Nuverra Environmental Solutions, Inc.
Q4 2018 Earnings Call Transcript

Published: 12 Mar 2019

[Operator:]

Good morning, and welcome to Nuverra Environmental Solutions Fourth 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 now like to turn the call over to Robert Kennedy, Vice President of Finance. Robert, please go ahead.

[Robert Kennedy:]

Good morning. Joining me today on the call are Charlie Thompson, Chairman and CEO; Robert Fox, Chief Operating Officer; and Stacy Hilgendorf, Chief Financial 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, March 12, 2019. And Nuverra undertakes no duty to update or revise this information. Today's discussion will also include certain non-GAAP financial measures, included adjusted EBITDA. Reconciliations of our non-GAAP measures to the most closely 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, Robert. I would like to welcome everyone to the Nuverra Environmental Solutions' 2018 fourth quarter conference call. We had a very active year in 2018 and are pleased to have accomplished many of the goals we established during the year. The year was one of transition and we have more work to do in 2019. Last year marked the first full year of operations post the restructuring. And with a healthy balance sheet and liquidity position we invested in the business to grow and improve our core activities in regions. We completed a $42 million acquisition, which added almost 17,000 barrels of strategically located saltwater disposal capacity in Eastern Ohio that nicely complements our trucking operation in the region and affords us access to customers for whom we have not previously provided service. We purchased 28 new trucks for the Northeast region to upgrade the fleet and better align our equipment with the demands of the water-hauling market. Most of that equipment will be delivered this year. We also reconfigured 15 trucks in the Northeast region to increase unit-hauling capacity by 20% to 30%. We purchased water transfer equipment in the Bakken and generated meaningful revenue in that business line in the first year. We did work on a number of our existing saltwater disposal wells in all regions and increased system capacity. In an effort to focus our operations, we exited the Eagle Ford basin early in the year as our operations there were subscale and not generating the returns we need for independent regional businesses. That process was managed successfully as closure costs were lower than expected, proceeds from asset sales exceeded our expectations. There were no customer disruptions and we executed the closure ahead of schedule. We made progress on the technology and business process fronts throughout the year. We started to roll out new systems to dispatch our services electronically, in an effort to shorten the transaction cycle-time, generate more information for management to run the business and better communicate with customers. That process began in the Bakken region in 2018 and will continue through this year in our other operating regions. While all technology adoptions require adjustments, this one is already beginning to drive down our billing cycle times. At the same time, we centralized our dispatch operations in the Bakken in order to become more efficient and better organize our activities. We're making progress with that change, yet it demands a lot of our employees and customers. We plan to continue to focus on investing in the business in 2019 and we'll add more new equipment to the fleet this year. As of now, we are planning on adding 20 to 30 new trucks in the Bakken for both water and oil hauling. We will continue to upgrade our disposal network and are actively looking at additional wells to supplement our existing network. Financially, we improved performance compared to our 2017 results. Revenue and EBITDA improved and our operating margins increased. We generated free cash flow. We made almost $55 million of gross capital expenditures including the Clearwater acquisition. Pro forma for the rights offering completed in early January, we have not increased outstanding debt. We raised $30 million of equity from our shareholders in early January and ended the year with almost $25 million of liquidity supported by asset sales of $20 million during the year. We are grateful to our shareholders for supporting us in the Clearwater transaction. We saw healthy commodity price backdrop for most of the year with softness in the fourth quarter, as prices dropped and budgets were exhausted. Activity at the end of the year moderated and we are off to a slower start in 2019 as our customers react to lower commodity prices and the demands of investors for business models showing disciplined capital allocation and free cash flow generation. We have seen recent stability in prices, but have noted activity to be slower so far in the first quarter. The early part of the year has been characterized by extreme weather in the Bakken and the Northeast, which has caused above-normal work interruption, which will impact our January and February results. Competition continues to be strong. Our business lines are characterized by demanding and price-sensitive operators, numerous small service company competitors in the trucking and disposal markets and new entrants in the order transfer business. In addition, we face regional competition to our water-hauling business from a growing number of active midstream companies. Our focus this year will be on continuing to execute efficient operations in our core regions through continued adoption and implementation of technology and improving our business processes. We will invest in the business, but maintain very rigorous capital discipline. We are implementing programs to improve our safety. We will be adding people selectively to upgrade our customer service, and strengthen and expand our customer relationships. We continue to seek new drivers and are working to increase retention levels for those already working for us. We are aggressively cutting costs and selling non-core assets although the pace of asset sales will be slower than last year. To end where I started, the company is making significant changes operationally, managerially and with technology, all of which will continue in 2019. We are hoping to enjoy the benefits of these changes this year, but are making these changes in a competitive environment. I will turn the call over to Stacy Hilgendorf for a more detailed review of the financial results.

[Stacy Hilgendorf:]

Thank you, Charlie. Let me start by reminding everybody that similar to our previous 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. Now, I'd like to walk through several key financial metrics and provide some additional thoughts on our fourth quarter performance. Despite the usual challenges resulting from year-end slowdowns, which include winter weather and holidays, the fourth quarter saw flat revenue as compared to Q3, but strong adjusted EBITDA improvement, primarily due to our recent strategic acquisition of 3 disposal wells in the Northeast. Activity levels on our trucking and disposal operations in all regions saw improvement in both Q4 and the full year 2018 versus year-ago periods supported by modest price increases in select businesses. Total revenue was $49.2 million in the fourth quarter compared to $46.4 million in the same period a year ago, an increase of approximately 6%. This revenue growth was comprised of 8% from volume increases and less than 1% due to price increases, offset by a 2% decrease from net acquisition and divestiture activity. 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 to our decision to exit the Eagle Ford basin in early 2018 coupled with lower volumes in our Haynesville produced water disposal pipeline. Our positive growth reflects the momentum throughout the E&P business. Rig counts are up nearly 16% over the past year in the basins we operate, and the number of wells completed in those areas has increased by 29%, which indicates that we should expect to see continued growth in production activity this year. Nuverra realized lower direct operating cost in the fourth quarter due primarily to successfully reducing our reliance on higher cost third-party truck drivers to satisfy customer demand. As a result, gross profit excluding special items, which also excludes depreciation and impairment and other non-cash costs increased by 3% from $10.5 million in the fourth quarter of 2017 to $10.8 million in the fourth quarter of 2018. Driver hiring and retention is clearly crucial to our business. And as Charlie mentioned earlier, we will continue to focus on this in the coming quarters. As of December 31, Nuverra had 347 drivers employed, which is flat as compared to the end of Q3, but up overall for the year when adjusted for the Eagle Ford closure. G&A expense excluding special items during the fourth quarter was $4.8 million, a reduction of $300,000 or 6% as compared to the same period in 2017. The reduction was primarily due to the realization of cost savings initiatives. The company's net loss for the fourth quarter of 2018 was $8.8 million as compared to a net loss of $30.9 million in the same period of the prior year. When adjusted for special items, the net loss was $6 million in the fourth quarter of 2018 versus $17.3 million in the fourth quarter of 2017. The primary driver for the improvement was due to an increase in depreciation expense in 2017 due to our reorganization. Fourth quarter adjusted EBITDA was $6.1 million versus $5.1 million in the fourth quarter of 2017. Adjusted EBITDA margin increased by 130 basis points. The improvement was primarily driven by the Clearwater acquisition, less reliance on third-party drivers and the realization of modest cost savings. Turning now to some other financial measures, the company has increased capital spending to support its refocused strategic plans. Gross CapEx spending was $2.6 million in the fourth quarter compared to $1.8 million in the fourth quarter of 2017. For the full-year, we spent $12.2 million on CapEx compared with $5.4 million in all of 2017. The bulk of the capital expenditures related to investments in our fleet and improving disposal capacity. The Q4 spending was financed primarily by operating cash flow. Nuverra has the liquidity available to invest in high-return opportunities in order to improve its operating position. We have demonstrated this commitment through the Clearwater acquisition and the new truck order that Charlie mentioned previously. We expect to continue investing in our core assets in the coming quarters. Total liquidity available for capital spending and other purposes at December 31, 2018 was $25.5 million. This consisted of $8 million in cash and $17.5 million of availability from our credit facilities. Interest expense for the fourth quarter of 2018 was $2.3 million as compared to $1.4 million in the same period a year ago. We ended the period with total debt of $66.4 million versus $39 million at the close of the fourth quarter of 2017. Both increases were due to the timing of our bridge loan used to finance the Clearwater acquisition in October, which was repaid with proceeds of our equity rights offering immediately subsequent to the end of the year. Adjusted for the completion of the rights offering on January 3 and the related debt pay down, our total debt balance was approximately $40.6 million upon completion of those transactions. Our weighted average interest rate on the Successor facilities was approximately 10%. Total debt to adjusted EBITDA for the last 12 months was 1.4 times, excluding the bridge loan, and when adjusted for acquisition and divesture activity on a pro forma basis. We believe we can continue to grow the business and maintain low financial leverage. Fourth quarter days sales outstanding was 59 days, down 6 days since the start of the year due to improved collection efforts. With Nuverra's focus on strategic investment, customer service, safe and efficient operations, the company is well positioned to further improve financial performance in 2019. At this time, I will turn the call back over the Charlie for some closing remarks.

[Charlie Thompson:]

Okay, thank you, Stacy. Thanks everybody for participating and taking the time to listen to our calls. We're available for questions separately, if people have any. We look forward to talking to you after the first quarter results. Thanks very much.

[Operator:]

Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.