Heckmann: An Astute Long-Term Investment


By Ishtiaq Ahmed

Heckmann Corporation (HEK) operates as services based company focused on total water and wastewater solutions for shale or unconventional oil and gas exploration and production. Recently, the company has been extremely aggressive in business expansion mainly through acquisitions. Its recent merger with Power Fuels has made it the biggest player in the hydraulic fracture services market and given it a strong foothold in this rapidly growing industry. Hydraulic fracturing has changed the gas industry in North America and has the potential to transform gas production and ultimately oil production worldwide. There is enormous potential in the industry, and Heckmann is positioning itself finely to take advantage of the potential.

Shift to Shale plays:

Shale rock reserves have been left mainly intact in the past due to the complexity of getting gas and time consuming nature of the process. However, hydraulic fracturing has accelerated that procedure in shale by injecting a mixture of water, sand and chemical additives to retrieve gas. According to estimates, the amount of gas reserves in shale is probably the second biggest natural gas resource on Earth. In the U.S., the Marcellus Shale reserve could potentially provide the whole country with natural gas for the next two decades. According to the U.S. Energy Information Administration, natural gas use would increase across the board in 2012, with the biggest raise coming from electric power.

Science of Hydraulic Fracturing and Environmental Issues:

Hydraulic fracturing involves using high-pressure jets of water, chemicals and sand to create cracks into rocks so oil and gas can flow. Present fluid formulations often contain dangerous components such as diesel fuel or hydrochloric acid, and environmentalists say the practice creates a threat to water supplies. Most of the water used in the process stays thousands of feet underground, and only about 15-20 percent comes back to the surface and is stored in lined pits or steel tanks. The wastewater returning to the surface is called flow back.

It can take up to 4 million gallons of water to fracture a horizontally drilled shale well, and chemical additives make up less than one-half of 1 percent of the water used. Benefits of these chemicals include eliminating friction and preventing corrosion. However, hydraulic fracturing has come under sever scrutiny due to concerns about the environment damage.

Opportunity for Heckmann:

Due to the increased concerns about the environment; there has been an immense increase in the demand for water treatment services. As a result, a new industry has taken shape, and Heckmann is one of the most important players of this booming industry. At present, the oil industry uses about six billion gallons of water a year, and it is expected to increase it to 15 billion gallons by 2035. In addition to this amplified water usage, an increased focus on the environment will surely increase the demand for Heckmann services.

Peer Comparison:

Heckmann operates in a unique industry and currently it is the only pure water services company. However, there are other companies in the industry offering related services. Waste Management (NYSE:WM) provides services in the solid waste management spectrum of the industry. Another player in the sector is Veolia Environment S.A. (VE).
















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Source: Morningstar.com

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

Our cash flow analysis suggests that Waste Management is a cash spring. The company generates at least $1 billion in free cash flow, which is more than enough to cover the current dividends. Moreover, the interest coverage ratio of 3.38 and debt service coverage ratio of 1.46 indicate that the firm has adequate buffer of funds to service its debt.

Veolia is based in France. The company was founded in 1853, at the start of the industrial era in Europe. It is one of the largest companies in France operating in the environmental recycling, water treatment, energy, and transportation segments. Even though, historical data on Veolia's performance are not so compelling, analysts seem to have faith in the company. Thirty percent of analysts' estimations suggest that the stock will be outperforming in the immediate future.


At the moment, the industry in its growth stage and the company is making sure it gets the lion's share of the market. Heckmann is trying to grow through acquisitions as well as organically. The use of shale oil and gas reserves is the way forward for the U.S. to become self sufficient in oil and gas. To keep up with the environmental standards put forward by EPA, the energy companies will look for Heckmann's services. As a result, the demand for Heckmann services will likely remain high for the foreseeable future. Heckmann Corporation has bright future prospects, and it could turn out to be an astute long term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ishtiaq Ahmed, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.