Enservco Corporation
Q3 2019 Earnings Call Transcript

Published: 14 Nov 2019

[Operator:]

Good day ladies and gentlemen, and welcome to the Enservco, Third Quarter Earnings Conference Call. All lines have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions]At this time it is my pleasure to turn the floor over to your host for today, Mr. Jay Pfeiffer of Pfeiffer High Investor Relations. Sir, the floor is yours.

[Jay Pfeiffer:]

Thank you, and welcome to Enservco's, 2019 Third 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 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 this 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 the call today. Today we issued our 2019 third quarter and nine month results press release after the market closed. I’m going to touch on some highlights for both periods and then hand it over to Margie for a recap of the numbers.As you know, our third quarter is historically our slowest quarter of the year. The work we performed for our customers is primarily production and maintenance related and we also spent a lot of time getting our teams and equipment gear up for our heating season, which encompasses the fourth and first quarters when we generate the majority of our revenue and cash flows for the year.Nevertheless, in spite of all the buzz around declining customer activity in the face of depleted capital budgets and the economic headwinds, we still managed to achieve a 23% increase in revenue in the third quarter. This increase was attributable to an influx in new customers from both our Adler acquisition and organic market efforts.We also saw some improvement in our water transfer segment, where revenue grew 42% year-over-year and we generated income of $70,000, following the previous two quarters that combined to generate $1.2 million in segment losses.We did experience a disproportionate increase in cost relative to our revenue increase in the third quarter. There were a few factors at play here. One, we incurred management transition costs in the quarter that we didn't have in Q3 last year; two, general industry headwinds resulted in an increase in our D&O insurance in the third quarter. Another factor involved was an increase in our bad debt reserve from $140,000 to $290,000 due to the unfavorable industry conditions.Additionally we took approximately 32,000 in write-offs in the quarter associated with two customer accounts. We also made some additional investments to enhance our IT infrastructure and that will not be repeated to nearly this level in coming quarters.Our year-to-date financial results were solid. Revenue increased 19% year-over-year and we achieved a $1 million improvement in our net loss. Absent the anomalous water transfer line freeze in the first quarter, our bottom line improvement would have been more significant.We have also made a lot of progress taking cost out of the business, although the Adler acquisition was primarily a market share play design to cement our position as the nation's largest provider of frac water heating services, it also presented opportunities to eliminate approximately $1 million in redundant costs in the form of compensation, duplicate service providers and physical locations.Regarding the latter, we have consolidated all legacy Adler facilities into our existing yards, and into our Douglas Wyoming facility. The bulk of these synergies took effect in the mid-year time frame and their impact will be more visible in the coming year.The Adler team has blended nicely into our legacy team and we believe we're getting good buy and across our workforce regarding the process improvement changes, we've been making in the overall direction of our business; morale is high. We are growing revenue, adding customers and market share and creating a more efficient cost structure designed to better serve our customers and enhance shareholder value. We believe the fruits of this labor will be reflected in improved financial results over the long term.And with that, I'll turn the call over to Margie for a review of our financial highlights. Margie.

[Marjorie Hargrave:]

Thank you, Ian. As a reminder, the third quarter and nine months results I'll be covering reflects the reclassification of prior year results of our Dillco water hauling segments as discontinued operations. As such, certain year ago figures were different from those referenced on past calls.Total revenue in the third quarter increased approximately 23% to $4.7 million from $3.8 million in Q3 last year. On a segment basis well enhancement services revenue grew 19% year-over-year to $3.8 million from $3.2 million. Our hot oiling service led the way growing 20% year-over-year to $2.7 million. Acidizing was up 4% and flat frac water heating was flat year-over-year. The well enhancement segment generated a loss of $737,000 in the third quarter, essentially flat versus a year ago.Out water transfer segment generated revenue of $899,000 in the third quarter, up 42% year-over-year from $634,000. Water transfer generated income of $70,000 in Q3 versus a loss of $16,000 in Q3 last year and versus approximately $1.2 million loss through the first two quarters of this year.Total operating expenses in the third quarter increased 28% year-over-year to $9.3 million from $7.3 million. Higher variable costs related to supporting increased customer activity accounted for $1.1 million or 55% of the $2 million increase.In addition, sales, general and administrative expense increased 48% in the third quarter to $1.7 million from $1.2 million last year, due to as Ian mentioned, an increase in our bad debt reserve and a write-off totaling $180,000, a hike at D&O insurance premium and investments in IT infrastructure and processes.In addition, we incurred $83,000 in transition costs during the quarter versus no such costs in the year ago Q3. Depreciation and amortization expense grew 20% to $1.7 million from $1.4 million due to the increased fleet side.As a result, our third quarter operating loss increased 33% to $4.6 million from an operating loss of $3.5 million in Q3 last year. Net loss increased to $5.4 million or $0.10 per diluted share from a net loss of $4.1 million or $0.08 per diluted share in the same quarter last year. Adjusted EBITDA loss in the third quarter increased to $2.7 million from the loss of $1.9 million in Q3 last year.Turning to our year-end financial results – our year-to-date, sorry, financial results. Total revenues through nine months increased 19% to $38.1 million from $32 million in the comparable period last year. Well enhancement services grew 19% year-over-year to $34.9 million from $29.5 million. The well enhancement segment included frac water heating up 29% to $22.7 million from $17.7 million; hot oiling up 9% to $9.5 million from $8.7 million; acidizing down 25% to $1.8 million from $2.4 million.The well enhancement segment generated $9.1 million in income in the first nine months, a 38% increase over income of $6.6 million in the same period year. Water transfer revenue increased 25% year-to-date to $3.2 million from $2.6 million last year. This segment generated a loss of $1.1 million compared to a loss of $28,000 in the same period last year. The increase was attributable to our previously reported launch rate in the first quarter of this year.Total operating expenses, inclusive of $1 million in the first quarter water transfer costs, water transfer cost overrun increased 18% in the first nine months to $41.3 million from $34.8 in the same period last year.Higher direct variable costs associated with increased activity accounted for $5.1 million or 80% of the $6.4 million increase. Sale, general and administrative expenses increased 28% to $4.8 million from $3.8 million last year, due primarily to hire personnel and overhead related to the Adler acquisition and investments in IT infrastructure. However, as Ian noted earlier, by early third quarter we had eliminated more than $1 million in annualized overhead related to the Adler acquisition and the benefit of that should be reflected in future quarters.Depreciation and amortization expense increased 15% to $5.1 million from $4.4 million due to our larger fleet. Our operating loss increased to 12% for the first nine months to $3.1 million from $2.8 million. Net loss improved 19% year-over-year to $4.3 million from $5.3 million. That improvement includes a $1.2 million gain related to a settlement agreement with the sellers of Adler. Diluted EPS loss was $0.08 versus a loss of $0.10 a year ago.Adjusted EBITDA year-to-date was flat at $2.6 million. Enservco generated $8.5 million in cash from operations year-to-date, which represents a 50% increase, over $5.7 million in the same period last year. Q4 capital spending will be primarily related to maintenance and for the foreseeable future we anticipate CapEx be in the range of $1 million to $1.5 million annually.Switching gears, I'm pleased to announce the East West Bank is currently in the credit process to provide more liquidity to our business and removed the over advance status we have been in for approximately one month. The amendment would allow for a higher advance rate against our equipment, which tapers down over the next six weeks to allow us to ramp-up for the winter season, a minor increase in our-all-in interest rate, the removal of the required liquidity in Enservco, which is to go below its 1.2 to one fixed charge coverage ratio, and a requirement for Enservco to raise some subordinated debt before March 31, 2020.As further to the need for subordinated debt, we are happy to inform you that our largest shareholder Cross River Partners loaned the company $500,000 of subordinated debt today November 13, 2019 under comparable terms to subordinated debt loan to the company in June 2017.Before I turn the call back over to you, I want to address the notification we received from the New York Stock Exchange regarding the listing requirements as they relate to stock price. We reported this notification in an 8-K filed yesterday. The notification is standard procedure in cases where the stock price falls below $0.20 for an extended period. The New York Stock Exchange has given us a six month cure period, during which we basically have two options

[Operator:]

Thank you. [Operator Instructions]. We’ll go first to Barry Mendel at Mendel Money Management.

[Barry Mendel:]

Yeah thanks. Question is, you mentioned that you've cut costs from your synergies by about $1 million, but that still doesn't get you to breakeven. So what is the plan to at least get to break even? Now your revenue growth has been good, but how do we get to breakeven?

[Ian Dickinson:]

Yeah, hi Barry, this is Ian. Thanks for the question. As you are probably familiar, we have a seasonal business and so when we generate the bulk of our revenue and cash flows in Q1 and Q4 and as I mentioned in the prepared remarks, third quarter is typically our slowest. So we've generated positive EBITDA in 2017 and 2018 and will again here in 2019. So you know the synergies we drove, the cost reductions we drove this year will help us operate more efficiently and add to that bottom line as we move into 2020.

[Operator:]

We’ll go to our next question from Bhakti Pavani at Alliance Global Partners.

[Bhakti Pavani:]

Good afternoon guys. Thanks for taking my questions.

[Ian Dickinson:]

Thanks Bhakti.

[Bhakti Pavani:]

Just kind of a follow-up on the previous caller's question. You know with regards to synergy, are there any additional areas where you - I mean have you identified where you can obtain or materialize further synergies and what would be – you know if you have to quantify what would be the extent of those synergies?

[Ian Dickinson:]

We’ve completed most of that synergy work with the final steps really being taken in the third quarter, the consolidation of facilities. Keep in mind that we were unable to come tackle those opportunities until we reached the second quarter in the wind down of our heating season Bhakti, so we really took those actions on beginning in the second quarter.I don't see the opportunity for significant additional synergy related cost reductions. We are as a management team always looking for areas where we can be more efficient and drive out an efficiency on unnecessary costs, so we’ll continue to do that. But in terms of, Adler’s specific synergies, we’ve executed on the bulk of all of that here in the second and third quarter.

[Bhakti Pavani:]

Fair enough, thank you. You know with regards to you know the beginning of the heating season and you are already half way through the last quarter. How has the season began as compared to last year with the extended fleet from Adler?

[Ian Dickinson:]

So, as we’ve noted, completions activity is down kind of generally across the basins. We added a significant number of new customers through our market share heading into this season, which has allowed us to combat some of that. But heading into last season oil prices in the September, October timeframe, we're in the high 50, low 70 range, and we saw a steep swing in mid-November down to the mid-40s.You know we entered this season with oil prices in the mid-50s, $57 a barrel, and a lot of our customers have exhausted some of their CapEx budget. So it’s a little softer market, but we've done a good job again of expanding our market share and really cross all the basins we participate in.

[Bhakti Pavani:]

Got it. And from the geographical standpoint, are you guys comfortable with the areas that you are currently in or do you plan to consolidate your fleet to an area which will provide you much better opportunity than you currently are obtaining?

[Ian Dickinson:]

No, we like the basins we are in and as we’ve mentioned on previous calls and again today, we opened a new facility in Douglas Wyoming that's opened up additional market opportunities for us. We’ve been executing in that area here over the past couple of years, but this is a kind of foothold that will allow us to expand.So I like the basins that we’re in. We’ve seen and continue to see growth in our South region, primarily there in South Texas and you know we continue to do the work to try to grow our presence further north, up North Dakota and the Adler acquisition has allowed us to do that on several fronts.But again, we’re happy with the basins that we’re in, and you know we’ll continue to try to grow across our entire footprint.

[Bhakti Pavani:]

Got it, and just one last one. I know you mentioned that you have been in active negotiations with East West Bank. Just kind of wondering, have you been talking to any other banks and trying to obtain any additional credit facilities, so that you are not in a position that you are currently in, in the third quarter.

[Ian Dickinson:]

So, we've been – our primary conversations have been with the bank, you know working through the amendment that Margie referenced. As a normal course of our business, we are constantly in touch with the capital markets and looking at options to optimize our capital structure, and so that's part of our ongoing efforts. I don’t know if there is anything you would add to that Margie.

[Marjorie Hargrave:]

No, I think that’s accurate.

[Bhakti Pavani:]

Okay, thank you very much, that's it from my side.

[Ian Dickinson:]

Thanks Bhakti. I appreciate it.

[Operator:]

[Operator Instructions] So we’ll move to Ed Woo at Ascendiant Capital.

[Ed Woo:]

Yeah, thanks for taking my question. My question is, your outlook for oil. It seems like oil is holding up relatively well, but it seems like drilling activities is lower. Can you talk about that?

[Ian Dickinson:]

Yeah, I think we’ve seen relative stability in oil prices in the mid-50’s. You know what we're seeing is the EMPs or customer base keeping with the mantra of living within cash flows and maybe doubling down on that mantra. And so, you know it's not that where oil prices are today that we can’t generate profits, you know general access to capital and a doubling down of the discipline of living within cash flows. It seems to be more what's driving activity levels and what would be small swings in the price of oil.

[Ed Woo:]

Great! Well, thanks for the color and good luck. Thank you.

[Ian Dickinson:]

Thanks Ed. I appreciate the question.

[Operator:]

With no other questions holding, I'll turn the conference back to management for any additional or closing remarks.

[Ian Dickinson:]

Thank you, and thanks for the questions again. As always, we appreciate your time and attention on the call today. We look forward to talking again with you following our fourth quarter. Take care and I appreciate the time.

[Operator:]

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