Enservco Corporation
Q1 2020 Earnings Call Transcript

Published: 16 May 2020

[Operator:]

Good day, ladies and gentlemen and welcome to your Enservco First Quarter 2020 Earnings Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Jay Pfeiffer. Sir, the floor is yours.

[Jay Pfeiffer:]

Hello and welcome to Enservco’s 2020 first quarter conference call. Presenting on behalf of the company today are Ian Dickinson, CEO and Margie Hargrave, CFO.As a reminder, matters discussed during this call may include forward-looking statements that are based on management’s estimates, projections and assumptions as of today’s date and are subject to risks and uncertainties disclosed in the company’s most recent 10-K, as well as other filings with the SEC. The company’s business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements. Enservco assumes no obligation to update forward-looking statements that become untrue because of subsequent events. I will also point out that management’s ability to respond to questions during this call is limited by SEC Reg FD, which prohibits selected disclosure of material non-public information.A webcast replay of today’s call will be available at enservco.com after the call. In addition, a telephone replay will be available beginning approximately 2 hours after the call. Instructions for accessing the webcast or replay are available in today’s news release.With that, I will turn the call over to Ian Dickinson. Ian, please go ahead.

[Ian Dickinson:]

Thanks, Jay. Welcome, everyone and thanks for joining the call today. Today, we issued our 2020 first quarter financial results press release after the market closed. I am going to provide a brief overview of our Q1 performance as well as some comments on recent macro events and what we will be focused on for the remainder of 2020. I will then turn the call over to Margie for a recap of the numbers.I want to begin by saying I hope all of you are well and weathering the impact of whatever social distancing and shutdown mandates you are facing in your particular state. You are certainly living in extraordinary times absent an instruction manual for pandemic at this time governments, businesses, individuals are learning on the fly and doing their best to navigate waters that are uncharted at least in our lifetimes. And Enservco is no exception. Fortunately, our staff and workforce have been remarkably unscathed by the virus and we are grateful for that. Our corporate staff have been working remotely for the most part and our field personnel have been vigilant about social distancing when interacting with customers and colleagues. I am happy to say we are slowly returning back to our corporate office and observing the best safety practices.Because Enservco provides mission-critical services to our country’s leading oil and gas producers, we are deemed an essential business and our work is not being interrupted by shutdown orders. Nevertheless, the economic slowdown caused by the pandemic along with the oil price collapse earlier in the first quarter has reduced the amount of work we are doing for our customers. The most severe impact it’s been on drilling and completions activity, which is the largest component of our revenue mix and the largest contributor to our profit metrics.On top of that, we had an unseasonably warm winter in Oklahoma and Pennsylvania, which translated into a sharp decline in heating services in those locations. As a result, Q1 revenues declined 62% to $9.4 million from $24.8 million in the same quarter last year. In what is typically our most profitable quarter of the year, we reported a net loss of $2.8 million versus a net profit of $4.3 million the same quarter last year. We also reported negative adjusted EBITDA of something we would have not thought possible even 4 months ago. But as I said, we are living in extraordinary times.The entire oilfield services industry is in difficulty right now facing unprecedented headwinds created by the economic downturn in oil price weakness due to both a plummeting demand related to the pandemic and the Saudi-Russia price war. There is nothing we are – our peers can do specifically regarding these macro trends. So we are focused on the things we can’t exercise control over to further strengthen our market leadership position and the related upside when the market eventually returns.First and foremost, we are taking steps to drive additional cost out of the business. You will recall that in the second half of 2019, we eliminated $1.1 million in redundant costs related to our Adler Hot Oil acquisition. We also closed our water transfer business last year after that contributed $1.2 million EBITDA burn in 2019 alone. Thus far in 2020, we have taken out additional $2 million in annualized costs. We closed our Oklahoma facility in favor of serving those customers remotely from our Colorado location. We scaled back operations in two other facilities, where we had excess capacity due to the downturn. We instituted pay and benefits reductions across the organization. And we have reduced our total workforce by nearly 60%. In addition, we have reduced our maintenance CapEx budget by approximately $600,000.Another area of focus for us is new customer development. We made major strides in this area last year, primarily through our Adler acquisition and have carried some of that momentum into the first quarter. We have one work with several new customers and are in promising discussions with additional customer prospects, particularly in Texas and North Dakota. It hasn’t heard that a couple of our smaller competitors in these areas are struggling that has opened the door for us. I will remind you that we are the nation’s largest provider of frac water heating and hot oiling services and the size of our fleet and our broad geographic coverage is a significant competitive advantage for us.As we mentioned in our earnings release this afternoon, we continue to work with our outside advisors in conjunction with our lender on options to restructure our debt. These discussions are ongoing and I am not able to provide further details at this time, but we are hopeful that they will result in a positive outcome for all concerns. Suffice to say, debt reduction is a key priority for us going forward. I will again close by my prepared remarks not to our administrative and field personnel who have done an extraordinary job keeping our business up and running and moving forward during this very challenging and difficult time.And so with that, I will turn the call over to Margie for a review of our financial highlights. Margie?

[Margie Hargrave:]

Thank you, Ian. The first quarter results I will be discussing today reflect the reclassification of prior year results of our water transfer segment as discontinued operations. As such, certain year ago figures will differ from those referenced on past calls.As Ian mentioned earlier, total revenue for the first quarter declined to $9.4 million from $24.8 million in the same quarter a year ago. Production services revenue was down 22% year-over-year to $3.2 million from $4.1 million. The production services segment included hot oiling, which declined to $2.9 million from $3.6 million, acidizing which declined to $277,000 from $469,000. Production services generated a segment loss of $292,000 in the first quarter compared to a segment profit of $770,000 in the first quarter last year. Completion services consisting of frac water heating generates $6.2 million in revenue in the first quarter, down 70% from $20.7 million in Q1 last year. Completion services generated a segment profit of $1.2 million, down from a segment profit of $8.7 million in the prior year.Total operating expenses in the first quarter declined 37% year-over-year to $11.6 million from $18.5 million due primarily to lower costs of providing completion services. Sales, general and administrative expenses increased 10% year-over-year to $1.8 million from $1.6 million due to higher cost associated with the bad debt reserve and two professional fees for third-party advisers who are working on our debt restructuring initiatives. These increases were partially offset by elimination of redundant costs related to the Adler acquisition.We reported an operating loss of $2.3 million in Q1 compared to an operating income of $6.3 million in the same quarter last year. Net loss in the first quarter was $2.8 million or $0.05 per diluted share versus net income of $4.3 million or $0.08 per diluted share in the same quarter last year. Adjusted EBITDA in the first quarter was a negative $503,000, down from a positive $7.9 million in the same quarter last year. Enservco used $1 million in cash from operations in the first quarter, down from $2.6 million in cash used in operations in the same quarter last year.That concludes our prepared remarks. I will now turn the call over to the operator for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Bhakti Pavani with Alliance Global Partners. Please go ahead.

[Bhakti Pavani:]

Good afternoon guys. Thank you for taking my question. I guess the first question is given the market activity currently with E&Ps laying down drill rates shutting in wells I am just kind of curious to know how what kind of impact are you guys feeding on your business given the recent development over the last couple of months and I guess the second question is what percentage of your existing hot oiling or acidizing fleet is being utilized?

[Ian Dickinson:]

Yes so thanks for the question. Bhakti, we are feeling some of the near term impacts of the pandemic and some shutdown activity we are still active though with our production services we anticipate that to recover back to normal levels as the summer progresses the overpaying very close to tension to the storage capacity which is the primary driver of that shut in most of the customers we work for are the larger what might turn the blue chip E&Ps and many of them are hedge in terms of their price and so what they are managing right now blue chip E&Ps and many of our heads in terms of their price. So what they're managing right now is what’s the right production level based on a number of factors that storage capacity being one of those it appears in conversations we've been having broadly across the customer base and across the different basements that we should hope to see return to more normal production levels in the coming months. It's important just to clarify too that as a business we. We don't deliver completions related services really in Q2 and Q3 it’s primarily the production related services of the frac water heating as a completions related service and that is busiest in Q4 and Q1.

[Bhakti Pavani:]

That’s very hopeful. Thank you.

[Operator:]

Our next question comes from Ed Woo with Ascendiant Capital. Please go ahead sir.

[Ed Woo:]

Thanks for taking my question. I was just wondering were there any trends that you saw in the quarter and also any trends you have seen in second quarter do you think we hit rock bottom now?

[Ian Dickinson:]

Yes that’s a difficult question to answer I mean I think. My sense is that as I mentioned in response to Bhakti’s question that we should see return of some production related activity here as we move through the summer. It's very hard to predict exactly how this pandemic plays out but my sense is that that we've got people returning to work we should see a draw down hopefully in the in the inventory’s and a return to more normalized production levels. And then we'll have to wait and see to see what happens here with drilling completions activity for our business. What we are looking at is, what are those activity levels as we approach our next heating season which would begin in the fourth quarter. So it's very difficult to predict obviously oil prices went to an unprecedented negative level and then turn back to the mid 20s. If you look at the futures there seems to be expectation that we'll see improvement in the price of oil but your guess is as good as mine.

[Ed Woo:]

There are some discussions out there if West Texas got to high 20 maybe even 30 that people will start reversing the shut-ins. Have you heard any of that or seen any of that?

[Ian Dickinson:]

Well, what we have heard is that one there were some proactive steps to shut in some wells in an effort to avoid a – dictate from the railroad commission and that seems to have worked. I think we are benefiting from the fact that some of those shut-ins were outside of our radius of service in Texas. Some of the smaller folks don’t really have the option to shut-in in the same way. So, they will continue to produce, I mean at this stage producing oil and at least driving some cash flows from that is important. What we are hearing is that the expectations that we returned back to more normal production levels as the summer progresses and so it’s been a very challenging environment right now, but we are hopeful and we are hearing from customers to be prepared for an increase in some of that activity. To what extent, it’s still too early to talk.

[Ed Woo:]

Great. And then my last question is just on the competitive landscape you mentioned that there was a couple of smaller competitors that were struggling, have you seen significant withdrawals out of this industry either people quitting or going bankrupt yet for your competitors?

[Ian Dickinson:]

We are seeing some of that. I don’t want to get into any specifics, but as I mentioned in the prepared remarks, we have competitors who are either stepping away from certain basins or certain service lines in opening up opportunities that have not historically been available to us. So, we are as I mentioned really focused on the things that we control. And I think there is going to be opportunity for us this year to take additional market share and that will drive long-term benefit for this business. And though so between controlling cost and being very aggressive on the customer acquisition side, I think those things will pay dividends for the business in the long run. But yes, I think the competitive landscape is going to shift here. This is the kind of downturn that there is just no way for it not to have some far reaching impacts.

[Ed Woo:]

Great. Well, thanks for answering my question and best of luck.

[Ian Dickinson:]

Thanks. Ed.

[Operator:]

[Operator Instructions] And we do have another question from Bhakti Pavani with Alliance Global Partners. Please go ahead.

[Bhakti Pavani:]

Thank you, guys. Sorry, I guess I dropped off. I have couple more questions.

[Ian Dickinson:]

Sure.

[Bhakti Pavani:]

Given the current situation, the Fed has announced a PPP loan program and I am just wondering being the small business have you thought about utilizing that benefit?

[Ian Dickinson:]

Yes. Maybe I will let Margie answer that question.

[Margie Hargrave:]

Sure. So, we actually did apply for the PPP loan and – on April 9 and we did receive the amount we applied for which is approximately $1.9 million. We have received it on April 15 and we are utilizing that now for what it’s allowed to be used for as far as payroll, rents etcetera. And we will utilize it for the 8 weeks that we are allowed to and to the extent sense that there is any remaining we may pay it back, it sort of depends on what the bank feels we should do. So, we definitely took advantage of that.

[Bhakti Pavani:]

Perfect. That’s great. And I guess and I apologize if I missed the earlier remarks, but I guess you did say that there have been some cost savings of $2 million primarily due to some of which were work flow production and reallocating your fleet. I am just kind of wondering do you think the reductions that we will have done currently, which are really great, because they help you save cost, but do you think they would have any kind of impact from the business acquisition standpoint when the markets comes back to normal?

[Ian Dickinson:]

We are very thoughtful on that front, Bhakti. I mean, we are taking extensive cuts to costs in the effort to mitigate or eliminate cash burn, but we also kept a very close eye in ensuring that we are in a position to respond when the market recovers. And so I think we have been able to accomplish both significant cost reductions at 2 million just to be clear as a number on an annualized basis and still leaving in place our ability to respond to the market when it recovers. The shutdown of Oklahoma as I mentioned in prepared remarks, we have in the past delivered frac heating services remotely in our Colorado facility. And so we still believe that we will be able to do that in the next heating season. Besides that, we have left the other locations in place. We have skinnied down operations during this downturn, but we will be ready to respond when the market recovers.

[Bhakti Pavani:]

Thank you, guys. That’s very helpful. Good luck to you guys.

[Ian Dickinson:]

Thanks, Bhakti.

[Operator:]

[Operator Instructions] And there appear to be no further questions at this time.

[Ian Dickinson:]

Well, as always, we appreciate your time and attention on the call today. We look forward to talking again following the close of our second quarter. Have a nice afternoon and take care and be safe.

[Jay Pfeiffer:]

Thank you.

[Margie Hargrave:]

Thank you.

[Operator:]

Ladies and gentleman, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.