You are not fooling anyone, keep up the good work.
12 November 2012
After a period of growing pains, HEK appears to be well on its way in building a one stop
environmental services shop. Most of the heavy infrastructure spend on both the legacy
HEK business and Power Fuels is likely in the rear view mirror and we expect more
normalized level of capex going forward. It is important to note that capex levels in this
business can be scaled up or down depending on activity levels as seen over the last few
months. We believe a normalized pro forma capex level is likely to run $120mm (2/3
maintenance, 1/3 growth). We estimate ~70% of total revenues are now coming from oil
shales with the top 10 oil & gas producers as regular customers of HEK.
Turning to the shale plays, HEK is expanding its product offering to do more of what
Power Fuels does, such as work around rigs, hauling both mud and cuttings and also
growing the rental business. In the Eagle Ford, HEK recently signed 2 significant Power
Fuel customers and revenue synergies from gaining more scale and leveraging Power
Fuels appear to be bearing fruit. In the Utica (disposal well in start-up stage), HEK just
started up a trucking operation at the end of Q3 which should begin taking commercial
It is important to note that HEK is driving up utilization of assets by both selling trucks
(~50) and moving assets into the Mississippi Lime. Q3 includes an immaterial amount of
revenue for the Mississippi Lime which we expect to get bigger over time. There are ~3
yards established and ~40 drivers hired in the area.
On the gas side, the Haynesville pipeline saw steady sequential volume at Q3 (~50K
barrels/day) and we continue to believe higher natural gas prices represent significant
optionality in the stock.
In the Bakken, HEK expects ~2,500 wells to be drilled in 2013, which is consistent with the
CS Energy team’s internal expectations. We would note internal rate of returns in the
Bakken appear to be close to 20%+ even with ~$60 oil price. One factor that has changed
in the last few months is that the discount to WTI which had been a negative to Bakken
producers is beginning to change. Bakken producers are delivering oil to the Louisiana
sweet crude market as refineries are able to accept rail cars. HEK believes the above
makes up ~$5 to $20/barrel difference.
It is important to note that we continue to see deferral of capex from certain E&P
customers which we expect to continue for the balance of the year. This could change in
2013 but we remain somewhat cautious. On a normalized basis, we expect pro forma
EBITDA margins to run in the mid 30% range due to higher competition and a lower base
On the recycling side, Thermo Fluids revenue was up both sequentially and year over year.
We expect HEK to continue to build ancillary recycling services around its disposal
capacity going forward. The AWS (Appalachian Water Services) deal represents a cost
effective way to treat and recycle flow back water in the Marcellus Shale where customers
are less willing to transport to Ohio. We believe the AWS deal was initiated by one of
HEK’s major current water customers.
On capital allocation, we expect more of a focus on execution rather than infrastructure
build out. We could see some tuck in deals to build other environmental capabilities but
are not expecting anything large.
We continue to rate HEK shares Outperform.
Companies Mentioned (Price as of 12 Nov 12)
Heckmann Corp. (HEK, $4.24, OUTPERFORM, TP $7.00)