Enservco Corporation
Q1 2018 Earnings Call Transcript

Published: 13 May 2018

[Operator:]

Greetings and welcome to the Enservco Corporation 2018 First Quarter Conference 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, Jay Pfeiffer, from Pfeiffer High Investor Relations. Please go ahead sir.

[Jay Pfeiffer:]

Hello and welcome to the Enservco's 2018 first quarter conference call. Presenting for the Company today are Ian Dickinson, CEO; and Dustin Bradford, CFO. As a reminder, matters discussed in 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 this call is limited by SEC Reg FD, which prohibits selective 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:]

All right, thanks Jay, and welcome everyone to our 2018 first quarter earnings call. I'm pleased to say we have carried our renewed 2017 momentum into 2018. The first quarter was our fifth consecutive quarter of year-over-year revenue growth and our second highest revenue quarter in company history. An impressive metric considering oil prices and service pricing are still well below their peak levels of 2014. It was also our second straight quarter of solid profit growth including double-digit increases in our operating income, net income, earnings per share and adjusted EBITDA. General activity levels continue to increase, which is driving steady growth in customer demand for our services and resultant increase in our fleet utilization rates. As we've indicated in our press release today, we now have more equipment working and more geographic areas than at any time in company’s history. Given the generally bullish outlook for commodity prices and as yet unrealized benefits from an ongoing process improvement program that is transforming the way we do business. We believe we are well positioned to create a platform for long-term sustainable revenue and profit growth, a platform that will also be ideally suited to strategic and accretive M&A activities. Let me drill down on a few financial highlights from the first quarter. Revenue increased 53% to $21.1 million in Q1 from $13.8 million in the same quarter last year that $21 million compares to our all time high of approximately $25 million in the first quarter of 2014 when the price of oil was in the $100 range and service pricing was correspondingly high. This underscores the point we have been making recently that revenue and profit growth for Enservco does not require $100 oil. Assuming oil prices remain relatively stable above $45 a barrel, we believe we can continue to increase our equipment utilization rates and benefit from the expanded earning capacity of the fleet. At the same time, we won't turn our nose up to $100 oil. Earlier today, Merrill Lynch – a Merrill Lynch analyst put out a note saying there is “risk of $100 oil next year.” Well, that's a risk we are certainly willing to assume. Also notable in Q1 all three components of our well enhancement services segment, frac heating, hot oiling and acidizing, showed double-digit growth and contributed to the significant margin improvement versus prior year. Likewise, our new water transfer business grew by double-digits and generated a modest profit in the quarter. There's a lot of runway and water transfer because only a small fraction of our customers are taking advantage of our ability to bundle the service with our other services, but the relatively modest fixed cost structure, the opportunity for revenue growth and margin expansion is significant. We continue to believe water transfer will become an increasingly relevant component of our revenue mix as we move forward. And finally, we enjoyed a continued resurgence in overall profit metrics with operating income up 278%, net income up more than 40 fold, earnings per share up 4x and adjusted EBITDA up 86% year-over-year. Now let me provide some color on what we've been experiencing at the field level. As a reminder, Enservco is a national company that serves most of the largest as well as many small to medium sized exploration and production companies in the United States. And like many of our competitors who specialized in a single service, we have five major service lines and therefore have a competitive advantage in helping our customers to simplify the procurement process and reduce costs. The growth we are enjoying is being driven by an increased demand for all our core services in most major basins in the U.S. With respect to our strong first quarter revenue gains, Colorado, where Enservco first began operations, led the way up 22% year-over-year to 9.7 million. We are the largest provider of frac water heating in Colorado's DJ Basin and that service dominated the total revenue mix in Q1 up 76% to $14.4 million. As we added new customers, we did a great job of retaining legacy customers. We also had a solid performance and some new customer wins in the Bakken in North Dakota and the Powder River Basin in Wyoming and The San Juan Basin in New Mexico and Marcellus in Pennsylvania and the Scoop/Stack in Oklahoma. As the heating season winds down, we are now in discussions with multiple customers lining up commitments for next season when we plan to deploy more of our units further north into Wyoming and North Dakota to take advantage of the longer season. We grew our hot oiling revenue 12% year-over-year to $3.7 million in Q1 as demand in our Texas, Eagle Ford and Austin Chalk areas remains strong with maintenance and work over rig activity on the rise. We're also seeing good results in the Bakken as well as the DJ. The 12% year-over-year growth was nice, but we think there's a lot of room to improve and we expect that to happen as we get further into our new sales initiative and process improvement program that I'll talk about in just a few minutes. Acidizing revenue grew 116% year-over-year to 1 million, again driven primarily by a resumption of maintenance activity on the strength of higher commodity prices. Our primary focus for acidizing is in South Texas, where we continue to win new business and retain legacy customers. We’re also active in Wyoming and Kansas and expect activity in all three areas to increase in the second and third quarters. On the water transfer front, we grew revenue 32% to $1 million in Q1. As I mentioned earlier, we think there are significant upside in this business line as we refine our marketing programs and leverage our customer relationships. In anticipation of this growth, we invested in an additional five miles a lay flat hose in first quarter increasing our total capacity to 17 miles. Other than the solid improvement in our top and bottom line performance, a big story to Enservco continues to be the ongoing transformation in the way we manage our operations. This has been a recurring theme in our recent earnings calls because we view it as critically important to further unlocking the value of our business. I won't repeat all the details I provided last quarter, but the process which will continue through 2018 involves strengthening our sales organization and enhancing our operating structure and business processes in order to improve communication, increase transparency and bolster a culture of collaboration in which our regional operations and corporate staff are all pulling in the same direction toward our common interest. The ultimate objective is to drive full fleet utilization by optimizing our equipment deployment and leveraging our geographic footprint and world-class customer base. Our workforce is fully engaged in this process and we believe it will significantly enhance our value proposition and will resonate with our customers and ultimately lead to outstanding returns for our shareholders. Before I hand the call over to Dustin, I want to say a few words about Austin Peitz, who recently left Enservco following 20 years of committed service. For those of you who don't know, Austin was a co-founder, who had been with the company since the very beginning. He played a major role in Enservco’s formative years and in the successful run up to the banner 2014 campaign not to mention helping to successfully guide the company through the most recent downturn and into a highly successful heating season. Over the past year as we recognized the opportunity to enhance our systems and processes to optimize our operations and logistics in a focused effort to take and serve go to the next level of growth, our board determined and Austin agreed that hiring a COO with a specific skill set in driving process and logistics efficiency in support of scale was required. We would have loved to keep Austin on board and in fact had a couple other roles in mind at the strategic level for him, but he respectfully declined in the interest of pursuing new challenges and we certainly respect his decision. So on behalf of the entire Enservco team I want to thank Austin for his incredible contributions to the company and wish him all the best in his future endeavors. In the meantime, we've initiated a search for a new COO and expect to fill that role soon. In summary, we are pleased to have delivered another strong quarter of revenue and profit growth. Our conversations with customers indicate continued demand for all our core services. Well permitting, rig count, drilling, completion and maintenance activity are all on the rise in the markets we serve. Our sales, marketing and process improvement initiatives are proceeding according to plan. The outlook for the economic growth in commodity price strength remains positive. Accordingly, we are optimistic about our ability to continue delivering improved financial results for the remainder of 2018. With that I'll turn the call over to our CFO, Dustin Bradford, for a brief review of our financial highlights. Dustin?

[Dustin Bradford:]

Thanks, Ian. Total revenue in the first quarter of 2018 increased 53% to $21.1 million from $13.8 million in the same quarter last year. As Ian mentioned, we approached pre-downtown levels of revenue without the benefit of peak oil prices in correspondingly high pricing for service providers. Well enhancement services revenue increased 61% year-over-year to $91.3 million from $12 million last year. All three well enhancement components showed year-over-year improvement in the quarter. Specifically, frac water heating was up 76% to $14.4 million from $8.2 million. Hot oiling was up 12% to $3.7 million from $3.3 million last year and acidizing increased 116% to $1 million from $471,000 in the first quarter of last year. Operating income in that segment grew sharply to $6.2 million compared to $3.5 million in Q1 last year. Water transfer revenue increased 32% to $1 million in Q1 from $752,000 in the comparable quarter last year. As Ian indicated, we think this service offering can play a big role in our growth and accordingly invested approximately $541,000 in additional assets during the quarter. In Q1 water transfer produced an operating profit of $38,000. Water hauling revenue in Q1 was $841,000 down 5% from $885,000 last year. We had an operating loss in this segment of $107,000. Total operating expenses in the first quarter increased 40% year-over-year to $18.2 million from $13 million, primarily due to higher direct costs of delivering the services. Selling, general and administrative expenses increased to approximately $1.4 million from $994,000 in the first quarter of 2017. That increase was principally due to higher personnel costs related to our establishment of a formal business development team and management transition costs. Depreciation and amortization expense was flat at $1.6 million. The higher revenue combined with our relatively lean fixed cost structure pushed operating income up 278% in the first quarter to $3 million compared with $783,000 in the same quarter last year. We reported a significant increase in net income in the quarter to $2 million or $0.04 per share versus net income of $50,000 or less than a penny per diluted share in the same quarter last year. Adjusted EBITDA in Q1 grew 86% to $4.7 million from $2.5 million in the comparable quarter last year. As a reminder due to the capital intensive nature of our business, we believe adjusted EBITDA is an important metric for our investors to evaluate our operating performance and the health of our business. On the balance sheet, working capital at the end of the quarter in the March 31 was $9.3 million, up 16% from $8 million at year-end 2017. Stockholders' equity grew 26% to $10.3 million from $8.2 million. Our current ratio improved to 2.55 to 1 from 2.84 to 1 at year end and our debt to equity ratio improved to 2.7 to 1 from 3.21 to 1 at year end. As we previously stated, we are focused on maintaining balance sheet discipline and intent to delever our business over time. Our fleet remains essentially unchanged from last quarter with the exception of the water transfer additions I mentioned. Our capital spending in Q2 will be primarily related to CapEx, maintenance CapEx on the existing fleet. And for the remainder of 2018, we anticipate CapEx to be in the range of $1 million to $2 million. And with that we'll turn the call over to the operator for any questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Bhakti Pavani, Euro Pacific Capital. Please go ahead, sir.

[Bhakti Pavani:]

Good afternoon guy. Congratulations on the quarter.

[Ian Dickinson:]

Thank you, Bhakti. I appreciate that.

[Bhakti Pavani:]

I guess that was one of the best quarters the company had in a while.

[Ian Dickinson:]

Yeah, since Q1 of 2014 that’s right.

[Bhakti Pavani:]

Yeah. So just quickly, you know, talking about the acidizing business, what are your plans are or what’s the utilization rate currently and how do you intend to improve the utilization over the next two quarters?

[Ian Dickinson:]

So the utilization rate for acidizing, bear with me Bhakti, was right around 55% for the quarter. We believe will drive additional utilization as I mentioned in the prepared remarks down in South Texas through expansion of current customer relationships and some new ones. We're also seeing a pick up in activity in Wyoming in the Powder River and also in Kansas out of our garden city office. So we've got some additional work that's lining up that we're working on with our current customer base and some new additional customers.

[Bhakti Pavani:]

Perfect. You have also mentioned about expanding your sales team. I wanted to understand are you looking to hire people with certain expertise or focusing on certain business? Or is it going to be throughout the business lines that you currently operate?

[Ian Dickinson:]

That will be throughout the current business lines. We're looking for folks who have significant experience selling into this oil field environment. Obviously if somebody has a particular skill set in one of our service lines that will accrue to their benefit, but we're looking for something as well rounded and can develop those customer relationships across the full suite of services.

[Bhakti Pavani:]

Got it. With regards to frac water heating business, I know Q1 is the strongest and considering the colder month of specifically April, should we expect to see similar kind of performance in Q2 that that you guys had in Q2 of last year?

[Ian Dickinson:]

Yeah, I haven't really gone back to look at Q2 from last year and how that would map against where we see the momentum here heading into the second quarter. Obviously, as we get into second quarter, we’re into what we kind of referenced as our shoulder season. And so as temperatures rise, obviously the work slows down. Now, we have seen that work begin to taper off as we got into the second quarter and in the latter part of – latter part of first quarter and as we move into the second quarter, but I don't have a real good sense right now, Bhakti, on how to compare that to last year.

[Bhakti Pavani:]

Okay. Moving to water transfer business, you acquired some assets there in Q1, what are – what initiatives are you taking on the marketing front in order to grow that business and how quickly do you think that business can grow given the current fleet or units that you have?

[Ian Dickinson:]

Well, so we are – from a marketing standpoint, I mean, obviously a big piece of what we're doing is reaching out to our current customer base and new potential customers and making them fully aware of the service offering. We're trying to focus our energies into the Rockies, so into the DJ and up into the Powder River although there are opportunities that have come our way and some of our other geographies. And so, we're not limited to the Rockies, but that’s where we’re putting some focus. We've developed some basic marketing collateral, done some website related enhancement, Google Search enhancement to try to drive – better awareness of the fact that this is a service line that we offer. So we have some of that going, but most of the work is going to be really at the direct relationship level with the current customers.

[Bhakti Pavani:]

Got it. Just one housekeeping question. You have about $40,000 in severance and transition costs in Q1, should we estimate any kind of you know one-time extraordinary expense in Q2 at this point?

[Ian Dickinson:]

Well, there will be transition costs associated with Austin's departure.

[Bhakti Pavani:]

Can you remind what’s the range or what should be the expectation at this time?

[Dustin Bradford:]

Hi, Bhakti. Dustin is here. So we did add the dollar amounts associated with that departure within our footnotes in the 10-Q. It’s in the range of $300,000 to $400,000 that we will have in the quarter.

[Bhakti Pavani:]

Okay, thanks guys. That’s it from my side. Again congratulations.

[Ian Dickinson:]

Thanks, Bhakti. I appreciate it.

[Operator:]

The next question is from Gary Ribe, Macro Consulting. Please go ahead sir.

[Gary Ribe:]

Hi, guys. Good job on everything.

[Ian Dickinson:]

Thanks, Gary.

[Gary Ribe:]

I have just I think a quick one. It sounds like you guys are pretty optimistic and things are going pretty well and that's excellent. I guess I know you guys don't give any guidance and that's fine, but would you expect since you're coming into the kind of seasonally weak Q1 and Q3, would you expect to be like EBITDA breakeven. Is that a reasonable expectation given the level of activity that you're seeing?

[Ian Dickinson:]

Well, yeah, again we don't give guidance. We're certainly – it’s a major focus for us as to start generating positive cash flows out of our Q2 and Q3. It's important to note that in 2014 when we did record revenues of roughly $57 million and EBITDA of roughly $11.5 million, we lost about $1.8 million of EBITDA in Q2 and Q3 combined. Obviously, we're putting more focus on our year around services including hot oiling, which does have a seasonal dynamic, but there is year round work. We're doing a fair amount in the down South Texas as an example. And acidizing is actually somewhat countercyclical. We see a small uptick as we move into second and third quarter traditionally. Our water transfer business, which is a new – relatively new service line for us is year round and does not really have a seasonal dynamic to it. And so as we focus on expanding – increasing utilization across our fleet, no service lines, that's the goal as to start driving positive cash flows out of those quarters. But again I won't give any specific guidance around what we expect from Q2 or Q3.

[Gary Ribe:]

Okay, now it’s fair enough. And you know given the focus that you guys have on sort of optimizing the fleet utilization and that sort of stuff. I think people look at you know where you were in 2014 and then the expansion of the fleet and all that sort of stuff. Do you think that if you can get back to similar kind of environment and maybe not – get back to similar environment, but like I mean when you get utilization up, would you expect the margins to be better because of the better utilization that you guys are trying to drive?

[Ian Dickinson:]

Well, I think I understand your question. We do have a slide in our investor deck that's out on our website that speaks to that dynamic. And so if we get back the utilization rates that we saw in 2014 with our new expanded fleet, we think we can drive somewhere in the $80 million to $85 million of top line and that's assuming rates remain compressed at the current levels, our billing rates to our customers. Obviously, if rates get back to 2014, the earning capacity top line is higher. From a margin perspective, the other thing that we've mentioned in that is that if we were to drive back utilization rate that we saw in 2014 current pricing in our current fleet, we would anticipate EBITDA margins in that high teens $20 million dollars range. But there is economy of scale as we grow. We do have a fixed cost component to the business. And so as we scale revenues, it’s certainly a dynamic of more dropping to the bottom line, but I would say this as well. I mean we do anticipate and I think most oilfield services providers anticipate some opportunity to increase prices here as we move through 2018 into 2019. I would just guard against drawing direct line of expectation to margins as we are seeing some pricing pressure, cost inflation, I guess I would put it at that way in terms of labor cost, primarily. It's a very tight job market. So we still think it would be a net positive to the extent we can gain some price increases, but there will be some cost inflation goes along with it.

[Gary Ribe:]

Got it. That was leading to my next question about is price increases and cost inflation. So you kind of caught me up in the past. I appreciate it. Alright, cool. Well, thank you. Good job in everything.

[Ian Dickinson:]

Thanks, I appreciate the questions.

[Operator:]

The next question is from [indiscernible]. Please go ahead, sir.

[Unidentified Analyst:]

Yes, good quarter guys. A couple of questions about. Number one, you've got a substantial 40% increase in SG&A. Is that a level that we should expect to see going forward or is there one-time cost in there that wouldn't be seen in future quarters?

[Ian Dickinson:]

Well as we mentioned – I think Dustin mentioned in his prepared remarks, we did invest in the business development team and that will be an ongoing cost. We are accruing bonuses month to month based – against our performance, against some internal targets. And so to the extent we continue to perform, we’ll continue to accrue bonuses. We do have some one-time cost in Q1 related to transition costs. But you know – so it's hard for me to tell you exactly, but we expect SG&A as a percent of revenue to actually decline as we grow our top-line. But the investment in the business development teams there, I wouldn't expect the incremental gains and we did have some one-time costs in Q1 that will not continue into the future quarters, at least those same costs.

[Unidentified Analyst:]

Okay. I guess my second question is around the water transfer and water hauling services, which are each just right around $1 million a quarter breakeven basically. Where do you see return on the investment going with those businesses as you if you're successful in growing those businesses with your customer base? What kinds of margins are expected to get out of those businesses?

[Ian Dickinson:]

Yeah, so they are distinct businesses. So let me start with water transfer. We believe that’s a business that can generate 30% margins. Once we get the fleet to a certain level of utilization, we're still – utilization level on the fleet we have today is still relatively low, so that margin is compressed. On the water hauling side that's been a service, that’s been relatively commoditized. We have done a few things here recently in renegotiating some rates and kind of reworking the way that we manage the labor, reducing over time. So we're making some moves on the water hauling side to try to enhance the margins there.

[Unidentified Analyst:]

Okay. Is there a reason that you keep the water – I mean that's traditional one and Mom and Pops always undercut your costs on water hauling your revenues? But where – what's the – why are you staying in the water hauling business then?

[Ian Dickinson:]

Well, so it's – we are constantly evaluating our lines of business and water hauling is one of the things that we always are looking at it. It's accretive to the business from the standpoint of the customer – better customer base we have. It's a valuable service. And if we do a better job, we’re kind of bundling and blending those services. I think we can start driving margins in that line of business to levels that may not rise to some of our other more non-commoditized services, but we think we can drive profits out of that business especially as the markets recovered and our ability to take rates up has proven out.

[Unidentified Analyst:]

All right, I'm looking at the numbers and that's – that makes sense to me, but again that's – you guys run the business. So thanks very much for your information.

[Ian Dickinson:]

Thanks for the questions. I appreciate it.

[Operator:]

We have a question from [indiscernible] Please go ahead, sir.

[Unidentified Analyst:]

Yeah, thank you for taking my question and graduations on the quarter. My question is there seems to be a consensus or the feeling that you mentioned earlier that oil can be possibly spike up soon. How much lead time is there in your business for your customers to want to wrap up production like how quickly would they be able to do it? And how much – how quickly would you be able to service them?

[Ian Dickinson:]

Well, we can respond very quickly. We keep our entire fleet ready to go. And so, we've got an active maintenance program, CapEx program to ensure that our fleet is ready to mobilize. It is by its nature a mobile fleet. And so, it's on wheels and in most cases power's itself first pulled by trailer. So we've got a very mobile fleet and the fleet is ready to go. So as soon as our customers call or request our services, we can deliver almost immediately. To the extent that demand comes from a basin that we're not in today, we'd be very thoughtful about how would respond to that, but we can even move to other basins relatively rapidly. Is that answers your question or not? I'm not sure.

[Unidentified Analyst:]

Yeah that does and then more of a general industry questions I mean obviously if the price of oil would have spiked while we have some geopolitical issues on how quickly do you think your customers will be you know trying to find every well they can to start up. And what’s – what’s kind of their decision process in terms of deciding to quickly ramp up [indiscernible] high.

[Ian Dickinson:]

Well that’s a hard question to ask – to answer just in general terms. I mean every one of our customers has different dynamics that are considered in consideration obviously commodity prices as a piece of it, but it depends a bit on you know their strategy, what basin they’re active. And I do think that if oil prices continue to rise, there will be obviously increased demand for oil field services and the hope would be that – the broader set of services can ramp in behind that, but it's very difficult to answer because every – at least from my perspective and there may be others who could answer that more clearly than I can. But I do think an increase in oil prices is going to drive increase in demand and I think we're well positioned to meet that demand, but it's hard to say from one customer to the next exactly how they'll respond and how quickly.

[Unidentified Analyst:]

Okay, well, thank you for understanding my question and good luck.

[Ian Dickinson:]

Thanks, Ed.

[Operator:]

Ladies and gentlemen, there are no further questions. I'd like to turn the call back to Mr. Ian Dickinson, CEO. Please go ahead sir.

[Ian Dickinson:]

Well, thank you all again for making time to join the call. We look forward to driving another good quarter here and talking with all of you again at the end of Q2. Have a great rest to your day.