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Is Nuverra Really Going to Go Under?

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"If you torture the data long enough, it will confess to anything." – Robert Coase

There is no greater fear for an investor than to lose big money on an investment. This is why most investors sell first and ask questions later. It's better to lose a little than to lose it all. Given Monday's double digit drop in Nuverra Environmental Solutions (NASDAQOTH: NESC  ) investors decided it was better to head for the exits rather than wait to see if there was any truth behind a recent article that called into question the solvency of the company.

The article, which warned of a looming liquidity event, cautioned that investors could lose a massive amount of money if that event came to pass. It made several valid points including the fact that the company has missed guidance repeatedly. However, the author makes what could be one fatal flaw which could render the analysis useless, and that is to assume that the current trends will persist into the future.

It is the same fatal flaw that nearly every investor makes. We see the data as it is today and from there deduce what the future will be. Sometimes it works out brilliantly, and sometimes not so much. When it comes to the analysis of Nuverra, the overarching theme is that Nuverra has missed guidance so often that it is doomed to continue that fate. It just might. However, there are three potential events which could make any looming liquidity event dry up in a heartbeat.

Bakken should get better
First, there is a reason that Nuverra has missed its numbers of late. The weather has been plaguing it all year. In the first quarter it missed the equivalent of 15 working days, while the second quarter wasn't all that better. In fact, the weather is one of the reasons why there are 500 wells in the Bakken just waiting to be completed.

This backlog of completions held back at a lot of companies including Oasis Petroleum (NYSE: OAS  ) , which had been growing production by triple digits annually, but had flat production in the second quarter. The company had 37 wells drilled but not completed. Bottom line, it expects to complete almost as many wells next quarter as it had in the first half of the year, which will lead to a 10% production boost next quarter.

Clearly, the potential is there for the back half of the year to be more heavily weighted for Nuverra's business as well. This is why CEO Mark Johnsrud said on the company's last conference call that the weather issue "is not specific to Nuverra and has had similar impact on other competitors in the region. We believe this revenue is delayed, not lost." If this turns out to be the case, it could lead to a better than expected improvement in its second half earnings.

Water recycling could de-commoditize the business
There is no doubt that the water recycling solution that Halliburton (NYSE: HAL  ) is moving forward with has the potential to be a game-changer, including changing Nuverra's game. However, what it is seeing is not a reduction in its business. Instead, it envisions that there will be a central treatment facility because that is the only way to logistically handle the amount of water required to frac a multi-well pad. What this means is that storage of all that additional water would be an extra service, which when combined with its solid waste service signals that Nuverra could indeed be building that full-cycle environmental solution that would be a higher margin product.

Source: Nuverra Investor Presentation (link opens a PDF)

Dark horse for a liquidity infusion
Something investors need to keep in mind is that one reason why Nuverra has over half a billion dollars in debt is because it gave CEO Mark Johnsrud a very nice check to acquire Power Fuels from him. In addition to 95 million shares, Johnsrud received $125 million in cash, which could come in handy down the road.

Think about it this way, with 260 million shares outstanding Johnsrud owns more than 40% of the company. While he does have that $125 million to fall back on, it is highly unlikely that he'll want to see the more than $200 million in equity he has in Nuverra to simply evaporate in a liquidity crisis. If a liquidity crisis does arise, Johnsrud is in the position to personally step in and help to bail out the company.

Final Foolish thoughts
There is no denying that the numbers Nuverra has produced this year aren't pretty. It's easy to deduce that those numbers will continue, or get worse, however, it is just as easy to see the other side of the story. A default is not the slam dunk that the numbers can be made to portray. That's because there are catalysts and other possibilities, including its banks cutting it more slack, that could nullify those concerns. The bottom line here is that the catalysts that attracted me to Nuverra in the first place, namely the need for an environmental solutions provider to improve the image of fracking has not changed. This is why I'm inclined to continue to stick with the stock as I just don't see the same liquidity event taking this ship under anytime soon.

That being said, it is a much more risky stock and might not be the best way for you to invest in the booming energy sector. Instead, you might be better off taking a look at a stock that The Motley Fool's analysts have uncovered, which an under-the-radar company that's dominating its industry. This company is a leading provider of equipment and components used in drilling and production operations, and poised to profit in a big way from it. To get the name and detailed analysis of this company that will prosper for years to come, check out the special free report: "The Only Energy Stock You'll Ever Need." Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.

Read/Post Comments (5) | Recommend This Article (24)

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 August 28, 2013, at 1:20 AM, Downpool wrote:

    How many quarters do they have to miss? Smoke and mirrors as usual.

  • Report this Comment On August 29, 2013, at 7:59 AM, TMFmd19 wrote:

    Personally, I'm giving them two quarters. That should see it through the Bakken completion backlog and the beginning of the Halliburton JV. Two more misses would suggest to me that the thesis is truly broken.


  • Report this Comment On August 30, 2013, at 9:03 AM, johnnymmmm wrote:

    I am going to attempt to manipulate the market,(like the article written recently by a short) and make a quick 25% with my own article (Seeking Alpha censored this exact comment)

    Nuverra in talks with Haliburton to be acquired for $16 a share...combination of stock and cash!

    I am going to make "1 melliion dollars"

  • Report this Comment On September 02, 2013, at 1:15 PM, Downpool wrote:

    Can't wait to see the optimistic folks with empty opinions eat some crow and thank the guy when q 3 and 4 are over with.

  • Report this Comment On September 25, 2013, at 4:39 AM, Touchdown311915 wrote:

    @downpool.... It is a lot of smoke and mirrors. The only thing partially truthful was the second quarter comment that the Eagleford had been mismanaged. The problem is you still have mismanagement going on in Nuverra. The company has had countless operational failures from the blatant mismanagement of federal drug policies & procedures to the typical run of the mill high profile sexual harassment terminations. I could rant on but I'll say this last bit the Bakken was never going to have the numbers right because the original due diligence on Powerfuels showed that they operated within DOT hours of service. When nothing could have been farther from the truth. Nuverra has VPs and directors that don't know what they are looking at or looking for, other than their need for things to look right on paper when the industry that they are in is about relationships and service.

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