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Inside Nuverra’s Quarter: The Good, the Bad and The Ugly

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Nuverra Environmental Solutions (NASDAQOTH: NESC  ) is out with its third-quarter earnings. The results were pretty lousy as the company just can't seem to get its act together this year. Let's take a closer look at what went down in the quarter.

The good
Nuverra did have a few highlights on the quarter, so let's start with what went right which was its ability to generate cash. On the quarter Nuverra produced $39.9 million in cash flow from operating activities. It was able to accomplish this by reducing its working capital as well as keeping its capital expenditures very low. I would much rather see that cash coming from its business growth, but I'll take it anyway.

Nuverra used $15 million of that cash to reduce borrowings under its credit facility as the company has made a concerted effort to address its liquidity worries head on. It has plans to continue paying down its debt which should help to alleviate any concerns about the company being on its way toward bankruptcy. Unfortunately, that's about all that was good about the past quarter.

The bad
The biggest problem on the quarter is that Nuverra did not see the increase in industry activity that it has been anticipating all year. This caused its shale solutions revenue to be relatively flat while earnings declined. The company was hurt by higher labor costs as it spent more to retain and incentivize personnel in anticipation of a stronger 2014.

What makes matters worse is that one of its competitors in the fluids management segment, Key Energy Services (NASDAQOTH: KEGX  ) actually saw its fluids management profits improve. This was despite lower revenue and sustained competitive pressures because it was able to reduce costs and improve its operations. The same can be said for Basic Energy Services (NYSE: BAS  ) which saw a slight uptick in revenue and roughly flat profits from its fluid services segment. While neither company is seeing a robust operating environment, both appear to be managing the current conditions much better than Nuverra.

The ugly
As bad as Nuverra performed operationally on the quarter, things did get worse. The company announced that it's taking a one-time, non-cash charge of $233.1 million on the quarter that includes goodwill and long-lived asset impairment. While this is a non-cash charge today, it did represent large cash outlays in the past.

One of the assets being written down is the TFI business it bought last year for $245 million. Turns out that the business wasn't the strategic fit that Nuverra thought and it has now decided to sell the business and use the proceeds to pay down debt and possibly buy back some stock. The total obliteration of investor capital here, which is $98.5 million of the writedown, is an ugly end to a business that has never lived up to the stable source of earnings that it was supposed to generate.

Thoughts on the future
This was not the quarter that investors wanted to see. The hope was that the company would finally find its footing and would begin to at least stabilize, if not turn the corner. That hasn't happened and I am beginning to lose confidence in management's ability to ever turn this business around.

The problem, at least from my perspective, is that oil and gas production in America is absolutely booming right now. At this point Nuverra has yet to set itself apart from its competitors enough in order to grow both market share and margins. I'm beginning to wonder if it has chosen the correct approach to profit from America's energy boom.

There is some hope on the horizon as its partnership with Halliburton (NYSE: HAL  ) on the H2O Forward water recycling initiative is set to conduct its first frac in the first quarter of next year. However, my optimism at this point is diming as it's becoming quite clear that at best it will take Nuverra several quarters to turn around its operations. Nuverra has been a frustrating company to invest in because the thesis makes a whole lot of sense, but the execution has been lackluster to say the least.

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Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On November 08, 2013, at 6:57 PM, POPPS wrote:

    Thanx for the article, a very good one. I'd like to know your opinion of the moves made, the divestiture, the people, and the outlook for the next five years............ thanks again. Regards, Popps

  • Report this Comment On November 09, 2013, at 10:06 AM, regotoguy wrote:

    Something nobody picked up on is that management discussed the reverse 1-10 split a year ago. Management new one year ago that the stock price would languish. Shareholders were misled that recovery was on its way. It was inferred that next quarter things would turn. Now the truth is coming out. Management said next quarter would underperform, but 2014 would get better. So now we have to wait 2 quarters to see improvement. I don't trust management. Usually I dismiss class action suits as greedy opportunistic lawyers attempting to extort legally. In Nuverra's case I am inclined to believe the blood sucking attorneys. Fortunately I bought and sold Nuverra 2 months ago at a small loss. I realized their story didn't add up. I wouldn't short it because I do not have an insiders perspective; however I have little faith in anything management says. Remember they discussed a 1-10 reverse split 1 year ago!

  • Report this Comment On November 09, 2013, at 3:22 PM, penywise wrote:

    Thanks for the article. I think you make good points, and careful measured statements that are neither pro, nor completely against the stock (although after a 33% drop in one day there are obviously a lot of people throwing their hands up on this one.) I agree with regotoguy - the stock has always been a story stock, and I think management was careful to craft the story to sell this to investors. Does anyone recall why Mr. Heckman bought a Chinese water company as part of the initial development? I'm sure because China, Water, Fracking, and Shale plays are all hot topics that investors are willing to put money in. There have been some management shake ups, and and the company is making moves that look like they are trying to "right the ship". So I'll continue to watch. Too late to sell now without locking in a decent loss - but I'm afraid I may have picked up a real dog of a stock here.

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