Nuverra Environmental Solutions Inc. (fka NESCQ)

[Hampden]

Shorts still believe NES is financially up against the wall. Regardless of indicators that NES has seen the bottom, shorts continue to maintain their positions primarily on the belief that financial results will continue to be poor. In particular, they are "banking" on lenders to push NES into bankruptcy for an expected failure to maintain loan covenants.

In a worst case scenario, however, even if NES were to not be able to comply with loan covenants, more likely than not the lenders would still prefer to amend the covenants than force NES into bankruptcy.

But the worst case scenario isn't likely at this 4th quarter, even if it will not be one of NES's shining quarters. NES will likely satisfy covenants with EBITDA of at least $35 million for 4Q13. Plus, I would not be too surprised to learn prior to reporting of year-end results that NES has reached an agreement on the sale of TFI with a buyer, which would, of course, significantly improve NES's balance sheet.

In short, if I'm correct, a short squeeze will happen sometime in 1Q14.

Anyway, here's a new post from the kind of short I described above; the guy who has posted bear articles on NES from Seeking Alpha, and who also goes by the name of MBAvalueinvestor.


texas_value


My last two articles were scorned for my analysis of Nuverra’s near term default risk. My analysis suggested that NES was set to violate its 4x net leverage ratio. The company consequently amended its covenants to appease investor worry, but the amendment was necessary. On page 45 of the latest 10-Q , NES’s 3Q leverage ratio was 4.2x, which means NES was set to trip its covenant and be in default.

But that was then, and this is now. According to the very recently amended credit facility, NES can only have leverage of 4.5x in 4Q13, 4.25x in 1Q14, and 4x in 2Q14. According to pages 19 and 45 of the latest 10-Q, Nuverra has $553m of total debt as of November 7th. At a 4.5x ratio, NES has to generate $123m of EBITDA to avoid defaulting on its credit facility and triggering an expedited repayment of its $400mm in senior notes (i.e. bankruptcy). With YTD EBITDA of $90.4mm, that means 4Q EBITDA has to grow to $33mm, or 32% sequentially, to avoid problems. In fact, the CFO even confirmed this on the conference call