I have been taking some time recently to reevaluate my investment in Nuverra Environmental Solutions (OTC:NESC). The company has had a string of less than stellar results, including its recent ugly third-quarter showing. That has caused its stock to drop by more than 50% this year.

Looking ahead, Nuverra has several opportunities that make a turnaround compelling. However, it also faces a number of risks that could sink shares further. Let's take a closer look at what could muddy the waters further and cause more losses for investors.

Competition is heating up
Nuverra has no true head-to-head competitor in providing environmental solutions to energy and industrial companies, instead competing against a myriad of small and large competitors in all of its business segments. Among its competitors are well capitalized oil-field service companies like Halliburton (NYSE:HAL) that provide similar services as an add-on. It also competes against small regional players that could price similar services at levels that would be unprofitable for Nuverra.

While Halliburton partners with Nuverra on a water solution project, it could decide to invest to compete more directly in the future. Furthermore, while the fractured industry is ripe for consolidation, which is what Nuverra would like to do, it has struggled to deliver value on all of the acquisitions it has already completed. Bottom line, Nuverra has competitors on all sides, which has made it tough for the company to earn a solid return. 

Keeping things in-house
If that wasn't enough, increasingly oil and gas companies are turning to in-house water solutions. For example, Apache (NYSE:APA) has recently been fracking wells in the Permian Basin using brackish water from an aquifer below ground. It's then recycling the water that is produced and reusing it to frack new wells. This has the company recycling 100% of its produced water. The treatment process costs about $0.29 per barrel, which is a fraction of the $2.50 per barrel that it would have to pay a company like Nuverra to take off its hands for disposal.

Apache is but one example of an energy company that has developed an internal solution for either water treatment or disposal. These could have been potential Nuverra customers, but the companies found that it cheaper to develop an in-house solution than to outsource the water process. That could change if the Nuverra/Halliburton H2O Forward water recycling initiative proves successful, but the venture would need to offer producers substantial cost savings to entice a switch.

Concentrated customer base
Another risk to consider is Nuverra's customer concentration. While the company boasts more than 20,000 customers, most of those are in its industrial recycling division -- which it just put up for sale. In its energy shale business, a large portion of its revenue is concentrated on a couple of large exploration and production companies. For example, last year Chesapeake Energy (NYSE:CHK) represented 15% of the segment's total revenue. It had several other large customers, especially in the Bakken where Whiting Petroleum (NYSE:WLL) made up a third of PowerFuels revenue before that company was acquired by Nuverra.

Nuverra's bottom line would be affected if one of these customers decided to bring its water solutions in-house or switch vendors. Nuverra might be forced to reduce what it charges top customers in order to keep their business. That would impact its already low margins.

Investor takeaway
Clearly, Nuverra isn't without risk. However, none are insurmountable at the moment. The company is still building out its services and leveraging the scale it has built from prior acquisitions. Furthermore, it's taking its services past water and focusing more on solid waste disposal options. That's why I'm not yet convinced that it's time to sell my shares.

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