It has been a rough year for investors of Nuverra Environmental Solutions (NYSE:NES). The company has been hit by everything from bad weather to bad business decisions. However, its future could turn out to be a lot better than its recent past. That's because the company is sitting on what could be a potentially massive future opportunity to recycle the water used in hydraulic fracturing. (NYSE:NES)
As details of Halliburton's (NYSE:HAL) partnership with Nuverra begin to emerge, it is becoming clear that the pair must first overcome a pretty tricky logistical problem. It's that problem that most investors, and even analysts, aren't even aware exists, which is why it could be one massive opportunity for Nuverra's future business.
For some color, consider the following dialogue during Nuverra's most recent quarterly conference call. An analyst asked management an intriguing question about the recycling process that largely summed thinking that the opportunity for Nuverra in the partnership might be limited. The analyst asked:
Conceptually ... the whole idea of the drillers becoming more efficient ... in the use of water where they're increasingly trying to keep the water on-site and for the fracking of, let's say, other wells on the pad, so to speak. You say that that helps you. How does that help you? Doesn't that require your bringing more assets to the pad to do what they want you to do, to recycle that water on-site?
His concern is that increased recycling on-site thanks to Halliburton's H2O Forward service might hurt instead of help Nuverra's business. However, according to Nuverra CEO Mark Johnsrud, the opposite is true. Johnsrud noted that:
... what you've just said, is what we're not seeing. We're seeing more of a ... central treatment facility. Because the logistics just do not allow you to put all the water at the location at a given time. The pads are relatively small and tight with all the equipment that's on them during the completion or fracking phase ... there's only room for roughly half of the capacity that's required to frack a single well on the location at any given time. When we start to frack a well, we're continually moving water onto that location during the frack.
... when we have multiwell pads and there's no way you're going to be able to move all the equipment on and have the storage on the location at any given time. It doesn't work. So the only way we really see that, is that you're going to have central treatment of the saltwater as we go forward, to use that for fracking. What we'll be doing, is we'll be originating saltwater. We'll be moving it to our central location. Treating it and then storing it, and then ultimately moving it back. One of the things that people forget is that right now we're using approximately 5 million gallons of freshwater for a well, to frack a well. So if you're going to do four wells, you'd have to have storage for 20 million gallons. It's just logistically impossible.
All signs point to Nuverra playing a vital role to overcome this logistical challenge. That is why Johnsrud believes this process will actually increase the service component of the company's business. That is important because the margins of a service business are much better than a simple commodity supplier.
The bottom line is that water recycling could be what really turns Nuverra's business around. Nuverra is playing a crucial role in solving the logistical challenges to help Halliburton move forward with this innovative process. That provides the company with the opportunity to offer more services to its customers such as storing the water off-site, which just increases its importance to customers. That's why Nuverra sees big things from recycling water.
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Fool contributor Matt DiLallo owns shares of Nuverra Environmental Solutions . The Motley Fool recommends Halliburton. The Motley Fool owns shares of Nuverra Environmental Solutions and has the following options: long January 2014 $4 calls on Nuverra Environmental Solutions and short January 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.