Nuverra Environmental Solutions, Inc.
Q3 2013 Earnings Call Transcript

Published: 8 Nov 2013

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Nuverra Third Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, November 7, 2013. I would now like to turn the conference over to our host, Ms. Kathy Price. Please go ahead, ma'am.

[Kathy Price:]

Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss Nuverra Environmental Solutions third quarter financial and operating results. Some of the comments we will make today are forward-looking. Generally, the words aim, anticipate, believe, could, estimates, expects, intend, may, then, project, should, will be, will continue, will likely result, would and similar expressions identify forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more detailed description of risk factors, please refer to our filings with the United States Securities and Exchange Commission, including our annual report on Form 10-K, our current reports on Form 8-K and any amendments to these filings, as well as our earnings release posted on the Nuverra website for a detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website, www.nuverra.com. Also, please note that certain financial measures we may use on this call, such as adjusted EBITDA, earnings before interest, tax, depreciation and amortization, are non-GAAP measures. Please see our press release for a reconciliation of these non-GAAP measures to GAAP. Joining us on the call today from Nuverra are Mark Johnsrud, Chief Executive Officer; and Jay Parkinson, Chief Financial Officer. With that, I would now like to turn the call over to Mark Johnsrud. Go ahead, Mark.

[Mark D. Johnsrud:]

Thanks, Kathy, and thank you, everyone, for joining us today. Nuverra is fundamentally a different company today than it was last year at this time. We have made significant operational changes to transform our company as we concentrate on our core Shale Solution business, including restructuring the organization, strengthening our management team, focusing on accountability, improving operations and driving efficiencies. We believe these actions establish a strong foundation to grow the business and build long-term shareholder value. Our national strategy is designed to establish the company as an essential partner to E&P customers seeking high-quality providers to help them meet growing demand and comply with current and future regulatory requirements associated with the industry, and we can do this nationwide. It takes time and hard work to be recognized as a valued partner. We are very encouraged by the evidence that our full-cycle environmental solutions platform is gaining traction and customers are recognizing the need for a nationwide comprehensive provider. For example, in the past 30 days, we have commenced discussions with 2 major companies about national service contract proposals, something that we haven't seen in the past. Our Bakken landfill is open and taking oilfield waste. We anticipate conducting our first H2O Forward frac with Halliburton in the first quarter of 2014. We are also pursuing growth opportunities in the solid waste treatment solutions, which Jay will discuss in detail later. We continue to rationalize our business to maximize operational efficiencies, leverage growth opportunities, enhance customer relations, improve business development to grow our business. Our Shale Solutions segment is now overseen by 3 operating divisions

[Jay Curtis Parkinson:]

Thank you, Mark, and thank you, everyone, for joining us on our conference call today. We have a lot going on this quarter with a lot of changes to talk about as we build this company for the future, so I'll get right to it. A quick note on our 10-Q filing. We anticipate filing it before they open on Tuesday. We have a lot of disclosure we are working through this quarter, so we're taking a few extra days there. Our revenues for the third quarter were $162.6 million, which compares to $165.5 million in the second quarter and $93.1 million in the third quarter of 2012. Adjusted EBITDA for the third quarter was $25.1 million, which compares to $33.3 million in the second quarter and $17.2 million in the third quarter of 2012. Our reported net loss per share in the third quarter was $0.78, which compares to a loss of $0.05 in the second quarter and $0.06 in the third quarter of 2012. Reported net loss was inclusive of a number of noncash and nonrecurring items, which I will discuss later. In the Shale Solutions segment, revenues were down slightly sequentially as the increase in the industry activity that we anticipated did not materialize. We did have some specific events that also impacted our Shale Solutions segment, including what we believe were some transitory events that hit us in the month of September, in particular. In the Bakken, one of our largest customers rotated some projects we were working on in September to another part of the basin we were not servicing them in, which impacted our September results in the area. We do believe this was transitory based on indications of October activity in the Bakken. This impacted revenue in both logistics, as well as rental. The lower rental activity, of course, had a bigger impact on margin. We also experienced higher personnel expense in the Bakken relating in part to some incentive accruals we took during the quarter. We continue to believe in the industry recovery in 2014, as Mark spoke about earlier, and do not want to have challenges meeting anticipated demand, so I'm making decisions for the long-term benefit of our company. This negatively impacted Q3 margins in the basin due to higher personnel costs, although we are optimistic about activity picking up in 2014. We are not seeing downward pressure on margins in the Bakken from pricing. Turning to some other shale basins. In the Eagle Ford, we continue to see challenges in this market. Both revenue and EBITDA were down sequentially as we see ongoing competitive pressures due to capacity that has moved to the market from dry gas basins. We continue to work on our turnaround plan in the area but believe we could see declines in the space and they could offset improvements in other basins in Q4. In the Haynesville, both revenue and EBITDA increased slightly on a sequential basis. Margins improved as we saw the benefits of increased activity level that we discussed last quarter. We have very recently also made progress in the basin getting pipeline volume. Revenue and EBITDA increased sequentially in the Marcellus/Utica area as we continue to see growth in that basin and are enjoying the benefits of the expansion we are making into the Utica, as well as investments we have made in drivers and personnel to meet what we believe is long-term demand from our significant customers in the area. We did see some softening in demand in the gassier Northeast Marcellus, but that was more than offset by improvement in the Southwest Marcellus and Utica, which are more levered to liquids-rich and oil drilling. Margins in the area also improved sequentially. Turning to our Industrial Solutions business segment. We had a challenging quarter, a sequential decline that exceeded our previous expectations. Used oil collection costs were higher in the quarter, without a corresponding increase in sales price per gallon, which impacts our net margin per gallon. Logistics costs remained above historical levels due to competition for crude railcars from the Bakken, as well as an overall increase in sales mix to re-refineries relative to local industrial demand for collected oil. We've taken significant steps to reduce UMO collection costs and do anticipate future benefit from these measures. In addition, we expect end markets closer to our generators to improve over time. Looking now at margins in our business segment. Shale Solutions reported an adjusted EBITDA margin of 19.1%, which was down sequentially from last quarter's 23.2% margin. This decline was due in part to what we believe was transitory lost revenue in September in the Bakken. Generally speaking, we are seeing stability in pricing across most shale basins, with pockets of weakness due to capacity oversupply. The biggest challenge in margin is just overall activity levels, particularly in dry gas basins. In Industrial Solutions, our adjusted EBITDA margin was 10.4%, which was down from 17.3% in the second quarter. As I noted previously, management believes that the initiatives currently being taken to reduce used oil collection costs are in the long-term interest of this business, and that we will see improvements in operating performance in future periods as a result. There was a lot going on in the quarter, so also, let me take a moment to walk through some of the onetime and unusual noncash charges that hit our income statement. First, on the impairment charge, let's break this out between TFI and the shale business. We have announced our intention to sell TFI and, as such, have written the asset down $145 million. Writing the asset down to this value accounts for a $98.5 million charge. The balance of the impairment was at our Shale Solutions segment, and was $108.4 million in total and related to a write-down of fixed and intangible assets, the majority of which was related to assets that the legacy Heckmann Corporation acquired in predominantly natural gas basins. We also accrued $16 million during the quarter, in connection with the legacy Heckmann Corporation class action lawsuit on China Water. We are moving forward as a company and looking to turn the page on legacy issues. Also incurred during the third quarter was a $3.8 million write-down of the company's equity holdings in Underground Solutions. This equity investment was made by the legacy Heckmann Corporation in 2009. These charges that I've discussed were noncash and do not affect Nuverra's cash position, cash flow, liquidity position, nor do they affect key metrics used for compliance with debt covenants. Turning now to our cash flow and balance sheet. During the third quarter, we produced very strong operating cash flow of $39.9 million as compared to $17.9 million generated in the second quarter. This sequential increase was due in part to the fact that our interest payments on the senior notes are payable in Q2 and Q4, but nonetheless, the business continues to produce very strong cash flow. We continue to show strong improvements in working capital. Our operating working capital came in at $41 million, a reduction of $18 million from June 30 and a total reduction of $32 million from March 31. This reduction in working capital has been realized through ongoing integration efforts, which have improved our collections and overall cash management. During the third quarter, we continue to pay down our revolver. Our third quarter paydown was $15 million, which followed a paydown of $17.5 million in the second quarter. Net cash, CapEx for the third quarter was $11.7 million, which was significantly inside of operating cash flow. Approximately $4 million of this CapEx was for the development of the landfill in North Dakota. As I have discussed previously, our strategic reduction in CapEx is a function of our focus on further efficiency gain and increasing utilization to drive growth. Looking to our current liquidity position. As previously disclosed, we've proactively amended our revolving credit facility during the third quarter, and our liquidity position as of September 30 was approximately $80 million. Depending on our operating results in the fourth quarter, as well as the benefit of potential acquisitions we might make this quarter, we will be closely monitoring compliance with the minimum interest coverage ratio and maximum total leverage covenants at year end. We have proactively had discussions with our bank group on this, and may proactively seek a waiver of these covenants. We believe given where we are with the sale of TFI, which we currently anticipate will occur in the late first quarter or early second quarter of 2014, and the anticipation of a complete paydown of our revolving credit facility as a result, we will be in a position to have a proactive discussion with our bank group. Looking more broadly at our strategic plan for our balance sheet. We believe the sale of TFI will have a material impact on our financial strategy and will provide us with flexibility to explore a number of options to create value for our stockholders. Pro forma for the sale of TFI at the value we marked the asset down to, we would be in a position to pay down all of our revolving credit facility, as well as put excess cash on the balance sheet. From a funded debt perspective, we would then be left with only our unsecured senior notes, which have no maintenance covenants, and our very flexible capital. We may also look at options either before or after the TFI sale, to alter our secured debt instruments, such as with an ABL facility to remove maintenance covenants altogether. This could allow us to look at options to make limited stock repurchases and/or make open market repurchases of our high-yield bond. Beginning this quarter, we have changed the method by which we provide guidance and business outlook, consistent with our focus on the long-term performance and direction of the business. Going forward, we will provide qualitative perspective and factors on our business segments in the overall market for our products and services. In light of our intention to sell TFI, which comprises our Industrial Solutions segment, we are evaluating our reporting segments and looking at segment reporting along the lines of the new geographic division structure we created. This is not something that we are able to do with our third quarter filings, given the very recent timing of that announcement. Mark spoke earlier about a business outlook for 2014, and in our next quarterly conference call, we will provide more color as it relates to our geographic divisions. Looking more specifically at the fourth quarter this year in Shale Solutions, we do not anticipate a material sequential change in business activity and further believe that given the general lack of urgency on customer spending, that the seasonal impact of the fourth quarter could be greater than normal. We also see continued challenges at TFI, coupled with regular Q4 seasonality in that business. On similar granular modeling items, we anticipate SG&A going forward in the range of $15 million to $18 million per quarter. Amortization will tick down somewhat as a result of our impairment charge, and we anticipate a range of $7 million to $9 million per quarter. Depreciation will also decrease as a result of the impairment charge, with an anticipated range of $20 million to $25 million per quarter. Estimated GAAP tax rate of 40% is unchanged, and we currently estimate fourth quarter CapEx in the range of $15 million to $20 million. On the CapEx front, we are starting to get more proactive with how we see opportunities to deploy capital as our more bullish outlook for 2014 crystallizes. As Mark said earlier, we are pretty excited about 2014 and the business climate our customers are currently planning for and talking about. We are also excited about some growth projects, which we believe expand our environmental solutions, including opportunities around solid waste treatment facilities. We are likely to spend some capital in the fourth quarter and into next year on these initiatives. In addition, we are seeing increased acquisition opportunities at levels that make sense to us as buyers. Up to very recently, there was a significant disconnect between buyers and sellers, and we believe that this may be closing somewhat. We have several opportunities that we are in fairly active discussions on that we believe could have a positive impact on expanding our environmental solution. With that, I would like to thank -- again, thank everyone for joining our call and ask the operator to open the line for questions.

[Operator:]

[Operator Instructions] And our first question is from the line of Hamzah Mazari with Crédit Suisse.

[Hamzah Mazari:]

Mark, you're making a lot of changes in the business, clearly, getting into solid streamlining legacy assets, selling a business. Could you maybe talk about how investors should think in terms of what innings are we in, in terms of you integrating this business? And I know you mentioned it's a new company versus last year. How many more changes should we expect going forward?

[Mark D. Johnsrud:]

I think that there's -- we've made a lot of changes so far, Hamzah, and we still have some things left to do operationally. And our goal is, is we want to continue to push the platform that we want to build on a long-term basis. We need to continue to build some more kind of services so that we really do provide that comprehensive solution for all of our customers truly on a nationwide basis. But as you can see, we thought that it's easier, right now, just to be more aggressive and get some of the changes behind us that need to be made. And I'm sure that -- any more questions, please ask.

[Hamzah Mazari:]

Yes. And you spoke about increasing the pace of hiring and incremental costs to meet demand. I know you're not sort of giving quantitative guidance on '14, but I think investors are going to need a sense of how to think about '14. So maybe you could speak qualitatively on how folks should think about the underlying EBITDA or earnings or cash flow for '14.

[Jay Curtis Parkinson:]

Hamzah, it's Jay. I think what we're seeing right now -- we obviously had a number of events that hit us particularly in September, which impacted the third quarter. As we've talked about, we also had a number of charges and accruals we took. I think as we firm up our outlook for '14, we kind of see a base industry growth rate, kind of in the mid-teens right now. I think in terms of just what customers are saying, I think that will have -- I think we also have some additions that will start to flow through, which have the potential to drive our growth rate somewhat higher. I think you obviously are going to get a full year contribution from the landfill, which is probably the $8 million to $10 million range on EBITDA. And as Mark talked about, getting some of these transitory issues behind us, I think, will be additive to that as well. But right now, what we're seeing firming up, kind of from an industry standpoint, I'd say it's kind of a mid-teens growth rate.

[Hamzah Mazari:]

Okay. And then lastly, on the TFI sale, maybe talk about what gives you confidence that, that sale is going to close in early '14. And then what is the appetite to do buybacks, given where the stock is at?

[Mark D. Johnsrud:]

We feel we've been visiting with our investment bank adviser. We've had a lot of -- several companies have called us. Several private equity firms have called us also. And have -- we have a lot of loop. There's been a lot of interest in that business. And what we've determined is, is that in our shale business, that there's a lot of opportunities. And we just are going to focus and spend more time on that core business of what we want to build. And we feel pretty -- we feel, I'd say, as confident as we can that, that will close by the end of the third -- or first quarter, beginning of second quarter 2014.

[Jay Curtis Parkinson:]

And then, Hamzah, as it relates to buybacks, as we referenced both in the remarks, as well as, I believe, the release as well, we're going to explore various options, maybe even before we were to execute on something with TFI. We think that we could alter the secured debt structure, such that it would allow us to execute a buyback of the stock or a limited buyback of a stock. Or even going and looking at open market purchases of bonds, which would blend down our cost of debt. So we've had pretty extensive discussions with our bank group about some structural flexibility that I think would be accretive to our shareholders.

[Operator:]

And our next question is from the line of Michael Hoffman with Wunderlich Securities.

[Michael E. Hoffman:]

Mark and Jay, can you help us baseline the third quarter EBITDA net of where you think the puts and takes would have been for business mix, as well as taking TFI out? I'm assuming that goes into discontinued ops going into the fourth quarter.

[Jay Curtis Parkinson:]

Yes. Michael, it's Jay. Because we made that announcement after -- the decision after the quarter, it's consolidated. But going forward, we're going to look at pulling that out, if there's a reporting period where that's still consolidated. If you think about EBITDA sequentially, you kind of -- on an all-in adjusted basis, you kind of had in the range of an $8 million sequential decline there. I would say probably about $2 million of that was sequentially weakness we saw at TFI, as well as just some seasonality at TFI, with the balance $6 million at shale. I would say of that $6 million at the shale side of the business, probably $2 million of that was related to some of the weakness we saw in the legacy Heckmann Water business. The shale's area is outside of the Bakken. I would say probably $2 million of that was related to a very weak September up in the Bakken that we talked about. I'd also say early signs in October are that, that was transitory, we're seeing activities pick back up. And then I'd say another $2 million of that was some incentive accruals we took in the Bakken during the quarter, as we want to be sure that we are actively hiring and retaining drivers to meet some of the customer discussions that have taken place about '14 activity. So I think that kind of bridges you sequentially from quarter 2 to quarter 3.

[Michael E. Hoffman:]

So if I think of the fourth quarter and trying to follow this, I've got about $6 million that I could add back?

[Jay Curtis Parkinson:]

That's probably right. And then the other thing that could be additive to the fourth quarter is you'll get a full quarter contribution from the landfill. I'd say probably...

[Michael E. Hoffman:]

It's about $2 million?

[Jay Curtis Parkinson:]

Yes. In that kind of ballpark. That's ramping up. We've got all of the -- a lot of the requisite customer approvals out of the way. This quarter, we did take volumes, but in the month of October, we saw a pretty dramatic ramp-up in volume activity from the landfill.

[Michael E. Hoffman:]

Okay. And then as we think going into first quarter, if we're starting in a kind of a $33 million, $35 million number, is it flatline because of seasonal issues? Or how do we play in that first quarter, second quarter as we work through the sale of TFI, get your debt paid down?

[Jay Curtis Parkinson:]

I think that if you apply the kind of mid-teen industry growth rate across the business, I think it's a little early for us to probably comment on what we think 1Q looks like. I certainly think that there probably will be an improvement throughout the year. I think that seasonality in the business probably dissipates with the disposition of TFI. There's probably more seasonality with that business. So I don't want to call it a flat number for next year, but I don't think that the incline will be as steep as maybe we originally thought this year.

[Michael E. Hoffman:]

Okay. And then just remind us of the most sensitive bank debt covenant that we're worrying about going into fourth quarter.

[Jay Curtis Parkinson:]

It'll probably be the EBITDA to interest coverage ratio. We amended the total debt-to-EBITDA ratio, which governs liquidity. So the one that we'll be monitoring will be the EBITDA to interest coverage ratio. A couple of things to keep in mind about that would be, we could do something to the facility altogether to support TFI. We've looked at an ABL facility, which would have no covenants at all. And also, we're permitted to do some of the things that we talked about earlier in terms of buyback. But we may look to waive that. We've had very proactive discussions with our bank group already.

[Michael E. Hoffman:]

Okay. And if we're at low-30s EBITDA, we're not at risk on that covenant, right?

[Jay Curtis Parkinson:]

It's probably where -- in those low-30s of EBITDA is kind of where you get to the point of getting past that risk, low- to mid-30s in EBITDA. The only other comment is, keep in mind, all acquisition EBITDA is added back for covenant purposes, and we're in the midst of some discussions, which would obviously be additive from an EBITDA basis.

[Operator:]

And our next question comes from the line of Scott Graham with Jefferies.

[R. Scott Graham:]

So, Mark, this is a question for you, and then one for you, Jay. Why would we be increasing expenses in Bakken in preparation for what you say here is more robust activity in 2014? I guess with the trending of EBITDA down since the merger, I'm kind of wondering why wouldn't you maybe take a more conservative approach to that and maybe spend the money when the orders were in as opposed to in front of that?

[Mark D. Johnsrud:]

Well, good question, Scott. The primary reason is, is that it takes time to get people in place, if you're going to start hiring, so that we always start that -- it takes about 3 months from the time we hire somebody to ramp that up, until they actually can be out, making money for us. So it takes a large fleet of people to do this. And so what we're doing is making sure, we have 1 month that was quieter, but it looks like it's getting busier as we go on through the year and into '14. So it takes us 2 to 3 months to get that prepared and get the people operationally, get them through all the training and all the safety.

[R. Scott Graham:]

Okay. And I do get that, and I don't want to keep hammering on the same question here. But if EBITDA has trended down and activity is lower, doesn't that suggest that we already have that capacity?

[Mark D. Johnsrud:]

No.

[Jay Curtis Parkinson:]

No, Mike -- or Scott. Basically, when you have an event like we had in September, you have a very quick rotation of activity out. Then you come out of the areas you're in, which happened and impacted us. You then come to the conclusion of do you want to try to reduce costs to try to max that decline of revenue or are you of the opinion that you want to keep those people on. Because if you immediately try to make those costs variable and drop it, if you think activity picks back up pretty quickly, you can't -- there's a lag time between when those employees can start generating revenue again. Does that make sense?

[R. Scott Graham:]

Well, I guess. I guess, I also look at a company on -- half of the business is in the Bakken area, and it would just seem that with the slowdown in activity, that there would be people kind of standing around a little bit. And those would be people that I would have thought would have been instantly leveraged when things got better, and instead, we're adding people for when things get better, I guess.

[Mark D. Johnsrud:]

Well, we're already seeing that as we go into October and -- through October and into November. We're already seeing the increased demand for services. And so, what, we saw 1 month that was down. But now we're starting to see the increase, what we actually would have thought we would have seen 2 or 3 months ago. So we are utilizing the people that we hired. We think that we've done the right thing. And by the amount of work that we're seeing in front of us, we know we've done the right thing, Scott.

[R. Scott Graham:]

Okay. Next question is, Jay, you indicated that your expectations for industry growth for next year are mid-teens. What are you basing that on? Is that your customers' indications of their CapEx, their business with you, outside party? What is that based on?

[Jay Curtis Parkinson:]

Yes, we kind of keep an internal tab here in terms of what the capital plans are for our major customers, and we triangulate around that. I think it's fairly consistent also with some of the third-party stuff we use to channel-check our assumptions that relates to wells drilled or just total CapEx plan. So if you look at some of our big customers out there, folks are talking to kind of a high teen to as much as 20%, 30% CapEx budget increase. So I think that's how we come up with that number.

[R. Scott Graham:]

And how do you know that, that will be the same number on the services side?

[Jay Curtis Parkinson:]

Well, that's their, like their drill-and-complete CapEx, essentially. So that will be services that we would be exposed to in terms of the revenue opportunity.

[R. Scott Graham:]

Right. But they're getting more efficient. So they require less, what I would call, almost aftermarket, the services that you provide. So wouldn't it be a lower number?

[Mark D. Johnsrud:]

Actually, Scott, we provide services that are -- happen at each well, even though that there is -- there's more efficiency in the system with pad drilling. But primarily, what we're doing is we provide the services for each individual well. So as we become more efficient, we'd see that we're probably going to end up with more activity. And the area that it has impacted us somewhat on is on our rental business. But as far as kind of the frac-ing and transportation, the solids business -- and that's why we've been pushing on their solids so hard, is as they become more and more efficient and drill more wells in a shorter period of time, now our solids business gets that much busier. And so that's the part that we're trying to push on, is how do we end up with not on a per day-type rental activity, but things where there's more of a flow-through. That we are going to be busier because there's more volume that we have to manage in a shorter period of time, as there's more efficiency in the system.

[R. Scott Graham:]

Understood. With respect to TFI and your indications of interest that it will sell and all of that, as you look around, Mark, as you've now had a full year to assess things. Are there any other operations that you think maybe just need to be jettisoned?

[Mark D. Johnsrud:]

No, not at all. What we actually see is that we're going to continue to try to add more of our services that we're providing in the Bakken that we're -- and actually, our guys in the Marcellus/Utica are also providing a number of services also. And we really see that trying to move that platform into some of our other basins is really what our target and what our goal is.

[Operator:]

And our next question is from the line of Eric Stine with Craig-Hallum.

[Aaron Spychalla:]

It's Aaron Spychalla on for Eric Stine. So the first question, and I think you guys just might have touched on it a little bit, but looking at some of your customers and other E&Ps, there's talks during the quarter about a lot of those guys having to use quite a bit more water in their operations, and I don’t know if that has to do with some of the pad drilling. But can you just kind of touch on whether you're seeing that and kind of what might be causing that and if you expect that going forward as well?

[Mark D. Johnsrud:]

I think basin by basin, we're seeing different types of completion activities and different processes. I'll talk about the Bakken a little bit. Historically, the cross-linked gels were used, and now we're starting to see some other processes that are used that take quite a bit more water. I think that there's also some new completion techniques that we've seen, that Whiting is using, that is actually increasing, up to doubling, the amount of production they're receiving at their IP rate. The whole industry, while we're probably 6 years into it type rate [ph], we're still just seeing how new technologies are really changing and revolutionizing what's going on with regards to efficiencies and overall production. We anticipate that how we're building our business is we also see the anticipation of recycling, especially with water becoming more and more of an issue. And we are really excited that we were able to get our Halliburton project started. And now with the permits, we'll anticipate doing our first salt water frac in 2014.

[Aaron Spychalla:]

Okay. Good. And then a lot of the questions have been answered, and you guys gave a lot of good detail. But maybe -- now that we're a year into Power Fuels, or around there, can you just talk about some of the synergies and give us an update on what you've seen from that, whether it's expanding into other basins or legacy customers expanding into the Bakken?

[Mark D. Johnsrud:]

I think a good example of how we're seeing the synergies -- and it's one of our largest customers in the Bakken, that has moved to the Utica, and they're just getting their drilling program built. But we know the people, we know all of the management, we know how they bill, we know how they're -- what they're looking for. And so we're able to take our good relationship we have in the Bakken and move that to the same relationship that we'll have in the Utica.

[Operator:]

And our next question is from the line of Philip Shen with Roth Capital Partners.

[Philip Shen:]

So I'm hopping between calls, so I apologize if this has been asked. I wanted to see if you could talk about pricing, what you see ahead. Perhaps you can give us some color on supply and demand dynamics in your different basins?

[Jay Curtis Parkinson:]

Yes. Sure. I think we're seeing, by and large, pricing has stabilized, maybe with the possible exception of pockets of weakness, particularly in the Eagle Ford. I think one thing is a lot of the capacity from the dry gas basins has gone down there. One thing that we are, I would say, cautiously optimistic about is we are working on our turnaround in the Eagle Ford. There's very robust projections for growth in the Permian next year, and that might take some of that capacity out of the Eagle Ford, particularly the southern Eagle Ford. And so we think that will help that basin. I'd say the Bakken, we're seeing very stable pricing; Utica, very stable pricing; Marcellus, very stable; the Haynesville, obviously, pricing's lower than where we'd like it to be. But I would say that we're seeing stability, by and large, down there as well.

[Operator:]

And our next question is from the line of Gerry Sweeney with Boenning.

[Gerard J. Sweeney:]

Quick question on acquisitions. Obviously, you said there looks like a lot of opportunities are starting to percolate, I guess, some of the values or projected values that owners would like are coming in. But I'm interested to see where you are most interested in putting some money to work, either by region or by specific service.

[Mark D. Johnsrud:]

I think the area that we're very interested in is in solids area. That's -- from a regulation and a regulatory perspective, that's becoming increasingly -- it's an area that's becoming more and more challenging as we see it. We think we have some very interesting solutions that we're going to work with. Part of that is, is the project we're working on with EERC, that we're trying to take a look at some of the alternative uses, some beneficial uses for the cuttings after we've had them -- after we've processed them. And we really see that probably in the Bakken, the Utica, Marcellus and Haynesville areas. And then I would say that's probably the first one that we're looking at. The other one that we're obviously looking at is how do we take our Halliburton relationship and use that in other regions too. Probably the first one that we'll be looking at will be in the Utica.

[Gerard J. Sweeney:]

Okay, great. And then you've spoken about, obviously, CapEx. It's come down substantially. And I know there's a lot of what is called legacy Heckmann assets still probably running around out there. Can you give us any idea of what type of utilization rates you have on your assets right now?

[Jay Curtis Parkinson:]

It really varies a lot by basin and even by district. I would say in some of the legacy Heckmann basins, you're never going to get to 100% utilization, but you see some of those dry gas basins kind of in the 50% utilization. So I think as we've spoken about before and I think you and I have talked about, I think there's continued opportunities even at a lower CapEx level to drive growth purely through utilization, as well as move some of those assets, which is the strategy we've employed in the Utica. If you think about the CapEx, and I talked a little bit about CapEx in 4Q ticking up a little bit, that will actually be almost -- the majority of that will be around treatment assets that Mark talked about, so kind of a different type of asset. It'll be -- we're going to talk a lot more about this probably next quarter. But we see some interesting opportunities to put some capital to work, probably over the next 4 quarters in total, around collocating some treatment assets at our landfill in the Bakken and potentially looking at other basins of that as well. So it's really a different type of profile of asset.

[Gerard J. Sweeney:]

Okay, perfect. That's what I was getting at. So you have plenty of runway, we'll say, on some of those legacy, like trucking assets, and most of your CapEx is looking at for higher value-added services, I'll call it.

[Jay Curtis Parkinson:]

Yes. I'd say the marginal CapEx, given where the industry is right now, we think, certainly, we're fairly bullish as we stand right now in terms of our outlook for the industry next year. I'd say probably Mark and I collectively -- probably collectively feel good about it, as we've seen, since we've been here. But I think we can soak up some of that demand by increased utilization. I think as you think about the marginal CapEx and the return profile and some of the treatment, there's some pretty interesting opportunities to put capital to work. We think it's kind of 2 to 4x EBITDA profile in terms of marginal CapEx return, and I think the unlevered returns on capital are pretty compelling on that as well. So it's something, I think, we'll talk a lot more about. I think the capital over the next 4 quarters will be the majority directed to that, absent M&A activity.

[Operator:]

And our next question is from the line of Scott Levine with Imperial Capital.

[Scott Justin Levine:]

You indicated you saw a big ramp in volumes at your North Dakota landfill in the month of October, but I was wondering if you could elaborate a bit further with regard to how that is reconciled or compared to your expectation levels. And it sounds like you're optimistic that you can develop other sites or you're focused on solids from an acquisition standpoint. Maybe a little bit more color regarding your plans. Are we're talking new landfill development or other areas of that business you're looking to get into.

[Mark D. Johnsrud:]

What we anticipate doing is there's some basins that we will end up developing or purchasing landfills. And then there's other basins, what we'll end up doing, is we will end up partnering with somebody. Just because from a regulatory standpoint, you're not going to be able to go in and permit and get anything operational for a few years. So I think in each basin, we'll end up with a different alternative. At the same time, some of the things we're looking up are really the front-end treatment that goes through the cuttings, and ultimately, part of that will reside in the landfill, part of it we're hoping is going to be used for beneficial use or other beneficial uses.

[Scott Justin Levine:]

Understood. And then turning to the Halliburton relationship, I think you said first frac in the first quarter of next year. Could you provide maybe a little bit more color regarding your thoughts on the economics of that arrangement and maybe some specifics, to the extent you can offer them, in your thoughts on how that will financially impact your business going forward. Or how we should think about, not necessarily modeling it but in terms of the economic impact as you look to extend that, perhaps, into other regions?

[Mark D. Johnsrud:]

We're probably just a little bit early to talk about what the complete economic package looks like. The thing, I guess, we can say though is that, when we see that our kind of piece of the market or market share with regards to what we're going to do with the collection, the treatment, the storage, all of those are relatively -- as we look at what the state is going to be requiring. And also, our partner is the only one that's currently doing this. So we think that we're in a really good position to take -- to have that first-mover advantage. Part of why it's taken us longer than we anticipated was the state had to go back and review some of their regulations with regards to the reuse, recycling and treatment and storage of saltwater. Because in the past, it was just -- everybody anticipated saltwater was just going to be disposed of in saltwater disposal wells. It's a really fundamental change in how the industry will operate.

[Scott Justin Levine:]

And is that regulatory -- that's a state reg, these are state regs that will differ market-by-market?

[Mark D. Johnsrud:]

That is correct.

[Scott Justin Levine:]

Got it. One last one, if I could sneak it in. Jay, I think you had indicated that acquisition multiples were coming down a bit in the marketplace, so I was hoping for maybe some numbers there if you could offer them or maybe some additional comments on multiples for various types of deals that you're looking at or pursuing?

[Jay Curtis Parkinson:]

I think we'll probably hold off on that until we hopefully get some of them done here. I guess what I would say, by and large, is expectations are tempering somewhat from a seller standpoint. As we flow through, I think many people in the industry thought that we'd see -- including us, thought that we'd see growth throughout '13 that, frankly, just didn't occur. So I think from that standpoint, to some extent, that may be flowing through P&L expectations. And we're at the point where we feel a lot better about getting some of this stuff closed. We certainly think that it will be, from both return on capital, which is the primary metric that we look at, not multiples, value-added from a return standpoint, but I think that the multiples are going to be accretive as well.

[Operator:]

And our next question comes from the line of Michael Hoffman with Wunderlich Securities.

[Michael E. Hoffman:]

Just in context of things are changing in the Bakken, what's happening with regards to the flaring and all of the -- just sort of fugitive gas. Is that having an impact on sort of pace of activity?

[Mark D. Johnsrud:]

Michael, at this point, we're not sure. We know that flaring is now at the forefront of the issues. There's companies that are actually changing some of their programs to make sure that they can collect the gas where there's already existing collection lines in place because it is becoming an issue. It's -- without question, it is the primary regulatory issue in North Dakota today.

[Michael E. Hoffman:]

Okay. And then lastly, with regards to the whole employment issue. I mean, my understanding is that efficiency actually is dictating a need to have people in place because of speed at which activity is happening. If you can't respond, they go somewhere else.

[Mark D. Johnsrud:]

That's right. We can't -- if we have a little bit of a downtime. By the time it takes 2 to 3 months to get them trained, and so sometimes -- it hasn't happened very often in 8 years that we have ever had any issues where we've got quiet time, but this September, we did. And -- but we've already seen that rebound as we've looked through and gone through October. So I think we're through that phenomenon.

[Operator:]

And I am showing no further questions. I will turn the call back over to management for any closing remarks.

[Mark D. Johnsrud:]

I want to thank everybody for joining us on our call today, and we look forward to talking to you on our fourth quarter call.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our conference call for today. If you would like to listen to a replay of today's conference, please dial [phone] or 1 [phone], and enter access code 4645996. We'd like to thank you for your participation, and you may now disconnect.