I'm going to attempt something a little odd today, Fools. Even though Nuverra Environmental Services (NYSE:NES) stock makes up 1% of my real-life holdings, I'm going to be giving you three reasons to consider selling the stock today.
Why am I doing this?
Recently, Nobel Prize winner Daniel Kahneman visited Fool headquarters in Virginia. While visiting, he talked about how a number of different biases can lead us to believe we can predict the future with relative certainty. In reality, he argued, we are just deluding ourselves.
It got me to thinking about how I don't write enough about the risks of owning the stocks I own. So, though I don't plan on selling my Nuverra stock right now, I think it's healthy for me to practice and model this behavior.
1. Counting on natural gas to be the next big thing
Nuverra is a company whose goal is to be a one-stop shop to meet all of the water needs of the oil and gas industry. It has set up operations in all of the major shale plays in the United States, and has been building out a massive infrastructure of pipelines, trucking fleets, and water treatment facilities.
Although the company will certainly profit from continued oil exploration in North America, to fully reach its potential, it needs lots of natural gas companies as customers, too. Recently, there's been an explosion of natural gas production, due mainly to newer fracking techniques.
But there are three problems with counting on natural gas. The first is that, should fracking prove to be harmful to the environment, its use could severely curtail.
Second, there needs to be enough uses for natural gas out there for demand to meet supply. Westport Innovations (NASDAQ:WPRT) is trying to drive demand, by designing engines for machinery, trucks, cars, and locomotives that can run on natural gas. In conjunction with Westport, Clean Energy Fuels (NASDAQ:CLNE) is building out filling stations for these machines to fill up on natural gas. If the efforts of these two companies -- and others like them -- can't create enough demand for natural gas, the energy companies won't have an incentive to continue extracting natural gas from the earth.
Finally, natural gas prices are an important factor. If prices can continually stay below that of oil and gasoline, then people have an incentive to buy vehicles that can run on natural gas. If, however, natural gas prices are as high or higher than petroleum-based fuels, that demand could evaporate.
2. Not yet profitable, and carrying lots of debt
According to the company's most recent quarterly report, Nuverra is currently carrying a debt load of $562 million, and has just $18 million in cash and equivalents on hand. That's what happens when a small company attempts to build out the infrastructure to be a major player in an industry -- it has to spend a lot of money up front in hopes of future profits.
Investors need to combine this fact, with the reality that the company has yet to report a profitable year, in mind before investing. Nuverra has said its capital spending as about to shrink significantly, but there's no guarantee its past investments will eventually pay off.
3. Counting on limited clientele
The final knock on Nuverra is that it has a couple major energy companies that account for large parts of its revenue. In 2012, Shell and Chesapeake Energy accounted for 29% of all revenue. If either company were to find a different water-service provider, it would create a significant problem for Nuverra.
What I'm doing
Taking all of this into consideration, I'm happy that Nuverra currently only accounts for 1% of my portfolio. There's a lot of risk here, but a lot of upside potential as well.
Fool contributor Brian Stoffel owns shares of Westport Innovations and Nuverra Environmental Solutions. The Motley Fool recommends Clean Energy Fuels and Westport Innovations. The Motley Fool owns shares of Nuverra Environmental Solutions and Westport Innovations 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 Nuverra Environmental Solutions , and Short Jan 2014 $3 Puts on 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.