Why Does the Market Hate This Energy Company?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The price of natural gas has stayed stubbornly below $4 for what has seemed like an eternity. As a result, the market has been punishing virtually every stock that would seem to benefit from a rise in the price of natural gas. It's especially punished the companies that make money on hydraulic fracturing as drillers increasingly pull back capital on dry gas-focused projects.

One company that's been hit harder than most is Heckmann (NASDAQOTH: NESC  ) . Over the past year, shares of this frack-water recycler have lost about a third of its value. This downside pressure has attracted the attention of short sellers, who have now sold short more than 30% of the float as of the end of January. 

I can understand why the shorts are piling into the stock. It's definitely tied to fracking, and that's not the easiest story to follow, as there are a lot of moving parts. However, shorts need to be careful that they don't end up drowning. There are two important aspects of Heckmann's business that I think they, along with the rest of the market, are overlooking.

It's a pure play for pure water
As investors, we really don't think a lot about water, because there's really no way to invest directly in water. However, the estimates on the need for investment in water infrastructure are staggering, with some as high as a trillion dollars. While Heckmann won't solve all of our future water problems, it is working on one of the most important: cleaning up frack water. 

That being said, I wouldn't put it past Heckmann to move deeper into water, because the opportunity is so vast. Few companies are available on the public marketplace that are dedicated to solving our present and future water problems. As a leading global water technology provider, Xylem (NYSE: XYL  ) is one of the more interesting true pure-play water companies. However, because of the environmental controversies surrounding fracking, I think Heckmann can really make a name for itself on the public market as it becomes the name in providing a solution. From there, the company has a number of ways to keep the profits flowing as it diversifies into other water-related businesses.

Its revenue is very wet
The other area I think shorts are overlooking is the that Heckmann is no longer a natural gas story. Its deal for Power Fuels late last year added the Bakken to its operations while also bringing its liquids and oil related revenue up to 70% of total revenue. That's the sweet spot these days for drillers, meaning that Heckmann's revenue is in no danger of drying up.

In fact, because of its size and scale, it's more attractive to customers as it offers a complete system to them across almost all of the basins in which they operate. That's one reason the company can attract multi-basin customers such as Chesapeake Energy (NYSE: CHK  ) and EOG Resources (NYSE: EOG  ) . Chesapeake might be the second largest natural gas producer, but it has acreage in 10 of the core shale plays where it can focus its capital on drilling liquids-rich opportunities. EOG is also spread across many of the best liquids plays, including the Bakken, which is one of the few prime locations that Chesapeake lacks. As Heckmann becomes more deeply embedded into its customers' operations, it can really clean up as they keep fracking.

My Foolish take
I think Heckmann is a dangerous short. Sure, the financials are a bit tough to decipher thanks to its recent acquisitions, and it has its share of debt, but the long-term growth story is refreshing. Heckmann is one to watch as it continues to solidify its customer relationships through smart acquisitions and builds one of the more intriguing water plays on the market.

Of course, Heckmann isn't the only company that's drawn the attention of short sellers. Because of missteps and the collapse of natural gas prices, energy investors would be hard-pressed to find another company trading at a deeper discount than Chesapeake Energy. Its share price depreciated after negative news surfaced concerning the company's management and spiraling debt picture. While these issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand new premium report on the company. Simply click here now to access your copy, and as a bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

Read/Post Comments (0) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2289461, ~/Articles/ArticleHandler.aspx, 9/24/2016 10:36:46 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 2:40 PM
NESC $0.21 Down +0.00 +0.00%
Nuverra Environmen… CAPS Rating: ***
CHK $6.63 Down -0.24 -3.49%
Chesapeake Energy CAPS Rating: ***
EOG $89.75 Down -2.86 -3.09%
EOG Resources CAPS Rating: ****
XYL $51.55 Down -1.07 -2.03%
Xylem CAPS Rating: *****