Sunday, January 11, 2015

From Cleaning Harbors to Feeding Roughnecks: “Next Year in Jerusalem!”

 The Canadian tar sands have been very good to Clean Harbors, a perennial Wall Street favorite that evolved from a disaster cleanup business (for which the company’s web pages still carry a plug at the bottom: “For 24-Hour Emergency Response, call 800.OIL.TANK”) into a diversified industrial service company through 35-plus acquisitions costing about $2 billion over 25 years.
 The tar sands business came with the 2009 acquisition of Eveready, and so swiftly did CLH expand deeper into so-called unconventional energy (everything from feeding and housing roughnecks in lodges to hauling out drilling waste) that oil and gas exploration and production services went from 0% of the company’s total business in 2008 to 27% in 2012, before the $1.25 billion acquisition of Safety-Kleen got them into the lube oil re-refining business, diluting the oil and gas piece to something closer to 15%.
 Now, I have a friend who refers to any company repeatedly flogged by Wall Street analysts while never quite seeming to meet their lofty expectations as a “Next Year in Jerusalem” story, after the phrase concluding the Passover Seder.  No matter what happens in the business, and how it varies from their expectations, the analysts, metaphorically speaking, say “Next Year in Jerusalem!”
 Granted, CLH deserved some free passes after beating analyst expectations for eight straight quarters from mid-2010 to mid-2012, but the streak ran out some time around the aforementioned Safety-Kleen acquisition—which seemed like a good idea at the time to the cheerleaders (fee-generating transactions generally do that!)—and the company failed to match expectations in 6 of the next 10 quarters, at least according to Bloomberg.
 But don’t take our word for it: the transformation of CLH’s from “beat and raise” to “hit or miss” is told in the headlines from various so-called analyst reports along the way:

5/11:    “Premier Mid-Cap Growth Story”
2/12:    “Momentum Strong Enough to Raise 2012 Outlook, but Still Conservative”
5/12:    “Slight 1Q12 Upside; Reiterates Guidance; Growth Story Intact”
8/12:    “2Q Transition/Seasonality or Structural?  We Believe LT Story Unchanged”
10/12:  “Upgrading to Strong Buy on Highly Accretive Safety-Kleen Acquisition”
2/13:    “Q412 Results A Bit Light; No Change to 2013 Guidance; Reiterate Buy”
5/13:    “Q1 Revenue Light with Targets Back End Loaded; Segment Results Mixed”
7/13:    “Inflection Unlikely for 2Q but More Likely in 2H”
8/13:    “2Q More Painful Than Expected, but Upside Narrative into 2014 Unchanged”
8/13:    “Q2 Weak/Guidance Cut; Technical Services Needs to Lead Charge”
9/13:    “Investor Day Enables Sentiment Shift; 2014 Appears Conservative”
9/13:    “A Very Bullish Investor Day; Reiterate Buy”
11/13:  “2013 Outlook Cut; Choppy Segment Results Don’t Help”
11/13:  “2014 Can’t Come Fast Enough”
2/14:    “Another weak quarter and outlook”
2/14:    “Oil & Gas/Re-refinery Drive Forecast Lower; Shares Finally Washed Out?”
2/14:   “CLH has not delivered a beat & raise quarter since 4Q11.”
3/14:    “From Land of the Lost toward the Path to Enlightenment”
5/14:    “Finally, a Good Quarter; Cost Reductions in Focus and Upside May be Returning”
6/14:    “Takeaways from Investor Meetings…businesses appear to be stabilizing/improving…”
8/14:    “Solid 2Q Driven by the Key Tech Service Franchise; Estimates Raised”
11/14:  “Estimates Cut on Energy Trends; Hopefully a Refocus on ‘Core’ Franchises
 Along the way, one large “activist” investor accumulated a 9% stake in the company, but months later announced it was shutting down its fund…and CLH began a strategic review, presumably with one eye on the “activist” investor…but then oil prices collapsed (in the truest sense of the word), putting a sudden damper on high-cost oil development in places like the Canadian tar sands and the U.S. shale areas where CLH had been planting its flag up until much so that shortly before year-end a “comp” to the company’s lodging services business—called Civeo, which had been spun out of Oil States International just last summer in order to “enhance shareholder value” at the behest of the same kind of “activist” investor that had accumulated 9% of CLH—shocked its own cheerleaders, saying thusly:
            “The acceleration in November of the decline in global crude oil prices and forecasts for a potentially protracted period of lower prices have resulted in major oil companies reducing their 2015 capital budgets…reducing the near-term allocation of capital to development or expansion projects in the oil sands, which is a major driver of demand for the company’s services in Canada.  It has also increased the difficulty of reliably estimating 2015 occupancy levels for the company’s facilities…”
 It wasn’t long ago—that 2013 “very bullish analyst day,” in fact—that the company’s cheerleaders were congratulating CLH for the lodging business being one of its highest return businesses.
 Now, Warren Buffett likes to say that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, “it is the reputation of the business that remains intact.”   But in the case of Clean Harbors, the analysts like to say, “Next Year in Jerusalem!”

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2014)    Available now at

© 2015 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.
  Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

1 comment:

Anonymous said...

The problem with your analysis here is that you COMPLETELY ignore its core business of disposing of toxic waste and cleaning up environmentally hazardous products, which has a massive moat and is responsible for the overwhelming amount of its cash flow. Admittedly, management (which by the way is an owner operator) has bungled on deals. No argument there. But if you read your post you'd think this was a oil services company. Misleading at best..