Enservco Corporation
Q1 2019 Earnings Call Transcript

Published: 16 May 2019

[Operator:]

Greetings, and welcome to the Enservco 2019 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jay Pfeiffer of Pfeiffer High Investor Relations. Thank you, Mr. Pfeiffer. You may begin.

[Jay Pfeiffer:]

Hello, and welcome to Enservco's 2019 first quarter conference call. Presenting on behalf of the company today are Ian Dickinson, CEO; and Dustin Bradford, 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'll also point out that management's ability to respond to questions during the call today is limited by SEC Regulation 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 two hours after the call. Instructions for accessing the webcast or replay are available in today's news release. With that, I'll turn the call over to Ian Dickinson. Ian, please go ahead.

[Ian Dickinson:]

Thanks, Jay. Welcome everyone and thanks for joining our call today. Today, we issued our 2019 first quarter financial results press release after the market close. I'm going to briefly recap our financial highlights and then talk about the progress we're making with our growth initiatives. Following my remarks, Dustin will recap our financial highlights and we'll be happy to take your questions. Enservco reported solid revenue, net income and adjusted EBITDA gains in the quarter. Total revenue inclusive of our Adler acquisition increased 29% year-over-year to $26.2 million. Net income increased 111% to $4.3 million and adjusted EBITDA grew by 49% to $7.2 million. We're proud of these growth metrics, which are the result of a tremendous team effort across all levels of the organization. We encountered a couple of challenges in the first quarter that kept our revenue and profitability from growing at a faster rate. First began with a sharp oil price decline in Q4 because many of our customers as sharply curtail their completion schedules towards year-end. When the new year started and oil prices recovered, our customers resumed frac operations, but it took the first two weeks of January to reramp activities. So those first two weeks of the year where we are normally extremely busy for us underperformed the norm and that took a bite out of both revenue and profitability for the quarter. The second challenge involves the line-freeze event in our water transfer unit in Wyoming. We entered the first quarter with customer commitments that should have resulted in solid profitability in this segment. Unfortunately, although we achieved 44% growth in revenue, our segment profit suffered due to an approximate $1 million cost overrun incurred to hire third party labor and rental equipment while several miles of our own lines thought out. The good news is we executed for our customer and the project was completed on time. Unfortunately, the overruns led to a segment loss of nearly $760,000. I want to emphasize that the freeze event was preventable and we have since taken corrective measures be a personnel in policy changes designed to prevent this from happening again. I'm happy to say that this valued customer has moved forward with us on additional projects. In addition to a tremendous effort by our field teams, the steps we've taken to increase utilization and optimized fleet deployment have also contributed to our solid results. You'll recall that in late 2018, we closed our unprofitable water hauling business and consolidated field locations moves that contributed to higher profitability in Q1 by eliminating the EBITDA burn and allowing us to reallocate equipment to basins with greater potential. These initiatives also resulted in us operating more efficiently. Our adjusted EBITDA margin in Q1 was 27.3%, up 360 basis points from 23.7% in Q1 a year ago. Absent these offsetting events I mentioned earlier, the adjusted EBITDA margin could well have reached into the low 30s range, which is where we were prior to the downturn. And remember pre-downturn margins had the benefit of billing rates that were 15% to 20% higher than they are today. Those higher rates were supported by $100 oil compared to today's price of around $62. So again, given the lower price environment, this is a clear indication we're operating more efficiently. On the subject of increased efficiencies, let me tell you about some additional changes we’re making with our physical operating locations. I'll start with our expansion in the Powder River basin, which is a promising growth area for us. Historically, the company has been servicing this area with our Platteville, Colorado and Rock Springs, Wyoming yards. Each of which are a couple of 100 miles for many of our customer drill sites. In the first quarter we opened a new location in Douglas, Wyoming, which is right in the heart of the Powder River Basin. This move will greatly enhance our ability to serve existing customers and compete for new business in the Powder and Niobrara while reducing travel time, costs and wear and tear on our equipment that's associated with long distance servicing. In 2018, 69% of our Wyoming-based revenue was derived from the Powder River basin. In the first quarter of 2019 that number grew to 91% Q1 revenue in the Powder was $2.4 million, which is just shy of the $2.6 million in revenue we did in all of 2018. So we are already seeing positive impact of this increased focus on the basin. It's also worth noting that our Douglas yard is generating revenue in all four of our service lines, frac water heating, hot oiling, acidizing and water transfer. As we noted in the past, we are focusing on leveraging our blue chip customer base by bundling more services to each customer, a strategy that also benefits our customers in the form of costs and procurement efficiencies. We're also relocating our Platteville, Colorado fuel location to a new location nearby. This new centrally located facility will also become the new home to personnel and equipment from three Colorado Adler facilities that will be closed. While there may be some modest cost savings from these consolidations, the real benefit will come in the form of logistics efficiencies. And speaking of Adler, I'll reiterate that the integration has gone very well and we're delighted with the talent, customer relationships and assets we've gained through this process. Over the remainder of 2019, we are focused on implementing a fleet management solution. Specifically, we are installing a system whereby key functions, including dispatching and geo location, maintenance and inventory, truck data and safety, reporting and compliance, electronic invoicing, and accounting and finance will be fully integrated. This system will form the core of our technology platform that will further enhance our operating efficiencies and our ability to scale. With that, I'll turn the call over to Dustin Bradford for a view of our financial highlights.

[Dustin Bradford:]

Thanks Dan. The first quarter results I'll walk through do reflect the reclassification of prior year results of our Dillco water hauling segment as discontinued operations. Accordingly, certain year ago figures will differ from those referenced on past calls. Total revenue in the first quarter increased by 29% to $26.2 million, from $20.3 million in the first quarter a year ago. As Ian mentioned, we had a slow start to the quarter due to the effect of oil price swings in Q4 were rallying when EMPs resumed their frac operations in earnest [ph]. Well enhancement services, were up 29% in Q1 $24.8 million from $19.3 million in the same quarter last year. The three components of well enhancement included frac water heating, which was up 42% year-over-year to $20.7 million from $14.6 million; hot oiling, which was essentially flat and the $3.6 million range; and acidizing was down 54% to $469,000 from just over a $1 million a year ago first quarter. The well enhancement segment generated income of $9.6 million in Q1, which is 55% increase over the income of 46.2 million in the same quarter last year. As noted in our press release today, acidizing, which is our smallest revenue generating line of business, declined primarily due to a reduction in services performed for few customers in Texas and Wyoming that had been very active in last year's first quarter. Additionally, the fourth quarter closure of one of our Kansas locations, where we previously provided acidizing services, also contributed to the decline. This equipment has since been redeployed to other basins and we recently won new asset acidizing business in several basins and expect the segment to show growth over the long-term. Our water transfer segment revenue increased 44% in the first quarter to $1.4 million from $1.0 million in the same quarter last year. Unfortunately, the previously referenced line-freeze issue turned what should have been an income positive quarter into a disappointing segment loss of $757,000. Total operating expenses in the first quarter increased 23% year-over-year to $21 million from $17.1 million. It is primarily due to the higher direct variable cost associated with increased activity across our service lines and locations, as well as the increased depreciation costs related to the Adler acquisition. In addition to the $1.0 million in cost overruns related to water transfer issues. Sales, general and administrative expenses increased 20% to $1.6 million from $1.4 million year-over-year due primarily to cost of our larger administrative organization related to the growth of our business. Depreciation and amortization expense rose to $1.7 million from $1.5 million due to the addition of Adler equipment to our fleet. Turning to our year-over-year improvement in all profit metrics, income from operations grew 65% to $5.3 million from $3.2 million. Net income increased 111% to $4.3 million from $2 million. Earnings per share doubled from $0.08 from $0.04 a share. And adjusted EBITDA grew 49% to $7.2 million from $4.8 million. I'll close with a few stats on our balance sheet in fleet. Working capital at March 31 was $13.4 million. Current ratio was 2.4

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of the Bhakti Pavani of Alliance Global. Please proceed with your question.

[Bhakti Pavani:]

Good afternoon guys. Thank you for taking my questions.

[Ian Dickinson:]

Hi, Bhakti.

[Dustin Bradford:]

How are you?

[Bhakti Pavani:]

Good. Well I should say, I know you mentioned that the profitability and the revenues were slightly low, but I would actually want to congratulate on your results because to be honest an improvement in gross margin was a really nice surprise for the quarter.

[Dustin Bradford:]

Well, thank you.

[Ian Dickinson:]

Yes, we had a very strong finish to the quarter.

[Bhakti Pavani:]

Yes I mean 33% is – I think it's been your best since the last four quarters. So I think it was really a nice surprise. The other thing was, it's really nice to hear you are making changes to the business and improve efficiency. Could you maybe talk about how do you see all the changes translating into the profitability or the bottom line going forward? What is your expectation?

[Dustin Bradford:]

Well, this has been an ongoing process of what I would call continuous improvement. We've made a lot of enhancements in the way that we operate day in, day out across our different locations and service lines. We are, as I mentioned in the script, in the process of implementing a fleet management software platform that will allow us to integrate across these different functional areas, from dispatch, to invoicing, maintenance and inventory management, and so on. As I've mentioned before, we are largely a logistics business when you really break it down. And so our ability to be more efficient in the way that we deploy our assets and our most important assets, are human assets, resources, will allow us to be a bit more efficient in the way that we're driving revenue and ultimately profit margins. So one of the, I'll give you an example, one of the dynamics that we have right now which is still heavily on a paper ticket system. And so moving where we can do electronic ticketing should be able to reduce the overall DSOs that we're experiencing. That increase in cash flows will reduce our principle balance on our revolver and generate interest expense savings for us. So there is some savings along that front. But I think in general it will allow us to be in a more efficient in the maintenance and deployment of our fleet.

[Bhakti Pavani:]

Good. That's great color. Actually, you answered my question on liquidity, because I noticed, at the end of the quarter, there was not any cash and you had significant receivables. So I was wondering, how are you guys going to manage your liquidity going forward?

[Ian Dickinson:]

Yes, I appreciate that question, but we’re in a strong liquidity position as we sit today. That was a bit of a timing dynamic at the end of the month with how payrolls fold we try to maintain a minimum cash balance to keep the revolver balance as low as possible. This is a typical pattern for us. We build up our AR through Q1 and then we’re into a collection phase through Q2 and we should move to what kind of borrowing low point in that June, July time frame as we convert that working capital. And so if you go back and look historically, this is the pattern that we’re used to, we would like to see a decrease the DSOs, accelerate collections of invoices. And with that kind of reduce that principal balance earlier and reduce the interest expense associated, but we’re in strong liquidity position as we sit today.

[Bhakti Pavani:]

Perfect. Thank you so much for the color. Moving on to acidizing and hot oiling business, I know, moving into second quarter, which is kind of the slow period, how do you feed the business from the utilization rate standpoint? I mean, where are you think opportunities in the business line? Could you maybe talk about that?

[Ian Dickinson:]

Yes. Well, let’s talk about hot oiling. So you’re right and that we do see some seasonality in our hot oiling fleet and that’s in part due to where we’ve directed some of the work. There are applications for the hot oilers to deal with cold weather environment, whether that’s addressing frozen lines, or steam outs, heating oil tanks. There is a big aspect of hot oiling that is year-round work that’s really more associated with a down-hole maintenance. We will see utilization rates in south Texas and Oklahoma, kind of continue at their current levels with increases as we focus on expanding the customer base and the utilization of that fleet. We’ll see a natural slowdown in some of the utilization of our hot oilers in our northern most territories. But there’s a lot of work we’re doing across the team to find those areas of the ongoing maintenance work. And we’re looking, as I’ve mentioned many times to ensure that we’re deploying that fleet in a way that’s optimizing. So, we’ve moved a few units down to south Texas as that demand is increased. We’ve moved some additional units in the Oklahoma as that demand is increased. We’ve moved some additional units into Wyoming as we brought on more customers. And so we’ll continue to make moves to put our hot oil fleet in a position where we can maximize the utilization, whether that be in the winter season or the summer.

[Bhakti Pavani:]

Got it. Okay. Thank you very much. Moving on to frac water heating business, how should we think about that business line? I mean do you expect to see a spillover of revenues into Q2 at this point?

[Ian Dickinson:]

Well, so Q2 as I think those who are familiar with the company or where is – the period of the year where we start seeing the frac heating revenue slowdown and it’s where the revenue, I’m sorry, where the weather plays a primary role. So obviously, we don’t give guidance here in terms of expectations for the quarter, but it is the timeframe in which was see that frac heating revenue begin to drop off and move really effectively close to zero as we get into the middle of summer timeframe.

[Bhakti Pavani:]

Alright. Thank you very much. That’s it from my side.

[Ian Dickinson:]

Thanks, Bhakti.

[Operator:]

[Operator Instructions] Our next question comes from the line of Ed Woo of Ascendiant Capital. Please proceed with your question.

[Ed Woo:]

Yes, congratulations on the profitability for this quarter. My question is just on the overall outlook for oil and what are you hearing out from your customers in terms of how confident they are of the business over the near term?

[Ian Dickinson:]

Yes, I would say – thanks for the question. There seems to be at least in the conversations that I’ve had and it’s certainly not exhaustive, and they’re probably better sources for this. But I can tell you from a company’s perspective in the conversations we’ve had with customers, there’s a general sense that we should see relatively stable prices. Clearly nobody knows for sure, but I think the general mood is that oil prices will remain stable here through the remainder of 2019.

[Ed Woo:]

Great. And in terms of M&A opportunity now that you guys are pretty happy with the Adler acquisitions, do you feel that you guys have the capacity to look at other opportunities?

[Ian Dickinson:]

Yes. Part of our growth strategy over the long term is to look for other accretive M&A opportunities. We are focused predominantly on executing on the fleet we have today. We think there’s opportunities for growth organically. But we will be opportunistic and we will look for opportunities to expand this company through acquisition, either through incremental services that we can bring to bear for our customers and with that potentially expansion into other basins. So we will keep a keen eye at the market looking for opportunities to continue to scale the business.

[Ed Woo:]

Great. And then can you talk a little bit more about activity in the Permian Basins that seems to be getting most of the attention and industry right now. How important is that for your business and what are you guys doing down there?

[Ian Dickinson:]

We don’t currently have any operations in Permian Basin. We’re in the south Texas more in the Eagle Ford. We do get a fair amount of calls from that basin, from that west Texas region. We have not made a decision at this point to chase those opportunities and set up sharp. So right now, we keep an eye on all basins and just the general market activity, but we don’t have any exposure at this time.

[Ed Woo:]

Okay. Well, thank you for answering my questions and good luck.

[Ian Dickinson:]

Thanks, Ed.

[Operator:]

At this time, there are no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

[Ian Dickinson:]

Well, as always, we appreciate your time and attention on the call today. We look forward to talking again with you in the near future. Take care.