Enservco Corporation
Q4 2019 Earnings Call Transcript

Published: 20 Mar 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to your Enservco 2019 Year-End Earnings Call. All lines have been placed in a listen-only mode and the floor will be opened for your telephonic questions following the presentation. [Operator Instructions]At this time, it is my pleasure to turn the floor over to Jay Pfeiffer. Sir, the floor is yours.

[Jay Pfeiffer:]

Hello, and welcome to Enservco's 2019 year-end 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.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 to 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 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 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, we issued our 2019 fourth quarter and full year financial results, press release after the market closed. I'll provide a brief review of our 2019 performance, as well as some comments on recent macro events and what we're seeing so far in 2020. I'll then turn the call over to Margie for a recap of the numbers.We certainly had a strong start of 2019 after two consecutive years of delivering higher revenue and profitability in 2017 and 2018. We reported a 19% increase in revenue and positive adjusted EBITDA through the first nine months of 2019. Unfortunately, a sharp decline in activity in the fourth quarter offset most of those gains and we closed the year with revenue up only slightly and [probably] these data came in below prior year levels.In addition to the overall decline in customer activity in Q4, we experienced some seasonably warm weather in Oklahoma and Pennsylvania where demand for frac water heating services fell far off other areas of operations where weather was more cooperative. It's no secret that the oil and gas industry is facing some serious challenges right now. In Q4, sharply lower drilling and completions activity had already put pressure on us, our competitors and other players in the oilfield services space.Add to that, the first quarter decline in oil prices, due to the Saudi-Russia price war, coupled with fears of an economic slowdown related to coronavirus, we have all found ourselves in a place that I don't think anyone could have envisioned. To provide further perspective, oil started the year in the mid-50s and is now hovering around the mid-20s. This in turn has required us to make in certain cases margin eroding pricing sessions in order to retain and add customers.Having said all that, I believe it's important to recap some of the good things we accomplished in 2019, because I think they put us in a better position to operate more efficiently once the macro environment turns back in our favor. First and foremost, we grew our market share in 2019, primarily due to our acquisition of Adler Hot Oil Services, previously our largest competitor; we added some new EMPs to our customer base and closed the year with more customers than we've had at any point in company history.In the process, we further distanced ourselves from the competition as the nation's largest provider of frac water heating services, which are an absolutely critical component in the drilling and completions process. In addition, we took decisive steps to reduce our operating costs. Step one was to complete the integration of the Adler acquisition and eliminate redundant costs totaling approximately $1.1 million per annum. Step two was the closure of our water transfer business, which was non-core and had contributed $1.2 million EBITDA burn in 2019 alone. Step three, which actually occurred here in Q1 of 2020, was a further reduction of overhead through the closure of our Oklahoma facility, and the redeployment of equipment and several skilled operators to more active basins. To be clear, this does not mean we are abandoning Oklahoma or our customers there.We have a highly mobile fleet and workforce and intend to service them remotely at a lower cost from our larger Colorado operation.On top of the things I've mentioned -- just mentioned, we will continue to evaluate our discretionary spend and implement other cost reduction initiatives that makes sense. The closure of our water transfer business allowed us to refocus on core competencies in the areas of production and completion services in order to increase fleet utilization, and now optimize our fleet deployment. In this regard, we have made investments and process improvement initiatives over the past couple of years that are designed to increase efficiencies and better leverage our expanded fleet and national leadership position.Now more than ever, we recognize the importance of a strong balance sheet, de-levering is and will continue to be a very high priority for us until we get our ratios back in line. Of course, this objective is heavily dependent on a rebound in the price of oil. And right now, we have no more visibility of that process than anyone else.In closing, I want to say that I'm proud of and appreciate our administrative and field teams, who despite the difficult environment have remained laser-focused and continue to work hard to provide our customers with a world class service.And with that, I'll turn the call over to Margie for a review of our financial highlights. Margie?

[Marjorie Hargrave:]

Thank you, Ian. The fourth quarter and full year results I'll be discussing today reflect the reclassification of prior year results of our Dillco water hauling business and our water transfer segment as discontinued operations. As such, certain year ago figures will differ from those referenced on past calls.In addition, you’d probably notice a new presentation of revenue on the face of our income statement this quarter. We are now breaking our revenue into two segments, production services and completion services. We think this presentation better describes our business and better communicates the fact that we are engaged in both major aspects of our customers’ well-site activities.Total revenue for the full year increased slightly to $43 million from $42.8 million a year ago. Production services revenue grew 1% year-over-year to $14.7 million from $14.5 million. Components of production services included hot oiling up 6% to $12.4 million from $11.7 million; acidizing down 20% to $2.3 million from $2.9 million. The production services segment generated a profit of $1.1 million in 2019, down $1.7 million in the prior year.Completion services revenue increased approximately $100,000 year-over-year to $28.3 million from $28.2 million. Completion services generated a segment profit of $7.9 million in 2019 versus a segment profit of $7.6 million in the prior year. Total operating expenses in 2019 increased 6% year-over-year to $46.6 million from $44.2 million. The increase included higher direct variable costs associated with increased activity and growth investments in South Texas and Wyoming, $1 million in first quarter cost overruns in our since discontinued water transfer business and higher SG&A and depreciation and amortization expense.SG&A increased 18% to $6.2 million from $5.2 million last year due to an increase in bad debt reserve, higher personnel and overhead related to the Adler acquisition, higher D&O and professional fees and investments in IT infrastructure. As Ian noted earlier, by early third quarter, we had eliminated approximately $1.1 million in annualized overhead associated with the Adler acquisition. And we're now seeing the benefit of that as well as lower costs moving forward related to other cost reduction initiatives.Depreciation and amortization expense increased 17% to $5.7 million from $4.9 million due to our larger fleet. Our operating loss in 2019 increased to $3.6 million from $1.4 million last year. Net loss from continuing operations, including a $1.3 million gain from the April settlement agreement with the sellers of Adler increased to $5.3 million from $4.1 million a year ago.Net loss from discontinued operations totaled $2.3 million in 2019 versus $1.8 million last year. Net loss for 2019 increased to $7.7 million or $0.14 per diluted share from a net loss of $5.9 million or $0.11 per diluted share in the prior year. We reported positive adjusted EBITDA of $2.8 million, down from a positive $4.7 million a year ago.Enservco generated $4.5 million in cash from operations in 2019, up from $1.3 million in 2018. Q1 capital spending will be primarily related to maintenance and for the foreseeable future we anticipate CapEx to be in the range of approximately $1 million to $1.5 million annually.Turning to our fourth quarter financial results, total revenue in the fourth quarter declined approximately 39% to $8.1 million from $13.3 million in Q4 last year. Production services revenue was flat at $3.5 million and included hot oiling at $3 million and acidizing at $455,000, both also essentially flat year-over-year. Production services generated a segment loss of $116,000 versus a segment profit of $468,000 a year ago. Completion services revenue consisting primarily of frack water heating in the fourth quarter was down 53% year-over-year to $4.6 million from $9.8 million.Completion services generated a segment profit of $404,000 versus a segment profit of $2.7 million in Q4 last year. Total operating expenses in the fourth quarter decreased 17% year-over-year to $10.5 million from $12.7 million primarily due to a decline in variable costs related to supporting production and completion services. SG&A expense declined 7% to $1.4 million from $1.5 million last year due to efficiencies we achieved related to the Adler acquisition.Depreciation and amortization expense grew 14% to $1.4 million from $1.3 million due to the increased fleet size. Loss from operations in the fourth quarter was $2.5 million, compared to income from operations of $544,000 in the same quarter last year. Net loss from continuing operations was $3 million, compared to a loss of $141,000 last year. Net loss from discontinued operations was $340,000 versus a loss of $376,000 last year. Net loss increased to $3.3 million or $0.06 per diluted share from a net loss of $517,000 or $0.01 per diluted share in the same quarter last year. We had positive adjusted EBITDA of $168,000 in the fourth quarter versus a positive $2 million in Q4 last year.On another front, we continue to work closely with our lender East West Bank on a potential amendment that would resolve our current over advance status. You’ll recall that we received a notice of default on our loan agreement in January, regarding fourth quarter over advance, as well as minimum liquidity and fixed charge covenants -- fixed charge ratio covenant violations. We had hoped to have made more progress towards resolving these issues by now. However, with the turmoil in commodity prices and global economic upheaval that is impacting debt markets, the process is taking longer than we had anticipated. More details on this are laid out in our 10-K and we will keep investors apprised once we have something more to report.Regarding the New York Stock Exchange American listed, since we last updated you on our Q3 conference call, the NYSC American informed us that they approved our plan regain compliance with their continued listing standard as it relates to stockholders’ equity. We have approximately 14 months from now till June 3, 2021 to be precise, to satisfy the equity requirement as long as we demonstrate progress towards that goal. We're not able to share further details of our plan at this time, but we will keep you posted on what we can share as the process continues.That concludes our prepared remarks. And now I'll turn the call over to the operator for questions. Operator?

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions]. And our first question comes from Bhakti Pavani with Alliance Global. Please go ahead.

[Bhakti Pavani:]

A quick question, given the market situation and the oil price volatility, a number of EMPs laid down drilled rigs and halted the drilling and completion activities. So, how are you guys preparing for that and what kind of impact you have seen on your business, especially in Q1, which is kind of the next highest revenue generating quarter for you guys?

[Ian Dickinson:]

Yes. Hi, Bhakti, thanks for the question. So, the lay down and the reduction in drilling and completions activity you referenced in the prepared remarks has had an impact on our Q1. As we move into Q2 and through Q2 and Q3, the business relies primarily on production related activities. And so, the reduction in drilling and completions work will be less impactful to our Q2 and Q3 but it certainly had an impact on Q1.

[Bhakti Pavani:]

And given the coronavirus situation which is kind of spreading very rapidly, as a company, how are you preparing yourselves and what precautions you have taken to-date, if you could expand on those please?

[Ian Dickinson:]

Well, we're taking all the appropriate precautions as company policy following the CDC's guidelines. There are little different dynamics between our corporate office which is working from home and what we're able to do so from field operations. So our locations are continuing to operate close to normal, paying attention to social distancing, et cetera. But -- so we’re continuing to operate across our locations. We're watching this by the day, by the hour and staying in close communication with our customers on their policies and any changes to their scheduled work. And so it's an ongoing process of monitoring. But we're following all the appropriate procedures.

[Bhakti Pavani:]

Thank you. You did talk about closing down your Oklahoma operation. Are there any other operations across the U.S. that you are monitoring and you think you would do some other kind of things that you did in Oklahoma? Could you maybe talk about those please?

[Ian Dickinson:]

I think Oklahoma for us -- and we've done this in the past where we provided heating services remotely out of Colorado. So that was an opportunity for us to eliminate some overhead costs. What I would say is, generally speaking, we're going to continue to monitor activity levels and look for ways we can be more cost efficient. But we're going to make the moves that make sense for the business based on the workload and demand. But at this time that was the only correct move to make from a location specific perspective, but we're evaluating all options.

[Operator:]

And our next question comes from Ed Woo with Ascendiant Capital. Please go ahead.

[Ed Woo:]

Yes. A quick question back on the prior question. So is that correct that your field operations has relatively been unaffected by the coronavirus relatively?

[Ian Dickinson:]

Yes, at this stage, as you know, this is a rapidly developing processes, everybody is aware. So we are, as I mentioned, just actively monitoring our policy to make sure that we're staying up to speed with the CDC recommendations. Top priority to us is the safety of our employees and the folks and customers we work with. And so, we're taking all necessary precautions. At this stage, we're still operating across all of our locations. And as I mentioned, we're monitoring customer activity and staying in close contact with them to the extent that changes, and we'll just respond accordingly.

[Ed Woo:]

Great. And then my question is, I know you talked a little bit about -- obviously the oil outlook is pretty grim right now. But what are you hearing from your customers? And it seems like people are predicting, at least acting like this is going to -- the $20 barrel oil is going to be there for the long haul. Is that what your customers are hearing as well?

[Ian Dickinson:]

I don't think anybody knows for sure. What I would say is what we're hearing from most of our customers is that, to expect a major drop off in drilling and completions activity, but that the production related work, our hot oiling and acidizing services, there'll be continued demand for that. I expect some of our customers are going to ask us to sharpen our pencil. But from the feedback we've been receiving, we've been told to prepare to continue the production related services. I think for these EMPs as they're laying down their drilling and completion rigs, even at these lower price points maximizing the production out of the producing wells is going to be important for them.So, it's impossible for us or anybody to know exactly what's going to transpire here in the weeks and months and quarters ahead. My sense is that we'll have sustained demand for the production services and we hope to see some rationality come back to the market as we exit third quarter and head back into fourth quarter where completions activity becomes important to us again for the fracking services. But we're going to be proactive and continue to manage the company and our cost structure to handle whatever is thrown our direction to the best of our ability. So we're going to be very proactive. We're in constant communication with our customers, and our employees and are active in managing situation.

[Ed Woo:]

Great. And then the last question I have is just on the competitive landscape. Now obviously there’s a little bit of turmoil, what are you seeing from the competitors? Are you seeing anybody -- you think maybe the competitive landscape will get easier and people start going out of business or what do you see out there?

[Ian Dickinson:]

Well, I think it's tough for everybody. As I had mentioned in the prepared remarks, we took additional market share here heading into this heating season in addition to the market share that we picked up from the Adler acquisition. And so, I know we've placed some additional pressures on our competition in our core heating markets. We continue to take market share in Texas as well as we've grown that market consistently year-over-year.I think this is going to be difficult for everybody. I’d prefer not to comment specifically on what we're seeing with our competitors, but it's my sense that the competitive landscape could be improved for us as we move forward. I mean the reality is in environment like this there are going to be some casualties. And we're aware of some folks who move the plow stakes and we're taking advantage of that where we can. We've got the equipment to do that, we've got the operators to do that, and as part of the decision to redeploy some assets out of Oklahoma to other basins where we've got work and can put those units immediately into action. So I think it's going to be to our advantage as it relates to competitive situation.

[Operator:]

[Operator Instructions]. And I'm showing no further questions at this time. So I'll turn it back over to Ian and Margie for any closing.

[Ian Dickinson:]

Thank you. And, as always, we appreciate everybody's time and attention on the call today. We look forward to talking again, following the close of our first quarter. Have a nice afternoon. I hope everybody stays healthy and safe.

[Operator:]

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and have a great day.