Heckmann – New buy
Heckmann Corp is an extremely compelling business with the best management team in the water treatment/bottling business. The company has huge potential for its business. At current prices, the company is not cheap based on current cash flow. Although, I believe if the company executes in the next 1-4 yrs, the current prices are ridiculous to the future potential.
I will be doing detailed write-up on Heckmann in multiple posts. I wanted to get out the new buy and some basic information on how I see this playing out, so readers can decide if agree.
Heckmann has two extremely good business: water bottling in China (Coke is their biggest customer) and water treatment/pipeline business for natgas wells. Both of these businesses are currently not generating much cash flow, but the future is extremely bright.
Water pipeline business (mostly for gas and oil)
The water treatment/disposal business is for water used by the natgas shale wells. They recently put their first pipeline in production, about 4 weeks ago and they have already filled 42% of max capacity and should be at 100% capacity by year end. Basically they currently have one 50-mile pipeline for Haynesville shale area of Northeastern Texas. The pipeline has the max capacity of 100,000 barrels of water per day. The company makes about $.90 – $1 per barrel with EBITDA of 65%, so around $0.65 per barrel. So you are looking at over $20M of EBITDA at max capacity. The company is currently doing 42K of barrels and expects to hit 50K barrels by end of Q2 and 100K by end of year. Management believes it can easily reach that by end of year. It cost the company roughly $50M to build the 50-mile pipeline. So the return on investment is substantial once they get to 100% flow-thru on the pipeline.
They recently did a 50/50 JV with a leader in the natgas pipeline business that should allow for great growth in the coming years. Now you take into account that their recent 50/50 JV will create substantial more capacity. I can easily see doubling capacity in 2 yrs. The JV is with Energy Transfer Partners (ETP). ETP transports 18% of NatGas thru its pipelines in the US. So imagine the scale at which ETP plays and it is extremely conservative that the JV only adds another 100,000 barrels/day in 2 yrs. I can easily see them going several 100K barrels a day from this JV. so a 40-50M EBITDA is extremely extremely conservative in 2-3 yrs. In recent CC, mgmt said they can see ‘several hundred thousand barrels a day’ capacity addition from the JV. So EBITDA could be huge in 2-3 yrs and onwards. Also Heckmann is going to be adding Marcellus shale treatment from the new JV, so volume will be very big and the geography of Marcellus makes the company’s pipeline service even more cost beneficial. Overall, we believe by end of 2010 the company’s 50-mile pipeline will start making over $20M of EBITDA. It takes about 1 year to go from start-to-finish on production of pipeline. Add to it another year for approval from government and paper. Management said they are looking to start production on new pipeline, under the JV, by late 2010 or early 2011. So EBIDTA should grow in 2-3 yrs out.
China Water Bottling
The China water bottling business is very interesting. The bottling business has two types of revenue: bottling for branded companies (like Coke) and bottling for its own branded products. It does OEM bottling of water for Coke. The company has low margins on this business but huge volume. They are also launching a new bottled juice under their own brand name. This bottled juice has been introduced in Canada and has been successful. This year, the company is launching the product in China and they expect good results. I think of the China water bottling business as a free option. It could be a huge return if it works out. To be safe, I put 0 value on this business. The china water bottling business does about 400M bottles last year and expects to do 500M this coming year. The business is cash flow positive, so no cash drain.
So by end of 2010, the company should be making over $20M of EBITDA. The company has a market cap of $650, $250M of cash, and $0 debt. So on the 2010 EBITDA, you are getting the company for 20x. Now this is not cheap.
Lets look at what could happen in 2-5 yrs out. The JV with ETP is a huge deal and can substantially alter the economics of the company. If they increase the pipeline capacity to 300K barrels a day in 2 yrs and we assume the same economic results as the current pipeline, then we can see $40M of EBITDA (the JV with ETP is a 50/50 partnership, Heckmann gets 50% of the cash flow). At that EBITDA you are looking at current prices trading at 10x. Now this is getting cheap.
The pipeline business is huge. The 100K barrels a day is just a beginning. I think the potential is huge, substantial multiples to the 100K barrels. The Haynesville shale is growing rapidly in the number of wells in production. Gas drilling requires water. The Marcellus shales play is substantially larger than Haynesville. I think the economics of the pipeline business are very compelling. Also, the competition (using trucks to transport water) can’t economically compete with the pipeline business.
Also, I’m not including any value for the China Water business. If their branded juice takes off in later half of this year, then we are looking at very good cash flow from this business. The branded drinks business has large margins. Also, the company has plenty of capacity at its current manufacturing to support a strong volume growth. So capital requirements for this business will be small.
As for management, you get the smartest person in the water business running the company. Richard Heckmann has an incredible background of building water related companies in US. read more at: