TEXT-S&P: Heckmann Corp's rating affirmed

Fri Dec 7, 2012 5:38pm EST

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Overview
     -- Heckmann Corp. has completed its acquisition of Badlands Power
Fuels LLC.
     -- The company executed an add-on issuance of $150 million in senior 
unsecured notes and increased the size of its unrated revolving credit 
facility by $175 million to $325 million.
     -- We affirmed our 'B+' corporate credit rating on Heckmann.
     -- We also removed our issue-level rating on the company's senior 
unsecured notes from CreditWatch, raised the issue-level rating to 'B', and 
revised the recovery rating to '5'.
     -- The stable outlook reflects our view that Heckmann's credit metrics 
will be appropriate for the current ratings, as we believe that hydraulic 
fracturing activity in the company's various shale basins will remain 
satisfactory and that the company will generate solid profitability from its 
enhanced geographic diversity and market position.
 
Rating Action
On Dec. 7, 2012, Standard & Poor's Ratings Services affirmed its 'B+' 
corporate credit rating on Scottsdale, Ariz.-based Heckmann Corp. 

We also removed our issue-level rating on the company's existing senior 
unsecured notes from CreditWatch, where we originally placed it with positive 
implications on Oct. 24, 2012. We raised the issue rating on this debt to 'B' 
from 'B-' and revised the recovery rating to '5' from '6'. We increased the 
par amount of the notes to $400 million from $250 million and withdrew our 
ratings on the $150 million of senior unsecured notes which were previously 
issued under Rough Rider Escrow Inc., a wholly owned unrestricted subsidiary 
of Heckmann Corp. Heckmann has now assumed the obligations of Rough Rider 
Escrow and has become the issuer of the notes through a mandatory redemption. 
The notes constitute an additional issuance of Heckmann's existing 9.875% 
senior notes due 2018 and are governed by the existing April 10, 2012, 
indenture.

Rationale
The affirmation reflects our view that Heckmann's credit quality will remain 
stable following its acquisition of Power Fuels. We believe Heckmann's market 
position and credit statistics will improve, but the resulting benefits are 
not yet sufficient to warrant higher ratings at this time. The company's 
services are dependent on unconventional energy exploration and production 
(E&P) methods like hydraulic fracturing in shale basins, and operating results 
can suffer if market conditions prompt a slowdown in hydraulic fracturing 
(fracking) activity. Free cash generation could be somewhat limited because of 
high capital expenditures, and the company still faces significant bargaining 
power from its customers, which include large multinational oil and gas 
exploration and production companies. Still, we recognize that the acquisition 
enhances Heckmann's geographic diversity and market position. Power Fuels' 
market share in the oil-rich Bakken shale basin, an area which Heckmann did 
not have meaningful exposure to before the acquisition, increases the 
company's water transport and disposal sales derived from oil and liquids-rich 
basins to over 70% from 30%. In addition, credit statistics will improve 
despite the add-on offering to the senior unsecured notes because Heckmann 
issued 95 million shares of common stock valued at roughly $370 million as of 
the Nov. 30, 2012, closing date to fund a majority of the purchase price.

The ratings on Heckmann reflect the company's "weak" business risk and 
"aggressive" financial risk profiles. Pro forma for the acquisition of Power 
Fuels, the company will relocate its headquarters to Scottsdale, Ariz., from 
Coraopolis, Pa.

Heckmann transports and disposes of the water used in fracking during oil and 
gas exploration in most major domestic shale regions. The company (through its 
April 2012 acquisition of Thermo Fluids Inc.) also recycles and reprocesses 
used motor oil in 18 states across the Western, Mountain, and South Central 
areas of the U.S. Power Fuels provides water delivery and disposal, fluids 
transfer and handling, water sales, and equipment rental services. Pro forma 
for the acquisition, we expect that Power Fuels to account for roughly 52% of 
the combined company's revenue, while the company's existing water-related and 
oil-recycling businesses will account for 31% and 17%, respectively. The 
company's operations are subject to the supplies and pricing of oil and gas, 
as adverse commodity price movements may stunt the future development and 
growth rates of shale fracking. The company has grown significantly during the 
past three years, as sales increased to $232 million for the 12 months ended 
June 30, 2012, from less than $4 million in 2009. Pro forma for the 2012 
acquisitions, we expect sales of over $800 million in 2013. Heckmann was 
founded in 2007 to make investments in various businesses, and we expect the 
company to continue to make tuck-in acquisitions from time to time, many of 
which may require debt financing.

Pro forma for the Power Fuels acquisition, we believe Heckmann's market 
position will strengthen because of scope and diversity. The company will 
fortify its large asset base in the specialized field of fracking waste water 
disposal and will have roughly 1,000 trucks in service and more than 3,800 
fracking tanks that are available for its customers to lease. Power Fuels 
operates in the Bakken shale basin, a more oil-rich basin that has seen 
increases in rig counts than other areas like the natural-gas-concentrated 
Haynesville basin, which has seen activity drop off substantially. Heckmann's 
operating results could benefit from the Power Fuels acquisition if oil prices 
remain high even if natural gas prices remain low. And while activity in the 
Haynesville, La., basin has curtailed during the past year, the company's 
underground pipelines provide a key competitive advantage that could prove 
useful if natural gas prices rise again. One of these pipelines is a PVC 
pipeline spanning 40 miles that provides fresh water used in the fracking 
process, and another is a fiberglass pipeline that stretches for 50 miles to 
dispose of the produced water into its network of 21 salt water disposal (SWD) 
wells in the region. The company also has five SWD wells near Eagle Ford, 
Texas, and two SWD wells around the Tuscaloosa Marine Shale area in Louisiana 
and Mississippi. It also has a handful of SWD permits in other regions.

With Power Fuels, Heckmann's main operating regions are in the Haynesville 
area in East Texas and Louisiana, the Eagle Ford/Eaglebine shale in South 
Texas, the Bakken region in North Dakota and Montana, and the Marcellus/Utica 
region in Western Pennsylvania and Northeast Ohio. The company also has 
operations in other shale plays including Tuscaloosa and the Permian basin and 
Barnett regions in Texas. With persistently low natural gas prices, 
profitability in the dry gas Haynesville region declined and the company 
mobilized resources away from that area during the past year and continued to 
move into more-profitable oil and wet gas-producing regions in Eagle Ford and 
Marcellus. Despite incurring $4 million of charges in connection with this 
redeployment, profitability remains good, with trailing-12-month EBITDA 
margins of 18% at Sept. 30, 2012. Power Fuels' profitability is very good, 
with EBITDA margins of over 40% in 2012. We believe this will improve 
Heckmann's adjusted EBITDA margin to roughly 28% in 2013. 

Our 2013 performance expectations for Heckmann include:

     -- Sales growth of over 100%, reflecting its proposed acquisition of 
Power Fuels and the full-year effect of acquisitions made in 2012, as well as 
organic growth arising from expansion into faster growing liquids and oil rich 
shale regions;
     -- Consolidated EBITDA margins of 28%, largely on the factors listed 
above; and
     -- Adjusted EBITDA of $224 million.
 
We characterize Heckmann's financial risk profile as "aggressive." Despite its 
public ownership, Heckmann is still a relatively new and growing company 
without an established track record of prudent financial policies. Because the 
hydraulic fracturing industry is in a high-growth stage, the company has 
funded large capital expenditures to build the infrastructure necessary to 
capitalize on this trend. We still anticipate high capital expenditures during 
the next year, though these expenditures are largely discretionary and should 
ease over time.

In addition, we expect the company to engage in tuck-in acquisitions from time 
to time, which could involve additional borrowings. For the current rating, we 
expect funds from operations (FFO)-to-debt of roughly 20%. Pro forma for the 
2012 acquisitions, we expect this figure to increase to the target expected 
for the rating. Pro forma for the Power Fuels acquisition, Heckmann owns and 
operates 47 SWD wells that are not required to be capped. As such, the company 
carries no asset retirement obligations on its financial statements and does 
not have any liabilities related to environmental remediation.

Liquidity
We view Heckmann's liquidity as "adequate." In conjunction with the add-on 
offering of its notes, the company amended its revolving credit facility and 
upsized the facility to $325 million. We expect the company to have over $175 
million of availability under the unrated revolving credit facility due 2017, 
net of $146 million of borrowings, and $1 million of letters of credit. The 
terms of the amendment also include a $10 million upsize to the letter of 
credit sublimit to $20 million from $10 million, and a $15 million upsize to 
the swingline to $30 million from $15 million. Most financial covenants will 
remain the same, and the minimum interest coverage ratio and maximum senior 
leverage ratio will stay at 2.75x and 2.50x, respectively. Regarding the 
maximum total leverage ratio, this remains 4.50x as of Sept. 30, 2012, and 
4.0x as of Dec. 31, 2012; however, the last step-change eases slightly, to 
3.75x as of June 30, 2014, from 3.50x as of March 31, 2013. Based on our 
scenario forecasts, we expect the company to be able to maintain sufficient 
headroom over the next year.  

Our liquidity assessment incorporates the following assumptions and 
observations:
     -- We anticipate $15 million to $20 million of revolver usage for working 
capital needs, with most of the usage occurring in the summer because of 
seasonality in the water transportation and oil recycling businesses;
     -- Capital expenditures of roughly $125 million in 2013, roughly 
two-thirds for maintenance-related capital spending and about one-third for 
growth;
     -- We expect sources of liquidity to exceed uses by 1.2x over the next 12 
months;
     -- We expect that net sources would be positive, even with a 20% drop in 
EBITDA; and
     -- Debt maturities are benign, with the earliest meaningful maturity in 
2017.
 
Recovery analysis
Heckmann's senior unsecured notes are rated 'B' with recovery ratings of '5'. 
The '5' recovery rating implies our expectation of modest (10%-30%) recovery 
in the event of a payment default. 

For the complete recovery analysis, see our recovery report on Heckmann, 
published on RatingsDirect.

Outlook
The stable outlook on Heckmann reflects our expectation that hydraulic 
fracturing activity in the various shale basins in which the company operates 
will remain satisfactory to support solid sales and profitability over the 
next year, and that the company will integrate the acquisition of Power Fuels 
without any major difficulties. Our base-case reflects our view that, over the 
next year, Heckmann will be able to maintain adjusted EBITDA margins of about 
28% and with FFO-to-debt of 24%.

We could raise the ratings modestly if the company establishes and maintains a 
track record of reliable operating performance and its business prospects 
remain robust. Another important factor in our consideration of a higher 
rating is whether Heckmann maintains adequate liquidity despite high capital 
spending and seasonal working capital-related borrowings.

We could lower the ratings if downside risks to our forecast materialize, such 
as greater-than-expected debt incurrence to fund acquisitions, unfavorable 
economic trends that reduce the profitability of hydraulic fracturing, 
environmental-related regulations that curtail drilling activity and 
investments, a disruption in water pipelines, other operating problems that 
could constrain liquidity, or significant debt incurrence to fund a 
shareholder distribution. Based on our scenario forecasts, we could take a 
negative rating action if the company's sales growth in 2013 does not meet 
expectations and its EBITDA margins decrease to 20%. If this happens, 
Heckmann's FFO-to-total adjusted debt would likely fall to about 15%.

Related Criteria And Research
     -- Heckmann Corp. Ratings Placed On Watch Developing On Plans To Acquire 
Power Fuels, Sept. 4, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
Sept. 18, 2012


Ratings List
Ratings Affirmed

Heckmann Corp.
 Corporate Credit Rating    B+/Stable/--       

Rating Raised
                            To                 From 
Heckmann Corp.
Senior Unsecured            B                  B-/Watch Pos
  Recovery Rating           5                  6

Rating Withdrawn
                            To                 From
Rough Rider Escrow Inc.
 Senior Unsecured
  Local Currency            NR                 B 
  Recovery Rating           NR                 5



 
Temporary Contact Information: James Siahaan (347-213-1346)Complete ratings 
information is available to subscribers of RatingsDirect on the Global Credit 
Portal at www.globalcreditportal.com. All ratings affected by this rating 
action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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