Every once in a while, a new company comes about in an emerging industry and investors don't quite know how it works. These misunderstood companies are evaluated with the traditional metrics of the industry, but those very metrics might not accurately reflect the changing dynamics of the industry. Let's check in with one of these companies, Heckmann , and see how a traditional metric for oil services might not do this company justice.
Oh, Wall Street, please don't let me be misunderstood
To the surprise of many, Heckmann soundly beat earnings expectations this quarter and ended in the black. What's also encouraging is that the report included numbers from Power Fuels only for December, so we won't see the full impact of the merger be until next quarter. Much of the consensus on this company has been that its outlook will be down for 2013, but there are three reasons that may not be the case.
1. Traditional oil-services metrics don't really work for Heckmann. One of the metrics for gauging the health of the oil-services sector is rig count. It's a decent metric for the likes of Nabors , which leases rigs, but it doesn't necessarily hold up for a company like Heckmann. What also needs to be considered is increased drilling efficiency. As more companies become better at drilling and move to pad drilling techniques, fewer rigs are needed to drill the same amount of wells. So even though the total amount of rigs would seem to indicate a decline, that isn't necessarily the case. Take a look at the Bakken. Even though rig counts are expected to remain flat throughout 2013, it's expected that the run rate of completed wells will increase almost 10%.
So while a company like Nabors will need to fight against its competitors to keep its rigs out in the field, Heckmann's realm is still growing, and pretty well.
2. Drilling and water use are not directly correlated. So fewer rigs will be used, but we can expect some marginal improvements when it comes to total wells drilled. This is decent news for drilling companies such as Haliburton and Schlumberger , but it isn't anything to write home about. While some water is used in drilling, the lion's share that's used to complete a well comes during the fracking stage. Fracking does happen in conjunction with drilling, but it can also be done multiple times afterwards to reopen the shale and increase production for a more mature well. It takes about 4 million to 6 million gallons of water to frack a well, according to a recent New York Times article, so the potential for Heckmann's business goes well beyond the drilling phase.
There's also another industry trend working in Heckmann's favor: a move toward more water recycling and reuse for drilling and fracking. In places such as the Eagle Ford formation, where oil and gas are plentiful and water is becoming more scarce, the need to reuse water grows every day. Unlike some fluids-treatment competitors such as Key Energy that focus mainly on disposal, Heckmann is positioning itself as a full-service wastewater company with treatment and reuse capability. With this type of operation, it will be able to control the entire life cycle of transport, treatment, storage, and delivery of water used in oil and gas drilling.
3. Heckmann isn't just natural gas anymore. Much of Heckmann's early business was centered on servicing natural gas operations, so it would make sense to associate the steeper decline in natural gas drilling with lowered expectations for the company. This isn't the case anymore. The company's other half, Power Fuels, was almost primarily focused on servicing oil operations, so with the two companies teaming up, they now sport a diversified portfolio of oil and gas services. Heckmann's management believes that several exploration and production companies are looking for a single company to handle their water services, and the merger positions it to be the company to provide that service.
What a Fool believes
We at the Fool like to see founder-led companies. So two founders must mean even better, right? After the successful merger of Heckmann and Power Fuels, Power Fuels founder Mark Johnsrud has taken over the reins as CEO and Heckmann founder Richard Heckmann will remain executive chairman of the newly formed company. Between the founders and other insiders, the company is more than 43% insider-owned. So investors can take comfort in knowing that management has a very large stake in the decisions it makes and that its goals should be closely aligned with shareholders.