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Prior to the open on Tuesday, Heckmann (HEK) announced a merger agreement for Power Fuels owned by Badlands Energy, LLC. The deal creates a leading environmental services company focused on energy and industrial end-markets.

The company is an environmental services provider dedicated to the movement, treatment and disposal of water generated by energy companies involved in the discovery and production of oil, natural gas liquids and natural gas.

The stock surged nearly 40% on Tuesday as the deal creates a potential game changer for the handling of fracking fluids. The deal is also highly accretive causing investors to take notice of a stock that had been crushed this year.

Deal Details

Under the terms of the agreement, Heckmann plans to pay $125M in cash and 95M shares of the company's common stock. The shares will be subject to a two-year lockup agreement and a two-year standstill agreement. Heckmann will also assume or refinance $150M in Power Fuel's debt.

The merger is expected to be highly accretive to Heckmann's earnings and is expected to close in the fourth quarter of 2012.

Power Fuels Highlights

Per the company, Power Fuels is the largest environmental services company in the Bakken Shale basin.

The press release provides the following highlights:

  • Trailing 12-month revenues of approximately $363.5M.
  • Trailing 12-month adjusted EBITDA of approximately $154.7M.
  • Operates a fleet of nearly 500 water trucks and 19 disposal wells in the Bakken Shale area in addition to a large rental fleet of equipment.
  • More than 2,500 frac tanks, 1,600 other fluid handling tanks, solid waste tanks, and other environmental service equipment.
  • Top customers include Hess Corporation, Statoil, Whiting Petroleum and Denbury Resources

While the revenue figures for both companies are similar, a huge difference exists in the more important income and adjusted EBITDA figures. Power Fuels has more than double the adjusted EBITDA and a staggering $113M in income for the last 12 months. These numbers are growing at a fast clip so the run rate is considerably higher.

Halcon Resources Deal Similarities

The surge in the stock price along with the game changing nature of the deal has some similarities to the Halcon Resources (NYSE:HK) deal to take over Ram Energy Resources back in December last year. The similarities don't just end with the stock symbols.

In the case of Halcon, the former CEO of Petrohawk Energy took over the struggling Ram stock and injected $550M in order to take existing Ram reserves and accelerate drilling.

In both cases, the deals hinge on CEOs with histories of growing firms into billion dollar companies.

Though the scenario is not exactly the same, the stock action could be similar. What is now Halcon jumped from $3.50 to eventually trade over $13 in about two months as investors became excited about the potential of the new company.

1 Year Chart - Halcon Resources

(click to enlarge)

Whether Heckmann follows this pattern is unknown at this point, but the potential does exist.

Valuation

With the surge in stock price, the combined Heckmann will have a market value of nearly $950M with roughly 247M shares outstanding. The revenue run rate has to be close to $800M placing the valuation at just over 1x revenue.

The forward earnings are impossible to know considering the lack of guidance and lack of details on the accretive amounts. The presentation though provides a surprising revelation that Power Fuels had $113M in income for the last 12 months.

In general, analysts forecast near break-even earnings for the Heckmann only business. The income from Power Fuels could provide a surprising $0.40 to $0.50 in income based on past results. The question remains when the historical Heckmann business line will become very profitable. The income at Power Fuels suggests that a more focused Heckmann could be very profitable.

Conclusion

The combined companies have the ability to market themselves as a pure play environmental services firm able to work in all major shale plays. As such, customers will have the advantage of dealing with one big, nationwide provider.

If Heckmann can become as profitable as Power Fuels in every basis, the combined company will become a very valuable entity. The real question is whether investors push the stock up as fast as Halcon considering the game changing nature of the deal.

Source: Heckmann Makes Game-Changing Merger

Additional disclosure: Please consult your financial advisor before making any investment decisions.