Heckmann and MGIC Investment Get Things Shaking
Sep 11th 2012 2:37PM
Updated Sep 11th 2012 2:38PM
There are one-hit wonders, and then there are those stocks for which the initial big move is only a preview for even bigger and better gains to come.
Oil and gas services specialist Heckmann (NYS: HEK) and mortgage insurer MGIC Investment (NYS: MTG) surged 48% and 36% higher, respectively, over the past week, far surpassing the broader market's 1.6% rise. The natural gas industry is still suffering from a surfeit of inventory, and the housing industry is in such a deep hole it's going to take years for it and related industries to bounce back.
For two stocks that have been lagging the indexes, the question investors need to ask is, can they hold onto those gains?
A mighty temblor
Although Heckmann operates in key oil and gas regions like Eagle Ford, Haynesville, and Marcellus, it's lacked a presence in what has become the hottest market today, North Dakota's Bakken. I've quoted the state's governor in the past saying he's given up on guessing how big the state's industry is going to grow because he keeps getting dwarfed by reality. North Dakota is second only to Texas in oil production, and state regulators estimate production will double to more than a million barrels a day by 2015. Heckmann's absence meant it was leaving money on the table.
Well, it just may have put a whole bunch of money in its pocket after announcing it agreed to buy privately held Power Fuels, a fluid services specialist focused solely on Bakken oil and gas companies. In the process it will become the largest nationwide provider of environmental services to the industry, doubling its revenues and "immediately and materially" increasing its earning per share.
In this case "environmental services" means the controversial process of hydraulic fracturing, whereby millions of gallons of water and fluids are pumped at high pressure into a well causing the underlying rock formations to crack. With the fissures held open by sand or ceramic beads such as those produced by CARBO Ceramics (NYS: CRR) , oil and gas is able to flow more freely, giving drillers access to resources previously impossible to exploit. When the wastewater generated by the fracking process is then extracted, Heckmann is responsible for treating it and disposing of it.
Analysts are bullish about the merger as the combined company tilts Heckmann decidedly in favor of oil and liquids with 70% of the combined company focused there. While that insulates it from the currently moribund dry gas market, fracking is still a lightning rod of controversy targeted by politicians, regulators, and environmentalists. I had rated the wastewater specialist to outperform the broad market averages on Motley Fool CAPS back in June, as it was hitting new lows, believing most of the negative sentiments had been priced in, but tell me in the comments section below if you agree that Heckmann now has the muscle to put the doubts aside and become a profitable business once more.
No laughing matter
Despite more jawboning in an effort to prove the housing market has finally turned the corner -- single-family housing starts are up 22% year over year, the Case-Schiller home-price index increased for the fifth consecutive month, and the National Association of Home Builders' housing market index rose to its highest level since February of 2007 -- it's painfully obvious there's still more pain to come.
Construction work hit a new one-year low, those single family starts are actually dropping compared to the month before, and mortgage insurers are only looking healthy because regulators are bending the rules to let them write more business when they should be precluded from doing so.
Both MGIC Investment and Genworth Financial (NYS: GNW) have risk-to-capital ratios in excess of the statutory maximum 25-to-1 ratio. As I pointed out the other day, Radian Group (NYS: RDN) might be currently below the threshold, but it expects to exceed the limit later this year.
Like Radian, MGIC saw a drop in the number of delinquencies, down less than 2% from the month before, but its cures (when a loan returns to on-time payment status) jumped 13%. That might sound hopeful, but 15% of its cures come from loan modifications; it estimates that half of them will default once again.
While the rule breaking suggests these large insurers will now survive, it doesn't mean that they will thrive. I'm rating MGIC to underperform the market but in the meantime, share your view in the comments box below on whether MGIC Investment will find a firmer foundation on which to build.
Shake, rattle, and roll
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The article Heckmann and MGIC Investment Get Things Shaking originally appeared on Fool.com.Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Heckmann and CARBO Ceramics. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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