Seeking Alpha
Profile| Send Message|
( followers)  

Edited by Adam Isaac

Heckmann Corporation (HEK) operates through two segments, Heckmann Water Resources [HWR] and Heckmann Environmental Services [HES]. Before the acquisition of TFI, the firm was solely focused on water treatment business. HES is ranked one or two in almost 80 percent of the markets where it operates. With the acquisition of TFI, Heckmann expanded its business exposure and now caters to multiple markets. TFI now allows this firm to provide low cost RFO that may be sold to industrial customers. The RFO sold by Heckmann will cost less than half what diesel costs, and produce more than twice the energy (when measured on a BTU dollar adjusted basis). RFO is also sold to refineries; this segment has reported more than 54 million gallons of processed fuel oil sold to over 250 customers.

In my previous articles about HEK, I touched on the company's balance sheet and cash flow positions. In this article, I will build on these discussions to assess its short-term solvency and credit situation.

Short Term Solvency

Short Term Solvency

2012

2011

2010

Current Assets

$98,892

$109,123

$199,190

Current Liabilities

$73,849

$91,856

$41,056

Current Ratio

1.34

1.19

4.85

Acid-Test Ratio

1.29

1.15

4.79

Values taken from the SEC filings

Heckmann is in an incredibly healthy short-term solvency position, as there is presently a sufficient amount of working capital to meet the needs of the business. Until 2010, the firm was holding excessive amounts of cash and cash equivalents, which resulted in a too high current ratio. The firm since has developed a more prudent working capital management plan, which is in line with industry standards. In addition, HEK initiated a new $150 million senior revolving credit facility with Wells Fargo Bank (NYSE:WFC) as the administrative agent. The New Credit Facility has an uncommitted "accordion" feature that allows HEK to increase borrowings by up to an additional $100 million. The New Credit Facility matures on April 10, 2017. Interest accrues on amounts outstanding at floating rates equal to a base rate or the one-month LIBOR, plus an applicable margin. Heckmann capitalized approximately $3.5 million in financing costs associated with entry into the New Credit Facility that will be amortized over the term of the agreement.

Financial Leverage

Financial Leverage

2012

2011

2010

Long Term Debt

$265,669

$47,932

$4,077

Minority Interest

$1,382

$1,411

$1,499

Current Liabilities

$73,849

$91,856

$41,056

Common Equity

$458,656

$315,358

$298,255

Preferred Equity

$0

$0

$0

Long Term Debt to Capitalization

0.37

0.13

0.01

Total Debt to Capitalization

0.42

0.30

0.13

Values taken from the SEC filings

Heckmann is a growing company and, like any other growing company, it has been taking on debt in order to maximize the benefits of industry growth. Specifically, Heckmann has been aggressively growing through acquisitions. The company made five acquisitions in 2011, and a further four in the first seven months of 2012. However, the biggest acquisition was the TFI; it is the main reason Heckmann has had to take on debt. In fact, HEK issued debt and equity, along with the new credit line, to pay for the acquisition. However, the company has not yet utilized its new credit line according to the most recent SEC filings. The firm had negligible debt levels before the TFI acquisition, and even after, these increased debt levels do not pose any significant threat to the company's survival. The capitalization ratios have been increasing over the past three years, but still remain manageable.

Summary

Heckmann Water Resources is just three years old, so the firm is still in its infancy and growing rapidly. Large-scale development takes time; it was necessary for the firm to first invest heavily in infrastructure in order to eventually increase revenues. HEK has been investing heavily, with the capital expenditures component of its cash flow being one of the most substantial of the past three years. However, it is unwise to place too much emphasis on numbers in this case, especially since the firm is presently unable to generate positive free cash flows. In this case, as with any other growth firm, true value is to be found in the future. In my previous article, I talked extensively about the growth potential of both the industry and the company itself. I am confident that Heckmann is well positioned to take advantage of industry growth. Furthermore, I expect the firm to grow organically with a reduced focus on acquisitions.

Over the previous three years, we have seen many large corporations feel the strain of economic and financial disintegration. Heckmann looks more expensive compared to the industry leader, Waste Management (NYSE:WM). Heckman's trailing P/E and P/FCF ratios are significantly higher. However, keeping in mind the relative youth of HEK, I believe that the company has done well. Though it will certainly take more time for the firm to begin generating positive free cash flows, that time is not far away.

In the previous two years, the firm has increased its revenues exponentially, and exposed itself to more than one market. In the coming quarters, TFI ought to have a particularly noticeable impact. This new sector will increase revenues significantly as well as providing the company some variety in its revenue generation capabilities. I remain very certain that this company will perform well in the future and that stockholders will benefit from the company's massive growth potential.

Source: Massive Growth Potential Exists For Heckmann