Nuverra Environmental Solutions Inc Is Stumbling Forward

The recent results of Nuverra Environmental Solutions highlight a company that continues to stumble forward, but it now needs to make a giant leap forward to reward shareholders.

May 14, 2014 at 1:48PM

The first quarter results for Nuverra Environmental Solutions (NYSE:NES) are probably best described as a stumble forward. After a few years of weak results, the stock surged nearly 10% following the release of earnings that were better than feared, but not exactly strong. 

The environmental solutions provider for the energy sector, built to benefit from the waste disposal of hydraulic fracturing fluids and water, is making noticeable steps in the right direction. The stock, though, is a noticeable laggard in an oilfield services sector generally on fire. Unfortunately for Nuverra, an accident with a large customer's well led to reduced spending that affected an already slow quarter due to severe weather.

The numbers, while generally better than feared, still pare in comparison to its new partner, Halliburton (NYSE:HAL), which saw a solid increase in business during the quarter despite the weak winter weather.

First quarter results
While the quarterly numbers for Nuverra were generally considered weak, they mostly met or even exceeded the reduced numbers forecasted by analysts. When excluding the TFI business being sold, Nuverra saw revenue hit $128 million versus $130.6 million in the first quarter of 2013. More importantly, shale services business earnings were negative and down when compared to the prior year. In addition, adjusted EBITDA declined to $18.9 million in the first quarter from $23.3 million in the prior quarter and $32.1 million in the prior year period.

A big part of the reason for the reduced earnings was a pick up in the operating and administrative expenses for an expected increase in revenue that didn't materialize due to weather and customer accident. The company specifically added truck drivers to the Bakken region back toward year-end to have them fully functional by the spring season. The benefits should show up starting in the second quarter.

As a comparison, Halliburton saw North America revenue grow 5% during the first quarter. More importantly, operating income was relatively flat despite the winter weather issues that caused companies to absorb fixed costs when work was shut down.

Crucial second quarter
During the earnings conference call, Nuverra mentioned that activity levels only started matching those of October during March, making the second quarter results very crucial. During the second quarter of 2013, the company generated $135 million in sales for the continuing shale and rental services. When combining those legacy services with the new landfill service in the Bakken, the combination will hopefully lead to a higher revenue run-rate somewhat helped by a stronger pricing environment. The total EBITDA last year rang in at over $33 million including a portion for the TFI business being divested. Investors will want to see that company approach the continuing operations portion though the company cautioned that multi-well pad drilling pushed their part of the services until later in the process.

The Halliburton H2O Forward initiative got delayed into the second quarter and needs to provide a major jolt for the company. This project, along with the expanded landfill services, is a cornerstone of the differential services provided by Nuverra.

For its part, Halliburton forecast a strong 25% surge in quarterly profits for the second quarter. Based on those expectations of an industry leader, Nuverra should have no excuses for not producing significant improvements for the current quarter.

Bottom line
Nuverra remains a stock to watch with environmental regulations undoubtedly increasing and service intensities growing as operators continue to gain efficiencies through multi-well pads and longer laterals that contribute higher waste volumes. Nuverra remains a high-risk play on the environmental demands of the energy sector, yet investors have to be cautioned that the company hasn't turned a profit despite the prime opportunities.

If investors want sector growth and stability, Halliburton is the safe investment. For those desiring more risk and a potential rebound play, Nuverra Environmental Solutions offers an intriguing investment at these levels.

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Mark Holder and Stone Fox Capital clients own shares of Nuverra Environmental Solutions. The Motley Fool recommends Halliburton. The Motley Fool owns shares of Nuverra Environmental Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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