Heckmann: Oil and water

by Nathan Slaughter, editor Scarcity & Wealth

Like most oilfield service stocks, Heckmann Corp. (HEK) has been taken to the woodshed and beaten. The shares have lost more than half of their value over the past six months.

But that has more to do with investor fear than any problems on the operational front -- in fact, business couldn't be better for the oil services firm.

Heckmann is a water transportation specialist that delivers fresh water to drilling sites and carries fouled water away for disposal.

This is a booming business. It takes six million gallons of water to frack a single well, enough to fill 10 Olympic-size swimming pools.

At the beginning of 2011, Heckmann operated only within the Haynesville Shale in northwest Louisiana and east Texas. But management has made a concerted effort to expand its geographic footprint over the past year -- a wise decision since tumbling natural gas prices have slowed drilling in the Haynesville play.

Today, the company has an active presence in eight shale formations around the country, including oil and liquids-rich plays such as the Utica in Ohio where exploration and development activity is buzzing.

To serve these regions, the company has built hundreds of storage tanks, installed miles of pipeline, dug dozens of salt water disposal wells, and amassed a fleet of hundreds of delivery trucks.

But none of that matters without customers -- and that is where the biggest strides have been made. As a trusted leader in the field, Heckmann continues to win lucrative contracts from heavyweights such as Chevron. The latest is a three-year deal to serve Shell's water needs in the Eagle Ford and Marcellus Shale basins.

All of that is reflected in the latest quarterly snapshot. Heckman's water solutions business posted revenues of $55 million, triple the $18 million from the first quarter of last year. That marks the sixth consecutive quarter of record sales.

And those revenues are beginning to filter down nicely to the bottom line. EBITDA for the quarter surged to $10.2 million from $4.1 million, an improvement of 149%. This from a company whose stock has fallen to $3, from $7.

Looking ahead, Heckmann continues to move aggressively into new areas such as the Tuscaloosa Marine Shale in Louisiana and Mississippi. And I believe water delivery volumes are poised to surge.

There are 760 rigs currently working unconventional oil and gas fields. Those rigs can drill about 15 new wells per year, on average.

That works out to 11,400 new wells per year -- each of which will require 6.1 million gallons of water. That's approximately 70 billion gallons of water per year.

Heckmann gets paid to bring the fresh water in and then gets paid again to haul the waste water away.

I think one of the best leading indicators of performance can be found in the HR department -- you don't hire dozens of new employees unless your current workforce will soon have more than it can handle.

So it speaks volumes that Heckmann just recruited 175 new truck drivers and a number of well technicians that will soon be dispatched into the field.

I haven't even mentioned the recent acquisition of Thermo Fluids, which brings 200 route-based trucks that pick up and recycle used motor oil and antifreeze.

This complementary business line will help Heckmann generate approximately $100 million in EBITDA this year. With a market cap of $450 million, the company is churning out enough cash to pay for itself in just four and a half years.

That cash generation (along with almost zero net debt on the balance sheet) makes Heckmann ripe for a takeover.

But I'd much rather see the firm continue to consolidate power in this fragmented $50 billion market. I plan to take advantage of the market's pessimism by adding HEK to our portfolio.

Learn more about this financial newsletter at Nathan Slaughter's Scarcity & Wealth.

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