-- Heckmann Corp. has completed its acquisition of Badlands Power
-- 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.
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,
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
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
-- Consolidated EBITDA margins of 28%, largely on the factors listed
-- 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.
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
-- 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
-- We expect sources of liquidity to exceed uses by 1.2x over the next 12
-- We expect that net sources would be positive, even with a 20% drop in
-- Debt maturities are benign, with the earliest meaningful maturity in
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.
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
Corporate Credit Rating B+/Stable/--
Senior Unsecured B B-/Watch Pos
Recovery Rating 5 6
Rough Rider Escrow Inc.
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
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