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, 2019 , filed with the SEC on March 10,
2020 (the "2019 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, 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 ofMarch 31, 2020 , we had 359 employees in the Rocky Mountain division.
Water Transport Services
We manage a fleet of 198 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. In the Rocky Mountain division, we own an inventory of lay flat temporary hose as well as related pumps and associated equipment used to move fresh water from water sources to operator locations for use in completion activities. We employ specially trained field personnel to manage and operate this business. For customerswho have secured their own source of fresh water, we provide and operate the lay flat temporary hose equipment to move the fresh water to the drilling and completion location. We may also use third-party sources of fresh water in order to provide the water to customers as a package that includes our water transport service. Disposal Services We manage a network of 20 owned and leased salt water disposal wells with current capacity of approximately 82 thousand barrels of water per day, and permitted capacity of 104 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.
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
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--------------------------------------------------------------------------------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, West Virginia ,Somerset andWellsboro, Pennsylvania , andCadiz, Ohio . Additionally, we operate a corporate support office nearPittsburgh, Pennsylvania . As ofMarch 31, 2020 , we had 214 employees in the Northeast division.
Water Transport Services
We manage a fleet of 184 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 14 owned and leased salt water disposal wells with current capacity of approximately 25 thousand barrels of water per day, and permitted capacity of approximately 32 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 inSpring, Texas . As ofMarch 31, 2020 , we had 72 employees in the Southern division.
Water Transport Services
We manage a fleet of 46 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 68 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 42 thousand barrels of water per day, and permitted capacity of approximately 100 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.
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--------------------------------------------------------------------------------Trends Affecting Our Operating Results
Impact of COVID-19 and Oil Price Declines
The outbreak of coronavirus disease 2019 ("COVID-19") in China during December
2019 has since spread to many regions of the world, including the United States .
In March 2020 , the outbreak was subsequently labeled as a global pandemic by the
World Health Organization . As COVID-19 has spread throughout the United States ,
federal, state and local governments have implemented significant actions to
mitigate the public health crisis, including many state and local governments
mandating shelter in place and stay at home orders, which required many
businesses to close, except those deemed essential services. Additionally, the
federal government implemented stringent travel restrictions. These actions have
resulted in a significant decline in airline travel and car usage, which has
negatively impacted the demand for refined products, such as gasoline and jet
fuel, and consequently the demand for crude oil.
Nuverra and our customers are considered an essential business in every state
that we operate. As a result, we have been able to continue performing our
services in areas with virus related restrictions. Many areas that we operate in
are relatively removed from high population areas and many of the job functions
we perform can be completed with minimal personal contact. Any back office
support staff that was able to work remotely from home has done so. In
combination, these factors have resulted in minimal business interruptions in
the first quarter of 2020.
Additionally, beginning in early March 2020 , the global oil markets have been
negatively impacted by an oil supply conflict occurring when the Organization of
Petroleum Exporting Countries and other oil producing nations ("OPEC+") were
initially unable to reach an agreement on production levels for crude oil, at
which point Saudi Arabia and Russia initiated efforts to aggressively increase
crude production. The convergence of these events created the unprecedented dual
impact of a dramatic decline in the demand for oil coupled with the risk of a
substantial increase in supply.
The resulting impact to oil prices during the first quarter of 2020 was
significant, with the price per barrel of West Texas Intermediate ("WTI") crude
oil plummeting 56% during March 2020 . WTI oil spot prices decreased from a high
of $63 per barrel in early January to a low of $14 per barrel in late March, a
level which had not been experienced since March 1999 . The physical markets for
crude have shown signs of distress as spot prices have been negatively impacted
by the lack of available storage capacity. This has significantly increased the
volatility in oil prices. While OPEC+ agreed in April to cut production,
downward pressure on crude oil has continued and could continue for the
foreseeable future, particularly given concerns over available storage capacity.
We have recently seen a stabilization of the crude oil markets with WTI prices
reaching $40 per barrel; however drilling and completion activity remains
depressed.
While we experienced minimal impact in the first quarter of 2020, we expect a
significant decline in activity, coupled with downward pricing pressure and
corresponding reductions in revenue and profitability for the remainder of
fiscal 2020. We have implemented a number of initiatives to adjust our cost
structure in anticipation of a reduction in revenue for the remainder of fiscal
2020, including:
• Adjusted salaries for all exempt and non-exempt non-contracted employees
between 10% and 20%;
• Headcount reduction of approximately 100 employees, including changes made
earlier in the first quarter of 2020;
• Reduced Chief Executive Officer's salary by 25%, Chief Operating Officer
salary by 20% and two other executives' salaries between 10% and 20%;
• Reduced the compensation program for the non-employee Board of Directors
by 25%;
• Materially scaled back operations in two completions-related businesses
and closed one location; and
• Reduced other non-critical operating expenses.
These initiatives are expected to reduce annual costs by approximately$11.0 million , and will allow us to be more competitive across all of our business operations. Additionally, we are targeting a significant reduction in our capital expenditures budget. We continue to actively review our organizational structure, and we anticipate additional steps will be taken to further streamline our operations. Additionally, our liquidity may be negatively impacted depending on how quickly consumer demand and oil prices return to more normalized levels. The current environment makes it even more difficult to comply with our covenants and other restrictions in our credit facilities, and a lack of confidence in our industry on the part of the financial markets may result in a lack of access to capital, any of which could lead to reduced liquidity, an event of default, inability to draw on amounts available under the$30.0 million revolving facility (the "Revolving Facility") and our delayed draw under the Second Lien Term Loan (as defined below), the possible acceleration of or repayment of our outstanding debt, or a limited ability to refinance our debt. 29 -------------------------------------------------------------------------------- While we are not able to estimate the full impact of the COVID-19 outbreak on our financial condition and future results of operations, we expect that this situation will have an adverse effect on our reported results for the remainder of fiscal 2020 and possibly beyond.
Other Trends Affecting Operating Results
We are seeing several industry trends in the shale basins in which we operate. 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 impacts the amount and volume of produced water, water for fracking, flowback water, drill cuttings and rental equipment requirements that determine the 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 2019 and continued to decline considerably during the first quarter of 2020. The price per barrel of WTI Crude Oil was$20.48 atMarch 31, 2020 as compared to$60.14 atMarch 31, 2019 . The average price of natural gas as measured by the Henry Hub Natural Gas Index was$1.91 for the three months endedMarch 31, 2020 compared to$2.92 for the three months endedMarch 31, 2019 . See "Impact of COVID-19 and Oil Price Declines" above for further discussion. The drop in crude prices primarily occurred inMarch 2020 and therefore had minimal impact on the first quarter of 2020 operating results as our customers had little time to adjust activity levels. However, we expect crude oil prices to remain low for the foreseeable future. Should prices remain at these levels, we expect our customers' targeting crude or natural gas liquids drilling and completion activity to fall substantially. A reduction in customer activity related to commodity prices most directly impacts our services that cater to drilling and completion activities. This includes fresh water transportation via lay flat hose, our rental equipment business and our landfill business in the Rocky Mountain region. Additionally, a portion of our trucking and salt water disposal business comes from flowback work, but primarily focuses on produced water transportation and disposal from existing wells. As such, we anticipate meaningful reductions in revenue and profitability for the remainder of fiscal 2020 and possibly beyond. Crude oil prices continued to fall during the second quarter of 2020 but have more recently stabilized at prices between$35 and$40 per barrel. As a result, many customers are shutting in production or lowering production. Per theNorth Dakota Industrial Commission , approximately 35% of daily crude oil production in the Bakken shale region is estimated to have shut-in contributing to a reduction of approximately 510,000 barrels per day. The impact on us has been that with curtailed production, produced water volumes have dropped accordingly. This is a phenomenon that has a dramatic effect on our produced water business in the Rocky Mountain division as some of our large customers have shut in many of their producing wells. We are already seeing similar trends in the liquids rich parts of the Marcellus/Utica areas. An additional important trend has been the focus ofWall Street and investors in the energy sector to encourage exploration and production operators to spend as a function of the cash flow they generate. Historically, as a result of accommodating debt and equity markets, exploration and production companies have been able to spend in excess of the cash flow generated by the business. This current trend has brought increased capital discipline to exploration and production companieswho are careful to make more selective capital allocation decisions. The recent drop in underlying commodity prices, net of hedging activities, will impact our customers' underlying cash flows and therefore their drilling plans. Following the drop in commodity prices and the impact of COVID-19, a number of our customers witnessed a material drop in their public stock prices and a number of our customers received debt rating downgrades. We believe this trend will make it more difficult for our customers to raise new sources of capital and therefore may further limit their ability to spend capital on future drilling and completion activities. Lastly, in the first quarter of 2020, 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. This work still requires trucking services, but 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.
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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 2019 Annual Report
on Form 10-K.
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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
March 31, Increase (Decrease)
2020 2019 2020 versus 2019
Revenue:
Service revenue $ 34,471 $ 39,001 $ (4,530 ) (11.6 )%
Rental revenue 3,471 3,626 (155 ) (4.3 )%
Total revenue 37,942 42,627 (4,685 ) (11.0 )%
Costs and expenses:
Direct operating expenses 31,476 32,557 (1,081 ) (3.3 )%
General and administrative expenses 4,924 5,475 (551 ) (10.1 )%
Depreciation and amortization 7,989 9,135 (1,146 ) (12.5 )%
Impairment of long-lived assets 15,579 117 15,462 NM
Total costs and expenses 59,968 47,284 12,684 26.8 %
Operating loss (22,026 ) (4,657 ) 17,369 NM
Interest expense, net (1,160 ) (1,421 ) (261 ) (18.4 )%
Other income, net 142 25 117 NM
Reorganization items, net - (223 ) 223 (100.0 )%
Loss before income taxes (23,044 ) (6,276 ) 16,768 NM
Income tax expense - (79 ) (79 ) (100.0 )%
Net loss $ (23,044 ) $ (6,355 ) $ 16,689 NM
NM - Percentages over 100% are not displayed.
Service Revenue
Service revenue consists of fees charged to customers for water transport services, disposal services and other service revenues associated with the drilling, completion, and ongoing production of shale oil and natural gas.
On a consolidated basis, service revenue for the three months endedMarch 31, 2020 was$34.5 million , down$4.5 million , or 11.6%, from$39.0 million in the prior year period. The decline was driven primarily by decreases in water transport services in all three divisions and disposal services in the Northeast and Rocky Mountain divisions partially offset by increases in other revenue in the Rocky Mountain division. As the primary causes of the changes in service revenue are different for the various 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 endedMarch 31, 2020 was$3.5 million , down$0.2 million , or 4.3%, from$3.6 million in the prior year period due to lower utilization. Direct Operating Expenses
The primary components of direct operating expenses are compensation costs, third-party hauling, fuel costs and repairs and maintenance costs.
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Direct operating expenses for the three months ended March 31, 2020 decreased
$1.1 million to $31.5 million compared to the prior year period. The decrease in
direct operating expenses is primarily attributable to lower activity levels for
water transport services during the period, resulting in decreases in
compensation costs and fleet-related expenses including fuel and repair and
maintenance costs. However, direct operating expenses increased to 83.0% of
revenues from 76.4% in the prior year period as a result of $0.8 million of
property tax credits and $0.9 million of gains on asset sales in the prior year.
See "Segment Operating Results" below for further details on each division.
General and Administrative Expenses
General and administrative expenses for the three months endedMarch 31, 2020 were$4.9 million , down$0.6 million , or 10.1%, from$5.5 million in the three months endedMarch 31, 2019 due primarily to a decrease in stock-based compensation expense and lower bad debt expense.
Depreciation and Amortization
Depreciation and amortization for the three months endedMarch 31, 2020 was$8.0 million , down 12.5% as compared to$9.1 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 and assets becoming fully depreciated.
Impairment of Long-lived Assets
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 has been a significant decline in oil prices during the first quarter of 2020, which has resulted in a decrease in activities by our customers. As a result of these events, during the three months endedMarch 31, 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 . We may face additional asset impairments in the future, along with other accounting charges, as demand for our services decreases in response to the COVID-19 pandemic and related factors. Additionally, during 2020, certain property classified as held for sale in the Rocky Mountain division was evaluated for impairment based on the 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 three months endedMarch 31, 2020 to adjust the book value to match the fair value. During 2019, management approved plans to sell real property located in the Northeast division. The real property qualified to be classified as held for sale and as a result was recorded at the lower of net book value or fair value less costs to sell, which resulted in a long-lived asset impairment charge of$0.1 million during the three months endedMarch 31, 2019 .
Interest Expense, net
Interest expense, net during the three months endedMarch 31, 2020 was$1.2 million , down 18.4% from the prior year period due to repayment of the$32.5 million bridge term loan (the "Bridge Term Loan") inJanuary 2019 , and the resulting expense of the remaining associated deferred financing fees, and continued principal payments on the First and Second Lien Term Loans (as defined below) partially offset by additional finance leases as a result of heavy duty truck replacement project. Other Income, net During the three months endedMarch 31, 2020 , we had other income, net of$0.1 million , compared to$25.0 thousand in the prior year period. The three months endedMarch 31, 2020 included$0.1 million for a bankruptcy settlement received from one of our vendors. Additionally, the three months endedMarch 31, 2019 included a$41.0 thousand loss associated with the change in the fair value of the derivative warrant liability. There was no change in fair value of the derivative warrant liability during the three months endedMarch 31, 2020 . We issued warrants with derivative features in connection with our chapter 11 filing in 2017. These instruments are accounted for as derivative liabilities with any decrease or increase in the estimated fair value recorded in "Other income, net." See Note 11 in the Notes to the Condensed Consolidated Financial Statements for further details on the warrants. 33 --------------------------------------------------------------------------------
Reorganization Items, net
Expenses, gains and losses directly associated with the chapter 11 proceedings are reported as "Reorganization items, net" in the condensed consolidated statements of operations. For the three months endedMarch 31, 2019 , these fees are primarily comprised of professional and legal fees related to our 2017 chapter 11 filing. There were no reorganization items recorded during the three months endedMarch 31, 2020 .
Income Taxes
No income tax expense or benefit was recorded for the three months endedMarch 31, 2020 as compared to income tax expense of$79.0 thousand for the three months endedMarch 31, 2019 . The primary item impacting income taxes for the three months endedMarch 31, 2019 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.
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 Corp/Other Total
Three months ended March 31, 2020
Revenue $ 23,468 $ 9,794 $ 4,680 $ - $ 37,942
Direct operating expenses 19,551 8,371 3,554 - 31,476
Impairment of long-lived assets 12,183 - 3,396 - 15,579
Operating loss (13,220 ) (1,762 ) (4,509 ) (2,535 ) (22,026 )
Three months endedMarch 31, 2019 Revenue$ 24,877 $ 11,840 $ 5,910 $ -$ 42,627 Direct operating expenses 19,828 9,715 3,014 - 32,557 Impairment of long-lived assets - 117 - - 117 Operating income (loss) (296 ) (1,502 ) 337 (3,196 ) (4,657 ) Increase (Decrease) Revenue$ (1,409 ) $ (2,046 ) $ (1,230 ) $ -$ (4,685 ) Direct operating expenses (277 ) (1,344 ) 540 - (1,081 ) Impairment of long-lived assets 12,183 (117 ) 3,396 - 15,462 Operating income (loss) (12,924 ) (260 ) (4,846 ) 661 (17,369 ) Rocky Mountain Revenues for the Rocky Mountain division decreased by$1.4 million during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due primarily to a decrease in water transport revenues from lower trucking volumes as a result of a general slowdown in the region with fewer rigs operating in the area as well as a 2.5% decrease in average barrels per day disposed in our salt water disposal wells during the current year. Rental revenues also decreased by 3.4% in the current year due to lower utilization. For the Rocky Mountain division, direct operating costs decreased during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due primarily to lower activity levels for water transport and disposal services. Direct operating costs as a percentage of revenue increased to 83.3% in the current year as compared to 79.7% in the prior year as a result of gains on asset sales in the prior year. The three months endedMarch 31, 2020 also included a$12.2 million long-lived asset impairment charge (as previously discussed above in the consolidated results). 34 --------------------------------------------------------------------------------
Northeast
Revenues for the Northeast division decreased by$2.0 million during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due to decreases in disposal services and water transport services. During 2019 and continuing into 2020, natural gas prices, as measured by theHenry Hub Natural Gas index decreased 34.6% from an average of$2.92 for the three months endedMarch 31, 2019 to an average of$1.91 for three months endedMarch 31, 2020 , contributing to a 40% rig count reduction in the Northeast operating area from 80 atMarch 31, 2019 to 48 atMarch 31, 2020 . Our lower activity levels in the Northeast are due to a combination of reduced drilling and completion activity by our customers as well as the continued industry trend of water reuse resulting in reduced costs on the service side by maximizing water reuse. 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, the average number of drivers during the quarter decreased 15% from the prior year and total billable hours were down 4.0% from the prior year. For the Northeast division, direct operating costs decreased during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due to the lower activity levels for water transport and disposal services. Direct operating costs increased as a percentage of revenue to 85.5% in the current year as compared to 82.1% in the prior year. General and administrative expenses decreased as compared to the prior year as a result of headcount reductions and lower bad debt expense during the current year.
Southern
Revenues for the Southern division decreased by$1.2 million during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due primarily to lower disposal well volumes, whether connected to the pipeline or not. Volumes received in our disposal wells not connected to our pipeline decreased by an average of 7,091 barrels per day (or 22.1%) during the current year and the volumes received in the disposal wells connected to the pipeline decreased by an average of 10,569 barrels per day (or 21.9%) during the current year. Direct operating costs increased during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due to property tax adjustments recorded in the prior year which resulted in an increase to 75.9% for direct operating costs as a percentage of revenue in the current year as compared to 51.0% in the prior year. Operating loss increased as compared to the prior year and general and administrative expenses decreased as compared to the prior year as a result of lower bad debt expense in the current year. The three months endedMarch 31, 2020 also included a$3.4 million long-lived asset impairment charge (as previously discussed above in the consolidated results).
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 endedMarch 31, 2020 were$0.7 million lower than those reported for the three months endedMarch 31, 2019 due primarily to lower stock-based compensation expense. 35
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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 first quarter of 2020 have included cash generated by our operations, borrowings from our Revolving Facility and asset sales. During the three months endedMarch 31, 2020 andMarch 31, 2019 , net cash provided by operating activities was$7.4 million and net cash used in operating activities was$0.5 million , respectively, and net loss was$23.0 million and$6.4 million , respectively. As ofMarch 31, 2020 , our total indebtedness was$35.3 million and total liquidity was$21.3 million , consisting of$15.6 million of cash and available borrowings under the Revolving Facility and$5.7 million available as a delayed draw under the Second Lien Term Loan. Due to the COVID-19 outbreak, there is uncertainty surrounding the potential impact on our cash flows, results of operations and financial condition. We have proactively taken steps to reduce costs and continue to look at our operating structure to find additional cost reduction opportunities as discussed in "Trends Affecting Our Operating Results". The maturity date of our Revolving Facility and$17.2 million first lien term loan (the "First Lien Term Loan") isFebruary 7, 2021 , at which time we must repay the outstanding principal amount of the Revolving Facility and approximately$15.0 million of the First Lien Term Loan, together with interest accrued and unpaid thereon. As ofMarch 31, 2020 , no borrowings were outstanding under the Revolving Facility. As ofMarch 31, 2020 , we were in compliance with the covenants under our borrowing arrangements; however if business conditions do not improve, we anticipate that we may not be in compliance with all of our debt covenants atJune 30, 2020 or for measurement dates thereafter. Absent an extension of the maturity date or an amendment or waiver deferring compliance with covenants, we project based on current financial forecasts that we may not have sufficient cash on hand or available liquidity to repay the Revolving Facility and First Lien Term Loan in full on the scheduled maturity date or if they were to become callable prior to scheduled maturity due to noncompliance with covenants. Due to these uncertainties surrounding our future ability to refinance, extend, or repay our outstanding indebtedness at maturity and maintain compliance with credit agreement covenants there is substantial doubt as to our ability to continue as a going concern within one year after the date that these financial statements are issued. Nonetheless, based on our current financial forecasts, we believe we will have sufficient liquidity to make all scheduled interest and principal payments on the Revolving Facility and the First Lien Term Loan during the period prior to the scheduled maturity date. In order to mitigate these conditions, we have undertaken various initiatives in the first half of 2020 that management believes will positively impact our ability to repay our outstanding indebtedness at or before the scheduled maturity date, including personnel and salary reductions, other changes to our operating structure to achieve additional cost reductions, and the sale of certain assets. We have also been engaged in active discussions with the lender to extend the scheduled maturity dates for both the Revolving Facility and First Lien Term Loan, and the parties executed a non-binding commitment letter in early 2020 to extend the scheduled maturity dates toMarch 2022 . The principal payments that are due within one year for the First Lien Term Loan will be included in the current portion of long-term debt on the condensed consolidated balance sheet until the maturity date extension has been executed. With respect to potential covenant violations, management has been negotiating with the lender to secure a waiver, cure or both. Absent an extension, waiver, or amendment of the maturing credit facilities, we believe we will be able to secure a replacement loan in order to have sufficient operating liquidity. As lenders have no obligation to provide additional loans or to extend or modify credit agreements, our plans to alleviate the substantial doubt may not be successful. We believe, however, that as a result of the cost reduction initiatives undertaken in the first half of 2020, our cash flow from operations, together with cash on hand and other available liquidity, will provide sufficient liquidity to fund operations for at least the next twelve months.
The following table summarizes our sources and uses of cash for the three months
ended
Three Months Ended
March 31,
Net cash provided by (used in): 2020 2019
Operating activities $ 7,413 $ (505 )
Investing activities (1,237 ) 39
Financing activities (1,419 )
(2,214 )
Net change in cash, cash equivalents and restricted cash
36
--------------------------------------------------------------------------------Operating Activities
Net cash provided by operating activities was$7.4 million for the three months endedMarch 31, 2020 . The net loss, after adjustments for non-cash items, provided cash of$1.0 million , compared to$3.1 million in the corresponding 2019 period. Changes in operating assets and liabilities provided$6.4 million in cash primarily due to a decrease in accounts receivable and increases in accounts payable and accrued liabilities. The non-cash items and other adjustments included$8.0 million of depreciation and amortization, long-lived asset impairment charges of$15.6 million and stock-based compensation expense of$0.3 million , partially offset by a$0.1 million gain on the sale of assets. Net cash used in operating activities was$0.5 million for the three months endedMarch 31, 2019 . The net loss, after adjustments for non-cash items, provided cash of$3.1 million . Changes in operating assets and liabilities used$3.6 million in cash primarily due to decreases in accounts payable and other accrued expenses. The decrease in accounts payable and accrued other current liabilities was the result of several large annual payments due in the first quarter of the year, including property taxes, insurance renewals and annual employees' cash bonus payments. The non-cash items and other adjustments included$9.1 million of depreciation and amortization, stock-based compensation expense of$0.9 million , long-lived asset impairment charges of$0.1 million , offset by a$0.9 million gain on the sale of assets.
Investing Activities
Net cash used in investing activities was$1.2 million for the three months endedMarch 31, 2020 and primarily consisted of$1.4 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 under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our fleet for water transport and disposal services. Net cash provided by investing activities was$39.0 thousand for the three months endedMarch 31, 2019 and primarily consisted of$3.7 million of proceeds from the sale of property, plant and equipment, offset by$3.6 million of purchases of property, plant and equipment. Asset sales were primarily comprised of 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$1.4 million for the three months endedMarch 31, 2020 and was primarily comprised of$0.8 million of payments on the First Lien Term Loan and Second Lien Term Loan and$0.6 million of payments on vehicle finance leases and other financing activities. Net cash used in financing activities was$2.2 million for the three months endedMarch 31, 2019 and was primarily comprised of$31.4 million in cash payments for the Bridge Term Loan,$1.1 million of payments on the First Lien Term Loan and Second Lien Term Loan and$0.8 million of payments on finance leases and other financing activities, partially offset by$31.1 million of proceeds received from the issuance of stock for the completed offering to our shareholders to purchase shares of our common stock on a pro rata basis with an aggregate offering price of$32.5 million .
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 three months endedMarch 31, 2020 totaled$1.4 million compared to$3.6 million for the three months endedMarch 31, 2019 . These capital expenditures were partially offset by proceeds received from the sale of under-utilized or non-core assets of$0.2 million and$3.7 million in the three months endedMarch 31, 2020 and 2019, 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$43.0 thousand and$4.0 million of equipment additions under finance leases during the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively. We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale areas in which we operate. Due to the COVID-19 outbreak, we are targeting a significant reduction in our capital expenditures budget for fiscal 2020, as discussed above in "Trends Affecting Our Operating Results". Our planned capital expenditures for the 37 --------------------------------------------------------------------------------
remainder of 2020 could be financed through cash flow from operations, borrowings under the Revolving Facility, Second Lien Term Loan, finance leases, other financing structures, or a combination of the foregoing.
Indebtedness
As ofMarch 31, 2020 , we had$35.3 million of indebtedness outstanding, consisting of$17.2 million under the First Lien Term Loan granted under the First Lien Credit Agreement, executedAugust 7, 2017 , by and among the lenders party thereto,ACF FinCo I, LP , as administrative agent, and the Company (the "Credit Agreement"),$9.0 million under the second lien term loan facility (the "Second Lien Term Loan") pursuant to the Second Lien Term Loan Agreement, datedAugust 7, 2017 , by and among the lenders party thereto, andWilmington Savings Fund Society , FSB, as administrative agent ("Wilmington"), and the Company (the "Second Lien Term Loan Agreement"),$0.6 million under the Direct Loan Security Agreement withPACCAR Financial Corp as the secured party,$0.2 million under the Equipment Term Loan and$8.2 million of finance leases for vehicle financings and real property leases. Our Revolving Facility, First Lien Term Loan and Second Lien Term Loan contain certain affirmative and negative covenants, including a fixed charge coverage ratio covenant, as well as other terms and conditions that are customary for revolving credit facilities and term loans of this type. As ofMarch 31, 2020 , we were in compliance with all covenants.
Equipment Term Loan
OnNovember 20, 2019 , we entered into a Retail Installment Contract (the "Equipment Term Loan") withRDO Construction Equipment Co. as theSecured Party . Under the Equipment Term Loan, we were given credit for$0.4 million of rental payments previously paid, and financed the remaining amount due of$0.2 million , including interest, to purchase four trucks. The Equipment Term Loan matures onNovember 2022 , and shall be repaid in monthly installments of$6,842 beginningDecember 2019 and then each month thereafter, with interest accruing at an annual rate of 6.50%.
Off Balance Sheet Arrangements
As of
Critical Accounting Policies
There have been no significant changes to our Critical Accounting Policies
during the three months ended
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