Did This Oil Services Company Make the Perfect Purchase?

If you could gamble on the chances of a successful company merger, the house would always take the fail side of the bet. Nearly 74% of all companies do not maintain revenue growth in the quarter following a merger. So, with water treatment oil services specialist Heckmann (NYSE: HEK  ) recently closing its acquisition of Power Fuels, prudent investors should take a hard look to see whether this combined company can deliver value for shareholders.

During Heckmann's conference call last Friday, company Chairman and CEO Richard Heckmann announced that his company will purchase Power Fuels by issuing $125 million in cash and 95 million shares of Heckmann stock, as well as refinancing $150 million of Power Fuels' debt. Despite the large sticker price, Heckmann avoided a large debt issuance and only increased its revolving credit facility – think of it as upping the limit on the company's credit card – by $25 million.

These past six months have not been kind to companies who serve gas exploration and drilling. Despite a decline in rig counts, production continues to rise. This is what makes the purchase of Power Fuels such a smart idea. Both companies specialize in treating, transporting, and disposing of wastewater used in drilling and exploration, but Heckmann has historically only dealt with gas drilling, while Power Fuels has worked exclusively on liquid fuels. With Heckmann acquiring Power Fuels, the two companies now have a combined presence in both these markets. This two-pronged approach should shield the company against the fluctuations of an individual market. The merger also gives Heckmann a presence in every major unconventional shale play in the United States.

The announcement for the merger came on top of a successful quarter in which Heckmann increased its revenue by 95% year over year, to $93.1 million. Adjusted EBITDA for the company also increased 57% to $17.3 million. However, this number should be taken with a grain of salt, since it does not include any operational adjustments for the quarter. The company did miss analyst estimates for both revenue and earnings per share, though. Revenue barely missed by $1.5 million, and Heckmann's net loss of $9.3 million missed by $6.2 million.

What a Fool believes
Since the company specializes in the treatment, transport, and disposal of water used in well drilling, Heckmann provides a unique opportunity for investors in the oil and gas space. This company can benefit from two major outcomes in the industry:

  • Increased oil and gas drilling will mean more wellheads and drilling rigs that require Heckmann's services.
  • Stricter EPA regulations on well waste discharge contaminant levels will make the company's services that much more important for drilling companies, which could allow Heckmann to increase the price of their services.

The ability to play both outcomes should put Heckmann at an advantage to other traditional oil services companies.

Company

Operating Margin

Expected 5-year EPS growth

Price to Sales

Dividend yield

Heckmann

(2.97%)

25.0%

1.81

N/A

Key Energy Services (NYSE: KEG  )

11.84%

6.7%

0.42

N/A

Halliburton (NYSE: HAL  )

17.36%

16.89%

1.00

1.2%

Schlumberger (NYSE: SLB  )

17.45%

18.7%

2.07

1.6%

Baker Hughes   (NYSE: BHI  )

12.05%

14.71%

0.84

1.5%

Source: Yahoo! Finance

When comparing Heckmann to other players within the oil services space, it doesn't look like the most stable investment. Keep in mind, though, that it is still a micro-cap company with plenty of room to grow. Key Energy Services is one of Heckmann's direct competitors, and the expected outcomes for the two companies over the next five years clearly favor Heckmann.

If you're looking for a high-growth company within the oil and gas services space, then this company could be a smart pickup. However, if you need some more stability in your portfolio, then the big three of oil services (Baker Hughes, Halliburton, and Schlumberger) are a much more attractive option.

The oil and gas boom in North America provides investors with several lucrative opportunities. Both the United States and Canada keep finding more and more resources every day. The challenge for investors in this space is to make sense of this boom and how to play the best hand. Our analysts at the Motley Fool keep a keen eye out in this space and have found one of the most intriguing companies in this space, Kodiak Oil & Gas.  We have put together a premium report on this company highlighting its huge growth potential and the challenges it faces.  To get a copy of this report, click here.


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