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3 Reasons to Sell Nuverra Environmental Services

I'm going to attempt something a little odd today, Fools. Even though Nuverra Environmental Services (NASDAQOTH: NESC  ) stock makes up 1% of my real-life holdings, I'm going to be giving you three reasons to consider selling the stock today.

Why am I doing this?

Recently, Nobel Prize winner Daniel Kahneman visited Fool headquarters in Virginia. While visiting, he talked about how a number of different biases can lead us to believe we can predict the future with relative certainty. In reality, he argued, we are just deluding ourselves.

It got me to thinking about how I don't write enough about the risks of owning the stocks I own. So, though I don't plan on selling my Nuverra stock right now, I think it's healthy for me to practice and model this behavior.

1. Counting on natural gas to be the next big thing
Nuverra is a company whose goal is to be a one-stop shop to meet all of the water needs of the oil and gas industry. It has set up operations in all of the major shale plays in the United States, and has been building out a massive infrastructure of pipelines, trucking fleets, and water treatment facilities.

Source: Nuverra Environmental Solutions 

Although the company will certainly profit from continued oil exploration in North America, to fully reach its potential, it needs lots of natural gas companies as customers, too. Recently, there's been an explosion of natural gas production, due mainly to newer fracking techniques

But there are three problems with counting on natural gas. The first is that, should fracking prove to be harmful to the environment, its use could severely curtail.

Second, there needs to be enough uses for natural gas out there for demand to meet supply. Westport Innovations (NASDAQ: WPRT  ) is trying to drive demand, by designing engines for machinery, trucks, cars, and locomotives that can run on natural gas. In conjunction with Westport, Clean Energy Fuels (NASDAQ: CLNE  ) is building out filling stations for these machines to fill up on natural gas. If the efforts of these two companies -- and others like them -- can't create enough demand for natural gas, the energy companies won't have an incentive to continue extracting natural gas from the earth.

Finally, natural gas prices are an important factor. If prices can continually stay below that of oil and gasoline, then people have an incentive to buy vehicles that can run on natural gas. If, however, natural gas prices are as high or higher than petroleum-based fuels, that demand could evaporate.

2. Not yet profitable, and carrying lots of debt
According to the company's most recent quarterly report, Nuverra is currently carrying a debt load of $562 million, and has just $18 million in cash and equivalents on hand. That's what happens when a small company attempts to build out the infrastructure to be a major player in an industry -- it has to spend a lot of money up front in hopes of future profits.

Investors need to combine this fact, with the reality that the company has yet to report a profitable year, in mind before investing. Nuverra has said its capital spending as about to shrink significantly, but there's no guarantee its past investments will eventually pay off.

3. Counting on limited clientele
The final knock on Nuverra is that it has a couple major energy companies that account for large parts of its revenue. In 2012, Shell and Chesapeake Energy  accounted for 29% of all revenue. If either company were to find a different water-service provider, it would create a significant problem for Nuverra.

What I'm doing
Taking all of this into consideration, I'm happy that Nuverra currently only accounts for 1% of my portfolio. There's a lot of risk here, but a lot of upside potential as well.

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Read/Post Comments (6) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 05, 2013, at 2:53 PM, iamgarce wrote:

    I fully agree with your thesis of being one's own

    devil's advocate and explore why a favorite holding

    might be a disaster ...

    that being said , i will take exception to your #1 point.

    Even if Nat Gas does not take off , fracking is

    now a method to bring oil from the ground , that

    would normally be unreachable by traditional

    drilling ... that can keep demand for NES services

    even if Nat gas isn't booming ... garce

  • Report this Comment On June 05, 2013, at 3:58 PM, truthsayer2 wrote:

    The United States is fast approaching energy independence thanks to the fracking industry. The first time ever. Natural gas useage will hopefully help lead the way. As to the three reasons given by Brian Stoffel for selling NES, all of them were well known and fully disclosed in filings with regulatory authorities over the past months by the company. So, what is new? ...truthsayer2

  • Report this Comment On June 05, 2013, at 4:21 PM, Dalemartin1957 wrote:

    Brian...for those three particular reasons are they why one should buy at this price right now.....think of it this way---when a college graduate starts their career they are loaded with debt, rely on parents who have money, and are taking calculated, reliable risks to launch their wealth building. Now doesn't that describe Nuverra at this point. The only thing different, if one thinks about it, is that the executive branch of the company has a whale load of more experience than a college graduate. I am going with the experience.........and trust that within the next few years their is no economic collapse. DM

  • Report this Comment On June 06, 2013, at 1:08 PM, RecvrngRegulator wrote:


    Do not discount the additive impact of adding natural gas generation of electricity to demand. Additionally once fleets are converted to natural gas they are not likely to switch back to gasoline. Taking out the cost of a private fueling station for say a school district if natural gas rose to $20 per mcf the gallon of gas equivalent price is still only $2.50. Once converted those fleets will not come back. Natural gas will continue to be a very important and growing source of energy for the foreseeable future. NES is an interesting way to play part of this large trend.

  • Report this Comment On June 06, 2013, at 11:25 PM, TMFCheesehead wrote:

    Thanks for the comments all. As I said in the beginning, I'm an NES shareholder, I just think its healthy for me to do, and model, a little contrarian thinking.


    True, they are in the filings. But not every visitor to our web site will have time to read the annual reports. Just trying to relay what I saw as the three biggest concerns to keep an eye on.

    Brian Stoffel

  • Report this Comment On July 04, 2013, at 1:22 PM, 1elk wrote:

    I am not long yet,and this does not show any reason not to go long. I agree that you should always look to the down side before going long on any thing in life.

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