This Just In: Upgrades and Downgrades

Why the "HEK" does Wedbush hate Heckmann?

Rich Smith
Rich Smith
Feb 12, 2013 at 8:05PM
Energy, Materials, and Utilities

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Wedbush condemns Heckmann to... heck
(NASDAQOTH:NESC) shareholders got off to a miserable start this week, as a downgrade from Wedbush sparked a 10% sell-off in their stock. But was this an overreaction? Could Heckmann's new share price -- now 10% cheaper -- be presenting investors a bargain?

It depends. As I pointed out last month, prospects have started looking up for Heckmann, whose business of supplying water for use in hydraulic "fracking" of oil- and gas-bearing shale, then disposing of the wastewater after, has begun generating honest-to-goodness free cash flow at the firm. For the first time in years, Heckmann's put together back-to-back positive free cash flow quarters: $7.6 million  in six months.

It's not exactly a gusher of cash -- yet. But it's a start. The problem here, though, is that if you listen to what Wedbush is saying, it may also be a finish.

According to Wedbush, prospects look poor across the oil and gas industry. In December, both Schlumberger (NYSE:SLB) and Baker Hughes (NYSE:BHI) issued profit warnings. Both wound up beating (reduced Q4 guidance) by a penny, but in each case, earnings declined year over year -- in Baker's case, by nearly 50%! Halliburton (NYSE:HAL), yet another big player in the oil-field services market, reported a 58% decline in operating income from its North American business last month.

Given the troubles elsewhere in the industry, it's perhaps not surprising that Wedbush would take a bearish stance on Heckmann's prospects as well. Most analysts think Heckmann will report a small loss for Q4, resulting in a loss for the full year as well. Wedbush sees the weak results continuing in 2013.

Even if, as expected, Heckmann manages to eke out a profit, the analyst thinks a cut in capital investment by oil companies and falling utilization rates (Wedbush sees Heckmann's equipment rental business getting cut in half) will result in earnings "well below expectations."

And Wedbush may well be right about that. We'll have a better idea about this in March, when the company reports Q4 results. In the meantime, though, here's what we know right now:

  • Halliburton -- one of the few oil-field services companies striking an optimistic tone in Q4 -- thinks Q4 was the "low water mark" for profit margins, which currently sit at about half of what Hally says are "normalized" levels.
  • Dawson Geophysical (NASDAQ:DWSN), a smaller player focusing on survey work for drillers, may have already turned the corner. Last week's fiscal Q1 2013 earnings report showed Dawson breaking a streak of earnings misses and reporting profits 28% greater than what Wall Street had expected.
  • While the possibility of reduced guidance is always out there, right now analysts predict a $0.22-per-share profit for Heckman in fiscal 2013. (Indeed, even Wedbush admits that its more pessimistic prediction still sees Heckmann earning $0.16 a share).

Whichever number ultimately turns out to be right, this means 2013 will mark the first time in more than five years that Heckmann produces a full-year profit.

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And, yes, topping it all off is the fact that Heckmann is already generating positive free cash flow and has continued doing so for two straight quarters.

Foolish final thought
Now, does all this mean Heckmann is a lock? An obvious buy, and a stock you must run right out and buy right now?

Hardly. To the contrary, with a trailing-12-month record that's still firmly free-cash-flow negative, a balance sheet stacked to the rafters with more than $250 million net debt, and the very real possibility that Heckmann will be forced to reduce earnings guidance -- as Wedbush predicts -- Heckmann remains a very risky stock.

It is, however, a stock that's begun to turn itself around. Whether it's worth buying today or still overpriced and too dangerous to own depends entirely on the speed at which the turnaround progresses. And to gauge that we'll simply have to wait for Q4 earnings. Check back in March, and we'll give you all the details.