The boom in U.S. energy resulting from the explosion in shale oil and gas is nothing short of remarkable. Not only has this new technology shifted America's dependence on foreign energy sources, but it has also effectively kept inflation in check and given the Federal Reserve room to maneuver. While the role of the majors tends to get the most ink, there are two blossoming companies that will give you great upside exposure to the industry. The first, Halcon Resources (HK), has asset plays in a variety of areas in the U.S., including the Bakken formation. The second, Heckmann (NESC), is a less direct play, as the company is in the business of helping companies manage the waste their mining operations create.
Not far from the bustle of North Dakota's Bakken shale activity, the Mesabi Trust (MSB 4.22%), near Babbitt, Minn., is quietly churning out iron ore and an 8.5% dividend yield. In addition to having solid trust characteristics, the company has solid analyst support. Let's look at each of these companies and why they might deserve a slot in your portfolio.
Halcon Resources: This up-and-coming shale oil company's Bakken asset accounts for 45% of proven reserves and 50% of the company's pro forma production. As a part of its most recent earnings release, the company reported a 417% increase in proven reserves and a 128% increase in net daily production. As of Dec. 31, proven reserves stood at roughly 109 million oil equivalent barrels from both oil and natural gas holdings. In addition to its presence in the Bakken region, the company has significant resources in both the Woodbine/Eagle Ford and Uttica.
In the fourth-quarter earnings call, CEO Floyd Wilson talked about the positive outlook for the company, stating: "[O]ur focus is on developing our resource base and growing production reserves and cash flow. The balance sheet is healthy, and we are well positioned to execute our business plan." The company is functioning in line with its own projections and gives investors solid exposure to shale gas and oil on a more pure-play basis. Given the growth nature of both the sector and this company, Halcon is a good bet.
Heckmann: This company operates in the service sector, but it represents one of the most critical elements of shale operations outside the actual drilling. Drilling, and, to an even greater extent, hydraulic fracturing require huge amounts of water. Estimates show that there are approximately 11,400 new wells drilled in the U.S. every year, each requiring a projected 6.1 million gallons of water to operate. That totals about 70 billion gallons of water per year. Heckmann is in the business of not only getting fresh water to these mines, but also in treating and processing the wastewater that each mine creates.
Environmental concerns have become a significant financial element of mining as regulations continue to get more stringent. Deploying capital in a company that profits from helping miners and drillers to meet these regulations has huge potential. To accomplish this task, the company has amassed a fleet of 200 rail cars, 1,200 trucks, 46 waste-disposal wells and 4,200 frack tanks. With a market capitalization over $1 billion, the company is a significant operation. Given current trends, it's hard to imagine how you might not profit by betting on a company that relies on increasing oversight and regulation.
Mesabi Trust: This entity, which is a subsidiary of Cliff Natural Resources (CLF -0.10%), has three characteristics for anyone thinking about investing in a trust. First, the underlying cash flow Mesabi generates is sustainable and relatively stable. The company announced its February distribution in January, seeing the number fall from $0.76 to $0.49 on a year-over-year basis. This decrease was primarily the result of a 19% decline in the average price per ton that the trust received for the iron it sold during the quarter. While this seems like a significant drop, relative to many other commodities, it is manageable.
The next attractive feature of Mesabi is that the trust has integrity and longevity as a legal entity. You must pay attention to how long the trust will continue to operate when you make an investment -- Mesabi has a minimum of 21 years ahead of it, so this feature is well covered. Lastly, the trust pays a significant dividend, currently 8.5%. Given the available yield in the market, and the other attractive features of the trust, this is a hugely compelling reason to have an allocation to this iron machine.
