholder approvals, the firm expects to complete the deal in the fourth quarter of 2012.
Heckmann merger with Power Fuels represents an expansion of its operations in the core business area. It is a horizontal merger, which will bring significant synergies to the company. In fact, the willingness of Power Fuels to accept a key portion of the transaction in the form of stocks of the combined company shows that both firms are extremely confident about the synergies from the deal. Heckmann will augment its revenues significantly along with the improved cost structure. The firm is acquiring an established player in the market, which will provide it with considerable expansion and further streamline and align the operations of the company. The merger with Power Fuels represents a completely different scenario than the acquisition of TFI; Thermo Fluids was an acquisition tailored to increase the exposure of the company and bring some stability to the revenues of the corporation, while Power Fuels merger is focused on increasing the operations in the core business.
Heckmann is young company, which has been growing aggressively through acquisitions. The firm has been incurring a lot of capital expenditures resulting in weak cash flows. The stock looks expensive compared to its large cap peers. Heckmann's valuation ratios are way higher than those of Waste Management (WM), and Veolia Environnement (VE). These two companies also pay nifty dividends. Heckmann does not have enough cash flow to pay any dividends yet. However, the recent merger announcement suggests that the future prospects of the company far outweigh the dangers. I remain confident in my assessment of the company to do well in the future. The merger with Power Fuels should increase revenues and cash flows significantly for the combined firm. Heckmann stock may retract a little after the surge on Tuesday, but in the long run, I expect the stock to carry on its rise. I believe there is a lot of potential in this stock and it will provide significant returns in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.