Heckmann Merger With Power Fuels Goes Ahead

| About: Nuverra Environmental (NESC)

By: Ahmed Ishtiaq

Heckmann Corporation (HEK) is an environmental services company. The company operates through two business segments. Heckmann Water Resources (HWR) handles the treatment and disposal of water generated by companies involved in production of oil and natural gas. Heckmann Environmental Service ((NYSE:HES)) offers recycling and collection services for oily wastewater, used motor oil, used oil filters and parts washers.

The company started working three years ago and since then it has been growing aggressively. Heckmann Corporation has been successful in augmenting its organic growth with mergers and acquisitions. As a result, it has become one of the biggest players in the market. The company reported its third quarter earnings on November 9. Heckmann missed the consensus earnings estimates by 4 cents. The company operates in every major natural gas shale and unconventional oil basin.

Third Quarter Results:

Heckmann reported revenues of $93.1 million for the quarter. Revenues increased by 95% year-over-year and by 2.5% from the last quarter. Gross margin for Heckmann went up from 16.6% in the second quarter to 17.6% in the third quarter. Further, the company reported adjusted EBITDA of $17.3 million, showing an increase of 57% year-over-year. EBITDA was adjusted for stock based compensations, non-cash losses on assets disposals and transaction costs. EBITDA margin also increased for the company from 13.3% in the second quarter to 14.2% in the third quarter. In addition, the company spent $7 million in capital expenditures. However, only $1.7 million was spent in cash and the balance was made up from asset sales. The company expects lower capital expenditures going forward. Heckmann Corporation believes that it has built big enough asset network.

At the end of the quarter, the company had $11.7 million in cash and cash equivalents, up by $6.5 million from the last quarter. Further, the long term debt of the company stood at $270.2 million. However, after the issuance of $150 million worth of senior unsecured notes, total debt for Heckmann will go over $420 million. Please refer to my previous article for a deep analysis of this new issue and total debt of the company. Moreover, the company reported $96.5 million in revenues and $36.1 million in EBITDA for Power Fuels. Power Fuels spent $15.4 million capital expenditures and reported an EBITDA margin of 37.4%. ProForma combined revenues for both companies were $189 million and an adjusted EBITDA of $53.4 million.

As a result of aggressive growth through acquisitions, the assets for the company have increased substantially. In the Eagle Ford Shale area, total drivers count increased by 26% during the third quarter. In addition, the company has five disposal wells compared to three disposal wells at the start of the year. Operations in other areas are also increasing at a rapid pace.

Power Fuels Transaction Approved by Shareholders:

Heckmann shareholders approved the Power Fuels transaction, which the company announced in September. Heckmann announced in September that it had struck an agreement with Power Fuels to merge both companies. In a previous article, I analyzed merger with Power Fuels in detail. Badlands Energy, LLC (Power Fuels) is a North Dakota based environmental company. It is the biggest environmental company in the Bakken Shale area. It has a strong foothold in the rich oil shale areas and is the leading market share holder in the region. The merger with Power Fuels will bring top customers such as Statoil (NYSE:STO), Whiting Petroleum Corp (NYSE:WLL), and Hess Corporation (HES) to the customer portfolio of Heckmann Corporation. More than 95% of Heckmann shareholders voted in favor of the merger, and the company expects to complete the merger soon. Once the merger is complete, Heckmann will become the leading player in the market. The company is working on expanding its credit facility to $325 million to fund the transaction.

Comparison with Peers:

Heckmann operates in a unique industry, and at present, it is the lone pure water services company. However, there are other players in the market offering 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).
















EPS Growth




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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 makes it an attractive investment.


Third quarter results for the company fell a little short of expectations. The street was expecting the company to report revenues in excess of $94 million. Nonetheless, the approval of merger with Power Fuels will change the game for the company. After the merger, revenues will increase substantially. In addition, Heckmann will become the biggest player in the market. At the moment, the company gets 70% of its revenues from oils and liquids. Revenues are skewed towards liquids which will prove to be beneficial for the company. Almost all of the big players in the Shale plays are moving towards liquids due to low natural gas prices. I believe the merger will be a catalyst for Heckmann and it will consolidate its position as the industry leader. I am extremely optimistic about the prospects of the company, and I believe it will prove to be a smart 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 Ahmed Ishtiaq, 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.

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