April 12 - Overview
-- Heckmann Corp. has completed its $250 million issuance of senior
unsecured notes and raised $80 million in equity.
-- Heckmann used proceeds from the notes to refinance its secured credit
facility and acquire oil recycler Thermo Fluids Inc.
-- We assigned our 'B+' corporate credit rating to Heckmann and our 'B-'
issue rating and '6' recovery rating to the notes.
-- The stable outlook reflects our expectation of increasing sales and
profitability in a growing market, offset by negative cash flow because of
high discretionary capital expenditures.
On April 12, 2012, Standard & Poor's Ratings Services assigned its 'B+'
corporate credit rating to Coraopolis, Pa.-based Heckmann Corp., a provider of
environmental services including water transportation for hydraulic fracturing
oil and gas projects and oil recycling services. The outlook is stable.
At the same time, we assigned our 'B-' issue-level and '6' recovery ratings to
the company's $250 million senior unsecured notes. The '6' recovery rating
indicates our expectation for a negligible (0% to 10%) recovery for lenders in
the event of a payment default. The company used the note proceeds--along with
$80 million from an equity issuance, $17.5 million of equity held in escrow,
and $63 million of existing cash--to refinance its secured credit facilities
and to acquire Scottsdale, Ariz.-based oil recycler Thermo Fluids Inc. (TFI;
unrated), a provider of used oil recycling services in the Western U.S.
Proceeds were also used to pay for transaction fees and expenses and other
general corporate purposes.
The ratings on Heckmann reflect the company's "weak" business risk profile and
"aggressive" financial risk profile. Heckmann transports and disposes of water
used in the hydraulic fracturing (fracking) process of oil and gas exploration
in shale regions. Pro forma for the TFI acquisition, we expect the company's
traditional water-related businesses (Heckmann Water Resources, or HWR) to
account for 58% of revenues and the acquired oil-related businesses to account
for 42%. The company's operations are subject to the supplies and pricing of
oil and gas, since adverse commodity price movements may impact the future
development and growth rates of shale fracking. The company has grown
significantly during the past three years, increasing sales to $157 million in
2011 from less than $4 million in 2009. We expect sales to hit $380 million in
2012. Heckmann was founded in 2007 to make investments in various businesses.
Despite favorable credit measures at the outset, we expect the company to
continue to make tuck-in acquisitions from time to time, many of which may
require debt financing.
The company acquired TFI for $245 million, with $227.5 million of the purchase
price in the form of cash consideration and $17.5 million as equity issued to
the former owners of TFI, which include equity sponsor CIVC Partners.
TFI is one of the larger oil recyclers in the U.S., with services in 18
states, predominantly in the Western U.S., and over 40% of revenues split
evenly between the Mountain and South Central states. The company collects
used motor oil, which it recycles and reprocesses into reprocessed fuel oil.
Heckmann expects TFI to generate $105 million to $115 million in revenue from
April through December 2012. We do not expect significant synergies from the
transaction, since TFI's 290 trucks are specialized and are not likely to be
able to be used in Heckmann's core business of frack water transport and
We also believe the acquisition increases the company's exposure to oil price
movements. However, despite the lack of synergies and TFI's exposure to oil
price movements, we believe the acquisition also increases Heckmann's service
diversity and revenue stability. Its operating results could benefit from the
TFI acquisition if oil prices remain high while natural gas prices remain low.
We also believe that the business mix will benefit from the steadier, slower
growth of its oil recycling business compared with its frack water transport
and disposal segment, which lacks a proven track record. Yet, despite
relatively slower growth, TFI's profitability is very good, with EBITDA
margins of 27% in 2011.
We believe Heckmann's traditional HWR business benefits from a good market
position because the company has a large asset base in the specialized field
of frack water disposal with more than 635 trucks in service and more than
1,100 frack tanks that are available for its customers to lease. A key feature
highlighting the company's competitive position is its underground pipelines
around Haynesville, La., one of which is a PVC pipeline spanning 40 miles to
provide 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, with a handful of
SWD permits in other regions.
The company's main operating regions are in the Marcellus/Utica region in
Western Pennsylvania and Northeast Ohio, and the Haynesville area in East
Texas and Louisiana. The company also has operations in other shale plays
including Eagle Ford, 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 in fourth-quarter 2011 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 EBITDA margins of 18% for the year ended Dec. 31, 2011.
Our 2012 performance expectations for Heckmann include:
-- Sales growth of 142%, reflecting its proposed acquisition of TFI., the
full-year effect of acquisitions made in 2011 and 2012, as well as organic
growth arising from relocation and expansion into faster growing liquids and
oil rich shale regions, partially offset by contraction in the lower-growth
dry gas Haynesville region;
-- Consolidated EBITDA margins of 25%, largely on the factors listed
-- Adjusted EBITDA of $96 million--within the company's stated guidance
of $95 million to $105 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
fracking industry is in a high-growth stage, the company has had to fund 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 as opposed to
mandatory, 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%. As of Dec. 31,
2011, the pro forma amount (excluding the full-year impact of acquisitions)
was 16%. However, when incorporating the full-year effect of Heckmann's
acquisitions in 2011 and 2012, along with the combined company's organic
growth prospects, we expect this figure to increase to the target expected for
the rating. Heckmann does not have any environmental liabilities and indicates
that the produced water it transports and disposes of is exempt from the U.S.
Clean Water Act. Heckmann owns and operates 25 SWD wells, which are not
required to be capped. As such, the company carries no asset retirement
obligations on its financial statements.
We view Heckmann's liquidity as "adequate." We expect the company to have
sufficient availability under the unrated $150 million revolving credit
facility due 2017, given no borrowings under the facility at the outset. The
facility includes a $10 million sublimit for letters of credit. Financial
covenants at the outset include a minimum interest coverage ratio of 2.75x, a
maximum senior leverage ratio of 2.50x, and a maximum total leverage ratio of
4.50x. The total leverage ratio is not applicable until the quarter ended
Sept. 30, 2012. 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;
-- High capital expenditures of more than $90 million in 2012, roughly
80% for growth-related capital spending and about 20% for maintenance;
-- 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
For the complete recovery analysis, see our recovery report on Heckmann,
published on RatingsDirect.
The stable outlook reflects our expectation that hydraulic fracturing activity
will remain favorable to support solid sales and profitability over the next
couple of years, while reductions in discretionary capital spending will
improve the company's free cash flow generation. Our base case assumes that,
over the next year, Heckmann will be able to maintain adjusted EBITDA margins
of about 25%, with FFO to debt of 25% as well.
We could lower the ratings if downside risks to our forecast were to
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 2012 were to
fail to meet expectations and its EBITDA margins decreased to 21%. If this
were to happen, Heckmann's FFO to total adjusted debt would likely fall to
We could raise the ratings modestly within the next 12 months if the company
establishes and maintains a track record of reliable operating performance and
its business prospects remain robust. Although the hydraulic fracturing
industry appears to be strong at present, changes in oil and gas prices could
affect profitability in certain regions, forcing some service providers to
incur unexpected costs as they move manpower and equipment to other regions.
Another important factor in our consideration of a higher rating is whether
Heckmann maintains adequate liquidity levels despite high capital spending and
seasonal working capital-related borrowings.
Related Criteria And Research
-- Heckmann Corp. Assigned Preliminary 'B+' Rating, Debt Assigned
Preliminary 'B-' Ratings; The Outlook Is Stable, March 27, 2012
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
New Rating; Outlook Action
Corporate Credit Rating B+/Stable/--
US$250 mil 9.875% sr nts due B-
Recovery Rating 6
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