Enservco Corporation
Q2 2019 Earnings Call Transcript

Published: 15 Aug 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Enservco 2019 Second Quarter Earnings Call. All lines have been placed in a listen-only mode and there will be a question-and-answer session following the presentation. [Operator Instructions] At this time it's my pleasure to turn the floor over to Mr. Jay Pfeiffer, Investor Relations. Sir, the floor is yours.

[Jay Pfeiffer:]

Hello, and welcome to Enservco's 2019 Second Quarter Conference Call. Presenting on behalf of the company today are Ian Dickinson, CEO; and Marjorie 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'll also point out that management's ability to respond to questions during the call 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 second quarter and six-month results press release after the market close. As always, we're going to go and we're going to provide some color on those results and then step through our numbers in more detail prior to opening the call to questions. I'll begin my comments by a recap of our second quarter results which were in-line with the preliminary results we announced a couple of weeks ago. As we detailed in our press release today, warm weather in April brought an early end to frac water heating activity as compared to a year ago when we enjoyed cooler temperatures in the spring in a more productive [indiscernible] to our heating season.It's no secret that weather can play a big role in our business. It can work in our favor as it did last year or can work against us as it did this year. An important thing to remember is weather influence results were not an indicator of the overall health of our business. Warm weather is warm weather. It is not a business plan or a shortcoming in our operations fusion [ph]. That's why we don't get too excited when the weather is cold in the fall and spring and we don't get too disappointed when it's warmer during those same periods.Ultimately our goal is to get to the point where the impact of temperature swings is less influential on our financial performance and that will require adding non-seasonal services to our mix to smooth out the bumps. This is certainly in our plans but it will take time. In the meantime, we will continue to experience the ups and downs caused by temperature changes in any given quarter and that's why we'll again remind you that we think quarter-to-quarter results are not the most accurate way to judge our performance. I think the fact that our six-month results showed double-digit revenue gains and improved profitability support that position. I'll get to those results in just a minute.So as I said in our announcement this afternoon while the warm April was a disappointment, it was not necessarily unexpected. What wasn't expected was the poor performance on our water transfer division. It was the second straight quarter on which revenue fell short of expectations and cost for well over budget. The water transfer division has been a big drag on profitability this year contributing roughly $1.2 million in burn year-to-date that goes straight to the bottom line.As a result to this performance we have taken decisive actions to stop the burn. This include replacement of the water transfer leadership team and certain other staff members. The right sizing effort includes retention of our field teams who are busy fulfilling customer commitments in the third quarter. We are seeing a positive impact from the changes we've made and expect they will carry through to the end of the quarter.As a reminder, we launch the water transfer business in 2016. Although it has generated decent revenue growth, water transfer remains a relatively small component of our overall business and the profitability has been erratic with the mix of plus or minus breakeven quarters over the past three years. But as I said, this uneven performance is not acceptable and not consistent with the performance standards we've established for our other lines that historically have achieved higher growth rates and generated the greatest profit contribution.On a brighter note, the six-month results we reported today were solid and we believe a more accurate reflection of the trajectory of our business. Despite our disappointing second quarter revenue in the first half, increased 19% year-over-year to $33.4 million, we generated $1.1 million in net income which represents a $2.3 million positive swing on our bottom line. In addition, adjusted EBITDA was up 6% [ph] year-over-year to $5.3 million.As in the first half, the second half of 2019 will include a traditionally slower off-season quarter, as well as a more productive Q4 when our heating season kicks off. We also believe the second half gross profit will benefit from the leader in water transfer business.Going forward in the short term, we are focused on executing in Q3 and getting up to a good start to our upcoming heating season. Right now, macro trends remain uncertain given trade negotiations, general world economic forces and supply issues. All these things put pressure on oil and gas producers to keep their cost down and that pressure inevitably trickles down to service companies like us.Acquiring our largest competitor for heating services late last year should help our cause on the pricing front, but we still face competition in certain basins for mom-and-pops that have little more price flexibility due to a lack of corporate and public company overhead that we have. That said, we still have the advantage of long-standing relationships with hundreds of leading MPs who ultimately in their own best interest are likely to value the liability execution and safety over cost.The heat waves team we have in the field have proven time and again over many years their ability to deliver high quality round-the-clock service with an emphasis on safety. We have a relatively young fleet and what we believe are the fine players in the business. Accordingly, we believe we are positioned to maintain and hopefully increase our market share in the coming years. I also want to note we have more fracking commitments at this time than we did at the same time last year.For the medium term, we continue to focus on two primary areas increasing fleet utilization to drive higher revenue and profitability and two, reducing our debt and strengthening our balance sheet so we can pursue M&A activity that can lessen the seasonal aspects of our business and take advantage of the platform we have built. A platform that we believe is capable of supporting a large organization and higher revenue streams without a commensurate increase in overhead costs. These are our priorities and we take them very seriously.Switching gears, I'd now like to introduce Margie Hargrave, our new Chief Financial Officer. Margie joined us in July and stepped into the role formerly occupied by Dustin Bradford who is moving on to another opportunity. Dustin has been an invaluable addition to our team over the past couple of years playing a key role in our efforts to transform Enservco into a technology-enhanced data-driven organization. With that process nearing completion, we believe our platform is capable of supporting accretive M&A opportunity and that's where Margie's strength come in.She has an extensive hands-on background in M&A, having played a lead role in dozens of transactions and prior assignments with companies that achieved tremendous acquisitive growth on her watch. An added bonus is that she is very strong in the banking side so she'll be taking the lead on our banking relationships going forward.And with that, I will turn the call over to Margie for a review of our financial highlights.

[Marjorie Hargrave:]

Thank you, Ian. The second quarter and six-months results I'll be covering are reclassification of prior year results of our Dillco water hauling segment as discontinued operation. As such, certain year-ago figures will differ from those referenced on past calls.Total revenue in the second quarter decreased approximately 9% to $7.2 million from $7.9 million in the second quarter last year. As Ian mentioned, the revenues decline was almost exclusively attributable to the impact of a warmer April which resulted in a sharp decline in frac water heating revenue year-over-year. As a result, well enhancement services were down 10% in Q2 to $6.3 million from $7 million in the same quarter last year.Well enhancement components included frac water heating, down 25% to $2.4 million from $3.2 million; hot oiling up 13% to $3.2 million from $2.8 million; and acidizing down 10% to $679,000 from $758,000. The well enhancement segment generated income of $189,000 in Q2, down from $1.1 million in the same quarter last year due primarily to the lower frac water heating revenue. The water transfer segment generated revenue of $867,000 in the second quarter, down 7% year-over-year from $929,000.Water transfer produced a loss of $420,000 in the second quarter, up substantially from the loss of $50,000 in the same quarter last year. Total operating expenses in Q2 increased 5% year-over-year to $10.9 million from $10.4 million. The increase was primarily due to additional overhead that accompanies the Adler acquisition. We are steadily achieving cost efficiencies related to the Adler transaction. So this metric should continue to show improvement.Sales, general and administrative expense increased 18% in Q2 to $1.5 million from $1.2 million last year. The increase included about $120,000 in year-end audit fees that have historically been recorded in the first quarter. It also included $70,000 in IT investments to support fleet management improvement and $50,000 in Adler related cost. Depreciation and amortization expense grew 14% to $1.7 million from $1.5 million due to the increased fleet size.Our Q2 operating loss increased $3.7 million versus an operating loss of $2.5 million last year. Net loss improved slightly, just $3.2 million or $0.06 per diluted share from a net loss of $3.3 million or $0.06 per diluted share in the same quarter last year. Current year results include the impact of an accounting gain of approximately $1.2 million related to the settlement agreement we reached with the sellers of Adler in April. Adjusted EBITDA loss in Q2 increased to $1.9 million from a loss of $247,000 in Q2 last year.Turning to our year-to-date financial results. Total revenue through six months increased 19% to $33.4 million from our $28.2 million in the first half last year and well enhancement services grew 18% year-over-year to $31.2 million from $26.3 million. The well enhancement segment included frac water heating up 31% to $23.1 million from $17.6 million. Hot oiling of 5% to $6.8 million from $6.5 million; acidizing down 35% to $1.1 million from $1.8 million.The well enhancement segment generated $9.8 million in income in the period, a 34% increase over $7.3 million in the first half of last year. Water transfer revenue increased 19% year-to-date to $2.3 million from $1.9 million last year. The segment generated $1.2 million losses in the first half compared to basically breaking even in the same period last year.Total operating expenses were 16% higher in the first half at $31.9 million versus $27.5 million a year ago. This was due primarily to higher direct variable cost associated with increased activity and to water transfer cost overrun in the first quarter of this year. Sales, general and administrative expenses increased 19% to $3.1 million from $2.6 million last year due primarily to higher personnel and overhead related to the Adler acquisition and investments in IT. Depreciation and amortization expense increased to 13% to $3.4 million from $3 million due to our larger fleet.Operating income increased 118% year-over-year to $1.5 million from $698,000. Net income in the first half improved to $1.1 million which represents a $2.3 million positive swing over last year's net loss of $1.2 million. As I mentioned in the Q2 discussion, the current year figure includes the gain of approximately $1.2 million related to our settlement agreement with the sellers of Adler. Segmented earnings per share was $0.02 versus a $0.02 loss a year ago. Adjusted EBITDA in the first half of 2019 increased 16% to $5.3 million from $4.3 million from $4.6 million in the prior year.Enservco generated $5.9 million in cash from operations in the first half which is down from $6.5 million in the same period last year. The decline was largely due to a delayed payment from a large customer in the DJ basin, a payment that has since been received. Along those lines, I think it's worth mentioning that material instances of delayed payments are extremely rare for Enservco. That speaks to the quality of our customer base and to good relationships we enjoy with them. In 2018, we recorded just $43,000 in bad debt expense, which is an amazingly low number, in fact less than one-tenth of 1% of our 2018 revenue of $47 million.I'll pause with a few steps on our balance sheet and fleet. Working capital at June 30 was $6.5 million. Current ratio was $2.6 million to $1 million. Debt to equity ratio was $5.7 million to $1 million. Total stockholder's equity with $6 million. As always, we are focused on maintaining balance sheet discipline and our goal is to delever our business over the next few years. Q3 capital spending will be primarily related to maintenance and for the foreseeable future, we anticipate CapEx to be in the range of $1 million to $1.5 million annually.And with that, we'll 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 Partners.

[Bhakti Pavani:]

Thank you for taking my questions. Welcome, Margie.

[Marjorie Hargrave:]

Thank you very much.

[Bhakti Pavani:]

Ian, you mentioned in your prepared remarks that you expect a much-better performance in the second half of this year. Just kind of curious to know, you are halfway through the third quarter which is the lowest revenue-generating quarter for the company. From the utilization standpoint of your fleet, your limit [ph] acidizing and hot oiling, where are you guys compared to the same time last year?

[Ian Dickinson:]

Yes, Bhakti, I don't have the utilization metrics in front of me. We are seeing increased utilization on our fleet as a general statement. Again as mentioned in the prepared remarks, Q2 is impacted by a rapid slow down on the frac heating side. Your question on the hot oiling and acidizing, we're seeing improved utilization across that hot oiling fleet, and we've repositioned a few of our acidizing units into Oklahoma and we're starting to see some good traction there. We have the acidizing fleet in Oklahoma, Wyoming and Texas so we have a nice distribution there. I'm not sure if that answers your question, but we can go in more detail if it's helpful.

[Bhakti Pavani:]

No. That's pretty helpful. That's fine. The next question is you have an upcoming heating season and this time you have Adler fleet. You have a much expanded fleet compared to same time last year. How do you plan to position yourself when it comes to different geographical areas? Which areas are you targeting more and how does the order book look like to-date?

[Ian Dickinson:]

If you recall, we closed the Adler acquisition in late October -- October 26, 2018. So we had the Adler fleet for a good chunk of this season last year. We'll obviously have that fleet active and ready to go at the very beginning of the season to -- typically starts in late September, early October, again depending on weather. We are as we do each year, focused on securing commitments from our customer base throughout the third quarter. In fact that work really begins at the wrap up of the previous season. As I mentioned in the prepared remarks, we've been able to secure more commitments than we had this time last year which is encouraging. We do face competitive pressures as all oil field service providers do. We are focused on expanding our customer footprint and the penetration with each of our legacy customers across all of our basins, but we're also focused on a pretty exciting group of additional customers.Where we sit right now, I feel pretty encouraged with where we are on customer commitments. Even with some of the headwinds of the industry, we got good indication of demand as we head on executing the next seasons.

[Bhakti Pavani:]

Got it. Just a follow up to that. At this point, have you guys thought about entering into different basins, or do you think you are comfortable where you are from the geographical presence standpoint?

[Ian Dickinson:]

I'm pretty happy with where we are today. As I've mentioned before on previous calls, I like the basins that we're in today. Any more into incremental basins would be done in a very thoughtful and business-driven way. As I mentioned in the prepared remarks, we opened a new facility in Douglas Wyoming in the second quarter. We've been doing more business in Wyoming. We've had a legacy rock springs yard. We have two yards now in Wyoming. We've done more revenue in Wyoming in the first half this year than we did in all of last year. So we see it as a good growth market for us especially in the Powder River and being in Douglas, we're right in the epicenter where that activity is ramping.

[Bhakti Pavani:]

Perfect. Thanks for the color. Just one last question from the housekeeping standpoint. You did mention the water transfer business had a disappointing quarter and as a result you have decided to change the leadership. Just wanted to get an idea. Is there any kind of one-time expense expected in third quarter due to that change that we should be [indiscernible]?

[Ian Dickinson:]

There is not. And again, it was disappointing performance in both first and second quarter. The changes we've made, we're already seeing some good results. But again in answer to your question, there will be no one-time cost in this quarter associated with those departures.

[Bhakti Pavani:]

Okay. Thank you. I'll hop back in queue.

[Ian Dickinson:]

Thanks, Bhakti. Nice talking to you. Appreciate the questions.

[Operator:]

We'll take our next question from Ed Woo with Ascendiant Capital.

[Ed Woo:]

Yes. Thank you for taking my question. My question is I know it's always very difficult to predict where the oil price is going to go, but what's your best guess on near term trends and how it's going to impact your business?

[Ian Dickinson:]

Yes, that's a $64,000 question. I really have no good sense for what oil prices are going to head, I think. What we are focused on is in whatever pricing environment, what are the things that we need to do day in and day out to set ourselves up for success, where the prices are in the near in the range they are today called mid-50s or if they were to drop, we have plans to respond accordingly and hopefully what we'll see is the recovery of those oil, the WTI prices back in the $60 range. We're focused on continuing to operate and operate successfully regardless of the pricing environment. I wish I had a direct answer for you.

[Ed Woo:]

But at current prices in the mid-50s, are you guys comfortable with your business plan at that price? Or is there a range where you feel that it would be better for your plans?

[Ian Dickinson:]

Well, yes. I feel comfortable in the mid-50s. The oil price is one indicator. It's certainly a leading indicator, it's an important metric in our industry. There are other metrics that we pay attention to -- rig activity, activity within the basins that we are active in and those that we may have future interest in being active in. We're paying attention to water usage and barrel of waters relates to our frac heating. We're paying close attention to maintenance schedules on producing wells. And we talk and stay in communication with our customers understanding their capital plans and their both completion of production schedule. So oil price is a piece of that, but we're certainly looking at a broader set of metrics. I think everybody prefer to see oil prices higher than they are today, but it's not something that we concern ourselves with too much. We're staying focused on things we can really affect and change.

[Ed Woo:]

Great. And my last question is on M&A. What's your current appetite for M&A and also what are you guys seeing out there in terms of potentials?

[Ian Dickinson:]

Yes. Well, as we've mentioned consistently, we think part of our growth strategy will include incremental M&A. I think we're going to be extremely cautious in the way we go about that. We want to make sure that any moves that we make are going to be accretive to the business. So we're quite happy with the Adler acquisition. We'll look for other opportunistic role that way. I think generally speaking, there are some really interesting potential deals out in the market, but we also have to be very conscious of our balance sheet. As we've mentioned, one of our primary priorities is to try to delever. We certainly want to protect against delusion as it relates to our shareholders. We'll have to be quite selective and strategic in a way that we would consider any M&A at this stage.

[Ed Woo:]

Great. Well, thanks for answering my question. Good luck.

[Ian Dickinson:]

Thanks, Ed. Appreciate the questions.

[Operator:]

[Operator Instructions] Well go next to Michael Madden, Private Investor.

[Michael Madden:]

Hey, guys. My first question is around the water transfer business. Can you guys remind us what you guys find attractive about the business? It seems like it's been more of growing in completion depending business. It doesn't really offset the seasonality. From the outside it almost looks like you got rid of the water hauling business and now we have the water transfer business to kind of fill the shoe. I was trying to get your guys' perspective on what is it you like about the business, kind of the time line, the possibility, that kind of thing.

[Ian Dickinson:]

Sure. Thanks, Michael, for the question. The water transfer business had some synergies with our frac water heating in terms of equipment actually physically hooks up to itself. There are some advantages in terms of being a provider of customers both the transfer service and the heating. Our fleet is relatively small. We've got it concentrated here in Colorado and Wyoming. I like that it's tied to water usage which is an important metric for us as it relates to the completions work that's true for frac heating as well. It's the business that we acquired back in 2016. As I mentioned in the prepared remarks, that we're seeing some decent top line growth, but we have not seen consistent profitability. That's our focus right now, is to address the cash burn that we've seen more recently and evaluate how best to deploy those assets.

[Michael Madden:]

Got it. Okay, thanks. I also wanted -- are there any other specific metrics investors should be looking at? I obviously talked about oil prices recounts and other one that has come out before, kind of monitoring customer at CapEx level. Are there any other specific metrics you could point investors to?

[Ian Dickinson:]

Yes. Well, let's talk about the completion side for our water transfer, but predominantly our frac water heating. The real metric is barrels of water usage. The only stat I have committed to memory right now and I need to get a more refreshed one, but if you look back from 2011, water usage is up 700% from 2011 to 2019. Rig counts are interesting but rig counts are down significantly from even the peak in 2014 when we are close to 2,000 rigs operating. Now we're just a little bit lower than 1,000, yet water usage is up. And that's really the metric that drives. We're heating the water and we've got temperized requirements. These larger fracs require just as much heating service with 1,000 rigs running as they did with 1,900 if that makes sense.So that's an important metric water for us on a completion side. And then really on the production and maintenance side, it's understanding our customers' production and maintenance activities and their plans for keeping the wells that they have producing. That's really more largely aligned, at least in our view around our customers' need to drive return on invested capital and one of the ways they do that is maximize the production from producing wells.

[Michael Madden:]

Okay, got it. And then just one final quick question. What do you guys think the company's M&A capacity is right now for the balance sheet is at [indiscernible] something similar?

[Ian Dickinson:]

I'm sorry I interrupted you. Say again?

[Michael Madden:]

Go ahead.

[Ian Dickinson:]

So obviously our balance sheet with the debt level which we think we can take a big bit out of here within our productive season constrains us a bit and again, we're sensitive not to increasing the leverage on the balance sheet and with where the stock price is and really for most folks in the sector, we certainly don't want to dilute shareholders by issuing a lot of equity or any equity. So it's going to have to be a strategic deal, a coming together of two companies with the belief that the combination would be accretive to not only our customers obviously, but to investors and see if we can structure a deal that allows us to keep those important aspects in mind. We're a bit constrained right now. That's the short answer.

[Michael Madden:]

Got it. Well, thanks for taking my questions and good luck this quarter.

[Ian Dickinson:]

Thank you. Appreciate it.

[Operator:]

And there are no further questions in the queue. Mr. Dickinson, I'll turn the call back over to you for any closing comments.

[Ian Dickinson:]

Well as always, appreciate your time and attention for the call today. We look forward to talking with you again following the close of our third quarter. Have a nice afternoon, everyone. Thank you.