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Nuverra Environmental Solutions (NYSE: NES ) plunged 15% this week following the fourth-quarter earnings report. Though the company tends to disappoint investors with missing guidance or reducing numbers going forward, this quarter had the hint of something different. This time it appears that investors had concerns about the potential of higher capital expenditures and the sales price for the Thermo Fluids assets.
The company is an environmental solutions provider to customers in the energy and industrial end-markets.
Despite the negative stock reaction and history of under delivering, the other news in the quarter is suggestive of a turnaround for not only Nuverra but also the oil services sector. The large spike in natural gas prices during the winter even has activity picking up in a basin abandoned over the last couple of years.
The fourth quarter was solid with total revenue of $154.5 million exceeding estimates. More importantly, margins in the Shale Services group rebounded to 21.6% from 19.1% in the third quarter. Selling investors might have been concerned about the weather related weakness during the first quarter, but the industry in general has already confirmed that situation, and the polar vortex winter is undeniable.
The more important statements were indications of incremental customer activities and actual pricing increases in certain basins. Even more interesting, activity is picking up in the Haynesville shale, where most customers abandoned the region due to higher costs than the Marcellus shale. The proximity of that shale to the Gulf Coast and the infrastructure issues in the Marcellus area could provide some solid growth to where Nuverra already has under-utilized pipeline assets.
Reduced debt loads
A previous concern of Nuverra was an extremely high debt load of over $556 million. The company announced plans to significantly reduce those debt levels by agreeing to sell the industrial fluids division for $175 million that includes a $165 million cash payment. Nuverra plans to apply that amount to reduce the debt load and has obtained a release from the credit facility to purchase Senior Debt in the open market at a discount.
In contrast to the debt levels, and probably a shock to investors fearful that Nuverra is facing a liquidity problem, the company is in the process of increasing the credit facility from $200 million to roughly $245 million. On top of that, management discussed the possibility for bolt-on acquisitions to further the one-stop environmental solution offering.
On the flip side of reducing debt, the company discussed several capital initiatives that require a decent amount of cash. First, the company is building a thermal desorption facility, which is a treatment and recycling center for oil well cuttings or solid material at its Bakken landfill.
The company plans to spend roughly $30 million on the project and sees increased demand due to pad drilling with multiple wells within a close proximity creating too much solid waste to remain at the well site. Second, the company is exploring building water pipelines in the Bakken that could cost around $20 to $30 million. Though management offers both projects up with bullish returns on invested capital, most investors are not eager to see the company pad on further debt.
Investors keen on whether the company is throwing away money on these projects with debt levels remaining high will want to follow the progress of the H20 Forward joint venture with Halliburton (NYSE: HAL ) . The project has obtained all the necessary permits to treat and recycle water at the same landfill site mentioned above and is key to the growth of Nuverra. Weather has delayed the opening of the project until the second quarter, but solid results are instrumental in convincing investors that the company is able to execute on strategic plans. Initial success in the Bakken could see the partnership with Halliburton expand this project to other basins, making it critical to long-term growth.
Nuverra Environmental Solutions is one of the most beaten down stocks in the general oil services sector. The company offered up strong indications that 2014 abounds with growth opportunities. Unfortunately, management was probably its own worst enemy by turning around a debt reducing divestiture into discussions on mergers and capital expenditures. While the industry has turned the corner, Nuverra probably still needs to convince the stock market that it will go along for the ride.
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