Nuverra Environmental Solutions, Inc.
Q3 2018 Earnings Call Transcript

Published: 6 Nov 2018

[Operator:]

Good morning, and welcome to Nuverra Environmental Solutions Third Quarter Earnings Call. This call is being recorded and will be available for the next 30 days on the company website at nuverra.com. I would like to turn the call over to Mr. Ed Lang, Chief Financial Officer. Mr. Lang, please go ahead, sir.

[Edward Lang:]

Thank you, Andrea. Good morning, everyone. Joining me today on the call are Charlie Thompson, Chairman and Interim CEO; Robert Fox, Chief Operating Officer; and Stacy Hilgendorf, Controller and Chief Accounting Officer. Today’s presentation will contain forward-looking statements about our expected financial results and operational performance. These statements involve risks and uncertainties that could cause actual results to differ from our expectations. Potential risk factors that could cause these differences are described in our SEC filings, which may be obtained by visiting the Investor Relations section of our website. All information provided on this call is as of today, November 6, 2018 and Nuverra undertakes no duty to update or revise this information. Today’s discussion will also include certain non-GAAP financial measures, including adjusted EBITDA. Reconciliations of our non-GAAP measures to the most likely related GAAP results can be found in the tables attached to our press release announcing financial results for the quarter. With that, I will turn the call over to Charlie.

[Charlie Thompson:]

Thanks very much, Ed. Nuverra’s third quarter was characterized by a healthy operating environment across all of our businesses, a continued focus on improving efficiencies and profitability and additional investment in the business. I’d like to discuss a few of the priorities we’re pursuing, as well as some of the noticeable changes in the business. A high priority has been to recruit drivers. Robert Fox has focused on targeted recruiting to add drivers in those regions, where we have the greatest business opportunity. He has added two experienced recruiters to the Bakken, become more active on social media and concentrated on individual yards. Those efforts have been successful. In the Rocky Mountain region, we have added 25 net drivers since the end of the second quarter. September was the best recruiting month we’ve experienced this year. In the Northeast, we added 11 drivers since the end of the second quarter. We recognize the market is extremely competitive and hope these trends continue. We invested in the business throughout the quarter. The most notable event was the Clearwater acquisition, which we hope will transform the profitability of the Northeast region. We have been working on scheduling and traffic patterns at those wells and preliminary results are encouraging. In addition, customer response has been positive with many operators interested in additional volumes. We continue to complete axle extension projects in the Northeast, which adds capacity to those trucks. We completed about 15 of those projects in the quarter and have another 10-plus to complete before the end of the year. We also ordered 28 new high-capacity trucks for the Northeast, which are going to be delivered in the fourth and first quarters. We hope to continue this fleet refurbishment project throughout 2019, but have yet to finalize those plans. On the technology and organization front, we have adopted GeoTab technologies across the fleet. We’re completing the installation of Field FX and we are currently centralizing dispatch in the Bakken. GeoTab will satisfy our ELD requirements and assist in monitoring safety performance throughout the company. Field FX is rolling out in the Bakken. This is a significant step in improving our transaction process and an effort to invoice and report electronically. We have had a paper-intensive transaction process that will be converted. We have been working hard with customers to make sure our applications work for their needs and systems. Among other things, we hope this system improves our collection process and reduces our working capital. Over the last couple of weeks, we have initiated a centralized dispatch function in the Bakken, which will improve our route planning, increase profitability, make life easier for customers and better coordinate the yards we manage. The combination of GeoTab, Field FX and centralized dispatch will allow us to reap cost savings in 2019. We have also initiated a review of ERP alternatives and expect to move forward with a new system implementation in 2019. We’re still vigilantly reviewing all of our costs, including insurance, repair and maintenance and third-party consultants. There’s a lot of change going on at the company, which has caused a slightly increased level of attrition. At the end of June, we employed 410 nondrivers, a number that has declined to 373 at the end of the third quarter. Let me switch to making some comments about the business. Revenue for the quarter was approximately $50 million, essentially flat with our second quarter revenue. Revenues in the Bakken were flat, increased in the Northeast and declined in the Southern region. In the Rocky Mountain region, we experienced a significant increase in drivers, although the benefit of additional drivers was not truly reflected in Q3 due to the majority of hiring occurring late in the quarter. We also enjoyed pricing increases with some of our trucking business such that our hourly rate increased almost $3.50 per hour over levels enjoyed in the second quarter. Rental volumes were up almost 10% from the second quarter and we have rolled out pricing increases across all of our rental services. Landfill volumes were up 18% compared to the second quarter, as we continue to market our attractive location. SWD average disposal volumes increased 19% from the prior quarter. We also saw some modest price increases and completed several small work over projects. The water transfer business had a slow quarter, due primarily to the timing of large jobs, but we’re seeing some additional work for the fourth quarter. In the Northeast, trucking volumes increased 6%, and we made a concerted effort to review customer relationships where profitability was below acceptable levels. We’re excited about Clearwater and the fleet capacity improvements for that region. On the SWD front, volumes increased on our legacy wells more than 40%. In the Haynesville, pipeline volumes decreased, but were largely offset by increased trucking volumes into our Bethlehem transfer station. That continues to be a very competitive market that we are devoting resources to increase our marketing efforts. We are seeing signs of increased activity in the area. Overall, it was a quarter of progress operationally and we’re excited to see the benefits of those efforts in the fourth quarter and into 2019. Let me turn the call over to Ed Lang.

[Edward Lang:]

Thanks, Charlie. I’d like to walk through several key metrics and provide some additional thoughts on our third quarter performance. Nuverra has continued to realize steady organic revenue growth and adjusted EBITDA in 2018. Activity levels in all our regions are increasing and pricing continues to improve from last year. Similar to our previous calls and SEC filings, we have included references distinguishing the predecessor and successor periods, which relate to the reporting periods prior to and subsequent to our reorganization. Those references are included in order to comply with GAAP guidance. Total revenue was $49.7 million in the third quarter, compared to $48.9 million in the same period a year ago, an increase of approximately 2%. Our revenue growth was comprised of 1% from price improvements, 8% due to volume increases, offset by a 7% decrease due to the exit of the Eagle Ford Shale area. The areas where we experienced the greatest volume growth were our Northeast and Bakken trucking and disposal operations. We experienced challenging year-over-year comparisons in the Southern division, due our decision to exit the Eagle Ford basin in early 2018, coupled with the lower volumes in our Haynesville-produced water disposal pipeline. The positive growth reflects the momentum throughout the E&P business. Rig counts are up 4.3% over the past year in the basins we operate. Energy production within our regions has increased over 20% compared to last year. In addition, the number of wells completed in the basins we operate have increased by 22%, which indicates continuing growth in production activity going into 2019. Nuverra did experience higher direct operating costs in the third quarter, due primarily to the increase in business activity in all basins. Along with increased reliance on higher third-party or subcontracted truck drivers as a result of the difficulties in recruiting and retaining enough full-time drivers to satisfy customer demand. As a result, gross profit, excluding special items, which also includes depreciation and impairment and other non-cash cost decreased by 18% from a $11.5 million in the third quarter of 2017 to $9.4 million in the third quarter of 2018. As Charlie mentioned earlier, we are aggressively managing these cost challenges through new driver recruitment programs, which we are confident will yield stronger margins in the coming quarters. As of September 30, 2018, Nuverra had 351 drivers employed, which is up from 322 at the end of Q2. G&A expense, excluding special items during the current quarter was essentially flat to the same period in 2017, if adjusted for one-time severance costs. The company’s net loss for the third quarter of 2018 was $7.1 million, as compared to net income of $207 million last year. When adjusted for special items, net loss – the net loss was $7.4 million in the third quarter of 2018 versus $18.5 million in 2017. The primary driver for the improvement was due to increase in depreciation and impairment changes in 2017 due to the reorganization. Third quarter adjusted EBITDA was $3.9 million versus $6.8 million in 2017. Adjusted EBITDA margin decreased by 610 basis points. This was primarily driven by the increased reliance on third-party drivers, a reduction of high-margin pipeline volume in the Haynesville and a change in the business mix in our trucking operations in the Northeast. Turning now to other financial measures, the company has increased capital spending to support the strengthening marketplace. Spending was $2.6 million in the third quarter, compared to $1.2 million in 2017. The bulk of the expenditures were related to investments in our fleet. The increased purchasing was financed primarily by the sale of underutilized assets for $1.4 million in the third quarter of 2018. Nuverra has the liquidity available to invest in high-return opportunities in order to improve our market leadership position. We expect to continue aggressively investing in our core assets in the coming quarters, including the purchase of new and more efficient heavy-duty trucks to meet the increased service needs of our customers. Nuverra dramatically improved its liquidity position as a result of the reorganization. Total liquidity available for capital spending and other purposes at September 30 was $31.3 million. This consisted of $15.1 million of cash and $16.2 million of availability under our credit facilities. Interest expense for the third quarter of 2018 was $1.2 million, as compared to $4 million in the same period a year ago. This was driven by the reduction of our outstanding debt balance through the reorganization during the third quarter of 2017. We ended the period with total debt of $35.6 million versus $40.2 million at the close of the third quarter of 2017. Our weighted average interest rate on success – on the successor facilities was 10%. Total debt to adjusted EBITDA for the last 12 months was 2.3 times and will fall below 1.5 times pro forma for the Clearwater acquisition, following the completion of the pending equity rights offering. We believe we can continue to grow the business and maintain low financial leverage. Third quarter day sales outstanding was 54 days. This is down six days from last quarter and from a year ago on improved collection efforts. Each day of DSO is equal to over $500,000 of free cash flow. Finally, I’d like to draw attention to our safety performance during the third quarter. TRIR, which stands for Total Recordable Incidents Rate, and is a common benchmark in the industry to measure injury-prevention performance increased by 0.76 year-over-year through Q3 2018 to 1.67. While this is below our comparable five-year average of 1.91, we continue to focus on driver training and safety reviews to improve our performance. Providing a safe work environment for employees, customers and all stakeholders is our highest priority and vital to our long-term success. With Nuverra’s focus on safety, operating leverage and strong industry fundamentals, the company is well-positioned to further improve financial performance this year and into next year. Operator, we will now take – open the call for questions.

[Operator:]

[Operator Instructions] We will now take our first question from Hamzah Mazari from Macquarie. Please go ahead.

[Mario Cortellucci:]

Hi. This is actually Mario Cortellucci filling in for Hamzah. When do you think you’ll start to realize the benefits of fleet investment? Have you approved further fleet investment for 2019? And maybe you can tell us a little more about your backlog to delivery – I’m sorry, to deliver new equipment?

[Charlie Thompson:]

I can start with that one, Mario. It’s Charlie.

[Mario Cortellucci:]

Good morning, Charlie.

[Charlie Thompson:]

So we’ve – the actual extension project is is ongoing. So we’ve been monitoring those projects in terms of when the work is done, how it compares on a cost basis and on a timing basis. Those have been going pretty much on schedule and on budget. And I think we have about 15 of those working right now, so that’s happening. And we’re recognizing the benefits of those – that additional barrels. It’s in the order of maybe 30-plus additional barrels per truck that we’re reconfiguring. With respect to the new orders, I don’t remember the exact date that we placed the order, but we put an order in for 28 new trucks, all allocated to the Northeast. It was kind of in two chunks, a five a 23. The five are having the barrels put on now, and last I checked and I was hopeful some of those might get delivered this year, but I’m not 100% sure. The rest of them are going to be coming into service. I think, in the first quarter, I will tell you that the adherence to the original schedules of delivery hasn’t been 100%. There has been a little drifting. We’re looking into that, so I don’t have a perfect answer. But I think, it’s just a function of the fact that there are a lot of people ordering trucks and the manufacturers are busy. We had a couple of Board meetings over the last two or three weeks during which we discussed what it is we were going to do in 2019. We have some preliminary ideas along the lines of a size similar to what we’ve ordered this year, but that’s not final. We don’t have any Board approval and we’re still talking about it and we’re talking about the allocation of that equipment into the different markets. I think, there will be a priority, because we get the most economic benefit from putting equipment into the Northeast, so there’ll be a priority there. But we’re also mindful of allocating equipment across the other basins, primarily the Bakken.

[Edward Lang:]

And Mario, just as far as the backlog, generally what we’re seeing now, I’d say, for orders placed today you’d probably expect about a four to six-month delivery timeframe. Simply as Charlie mentioned, the manufacturers are – have a pretty good backlogs and it does take – you have to kind of look around to find an opportunity to get slots to manufacture. So manufacturers are busy. And so orders placed, say, before year-end probably won’t be delivered until sometime late Q2 in 2019.

[Mario Cortellucci:]

Great. Thank you. And just a quick follow-up. I guess, what are your expectations for M&A activity in 2019?

[Charlie Thompson:]

That is a – that’s the $64,000 question. There is an awful lot of stuff out on the market for sale. We’ve seen a number of trucking companies. We’ve seen other disposal assets. We’ve seen kind of derivative assets to our core businesses. That’s been kind of an M&A theme through the course of 2018 across all parts of the service sector and it’s continued recently. I think, we’re looking at a lot of those things. I think, our focus right now given the magnitude of Clearwater for us is to integrate that. But we’re not staying still with respect to additional M&A. I think, our aspirations continue to be for scale in the markets primarily that we operate. We’re not spending a lot of time looking at new markets right now, but we certainly see opportunities outside of the core areas we operate. I think, the market, as you’re probably well aware, has been a balance of supply more than demand. So executions have been spotty and pricing has been, I guess, generally weak. So with that backdrop in mind, we’re continuing to look. But that’s about all I can say on that right now.

[Mario Cortellucci:]

That’s great. I appreciate it.

[Charlie Thompson:]

Sure. Thanks for calling in.

[Operator:]

We will now take our next question from Mr. Adam Ritzer from Pressprich & Co. Please go ahead, sir.

[Adam Ritzer:]

Good morning. Thanks for taking my call. Just in terms of the Clearwater deal, you guys closed that, what 30 days? That was pretty quick. Congrats on getting that done. Has there been anything better or worse that you guys have seen or anticipated since we had the call about a month ago from that?

[Charlie Thompson:]

We are – we’re working – it’s kind of too early to tell, is the answer. We’ve been working pretty hard to deal with the integration of that thing right now. And I would say, our operating people are spending a lot of time at the facilities, dealing with things like scheduling trucks. It’s a slightly different business now integrated with us than it was previously, it’s just a place where trucks showed up. We have a higher sensitivity to scheduling the deliveries of the saltwater in the context of our trucking operations. So we’re working hard on that. I would say, the preliminary results have been encouraging. We’ve reduced the delays that some of the trucks were experiencing previously. That’s number one. Number 2, I would say, there has been a pleasantly encouraging set of responses from the operators all of whom seem keenly interested in additional volumes. So I would say, Adam, that it was right after we announced the deal, there was like a flurry of calls, we want more space, we want – when are you going to do this, when are you going to do that, we want more water. We’re having those conversations, those have subsided a little bit or we’ve kind of called through who we think are genuinely interested and might do something on a more committed basis. So working – we’re working through those opportunities right now.

[Adam Ritzer:]

Okay. It sounds pretty good. What – could you give anymore details about what the record dates are going to be and when the rights offering was going to officially kick off?

[Charlie Thompson:]

Well, Adam, we filed the S-1 registration statement on October 25. Obviously, then you kind of get into the process of working with the SEC. I guess, the best direction we could give you is that, we would hope to complete the rights offering before year-end, but we don’t totally control the calendar.

[Adam Ritzer:]

Okay. So you have to hear back from them, get official approval, then you could launch?

[Charlie Thompson:]

Correct.

[Adam Ritzer:]

Got it. So the Bakken looks pretty good, so that – and the extra truckers should help there. It sounds like, I guess, really the only issue right now is, what’s going on with the pipeline. Could you talk about a little more in detail about what the issues are? How we’re going to resolve them? That was forecasted to be the best asset you guys had coming out of bankruptcy, and obviously, it hasn’t done as well as expected? Could you talk about that a little more?

[Charlie Thompson:]

Yes. The – a couple of things are going on there. That is – it’s still a good pipe. It’s still got a lot of capacity, but what we’ve seen is a couple of things, I guess, a little bit of episodic activity levels. You deal with out there the two principal producing formations, which are the Haynesville and the Cotton Valley. The Cotton Valley makes a lot more water than the Haynesville. From our perspective, we like Cotton Valley more than we like Haynesville from an economic standpoint. From the perspective of the operators, they’re probably spending more time in the Haynesville. So the activity level has been, it’s in pockets. It’s more enthusiastic for some than it is for others. The basin is still busy. We’ve seen some increased activity from some other people that we’re going after. We’ll see what happens with the BP deal and there are some other names there, who are – who seem to be getting active again. Some of our customers have been, as the trend has existed, whether it’s in the Permian in particular or in some other basins, where some of the operators are going in-house with their own water infrastructure activity. We’ve suffered from a little bit of that, so that’s taken some volumes off of the system. They’ve also done some of their own saltwater disposal drilling, which has put some pressure, given the overall capacities of saltwater supply – saltwater supply in the region on pricing. So I would say, yes, it hasn’t performed as we had hoped and expected it would coming out of bankruptcy. I don’t think on objective reflection as to what was going on at the time that, that should have been a huge surprise. What we’re doing is working – the business development group and the sales organization is kind of redoubling their efforts with a push from all of us that the priority is to get volumes in the pipeline. We’re probably running it anywhere from 30,000 to 35,000 barrels a day. Capacity is probably close to 70. So we’re pushing the business development guys to spend a lot of time with all of the operators to do what we can structurally to get additional volumes. We’re also talking to other operators about the potential, and we have to look carefully at the economics of allocating a little capital there to build to some of the operators. What you have there is, we have a nonmoving pipe and the basin moves. And so we just have to figure out how to get the water, that’s part of the current development in the basin. We’ve made a concerted effort with some of the falloff in the pipeline volumes to work the trucking points and we’ve meaningfully increased the volumes coming into the trucking deliveries down there, and they’re going to try to continue to do that. We still have capacity in the trucking points. And so we’re working on that component of volume into the system. But it’s suffice it to say, your comments are not lost on any of us and that’s a top priority for us operationally and from a marketing standpoint.

[Adam Ritzer:]

Okay, that’s helpful. I guess, two follow-ups on that, not being an expert on the various basins. Could you – is there, like what’s the difference between the Haynesville and the Cotton Valley, number one? And number two, what has BP announced down there?

[Charlie Thompson:]

The first question is, my geology days are deep in the rearview mirror. So I’m going to have to do a little extra homework rather than babble through that on the call and I’ll call you back. On the second one, we’re – I don’t know if – I haven’t checked the news to see if it – but BP was picking up to BHP onshore business. And so their acreage in the potential activity, we’ve – I know we’ve talked to BP about what they’re going to do with the BHP assets? But their answer was late last month and into early this month, we can’t talk to you quite yet on that, but when we can we will. So we’re…

[Adam Ritzer:]

Okay.

[Charlie Thompson:]

…that’s – there’s nothing that we’re counting on there. It’s just sort of a significant event in the area that affects a big operator, and I don’t have all the answers on what that’s going to mean for us and any opportunities that are going to come out of that.

[Adam Ritzer:]

Got it. Okay. Thanks very much for answering my questions.

[Charlie Thompson:]

Okay, I’ll circle back with you with a little….

[Adam Ritzer:]

Okay.

[Charlie Thompson:]

…Haynesville, Cotton Valley primer.

[Adam Ritzer:]

Great, thanks a lot.

[Charlie Thompson:]

Okay. Yep, sure, Adam.

[Operator:]

[Operator Instructions] There are no further questions queued at this time.

[Edward Lang:]

Okay. Thank you, Andrea. And we thank everybody for dialing in for the call today, and we look forward to talking to you about our fourth quarter and full-year earnings early in the New Year and happy holidays to everyone. Thank you.

[Charlie Thompson:]

Thanks very much.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call Thank you for your participation. You may now disconnect.