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 5 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 ofJune 30, 2021 , we had 213 employees in the Rocky Mountain division.
Water Transport Services
We manage a fleet of 219 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 79 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 andWellsboro, Pennsylvania , andCambridge andCadiz, Ohio . As ofJune 30, 2021 , we had 153 employees in the Northeast division. Water Transport Services We manage a fleet of 186 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 21 thousand barrels of water per day, and permitted capacity of approximately 21 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 ofJune 30, 2021 , we had 62 employees in the Southern division.
Water Transport Services
We manage a fleet of 36 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.
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 32 thousand
barrels of water per day, and permitted capacity of approximately 100 thousand
barrels of water per day, in the Southern division.
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--------------------------------------------------------------------------------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") in the first quarter of 2020
and its continued spread across the globe throughout 2020 and through the first
half of 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. Certain parts of the world have lagged the
United States in vaccine administration and COVID-19 rates remain high with
travel and other restrictions continuing to cause global macroeconomic
volatility. As a global commodity, crude oil pricing has continued to be
subjected to swings based on these factors.
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 second
quarter of 2020 and increased during the second quarter of 2021. The average
price per barrel of West Texas Intermediate ("WTI") crude oil was $66.19 for the
three months ended June 30, 2021 as compared to $28.00 for the three months
ended June 30, 2020 . The average price per million Btu of natural gas as
measured by the Henry Hub Natural Gas Index was $2.95 for the three months ended
June 30, 2021 compared to $1.70 for the three months ended June 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 $68 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 in the Permian Basin and activity in the Bakken
has remained slow, with the rig count remaining below 17 in 2021 thus far
compared to 50 in the first quarter of 2020. 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.
As the economy continues to reopen, we are experiencing increased pressure on
wages as other parts of the economy have remained strong or improved. This
phenomenon has required us to evaluate and in some cases adjust hourly rates and
salaries for drivers and mechanics, for example. We are facing challenges to
recruit and maintain drivers who historically migrated to the energy industry in
search of a higher compensation structure. In addition, as crude oil prices have
increased we are seeing substantial increases in fuel prices, which are a
significant operating cost for the trucking business.
32
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As a result of these increased costs and given the higher cash flows our
customers are experiencing due to higher commodity prices, in the second quarter
of 2021, 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 to enhance our margins
including reducing our capital expenditures budget and continuing to maintain
most of our pay reductions and other savings initiatives instituted during 2020.
Our liquidity may be negatively impacted depending on how quickly consumer
demand and oil prices stabilize. 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 $5.35 million .
While we are not able to estimate the full impact of the COVID-19 outbreak and
the decrease in oil production levels on our financial condition and future
results of operations, we expect that this situation will have an adverse effect
on our reported results through 2021 and possibly beyond.
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 had a dramatic negative effect on our produced water business in the Rocky
Mountain division that has been slow to rebound. Additionally, in early July
2020 , a United 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 with
capacity to transport in excess of 500,000 barrels per day. Although transport
of product from the Bakken shale area historically has also occurred by rail and
other means, the net prices realized by producers is significantly lower than
crude oil sold into the DAPL. As a result, if the pipeline is shut down,
activity in the basin should be lower as the economics to the operators will
deteriorate. Appeals courts have allowed the DAPL to continue to operate in the
near term, but courts have also vacated needed easements making DAPL vulnerable
to being shut down by government action or further litigation. The potential
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.
During 2020 and the first six months of 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 certain 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.
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
June 30, Increase (Decrease)
2021 2020 2021 versus 2020
Revenue:
Service revenue $ 23,113 $ 22,956 $ 157 0.7 %
Rental revenue 1,661 1,510 151 10.0 %
Total revenue 24,774 24,466 308 1.3 %
Costs and expenses:
Direct operating expenses 21,437 18,551 2,886 15.6 %
General and administrative expenses 4,844 4,445 399 9.0 %
Depreciation and amortization 5,734 7,156 (1,422) (19.9) %
Total costs and expenses 32,015 30,152 1,863 6.2 %
Operating loss (7,241) (5,686) 1,555 (27.3) %
Interest expense, net (641) (1,116) (475) (42.6) %
Other income (expense), net 4,025 38 3,987 10,492.1 %
Loss before income taxes (3,857) (6,764) (2,907) 43.0 %
Net loss $ (3,857) $ (6,779) $ (2,922) 43.1 %
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 endedJune 30, 2021 was$23.1 million , up$0.2 million , or 0.7%, from$23.0 million in the prior year period. The increase 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 endedJune 30, 2021 was$1.7 million , up$0.2 million , or 10.0%, from$1.5 million in the prior year period due to a small increase in drilling and completion activity, which resulted in higher utilization of rental equipment by our customers 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 endedJune 30, 2021 increased$2.9 million to$21.4 million from$18.6 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 endedJune 30, 2021 were$4.8 million , up$0.4 million , or 9.0%, from$4.4 million in the three months endedJune 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 endedJune 30, 2021 is approximately$1.3 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 endedJune 30, 2021 was$5.7 million , down 19.9% as compared to$7.2 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 assets becoming fully depreciated 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 ended
Other Income, net
During the three months endedJune 30, 2021 , we had other income, net of$4.0 million compared to$38.0 thousand in the prior year period. The increase in other income, net is due to the forgiveness of the Paycheck Protection Program (the "PPP") loan granted to an indirect wholly-owned subsidiary of the Company (the "PPP Borrower") under the Coronavirus Aid, Relief, and Economic Security Act (the "PPP Loan"), which was fully forgiven in June 2021.There was no change in fair value of the derivative warrant liability during the three months endedJune 30, 2021 andJune 30, 2020 .
Income Taxes
No income tax expense or benefit was recorded for the three months endedJune 30, 2021 orJune 30, 2020 . The primary item impacting income taxes for the three months endedJune 30, 2021 andJune 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 June 30, 2021
Revenue $ 12,815 $ 7,872 $ 4,087 $ - $ 24,774
Direct operating expenses 11,151 7,198 3,088 - 21,437
Operating loss (1,370) (1,934) (334) (3,603) (7,241)
Three months ended June 30, 2020
Revenue $ 12,222 $ 8,162 $ 4,082 $ - $ 24,466
Direct operating expenses 10,458 5,593 2,500 - 18,551
Operating income (loss) (2,634) (397) (404) (2,251) (5,686)
Change
Revenue $ 593 $ (290) $ 5 $ - $ 308
Direct operating expenses 693 1,605 588 - 2,886
Operating (loss) income 1,264 (1,537) 70 (1,352) (1,555)
Rocky Mountain
The Rocky Mountain division has experienced a significant slowdown as compared
to the prior year, as evidenced by the rig count declining 24%, from an average
of 21 for the quarter ended June 30, 2020 to 16 for the same period in June 30,
2021 . Although there was a notable increase in WTI crude oil price per barrel,
which averaged $66.19 in the second quarter of 2021 versus an average of $28.00
for the same period in the prior year, new drilling and completion activities
have been very low This is the result of many of the larger exploration and
production companies either focusing their capital spending in other basins or
having a predetermined drilling program and not looking to increase production
as they focus on drilling within cash flow. Revenues for the Rocky Mountain
division increased by $0.6 million , or 5%, during the three months ended
June 30, 2021 as compared to the three months ended June 30, 2020 , primarily due
to a $0.4 million , or 4% increase in water transport revenues from higher driver
utilization. Company-owned trucking revenue declined 15%, or $1.2 million and
third-party trucking revenue increased 145%, or $1.6 million . We continue to
face a truck driver shortage in the Rocky Mountain Division similar to other
areas of the country and industries. The regional driver count declined
approximately 26% year over year which also contributed to the lower revenue. We
are actively recruiting to attempt to increase our driver count. Our rental and
landfill businesses are our two service lines most levered to drilling activity.
Rental revenues increased by 11%, or $0.2 million , in the current year due to
higher utilization and pricing. Our landfill revenues decreased 64%, or
$0.2 million , compared to prior year due primarily to the landfill being near
capacity. We actively managed the facility to keep volumes low and are currently
working on expanding the facility to take in additional volumes. Our salt water
disposal well revenue increased $0.4 million , or 33%, compared to the prior year
as higher completion activity and production volumes in the areas near our wells
led to a 28% increase in average barrels per day disposed during the current
year. Other revenue not related to the categories above decreased by
$0.1 million .
For the Rocky Mountain division, direct operating costs increased by $0.7
million during the three months ended June 30, 2021 as compared to the three
months ended June 30, 2020 due primarily to higher disposal costs, higher third
party hauling costs and higher fuel, maintenance and repair costs.
36
--------------------------------------------------------------------------------Northeast
Revenues for the Northeast division decreased by$0.3 million , or 4%, during the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 mainly due to decreases in water transport services of$0.2 million , or 4%, and other revenue of$0.1 million or 41%. The rig count declined 5% from 40 during the three months endedJune 30, 2020 to 38 during the three months endedJune 30, 2021 , which led to lower activity levels for both water transport services and other services. Our customers 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. For our trucking services, revenues per billed hour decreased by 5% which was a function of the increased competition and the operator focus on reducing costs. The regional driver count declined approximately 12% year over year which also contributed to the lower revenue. We continue to face a truck driver shortage in our Northeast Division similar to that seen in ourRocky Mountain Division and similarly are actively recruiting to attempt to increase our driver count. The combination of a lower rig count, water reuse and sharing and competition, contributed to the decline in disposal volumes and pricing. In addition to these factors, we chose to close ourWellsboro truck yard inNorthern Pennsylvania and relocated certain trucks to other areas of operation during the second quarter. This led to a decrease in revenue as we ceased operations at that location. For the Northeast division, direct operating costs increased by$1.6 million , or 29%, during the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 due to a combination of higher fleet-related expenses, including fuel costs. Operating loss increased by$1.5 million over the prior year period due primarily to$0.3 million in lower revenue, coupled with a$1.6 million increase in direct operating expenses, offset by$0.6 million decrease in depreciation and amortization expense.
Southern
Revenues for the Southern division remained flat during the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 . Rig count increased 29% in the area, from 38 atJune 30, 2020 to 49 atJune 30, 2021 driving an increase in trucking revenue and an increase in volumes received in our disposal wells not connected to our pipeline increased by an average of 1,776 barrels per day (or 9%) during the current year. Volumes received in the disposal wells connected to the pipeline decreased by an average of 6,571 barrels per day (or 17%) during the current year.
For the Southern division, direct operating costs increased by
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 endedJune 30, 2021 were$1.4 million higher than those reported for the three months endedJune 30, 2020 due to approximately$1.3 million of transition costs, which included but were not limited to severance and stock based compensation for executives. 37 --------------------------------------------------------------------------------
Six Months Ended
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):
Six Months Ended
June 30, Increase (Decrease)
2021 2020 2021 versus 2020
Revenue:
Service revenue $ 45,439 $ 57,427 $ (11,988) (20.9) %
Rental revenue 3,000 4,981 (1,981) (39.8) %
Total revenue 48,439 62,408 (13,969) (22.4) %
Costs and expenses:
Direct operating expenses 42,418 50,027 (7,609) (15.2) %
General and administrative expenses 8,371 9,369 (998) (10.7) %
Depreciation and amortization 11,804 15,145 (3,341) (22.1) %
Impairment of long-lived assets - 15,579 (15,579) (100.0) %
Total costs and expenses 62,593 90,120 (27,527) (30.5) %
Operating loss (14,154) (27,712) (13,558) (48.9) %
Interest expense, net (1,319) (2,276) (957) (42.0) %
Other income, net 4,013 180 3,833 2,129.4 %
Loss before income taxes (11,460) (29,808) (18,348) (61.6) %
Income tax expense - (15) (15) (100.0) %
Net loss $ (11,460) $ (29,823) $ (18,363) NM
Service Revenue
On a consolidated basis, service revenue for the six months ended June 30, 2021
was $45.4 million , down $12.0 million , or 20.9%, from $57.4 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 June
30, 2021 was relatively flat compared to the three months ended June 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 six months endedJune 30, 2021 was$3.0 million , down$2.0 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 six months endedJune 30, 2021 were$42.4 million , down$7.6 million from$50.0 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 six months endedJune 30, 2021 amounted to$8.4 million , down$1.0 million from$9.4 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 six months endedJune 30, 2021 is approximately$1.3 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 six months endedJune 30, 2021 was$11.8 million , down$3.3 million from$15.1 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 assets becoming fully depreciated partially offset by asset additions.
Impairment of long-lived assets
There was no impairment charges recorded for the six 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 six months endedJune 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 six months endedJune 30, 2020 to adjust the book value to match the fair value.
Interest Expense, net
Interest expense, net during the six months endedJune 30, 2021 was$1.3 million , or$1.0 million lower than the$2.3 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 six months ended
Income Taxes
Income tax expense for the six months endedJune 30, 2021 was none as compared to$15.0 thousand for the six months endedJune 30, 2020 . The primary item impacting income taxes for the six months endedJune 30, 2021 andJune 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: Six Months Ended
The following table shows operating results for each of our segments for the six
months ended
Rocky Mountain Northeast Southern Corporate/Other Total
Six months ended June 30, 2021
Revenue $ 25,604 $ 15,178 $ 7,657 $ - $ 48,439
Direct operating expenses 22,514 13,851 6,053 - 42,418
Impairment of long-lived assets - - - - -
Operating loss (3,177) (3,995) (1,279) (5,703) (14,154)
Six months ended June 30, 2020
Revenue $ 35,690 $ 17,956 $ 8,762 $ - $ 62,408
Direct operating expenses 30,009 13,964 6,054 - 50,027
Impairment of long-lived assets 12,183 - 3,396 - 15,579
Operating income (loss) (15,854) (2,159) (4,913) (4,786) (27,712)
Change
Revenue $ (10,086) $ (2,778) $ (1,105) $ - $ (13,969)
Direct operating expenses (7,495) (113) (1) - (7,609)
Impairment of long-lived assets (12,183) - (3,396) - (15,579)
Operating (loss) income 12,677 (1,836) 3,634 (917) 13,558
Rocky Mountain
The Rocky Mountain division continues to experience a significant slowdown as
compared to the prior year, as evidenced by the rig count declining 24% from 21
at June 30, 2020 to 16 at June 30, 2021 . The slowdown primarily occurred in the
three months ended March 31, 2020 as compared to the three months ended March
31, 2021 while the three months ended June 30, 2020 as compared to three months
ended June 30, 2021 were relatively flat. Although there was a notable increase
in WTI crude oil price per barrel, which averaged $62.21 in the first half of
2021 versus an average of $36.82 for the same period in the prior year, new
drilling and completion activities have been very low. This is the result of
many of the larger exploration and production companies either focusing their
capital spending in other basins or having a predetermined drilling program and
not looking to increase production as they focus on drilling within cash flow.
Revenues for the Rocky Mountain division decreased by $10.1 million , or 28%
during the six months ended June 30, 2021 as compared to the six months ended
June 30, 2020 , primarily due to a $4.4 million , or 19%, decrease in water
transport revenues from lower trucking volumes. Third-party trucking revenue
decreased 15%, or $0.7 million , and revenue from company-owned trucking revenue
declined 19%, or $3.4 million . Average total billable hours were down 22%
compared to the prior year. 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 40%, or $2.0 million , in the
current year due to lower utilization resulting from a significant decline in
drilling activity driving the return of rental equipment. Our landfill revenues
decreased 90%, or $1.6 million , compared to the prior year primarily due the
landfill being near capacity. We actively managed the facility to keep volumes
low and are currently working on expanding the facility to take in additional
volumes. Our salt water disposal well revenue decreased $4.4 million , or 19%,
compared to the prior year as well shut-ins and lower completion activity led to
a 17% decrease in average barrels per day disposed during the current year, with
water from producing wells continuing to maintain a base level of volume
activity.
40
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For the Rocky Mountain division, direct operating costs decreased by $7.5
million during the six months ended June 30, 2021 as compared to the six months
ended June 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 half of 2021
decreased 35% from the prior year period. The Rocky Mountain division had a $3.2
million operating loss during the current year period, as opposed to $15.9
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 $7.5 million in direct
operating expenses, $1.4 million in general and administrative expenses and
$1.7 million in depreciation and amortization expense.
Northeast
Revenues for the Northeast division decreased by$2.8 million , or 20%, during the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 due to decreases in water transport services of$2.0 million , or 15%, and disposal services of$0.3 million , or 8%. The decreased activity primarily occurred in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 while the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 was relatively flat. Although natural gas prices per million Btu, as measured by theHenry Hub Natural Gas Index, increased 77.9% from an average of$1.81 for the six months endedJune 30, 2020 to an average of$3.22 for the six months endedJune 30, 2021 , the rig count declined 5% in the Northeast operating area, from 40 atJune 30, 2020 to 38 atJune 30, 2021 . This led to lower activity levels for both water transport services and disposal services. Our customers 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. For our trucking services, total billable hours were down 8% from the prior year and pricing decreases also contributed to the decline, offset by a disposal volumes increase in our salt water disposal wells of 2% in average barrels per day. For the Northeast division, direct operating costs decreased by$0.1 million during the six months endedJune 30, 2021 as compared to the six months endedJune 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. The average number of drivers during the quarter decreased 15% from the prior year. Operating loss increased by$1.8 million over the prior year period primarily due to a 2.8 million decrease in revenues, partially offset by a$0.4 million decrease in general and administrative expenses due to headcount and compensation reductions and$0.4 million in lower depreciation and amortization expense. Southern Revenues for the Southern division decreased by$1.1 million , or 13%, during the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 . The decreased activity primarily occurred in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 while the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 was relatively flat. 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. Volumes received in our disposal wells not connected to our pipeline decreased by an average of 5,771 barrels per day (or 13%) during the current year and volumes received in the disposal wells connected to the pipeline decreased by an average of 16,801 barrels per day (or 22%) during the current year. In the Southern division, direct operating costs remained flat during the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 due to lower activity levels for disposal services and water transport services. The Southern division had$1.3 million in operating loss during the current year period, as opposed to a$4.9 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 six months endedJune 30, 2021 were$0.9 million higher than the six months endedJune 30, 2020 due primarily to approximately$1.3 million of transition costs, which included but were not limited to severance and stock based compensation for executives. 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 six months endedJune 30, 2021 included cash generated by our operations and asset sales. During the six months endedJune 30, 2021 andJune 30, 2020 , net cash used in operating activities was$2.4 million and$9.8 million , respectively, and net loss was$11.5 million and$29.8 million , respectively. As ofJune 30, 2021 , our total indebtedness was$29.8 million and total liquidity was$12.4 million , consisting of$7.4 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 , in order to increase by$510,000 the maximum availability thereunder, for up to$5.349 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$8.3 million , respectively. The Company continues to incur operating losses, and we anticipate losses to continue into the near future. Due to higher operating costs and lack of significant additional production by our customers, there is uncertainty around our future cash flows, results of operations and financial condition. We expect our operating costs to remain high into the foreseeable future as we anticipate our customers' crude oil or natural gas drilling and completion activity to continue to operate at lower levels. In order to mitigate these conditions, the Company implemented various initiatives during 2020 and continuing into 2021 that management believes positively impacted our operations, including personnel and salary reductions, other changes to our operating structure to achieve additional cost reductions, and the sale of certain assets. While we believe the Company's cash flow from operations, together with cash on hand and other available liquidity, will be provide sufficient liquidity to fund operations for at least the next twelve months, the Company remains exposed to significant uncertainty regarding its future liquidity position and the availability of alternative sources of liquidity.
The following table summarizes our sources and uses of cash for the six months
ended
Six Months Ended
June 30,
Net cash provided by (used in): 2021 2020 Operating activities$ (2,393) $ 9,825 Investing activities (1,055) (780) Financing activities (1,555) 1,038
Net change in cash, cash equivalents and restricted cash
$ 10,083 Operating Activities Net cash used in operating activities was$2.4 million for the six months endedJune 30, 2021 . The net loss, after adjustments for non-cash items, provided cash of$2.9 million , compared to$1.5 million provided in the corresponding 2020 period. Changes in operating assets and liabilities provided$0.5 million in cash primarily due to a decrease in accounts receivables and prepaids because of the timing of cash receipts. The non-cash items and other adjustments included$11.8 million of depreciation and amortization, and stock-based compensation expense of$0.5 million , partially offset by a gain on PPP Loan forgiveness of$4.0 million and a$0.3 million gain on the sale of assets. 42 -------------------------------------------------------------------------------- Net cash provided by operating activities was$9.8 million for the six months endedJune 30, 2020 . The net loss, after adjustments for non-cash items, provided cash of$1.5 million . Changes in operating assets and liabilities used$8.3 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 ,$15.1 million of depreciation and amortization, and stock-based compensation expense of$0.6 million , partially offset by a$0.3 million gain on the sale of assets. Investing Activities Net cash used in investing activities was$1.1 million for the six months endedJune 30, 2021 and primarily consisted of$1.3 million of purchases of property, plant and equipment partially offset by$0.2 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 in investing activities was$0.8 million for the six months endedJune 30, 2020 and primarily consisted of$2.3 million of purchases of property, plant and equipment partially offset by$1.5 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$1.6 million for the six months endedJune 30, 2021 and was primarily comprised of$0.3 million of payments on the CRE Loan and$1.3 million of payments on vehicle finance leases and other financing activities. Net cash used in financing activities was$1.0 million for the six months endedJune 30, 2020 and was primarily comprised of proceeds from the PPP Loan of$4.0 million partially offset by$1.9 million of payments on the FirstLien Credit Agreement and Second Lien Term Loan Agreement and$1.1 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 six months endedJune 30, 2021 totaled$1.3 million compared to$2.3 million for the six months endedJune 30, 2020 . These capital expenditures were partially offset by proceeds received from the sale of under-utilized or non-core assets of$0.2 million and$1.5 million in the six months endedJune 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 none and$0.2 million of equipment additions under finance leases during the six months endedJune 30, 2021 andJune 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. 43 --------------------------------------------------------------------------------
Indebtedness
As ofJune 30, 2021 , we had$29.8 million of indebtedness outstanding, consisting of$13.0 million under the Equipment Loan,$9.7 million under the CRE Loan,$0.2 million under our vehicle term loan,$0.1 million under our equipment finance loan and$6.9 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.
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 six months ended
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