Nuverra: On the Cusp of a Rebound?

Nuverra: On the Cusp of a Rebound?

After yet another disappointing earnings report for Nuverra Environmental Solutions , investors need to remain focused on the long-term picture. Sure the company announced plans for a reverse split, and reduced EBITDA brings debt covenants into question, but investors always need to keep cool and research all the facts.

You can't deny that Nuverra has been a serial disappointer, on the path to becoming a complete environmental solutions provider to customers in the energy and industrial end-markets. The promise of providing environmental solutions for the dangerous materials produced by hydraulic fracturing once provided enormous potential.

Though Nuverra hasn't realized that potential yet, grounded investors might realize a better future by paying attention to the earnings call. The encouraging part is the capital expenditure increases of oil exploration companies such as EOG Resources and Continental Resources .

Disappointing results
With fears circulating on missing debt covenants, the expectations were for Nuverra to beat numbers this quarter. Instead, it saw a sequential decline in revenue and EBITDA that only adds fuel to the fire. Nuverra reported revenue of $162.6 million versus estimates of around $185 million. Yes, that is correct: The expectation was for a nearly $20 million sequential increase from the $165 million generated in the second quarter, yet the company delivered a small decline.

Possibly, the most devastating number was a reduction in EBITDA to $25.1 million from $33 million sequentially. Again, management overpromised EBITDA and expected it to increase to over $40 million -- that didn't happen. On top of these ugly numbers, the company plans to execute a 1 for 10 reverse split. For some reason, the reverse split scares investors, though it really has no other impact than reducing its outstanding shares.

Signs of a rebound
Clearly, the biggest problem with Nuverra continues to be confusion over whether the disappointing results are market-related or company-specific. Since the days of Heckmann, this company has repeatedly overpromised and underdelivered. But investors shouldn't get too caught up in the earnings report and ignore important details about the future of the company. Sure management could be overpromising again, but it had a ton of bullish nuggets that would have been missed if you only read the headline numbers.

One positive is that despite missing estimates and liquidity fears, Nuverra actually paid down debt by $15 million. Adding the $17 million repaid last quarter; this company has reduced debt by $32 million while struggling to meet expectations. Another shocking revelation is that it is in advanced discussions for several potential acquisitions that would be accretive to EBITDA. On top of that, management suggested that limited stock buybacks, or below-market repurchases of debt, could be in order. A further good sign is the start-up of the landfill business in the Bakken that should add $8 million to $10 million of EBITDA for the year.

Possibly most surprising was the forecast that industry growth would reach the mid-teens in 2014 based on forecasted customer spending. Nuverra is so comfortable with those forecasts, that it actually has started hiring people, which hurt EBITDA in the third quarter. Analysts think Nuverra is delusional considering September issues in the Bakken caused part of the shortfall in the third quarter. Regardless, the company has already seen a rebound in October and growth forecasts for 2014 justify hiring workers, who take up to three months to be productive.

Spending plans
One thing that will help these disappointing results is increased spending by customers. In that manner, two of the more prominent exploration firms in the Bakken are Continental Resources and EOG Resources. In both cases, the companies have provided credible plans to spend more in 2014.

In a recent earnings report, EOG forecasts 39% oil production growth for the full year of 2013. In addition, the company has raised $620 million (on a planned $750 million) from asset sales. EOG wasn't specific on next year's plans, but it did announce intentions to increase its level of drilling activity.

Continental Resources reported that its third quarter 2013 production hit a record level, up 39% from the prior year. The company also generated record profits (before depreciation, interest, and taxes) that were up 62% compared to the same quarter last year. Both numbers not only solidify plans by Continental Resources to increase oil and natural gas production in 2014, but they provide the company with incentives and financial resources to follow through on those plans.

Bottom line
After repeated disappointments, it is difficult for the market to believe that Nuverra Environmental Solutions could have anything positive going on. The forecasts of major E&P firms like EOG and Continental Resources suggest that Nuverra may be right about a rebound in 2014. Investors might want to think twice before dumping their shares after the stock plunged 30% in a single day.

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Mark Holder and Stone Fox Capital clients own shares of Nuverra Environmental Solutions. The Motley Fool owns shares of EOG Resources and Nuverra Environmental Solutions and has the following options: long December 2013 $2 puts on Nuverra Environmental Solutions, 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.

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Originally published