Enservco Corporation
Q2 2018 Earnings Call Transcript

Published: 15 Aug 2018

[Operator:]

Greetings and welcome to the Enservco Corporation 2018 Second Quarter Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. For opening remarks I will now turn the call over to Jay Pfeiffer, from Pfeiffer High Investor Relations. Thank you Mr. Pfeiffer. You may begin.

[Jay Pfeiffer:]

Hello and welcome to the Enservco's 2018 second 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:]

Thanks Jay. Welcome everyone to our 2018 second quarter and six-month earnings call. As indicated in our news release this afternoon while there is a lot to like in our solid overall first half performance or second quarter was somewhat of a mix bag. Although we achieved 24% year-over-year revenue growth highlighted by increased demand for all four core service offerings in Q2, our profit metrics came in below expectations primarily due to several anymonous cost factors that we believe are not ongoing in nature and Dustin will break down in more detail during his financial recap. In addition we continue to make investments in the transformation of our business to better drive long-term operating efficiencies. Sorry. Due primarily to several anomalous cost factors that we believe are not ongoing in nature and that Dustin will breakdown in more detail during his financial recap. In addition we continue to make investments in the transformation of our business to drive better long-term operating efficiencies and these investments also impact profitability in the quarter. The good news for us and for you as investors is we are making big gains with respect to this transformation aligning the team and processes to enable scale and increase margins over the long term. As I said our first half results were very solid and we believe a much better indicator of a long-term trajectory of our business in terms of both revenue and profitability. The other bit of the good news is that the second half of 2018 and particularly the fourth quarter is expected to be strong as well. With customer commitments exceeding those of last season we expect to deliver our best full-year financial performance since prior to the downturn of 2014. Let me recap a few of the year-to-date highlights. In terms of geographic revenue distribution we had double-digit gains across the board including our Rocky Mountain, central and eastern regions with particularly solid year over year growth in the DJ Basin, the Eagle Ford, the Marcellus Utica, the Bakken and the Scoop/Stack. As a reminder we are the only national provider of our particular service set and have a footprint second to none among our peers, the decided competitive advantage when it comes to moving from basin to basin with the same customer and offer regional national EMP some consistency in the procurement process. We achieved total revenue growth of 43% year-over-year. Well enhancement service revenue was 48% versus last year and that included frac water heating of 65%, hot oiling of 15% and Acidizing up 48%. Revenue from a relatively new water transfer service grew 82% year-over-year and was tripled as we tripled our customer account in the second quarter compared to last year. While 82% is a nice increase we know we can do better. It had only had approximately 50% of our assets utilized. We are working to build a more robust pipeline by better educating customers on our capabilities in water transfer and how bundling can help them streamline procurement by reducing the number of vendors at the wellhead. We also ran into a situation in the second quarter where a commitment we thought we had failed to materialize through no fault of our own resulting in idle crews and equipment for the month of May. So we need to be more consistent and that will come with better customer education and a deeper pipeline. Overall we are bullish on this business segment because demand is there. We have great operators, happy customers and it's a good margin business. In terms of profitability for the six-month period our pre-tax net loss was reduced by nearly two thirds and our net loss was cut in half. Adjusted EBITDA grew 94% to $4.3 million and cash generated from operations increased 223% to $6.5 million. To remind you our business has a certain amount of fixed cost that are non-negotiable and don't directly contribute to revenue. As revenue streams continue to grow those costs are fully covered then a higher percentage of the incremental revenue will drop to the bottom line. Our earlier reference investments in our transformation were driving to enhance our operating structure and business processes. There are two goals with this initiative. One, is to drive fleet utilization which if we're successful gives us the potential to far surpass the record revenue and profit metrics we achieve in the year immediately preceding the industry downturn. With no significant incremental CapEx investment by the way. The second goal is to create a platform is capable of supporting a much larger business. This process has been a sea-change for our field personnel and while they're responding well to challenge it nevertheless has been quite a learning curve. Keep in mind, over the past quarters we have been integrating a new corporate leadership team, a new business development team and our nationally distributed operations team into a cohesive unit. While at the same time implementing a series of process changes across our business. This has required some of our key field leadership to adapt to new processes. I have to say I'm very proud of our entire team for how they have responded to a new set of requirements while continuing to provide excellent customer service and maintain solid safety record. The platforming process will likely continue through the year end and result in our ability to drive greater efficiency, scale, and profitability over the long haul. So at this point we are busy preparing for our upcoming Q4 and Q1 heating season. We are securing customer commitments across all basins in excess of last season and importantly several key commitments are coming from a EMPs operating further north in the Bakken for the season last longer than another basins. From a macro point of view the tailwind we have enjoyed since the recovery began continued to be at our back in the form of robust economic growth and increased activity driven by higher commodity prices across all our basins. Before I hand the call over to Dustin I want to reiterate that we're optimistic we'll have a solid finish to 2018 and carry momentum into 2019. We have a relatively young fleet and a fantastic group of skilled operators. We have a new business development team that is just now beginning to hit its stride. We have opportunities for a creative M&A activity and the benefit of macro tailwind and a management team on board that are very motivated to take this company to the next level of growth with a focus on improving profitability and shareholder value. It is an exciting time in Enservco and I look forward to sharing with you our achievements as a year progresses. With that I'll turn the call over to our CFO, Dustin Bradford for a brief review of our financial highlights.

[Dustin Bradford:]

Thanks Ian. Total revenue in Q2 increased 24% to $8.8 million from $7.1 million in the same quarter last year and represented our sixth straight quarter of year-over-year revenue increases. Well enhancement services which comprised 80% of total revenue in the quarter increased 20% year-over-year to $7.0 million from $5.8 million. We achieved growth in all three components of this segment including frac water heating up 28% to $3.2 million from $2.5 million, hot oiling of 19% to $2.8 million from $2.4 million and acidizing up 4% to $758,0000 from $728,000 a year ago. The well enhancement segment showed a $1.1 million operating profit in the quarter which was down from $1.5 million last year. As Ian mentioned we had an unusual confluence of anomalous factors that contributed to this. But first involved a spate of healthcare claims in the second quarter. Enservco is partially self-insured and therefore makes a relatively large upfront payment on each claim. Within our well enhancement segment this accounted for an approximate $283,000 increase in the second quarter compared to last year. Additionally, a change in the structure of our workers compensation insurance program required us to fund what we expect to be the final payment into our required reserve under the legacy policy which resulted in an increase in expense in the second quarter. The other point worth making is that going forward we would anticipate that increases in our well enhancement segment revenue will drive corresponding increases in operating profit. Revenue from a relatively new water transfer service grew by 204% in the second quarter to $929,000 from $306,000 a year ago. We showed a $50,000 operating loss in this segment which was a significant improvement over the year ago loss of $310,000. Water hauling revenue in the second quarter was down 3% year-over-year to $858,000 from $881,000 and we had an operating loss in the segment of $95,000 compared to the year ago loss of $311,000. As a reminder our results last year included an accrual of $250,000 related to workers compensation claim that we subsequently reversed due to our insurance company denying the claim. Total operating expenses in the second quarter increased 13% year-over-year to $11.5 million from $10.2 million due primarily to higher costs of delivering services in combination with the previously mentioned anomalous expenses. Sales, general, and administrative expenses decreased 4% year-over-year to $1.2 million from $1.3 million in Q2 last year due primarily to lower stock based compensation costs related to last year's management transition which offset some increased cost of the new business development team. Depreciation and amortization expense were down slightly at $1.6 million versus $1.7 million last year. We reported a second quarter net loss of $3.3 million or $0.06 per diluted share versus the net loss of $2.5 million or $0.05 per diluted share in Q2 last year. The year ago net loss included the impact of $1 million tax benefit versus no tax benefit in the second quarter of 2018. As a reminder while our current year operating results would normally result in a GAAP tax benefit we have recorded evaluation allowance against our data for tax assets. Due to limitations on the use of net operating loss [indiscernible] and our existing deferred tax liability related to book versus tax depreciation any current period tax provision is offset by an increase or decrease in the evaluation allowance. We evaluate the accounting treatment of our deferred tax assets and liabilities and the related evaluation allowance on an annual basis. Adjusted EBITDA loss in Q2 including the previously described anomalous cost in the period was $347,000 compared to a loss of $286,000 in the same quarter last year. As a reminder due to the capital intensive nature of our business we believe adjusted EBITDA is an important metric for investors to evaluate our operating performance and the health of our business. Turning to six-month results, total revenue for the period ended June 30, 2018 increased by 43% to $29.9 million from $20.9 million last year. Well enhancement services which comprised 88% of total revenue in the first half of 2018 grew 48% year-over-year to $26.3 million from $17.8 million; once again all three well enhancement components delivered good growth including frac water heating up 65% to $17.6 million from $10.7 million; hot oiling of 15% to $6.5 million from $5.6 million and acidizing of 48% to $1.8 million from $1.2 million a year ago. The well enhancement segment produced operating income of $7.3 million through six months up from $5.0 million last year. Water transfer revenue in the first half of 2018 increased by 82% to $1.9 million from $1.1 million in the same period last year. As you heard Ian say we are steadily adding new customers for the service and taking steps to boost revenue through better planning and better customer education. The water transfer segment had a $12,000 operating loss year-to-date which is a big improvement over the loss of $234,000 in the same period last year. Again, we think we're getting close to achieving profitability in this segment. Water hauling revenue declined to $1.7 million in the first half from $1.8 million in the same period last year and generated an operating loss of two $202,000 which compares to last year's three $339,000 loss. Last year's results included a $250,000 accrual for workers compensation claim I described previously. Total operating expenses increased by 28% in the first half of 2018 to $29.7 million from $23.2 million in the same period last year due primarily to cost associated with increased activity as well as the after-mentioned healthcare and other insurance costs. Sales, general, and administrative expenses were up 14% to $2.6 million from $2.3 million last year due primarily to the build-out of the company's business development team and hire personnel cost year-over-year. Depreciation and amortization expense was down slightly to $3.2 million from $3.3 million. Our net loss through six months improved by 50% year-over-year to $1.2 million or $0.02 per share from $2.5 million or $0.05 per share in the same period last year. Adjusted EBITDA thought for six months was up 94% to $4.3 million from $2.2 million in the same period last year. We have generated $6.5 million in cash from operations year-to-date which is a 223% increase over the $2 million we reported in the same period last year. On the balance sheet we had working capital at June 30, of $4.1 million and our current ratio was a healthy 2.6

[Operator:]

Thank you sir. We will now b e conducting a question-and-answer session. [Operator Instructions]. Our first question is from Jim [indiscernible] Capital. Please go ahead.

[Unidentified Analyst:]

Yes. Thank you and good afternoon. Dustin can you talk about your working capital needs in the second half?

[Dustin Bradford:]

Jim sure. I think in general the working capital needs will follow a similar trajectory to what we experienced last year while we are seeing good growth year-over-year obviously that has helped our working capital coming into the season and as I mentioned in the prepared remarks our maintenance CapEx is all we expect in terms of capital requirements outside of operations and we were able to successfully navigate to the second half of last year with a similar starting point to where we are today.

[Unidentified Analyst:]

I guess I was thinking in the past couple of years your second half working capital needs have been $3.5 million, $4 million, $5 million and I was just thinking that since this year is likely it you'd be bigger. Does that mean that your working capital needs are kind of in line with that revenue growth or would it require more or less of a growth?

[Dustin Bradford:]

Jim thanks for clarifying and I agree just due to the growth in the business that we've experienced thus far and the growth we expect to see we think 5 million to 6 million is a fair expectation for those needs going forward just a similar in line increase as you guys you've seen in the revenue top-line.

[Unidentified Analyst:]

Okay. Great. Thank you. And in your comments you talked – you mentioned a couple of times customer commitments for the second half. Did I miss it or did you talk about if those were broad-based by geography and services or is it limited to or is it mostly for specific geographies and services?

[Ian Dickinson:]

Yes. So I wasn't specific on that but I will be here in terms of the commitments we're seeing for the upcoming heating season it's really across all basins that are relevant. So our South Texas operation doesn't have that seasonal dynamic but from the Scoop/Stack. the Marcellus, the DJ, the San Juan we support out of our Colorado location up into Wyoming and then North Dakota we're seeing increased commitments really across the board and I did mention that we're seeing a few additional customer commitments we didn't have last year up in North Dakota which we're excited about; it's a longer season. So it's a short answer is yes it's really across the basins that are relevant.

[Unidentified Analyst:]

And finally can you talk a little bit about the pricing environment; good, bad and different for you?

[Ian Dickinson:]

Yes. Well – so it's an improving in pricing environment. We are seeing a few instances where we've got the opportunity to take prices up. We are seeing some expanded commitments when I mean commitments actual contractual commitments taker pays, commitments around idle time. It's an interesting thing because some of these commitments were locking down now and so we've got this opportunity to revisit some of where the pricing was last year. We've got a few customers who are opening their wallets a bit more than maybe we've seen in prior years understanding that there is a constrained demand on equipment like ours. So it's a nice opportunity but I'll say this every time we talk about price increases we are feeling some pressure around crop cost inflation mostly around labor. So while I think we'll see a modest amount of price increase I think a portion that will get offset by labor costs.

[Unidentified Analyst:]

And by modest can I read into that about 5% or is your modest different than mine?

[Ian Dickinson:]

Yes, I think that's probably a fair range. Frankly I need to go back and look at customer by customer to really calculate that out. So don't but I think that's a fair range Jim.

[Unidentified Analyst:]

Yes. I won't hold you to it I'm just trying to get a sense for the magnitude. Okay. Great. That's all for me. Thanks a lot guys.

[Ian Dickinson:]

Thanks Jim.

[Operator:]

Our next question is from Bhakti Pavani with Euro Pacific Capital. Please go ahead.

[Bhakti Pavani:]

Good afternoon guys.

[Ian Dickinson:]

Hi Bhakti.

[Bhakti Pavani:]

I just wanted to quickly talk about the second half. It looks like it's been pretty exciting for you guys since you already have some commitments. Would you maybe comment on how much of your order book has been filled to-date and what roles will the new business development team would be playing in further improving that?

[Ian Dickinson:]

Yes. Okay. I'm sorry. Can I ask the first part of that question again Bhakti.

[Bhakti Pavani:]

I said what proportion of your order book has been filled to-date, I mean you said you already have some commitments.

[Ian Dickinson:]

Yes. So your question is of our fleet how much is committed right now going into the season. Yes, so boy at this stage the majority of our frac fleet is designated to commitments. We've got 80 [indiscernible] I think all of those will be busy. One of the tasks underway for us right now is to optimize the deployment and so we're evaluating the various customer commitments and aligning our fleet and our teams around maximizing that opportunity but the dynamic is how quickly the season starts and how quickly it gets cold but if we look at the arc of the season I think we'll have all of our equipment fully deployed. Our task is to do that in an optimized way. And I'm sorry the second part of your question.

[Bhakti Pavani:]

The second part was how – you said you have a new business development team in place and they just hit the ground running. So I was wondering what kind of role are they going to play in further improving the business?

[Ian Dickinson:]

So our business development team is working hand and glove with our operations leads. Our operating team is the forefront of our interactions with our customers and our business development team is working to augment those efforts. They're also working on broader account strategies and ways that we can support our customers more effectively within a basin but also across multiple basins and so it's a real teamwork approach and we've got folks now really supporting each of our basins and making a ton of progress on that front. So they'll be very active and they'll be locked a bit with our office team throughout well throughout the season but day in day out.

[Bhakti Pavani:]

That's perfect. I just wanted to know more about the water transfer business. I know your strategy is to offer bundled services but at this point in order to improve the utilization further have you guys thought about doing something else in order to improve that?

[Ian Dickinson:]

Well, we're working across multiple fronts. I'm really excited about the business. I hope that came through in the prepared remarks. I mean we've got great assets, we've got an unbelievable customer base and we need to do a bit better job and letting folks know we are over here and the assets we have. Our water transfer team is working very closely with our frac heating team and joint meetings and discussing ways that we can bundle those services and drive efficiency. The equipment literally hooks to itself. So we just need to do a better job educating our customers and just deepening the pipeline. We've stayed pretty focused just in the Rocky Mountain region. We've got opportunities in some of the other basins and so we're looking at ways that we can support some broader basins but the goal right now is to keep those assets pretty well concentrated and just focus on bundling it more effectively with our frac heating and other services. So I'm excited about it. We're working across all fronts. We've got our business development team and all of our operational leads focused on helping us grow that line of business.

[Bhakti Pavani:]

That's good to know. And just wanted to clarify in your prepared remarks you did mention about a commitment that was – that you guys had expected to come in May and that didn't come through. Where you referring to the water transfer business?

[Ian Dickinson:]

Yes. I was. Sorry that wasn't clear. So this is from time to time we will see rig delays, crew delays. This was one that we didn't anticipate and found out kind of right before we were supposed to start rigging up and so it had an impact on May. When we see the revenue drop like that it has an impact on costs as well and this just really speaks more to the fact that we've got to have a deeper pipeline and the team understands that we as an executive team are working to support their efforts more effectively but it's a bit of a growing pain is the best way to describe it and we hope to see that to move out as we continue to grow that business line.

[Bhakti Pavani:]

Got it. And just last one I was curious to know about your balance sheet or what are your plans with the debt? I mean do you plan to repay the debt or how would you make or how would you strengthen your balance sheet even more by taking care of the debt portion?

[Dustin Bradford:]

Well, our primary objective around that is to delever through operating cash flows and so if we continue to execute and we see great opportunity for us over the next 18 to 24 months to do just that we'll just by the generation of those cash flows drive our debt balance down. We have set a target to be at 1.5 to 1 times debt to EBITDA. We think that's – or one to one, we think that's a healthy ratio and so we're working hard to get there. The debt balance will be focused on growth opportunity. So the extent we are going to take on additional debt it would be associated with expansion of the fleet but in general our goal is to drive the debt balance down to that ratio and below to the extent we're not continuing to focus on growth.

[Bhakti Pavani:]

Perfect. That's it from my side and good job guys.

[Ian Dickinson:]

Thanks. Bhakti. Appreciate it.

[Dustin Bradford:]

Thank you Bhakti.

[Operator:]

[Operator Instructions]. Our next question is from [indiscernible] a private investor. Please go ahead sir.

[Unidentified Analyst:]

Hi guys. Good afternoon.

[Ian Dickinson:]

Good afternoon. Thanks for the question.

[Unidentified Analyst:]

Yes. I was wondering if you could just really quickly talk about initiative 97. It looks like that's going to be on the ballot this year in Colorado. Some folks in the industry are really kind of painting a doomsday picture as far as what that might mean for the industry in the state of Colorado. Can you talk about just what it is? What you think; the realistic impact that might be and just any scenario planning you're kind of doing around that?

[Ian Dickinson:]

Yes. So we are watching that closely. This has been – this is kind of an acute dynamic but this has been an ongoing political dynamic in Colorado for many years. Nobody knows what the exact results going to be. In general what we're seeing with our customers and other service providers is a kind of stay the course of approach. My view is that we're positioned pretty well because if the worst-case scenario were to play out we've got a mobile fleet. So we will move our equipment to the basins that are most active and that's an ongoing dynamic for us. Obviously, if there was a massive shutdown here would have some impact on us but I think relatively speaking we're going to be in a very good position to respond and that would mostly be by just redeploying a portion or all of the fleet in the worst-case scenario, but we're keeping a very close eye on it. It will be interesting to see if that legislation goes through how the EMPs might respond longer laterals or other ways of working around those restrictions, but we'll have plenty of time to be organized around how to redeploy our fleet.

[Unidentified Analyst:]

Okay. Yes. I guess just part of me had wondered even if that man kind of [debt] or relocate wells or use longer laterals that would almost be a positive in some ways I think overall probably not but notice that was something I thought and I'm just curious on that.

[Ian Dickinson:]

Yes. I don't I don't know if I can answer that question well. I mean I do think there – the technology is such that longer laterals are certainly possible that's happening in the Marcellus Utica. I think they're doing 20,000 foot horizontals now. So there may be some technology advances that allow the EMPs to work around that focusing on different acreage. So we will keep a close eye on it but again, I mean the way I look at is the DJ is a great basin for us. But we have had a lot of basins we operate in and if we need to redeploy a portion or a majority of our fleet we can do that rapidly and efficiently.

[Unidentified Analyst:]

And then kind of a follow-up here on that same note you brought [indiscernible] recently; just curious how fleet optimization efforts are going kind of looking at some different analytics around how you organize your fleet and how you deploy it. Can you talk a little bit more about that?

[Ian Dickinson:]

Yes. So Kevin Kersting joined the company in May and he has done a fantastic job engaging across all of our locations and really working with the teams to take their best thinking and match it up with his logistics background. We're working processes from ground up making sure that we've got the right SOPs. We've got the right kind of job descriptions and staffing plans and maintenance schedules and putting some of that rigor in place but really where the rubber meets the road on driving utilization is making sure that we've got a robust pipeline of opportunities and that we're focused on deploying the fleet into the customer base and geographies that we can earn the greatest profit margins on and so there's a lot of analytics going on here at the corporate office and with our OPs teams to figure it all that out. It's a process though and so we we'll take a big step I think forward here as we head into this next heating season and then just we'll continue to refine that but what I'm really most impressed by is the engagement of our team, I mean everybody's really across the board excited about the processes we are driving and understanding that if we do this well it's going to allow us to be much more efficient and how we deploy our fleet and I've mentioned before on calls that I largely see us as a logistics organization and so we don't need to be FedEx but we need to be pretty darn crisp on how we make decisions now we deploy our fleet and we're making big strides in that direction.

[Unidentified Analyst:]

Okay. Great. Appreciate the colors. Thanks for taking my questions.

[Ian Dickinson:]

Thanks for the question.

[Operator:]

There are no further questions registered at this time. I'll turn the call back over to the presenters for any closing remarks.

[Ian Dickinson:]

Well as always we appreciate your time and attention on the call. We're looking forward to an excellent second half of 2018 and great momentum as we head into 2019. The team here is working extremely hard to drive shareholder value and we again appreciate everybody's time and wish you all a great afternoon.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.