I’m going to attempt something a little odd today, Fools. Even though Nuverra Environmental Solutions Inc (NYSE:NES) stock makes up 1% of my real-life holdings, I’m going to be giving you three reasons to consider selling the stock today.
Why am I doing this?
Recently, Nobel Prize winner Daniel Kahneman visited Fool headquarters in Virginia. While visiting, he talked about how a number of different biases can lead us to believe we can predict the future with relative certainty. In reality, he argued, we are just deluding ourselves.
It got me to thinking about how I don’t write enough about the risks of owning the stocks I own. So, though I don’t plan on selling my Nuverra stock right now, I think it’s healthy for me to practice and model this behavior.
1. Counting on natural gas to be the next big thing
Nuverra Environmental Solutions Inc (NYSE:NES) is a company whose goal is to be a one-stop shop to meet all of the water needs of the oil and gas industry. It has set up operations in all of the major shale plays in the United States, and has been building out a massive infrastructure of pipelines, trucking fleets, and water treatment facilities.
Although the company will certainly profit from continued oil exploration in North America, to fully reach its potential, it needs lots of natural gas companies as customers, too. Recently, there’s been an explosion of natural gas production, due mainly to newer fracking techniques.
But there are three problems with counting on natural gas. The first is that, should fracking prove to be harmful to the environment, its use could severely curtail.
Second, there needs to be enough uses for natural gas out there for demand to meet supply. Westport Innovations (NASDAQ:WPRT) is trying to drive demand, by designing engines for machinery, trucks, cars, and locomotives that can run on natural gas. In conjunction with Westport, Clean Energy Fuels (NASDAQ:CLNE) is building out filling stations for these machines to fill up on natural gas. If the efforts of these two companies — and others like them — can’t create enough demand for natural gas, the energy companies won’t have an incentive to continue extracting natural gas from the earth.
Finally, natural gas prices are an important factor. If prices can continually stay below that of oil and gasoline, then people have an incentive to buy vehicles that can run on natural gas. If, however, natural gas prices are as high or higher than petroleum-based fuels, that demand could evaporate.