Liz Merritt - Vice President IR, Corporate Communications Mark Johnsrud - Chairman, CEO Jay Parkinson - CFO, EVP.

Flavio Campos - Credit Suisse Joe Giordano - Cowen Joe Reagor - ROTH Capital Partners Michael Hoffman - Stifel Gerry Sweeney - Boenning Scott Graham - Jefferies Scott Levine - Imperial Capital David Rose - Wedbush Securities.

Good day, everyone, and welcome to the Nuverra Second Quarter 2014 Earnings Conference Call. Today's call is being recorded. I would now like to turn the conference over to Liz Merritt, Investor Relations for Nuverra. Please go ahead..

Good afternoon, everyone, and welcome to the Nuverra Environmental Solutions second quarter 2014 financial and operating results conference call and webcast. With me today are Mark Johnsrud, Chief Executive Officer; and Jay Parkinson, Chief Financial Officer. Before getting started, let me quickly cover the Safe Harbor.

Today's presentation will contain forward-looking statements about our expected financial and operational performance, including revenue growth, the expected performance of our businesses and our strategies, products, cost controls and related matters.

These statements involve a number of risks and uncertainties and could cause actual results to differ materially from our projection and include a variety of factors, some of which are beyond our control.

Potential risk factors that could cause these differences are described in our SEC filings, including our Form 10-Q filed with the SEC today, our current reports on Form 8-K and our earnings release posted on the Nuverra Web site.

Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our Web site at www.nuverra.com. All information provided on this call is as of today, August 7, 2014, and Nuverra undertakes no duty to update or revise this information based on new information, subsequent events or otherwise.

Today's discussion will also include certain non-GAAP financial measures, including adjusted EBITDA. Reconciliations of our non-GAAP results to the GAAP results we consider most comparable can be found in our press release. With that, I will turn the call over to Mark Johnsrud, Nuverra's Chairman of the Board and Chief Executive Officer.

Go ahead, Mark..

Thank you, Liz, and welcome to everyone on the call this afternoon. Our results for the second quarter reflect both the expected gradual ramp in activity across the industry along with steps we have taken to rationalize our business and position the company for high quality long-term growth.

During the quarter, we were successful with two key strategic initiatives. We increased our pricing and we took several significant steps to advance our business model around pipelines and solid treatment initiatives.

First on pricing; during the quarter, we implemented pricing increases in multiple basins and moved away from revenues that did not meet our return targets. As a result while revenue was essentially flat quarter-over-quarter with this initiative coupled with cost cutting, we grew shale adjusted revenue EBITDA margins by 220 basis points.

In other words, we were making decisions about the segment of the business we want to pursue long-term and moved away from business we view more transactional and that compromises our margins. This pricing initiative is direct result of very thorough basin by basin review of our pricing structures and contracts.

We are also highly focused on identifying areas to leverage greater cost efficiencies. The shale industry continues to evolve. More wells are now producing. More water is now being used due to advances in fracing techniques as well as well density is increasing dramatically.

What does that mean for Nuverra and our customers? First, fixed pipeline systems make more sense than ever. Once a well has been drilled and completed, it produces both hydrocarbons and water for the next 20 to 30 years. Unlike drilling and completion activity, which is temporary, a producing well is not.

A fixed pipeline system taking this produced water to our disposal wells makes a lot more economic sense for both Nuverra as well as our customers. Secondly, well density is increasing significantly both down spacing and in some basins the development of stacked pay zones.

Customers in the Bakken are drilling an average of 8 or more wells on a single well pad with down spacings of 8 to 16 wells per spacing unit. Safe and long-term solutions for the solids that are a byproduct of the drilling are critical.

Eight wells on a single well pad means 8x the volumes of solids that is significant amount of drill cuttings to leave and bury out the well pad. Third, advances in hydraulic fracturing techniques including the use of select water and hybrid fracs will likely cause a dramatic increase in the amount of water used in the shales.

For example, in the Bakken, the standard gel fracs typically use 50,000 to 60,000 barrels per well or the hybrid and silk water fracs are using upward of 250,000 barrels per well. This change in process significantly increases the volume of water that needs to be managed through the frac and flow back phase of completion.

In North Dakota last year, it is estimated a 7 billion to 9 billion gallons of fresh water are used for fracing. We see continual transition to hybrid fracs which use 3x to 5x the amount of water as compared to drill fracs.

As a result of this advances in the industry, we continue to believe water recycling and we use initiatives will be critically important. And Nuverra is at the forefront of that. We are taking meaningful steps to advance our business model to meet these customer needs.

We noted on our last quarter's call that we are in advance technical discussions with several major operators on pipeline proposals. Today, we are very excited to announce that we have executed a memorandum of understanding for a significant pipeline project with a major customer back by a long-term contract.

This is still a memorandum of understanding and of course, settled to finalizing and signing a definitive agreement. But, we are hopeful that we advance our process this quarter and begin developing the program later this year or early next year.

This project will result in what we believe will be one of the largest permanent shale water pipeline systems in the United States.

It is anticipated this initial system will have the capacity to serve as a foundation for a larger network with bolt-on capacity to manage the water delivery, collection, recycling and disposal needs of E&P operators throughout the region.

We believe this project will be a game changer for water management and solidifies Nuverra's role as a leader in the industry in this area. During the second quarter, we also expanded our pipeline discussions to include customers in the Permian and Eagle Ford Shale regions.

From our discussion with customers, we are finding the same corporate teams are managing these initiatives for multiple basins. So we are finding a lot of opportunities in these discussions to expand pipeline solutions into other basins. This is one of the clear advantages of having a national platform which we have talked about in the past.

It is also important to point that pipeline RFPs we are revealing also require a pipeline operators to provide trucking logistics in addition to pipeline services. This reinforces our belief that both an integrated as well as a national model will be necessary for providers to successful compete in this space.

Updating everyone on H2O Forward, water recycling program, while we continue to believe the secular trends that I discussed about water reuse, we did not complete our first H2O Forward frac this quarter as anticipated.

I believe some apprehension remains among operators concerning the potential issue of co-mingling one operators' full back or produced water with another operator's. And the impact to the legal chain of title and the potential environmental risk associated with water recycling.

We are actively working with the state regulators in North Dakota on a solution that will allow for the chain of title to be settled once the water has been recycled by a H2O Forward.

We have also engaged in national environmental law firm to help us work through the state regulations so that we can help remove any doubt about the residual chain of title for treated water and advance the H2O Forward program.

We remain optimistic about the potential for a significant water recycling to Bakken and other shale plays as completion techniques result in significantly more water used. In the last 18 months, we have cleaned up the legacy issues and have transitioned this company to be a multi-faceted one-stop shop environmental solution provider.

The focus going forward will be a lot more on engineering logistics and science and we look forward to updating you on these initiatives in the coming quarters. Our outlook for the second half of 2014 remains optimistic.

We are confident that the overall industry growth and expansion will continue to provide the basis for a very positive business environment in the second half of the year. In North Dakota alone 610 drilled wells were waiting completion for work at the end of May.

We are also seeing a number of customers announcing plans for increased activities in the basins throughout the back half of the year. Due to a rapidly changing regulatory environment, we believe that our full cycle business is becoming even more relevant and attractive to customers.

We believe it is more cost effective and enhances a long-term risk management for operators to engage a single integrated provider with expertise and resources to manage all of their environmental waste streams. With that, I will turn the call over to Jay for a discussion of our financial results. Jay..

Thank you, Mark and thanks everyone for joining us this afternoon. As we forecasted in our first quarter call, the business environment in the second quarter was sequentially positive and we believe it will serve the transition period to a stronger second half.

As Mark touched on with the increased activity came an opportunity to further focus on repricing services and releasing certain business that does not meet our margin and our return capital hurdles. While this resulted in some lost revenue in the second quarter, we also improved margins and grew adjusted EBITDA.

We want to note, that a good portion of the revenue impact this quarter was related to the application of our business rationalization plan in the MidCon region. During the second quarter, we completed our exit from the Barnett Shale as it did not meet our return targets. Again, this impacted revenues but not our margins in economics.

Turning to results for the quarter I will discuss financial result inclusive of TFI to give you a better comparative view to prior period results. As you may recall, we moved TFI to discontinued operations in the fourth quarter of 2013 following our decision to divest the business.

Moving to second quarter results, revenues were $156.6 million compared with a $155.7 million in the first quarter of this year and $165.5 million in the second quarter of 2013.

Our reported net loss per diluted share in the second quarter was $0.91, which compares to a loss of $0.46 in the first quarter and a loss per diluted share of $0.53 in the second quarter of 2013. This reported net loss was inclusive of a number of non-recurring and non-cash items, I will talk about later and are shown as adjustments to EBITDA.

Adjusted EBITDA for the second quarter was $25.9 million an increase of 17.8% compared with adjusted EBITDA of $22 million in the first quarter, reflecting our focus on higher margin business and improved pricing. Shale Solutions adjusted EBITDA margins were up 220 basis points sequentially.

There will be a number of non-recurring adjustments to EBITDA in the period related primarily to expenses incurred in the settlement of legacy legal matters.

These included $5.5 million in settlement expense and $1.3 million in legal fees for a total of $6.8 million to resolve all claims related to the Dimmit County Texas Lawsuit as previously announced.

Also as part of the previously announced China Water settlement, we recorded a non-cash charge of $3.6 million related to the increase in market value of the 847,990 shares issued in connection with that settlement and 1 million of final legal expenses and defense costs.

To be clear, this charge relates only to the change in market value of those 847,990 shares as of June 30. There were no new shares issued. When the preliminary settlement terms were agreed to, the stock price was $15.92.

At June 30, the Nuverra's stock price was $20.11 per share and thus we have to take a non-cash charge against the shares to be issued as part of the settlement. A future change in Nuverra stock price from this $20.11 were the shares are currently marked would result in a non-cash gain or loss during the third quarter.

Currently, approximately 282,663 of these shares have been issued and are included in the share count on the cover of our 10-Q and during the third quarter, we anticipate the remaining 565,327 shares will be issued at which point we will be done with this matter.

I would note that during the quarter, there were no adjustments relating to transaction integration or rebranding expense from continuing operations. Turning to Shale Solutions, total revenue was $126.9 million relatively flat sequentially from $128 million in the first quarter of 2014.

This decline is related to the pricing strategy discussed previously. We completed our exit from the Barnett, replaced some low margin revenue and also took expenses out of the business. Looking at margin performance, we recorded an adjusted EBITDA margin of 21.6% on the Shale Solutions side up 220 basis points from 19.4% in the first quarter of 2014.

Let's turn now to a closer look at basin level performance in the second quarter. In the Bakken, we saw revenues that were down slightly sequentially largely due to utilization of rental assets.

This was offset by growth in other areas including continued growth of landfill solids volumes as well as strong growth in the good waste volumes which is direct evidence of the increasing activities among our operators in the play.

We expect this increase in disposal volumes will continue as frac techniques advance and more wells are completed and bought on production. The overall trend in drilling activity is also picking up.

With regard to our new treatment and reused facilities for solids, we have nearly completed construction of the 32,000 square foot structure and recently took delivery of the equipment that will comprise our system.

We are still on track to open the facility in the fourth quarter and look forward to introducing this new service to operators who seek an efficient and reduced risk alternative to bearing solids at the well site.

We remain very encouraged and will have lot more to say about this as well as our broader strategy around solid management during our third and fourth quarter calls.

It is important to point out that we are seeing a heightened focus on regulation and environmental matters in North Dakota given our significant presence in the Bakken and our longstanding reputation for safety and regulatory compliance; this is a positive dynamic for our company.

The Marcellus and Utica shale has recovered nicely from the Q1 weather and operator issues and performed well throughout the second quarter. We continue to successfully negotiate price increases with customers in these basins including an increase with our largest customer in the area which took effect July 1st.

We remain actively engaged in discussions with our customers in the region to rationalize our pricing structure and look forward to growth and improved margins in the second half. In the Eagle Ford, we continue to improve our business.

Our regional management team has made great strides and continues to effectively grow revenues and margins while seeking new opportunities to expand our integrated model there.

This is clearly an area of growth and we are evaluating our opportunities to invest capital and replicate our integrated model including the build out in 2015 of our planned environmental treatment center for recycling and disposal of E&P solids that we have discussed last quarter.

We are in the process of evaluating our options there now and will provide more detail on our plans later this year.

In the Haynesville shale, we have had success in our negotiations to reprice services and as a result of the ramp-up of drilling and completion activities in the Cotton Valley plain East Texas in Northern Louisiana are also seeing increases in pipeline volumes.

We expect further increases in the back half of this year as new Cotton Valley wells come on production. In the Haynesville, we also benefitted from our efforts to expand services to include our moderate amount of work in solids management.

The decision to draft our cuttings work in the Haynesville is part of our longer term strategy to build out a fully integrated service model in this region. Activity in the Tuscaloosa Marine Shale is accelerating and our disposal well volumes have increased ten-fold year-over-year.

We currently on the largest salt-water disposal facility in the basin and believe we are well-positioned for what appears to be significant future growth in the TMS.

Turning briefly to the balance sheet and statement of cash flows, on a total company basis including TFI, we ended the second quarter with approximately $4.5 million of cash and operating working capital of $68 million.

As of June 30, 2014 total debt was approximately $580.5 million which included $400 million of senior unsecured notes approximately $163.3 million drawn on our credit facility and $17.2 million in capital leases. These figures exclude net unamortized discounts and premiums of $0.7 million.

Second quarter net cash CapEx including TFI was $15.2 million primarily related to our solids treatment facility in the Bakken. As discussed on past calls, we have been very focused on asset efficiency which has resulted in significantly lower capital expenditures for the company.

On the TFI transaction, as we disclosed in our news release on June 24, we extended the purchase agreement with VeroLube to allow time to complete standalone audited financial statements for TFI for fiscal 2011 including the conversion of historical TFI financial statements from U.S.

GAAP to international financial reporting standards as requested by VeroLube. We have delivered all the required financial statements both annual audits and interim reviews to VeroLube last month for inclusion in their Securities filings. VeroLube and Canaccord are in the process of taking VeroLube public in Canada.

As such given that they are currently in the registration process with the Ontario Securities Commission, we are not able to comment on their financing process beyond the previously disclosed transaction closing deadline of August 29.

I would also like to point to everyone's attention to the fact that with the announced divestiture of TFI, we are going to look at our reporting structure which could include breaking on how we report operations from our continuing Shale Solutions business including potentially on a geographic basis.

This is different from how we currently report those operations and as such this is one factor that requires us to conduct an impairment test and allocate goodwill with the new financial reporting structure.

This process will occur this quarter and depending on the result of this test, could result in a non-cash impairment charge in the third quarter. We have included a fair bit of discussion on this in our Form 10-Q. We have discussed some very exciting growth projects on our call today including the memorandum of understanding on the pipeline system.

We are in process of working on a definitive agreement for this system with our customer. So I will refrain from providing too much detail. I can say that we currently estimate that CapEx for this system will be in the range of $125 million to $150 million.

We currently believe that the bulk of the capital would be weighted to the backend of the project. I spoke last quarter about estimated CapEx multiples of EBITDA for like systems in the range of 3x to 4x which includes contracted as well as third party water.

I want to caution that while we are working toward a definitive agreement and confident in that process, at this time, this is a memorandum of understanding with our customer and of course change.

In conjunction with this and other growth initiatives we have discussed on this call, Nuverra is currently in the process of formulating strategies to fund our growth and enhance shareholder value.

We are considering the formation of a dropdown MLP structure which would Nuverra to retain operational control while realizing additional value from assets currently in operation as well as assets we plan on developing including the pipeline growth initiative discussed on this call.

We have engaged a national law firm with significant industry and MLP experience to assist us with formulating a potential structure and the related tax analysis including obtaining a private letter ruling or PLR from the IRS.

It goes without saying that there is a lot of work to do before we could complete this including some changes to our current debt structure. We believe this could be a very interesting option for Nuverra and anticipate having a lot more to say about this on future calls.

With that, I will provide an update on modeling points with a reminder that these projected ranges are pro forma for the sale of TFI. Our direction with respect to SG&A per quarter is in the range of $12.5 million to $14 million.

Depreciation and amortization also remain consistent in the range of $16 million to $18 million of depreciation and $4 million to $5 million of amortization per quarter. That concludes our prepared remarks. I would like to thank everyone again for joining our call. And ask the operator to open the line for questions..

Thank you. (Operator Instructions) And first we will go to Hamzah Mazari with Credit Suisse..

Hi, there, this is Flavio Campos on behalf of Hamzah. Just a couple of quick questions, first, if you could focus on the margin expansion for a little bit. Both in the sense have you finished integrating well used to be the Heckmann assets already.

And if there is anything left on the front, and if that – if driving up margins in that legacy business is part of the increase in margins or if it's mostly related to this dropping of lower margin business..

I will kind of start out and then let Jay comment also. I guess, the first piece is that we think that our margin first was mostly just in pricing and part of it's going to be as we are looking into some of the legacy Heckmann basins we are trying to pick what piece of business we want that we see that's a higher value up.

And so taking part of the existing business and picking what sector and then it's also trying to see if we can't provide more higher margin services to our customers. And I would say Flavio as it relates to integration, I think you probably noted we didn't have any adjustments related to that. So we think that's something that we got behind.

And I think the other thing you will notice there was a fair bit of savings at the corporate level as well. And I think that's a function of some of the integration matters we have taken – run some at the back office functions and we have really taken some cost out of the business..

Perfect. That's very helpful.

On the similar way, I mean have you considered like which – what sort of services that you provide in the Bakken that you feel like you still need to be build in other basins and which basins do you feel that you need additional services?.

I guess the one that we are extremely interested and I'm very excited about is in the south piece. We see that as regulatory environment is changing, we could end up in almost – in every basin that we work in seeing that's changing over time and we are pretty – we are very excited about the process that we are working on in the Bakken today..

Great. And just a final question on CapEx especially on the line of the new investments that you guys are going to be – pursuing with the pipeline, I do realize that your CapEx budgets are pretty flexible.

But, it has been down for a few quarters now, if you could just help us understand what's your normalized level of CapEx both maintenance and growth at this large projects are going forward?.

Flavio that really depends a lot on the efficiency of the assets. One of the reasons you're seeing CapEx down is because they have been a lot more efficient with some of the past investments. So I don't see any significant increase in that over the near term. I do think you will see CapEx up a little bit this quarter.

We are making some additional investment in the thermal facility up in the Bakken, so you may see CapEx 20%, 30% sequentially up.

But I don't see near term any significant spikes on the maintenance CapEx front?.

That's it. Very helpful. I will jump back in queue now. Thank you..

Thanks..

Moving on to Joe Giordano with Cowen..

Hey, guys. If I guess, what was most surprising to me, I will probably be on the Bakken commentary in terms of the top line there. Considering the commentary from first quarter with the weather issues and the drilling but not completing wells up there.

This quarter to have sequential decline when completions were up big and you said your disposal of volumes were up 20%.

Can you help us kind of help bridge that gap a little bit for me?.

This is Mark. Yes. I think what we've kind of found and what we determined is that we kind of – our business segment have moved a little bit more towards the produced water phase.

And consciously what we are doing is, we are going to push our – and move our business back towards the drilling and the completion phase is because we are able – and that's the area we are able to spend and end up with more products and services that go to the customers and those have higher margins.

It is just something that kinds of – I would say you wrote it a little bit and will be able to get that back on track..

So this is erosion on the completion side of the business?.

Not on the completion side. This is more of moving -- our business mix has moved a little bit more towards the produced water side and we are going to be able to move that back towards what we are going to be able to have multiple services that we providing in an overall comprehensive plan..

Okay.

Are you seeing more, I heard some talk about on the completion side more of that volume being done to like lay-flat piping like done in the Bakken and is it something that you are seeing up there?.

We are seeing more of it done with lay-flat pipe. I think that's going to be very seasonal. In the middle of the winter, the lay-flat pipe just really doesn't work very well. And we are also seeing that most of that's coming out of our surface water and there is just not a lot of surface water in some region.

So I would say kind of early June – May-June timeframe you are going to see more lay-flat part of the season you are not going to – just doesn't work..

Okay. And then if I can ask on H2O Forward, I thought that you were using – you mentioned that coming going issue and some people worried about that. I was under the impression that you would be using like one operators water for their own track, is that not how we will step-up initially.

So I'm just trying to figure out where the coming kind of comes in..

If you are going to – because all the water that's going to be used has to be treated but it has to be stored also. So as the fracs get larger and larger, you are going to have the whole a lot of product.

And so I think what we are seeing anyway is that companies are seeing, if they could do it more on just in time basis because the treatment center can handle larger volumes then we would be co-mingling water. So I think everybody is very interested in this. I just think that it's taking a little more time than we anticipated to prove out the science..

Okay.

And then last on the MLP, not going to get into specifics but if you have roughly like – how much of your current operations would you say – would at least be in the potential discussion for a qualification or at least you will be able to talk – make an argument one way forward?.

I would say if you think about this Joe, obviously, there is a lot work to do here and we are at the very early stages here. And there is a lot of advice. I would say very preliminary and subject to change probably somewhere north of a third right now..

Okay, great. Thanks guys..

On what we have operating right now..

Okay.

On an EBITDA basis, right?.

Correct..

Okay. Thanks..

Thanks..

Next we will go to Philip Shen with ROTH Capital Partners..

Hi, guys. Joe Reagor in for Phil.

Couple of questions, first on TFI with the extension that you guys announced where there any changes to the agreement otherwise and then can you provide any color on how their capital raising is going at this point?.

We are not going to – really as we said given the process right now – the registration process, we are not going to make any comments beyond what we said on that.

The document is filed, and out there and you can do it comparatively to kind of see what change, one of the requirements as we disclose in our prior press releases us giving them IFRS audits and we have completed that process along with schedule that was laid out in the stock purchase agreement..

Okay.

And then just shifting gears a little bit, I think with the recent small pull back in oil price, are you seeing any change in tone of operators for the speed at which they intend to grow their drilling rates or is it still basically all systems go for guys around other basins?.

I guess what we are seeing is that even we have seen a slight pull back, we are still at pricing levels that are very encouraging for operators and I think what we are also seeing is there has been more efficiencies and their returns look excellent, I would say that if you look at all of our customers that have reported their second quarters, I think every single one of them is overall pleased with where they are at especially when they are looking at the onshore non-conventional activity..

Okay. And then one final one, just in the Bakken, you guys mentioned in the release that there is a bit of an oversupply of rental equipment.

Do you guys expect that to continue going forward or do you think that growth in drilling rates will alleviate that issue, what do you think maybe some guys might choose to access the basin?.

I think we will see some companies exit, and then I also see that it's gotten a little more competitive. I think there is also from our standpoint, what we have done is, we are – have put a new group in that's leading our sales and marketing group because we are – it's changed a little bit and we are just correspondingly going to be more aggressive..

Okay. Thank you..

Thanks..

Next we will go to Michael Hoffman with Stifel..

Hi. Thank you very much for taking the questions. As you think about the Bakken and I will hitchhike for the last question on rental equipment, when you built the business power fuels Mark, you know, there was a strategy around the bundle to service to get yourself on the well pad.

But, today you have a strong disposal network in both liquids and solids, the transportation network that can adequately move those volumes.

So I'm presuming you can turn on and off rental equipment fully – basically fully depreciated stuff, if you can sell it at a right rate, sell it but otherwise you are not? You don't need to have that revenue per se?.

That is correct. The nice part about it Michael is that I just mentioned we are going to push – and we are going to go back and change our mix of business a little bit on what we are targeting. And as we move towards where we use more of a rental equipment, we have more higher margin services that we provide to our customers.

And the other part is that as we look at the build out in the Utica, we can always start moving some equipment if we need to there because that activity is just – we are very confident, very excited about what we see coming up for 2015 in the Utica..

Okay.

And then in the Utica, you had earning in Bakken, you had a major customer consolidation occurring, how do you see that impacting your business and was it – whether any disruptions related to that customer concentration?.

Actually I don't see any disruption at all, we have excellent relationship with Whiting we work to that company for ever since I have been involved and percentage wise Kodiak was a smaller customer to us. But, I think it will be very complementary to what we are doing today. We are actually – I was very excited to hear that..

Okay.

And then regards to the MLP process have you filed the PLR or are you in the process of preparing documents to do so?.

No. We are in process of getting all that prepared Michael, we have not filed it..

And I'm assuming you are using one of the sort of two big names legal wise that do this?.

We are using a firm that has lot of experience both in the industry and in MLP specific and also has a lot of experience with some of the other names that you have out there that have talked about employing a strategy like this..

Okay.

What are they telling you about when IRS is going to be done – enable checking on this?.

You hear a lot of stuff from different lawyers and bankers, some people say it could be as early as late August or into September. We don't really know and don't have a good way to predict that. But, the word out there seems to that maybe in the next several months you are going to be in a position to unfreeze some of this..

Okay. And then I think of that….

We don't have any control over, so we will accept, we have to live with the environment..

Right.

And is August 29 closing subject to at this point successful IPO or that's you got a hard day and that you provided everything they need and they got till the 29th, show up with $165 million in cash?.

Correct..

Okay.

In the context market talking about your strategy of lifting solids and moving it to other opportunities even in the Bakken there is three or four more landfill permits sort of impresses sort of general book view of the 8th plant so they are now and maybe the number goes to 12, what's your strategy within the context of seeing any kind of consolidation of who controls those 12 – 8 today and then going forward maybe those 12 landfills?.

Michael there is a lot of technology and changes that are ongoing today and even as far as managing the transportation from the well-pad to whatever the further process is or landfill.

So I think there is a lot of changes that are going to be very interesting as how they are managed that we will see in the next three to six months and we will be able to give a lot more activity. We know that there is a focus on – to some degree the amount of traffic roads some of those areas, how do we become more efficient.

All of our customers are talking about efficiency and so all the way from collecting, moving and then ultimately managing or handling. We taking a look at that as an integrated approach that we think we have a very interesting integrated solution here that we will tell you more about it as the coming months – in the next coming months..

Okay. And then in the Utica, another competitor just recently announced a pipeline proposal, you have a very significant recycling operation in Ohio, AWS and some disposal capacity.

Can you talk about what your strategies are around the master transportation issue that sort of overshadows the treatment and disposal of both produced and flow back?.

I think that there is a lot of transition that's going on because as the drilling programs in Pennsylvania continue to be – I would say more solidified from what we are talking to customers about the efficiencies and their kind of break even cost continues to go down.

And I think pipelines in gas plants – the number of gas plants continues to increase where I think that equilibrium is going to continue to increase where there is going to be more capacity and so the ultimate price received by the operator will continue to get better. That was for a while, there was a discount.

I think with that the more they are continuing to drilling complete, the more recycling of water will happen. It's really when they get out of balance that water needs to be moved from Pennsylvania to Ohio.

I think right now there is still even though there is – it's primarily gel fracs, I think we are going to start to see more of a hybrid or even slickwater fracs..

Which improves the recycling potential?.

Absolutely. And I think there is still a little bit of an issue around how do you make sure that you have to have a balance because as it comes in you need a place to store it. Once you treat it, then you are going to have to have enough storage capacity so that you may not be exact – the timing may not fit exactly.

So you may have to store for a day or for a week before it gets reused again..

Right.

And you had a major customer shut production during the first quarter because of the weather is that -- all that activity comes back?.

Yes. All that activity has come back..

Okay. And then in Texas, I mean you have your footprint in the Eagle Ford but candidly as you appreciate the Permian, there is 500 rigs there.

What's the strategy to become a player in the Permian?.

We definitely want to become a player in the Permian. Our partner in the water recycling as asked us what we want to do in that area. We definitely want to be out there. All over we are trying to be very careful about whether or not we grow organically or if we become inquisitive..

Okay. Thank you very much for taking my questions..

Thank you, Michael..

Next we will go to Gerry Sweeney with Boenning..

Good afternoon guys..

Hi, Gerry..

Would you be able to talk about how much revenue you walked away from?.

I don't think would probably want to get into quantifying that and frankly it be sort of difficult to quantify. But, I think reflect of kind of what you saw on the margin you can see the focus was clearly on, number one, pulling through some higher margin revenue and some of that was substituted – and some of those frankly just walked away from..

Okay.

And I mean – are you done with that process I imagine was booking at current workers and clients but is the major – the heavy lifting in that area done for now?.

No. I don't think so. I think we are going to continue to try to improve the economics on the asset utilization. We have talked a fair bit recently, frankly since we have been here about where we want to get from a margin profile. We had quite a substantial improvements sequentially kind of north of 300 basis points on the shale business.

And I think we are going to continue to try to work towards that. And there is scenarios where – there is revenue that basically aware of its price and where the margins are, it doesn't make – meet our economic hurdles. So I wouldn't say that we are done with that process..

Okay.

And then just speaking to asset utilization, any idea give us ballpark where utilization sits now?.

Very hard to answer depends on the assets. But, I would there is still slight utilization kind of consistent with what we have seen in the past..

Okay.

And then final question, just on the income statement general and administrative expenses jumped, I assume some of that was probably – some of the charges in the quarter?.

Yes, most of that is the charges. Actually on a apples-to-apples basis sequentially from 1Q to 2Q, they were actually down about $2 million..

Okay. Perfect, that's what I figured. All right, that's it. Thank you..

Okay. Thanks..

Thanks..

Next we will go to Scott Graham with Jefferies..

Hey, good afternoon. I got a couple of maybe broader questions because since you become the – these conference calls have changed a lot, used to be a lot about trucking and hauling and kind of more get the well head and now it seems to be much more pipeline and maybe further downstream.

And I'm just wondering if we are going to continue to hear that from the company and is this a function of because that's where the best business is or is this just a competitive issue?.

I think really – it's a great question. I think the – there is really two pieces to that. If you look at the industry five years ago it was run as fast as you can and get the work done.

And now, over the last two years it's been about how are we going to do it more efficiently, how are we going to do it safer and how are we looking at the sort of long-term basis.

At the same time and I will try to use the Bakken as the example, we have seen where company start, we are going to drill one well per spacing unit which is every 1280 acres. To now there is anywhere from 6 to 20 wells, 18 wells per spacing unit.

So the density, the efficiency are all being relooked at because of the size of the play is changing dramatically. I think that the science continues to get better and three years ago we were using 60,000 to 90,000 barrels of water for a frac and then it went down to 40,000 to 50,000 barrels.

And now, the new technology or I shouldn't say new technology but the new thesis is, is that we are going to move that up to 200,000 or 250,000 barrels per frac. So there is a lot of changes because you know we have mentioned that we are still fairly early in the overall second or third inning in the game.

And I guess with that we are also seeing that the next phase of that business is going to really include how do we become more efficient. And that's going to be bolt-on and use of people and equipment and part of that that's going to be pipelines, it's going to be how do we manage solids different.

The interesting part is that as we have been looking at the RFPs for pipeline, you have to be able to provide trucking logistics as a backup in case there is an interruption because all these companies are contracting, the amount of oil they produce. And there used to be some sort of an admiration out there or problem.

They are going to have to continue to make sure that the wells produce so that they can hit the contracts. So it's really becoming a manufacturing process and if we are going to stay on the forefront which we are – we have to be able to change what our product mix is as we go forward..

Well, I guess that's fair, I think that is the situation in any emerging industry as this one kind of is. But, this one is potentially costly, you are talking about pipeline system that on top which is $250 million to lay out.

I guess, what I'm wondering is, what the company is thinking on internal rates of return on such system because I don't think anyone is going to really sign-up for minimum on volumes, so I'm just kind of wondering what type of hurdle rates and then what are those hurdle rates attached to for this type of investment to make sense?.

Hey, Scott, its Jay. So just to be clear that the capital on the pipeline was 125 to 150, it's kind of what we thought.

As we think about capital deployment, we obviously have internal hurdle rates and we're not going to get into those for competitive reasons on any of these systems, but as we think about how we make our investment decisions, it's obviously very ROIC driven and really involves testing what we think that marginal return is as against the marginal cost.

Now in a lot of cases, there is synergies with some of the investments we already have as Mark talked about I mean a lot of these on a full cycle for other potential investors would be different – to go replicate the transportation fleet that we already have would be quite costly.

But obviously, we have our hurdle rates and try to exceed those with the investment..

Okay. Fair enough. Could you also just give us a couple of words on Marcellus. I didn't hear you cover that, maybe I missed it..

We see the Marcellus is – we've had – I think it was in July they set a new record for the volume of gas that's being produced. There is a lot more and I think that the technology, the completion techniques and the multi-well pad drilling is dropping the cost.

So that, even at today's rates, I think from what we're hearing and seeing, companies are seeing a nice return on their invested capital. What we anticipate is and what we're seeing is there is a lot more activity by our customers out there. We see – we're very positive in that basin. I think gas around $4.

I think everybody is pretty comfortable with the returns, and I think we're seeing that because the infrastructure that's being invested in both pipe from a gas points, the end point and also gas processing plants are being built and completed, which is required so that they can continue to drill more and drill and complete more wells..

Okay, fair. I appreciate that.

And next question and last one is, I think kind of what, I think others are trying to triangulate toward – I think that there were expectations for noticeably higher revenue number and I think we all understand the desire to move to margins but it seems to me with some pretty upbeat commentary that either all of this revenue shortfall versus what I think all of us were expecting has to do with business that you walked away from, but then I then turn around and paused this, what I really can't be because you can't walk away from that much business that quickly.

So could you kind of tell us where there were particular weak spots this quarter on a year-over-year basis that kind of bridges the gap from what I think some of us were expecting versus the reality..

I guess maybe the right way to look at it was that we would spend a lot of time analyzing where we were on profitability within a basin. And then, there were certain work that when we went back kind of by customer and ran our profitability analysis, we just determined there is some things that we're going to walk away from.

We – and over time, it takes a little longer than you'd liked because you have to have the conversation, you have to go let the customer now. In some cases they agree, some cases that they even shifted business from one of the segments to another segment.

And in some cases, we said we can't work this cheap that we need to either you need to find somebody else or we need to work out something that is acceptable for both of us. And I would say in almost every basin, I would say without question, in every basin, we've had those discussions.

How much of business we walked away from?.

If I may you're kind of making my point, that's my – that it takes time to walk away from business suggesting that there were a couple of areas where things were particularly weak for you guys in the quarter. That's what I'm trying to get at..

I think that there is – I think that the kind of the adoption in the change was different in each basin where we've seen increased activity, those conversations were a little easier, or maybe it was flat and that took longer. Also, customer by customer, sometimes it's an easy dialog and sometimes it's a tougher dialog.

But, what we've been talking about is trying to be focused on our margins. I think that going back and saying where is our target and as well as we do that coming from where we were, it's been an uphill battle..

Next, we'll go to Scott Levine with Imperial Capital..

Hey, good afternoon guys..

Hey, Scott..

I'll try to ask the last question maybe in a different way. If you were to exclude the business, the revenue asset loss associated with your calling of unprofitable business.

Would you say activity levels in the quarter improved consistently with internal expectations that your outlook for the back half of the year is as optimistic as it was at the time of your first quarter call?.

I would say it was -- the one thing that we pointed to in the release in the script was obviously there is some softness in the rental side of the business, which we're working to – we're working on right now that Mark has talked to a fair bit about.

I would say by and large two things, number one, we are seeing the pickup and I'd say the second thing is we're seeing some thought progress on some of the integration and it's some of the stuff that we've taken some charges for in the past as it relates to taking expense out of the business, we think that's very sustainable as well..

Got it. One last follow-up as well. Last quarter you mentioned Haynesville and some encouraging signs there, the current year in the releases is positive as well there. How much of that is associated with some of the – with the gas related activity, you talked a little bit about the Marcellus at $4 per Mbtu.

And does the same – maybe give us some color with regard to expectations for the Haynesville and the time with gas drilling and whether you're optimistic now there as you were last quarter?.

Very optimistic. Two fronts there, I think we've had some good success there pushing some pricing which has helped – I think will continue to help. Some of that obviously didn't flow through the entire quarter. And then the second thing, we're seeing there is a very nice increase in volumes in the pipeline.

I think a lot of that is – some of it – some of the – just the dry-gas drilling a fair chunk of that's driven by some of the continued development of the Cotton Valley play there. That probably been a big driver of some of the incremental pipeline volumes.

And what we're seeing from our customers down there is a lot of those wells are not yet on production, they've been completed or close to being completed and we're actually pretty optimistic about – at this point about what the second half looks like, certainly in terms of the pipeline related to some of that stuff coming on production..

Got it. Thanks Jay..

Thanks.

Moving on to David Rose with Wedbush Securities..

Good afternoon. Thank you for taking my call. I had a couple of follow-up questions. As we kind of think about the revenue trajectory, I may have missed it, but I got the SG&A and the EBITDA for the back half or at least for the third quarter.

When we think about revenues, are we looking for – as you continue to walk away from business or business walks away from you however it's phrased.

Do we see a sequential decline in revenues to revenues, or they flat in Q3? Did they pick up as they traditionally do with the seasonality in the business? How should we think about that particularly in context of more revenues or you folks walking away from more revenues?.

I think the way you should think about that is we think that there are sequential growth in revenues – part of it's seasonal and a part of it just continued trajectory in the business.

And then also part of it is in the second half, you're going to start seeing some of the incremental investments come on, you're starting to break through some of that as well. So I think we're pretty encouraged about the second half..

Are we talking about low single digits type of growth, mid single-digits. Can you give us a little bit of….

I don't think we're going to get into – I don't think we're going to get into any guidance there. I think, but we're encouraged, we've talked in the past about some broad thoughts around growth rates and I think we'll see that start to hit..

Okay.

And then on the DSO's can you walk us through sort of the work being down and when you start to see a little bit progress on the DSO?.

We actually made some progress, we shaved a couple of days off sequentially hit the shale business. We lost a little bit at TFI, we'll continue to focus on that. And as we said on the last call, our objective is to get that something look closer to the low sixties and obviously, bring some capital back in..

Okay. And then lastly, you and I last spoke I think there were some encouraging commentary about bundling the business and I think that was probably reflected in the margin profile we saw here..

Right..

Is there a percentage of business that's bundled now, are you able to do that and provide hat for us yet?.

I don't think we would be able to give you an exact percentage of what bundled but I agree with the commentary and also kind of when we have spoken in the past that part of the margin pickup here, if you break it out, it hit the gross line or at the – just the shale line or maybe if you want to go to continuing operations, all of those show pretty significant increases in margin.

I think part of that is a function of the bundling, a good part of it's obviously some of the progress we made on expenses. But, clearly part of the folks are moving to higher margin revenue that's not just a function of price it's also a function, if you are able to bundle and tapped on services that have a higher margin percentage.

That's obviously, very accretive what the profile looks like..

Okay, great.

And is there any other particular cost items that you eliminated in the period to improve productivity that you want to call out?.

I don't want to call out, I think we did at a direct level and then obviously at the overhead level and then corporate. That's largely a function of some of the investments, some of the expense we took in past quarters related to integrating the business – moving around and centralizing some of the back office functions.

And that's reflected in where we are talking SG&A too..

Yes, great. Thank you very much..

Thank you..

We have no further questions at this time. I will now turn the conference back over to management for any additional or closing remarks..

We would like to thank everyone for joining us this afternoon. And we look forward to updating you in three months. Thank you..

This does conclude today's conference. We do thank you all for your participation..