A Deeper Look At Heckmann's New Debt

Nov. 1.12 | About: Nuverra Environmental (NES)

by Ishtiaq Ahmed

Heckmann Corporation (HEK) is one of the most aggressive companies in the environmental services industry. The company has been making important acquisitions to increase its foothold in this rapidly growing business. After the discovery of Shale plays, the oil and gas sector revived in the U.S. which gave birth to a new environmental services industry. The participants of the industry have been striving to fetch as much of the market share as possible. Heckmann is relatively young company, but it managed to get a lion's share from this segment. The company has complemented its organic growth with acquisitions.

Heckmann acquired the largest operator in the Bakken Shale area, Badlands Energy, LLC (Power Fuels). After announcing a merger with Power Fuels, the firm also acquired a majority stake in Appalachian Water Services, LLC ("AWS"). The last two acquisitions for Heckmann have been mainly focused at consolidating in the core area of its business. Heckmann has progressed considerably from its position three years ago. The company is now set to become an incredibly strong player in the environmental services business.

However, growth through acquisitions always comes at a cost. In case of Heckmann, the cost is the increased levels of debt. Heckmann issued $250 million worth of senior unsecured notes, taking its debt close to $300 million from $48 million. The company has decided to issue $150 million worth of debt to pay for the acquisitions. In this article, I look at how the company intends to use the debt.

New Debt Issue:

The company recently announced that it will be issuing new debt of $150 million at a rate of 9.875%. Heckmann plans to use the proceeds from the offering to finance the merger with Badland Energy, LLC (Power Fuels). The company also plans to use proceeds to pay the fees and expenses related to the merger. After the merger is complete, the notes will be exchanged for a similar principal amount of senior notes due 2018. The company will also use $345 million in equity and $146 million from the established credit facility to pay for the upcoming notes. The rating agencies have given B- rating to its current outstanding notes, and suggested a level rating of B to the new $150 million debt issue.

Current Debt Situation:

The company has been taking on debt to fund its acquisitions. As a result, the leverage situation of the company has deteriorated. Heckmann has a total debt of just over $265 million. Before the new debt issuance, its long-term debt to capitalization ratio and total-debt to capitalization ratio were 0.37 and 0.42, respectively. However, the recent debt issue will affect the ratios negatively. It is likely to increase the leverage for the company.

Heckmann had a debt to equity ratio of 0.6, which will also increase after the new debt issuance. However, the ratio will still be substantially lower than the industry average of 3.1. Heckmann had established a credit facility of $150 million, but it did not use it up till now. The company now intends to use the credit facility to finance the merger. The company will use $146 million from the credit facility. Although the metrics for Heckmann will be affected by the recent debt issue, I believe the overall condition of the ratios will remain strong.

Comparison with Peers:

Heckmann operates in a unique industry. At present, it is the only pure water services company. However, there are other players in the market offering similar services. Waste Management (WM) offers services in the solid waste management segment of the industry. Another player in the sector is Veolia Environment S.A. (VE).

 

HEK

VE

WM

P/E

65.4

N/A

16.5

P/B

1.20

0.60

2.40

P/S

1.90

0.10

1.1

EPS Growth

N/A

N/A

-2.30%

Operating Margin

-4.90%

4.50%

14.30%

Net Margin

-6.80%

-0.90%

6.70%

ROE TTM

-4.30%

-3.70%

14.70%

Debt to Equity

0.60

2.20

1.50

Click to enlarge

Source: Morningstar.com

The comparison with its peers shows that the stock is trading at a premium. However, the potential in the industry and the business prospects makes it an attractive investment. Veolia could be an interesting play as well. It is the largest environmental service company in France, and currently offers a yield of 8.62%. Waste Management could be another income option --- particularly for dividend growth investors. The stock yields 4.4% currently.

Summary:

Hydraulic fracking business will remain strong in the near future. Power Fuels acquisition is likely to strengthen Heckmann's market position. It was a large scope acquisition that will help to diversify the business segments. The new debt issue will surely increase the leverage of the company, but Heckmann should not have any trouble with its debt. The business prospects for the company remain strong. The increased revenue and cash flows from the merger will also help the company improve its metrics.

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 equity researchers. 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.