NUVERRA ENVIRONMENTAL SOLUTIONS, INC. Special Note about Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying unaudited
Condensed Consolidated Financial Statements and related notes thereto. See
"Forward-Looking Statements" on page 4 of this Quarterly Report on Form 10-Q
("Quarterly Report") and "Risk Factors" included in our Annual Report on Form
10-K for the year ended December 31, 2020 , filed with the SEC on March 16,
2021 (the "2020 Annual Report on Form 10-K"), as well as the updated risk factor
below in "Part II - Other Information Item 1A. Risk Factors", and in our other
filings with the United States Securities and Exchange Commission ("SEC") for a
description of important factors that could cause actual results to differ from
expected results.
Company Overview
Nuverra Environmental Solutions, Inc. and its subsidiaries (collectively,
"Nuverra," the "Company," "we," "us," or "our") are providers of water logistics
and oilfield services to customers focused on the development and ongoing
production of oil and natural gas from shale formations in the United States .
Our business operations are organized into three geographically distinct
divisions: the Rocky Mountain division, the Northeast division, and the Southern
division. Within each division, we provide water transport services, disposal
services, environmental remediation services and rental and other services
associated with the drilling, completion, and ongoing production of shale oil
and natural gas. These services and the related revenues are further described
in Note 3 in the Notes to the Condensed Consolidated Financial Statements
herein.
The Rocky Mountain division is ourBakken Shale area business. The Bakken and underlyingThree Forks shale formations are the two primary oil producing reservoirs currently being developed in this geographic region, which covers westernNorth Dakota , easternMontana , northwesternSouth Dakota and southernSaskatchewan . We have operations in various locations throughoutNorth Dakota andMontana , including yards inDickinson ,Williston ,Watford City ,Tioga ,Stanley , andBeach, North Dakota , as well asSidney, Montana . Additionally, we operate a financial support office inMinot, North Dakota . As ofSeptember 30, 2021 , we had 188 employees in the Rocky Mountain division.
Water Transport Services
We manage a fleet of 137 trucks in the Rocky Mountain division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities and for work over activity.
Disposal Services
We manage a network of 20 owned and leased salt water disposal wells with current capacity of approximately 78 thousand barrels of water per day, and permitted capacity of 107 thousand barrels of water per day. Our salt water disposal wells in the Rocky Mountain division are operated under the Landtech brand. Additionally, we operate a landfill facility nearWatford City, North Dakota that handles the disposal of drill cuttings and other oilfield waste generated from drilling and completion activities in the region. 30 --------------------------------------------------------------------------------
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Rocky Mountain division. These assets include tanks, loaders, manlifts, light towers, winch trucks, and other miscellaneous equipment used in drilling and completion activities. In the Rocky Mountain division, we also provide oilfield labor services, also called "roustabout work," where our employees move, set-up and maintain the rental equipment for customers, in addition to providing other oilfield labor services.
Northeast Division
The Northeast division is comprised of the Marcellus andUtica Shale areas, both of which are predominantly natural gas producing basins. The Marcellus andUtica Shale areas are located in the northeasternUnited States , primarily inPennsylvania ,West Virginia ,New York andOhio . We have operations in various locations throughoutPennsylvania ,West Virginia , andOhio , including yards inMasontown andWheeling, West Virginia ,Williamsport, Pennsylvania , andCambridge andCadiz, Ohio . As ofSeptember 30, 2021 , we had 142 employees in the Northeast division. Water Transport Services We manage a fleet of 148 trucks in the Northeast division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region, or to other customer locations for reuse in completing other wells. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities.
Disposal Services
We manage a network of 13 owned and leased salt water disposal wells with current capacity of approximately 19 thousand barrels of water per day, and permitted capacity of approximately 19 thousand barrels of water per day in the Northeast division. Our salt water disposal wells in the Northeast division are operated under the Nuverra, Heckmann, and Clearwater brands.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Northeast division. These assets include tanks and winch trucks used in drilling and completion activities.
Southern Division
The Southern division is comprised of theHaynesville Shale area, a predominantly natural gas producing basin, which is located across northwesternLouisiana and easternTexas , and extends into southwesternArkansas . We have operations in various locations throughout easternTexas and northwesternLouisiana , including a yard inFrierson, Louisiana . Additionally, we operate a corporate support office inHouston, Texas . As ofSeptember 30, 2021 , we had 62 employees in the Southern division.
Water Transport Services
We manage a fleet of 31 trucks in the Southern division that collect and
transport flowback water from drilling and completion activities, and produced
water from ongoing well production activities, to either our own or third-party
disposal wells throughout the region. Additionally, our trucks collect and
transport fresh water to operator locations for use in well completion
activities.
In the Southern division, we also own and operate a 60-mile underground twin
pipeline network for the collection of produced water for transport to
interconnected disposal wells and the delivery of fresh water from water sources
to operator locations for use in well completion activities. The pipeline
network can currently handle disposal volumes up to approximately 50 thousand
barrels per day with 6 disposal wells attached to the pipeline and is scalable
up to approximately 106 thousand barrels per day.
31--------------------------------------------------------------------------------
Disposal Services
We manage a network of 7 owned and leased salt water disposal wells that are not connected to our pipeline with current capacity of approximately 83 thousand barrels of water per day, and permitted capacity of approximately 206 thousand barrels of water per day, in the Southern division.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Southern division. These assets include tanks and winch trucks used in drilling and completion activities.
Trends Affecting Our Operating Results
COVID-19 Pandemic and Oil Price Fluctuations
The outbreak of the novel coronavirus ("COVID-19" or the "pandemic") in the
first quarter of 2020 and its continued spread across the globe throughout 2020
and 2021 has continued to cause significant economic disruptions, including
reduction in energy demand and commodity price volatility. During 2020, federal,
state and local governments implemented significant actions to mitigate the
public health crisis, including shelter-in-place orders, business closures and
capacity limits, quarantines, travel restrictions, executive orders and similar
restrictions intended to control the spread of COVID-19. At the end of 2020 and
into 2021 most of these restrictions have been adjusted based on the severity of
the COVID-19 outbreak in particular communities, sometimes resulting in an
easing of restrictions while other times resulting in a reinstatement or
tightening of restrictions. The distribution and administration of COVID-19
vaccines has led to the reopening of meaningful elements of the domestic economy
throughout most of the country. The economy has started to recover back to
pre-pandemic levels and continues to show improvement. The opening of the
domestic economy and return to travel has resulted in a generally improved
demand for refined products, such as gasoline and jet fuel, and consequently an
increase in the demand for crude oil. Overall there has been strong
post-pandemic economic activity throughout 2021, this has translated into higher
fuel costs which are a significant operating cost for the trucking business. The
pandemic created insurmountable financial challenges for many businesses that
ultimately closed, however there are still many participants in each of our
business who are as active with aggressive pricing services as they have been.
Despite businesses closing the competition across the industry has remained
strong.
Other Trends Affecting Operating Results
Our results are affected by capital expenditures made by the exploration and
production operators in the shale basins in which we operate. These capital
expenditures determine the level of drilling and completion activity which in
turn impact the amount of produced water, water for fracking, flowback water,
drill cuttings and rental equipment requirements that create demand for our
services. The primary drivers of these expenditures are current or anticipated
prices of crude oil and natural gas. Prices trended lower during the third
quarter of 2020 and increased during the third quarter of 2021. The average
price per barrel of West Texas Intermediate ("WTI") crude oil was $70.58 for the
three months ended September 30, 2021 as compared to $40.89 for the three months
ended September 30, 2020 . The average price per million Btu of natural gas as
measured by the Henry Hub Natural Gas Index was $4.07 for the three months ended
September 30, 2021 compared to $2.00 for the three months ended September 30,
2020 . See "COVID-19 Pandemic and Oil Price Declines" above for further
discussion.
The rapid drop in crude prices occurred primarily in March and April 2020 . Since
June 2020 , crude oil prices have ranged between $35 and $70 per barrel. The drop
in crude oil prices had minimal impact on the first quarter of 2020 operating
results as our customers had little time to adjust activity levels. However, our
customers' drilling and completion activity fell substantially beginning in the
second quarter of 2020, with many customers also shutting in or lowering
production as a result of spot crude prices falling below the cash costs of
production in many basins and wells. While crude oil prices have recovered, the
increase in activity has been largely in the Permian Basin , but the Bakken is
improving as the rig count has more than doubled from the 2020 low. One driver
preventing an activity increase is a recent trend by our customers, at the
insistence of investors, to limit capital expenditures to cash flow and to
return any excess cash to shareholders in the form of dividends or stock
repurchases and or to repay debt. While it is unclear if our customers will
maintain this stance permanently, to date they have maintained capital
discipline despite significant increases in crude oil pricing from the lows
experienced in 2020. This has limited additional activity and capital
expenditures versus what has been seen historically when commodity prices were
at current levels.
32-------------------------------------------------------------------------------- As a result of increased operational costs, and values in commodities our customers experienced higher cash flows during this period. Along with many of our competitors, we began reaching out to our customers requesting price increases. While it is unclear to what degree our efforts will be successful, any increase in pricing for our services will help to offset some of these cost pressures. In addition to price increases, we have continued to focus on reducing costs where possible and other savings initiatives instituted during 2020. A lack of confidence in our industry on the part of the financial markets may result in a lack of access to capital, which could lead to reduced liquidity, an event of default, or an inability to access amounts available under our Operating LOC (as defined below) of$5.0 million , and our Letter of Credit Facility (as defined below) of$5.880 million . During 2020 and 2021, we have seen continued reuse and water sharing in the Northeast. Some of our customers are using produced and flowback water for fracking as they have determined it is more economical to transport produced water to sites than it is to dispose of the water. Operators are also sharing water with other operators to avoid disposal. Transporting shared or reused water still requires trucking services, but it is generally shorter haul work done at an hourly rate which negatively impacts our revenues.
Other Factors Affecting Our Operating Results
Our results are also driven by a number of other factors, including (i) availability of our equipment, which we have built through acquisitions and capital expenditures, (ii) transportation costs, which are affected by fuel costs, (iii) utilization rates for our equipment, which are also affected by the level of our customers' drilling and production activities, competition, and our ability to relocate our equipment to areas in which oil and natural gas exploration and production activities are growing, (iv) the availability of qualified employees (or alternatively, subcontractors) in the areas in which we operate, (v) labor costs, (vi) changes in governmental laws and regulations at the federal, state and local levels, (vii) seasonality and weather events, (viii) pricing and (ix) our health, safety and environmental performance record. While we have agreements in place with some of our customers to establish pricing for our services and various other terms and conditions, these agreements typically do not contain minimum volume commitments or otherwise require the customer to use us. Accordingly, our customer agreements generally provide the customer the ability to change the relationship by either in-sourcing some or all services we have historically provided or by contracting with other service providers. As a result, even with respect to customers with which we have an agreement to establish pricing, the revenue we ultimately receive from that customer, and the mix of revenue among lines of services provided, is unpredictable and subject to variation over time. According to theU.S. Bureau of Labor Statistics , 4 million Americans quit their jobs inJuly 2021 ; ( "The Great Resignation" ) with a record breaking 10.9 million open jobs at the end of July. We are experiencing increased pressure on wages as other parts of the economy have remained strong or improved with in our industry. This phenomenon has required us to evaluate and in some cases adjust hourly rates and salaries for drivers and mechanics. We are facing challenges to recruit and retain drivers who historically migrated to competitors within energy industry in search of a higher compensation structure. Our intent is to retain the current talent and hire new employees for driving and non-driving jobs, focusing on growth, values, and transparency to keep good employees. The results reported in the accompanying condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our 2020 Annual Report on Form 10-K . 33 --------------------------------------------------------------------------------
Results of Operations:
Three Months Ended
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):
Three Months Ended
September 30, Increase (Decrease)
2021 2020 2021 versus 2020
Revenue:
Service revenue $ 22,603 $ 22,666 $ (63) (0.3) %
Rental revenue 2,183 1,130 1,053 93.2 %
Total revenue 24,786 23,796 990 4.2 %
Costs and expenses:
Direct operating expenses 20,647 19,022 1,625 8.5 %
General and administrative expenses 4,894 4,084 810 19.8 %
Depreciation and amortization 5,602 6,821 (1,219) (17.9) %
Total costs and expenses 31,143 29,927 1,216 4.1 %
Operating loss (6,357) (6,131) 226 (3.7) %
Interest expense, net (645) (1,014) (369) (36.4) %
Other income 28 20 8 40.0 %
Reorganization items, net (196) - (196) N/A
Loss before income taxes (7,170) (7,125) 45 (0.6) %
Net loss $ (7,170) $ (7,125) $ 45 (0.6) %
Service Revenue
Service revenue consists of fees charged to customers for water transport services, disposal services and other services associated with the drilling, completion, and ongoing production of shale oil and natural gas.
On a consolidated basis, service revenue for the three months endedSeptember 30, 2021 was$22.6 million , down$0.1 million , or 0.3%, from$22.7 million in the prior year period. The decrease in service revenue is primarily due to increases in water transport services in the Rocky Mountain and Southern divisions, offset by a decrease in water transport services in the Northeast division and a decrease in disposal services in the Southern division. As the primary causes of the fluctuations in water transport services and decreases in disposal services are different for all three divisions, see "Segment Operating Results" below for further discussion.
Rental Revenue
Rental revenue consists of fees charged to customers for use of equipment owned by us, as well as other fees charged to customers for items such as delivery and pickup of equipment. Our rental business is primarily located in the Rocky Mountain division, however, we do have some rental equipment available in both the Northeast and Southern divisions. Rental revenue for the three months endedSeptember 30, 2021 was$2.2 million , up$1.1 million , or 93.2%, from$1.1 million in the prior year period due to an increase in drilling and completion activity, which resulted in higher utilization and pricing of rental equipment in the Rocky Mountain division. 34 --------------------------------------------------------------------------------
Direct Operating Expenses
The primary components of direct operating expenses are compensation, third-party hauling, fuel and repairs and maintenance costs.
Direct operating expenses for the three months endedSeptember 30, 2021 increased$1.6 million to$20.6 million from$19.0 million in the prior year period. The increase is primarily attributable to higher costs in water transport services and disposal services, coupled with an increase in third-party hauling costs and fleet-related expenses, including fuel and maintenance and repair costs. See "Segment Operating Results" below for further details on each division.
General and Administrative Expenses
General and administrative expenses for the three months endedSeptember 30, 2021 were$4.9 million , up$0.8 million , or 19.8%, from$4.1 million in the three months endedSeptember 30, 2020 due primarily to an increase in compensation costs resulting from an increase in stock based compensation. There were partial wage increases that took effect inMarch 2021 for employees whose wages had been reduced in prior periods. Included in these expenses for the three months endedSeptember 30, 2021 is approximately$0.8 million of transition costs, which included but were not limited to severance and stock based compensation for executives.
Depreciation and Amortization
Depreciation and amortization for the three months endedSeptember 30, 2021 was$5.6 million , down 17.9% as compared to$6.8 million in the prior year period. The decrease is primarily attributable to a lower depreciable asset base due to the sale of under-utilized or non-core assets as well as an aging asset base that is becoming fully depreciated which is partially offset by asset additions.
Impairment of Long-lived Asset
There were no impairment charges recorded during the three months ended
Interest Expense, net
Interest expense, net during the three months endedSeptember 30, 2021 was$0.6 million compared to$1.0 million in the prior year period. The decrease is primarily due to the retirement of the First Lien Credit Agreement and Second Lien Term Loan Agreement (as defined below) and the lower overall effective interest rates on our outstanding debt.
Other Income, net
During the three months endedSeptember 30, 2021 , we had other income, net of$28.0 thousand compared to$20.0 thousand in the prior year period. There was no change in fair value of the derivative warrant liability during the three months endedSeptember 30, 2021 andSeptember 30, 2020 .
Income Taxes
No income tax expense or benefit was recorded for the three months endedSeptember 30, 2021 orSeptember 30, 2020 . The primary item impacting income taxes for the three months endedSeptember 30, 2021 andSeptember 30, 2020 was the valuation allowance against our deferred tax assets. See Note 12 in the Notes to the Condensed Consolidated Financial Statements herein for additional information on income taxes. 35 --------------------------------------------------------------------------------
Segment Operating Results: Three Months Ended
The following table shows operating results for each of our segments for the
three months ended
Rocky
Mountain Northeast Southern Corporate/Other Total
Three months ended September 30,
2021
Revenue $ 13,923 $ 6,253 $ 4,610 $ - $ 24,786
Direct operating expenses 10,518 6,457 3,647 25 20,647
Operating income (loss) 299 (2,824) (388) (3,444) (6,357)
Three months ended September 30,
2020
Revenue $ 11,308 $ 8,540 $ 3,948 $ - $ 23,796
Direct operating expenses 9,700 6,405 2,917 - 19,022
Operating loss (2,038) (839) (649) (2,605) (6,131)
Change
Revenue $ 2,615 $ (2,287) $ 662 $ - $ 990
Direct operating expenses 818 52 730 25 1,625
Operating income (loss) 2,337 (1,985) 261 (839) (226)
Rocky Mountain
The Rocky Mountain division has experienced a recovery in the third quarter of
2021 compared to the third quarter of 2020. The rig count increased to 23 at the
end of September 2021 compared to 10 at the end of the same period of 2020. WTI
crude oil price per barrel barrel has improved to an average of $70.58 in this
period compared to $40.89 in the third quarter of 2020. The Bakken basin is
seeing an overall increased level of activity since the depths of the pandemic,
which were still driving the business in the third quarter of 2020. As a result,
our revenues increased 23%, quarter over quarter to $13.9 million for the period
ending September 30, 2021 . The trucking business enjoyed slightly in excess of a
10% increase in revenue in the third quarter of 2021. While the average fluid
driver count declined almost 37%, our adjusted rates increased enough to offset
the decline in driver count. The rental services increased their activity since
rental is highly dependent upon drilling activity. We saw both rental equipment
and winch truck hauling increase compared to the third quarter in 2020. On the
other hand, our Salt Water Disposal business saw an increase in average daily
volumes of approximately 20% and pricing improved approximately 10% during this
period. Quarter over quarter there were no material changes in the landfill
business as both quarters were affected by capacity limitations while we develop
the new cell that should be fully operational during the fourth quarter of 2021.
For the Rocky Mountain division, direct operating costs increased by
36
--------------------------------------------------------------------------------Northeast Revenues for the Northeast division decreased by$2.3 million , or 27%, during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . The rig count in the Marcellus/Utica basin increased to 38 during the three months endedSeptember 30, 2021 compared to 32 for the three months endedSeptember 30, 2020 , with all of the increase associated with theUtica Basin . Natural gas prices per million Btu, as measured by the Henry Hub Natural Gas Index, increased 103.5% to an average of$4.07 for the three months endedSeptember 30, 2021 from an average of$2.00 for the three months endedSeptember 30, 2020 . The trucking business contributed to approximately$1 million of the decline in revenue. This reduction was caused by a decline in the average number of drivers to 94 in 2021 from 123 in 2020, primarily due to the closure of theWellsboro trucking operation in the northern part of the basin and the challenge in keeping drivers given the alternative opportunities they have available. We experienced a very slight increase in pricing for the period. The remainder of the$2.3 million decline is a function of lower volumes and lower prices for the disposal business. Volumes declined approximately 30% during the period as a result of reuse and some downtime at one of the wells and pricing was down slightly in excess of 10% as a result of ongoing competitive pressures. For the Northeast division, direct operating costs increased by$0.1 million , or 9%, during the three months endedSeptember 30, 2021 , as compared to the three months endedSeptember 30, 2020 due to a combination of higher fleet-related expenses, including fuel costs. Operating loss increased by$2.0 million over the prior year period due primarily to$2.3 million in lower revenue, coupled with facility closures. Southern Revenues for the Southern division increased 17%, to$0.6 million , during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . Rig count increased 31% in the area, to 47 atSeptember 30, 2021 , from 36 atSeptember 30, 2020 . Natural gas prices per million Btu, as measured by the Henry Hub Natural Gas Index, increased 103.5% to an average of$4.07 for the three months endedSeptember 30, 2021 from an average of$2.00 for the three months endedSeptember 30, 2020 . The pipeline volumes and pricing were both marginally lower and revenue for the quarter from the pipeline declined approximately$0.1 million ,. The non-pipeline disposal business saw a 35% increase in average daily volumes and pricing for that business increased slightly in excess of 20%, both as a result of the increase in activity. Similarly the trucking revenue increased 20% with an equivalent number of drivers. For the Southern division, direct operating costs increased by$0.7 million during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 due to an increase in fleet-related expenses, including fuel and maintenance and repair costs and compensation costs. Operating loss decreased by$0.3 million as compared to the prior year as the increase in direct operating expenses was offset by a decrease of$0.4 million in depreciation and amortization expense during the current year.
Corporate/Other
The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general and administrative costs for the three months endedSeptember 30, 2021 were$0.8 million higher than those reported for the three months endedSeptember 30, 2020 due to approximately$0.8 million of transition costs, which included but were not limited to severance and stock based compensation for executives. 37 --------------------------------------------------------------------------------
Nine Months Ended
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):
Nine Months Ended
September 30, Increase (Decrease)
2021 2020 2021 versus 2020
Revenue:
Service revenue $ 68,042 $ 80,093 $ (12,051) (15.0) %
Rental revenue 5,183 6,111 (928) (15.2) %
Total revenue 73,225 86,204 (12,979) (15.1) %
Costs and expenses:
Direct operating expenses 63,065 69,049 (5,984) (8.7) %
General and administrative expenses 13,265 13,453 (188) (1.4) %
Depreciation and amortization 17,406 21,966 (4,560) (20.8) %
Impairment of long-lived assets - 15,579 (15,579) (100.0) %
Total costs and expenses 93,736 120,047 (26,311) (21.9) %
Operating loss (20,511) (33,843) (13,332) (39.4) %
Interest expense, net (1,964) (3,290) (1,326) (40.3) %
Other income, net 4,051 200 3,851 1,926 %
Reorganization items, net (206) - 206 NA
Loss before income taxes (18,630) (36,933) (18,303) (49.6) %
Income tax expense - (15) (15) (100.0) %
Net loss $ (18,630) $ (36,948) $ (18,318) NM
Service Revenue
On a consolidated basis, service revenue for the nine months ended September 30,
2021 was $68.0 million , down $12.1 million , or 15.0%, from $80.1 million in the
prior year period. The decline in service revenue is primarily due to decreases
in water transport services in the Rocky Mountain and Southern divisions,
coupled with a decrease of disposal services in all three divisions that
primarily occurred in the three months ended March 31, 2020 as compared to the
three months ended March 31, 2021 while the activity in the three months ended
September 30, 2021 was relatively flat compared to the three months ended
September 30, 2020 . As the primary causes of the changes in service revenue are
different for all three divisions, see "Segment Operating Results" below for
further discussion.
Rental Revenue
Rental revenue for the nine months ended September 30, 2021 was $5.2 million ,
down $0.9 million as compared to the prior year period due primarily to a
decline in drilling and completion activity, which resulted in lower utilization
and the return of rental equipment by our customers in all three divisions.
Direct Operating Expenses
Direct operating expenses for the nine months endedSeptember 30, 2021 were$63.1 million , down$6.0 million from$69.0 million in the prior year period. The decrease is primarily attributable to lower activity levels in water transport services and disposal services and company-enacted cost cutting measures resulting in a decline in third-party hauling costs, compensation costs, and fleet-related expenses, including fuel and maintenance and repair costs. See "Segment Operating Results" below for further details on each division. 38 --------------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses for the nine months endedSeptember 30, 2021 amounted to$13.3 million , down$0.2 million from$13.5 million in the prior year period. The decrease was primarily due to a decrease in compensation costs resulting from broad employee wage reductions and layoffs and a$0.1 million decrease in stock-based compensation expense partially offset by$0.8 million of transaction fees during 2020 associated with the credit agreements. Included in these expenses for the nine months endedSeptember 30, 2021 is approximately$2.1 million of transition costs, which included but were not limited to severance and stock based compensation for executives.
Depreciation and Amortization
Depreciation and amortization for the nine months endedSeptember 30, 2021 was$17.4 million , down$4.6 million from$22.0 million in the prior year period. The decrease is primarily attributable to a lower depreciable asset base due to impairment of long-lived assets during 2020, the sale of under-utilized or non-core assets and an aging asset base that is becoming fully depreciated partially offset by asset additions.
Impairment of long-lived assets
There was no impairment charges recorded for the nine months ended
Long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Due to the impacts of the outbreak of COVID-19 and the oil supply conflict between two major oil producing countries, there was a significant decline in oil prices during the first quarter of 2020, which resulted in a decrease in activities by our customers. As a result of these events, during the nine months endedSeptember 30, 2020 , there were indicators that the carrying values of the assets associated with the landfill in the Rocky Mountain division and trucking equipment in the Southern division were not recoverable and as a result we recorded long-lived asset impairment charges of$15.0 million . Additionally, during 2020, certain property classified as held for sale in the Rocky Mountain division was evaluated for impairment based on an accepted offer received by the Company for the sale of the property. As a result of that offer, an impairment charge of$0.6 million was recorded during the nine months endedSeptember 30, 2020 to adjust the book value to match the fair value.
Interest Expense, net
Interest expense, net during the nine months endedSeptember 30, 2021 was$2.0 million , or$1.3 million lower than the$3.3 million in the prior year period. The decrease is primarily due to continued principal payments on the First and Second Lien Term Loans (as defined below) and lower overall effective interest rates on our outstanding debt.
Other Income, net
Other income, net for the nine months endedSeptember 30, 2021 was$4.1 million compared to$0.2 million in the prior year period. The increase is primarily due to a gain due to the PPP Loan forgiveness granted to the Company inJune 2021 , and less debt. Income Taxes No income tax expense or benefit was recorded for the nine months endedSeptember 30, 2021 , as compared to$15.0 thousand income tax expense for the nine months endedSeptember 30, 2020 . The primary item impacting income taxes for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 was the valuation allowance against our deferred tax assets. See Note 12 in the Notes to the Condensed Consolidated Financial Statements herein for additional information on income taxes. 39 --------------------------------------------------------------------------------
Segment Operating Results: Nine Months Ended
The following table shows operating results for each of our segments for the
nine months ended
Rocky
Mountain Northeast Southern Corporate/Other Total
Nine months ended September 30, 2021
Revenue $ 39,527 $ 21,431 $ 12,267 $ - $ 73,225
Direct operating expenses 33,057 20,308 9,700 - 63,065
Impairment of long-lived assets - - - - -
Operating loss (2,903) (6,819) (1,667) (9,122) (20,511)
Nine months ended September 30, 2020
Revenue $ 46,998 $ 26,496 $ 12,710 $ - $ 86,204
Direct operating expenses 39,709 20,369 8,971 - 69,049
Impairment of long-lived assets 12,183 - 3,396 - 15,579
Operating loss (17,892) (2,998) (5,562) (7,391) (33,843)
Change
Revenue $ (7,471) $ (5,065) $ (443) $ - $ (12,979)
Direct operating expenses (6,652) (61) 729 - (5,984)
Impairment of long-lived assets (12,183) - (3,396) - (15,579)
Operating (loss) income 14,989 (3,821) 3,895 (1,731) 13,332
Rocky Mountain
Revenues for the Rocky Mountain division for the nine months ended September 30,
2021 , declined 16%, to $39.5 million , compared to the same period in 2020. The
region recognize revenue of $23.4 million in the first three months of 2020, and
the first quarter of 2020 was the last pre-pandemic reporting period. For
reference, the division generated $12.8 million of revenue in the first quarter
of 2021, a time when the pandemic was still dramatically effecting the division.
This $10.6 million decline from the first quarter of 2020 to the first quarter
of 2021 was larger than the decline when comparing the full nine month periods.
The second two quarters of 2020 were most significantly impacted by the pandemic
and business started to stabilize late in the third quarter of 2020. Crude oil
prices fell to below $20 per barrel in March of 2020, and recovered to a monthly
average high of $47 per barrel in December of 2020. The regional rig count
dropped to 10 by the end of the second quarter of 2020 and recovered to 23 by
the end of the third quarter of 2021. These commodity price and rig count
numbers established the foundation for regional activity over the two nine month
periods. The same trends affected each of the businesses in the region; a strong
first quarter of 2020 followed by the pandemic. Trucking revenue over the nine
month period of 2021 declined slightly less than 10%. The significant decline in
company drivers was offset by a $2.6 million increase in revenue associated with
third party drivers. Pricing over the comparable periods, on average, was almost
flat. The division's rental business revenue for the nine month period of 2021
declined 17% from the same period in 2020. Almost 45% of the rental revenue for
the nine month period of 2020 was generated before the pandemic in the first
quarter. Comparing the second and third quarters of 2020 and 2021 shows a 14%
increase in revenue for the two quarters of 2021, reflecting the slight recovery
from the pandemic. Revenue from the saltwater disposal well business was
relatively flat over the two periods, with little change to average pricing and
volumes for the two periods. The landfill saw a significant decline in revenue
between the two comparable periods. The landfill was fully operational in the
first four months of 2020 at which time volumes were restricted reflecting the
need to build the new cell that has recently been completed.
40
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For the Rocky Mountain division, direct operating costs decreased by $6.7
million during the nine months ended September 30, 2021 as compared to the nine
months ended September 30, 2020 due primarily to lower activity levels for water
transport services and disposal services resulting in a decline in third-party
hauling costs, compensation costs that are also impacted by company cost cutting
initiatives, and fleet-related expenses, including fuel and maintenance and
repair costs. The average number of drivers during the first nine of 2021
decreased 37% from the prior year period. The Rocky Mountain division had a $2.9
million operating loss during the current year period, as opposed to $17.9
million in operating loss in the prior year period, due primarily to a $12.2
million long-lived asset impairment charge (as previously discussed above in the
consolidated results) and lower activity levels for water transport services and
disposal services partially offset by a decrease of $6.6 million in direct
operating expenses, $1.3 million in general and administrative expenses and
$2.3 million in depreciation and amortization expense.
Northeast
Revenues for the Northeast division decreased by$5.1 million , or 19%, during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . Natural gas prices per million Btu, as measured by the Henry Hub Natural Gas Index, increased 93.0%, from an average of$1.87 for the nine months endedSeptember 30, 2020 to an average of$3.61 for the nine months endedSeptember 30, 2021 , and the rig count increased 19% from 32 atSeptember 30, 2020 to 38 atSeptember 30, 2021 . Despite these positive macroeconomic trends, we continued to face challenges with drivers, leading to trucking contributing to$3.3 million of the decline in revenue. Average driver count decreased from 132 in the nine-month period endingSeptember 30, 2020 to 109 for the same period in 2021. Disposal revenue decreased$1.5 million , driven primarily by average barrel volumes which were lower by 13%, or approximately 1,700 barrels per day versus the prior period. Our customers have continued the industry trend of water reuse and water sharing in 2021. Water reuse inherently reduces trucking activity due to shorter hauling distances as water is being transported between well sites rather than to disposal wells. This also contributed to the decline in the business versus prior periods. For the Northeast division, direct operating costs decreased by$0.1 million during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 due to a combination of lower activity levels for water transport services and disposal services as well as company cost cutting initiatives resulting in a decline in compensation costs and fleet-related expenses, including fuel costs. Operating loss increased by$3.8 million over the prior year period primarily due to a$5.1 million decrease in revenues, partially offset by a$0.4 million decrease in general and administrative expenses due to headcount and compensation reductions and$0.7 million in lower depreciation and amortization expense.
Southern
Revenues for the Southern division remained relatively flat, decreasing by$0.4 million , or 3%, during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . The decrease was due primarily to lower disposal well volumes both on the pipeline and for saltwater disposal assets not connected to our pipeline due in part to the winter storm in the first quarter of 2021 resulting in lost revenue days due to power outages and dangerous road conditions. These revenue declines were partially offset by an increase in trucking revenue and higher prices received in our non-pipeline disposal wells. Volumes received in our disposal wells not connected to our pipeline decreased by an average of 4,600, barrels per day (or 23%) during the current year and volumes received in the disposal wells connected to the pipeline decreased by an average of 12,990, barrels per day (or 36%) during the current year. In the Southern division, direct operating costs remained flat during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 due to lower activity levels for disposal services and water transport services. The Southern division had$1.7 million in operating loss during the current year period, as opposed to a$5.6 million loss in the prior year period due primarily to a$3.4 million long-lived asset impairment charge in 2020 (as previously discussed above in the consolidated results).
Corporate/Other
The Corporate general and administrative costs for the nine months ended
41
--------------------------------------------------------------------------------Liquidity and Capital Resources
Cash Flows and Liquidity
Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. Our sources of cash during the nine months endedSeptember 30, 2021 included cash generated by our operations and asset sales. During the nine months endedSeptember 30, 2021 andSeptember 30, 2020 , net cash used in operating activities was$5.1 million and net cash provided by operating activity was$11.9 million , respectively, and net loss was$18.6 million and$36.9 million , respectively. As ofSeptember 30, 2021 , our total indebtedness was$28.0 million and total liquidity was$8.9 million , consisting of$3.9 million of cash and$5.0 million available under the Operating LOC Loan (as defined below). OnNovember 16, 2020 , the Company entered into a Loan Agreement (the "Master Loan Agreement") withFirst International Bank & Trust , aNorth Dakota banking corporation ("Lender"). Pursuant to the Master Loan Agreement, Lender agreed to extend to the Company: (i) a$13.0 million equipment term loan (the "Equipment Loan"); (ii) a$10.0 million real estate term loan (the "CRE Loan"); (iii) a$5.0 million operating line of credit (the "Operating LOC Loan"); and (iv) a$4.839 million letter of credit facility (the "Letter of Credit Facility") (the CRE Loan, the Equipment Loan, the Operating LOC Loan and the Letter of Credit Facility, collectively may be referred to as the "Loans"). The Loans were funded and closed onNovember 20, 2020 . The Letter of Credit Facility was amended onJanuary 25, 2021 andAugust 19, 2021 in order to increase the maximum availability thereunder, to$5.880 million . In connection with the closing of the Loans, the Company repaid all outstanding obligations in full under (a) our First Lien Credit Agreement (the "First Lien Credit Agreement"), by and among the lenders party thereto,ACF FinCo I, LP , as administrative agent, and the Company and (b) our Second Lien Term Loan Agreement (the "Second Lien Term Loan Agreement") by and among the lenders party thereto,Wilmington Savings Fund Society , FSB, as administrative agent, and the Company, totaling$12.6 million and$8.3 million , respectively. The Company continues to incur operating losses, and we anticipate losses to continue into the near future. Due to high operating costs and lack of significant additional production by our customers, there is uncertainty around our future cash flows, results of operations and financial condition. In order to mitigate these conditions, the Company implemented various initiatives during 2020 and continuing into 2021 that management believes positively impacted our operations, including personnel and salary reductions, other changes to our operating structure to achieve additional cost reductions, and the sale of certain assets. The Company remains exposed to significant uncertainty regarding its future liquidity position and the availability of alternative sources of liquidity.
The following table summarizes our sources and uses of cash for the nine months
ended
Nine Months Ended
September 30,
Net cash provided by (used in): 2021 2020
Operating activities $ (5,100) $ 11,924
Investing activities 407 (1,206)
Financing activities (3,368) (2,959)
Net change in cash, cash equivalents and restricted cash
$ 7,759 Operating Activities Net cash used in operating activities was$5.1 million for the nine months endedSeptember 30, 2021 . The net loss, after adjustments for non-cash items, used cash of$5.1 million , compared to$1.7 million provided in the corresponding 2020 period. The non-cash items and other adjustments included$17.4 million of depreciation and amortization, and stock-based compensation expense of$1.0 million , partially offset by a gain on PPP Loan forgiveness of$4.0 million and a$1.7 million gain on the sale of assets. Net cash provided by operating activities was$11.9 million for the nine months endedSeptember 30, 2020 . The net loss, after adjustments for non-cash items, provided cash of$1.7 million . Changes in operating assets and liabilities used$10.2 million in cash primarily due to decreases in accounts receivable partially offset by decreases in accounts payable and accrued liabilities. The non-cash items and other adjustments included long-lived asset impairment charges of$15.6 million ,$22.0 million of 42 --------------------------------------------------------------------------------
depreciation and amortization, and stock-based compensation expense of
Investing Activities
Net cash provided by investing activities was$0.4 million for the nine months endedSeptember 30, 2021 and primarily consisted of$2.1 million of purchases of property, plant and equipment partially offset by$2.5 million of proceeds from the sale of property, plant and equipment. Asset sales were primarily comprised of the disposition of motor vehicles and under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our fleet upgrades for water transport and disposal services. Net cash used by investing activities was$1.2 million for the nine months endedSeptember 30, 2020 and primarily consisted of$2.8 million of purchases of property, plant and equipment partially offset by$1.6 million of proceeds from the sale of property, plant and equipment. Asset sales were primarily comprised of the disposition of two properties and under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our truck fleet for water transport services.
Financing Activities
Net cash used in financing activities was$3.4 million for the nine months endedSeptember 30, 2021 and was primarily comprised of$0.4 million of payments on the CRE Loan and$1.4 million of payments on vehicle finance leases and other financing activities. Net cash used in financing activities was$3.0 million for the nine months endedSeptember 30, 2020 and was primarily comprised of proceeds from the PPP Loan of$4.0 million partially offset by$5.5 million of payments on the First Lien Credit Agreement and Second Lien Term Loan Agreement and$1.5 million of payments on finance leases and other financing activities.
Capital Expenditures
Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. Cash required for capital expenditures for the nine months endedSeptember 30, 2021 totaled$2.1 million compared to$2.8 million for the nine months endedSeptember 30, 2020 . These capital expenditures were partially offset by proceeds received from the sale of under-utilized or non-core assets of$2.5 million and$1.6 million in the nine months endedSeptember 30, 2021 and 2020, respectively. A portion of our transportation-related capital requirements are financed through finance leases (see Note 4 in the Notes to the Condensed Consolidated Financial Statements herein for further discussion of finance leases). We had$0 and$0.3 million of equipment additions under finance leases during the nine months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale basins in which we operate. Due to the COVID-19 outbreak, we implemented a significant reduction in our capital expenditures budget for fiscal 2021, as discussed above in "Trends Affecting Our Operating Results." Our planned capital expenditures for 2021 are expected to be financed through cash flow from operations, finance leases, borrowings under our Operating LOC Loan, or a combination of the foregoing.
Indebtedness
As ofSeptember 30, 2021 , we had$28.0 million of indebtedness outstanding, consisting of$11.8 million under the Equipment Loan,$9.5 million under the CRE Loan,$0.1 million under our vehicle term loan,$0.1 million under our equipment finance loan and$6.5 million of finance leases for vehicle financings and real property leases. The PPP Borrower used the PPP Loan proceeds for designated qualifying expenses over the covered period and applied for forgiveness of the PPP Loan duringSeptember 2020 in accordance with the terms of the PPP, which was granted in full inJune 2021 . See Note 10 in the Notes to the Condensed Consolidated Financial Statements herein for a discussion about our debt arrangements and related terms. 43 --------------------------------------------------------------------------------
The Loans contain certain affirmative and negative covenants, including a
minimum debt service coverage ratio, beginning
Off Balance Sheet Arrangements
As of
Critical Accounting Policies
There have been no significant changes to our Critical Accounting Policies
during the nine months ended
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