Just about 50 days ago, Heckmann (HEK) announced the deal to purchase Power Fuels. The deal turns Heckmann into a domestic leader in the wastewater removal industry supporting the shale oil and gas boom. See our article "Heckmann Makes Game-Changing Merger" for more details on the deal.
While the stock initially popped from just above $2.50 all the way to $5, it has now slumped all the way to the $3.60s. Lower drilling in the domestic U.S. where both Heckmann and Power Fuels operate has impacted the excitement over the deal.
Have the economics really changed that much to warrant a 30% drop? Makes us wonder what is going on.
Updated Q312 Guidance
Below are the highlights of the recently released Q3 2012 forecasted earnings:
- Revenue of $91 to $93M
- EBITDA of $15 to $17M
- Revenue of $94 to $96M
- EBITDA of $35 to 37M
- Revenue of $185 to $189M
- EBITDA of $50 - $54M
These forecasts are clearly lower than the economics provided just 50 days ago. Power Fuels has dropped from a annualized EBITDA rate of $154M to $144M.
As the company highlighted back in September, the deal involves Heckmann paying $125M in cash and 95M shares of the company's common stock.
The company also announced a $150M debt offering to refinance the debt owed by Power Fuels.
The combined company will now have 247M shares placing the current valuation at $890M. At the projected EBITDA run rate, the company is now trading for only 4.3x those numbers. The annualized revenue is close to a 1x multiple.
Company after company has reported lower domestic results so investors shouldn't be overly shocked by the lowered than expected forecasts from Heckmann. Sure the company is growing fast with huge potential, but it can't grow if customers decide to drill less in the short-term.
Clearly investors need to step back and review the investment thesis of this stock. No doubt exists that the shale-drilling sector is under short-term pressure, but the long-term prospects remain strong.
With the Power Fuels deal, Heckmann has the potential to become a powerhouse in the environmental sector. Investors should view this as an opportunity to enter a growth company at an extremely low EBITDA multiple. Not many opportunities exist for purchasing such a cheap company.
Disclosure: I am long HEK.
Additional disclosure: Please consult your financial advisor before making any investment decisions.