- That is still hoping for the best from its Safety-Kleen acquisition late last year, which hasn't generated the margin growth the company forecast.
- That bought into the oilfield waste disposal and services business at the peak of the oil cycle.
- Whose CFO (on the job when Safety-Kleen was bought) quit in February after less than a year on the job. He was replaced by the company's former CFO, who is also president. (It's often best when those two jobs are split.)
About the only surprise about Clean Harbors ( CLH), the waste management company, is that almost every analyst who follows it still rates is as a Buy. That's even after the company's most-recently-reported quarter, which included yet another in a series of sliced guidance, missed expectations or a combo of both. . Yet this is the same company:
After peaking in 2010 at 18.2%, a year after the acquisition binge started, EBITDA margins have struggled to recover from first-quarter low of 12.9%. Last quarter's 16.1% was an improvement, but still well below a year ago, "primarily due to the weight of the lower-margin Safety-Kleen business," said Morningstar analyst Barbara Noverini. Therein lies an important part of the story: It wasn't supposed to be this way. The forays into the oil-and-gas-related services businesses were supposed to help leverage Clean Harbors' existing industrial base and create cross-selling opportunities while expanding its geographical footprint from its traditional base in the Northeast throughout the U.S. and Canada. It has had a steady success in Canada's oil sands. The acquisition spree culminated with the $1.25 billion Safety-Kleen deal, which boosted revenue by more than 50%. It occurred just as the company's oil-and-gas business was losing steam. Four years out of bankruptcy and on the brink of going public, Safety-Kleen's two principal businesses -- re-refining recycled oil, much of it collected through its other business, and service station parts cleaning -- were expected to save the day. When the deal was announced, CEO Alan McKim said it would be "immediately accretive." It hasn't been. In fact, even with synergies from the acquisition, the company has struggled to keep its balance. "We're disappointed with our performance compared to what the guidance and expectation was with the business," McKim told me in an interview.
It has become so unpredictable that Credit Suisse analyst Hamzah Mazari, who originally upgraded the stock in 2010, veered from the pack earlier this week and downgraded Clean Harbors to a Neutral. He called management's credibility with guidance "low," and said that as the company has become more cyclical, it faces "a higher risk of missing expectations." Anything short of that, he said, would require "flawless execution."
Source: U.S. Energy Information Administration As gas prices fell, so did the demand for oil and the oil rig count in the U.S. -- and so did the need for Clean Harbor's services, which include oilfield related disposal and transportation. The company attempted to reposition itself in an effort to expand its customer base, moving into new oil producing regions -- from the Marcellus to Bakken -- looking for the kind of success it has had in Canada's oil sands. Adding insult to injury, the Safety-Kleen acquisition was completed just as base oil prices tumbled. Base oil is the kind oil Safety-Kleen re-refines and sells. Typically it tracks crude. But just after the acquisition was announced there were three price declines in base oil, McKim says, "and when I talked to people at Safety-Kleen they said this was unprecedented. They said they had never seen it and that it will be temporary." But the spread between crude and base oil, while narrowing a bit, remains wide. In retrospect, McKim says, "We bought Safety-Kleen and paid a lot of money and probably bought at the top. Who would've had a crystal ball on what would happen to the spread between crude and base oil." McKim, who founded Clean Harbors 34 years ago, still believes the strategy will pay off. The company even bought another re-refiner recently, even though Chevron ( CVX) is expanding its re-refining capacity. Still, he said he sees margins improving, which they did last quarter, "because of the new markets we're going into." As a silver lining of low natural gas prices, manufacturing in the U.S. is seeing a resurgence.
"We're seeing reinvestments in new chemical plants," he said. "Jobs are coming back and that will create more hazardous waste."