Environmental-services company and frack-water treatment specialist Heckmann (HEK +0.00%) is scheduled to report financial results for its 2012 fourth quarter and full year on March 11. As the first report since closing its merger with Power Fuels on Nov. 30, this is an important report for the company, and investors need to pay the closest attention to three specific areas.
1. Integration with Power Fuels
The merger with Power Fuels is a transformative deal in more ways than one. One of the biggest changes is that Heckmann founder Richard Heckmann handed over the CEO reins and a significant stake in the company to Power Fuels CEO and owner Mark Johnsrud. Having built Power Fuels from the ground up, he would appear to be the right man for the job. However, the new Heckmann is a much bigger operation to manage, so it will be important to see whether the integration has caused any indigestion.
The other new face here is CFO Jay Parkinson, who'd been the company's investment banker at Jefferies. The good thing is that he knows the company's story better than most. The question is whether he can tell that story in a way that investors will both understand and embrace.
2. The numbers
Heckmann's financials are muddied by its acquisition growth model. The company needs to work a bit harder to show clean financials that investors can clearly understand. On average, analysts are expecting the company to lose $0.07 a share in 2012, with consensus of a $0.04 loss in the fourth quarter. However, what's more important is the true picture of the company's financial health.
That could prove tricky, as analysts have become increasingly more bearish on the company, given what happened with drilling in the country last quarter. For example, oilfield service providers such as Halliburton (HAL +4.33%) called 2012 "challenging" and noted a significant drop in rig activity, especially toward the end of the year. Baker Hughes (BHI +0.00%) echoed these sentiments, noting on its conference call that the it "experienced a reduction in activity as rig counts declined sharply toward the end of the quarter" because customers "[shut] down early for the holiday period." The question is, how much did that effect Heckmann's business in the quarter?
Jefferies, of all places, recently downgraded the stock to "hold" from "buy." With the well-documented fourth-quarter slowdown in drilling activity as context, it sees reasons for Heckmann to be hit by that sluggish activity and sees water-service pricing being challenged. Heckmann investors need to watch whether the company's new Bakken business and other liquids-rich operations are able to overcome weaknesses elsewhere in its footprint.
3. Business outlook
The most important area to pay attention to is the company's business outlook. There are a lot of questions I hope the company can answer. First, are there any more acquisitions in the pipeline? More importantly, given its near nationwide footprint, is the combined company now able to secure more businesses by providing a system of services? Finally, how likely is its ambitious target to hit $1 billion in revenue?
A weak outlook could hit shares hard, especially if the newly expanded company isn't able to deliver on its growth promises. Look to see whether management's outlook has changed or whether it's seeing something Wall Street might be missing.
My Foolish take
While the fourth-quarter numbers might get a bit messy given the Power Fuels deal, I think the acquisition could turn out to be better than expected. The numbers coming out of Bakken producers all showed tremendous production growth. If Heckmann was able to capture its share of that growth and grow elsewhere in its footprint despite a challenging on-shore market, then 2013 could be a very good year for the company's investors.
