Enservco Corporation
Q3 2018 Earnings Call Transcript

Published: 15 Nov 2018

[Operator:]

Greetings and welcome to the Enservco Corporation 2018 Third Quarter Earnings 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’d now like to turn the conference over to your host Mr. Jay Pfeiffer, from Pfeiffer High Investor Relations. Thank you, Mr. Pfeiffer. You may begin.

[Jay Pfeiffer:]

Hello and welcome to the Enservco’s 2018 third quarter conference call. Presenting on behalf of the company today are Ian Dickinson, CEO; and Dustin Bradford, CFO. As a reminder, matters discus during this call may include forward-looking statements that are based on management’s estimates, projections and assumptions as of today’s date and are subject to risks and uncertainties disclosed in the Company’s most recent 10-K as well as other filings with the SEC. The Company’s business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements. Enservco assumes no obligation to update forward-looking statements that become untrue because of subsequent events. I’ll also point out that management’s ability to respond to questions during 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. Good afternoon, everyone, and welcome to the call. We have a lot of great updates to cover, so I’ll jump right in. Today, we issued our third quarter press release after the market closed and financial results were generally in line with the prerelease we issued on October 29. As usual Dustin will walk through those results after my opening remarks. Today’s press release also detailed some important cost reduction measures we undertook during the third quarter and of course the acquisition of our primary competitor Adler Hot Oil Service. We think all of these actions combined to put us in a stronger position to accelerate revenue growth, improve profit metrics and delever our balance sheet. I’ll begin with a recap of our cost reduction measures. After a thorough review of all of our service line and field locations, we implemented a series of measures designed to enhance our profitability by phasing out non-strategic and/or unprofitable operations and focusing on our more strategic higher margin growth businesses. Those measures include the following; closure of our Dillco water hauling business, water hauling has become a highly commoditized business and Dillco has consistently been a drag our earnings. Even in the best of times, water hauling is a low margin business that is not a strategic fit with our higher margin well enhancement and water transfer service lines. We explored options to sell the business, but in the end decide to shut it down and liquidate the assets, which include real estate and equipment located in Hugoton, Kansas. Secondly, closure of our Garden City, Kansas facility and relocation of certain hot oiling and acidizing units to our nearby Okarche, Oklahoma facility and to North Dakota. We also own the real estate free and clear in Garden City, which we sold in October for 450,000. Closure of our Bryan, Texas facility and relocation of its assets to our larger Jourdanton in Texas yards, which will now serve both the Eagle Ford and the Austin Chalk Basin. We believe all three of these moves will be accretive to earnings. In the first nine months of 2018 Dillco and the now closed Kansas and Texas field operations contributed over 700,000 in EBITDA losses. So from a purely financial standpoint, these were prudent moves for us. We will also realize some modest cash inflows from the sale of equipment and real estate, including the aforementioned 450,000 Garden City real estate sale. The closure of Dillco and the two field locations is in line with our ongoing initiatives to optimize lead deployment to areas where demand is highest and we’ll continue to look for ways to do this. The other transaction I want to highlight is our acquisition of Adler Hot Oil Service that was effective on October 26 of this year. We will – which will give us roughly two months of revenue and profit contribution from Adler in Q4. We believe this transaction which was completed at favorable valuation with no dilution to Enservco shareholders has compelling applications for our company, our customers and our shareholders. First of all, Adler has been a significant competitor, one of the only other companies out there that does what we do. Serve as Blue Chip EMPs with multiple mission critical services. With Adler, now part of the Enservco family instead of competing, we have begun collaborating. Adler serves more than 60 EMPs, EMP customers with very little overlap with our customer base. So we think there are good opportunities to cross market are complimentary water transfer and acidizing services. The transaction has a lot of other benefits as well, including a modern equipment fleet that includes 28 frac water heaters and 16 hot oilers. The addition of their fleet solidifies Enservco’s position as the dominant player in the frac water heating and hot oiling. What should keep us top of mind throughout the EMP community and which we hope will provide some operating efficiency benefits as well. In 2017, 62% of Adler’s revenue was derived from the Bakken Shale. This dovetails with and accelerates our strategic plan to deploy equipment further north where the heating season begins earlier and last longer. Adler also bring some valuable IP to the table, including their patented OmniHeat System, which provides EMPs with flexibility around the type of fuel used to fire our burners. Like our own heat waves team, Adler has exceptional operators who are well respected in the field and who are responsible for building a solid safety track record, which is essential and qualifying for master service agreements and winning new customers. Adler have 66 employees, including an exceptional management team with vast field level expertise and relationships. And finally from a balance sheet perspective, the Adler transaction strengthen certain of our debt covenant ratios and affords us added earning potential to support plans, enhanced profitability and delever our business going forward. In addition, we were able to structure the Adler transaction with minimal upfront cash outlay in a way that enables us to pay a large portion of the purchase price during our more active heating season when cash flows are at their peak. So in summary, we’re thrilled to bring Adler into the fold. The timing could not have been better heading into the heart of our heating season with the combined company having more customer commitments and at this time last year. It’s worth noting cost efficiencies. We’re not a primary component of the value proposition of this deal. We think what Adler brings will be additive in almost every way. We have already begun executing on the administrative and operational integration and synergy plans. While Dustin, Kevin Kersting, our COO, and I have been heavily focused on the turn down and M&A activity in recent months. Our operations in business development teams under Kevin’s leadership have been doing a great job winning and executing on customer commitments and driving revenue growth. We’re seeing good activity across all our operating areas. A few examples include new service bundling wins involving frac heating and water transfer for new customers in the Powder River and DJ Basin and new customer wins across our five other basins more than I have time to detail here. This momentum is building in the fourth quarter and we’re off to a strong start to the heating season with activity levels well above those of a year ago. Before I turn it over to Dustin, I want to say a few words about proposition 112 that was recently soundly defeated in Colorado. For those of you who don’t know, 112 was a ballot measure to dramatically increase the setback requirements for new oil and gas wells. I know that some investors were worried about the implications of that measure passing, but honestly we at Enservco weren’t all that concerned. Remember, our fleet is highly mobile and we can quickly deploy to areas where demand is highest. So while we do a lot of work in Colorado and specifically in the DJ, where prop 112 would have been most impactful. We believe there is plenty of work elsewhere and the prospect of redeploying equipment to other prolific oil and gas producing areas is not that daunting. We recognize the oil and gas industry is dynamic and ever changing. We embrace and diligently prepare for these systemic factors. I want to ensure our investors that we will be ever watchful and prepared to respond in the best interest of our shareholders. In summary, we drove significant strategic and operational winds during third quarter, highlighted by the accretive acquisition of Adler, the turned down of three unprofitable and non-strategic operating locations and the successful buildup to the upcoming heating season marked by increased customer commitments and more work across our northern most basins. The heating season is off to a strong start and we look forward to reporting and discussing those results at our next earnings call. With that, I’ll turn the call over to Dustin for review of our financial highlights.

[Dustin Bradford:]

Thanks, Ian. Total revenue in the third quarter decreased 22% to $4.5 million from $5.7 million in the same quarter last year. As we said in our press release, Q3 revenue was negatively impacted by record rainfall in South Texas that curtailed customer activity in the Eagle Ford Basin, which has been such a big revenue producer for us in the last couple of years. Revenue was further impacted by a plan slowdown in water hauling activity in the run-up to the closure of our Dillco and by equipment downtime related to the closure of 200 performing field facilities and associated turnover of hot oiling and acidizing personnel. We are working to determine whether we will incur any related cash restructuring and/or non-cash impairment charges from the Dillco and facilities closures. If that were to occur, it would be reflected in our fourth quarter. Our revenue mix included $3.2 million in well enhancement services down from $4.0 million in Q3 of last year, while enhancing revenue on a year-over-year basis, included hot oiling of $2.2 million versus $2.4 million last year. Frac water heating of $49,000 compared to $142,000 in 2017 and acidizing of $609,000 versus $812,000 in 2017. The well enhancement segment generated a loss of $746,000 in Q3 compared to a loss of $129,000 in the same quarter last year. This year’s operating loss included a $267,000 non-cash charge related to our former partially self insured workers’ compensation policy, which we allowed to expire at the end of the first quarter. As I’ve discussed on previous calls, we had the further portion of that total cash paid into fund reserve requirements under the policy over previous years, as we wait for certain claims made under the policy to be resolved. In the third quarter, we received new information about a claim made under the policy and based on our accounting policy for that self insurance exposure, expensive portion of our deferral into earnings. As of the end of the quarter, we had continued to defer approximately $189,000 in payments made into those reserves and expect that remaining amount to either be recorded as expense in future periods or refunded to us depending on the outcome of claims made under the policy. Water transfer service revenue in Q3 decreased to $634,000 from $798,000 year-over-year. Even with the decline, we move closer to break even in this business reporting a segment loss of $16,000 versus a year ago segment loss of $24,000. Building our year around water transfer business remains a top priority for us. As expected, water hauling revenue in Q3 declined to $638,000 from $911,000 with a segment loss of $95,000 this year compared to a segment income of $110,000 in last year’s third quarter. The year ago segment profit included the impact of our initial deferral of those reserved payments, I described a minute ago into the self insured workers comp plan, which resulted in a segment profit a year ago. The deferral was the result of a significant claim being denied by our insurance policy. The specific claim that had been denied a year ago is still being contested and has not been resolved. Total operating expenses in the third quarter decreased by 7% year-over-year to $8.1 million from $8.8 million, primarily due to lower direct variable costs resulting from lower revenue, offset by some of the costs increases we’ve previously discussed around our self insured workers compensation and health insurance policies. Our depreciation expense declined year-over-year due to more of our equipment becoming fully depreciated. Sales, general and administrative expense increased 5% year-over-year to $1.2 million from $1.1 million, primarily as a result of higher costs associated with our new business development team. Our pretax net loss in Q3 was $4.1 million compared to $3.9 million a year ago. Net loss was $4.1 million or $0.08 per diluted share versus a net loss of $2.5 million or $0.05 per diluted share in Q3 last year. The year ago net loss included a $1.4 million tax benefit and our tax benefit in Q3 this year was offset by a full valuation allowance an increase in our valuation allowance of the resulting increase in our net deferred tax assets. Adjusted EBITDA loss in Q3 was $2 million, up from $1.3 million in the year ago third quarter. As a reminder, due to the capital intensive nature of our business, we believe adjusted EBITDA as an important metric for investors to evaluate our operating performance and the health of our business. Turning to nine months results, total revenue for the nine month period ended September 30, 2018 increased 29% to $34.4 million from $26.6 million in the same period last year. Well enhancement services revenue increased 35% year-over-year to $29.5 million from $21.8 million. All three components of our well enhancement segment showed good growth. It included frac water heating up 63% to $17.7 million from $10.8 million. Hot oiling up 8% to $8.7 million from $8 million, and acidizing up 19% to $2.4 million from $2 million. The well enhancement segment generated segment income of $6.6 million year-to-date, which is up 31% from $4.9 million last year. Water transfer revenue through the first nine months of 2018 increase 38% to $2.6 million from $1.9 million in the same period last year. The segment had a $28,000 loss year-to-date, a significant improvement over the loss of $258,000 in the same period last year. Water hauling revenue was $2.3 million year-to-date versus $2.7 million in the same period last year. And the segment loss this year was $297,000 versus a loss of $229,000 a year ago. Total operating expenses increased by 18% in the first nine months to $37.8 million from $32.0 million in the same period last year, due primarily to cost associated with the increased activity I described. Sales, general and administrative expenses were up 11% to $3.8 million from $3.4 million last year, due primarily to the build out of the company’s business development team and higher personnel costs year-over-year. Depreciation and amortization expense was down slightly to $4.7 million from $4.9 million. Our pretax net loss was $5.3 million year-to-date. That represents a $2.1 million or 28% reduction from the pretax loss of $7.4 million in the same period last year. Net loss through nine months was up 7% year-over-year to $5.3 million or $0.10 per diluted share from $5 million or $0.10 per diluted share in the same period a year ago. The year ago net loss included a $2.4 million net tax benefit, our tax benefit from our net losses in the current year are offset by an increase in the valuation allowance on the resulting net deferred tax assets. Adjusted EBITDA through nine months was up 138% to $2.3 million from $1.0 million in the same period last year. We generated $5.7 million in cash from operations year-to-date, which is a $6.3 million positive swing over the $600,000 in cash used in operations through the first nine months of 2017. On the balance sheet, working capital at September 30 was $2.6 million. Our current ratio was 2.2 to 1. Our debt to equity ratio is 4.9 to 1, stockholder’s equity was $5.0 million and I want to highlight that we do continue to focus on balance sheet discipline with plans in place to increase our fleet utilization and with the additional earnings power represented by our new Adler Hot Oil unit. We expect to make progress delevering our business in coming years. Our legacy fleet remained essentially unchanged from last quarter, but we added 44 units with the Adler acquisition. Our capital spending in Q4 will be primarily related to maintenance CapEx, and for the foreseeable future, anticipate annual CapEx to be in the range of $2 million to $2.5 million, including the Adler units. And with that, we'll turn the call over to the operator for questions. Operator? Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Bhakti Pavani of Alliance Global Partners. Please proceed with your question.

[Bhakti Pavani:]

Good afternoon, guys.

[Ian Dickinson:]

Good afternoon, Bhakti.

[Dustin Bradford:]

Hi, Bhakti.

[Bhakti Pavani:]

Just wondering if you maybe will comment on a given fourth quarter and first quarter are normally your strongest revenue generating quarters, because it's the heating season. How are the or how the utilization rates of your frac water heaters excluding Adler?

[Ian Dickinson:]

So we don't know yet, Bhakti. Obviously we haven't gotten through fourth quarter and obviously not into first quarter yet. We expect our utilization rates to be higher than they were last year, as I mentioned in the prepared remarks, we had higher level commitments heading into this season than we did last year. I don't have those projected utilization amounts in front of me, but I do anticipate increased utilization in this heating season.

[Bhakti Pavani:]

Okay. And with regard to acquisition of Adler, how does it fair now that the heating season has started and I believe one of the rational of the acquisition was the our largest competitor. How are they performing as compared to your expectation or is that happy with their performance?

[Ian Dickinson:]

Yes, we're happy with the performance. We spent a good deal of time with the Adler management team in the preparation towards close. And so there was a lot of work between the teams on coordinating efforts with customers. We had very little customer crossover between the Enservco legacy customer base and Adler. So that team has remained intact and is working with both Kevin and I and focused on delivering on the commitments they had heading into this season.

[Bhakti Pavani:]

Got it. Also if you could maybe comment on the – or quantify the productivity that has been increased due to the expanding of your business development team on your topline.

[Ian Dickinson:]

Yes. So we're seeing good traction with our business development group and it's worth noting that Adler's got a great team in place as well that actually filled a few gaps that we still had. So a nice combination there in terms of the BD group. As I mentioned again in the prepared remarks, we closed a number of new customers in preparation for this upcoming heating season. Our business development team was primary drivers along with our ops team and making that happen. There is some examples of winning some new deals in bundled form with our frac heating and water transfer, again partnered between our business development group and our ops team. So the business development group we've been building over the last year, we're seeing great production firm and equally important, we're seeing great coordination between them and our ops team working hand in glove.

[Bhakti Pavani:]

Perfect. Thank you for the color. The other question was related to your balance sheet, the cash position has significantly reduced following the acquisition. How do you expect to manage the liquidity given fourth quarter is not one of your strongest quarter when it comes to receiving the receivables. So if you could maybe comment on the liquidity and the cash position going forward, what are your thoughts?

[Dustin Bradford:]

Hey, thanks, Bhakti. I'll take that. The – I'll just remind you and then anyone else listening that the cash position at the end of the quarter is really fungible with our loan balance and our availability under our loan. And you're absolutely right. As we head into the fourth quarter, our liquidity does become somewhat challenge and our working capital needs grow. As you'll know, if you review the second amendment to the East West loan, they did expand the limit that maximum drawn to that to $37 million from $30 million and we believe that the combination of the AR from the work we're doing in the fourth quarter, and the flexibility under that facility will be adequate to cover our working capital needs.

[Bhakti Pavani:]

Perfect. Thank you. And my last question is with regards to the Dillco assets, are you guys in active discussions or negotiation with customers regarding selling those assets? Do you had makeup a centric pipeline?

[Ian Dickinson:]

Yes. We've been engaged with several folks interested in that asset base. So we're still evaluating exactly how we're going to dispose of those assets, but that's been an active ongoing conversation. The rest of the assets that were in Oklahoma or I'm sorry, in Okarche, sorry, in Garden City.

[Bhakti Pavani:]

Okay. Thank you very much. That's it from my side.

[Ian Dickinson:]

Sorry Bhakti, we got disconnected there. Just to finish answering your question, the assets that were in Garden City were moved to Okarche, Oklahoma and the assets were in Bryan, Texas were moved to Jourdanton. But we're confident we'll generate some cash flows off the sale to Dillco assets and we're working through that process actively right now.

[Bhakti Pavani:]

Perfect. Thank you very much. That's it from my side.

[Ian Dickinson:]

Thanks, Bhakti. Appreciate it.

[Operator:]

[Operator Instructions] Our next question comes from the line of Ed Woo of Ascendant Capital Incorporated. Please proceed with your question.

[Ed Woo:]

Yes, thank you and congratulations on the acquisition. My question is once your outlook, given the recent decline in oil prices, does it affect your business or your outlook? Thank you.

[Ian Dickinson:]

Yes. Good question, Ed. And people haven’t noted, oil prices have declined here over the past month. Notably, I think the WTI, which is what we pay closest attention to, I think, close today around $56 roughly. As I stated on previous earnings calls, obviously, oil prices have an impact on our business, but we believe as long as we stay north of $50 a barrel, perhaps even over $45 a barrel that we’ve got the market conditions to allow us to get our fleet fully deployed. It’s an interesting dynamic, because it depends by basin and it depends by individual operators, how they respond to fluctuations. But we’ve seen no indication. We’ve received no indication from our customers of any slowdown related to the current move in price. But we’ll keep a close eye on that and we’ll be ready to respond. I mean, one of the things that we pride ourselves on is being agile and making sure that we’re looking for ways to compare those systemic factors that we face. But it’ll be interesting to see, I really not concerned with where the price is set today. And again, we haven’t gotten any indication from any customers of a slowdown on their planned completions or maintenance and production to work here in the fourth quarter or first quarter.

[Ed Woo:]

Great. Thank you for the color and good luck.

[Ian Dickinson:]

Thank you.

[Dustin Bradford:]

Thank you, Ed.

[Operator:]

Our next question comes from the line of Michael Madden, a Private Investor. Please proceed with your question. Mr. Madden, your line is open. Please proceed with your question.

[Michael Madden:]

Sorry, guys, I was on mute there. Yes, I apologize. I got let in a little bit late. You guys, you've been have any numbers around restructuring charges or anything like that yet.

[Ian Dickinson:]

No, not yet. [Indiscernible] anything want to add.

[Kevin Kersting:]

Yes. We put them together yet based on the way that the Dillco turned down that being a reportable segment. I think we do anticipate that will be a discontinued operation in future reports. I could say that, these yard facility that we do close down, they tend to be pretty simple facilities and so for the most part, just moving trucks from one of the other. And there’s not a very significant amount of capital involved in that effort. And the workforce is in these particular locations, we’re not a large number of people. Most of them stayed on as an employee that just moved to other locations.

[Michael Madden:]

Okay. Got it. And then did you mention anything about anticipated savings or how it created that might be the earnings.

[Ian Dickinson:]

Well, so one of the things that we mentioned in the prepared remarks, those three locations, Dillco, Garden City, and Bryan, Texas. Between the three of them over the past nine months, the first nine months of 2018 collectively generated about over $700,000 of EBITDA loss. So they’re pretty significant burn and weight on our P&L that we’ve removed.

[Michael Madden:]

Okay, great. And do you think you’ll – in the future period, you’ll fully recruit that does not understand some of the personnel moves. So I didn’t know realize the full $700,000 savings over that same period. But that’s like the right order of magnitude, I guess.

[Dustin Bradford:]

I mean – look, we certainly will – the revenue generating units that were in Garden City and in Bryan, Texas have been redeployed. And so those will generate revenue out of the locations are being dispatched from. Obviously, the Dillco assets will not. But the removal of that kind of month, that monthly EBITDA burn will be significantly accretive to the business as we go forward. We’ve completely shut down Garden City and sold that facility, as I mentioned on the call, the lease that we had in Bryan, Texas, we’ve subleased that. So there’s no burn associated with that facility and Dillco we’re in the process of liquidating those assets. We also own that real estate free and clear, and so we’ll look to sell that as well.

[Michael Madden:]

Got it. And then just one more kind of a, I guess, technical question, but that’s per tax asset you think, you guys do achieve solid profitability in future quarters. That – is it possible that valuation allowance you’re currently according, become somewhat of a tailwind if you’re able to reduce that allowance and you realize a tax benefit.

[Dustin Bradford:]

Absolutely. We do have a gross – a net deferred tax asset related to the operating losses in place and other tax differences. And so that is on our balance sheet, but to be clear, each quarter when we would be increasing that deferred tax asset, due to the net operating losses, we’re offsetting that with a valuation – increase in our valuation allowance into it’s netting to zero to the P&L. But your question absolutely, that’s an annual assessment or more frequently if we were to deem it necessary with our auditor’s, it’s an annual assessment of how that should be treated on the balance sheet and on the face of the P&L with regards to showing a tax benefit and a deferred tax asset.

[Michael Madden:]

Got it. Okay. Great, thanks guys. Good luck.

[Dustin Bradford:]

Thanks. Appreciate the question.

[Operator:]

[Operator Instructions] There are no further questions over the audio portion of the conference. I would like to turn the conference back over to management for closing remarks.

[Jay Pfeiffer:]

Thank you. As always, we appreciate your time and attention on the call today. Look forward to a strong close to 2018 and we’re excited about prospects for continued growth and improved profitability as we moved into 2019. So thanks again for your time. Have a nice afternoon.