While Nuverra Environmental Solutions (NYSEMKT:NES) continued to struggle in 2013 along with the domestic oilfield services group, the stock isn't headed to $0 as suggested by others. In fact, the stock is now higher a couple of months later.
Nuverra Environmental is an environmental solutions provider to customers in the energy and industrial end-markets.
During the fourth quarter and the first part of 2014, the company made great strides to move beyond the struggles of the last couple of years. Ironically, the company supposedly headed to $0 is now in a position to repurchase debt at a discount and ride the return to growth in the domestic oilfield services. In fact, the company may actually thrive with an improved balance sheet.
Thermo Fluids Sale
Considering the high debt level, it wasn't surprising to see that the company moved forward with unloading the industrial division for $175 million. Thermo Fluids nets the company $165 million in cash and $10 million in VeroLube stock. Most importantly the company obtains $165 million in cash that will be utilized to pay down on the roughly $556 million in debt at the end of 2013. Note that the previous analysis suggested that Nuverra was hoping to sell Thermo Fluids for only $148 million. Again, another example that Nuverra wasn't a distressed seller and based on the limited EBITDA, the deal was substantially better than those expectations.
For Q413, the division provided only $26.1 million in revenue and $2.4 million in adjusted EBITDA. Most investors point to the negativity of paying $245 million for the division only two years ago, but it doesn't suffice to look back. Another point is that the former CEO that is resigning from the board of directors made the deal.
A major issue with the previous Heckmann portion of the business was an oilfield services firm spread too thin amongst many different basins. Even a year after the Power Fuels merger that brought in the Bakken group, it still remains by far the only successful operation run by Nuverra.
The good news is that the polar vortex winter forced natural gas inventories to multi-year lows and a rebounding drilling rig sector should finally lead to growth in the sector. The struggles at Nuverra can't be viewed in a vacuum where weak industry demand is ignored.
Prior to the severe winter weather, Nuverra saw strong growth during October. The month wasn't impacted by the holidays or the weather providing an example of potential for 2014. For that month, the Bakken increased 15%, the Marcellus/Utica grew 14%, and the Haynesville actually gained 13%. The Eagle Ford remained a struggle though the region appears to have hit bottom.
Amazingly, the company actually generated higher margins in both the Bakken and Haynesville. Remember that the company has a wastewater pipeline in the Haynesville that would benefit from resurgence in that basin.
Financials Always Better Than Presented
Another big issue with Nuverra that is constantly overstated is the extent of the weakness of the financials. For Q413, the Shale Services segment reported a loss of $13 million on revenue of $128.4 million. When eliminating non-cash charges for amortization of intangible assets, legal, and integration and rebranding costs, the loss quickly disappears. The adjusted EBITDA margin reaches over 18%, which again is another sign of relative strength considering the struggle the industry faced during 2013.
Another big improvement should come from a reduction in the quarterly interest expense that recently reached $13.5 million. If the company can reduce the debt level beyond the $165 million cash proceeds via open market purchases of senior debt at discounts, the reduction in interest expenses would be substantial. The cash payment is equivalent to 30% of outstanding debt and any sizable purchases at a discount would help reduce quarterly interest payments beyond the already expected $4 million reduction.
Below is the reconciliation of adjusted EBITDA for the last five years. Note how the numbers fell off during 2013 due to lowering pricing and margins. The improvements in both demand and pricing should help Nuverra see a big bounce during 2014.
Surviving And Thriving
Not sure one can say that Nuverra is going to survive and thrive, but anybody reading the Q413 earnings call transcript gets the impression of a company with a burgeoning future. Whether good or bad, the company plans some bolt on acquisitions and is exploring investing in a wastewater pipeline in the Bakken. This after, already moving on a $30 million investment in a thermal desorption facility, which is a treatment and recycling center for oil well cuttings or solid material at its Bakken landfill. In addition, the pipeline could add another $20 to $30 million to capital expenditures. See the slide below for more details on the new solutions:
Besides these new projects, the company is still working to start up the H20 Forward project with partner Halliburton (NYSE:HAL). The project allows E&P operators to treat and re-use flowback and produced water with Nuverra providing the environmental solutions. The project finally has all of the permits and got delayed until Q2 due to the weather. Combined with the startup of the Bakken landfill last August, the company already has a lot to showcase during the 1H 2014 earnings. Successful results on the H20 and landfill projects in the Bakken should lead to expanding the projects to other basins including the Marcellus and possibly the Eagle Ford or Haynesville. See the slide below for more details on the H20 Forward and landfill projects:
If anything, these higher levels of capital expenditures bring some doubt into what was a very bullish quarterly report. Investors aren't ready for a heavily indebted company that is losing money to invest in the "future." At the same time, the company doesn't show any signs of heading towards $0.
In a sign of strength, Nuverra upsized its revolving credit facility by $45 million to $245 million. With the terms and pricing of the new facility unaffected by the larger size, the company actually plans to pursue more organic growth initiatives. Clearly the bankers at Wells Fargo and Bank of America don't agree with the theory of huge downside risk or these financial institutions sure wouldn't increase a credit facility.
Ultimately, the proof of whether the recent quarterly report was better than expected is reflected in the stock price. Even facing an industry weak Q1, the stock is rebounding to multi-month highs. Investors no long fear the massive downside originally forecast. How far the stock worth $460 million rebounds ultimately depends on the progress the company makes during the year on the growth initiatives. Remember that it traded around $25 prior to the absurd fear was originally introduced and the stock even traded around $40 back during the summer. With a strong industry rebound and more emphasis placed on environmental regulations, the stock could easily rebound to those levels during the year.
Disclosure: I am long NES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.