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The 1 Glimmer of Hope for Nuverra Environmental Solutions' Investors

There are lots, I mean lots, of reasons to be down if you are a shareholder in Nuverra Environmental Solutions (NYSE: NES  ) . I know, I'm one of them. The company has tried my patience on a number of occasions, and each day that passes there are more doubts that Nuverra will be able to execute its business plan to address what is one of the greatest issues facing the future of hydraulic fracturing in the U.S.: water use. 

Yet despite all of the bad news and underperformance, there is one thing that gives some promise that Nuverra can turn things around: Insider ownership has been on the upswing for the past several months. Let's see what management has been up to and whether its moves are enough to put Nuverra back on the right track.

Taking ownership
For a company that has struggled as much as Nuverra has over the past year or so, it is rather encouraging to see management pick up as many shares at it has in the past several months. Since August 2013, CEO Mark Johnsrud has acquired an additional 126,000 shares on the open market valued today at $2.3 million. In total, he now has ownership of over 34% of common shares outstanding. Also, five members of the board and the executive management team have made open market acquisitions Nuverra's shares over that same time period with no dispositions.

In total, the executive management team and the board of directors have ownership of over 39% of the company. This is by far the most highest percentage of shares management has held in the company. A cynical approach to this would say that management is simply doing this to prop up shares to secure financing. It's a possibility, but the efforts the company are undertaking might suggest that the company is actually starting to turn things around. 

Getting focused
It seemed ambitious and promising at the time, but when both Heckmann and Power Fuels merged to create Nuverra, the combined company had a presence in every major shale region across the U.S. On the surface this sounds great, it would in theory allow the company to cross sell its service to customers with presence in multiple shale formations. In reality, though, the company was simply spread too thin and could not provide adequate service to its clients. To make matters worse, the company also had some ancillary business segments such as the used oil recycling business with Thermo Fluids.

Nuverra's management has since acknowledged these issues and is working to streamline the business. It recently unloaded the Thermo Fluids business for $175 million and is concentrating its water recycling business on four regions where it has significant assets in place: the Bakken, Haynesville, Eagle Ford, and Marcellus/Utica shales.

Also, the company is making significant investments in water pipelines, especially in the Bakken. With the advancement of pad drilling in the region where exploration and production companies drilling 20 or more wells per pad, it is much more economical to use pipelines to move water rather trucks. The company expects to spend about $20-$30 million on water pipeline infrastructure to better connect its water treatment facilities with wells.

Source: Nuverra Investor Relations Presentation

There is no guarantee that these efforts are the silver bullet to completely turn the business around, but the chances of success with this model do appear to be much better than the path it was previously on.

Cleaning up the finances
On Nuverra's most recent conference call, management stated that it would take the $165 million in cash it has received for the Thermo Fluids sale and put it toward paying down debt. It sounds a bit odd to see a company of this size use that money to pay down debt rather than grow the business, but there has been growing concerns from investors regarding its debt situation.

By using this cash to exclusively pay down debt, it will certainly help to clear up some of these issues. By eliminating $165 million of its 9.875% senior notes, it will save the company $16.2 million annually in debt payments. Also, from an investor standpoint, it will certainly make the debt situation look much less dire.

  Today Pro-forma using sale to pay down debt
Debt-to-capital 46.28% 37.3%
Debt-to-EBITDA 5.9x 4.07x

Source: S&P Capital IQ, authors calculations

What a Fool believes
Nuverra's shares have disappointed for quite a while, and it's hard to fault anyone who has sold their shares recently. But between the recent uptick in insider ownership, the moves to cut out out ancillary business segments, and the company's joint venture with Halliburton (NYSE: HAL  ) coming online in the first half of this year there are small signs of life that management can drag this company out of its funk and actually execute on its great idea. As someone who still owns shares in the company, I'm going to give the company the benefit of the doubt to see if these moves pan out, but it is on a pretty short leash.

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Read/Post Comments (3) | 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 March 27, 2014, at 10:25 AM, nomercadies wrote:

    This was a nice and thoughtful article, but my appreciation and respect will be for the person or persons that go out and interview people in the field, inspect traffic and operations, and compile data from the sites where the work takes place. The missing information is of a nature that can only be gained by having been there. I’ve been exposed to some of that, and the NES story takes an entirely different twist when you factor in that kind of information. I don’t have the time or inclination to become a contributor, but would someone please go out and do the actual fieldwork? If you want to separate yourself from all the other annalists that sit behind a computer and write on what has already been chewed by everyone else, then go … take pictures … get interviews … and elevate yourself. Become an annalist everyone will want to follow.

  • Report this Comment On March 30, 2014, at 8:38 AM, mlr585 wrote:

    My huband works for this company and the biggest challenge we find is not knowing from day to day if he is going to have work or not. It's a little hard to have a life when you don't know what is going on with your job. We just keep holding our breath sooner or later we are going to run out of air.....and now that I read they want to use pipes to move water rather than trucks (my husband is a trucker) maybe its time to keep on rolling and find another company that cares about ALL of their employees not just management

  • Report this Comment On March 30, 2014, at 10:43 AM, nomercadies wrote:

    Dear Ms. mir585,

    This is wonderful !! In what part of the country does your husband work? It would be great to have someone so close to the situation share more "up close and personal" viewpoints. Can you share more about how often your husband works, how many hours he puts in per day, what routes he runs, what type of load he carries, what kind of housing he has, if you are able to be with him there or if he has to live on location alone, and ... I know it is kind of personal, but what pay scale he has? Does he live in company housing or own his home or other? What do most drivers do for housing? What might be a top pay for a driver? How about what level of license he needs? How many drivers are at his location? What is a ballpark average age of the truck fleet he and his fellow drivers use? Are they driving older trucks or newer ones? What kind of jobs are connected with the company other than truck driver? Are they any pictures of his workplace and surroundings available? What does the "chain of command" look like? In other words, how many levels of supervision and administration is he working with/for? Where are they located?

    If you and your husband choose to move on, where are you going to go? Is there an employer that is clicking on all cylinders that we should know about? It would be great to know which company is collecting the most and best employees.

    I'm sure the answers you share will give rise to even more questions. Your input would be so valuable. Thanks for sharing.

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Tyler Crowe

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