Hii Technologies, Inc. (OTCQB:HIIT) frac water management market looking for the upturn.

Hii Technologies: Survival Of The Fittest Will Be Put To The Test

Jun. 3, 2015 6:42 PM ET    |  About: Hii Technologies, Inc. (HIIT)

Disclosure: The author is long HIIT. (More...)

Summary

• HIIT and the rest of the oil and gas service providers are really feeling the pain of the current pricing downturn now.
• But HIIT has a few unique advantages over "mom and pop" providers that make up a large part of its competition.
• If HIIT can survive the rest of the pricing driven oil and gas slowdown it stands to aggregate quite a bit of market share.

Well there isn't any sugar coating it - Hii Technologies, Inc. (OTCQB:HIIT) has been smoked since trading at roughly $1.10 shortly after I bought it and shortly before the oil and gas pricing collapse. It's crazy to think that at one point I had almost 40% gains in this name. Now, I'm down roughly 75%. Absolute lunacy.

But who could have seen this coming? Certainly not the "smartest guys in the room" as every E&P, every energy trading desk, every analyst, and every forward looking forecasting service proved out to be dead wrong in just about everything associated with pricing. This took the industry by storm and it took the service providers by The Perfect Storm, making them the figurative whipping boy for the space.

The question becomes is there any turning back for HIIT? Can HIIT come out on the other side of this collapse a better company? If it can survive, which I think it can based on its historic ability to raise capital, can it take anything positive from this?

Maybe. That's the best answer I have for you guys right now but it's a lot better than a no. The good news is that at least right now I think HIIT can survive the worst of this as its lender is being accommodative and it apparently has a loyal investor base that it can go back to for cash. Not getting shut down by a lender and not running out of cash are the two most important factors to have some certainty over and it appears that HIIT has certainty in both. That counts for quite a bit.

As it alluded to in its Q1/15 PR, the service company survivors stand to gain quite a bit of market share on the other side of a recovery. Plenty, depending on how long the downturn lasts, will not make it. HIIT believes the first to go will be the "mom and pop" local and borderline regional providers that aren't well funded and that don't have differentiated technology:

"The Company continues to believe the demise of smaller owner/operator "mom and pop" companies and the apparent lack of meaningful technology with larger competitors will allow HII Technologies to pick up valuable market share in the frac water management market. Many smaller firms do not appear to be able to procure new equipment needed to adapt to customer requirements. Additionally, we continue to believe our customers are migrating to bundled service providers offering a full spectrum of services that can drive efficiencies and cost savings for oilfield operators and reduce vendor management costs."

Actually, I largely agree with this. A large part of why I invested in HIIT in the first place was because of its ability to aggregate unique technologies in a really not well done niche of the space - water management. HIIT of course has some ancillary products that serve power and safety needs but for the most part I bought in because of the water management capacity of the company and how important taking care of that need is out in the field. Trust me, I've been there. It's a huge issue and something that's always on the front of the mind.

I think that's maybe what HIIT's investor base thinks as well, they of course continue to fund operations via private placements. HIIT can be and should be a great long term story, it just ran into a historic buzz saw in the current pricing collapse.

That said, HIIT isn't lost at sea. It's cost cutting and it's pushing as much pricing pressure as it can down the chain (to what downchain it has) while working with its lender to get the covenant waivers and amendments that it needs to keep going. Keep in mind that HIIT also recently landed two massive deals with major operators in the West Texas area for its AES Hydroflow and its Rapid-B technologies so there might be some balance sheet leveraging to be had there as well. Is that a bit of stretch? Sure. But these majors didn't sign HIIT to never deploy its services. If HIIT is impaired, this doesn't happen.

Again, the bottom line is that while concerning I don't think that HIIT is at the end of its rope. The stock, for whatever reason, traded down as low as $0.07 intraday a little over a week ago and has "recovered" to a recent close of $0.20. I'm not who or what pushed it down to those levels but I'm hoping the worst of the selling is over.

I'll look to get in touch with management soon and get us a crisis management interview. If convinced in the near-term outlook I think I have to buy shares and average down here if I'm planning on testing the "go down with the ship" strategy. HIIT isn't a huge position for me but it's one that if it can fight for its life could payout huge in the long-run off these lows. Stay tuned for the interview if I can land it.

In the meantime, know the risk of investing in or adding to a HIIT position. The stock stands a great chance to chop around with huge volatility in the near and mid-term. Just be careful here if looking to bottom tick this name. I still believe it, but that might not be enough.

Good luck everybody.

Risks

• HIIT is a micro-cap with shares traded over the counter, where liquidity is often light. Prop research platform Sentieo.com puts HIIT's average trading volume over the past 30 days at roughly 80k shares a day, which is one of the reasons the stock is so cheap. You can buy the stock well below fair value, but that also means you may have a problem selling at fair value, or at all, in the future. Because of the illiquidity in HIIT shares, you should only enter a position if you won't need the money in the near term.
• Also, there is competition. The energy sector is incredibly competitive and while actual pure-play competition in HIIT's space is limited its closest comparable peer is much better funded, has a longer track record of operations, and is in what could be conceived as a better position to access the credit markets. HIIT Has been hesitant to make any particular call outs in regard to competition specifically as the direct space within the energy sector (Water Management) that HIIT occupies is highly fragmented, however, there are hundreds of companies that participate in this space (albeit on a local level).
• There is also execution risk. If management does try to significantly grow the business and increase market share organically by increasing expenses, the plan could suffer setbacks and the company could be forced to raise capital at inferior terms if it can raise capital at all. Simply because HIIT is participating in a space with attractive historic economics and highly limited competition this does not guarantee that HIIT can or will have execution successes.
• A final risk factor I'll mention is macro-sector commodity risk. HIIT, while not being directly dependent on commodity pricing for revenues (oil and gas) is tethered to overall activity in its region which is driven partially by commodity pricing. While HIIT's ability to increase efficiencies and help reduce break-even costs for operators should theoretically move its value-prop forward in these types of environments obviously this is not guaranteed.

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