Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Nuverra Environmental Solutions, Inc. (1403853) 10-Q published on Aug 11, 2020 at 4:40 pm
Reporting Period: Jun 29, 2020
Upon emergence from chapter 11 on August 7, 2017 (the “Effective Date”), we entered into a new $45.0 million First Lien Credit Agreement (the “First Lien Credit Agreement”) by and among the lenders party thereto (the “First Lien Credit Agreement Lenders”), ACF FinCo I, LP, as administrative agent (the “Credit Agreement Agent”), and the Company. Pursuant to the First Lien Credit Agreement, the First Lien Credit Agreement Lenders agreed to extend to the Company a $30.0 million senior secured revolving credit facility (the “Revolving Facility”) and a $15.0 million senior secured term loan facility (the “First Lien Term Loan”). As our collections on our accounts receivable serve as collateral on the Revolving Facility, all amounts collected are initially recorded to “Restricted cash” on the condensed consolidated balance sheet as these funds are not available for operations until our First Lien Credit Agreement Lenders release the funds to us approximately one day later. We had a restricted cash balance of $0.9 million as of December 31, 2019.
As of June 30, 2020, no borrowings were outstanding under the Revolving Facility. Additionally, on July 13, 2020, the Company entered into an amendment of its First Lien Credit Agreement, which includes among other terms and conditions, a prohibition on drawing on the Revolving Facility until the fixed charge coverage ratio (“FCCR”) is above the established ratio at 1.00 to 1.00. As such, beginning June 30, 2020, the Company will no longer record amounts to restricted cash until such time the Company meets the established FCCR and is able to draw on the Revolving Facility. See Note 18 for further discussion of the amendment.
During June 2020, per the North Dakota Industrial Commission, approximately 28% of daily crude oil production in the Bakken shale region was estimated to have been shut-in, contributing to a reduction of approximately 405,000 barrels per day. The curtailed production dropped the volumes of produced water accordingly. This has had and will continue to have a dramatic negative effect on our produced water business in the Rocky Mountain division. Additionally, in early July 2020, a Unites States court ruling ordered the shutdown of the Dakota Access Pipeline (“DAPL”) over concerns on the environmental impact of the pipeline. The DAPL is a major transporter of oil volumes from the Bakken shale area. Although transport of product from the Bakken shale area historically has also occurred by rail and other means, which is a higher transportation cost than the DAPL, there can be no assurance that there will be sufficient future takeaway capacity. Though an appeals court has allowed the DAPL to continue to operate in the near term, the pending closure of the DAPL has customers cautious about returning to more normal business volumes and/or deferring capital expenditure projects until the litigation has been adjudicated. As a result, the recovery of the Rocky Mountain region will likely be slower than other oil producing basins.
The Rocky Mountain division has experienced a significant slowdown as compared to the prior year, as evidenced by the rig count declining 82% from 55 at June 30, 2019 to 10 at June 30, 2020. In addition, some producers have shut-in wells due to the decline in oil price, which averaged $36.82 in the first half of 2020 versus an average of $57.53 for the same period in the prior year. Revenues for the Rocky Mountain division decreased by $18.2 million during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to a decrease in water transport revenues from lower trucking volumes, with third-party trucking activity being the most negatively impacted. While company-owned trucking activity is more levered to production water volumes, third-party trucking activity is more sensitive to drilling and completion activity, which has declined to historically low levels, thereby resulting in meaningful revenue reduction. Our rental and landfill businesses are our two service lines most levered to drilling activity and therefore have declined by the highest percentage versus the prior period. Rental revenues decreased by 34% in the current year due to lower utilization resulting from a significant decline in drilling activity in the area driving the return of rental equipment. Additionally, we experienced a 37% decrease in disposal volumes at our landfill as rigs working in the vicinity declined materially. Well shut-ins and lower completion activity led to a 26% decrease in average barrels per day disposed in our saltwater disposal wells during the current year, with water from producing wells continuing to maintain a base level of volume activity.
Some of our customers have entered bankruptcy proceedings in the past, and certain of our customers’ businesses face financial challenges that put them at risk of future bankruptcies. Customer bankruptcies could delay or in some cases eliminate our ability to collect accounts receivable that are outstanding at the time the customer enters bankruptcy proceedings. We are also at risk that we may be required to refund amounts collected from a customer during the period immediately prior to that customer’s bankruptcy filing, and the amount we ultimately collect from the customer’s bankruptcy estate may be significantly less. Customer bankruptcies may also reduce our availability under our revolving credit facility. Although we maintain reserves for potential customer credit losses, customer bankruptcies could result in unanticipated credit losses. As a result, if one or more of our customers enter bankruptcy proceedings, particularly our larger customers or those to whom we have greater credit exposure, it could have a material adverse impact on our liquidity, operating results and financial condition.
Our customers’ business depends on crude oil and natural gas transportation, processing, refining, and export systems, and disruptions impacting those systems could adversely impact our business.
The price our customers receive for crude oil and natural gas is significantly impacted by the cost, availability, proximity and capacity of gathering, pipeline and rail systems and centralized storage, processing, refining, and export facilities. The inadequacy or unavailability of capacity in these systems and facilities could result in the deferral or cancellation of drilling and completion activities, the shut-in of producing wells, the delay or discontinuance of development plans for properties, or higher operational costs for our customers. If our customers’ business operations are negatively impacted for these or other reasons, it likely would reduce customer demand for our services and negatively impact our business.
Certain shale basins, including the Bakken shale area in which our Rocky Mountain operating division is located, are particularly susceptible to increases in the cost of product transport and disruptions in transport capacity due to the long distance between the geographic area where production occurs and the locations of centralized storage, processing, refining and export facilities in other parts of the United States. Although additional pipeline infrastructure has generally increased takeaway capacity in the Bakken shale area in recent years, ongoing legal disputes regarding pipeline systems, including litigation regarding the DAPL which became commercially operational in 2017, have resulted in periodic shutdowns of significant portions of the basin’s pipeline takeaway capacity. Although transport of product from the Bakken shale area historically has also occurred by rail and other means, there can be no assurance that there will be sufficient future takeaway capacity. Any temporary or permanent reduction in pipeline takeaway capacity, or other constraints or disruptions impacting product transport by rail or other means, could harm our customers’ business operations and, as a result, significantly reduce the demand or pricing for our services in the impacted region. Any such reduction in demand or pricing could have a material adverse effect on our business operations, financial condition, results of operations and cash flows.