“Cleaning Up: How One Company Has Discovered A Way To Profit Big From The Fracking Process”

Sniffing out a Flagler Financial Group teaser from Eric Dickson

By Travis Johnson, Stock Gumshoe, January 30, 2013

Irregulars Quick Take Paid members get a quick summary of the stocks teased and our thoughts here. Join as a Stock Gumshoe Irregular today (already a member? Log in)

This teaser ad comes from Eric Dickson at Trinity Research, who is now selling something that’s not quite like a newsletter — he’s pitching both a series of “Special reports” that you can buy for $99 each, and a membership in the Flagler Financial Group that gets you access to all of the reports and any other reports they issue, for $995 (with no guarantee that there will ever be another “special report” after this first series of three they’re touting).

My impulse is to be quite cautious about the “special reports” that Dickson and his colleague Tim Fields publish at Trinity, in part because they’ve shown a propensity in the past to keep republishing the same report for years and years — they’ve continued to recycle their old “forever battery” and WiMax teasers from five or six years ago, and I get questions about those via email every few weeks — and assuming that they’re not updating those reports to change the companies, a few of the stocks they’ve teased for those special reports at their Untapped Wealth newsletter have been quite awful (like CLWR at $20, or XDSL at ten cents). They’re not alone in this, of course, just wanted to issue that note of caution before we uncover this latest report subject.

The one that’s really catching the eye of readers, at least according to my email inbox, is the hydrofracturing cleanup play that’s being teased by Dickson as the focus of the special report, Cleaning Up: How This Undiscovered Company Is Transforming Fracking Waste Into Serious Profits.

So what is our fracking waste company?

Here are the clues:

“You see, this company works in some of the most prolific shale areas in the America; Utica, Eagle Ford, Haynesville, Marcellus(‘Little Saudi Arabia’), Barnett and Tuscaloosa Marine…

“And what they’re doing in these oil plays couldn’t be more important, especially to the residents of these areas. Their job is simple? They clean or dispose of the waste water generated through fracking – and in these areas, for this company at least – business is BOOMING!

“In 2011 they reported $156,837,000 in revenues – up more than 4,000% from 2009!!

“Their earnings are up more than 5,771% in that same two year period. In fact, their earnings were so strong in Q3 2011, that they beat analysts’ estimates by a whopping 300%!

“So what makes this company a smart play?

“Well, besides the fact that their earnings are phenomenal, and their revenues continue to mount at epic proportions…

“Consider this – while right now their shares are trading under $4 ($3.75 as of this writing) expert analysts are expecting them to double and reach $8 before the year is out…

“Their earnings are up more than 5,771% in that same two year period. In fact, their earnings were so strong in Q3 2011, that they beat analysts’ estimates by a whopping 300%!

“So what makes this company a smart play?

“Well, besides the fact that their earnings are phenomenal, and their revenues continue to mount at epic proportions…

“Consider this – while right now their shares are trading under $4 ($3.75 as of this writing) expert analysts are expecting them to double and reach $8 before the year is out….

“Yes, you read that right… their shares are expected to double in JUST the next 2 months!”

OK, so if “before the year is out” is “in the next 2 months” then we’ve got another somewhat stale teaser here — I got it via email in one of Dickson’s mailings just today, so they’re still sending it, but clearly they wrote it in October.

And I hate to break it to you, but the company they’re teasing did not actually double in the last two months of the year — though, the optimist points out, that means perhaps you haven’t missed out yet … right?

Well, maybe. This stock is Heckmann (HEK), a company that was widely covered a year or two ago as they started to try to “wrap up” the (mostly) very local little water cleaning and supply companies that serve fracking sites into a national corporation. They got attention both because the sector was hot (water supply, cleanup and disposal is a major issue for hydrofracking projects, and a big point of political concern, especially in heavily populated areas like the Marcellus Shale) and because the CEO has done this before — Richard Heckmann built US Filter into a huge company and sold it for dramatic gains after making 260 acquisitions of small companies to consolidate that sector.

So investors jumped on it when he raised “blank check” money to build Heckmann Corp five or six years ago, thinking he’d do the same thing again — he started with a not-so-successful purchase of a Chinese bottled water company for about $600 million dollars back in the boom days of early 2008, though that appeared to be a fraud within a year or so and was off the books by September 2011. Coincidentally, that $600 million is now pretty close to the current reported market cap of HEK, which several years ago moved into the oil service sector with water disposal and cleaning operations, including a water disposal pipeline, and more recently diversified (to the market’s chagrin) into waste oil treatment (as in recycling motor oil) with the purchase of Thermo Fluids in early 2012.

You can see Heckmann’s latest investor presentation here, I’ve actually been encouraged by the latest of Heckmann’s acquisitions, they just completed their biggest recent deal with the acquisition of Badlands Power Fuels, a water treatment company serving the Bakken that helped reassure analysts that Heckmann is still focused on fracking water consolidation. That deal also bumped up the debt at Heckmann and they issued 95 million shares for the purchase, so it’s still not particularly clear what the earnings per share will look like (they don’t give much guidance), and there hasn’t been a quarterly release since the deal closed in December, so there’s likely to be some uncertainty remaining for quite a while since this acquisition is such a major one. The CEO of Power Fuels is now taking over as CEO of Heckmann, though Richard Heckmann is remaining on as Executive Chairman and will, presumably, still be deal-hungry.

Oh, and the reported market cap that you see in most of the finance sites doesn’t reflect the merger with Power Fuels yet — so HEK isn’t really a $600 million company anymore, it’s more like a $1 billion company. According to their presentation the total enterprise value will be about $1.6 billion ($550+ million of debt), and EBITDA (earnings before interest, taxes, depreciation and amortization) around $200 million, so EV/EBITDA is about 8, which I would say is not dirt cheap for a good-sized and capital intensive company, but not outlandishly high, particularly if they can grow. Veolia (VE), the mega water treatment company, carries an EV/EBITDA of 7 and should grow far more slowly, just to give one comparison (the two companies are certainly not easily comparable). I would say that the deal looks like it should be pretty dilutive, since Power Fuels will be generating about half the revenue but only a quarter of the EBITDA of the combined company, but that’s based just on some pretty limited numbers from the presentation. So far they’ve mostly been about break-even, with operating costs pretty much equaling their gross profit most of the time … that gives some call for concern if the deal doesn’t juice the margins, since their newly increased debt levels will take up a lot of cash flow (it looks like they’re paying about 8% on that debt), though I suppose $200 million of EBITDA ought to be able to handle what should be $40-50 million in annual interest costs.

So far analysts are more optimistic than they were last Summer, but not so much that they expect the shares to double in two months (I don’t think that was ever a fair interpretation of analyst targets on HEK). They are targeting an average of $7 a share and those targets are usually “within 12 months” … they base this, at least in part, on a turnaround in earnings — they’re looking for a profit in 2013 in the neighborhood of 15-20 cents a share, so if they’re able to keep growing revenue and consolidating the industry with small acquisitions at reasonable prices you can certainly justify 15-25 times earnings for HEK. Though it’s worth remembering that HEK doesn’t give much guidance about earnings, and analysts have not done a very good job of guessing at them in the past — and at least one analysts sees them losing money again this year — which is certainly within the realm of possibility. The average rating is still a “hold,” I think, so it’s not as though the ranks of analysts have been imbued with feckless enthusiasm just yet… though Jim Cramer apparently recently reiterated that he “believes in Heckmann”. You can interpret that however you like.

So … looks like the teaser is a bit stale, but it is a real company that gets a lot of attention from pundits and from newsletter guys thanks to Richard Heckmann’s acquisitive (and mostly successful) past ventures, and it is just below $4 so the price isn’t markedly different than when the teaser was written. I’ve almost suggested Heckmann to the Irregulars a couple times in the past but have not gotten comfortable enough with their strategy or their earnings prospects, I’ll have to take another look now that they’ve done this big transformative deal and see if I like them better — so far, color me curious.

What do you think? Let us know with a comment below.

Leave a Reply

29 Comments on "“Cleaning Up: How One Company Has Discovered A Way To Profit Big From The Fracking Process”"

avatar

Mr. T
Guest
0
Mr. T
January 30, 2013 4:54 pm

I have been watching HEK for awhile as well, and I have been pondering taking a position recently. I would be curious to hear more of what you dig up Travis. Thanks for your thoughts and analysis.

adventure
Member
0
adventure
January 30, 2013 5:31 pm

sometime ago I bought ESPH (eco sphere) at 0.36. it it now a bit higher. they also claim to be good in fracking waste water treatment area.

Ispy
Irregular
0
Ispy
January 30, 2013 7:03 pm

Fwiw Yahoo Finance is showing a 1 year target estimate of $4.82 or about a 25% move up from it’s closing price today.

pcolajoe
Member
0
pcolajoe
January 30, 2013 7:26 pm

Yes, quite cautious, I agree.

Lloyd Moss
Guest
0
Lloyd Moss
January 30, 2013 8:29 pm

Lots of competition in this space and these stories doesn’t always end well, take Poseidon for example. Start with a small position and scale in if you are a believer, but be careful about what you believe. Seems to me the whole oil and gas services sector is underpriced at the moment so it may be a bit safer to take a broader approach like an ETF or a basket of such companies.

Dave B
Guest
0
Dave B
January 30, 2013 8:34 pm

Did a little research on HEK: says 3 Energy Services Stocks to Sell Now
http://investorplace.com/2013/01/3-energy-services-stocks-to-sell-now-glf-orig-hek/?cc=msnfeed Interesting one says it will strike gold, and one says run for the hills. Anybody know who is correct? 😉

Crapsman
Guest
0
Crapsman
January 30, 2013 8:45 pm

I have been watching this market carefully, and there is a HUGE need for cleaning Frack water. One small special co is OOIL (origin oil) they just fell across a cleaning solution and are now in the Eagleford Shale, there waste to water return is 98%..Their algae processing machine’s seem to be on the back burner now but also an interesting idea..

thomas doepke
Guest
0
thomas doepke
January 30, 2013 8:46 pm

I also have a position in ESPH. ITS SO hard to know who is doing the clean thing. I had never heard of the company in the article. I know ESPH has a contract with the Indian nation in SD ,where anyone fracking has to use ESPH.

ET
Guest
0
ET
January 30, 2013 8:56 pm

The real question is who might be the next acquisition target for HEK. Any ideas?

ric jones
Guest
0
ric jones
January 30, 2013 9:40 pm

Atlantic Technologies is said to be able to clean frack water for half the price with ionization.

samroy
Irregular
0
samroy
January 30, 2013 10:24 pm
Does HEK’s technology provides sustainable solution and better than the competitiors ? I am having difficulty in understanding if the Fracking Water is Recycled through RO process then is it bottled for drinking water? or disposed. I would like if any one have an answer. As we have a solution that water can be fortified to Nutritional Drinking Water. Now what happened to Posiedon? It is down to $1.28 from $15.12 in Jan 2012. I think Harnessing Fracking water for the good of our communities does offer a Great Growth Opportunity. I will like to hear from any interested party.… Read more »
Tarzan Leather-Chaps
Guest
0
Tarzan Leather-Chaps
January 31, 2013 12:01 am

I was depressed to hear that GSFVF (which I own) was chosen by Stockgumshoe as the worst stock of 2012. Shortly after it was chosen, a competitor, POOSF took a nosedive like no other. Travis, you pulled the trigger a little early on that one.
Ric Jones, does Atlantic Technologies have a ticker? I am in the mood to drive another fracking cleanup company in the toilet!!

enuhfer
Irregular
2
enuhfer
February 1, 2013 1:47 am

I too have a small stake in Gasfrac and am glad it is small since I have lost a lot % wise. In comparing Gasfrac with HEC, the latter has beat Gasfrac handily 90% of the time over the past year. HEC’s business is based on cleaning the water used in fracking; GSFVF’s business is based on avoiding use of water. To date, the latter has not caught on much.

Ron
Guest
0
January 31, 2013 12:25 am

I’ve been following Gasfrac Energy Services Inc (CDN), which does fracking without using water. In a patented procedure, it uses hydrocarbons, which are later recovered along with the natural gas and petroleum which is produced. The stock appears to have bottomed out. I would be interested in the information and insights of those who understand the company better than I.

petrohog
Member
0
petrohog
January 31, 2013 1:23 am

http://molecularfiltration.com/applications/

Here’s a free look into the future. Been following this company for a while. They have proven up a disruptive technology in this space, quite amazing. Sorry, not public. Keeping an eye out though 🙂

Murphey
Guest
0
Murphey
January 31, 2013 4:46 am

TTI, TETRA Technologies, happens to report expected year ahead today. Also in frac water management, Company has toyed in the past with the idea of going into coiled tubing (necessary occasionally post frac). Business across domestic area seems to be slowing down, watch and see.

nmcampbell1
Irregular
0
nmcampbell1
January 31, 2013 8:45 am

Dick Heckman was very successful in building US Filter from over a hundred small buyouts and selling the resulting conglomorate to Vivende (France).
He knows the capital markets and the water business. Wouldn’t bet against him!!!!!!

Murphey
Guest
0
Murphey
January 31, 2013 2:14 pm
The usual idea of recycling frac water is only that. to make if possible to use the recovered water on the next frac job. Thus lower demand for additional water from other sources. Most tight gas shales are fracked without gelling agents, just water. Thus the low sand rates that are transported and the very large amounts of water required — to get sufficient sand in place to do any good. So reclycling water means cleaning it enough that it won’t damage productivity. That means, usually additional biocides, filtration to the tightest specifications, removal of anything that might precipitate adjust… Read more »
ron sargent
Guest
0
ron sargent
January 31, 2013 2:27 pm

Always thought original fracking was done with hydocarbons from same well. his was mixed with very special sand ( US Silica ) and few other chemicals and pumped back into well under enormous pressure until a fracture initiated and pressure dropped and increased flow out started. . This is reaped several times . Don’t know why or where all this water is used .

biff summers
Guest
0
biff summers
January 31, 2013 4:20 pm

I own some shares of IPRC, located in Boyd Texas but they only recover what oil they can from the frack water and send it down the hole.

pmredmonton
Member
0
pmredmonton
February 1, 2013 1:11 am
There is also Ridgeline (RLE on the TSX Venture) that has a patented technique for removing particulates from water. They claim the process they use is the lowest cost and fastest process out there and can return fracking water to levels acceptable for irrigation of farmland. The other thing with this company is they claim they can also reclaim the hydrocarbons that are dissolved in the water which further would decrease the net cost of water treatment. I know this stock has taken a drubbing due to some lingering uncertainties. They have bought a plant in California where they will… Read more »
Johnny905
Guest
0
Johnny905
February 1, 2013 12:50 pm

I agree that Gasfrac (GFS.TO) is an interesting alternative play to HEK. I picked up some GFS earlier this year and they’ve done well, although they’ve given some of the recent gains back. I will take a look at HEK as well.

who noze
Guest
0
February 2, 2013 11:56 pm

ever wonder what happened to our former v/p QUAYLE he sits on hek board along w//’lou holtz also hek is contemplating a reverse split

ove johannes aspen
Guest
0
February 3, 2013 3:10 pm

I would like to recommend GINGER Oil ticker GOIL which seems to have an awful lot of Gas and Oil in their 18 Wells in Texas-Arkansas-Luisiana and Michgan.They are using very modern 3D Fracking Technology and is now raising more money to increase the Production Capacity.And the shareprice is awful Cheap and Raising….

bonnieember
Member
0
February 11, 2013 7:49 pm
Hello Everyone, Oil, Water, Gas Company’s that look reasonable to me that are cheap: GPR Has acreage & wells. The best one is the Monterey Shale. They do not spend any money on advertising. Can’t wait for this one to go online & up. There are pipelines in Place, & delivery is much cheaper than in the Bakken. I just bought into Poseiden, Constellation & Gasfrak. The World has gone Mad Max for Oil. Get your share of Black Gold, from a Gold Bug. The Miner’s are languishing. Might as well buy a Sector that has lots of upside. I… Read more »
wim_lu
Member
1
wim_lu
June 17, 2013 9:02 am

Heckmann Corporation has changed its name into Nuverra Environmental Solutions. Ticker: NES.

lbehrler
Member
0
lbehrler
August 26, 2013 2:13 pm
wpDiscuz