This week marks the beginning of trading for Nuverra Environmental Solutions (NYSE: NES), which was formerly known as Heckmann. The name change is an important next step for a company that is hoping to lead the way in providing an environmentally responsible solution to the fracking issue. With that as a backdrop, let's take deeper look at what the future holds for the company.
A little bit of history
For those of you who are not familiar with the story, Heckmann was taken public by Richard Heckmann as a special purpose acquisition company in 2008. Since that time, the company has been building a company to provide solutions to the oil and gas industry surrounding the water used in fracking. Through a number of strategic acquisitions over the years, the company has built up an impressive asset base to meet the growing environmentally sensitive needs of the energy industry as you can see below:
The name change not only consolidates its many acquired assets but the idea behind the new name is to build a brand that represents a cohesive environmental solutions provider. The Nuverra name contains references to new, green, earth, and time, and according to the company it speaks of its "fundamental dedication to supporting sustainable energy generation and America's energy independence." Now that it has the assets in place, the company is ready to take this approach to the next level.
What does the future hold?
The first thing you can expect from Nuverra is that it will continue to consolidate its smaller rivals under this new banner. In fact, on its last quarterly conference call, CFO Jay Parkinson said that:
Turning now to the M&A front, we're very focused on transactions that allows to expand our treatment, recycling, and disposal network. This is really consistent with our strategy of leveraging our transportation network and providing an end-to-end solution to our customers. We believe this is a highly differentiating value proposition, and will serve us well in meeting our strategy.
The other point I'd say is, we think there may be some consolidating transactions that can occur as well. Having a national footprint, as we've talked about before is very key to our strategy, our customers operate nationally and need solutions, in every basin they operate in, so there may be some opportunities on that front. We are in very active dialog in total now in four smaller deals, all of which I believe could potentially close this quarter.
In addition to that, look for Nuverra to become a bigger portion of its customers' capital spending plans. The company sees approximately 8%-10% of upstream capex spending in the future to be on environmental waste solutions. Part of this is due to other drilling and completion costs going down but the bulk of this will be due to the increased regulations and the solutions that Nuverra is providing to meet more of its customer needs.
In addition to capturing a greater portion of this capital spending, by having a national footprint Nuverra is in a great position to leverage and extend its customer relationships to additional basins. As you can see in the map below, Nuverra has operations in most major shale basins:
Across these basins the company serves a variety of customers and at of the end of last year Chesapeake Energy (NYSE:CHK) and Shell (NYSE:RDS-A) represented its top two customers as each contributed 15% of its revenue. Further, when it acquired its Bakken operations it also acquired key customer relationships with Hess (NYSE:HES) and Whiting (NYSE:WLL). Now that the company has built a solid foundation with these customers it's looking to become an increasingly important partner to each.
One way it will further embed its services with these customers is through spending a planned $90 million-$110 million in capex this year. It has a variety of ways it can grow organically. For example, its relationship with Hess originated in the Bakken and now Hess is expanding in the Utica where Heckmann has operations -- this represents a potential synergistic expansion opportunity with a current customer. Another potential opportunity is in the emerging Niobrara in Colorado where Whiting, Shell, and Chesapeake have operations; it's not a basin where Nuverra currently has operations. As you can see, there are many organic growth opportunities for Nuverra to expand its operations with both current and new customers.
Foolish bottom line
Despite several challenges on the horizon, Nuverra is emerging as one of the more interesting oil-field services companies because of its focus on the important environmental issues surrounding fracking. Nuverra's comprehensive, solutions-based approach really opens the door for it to be a leading player in solving these environmental issues, which puts the company in a prime position to provide exceptional long-term returns for investors.
Motley Fool contributor Matt DiLallo owns shares of Heckmann and has the following options: Short Jun 2013 $4 Puts on Heckmann. The Motley Fool owns shares of Heckmann and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, Short Jan 2014 $15 Puts on Chesapeake Energy, Long Jan 2014 $4 Calls on Heckmann, and Short Jan 2014 $3 Puts on Heckmann. 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.