Enservco Corporation
Q2 2020 Earnings Call Transcript

Published: 14 Aug 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to your Enservco Second Quarter Earnings Call. All lines have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Mr. Jay Pfeiffer, Investor Relations. Sir, the floor is yours.

[Jay Pfeiffer:]

Hello and welcome to Enservco’s 2020 second quarter conference call. Presenting on behalf of the company today are Rich Murphy, Acting 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. 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. Additionally, a telephone replay will be available beginning approximately two hours after the call. Instructions for accessing the webcast or a telephone replay are available in today’s news release. With that, I’ll turn the call over to Rich Murphy. Rich, please go ahead.

[Rich Murphy:]

Thanks, Jay. Welcome, everyone, and thanks for joining our call today. I'm Rich Murphy, Chairman and Acting CEO of Enservco. Since this is my first time addressing investors, since I've assumed the role of acting CEO, I want to give you a little background on myself. The investment fund I manage Cross River Partners is a longtime owner of Enservco common stock. We are in fact, Enservco’s largest shareholder. It was factoring to Enservco is the company's blue chip customer base, broad geographic footprint, diverse services set, committed field teams and dominant position in the frac water heating space. In short, Enservco provides mission critical services to the largest oil and gas producers and the most prolific basins in the country. Approximately five years ago, when oil prices were north of $100, and Enservco couldn't keep up with a growing demand for services, the company essentially double the size of its fleet to ambitious CapEx program funded by a large new credit facility. As luck would have it, just as the expansion was complete, oil prices collapsed under the weight of oversupply and slowing global economic growth. Had oil prices remain high our debt load would not have been a big issue. But in recent years, volatility in commodity prices lead to uneven customer demand, which in turn lead to disappointing financial results. Today in this lower revenue environment, our debt service has simply become unsustainable. We are in violation of certain loan covenants with our lender, East West Bank, which has been extremely patient with us, but which has also assets to refinance our debt. As noted in our earnings release today, we are working diligently to do that. Specifically, we're working with our lender and a third-party investment group on a transaction that we hope will result in a significant reduction of a long-term debt balance and an increase in shareholder’s equity. We have a plan in place that's been tentatively approved by all involved parties, including East West Bank, which earlier this week to aid us in negotiations, granted us a 45-day extension on the maturity date or senior secured revolving credit facility. If we are successful in completing this refinancing in the coming weeks, it will be nothing short of transformational for our balance sheet. By the way, at the request of the independent directors of the Board, and the interest of further increasing show with equity, our investment from crossword partners will be converting approximately 1.5 million of subordinated debt into unregistered Enservco common stock at a 50% premium to the August 13th to 2020 closing price. I want to be clear, this refinancing effort is a work in progress and there's no assurances, it will be successfully completed, while we have made a lot of progress, we still have some work to do. However, I also want to tell you that all involved parties, our lender, the investment group, and the board and executive team -- any executive team in Enservco are working very hard and very collaboratively to get this done. Concurrently, we've been taking costs out of the business to better structure our organization, to meet the challenges of fluctuating commodity price. Since the beginning of the year, we have made overhead cost reductions of more than 4 million on annualized basis. These reductions include personnel adjustments at all levels of our business, closure and or consolidation of certain physical locations and reduce maintenance CapEx budget. The result is a leaner organization with a lower cost structure. I'm proud of the work of our entire team has done in reshaping our business over the last seven plus months. With that, I'll turn the call over to Margie to recap our financial results.

[Margie Hargrave:]

Thank you, Rich. Today we issued our 2020 second quarter financial results press release after the market closed. We reported Q2 revenue of $2.1 million with an adjusted EBITDA loss of $2.1 million compared to revenue of $6.3 million and an adjusted EBITDA loss of $1.5 million in Q2 last year. Revenues through six months was $11.5 million with an adjusted EBITDA loss of $2.6 million compared to revenue of $31.2 million and adjusted EBITDA of $6.59 in the first half of last year. As you know, Q2 and Q3 are our slower off season quarters, while Q1 and Q4 and Q1 are colder quarters comprise our heating season when we generate the majority of our revenue and EBITDA for a given year. Our second quarter was slower than normal this year, reflecting reduced customer activity due to commodity prices and the COVID-19 pandemic. Those headwinds have carried into Q3, but we have taken advantage of these downturns to add some new customers and redeploy assets to more active areas. And today we are rapidly approaching and gearing up for heating season when we expect an increase in customer activity through the winter and into next spring. Rich?

[Rich Murphy:]

Thanks Margie. So in closing, our priorities right now are to get the refinancing done, so we can focus all our efforts on our upcoming heating season. Before I open the call to questions, I want to thank you for your interest in Enservco and for your patience as we move through this process. As a fellow shareholder, I want you to know that our interests are aligned and I am fully engaged and committed to building shareholder value for Enservco. And with that, I'll now turn the call over to the operator for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Bhakti Pavani with Alliance Global.

[Bhakti Pavani:]

Good morning, Rich. Thank you for taking my questions. Just a quick question on the activity side. You know, given the uncertainty in the oil price environment, at least on the small cap side, small cap companies we aren't hearing anything about the – you know, picking up drilling activity just wanted to hear your thoughts on what are you hearing from your end with regards to cutting back the drill rigs and starting production?

[Rich Murphy:]

Generally speaking, you know, we deal with a lot of blue chip oil customers, the general sense is our precaution, but we do, we are starting to see, if oil stays in the $40 to $50 range, the CapEx budgets have been all shut in up to this point. So there's – which is good for us, because we don't really have much business in the second, third quarter. So if you're going to have slow CapEx activity, this is the time you want it to occur. So there is – we do hear the rumblings from our customers that oil stays around this price. And they get comfortable with that. They'll start opening up a lot of the ducts and that's kind of what we're hearing right now.

[Bhakti Pavani:]

Got it. You know just a follow up. As Margie mentioned, fourth quarter and first quarter are the strongest revenue generating quarters because of the heating season. At this point, have you received any kind of firm commitment, or how does your order book look like when it comes to the upcoming heating season?

[Rich Murphy:]

So part of our cost cutting was to push out a lot of our business development to our yards, which makes more sense because these – our yard managers have the relationships with the guys in the field who actually makes the decision to who to choose as their service provider. So, and it also gives us better information flow. So what we're seeing and hearing is what I just said is that you know, we're going to probably, we expect if oils in this $45 range is that there's going to be a lot of – and pipe ducts, I don't know that's interesting term, but there's about 850 ducts in the Niobrara, the DJ Basin, right now. They have to be you know, just basically unplugged. The frac job is essentially almost complete. So, we are an essential service to complete that frac job. So, that's just one basin. But 850 have been shut in essentially. So, if we get to that stable oil price around here, we think those things will be -- there'll be a lot activity just on that front.

[Bhakti Pavani:]

Got it. Appreciate the color. And just from the cost front, you did mention that you have been able to reduce $4 million in annualized cost. Just wanted to understand is there further room for their costs to reduce EPS what percentage of cost reduction do you think you can achieve in the back half of the year?

[Rich Murphy:]

I think there is a little more corporate G&A, one other change we made we moved our office from Denver, Downtown Denver into our biggest yard in Colorado. I think it's important for the corporate staff to be intermingled with the team -- the yard guys. So, that's a cost savings obviously, but as far as -- I'm more focused now -- I mean we've taken a lot out. I'm more focused on revenue generation and getting into the heating season in the right manner. So, I think in the past one of our issues has been, we might staff up too early or too late or -- so we have a very data-driven strategic way with our yard managers to get into the season where we there's not as much waste. So, I think we're going to save some money on that end and have higher margins by -- just by entering the season in a more structured way. And I could get in detail, but it's probably not worth it. I can talk to you offline about how we expect to do that.

[Bhakti Pavani:]

Yes, for sure. But yes, that's it for my side. Thank you very much and good luck.

[Rich Murphy:]

Thank you.

[Operator:]

So, with no other questions holding, Mr. Murphy, I'll turn the conference back to you for any additional or closing comments.

[Rich Murphy:]

As always, we appreciate your time and attention on the call today. We look forward to talking to you again on the close of our third quarter. Enjoy the weekend. Thanks.

[Operator:]

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time and have a great day.