Shareholders in Heckmann (NASDAQOTH:NESC) have been on one heck of a ride over the past two months. In early September, the company announced the acquisition of Power Fuels, and the stock shot up almost 50%.
Yesterday, the seesaw headed in the other direction, with the company down about 9%. Below, I'll explain why this happened, why investors don't need to worry too much, and at the end, I'll offer access to a special free report on the one energy stock every investor should look into.
But first, a quick primer on what the company does
If you've been following the energy sector over the past two years, this may be a review for you. But for those who are just entering the game, the big story as of late is natural gas. With new fracking techniques -- which have created their fair share of controversy -- companies like Chesapeake Energy (NYSE:CHK) have gained access to huge swaths of natural gas on North American soil that were previously inaccessible.
Along with this boom, several companies have gained traction in their attempt to make natural gas the fuel of choice for the future. Westport Innovations (NASDAQ:WPRT), for instance, designs engines for cars, trucks, and heavy machinery that can run solely on natural gas. And several electrical utility companies, like Duke Energy (NYSE:DUK), have also started building new facilities designed solely for natural gas use.
With all of this potential demand for natural gas building up, Heckmann is aiming to be the company that helps meet the needs oil and natural gas extractors. Specifically, the company provides and disposes of the water used in the fracking process, and can help recycle water and oil when mixed together.
Why the stock fell
As I mentioned above, the week hasn't been to kind to Heckmann. This is largely because yesterday, the company announced it was issuing $150 million in debt, which will be due in 2018 at 9.875%.
That might make sense to the CPAs in the room, but for us mere mortals, here's what it means. Heckmann's doesn't have enough money on hand to acquire Power Fuels outright. When that happens, a company can do two things to raise money: issue more shares or take on debt.
Heckmann chose the latter, and by doing so, created a lot more debt for itself. Currently, Heckmann has about $5 million in cash, and about $270 million in debt. The recent announcement means that the company will grow its debt by about 55% to $420 million.
Such moves can often scare investors, as it puts more of an onus on the company to perform excellently for the debt being taken on to be worth it.
Why investors shouldn't worry
But if you've been following what CEO Richard Heckmann has been saying, you knew this was a possibility. A successful entrepreneur in the past, Heckmann is intent on building the company that will lead the water services industry when it comes to energy.
Previously, Heckmann had been heavily concentrated in the Haynesville basin, which offers up natural gas, but no oil. When the price of natural gas plummeted earlier this year, business in the basin took a hit. In order to diversify and stabilize the company, Heckmann went out and got Power Fuels.
The move was important because Power Fuels is already a well-established presence in Bakken shale of North Dakota and Montana. The shale is both an oil and natural gas play, which means that business should be steady no matter which commodity is in higher demand.
When all is said and done, S&P predicts that 52% of Heckmann's revenue will come from the bigger, but slower growing Power Fuels business, while Heckmann's core water and recycling businesses -- which are growing much faster -- will account for the rest.
In other words, the debt is being taken on to provide a stable stream of income from one half of the business, while the other half continues to grow quickly. There's no guarantee that the deal will end up being a profitable one for the company, but on the face of it, it makes a lot of sense.
Fool contributor Brian Stoffel owns shares of Westport Innovations and Heckmann. The Motley Fool owns shares of Heckmann and Westport Innovations and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and long JAN 2014 $4.00 calls on Heckmann. Motley Fool newsletter services recommend Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.