Acting as both boon and bane to the natural gas industry, unconventional drilling methods have allowed drillers the opportunity to exploit previously inaccessible deposits. From horizontal drilling to hydraulic fracturing of rock formations, the industry is awash in supplies like never before.
But fracking has attracted the wrath of environmentalists who blame it for everything from groundwater pollution to earthquakes. Yet the National Intelligence Council says that if the Obama administration continues to put roadblocks before the industry, it will impede the industry's ability to lead the U.S. to energy independence in as little as 10-20 years. Environmental extremism remains the "greatest obstacle" to fracking.
Therein lies opportunity. Heckmann (NYSE:NES), as the leading supplier of water to the industry, and its remediation after use, stands to benefit from the industry's move toward more environmentally conscious standards.
What the frack?
Fracking is the process where drillers pump large amounts of water and other fluids under high pressure 10,000 feet below the surface into the rock, causing it to crack, or fracture. The fluids contain proppants -- sand like that provided by U.S. Silica (NYSE:SLCA) or ceramic beads such as those made by CARBO Ceramics (NYSE:CRR) -- that prop open the fissures, allowing the gas and oil to flow more freely.
According to Heckmann, millions of gallons of water are needed for each hydrofractured well. The wastewater generated by the fracking process is then extracted when the oil and gas starts flowing, and Heckmann is responsible for treating it and disposing of it.
One step back
Therein lies another problem because of concerns it contains hydrocarbons and other pollutants. The effluents are typically disposed of by injecting them into deep, underground wells.
Surprisingly, though, despite the historic opportunity, Heckmann's stock has cratered, rebounded, fallen again, and is now on the rise once more. Originally taken a hit as gas drillers took rigs off line to deal with the industry glut and pursue more profitable ventures in oil drilling, Heckmann was left with fewer customers for its services. It's lost three-quarters of them in the Haynesville Shale area alone over the past two years.
Two steps forward
The rebound was due to its acquisition of privately held Power Fuels, a fluid services specialist focused solely on Bakken oil and gas companies. By doing so it will become the largest nationwide provider of environmental services to the industry, doubling its revenues and "immediately and materially" increasing its earning per share.
Yet there's also a lot of competition for the business, too. Cameron International (NYSE:CAM) is said to own half the market, and Siemens (NASDAQOTH:SIEGY) and Veolia (NASDAQOTH:VEOEY) each possess a significant stake as well. Some analysts, however, think Heckmann might make an attractive takeover candidate, though its purchase of Power Fuels gives it a lot more muscle and would allow it to command a higher premium if that ever came to pass.
An oil slick
Standard & Poor's seems to think that, even with the issues around fracking, Heckmann remains an attractive investment and has affirmed the "B+" rating of its debt. Being as dependent as it is on what is currently a depressed industry, its ability to generate excess cash might be constrained if conditions don't improve. Yet the wastewater specialist has bolstered its industry position and now has a large exposure to oil that it didn't have before.
Earlier this year Heckmann also purchased Thermo Fluids, so it now also has a used motor oil recycling business. S&P expects more and so do I.
A big tent
Company founder Richard Heckmann has made a career out of rolling up an industry under one roof. He did it when he headed US Filter, chewing threw some 260 companies throughout the 1990s before allowing the company itself to be swallowed by Vivendi in 1999. Then he moved on to sporting goods outfit K2, where he collected an assortment of sporting goods brands that are well-known, established, and respected -- before it got acquired by Jarden (NYSE:JAH). So, speculation that Heckmann itself could be acquired is not out of the question.
Although it's recovered some of its lost ground, let me know in the comments section below whether you think Heckmann is preparing itself to be bought out.
Rich Duprey has no positions in the stocks mentioned above. The Motley Fool owns shares of CARBO Ceramics and Heckmann and has the following options: long JAN 2014 $4.00 calls on Heckmann and short JAN 2014 $3.00 puts on Heckmann. Motley Fool newsletter services recommend Veolia Environnement. 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.