When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upsides outweigh its risks. Let's take a look at Heckmann (NYSE: HEK ) today, and see why you might want to buy, sell, or hold it.
Heckmann is focused on wastewater treatment and disposal, and not any old wastewater. It specializes in wastewater resulting from unconventional oil and gas exploration and production. If you've heard of the controversy over fracking, largely due to concerns about the wastewater that results from that process of producing natural gas, that's another specialty of Heckmann. (Fracking involves the high-pressured injection of water, sand, and chemicals into rock formations to break them up and make it easier to retrieve oil and gas reserves.)
The company recently sported a market cap near $600 million, and over the past year, its stock is down 36%. Is it a bargain now? Let's see.
The basic economic laws of supply and demand are one reason to consider buying Heckmann. Our global population is growing and developing economies are building infrastructure and increasingly modernizing their standard of living, and all that will translate into increased energy demands over time. Companies tied to the energy industry have this tailwind behind them.
The company does have significant debt, but revenue has been growing in recent years.
In our CAPS community, All-Star participant tenmiles has opined that:
[Chairman and CEO Richard Heckmann] clearly knows how to acquire and integrate businesses. ... tens of thousands of new wells will be drilled in the next ten years all requiring water remediation and disposal. This one will likely be a winner for those of us who scale in over time.
Competition is a concern for Heckmann, but also potentially an opportunity. As my colleague Sean Williams has noted, Cameron International, with a market cap about 20 times that of Heckmann's, "currently possesses more than half of the oil-field water solutions side of the business, with multiple other competitors in the mix." Siemens and Veolia (NYSE: VE ) also hold big market shares. This actually makes Heckmann, with its depressed stock price, a potential acquisition target for one of these bigger companies. (It's rarely smart to buy a stock merely on such a possibility, though.)
Finally, Wall Street sentiment is positive on the company. The average opinion of Wall Street recommendations tracked by S&P Capital IQ is "outperform," with an average price target of $7.00.
One reason to consider selling Heckmann is that F-word I mentioned above: fracking. Proponents argue that when performed responsibly, it's safe and a terrific way to boost our energy supply. But others point out that it's apparently not performed responsibly all the time, and some people can light their cigarettes from fire coming out of their sink faucets. (Really.) In addition, some research is now suggesting that activities related to fracking are leading to increased earthquake activity. If regulations crack down on and reduce fracking activity, Heckmann's business could suffer. (On the other hand, regulations could help Heckmann, too, if greater attention is paid to treating wastewater and disposing of it safely.)
Meanwhile, the price of natural gas is so low now that many companies are turning their attention elsewhere for greater profits. My colleague Rich Duprey reports that Chesapeake Energy (NYSE: CHK ) and Encana (NYSE: ECA ) are reining in their drilling for it, and Linn Energy (NYSE: LINE ) is shifting its focus more toward oil.
If all this has you skeptical about the stock's prospects, know that you're not alone. About 21% of the stock's outstanding shares had been sold short recently, reflecting a lot of pessimism. Of course, if these folks are proved wrong, then the stock will get a boost as they buy shares to cover their positions.
Given the reasons to buy or sell Heckmann, it's not unreasonable to decide to just hold off. You might wait for it to turn the corner into sustained profitability. You might want to wait for the price of natural gas to rise.
I think I'll be holding off on Heckmann, at least for now. After all, there are plenty of compelling stocks out there with less uncertain futures. As more new companies embark on volatile projects, fortunes can be made or lost -- Heckmann could be the play that boosts your portfolio, or you could look elsewhere for an even more promising energy stock. You can learn about an energy stock set to soar in our special free report: "The Only Energy Stock You'll Ever Need." Get a copy today and have an opportunity to get a great value, it is free and only available for a limited time.