Enservco Corporation
Q2 2017 Earnings Call Transcript

Published: 15 Aug 2017

[Operator:]

Greetings. Welcome to the ENSERVCO Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. An interacted 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. You may begin.

[Jay Pfeiffer:]

Hello, and welcome to the ENSERVCO’s 2017 second quarter conference call. Presenting on behalf of the company today are Ian Dickinson, CEO; Tucker Franciscus, Chief Financial Officer; and Austin Peitz, Senior Vice President of Field Operations. As a reminder, matters discussed during this call may include forward-looking statements that are based on management’s estimates, projections and assumptions as of today’s date and are subject to risks and uncertainties disclosed in the company’s most recent 10-K as well as other filings with the SEC. The company’s business is subject to certain risks that could cause actual results to differ materially from those anticipated in 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 webcast or replay are available in today’s news release. With that, I’ll turn the call over to Ian Dickinson.

[Ian Dickinson:]

Thanks, Jay. I'd like to welcome everyone to our second quarter earnings call. The last time I spoke to you on our first quarter call, I've been with ENSERVCO for only a few days. Today [indiscernible] 3, 4 months under my belt, I'm in a much better position to talk about the performance of our business and our prospects for continued growth. In the interim, I've had an opportunity to meet with personnel throughout our organization, from the corporate staff to our field crews. I've also gained a large insight in the dynamics that are driving our business and industry positioning. I’m happy to say that I think we have a very compelling business opportunity. Over the past several months, we've been busy at the corporate level retooling and strengthening our senior executive team and developing a strategic plan that we would think will carry ENSERVCO to new levels of success. We have a great foundation and includes on the industry's youngest service fleets and massive service agreements with the large base of major mid-size and smaller E&P customers. Equally important, we have a great group of talented, hardworking and loyal field personnel, who are responsible for the high level of customer satisfaction that translates and to solve customer retention rates and a number of new customers. Led by our senior VP of Field Operations, Austin Peitz, here are the frontline crews and support personnel that are driving the solid financial results we've delivered over the past few quarters. They are real strength and backbone of our company. Before we get into the second quarter performance, I want to address this subject that I know has been of interest to our investors over the past six months or so, and that's a status of our credit facility. Engaging this to our announcement on August 11, I'm happy to report that ENSERVCO terminated its credit agreement with PNC Bank and signed a new loan and security agreement with East West Bank that affords us more favorable credit terms and improve financial flexibility. This new agreement has been on higher priority for us and we’re pleased to have to finalize so we can focus all our energy and attention on growing the business. We also hoping put to rest any concerns investors had about our credit worthiness and the bank-ability of our valuable asset base. I’m going to let talk Tucker Franciscus to provide more detail on new facility in just a few minutes. Tucker joined as the Chief Financial Officer about a month ago, replacing Bob Devers, who left to pursue other opportunities. So I want to take a moment to formally thank Bob for his many services over the years and welcome Tucker to the team. Tucker is a highly experienced financial executive with a deep background in the energy industry and a skill set that includes financial management, private equity, strategic planning, M&A, investment banking and SEC reporting. He's as excited as I am about our business prospects, and he's been a great addition to our team. I should also mention we made a change at the Corporate Controller position, bringing in Dustin Bradford, another highly experience financial professional, who has hit the ground running. Turning now to our second quarter performance highlights. As a reminder, Q2 and Q3 are traditionally our slower quarters due to warmers weather and the associated reduction in frac water heating activities. Having said that, on a year-over-year basis, we reported 72% growth in revenue and $1.2 million improvement in adjusted EBITDA in the quarter, with our second straight quarter of double-digit revenue growth and improved profit metrics. As in the first quarter, our second quarter results reflect the positive industry tailwinds I referenced earlier. Likewise, our six month year-to-date performance was very solid with 68% top line growth and positive adjusted EBITDA of $2.2 million from more than $3 million positive swing in adjusted EBITDA over the same period last year. As you know, ENSERVCO conducts operations throughout the United States and we are happy to report that we’re seeing increased demand in all of our locations. North Dakota, Wyoming and Pennsylvania, all delivered year-over-year growth in the second quarter. But as our activity in Colorado and Texas could have been the primary drivers of our research and financial results, in Colorado, particularly in the DJ, where we enjoyed great customer relationships, our second quarter revenue more than tripled year-over-year; and Texas, where we have established a strong presence throughout our expansion into the Eagle Ford Basin, and elsewhere, Q2 revenue increased 50% year-over-year. We talked in last quarter about our plans to end the Permian Basin, Texas, for a couple of factors, plus a recent opportunity in the Austin Chalk formation, also in Texas, has put those plans on hold for now. I’ll let Austin will provide some color on that just in few minutes, but I will say that, for the [indiscernible] another great example of our ability to be nimble and quickly redeploy equipment improves to new areas on very short notice, when good opportunities arise. Another bright spot in the quarter was our continued progress on our new water transfer business, although revenue was lower than expected due to postponement of a large water transfer commitment from our major E&P. Keep in mind that although we expect significant and growing revenue from our water transfer going forward, we assume that there is still somewhat small operations, so we have to pick and choose our opportunities carefully to reduce the risk for the kind of postponement we experienced in this case. Unfortunately, it is quite a fact that this situation involves historically reliable major E&P customer, they made a late decision to profound the work and that let the whole on our schedule resulted in lower revenue and higher carrying costs in Q2. Nevertheless, as I previously mentioned, we are expecting solid growth in this revenue segment in 2017 and beyond. As earlier mentioned, our debt refinancing was the top priority for us and now we are showing our attention to growing the business. In this regard, we have made some important changes designed to strength in our sales and marketing capabilities. We added a senior sales executive, Mike Bradbury, to the team as VP of Business Development. Mike is working closely with Austin and need to upgrade and formalize our sales processes, beginning with the thoroughly evaluation of our market coverage that includes development of an updated competitive pricing map and a new sales pipeline reporting system. We are also conducting executive outreach to key customers and support of our operations team’s activities in the field. An later this week we are convening our 2017 Managers Meeting at our Killdeer, North Dakota, facility. In addition to being an auctioning for team building and introducing some of the new faces, who’ll be reviewing, refining growth strategies for all our business units with an optimizing utilization and planning for successful 2017-2018 heating season. With that, I’ll turn it over to Austin for a few comments. Austin?

[Austin Peitz:]

Thank you, Ian. Our well enhancement activity is clearly up from last year. We are pursuing a lot of opportunities in hot oiling, acidizing and already bidding on frac water heating projects for the upcoming season. We are finally seeing some price improvements in some of our areas of operation particularly in Texas and North Dakota and this will be helping us on the margin side as well. Overall, in spite of the industry recovering somewhat, it’s still very competitive out there, but we’re winning our share of new customers and do in a good job retailing existing customers. I want to take a minute to expand on Ian’s comments about our Texas operations. He correctly described our Eagle Ford activity as a continuing bright spot in terms of year-over-year growth, although we have seen a recent slowdown in our acidizing business there due to a large customer deferring some maintenance work. As a reminder, the work that is performed in the Eagle Ford is primarily a year ground maintenance service that is not tied to drilling and completion activity, and is not cold weather-dependent. This supports our objective of reducing the seasonality of our business and smoothing out our revenue spikes. Further, as Ian also mentioned, we have moved into the Austin Chalk formation with equipment we redeployed from the Permian Basin. The Austin Chalk is a very interesting opportunity for us that involve some existing and potential new customers. We are bidding on a lot of hot oiling and acidizing work there and feel good enough about our pipeline that we’re in the process to setting up a base of operations in nearby call it station. We now have a total of three units improves in the Austin Chalk area, including two hot oilers and one acidizing unit and plans for more equipment to be deploy there in the near future. That is what we had expected to be doing in the Permian Basin, but the further regarding in the negotiations, the more clear became that the available work was at a much lower margin than originally anticipated. In fact, the early pricing was sometimes as much as 40% to 50% lower than cost to stay in the Austin Chalk formation. So again, this underscores the flexibility we have to redeploy assets to more attractive basins on a very short notice. We will keep it closed eye on the Permian and be able to move quickly if the margin profile improve, but for now the Eagle Ford and the Austin Chalk are primary target in Texas. Our water transfer business is also getting very interesting. We are currently on three jobs, two in Colorado and another in Pennsylvania, where we hired a new area manager and additional staff. We are bidding on a lot of opportunities with new work on the books of 30 to 45 days and some projects as far as six months. Again, this is a year-around business for us and a very timely new revenue stream for the company that we are very excited about and where it will take us in the near future. With that, I’ll turn it over to Tucker to summarize financial results. Tucker?

[Tucker Franciscus:]

Thank you, Austin, and hello, everyone. As Ian said, I’m really excited to have joined ENSERVCO. I’m looking forward to be in part of what we all believe is a very compelling business opportunity. With respect to the refinancing, we’re all very relieved to have it over and done with from a timing distraction perspective, although we’re very confident all along did we get done. New facility is a $30 million revolving line of credit that in short is a lower cost and more comprehensive debt financing. It has a three-year term expiring August of 2020. And very importantly, borrowings under the line will be classified as long term. Now turning to second quarter results. Total revenue in Q2 increased 72%, $7.1 million from $4.1 million in the same quarter last year. It was our second consecutive quarter of high double digit revenue growth and primarily reflected the impact of renewed drilling, completion and maintenance activity, new customer additions, cool temperatures and an increase in minimum water temperature required by few major customers that extended heating further into the year and a continued success of our Eagle Ford expansion initiatives. Our well enhancement services led the way in Q2 with the 119% revenue increase to $5.8 million from $2.7 million with all three components segments delivering a strong year-over-year performance. The breakdown of it is as follows

[Operator:]

Thank you. At this time we’ll be conducting question-and-answer session. [Operator Instructions] Our first question is from Bhakti Pavani from Euro Pacific Capital. Please go ahead.

[Bhakti Pavani:]

Congratulations on the great quarter. It was really an impressive performance from the revenue standpoint.

[Ian Dickinson:]

Thank you.

[Bhakti Pavani:]

Jay, I know, I mean -- like I said traditionally second quarter and third quarter are the fourth quarter in terms of standpoint, and clearly frac water heating business was pretty impressive in second quarter. Quite curious, is that any possibility to spill it over in to third quarter at all?

[Jay Pfeiffer:]

I’m sorry, but can you ask the question one more time?

[Bhakti Pavani:]

The frac water heating business you haven’t had, is there any probability that the revenue slower in the third quarter?

[Ian Dickinson:]

So I’ll let Austin, I and Tucker to essentially got have something to add on. As Austin referenced in his discussion points, we have a growing pipeline of opportunities and we’ve got some committed work that have begun and we’ll come online here in the third quarter. So we anticipate, as we’ve mentioned, we’ll continue to grow in this segment.

[Austin Peitz:]

Yes. We’re pursuant -- to add just a little bit for what Ian saying, we’re pursuing opportunity that could help third quarter. There’s still kind of -- as far as frac water heating, they’re not setting stone yet, but we’re hard on the 12/11 for sure.

[Bhakti Pavani:]

With regards to the hot oiling and acidizing, can you mentioned that in Eagle Ford, one of the customer kind of deferred their plans. So how much of an impact do you think that could have? And do you anticipate them to get back on the schedule pretty quickly here? Or do you think that revenue might not be in third quarter?

[Austin Peitz:]

So what we’re dealing right now is those numbers have that impact to built into the second quarter. We seen they started to firm those right at the beginning the second quarter; however, we started performing acidizing and service for other folks within the Eagle Ford and also into the Austin Chalk areas that we’re targeting. So we’re very hopeful that those opportunities will well offset the customers deferred the maintenance activities at this time. They re kind of unclear whether going some of those activities could resume. However, there is potential talk to that customer selling off some assets. That’s why they deferred their maintenance activities at this time.

[Bhakti Pavani:]

Okay, got it. Also with regards to pricing, you said that you are seeing some pricing improvements in some of the areas, could you maybe talk more about what percentage of pricing improvements that you're seeing? And do you think that would spread across all your business segments, across all the locations?

[Austin Peitz:]

Sure. We would love forward spread across all business segments, across everywhere. We're just trying to play carefully and when -- the cost, we're testing the market in some areas. We've been successful to this point. We're not talking about full margin recovery. We're talking about small improvements where roughly a few target customers, not geographic areas specifics but few customers we've got 15% tight increases in recently. We plan on trying to roll out addition ones where available without hindering the business. So the hot oiling and some of the frac water heating, we've been successful with that so far, but still in the trial phase and the test phase of how far that's going to go.

[Bhakti Pavani:]

Okay. Also with regards to the Permian basin, you did mentione that the cost, if I correctly understood, are significantly higher than the Austin Chalk formations. Is that because -- I mean, do you see a lot of competition in the area? Or what was the reason? I mean what happen if you could provide more information?

[Ian Dickinson:]

So, Bhakti, this is Ian. I'll let Austin way in. The primary driver of the near-term decision to redeploy assets to the Austin Chalk was specific to the rates that our competitors and our customers were offering. And so that's when you look at the cost components. It’s not only a higher cost drivers first in that basin, we need to make sure that we're getting raise the margin products that we have in place and we felt there is a better opportunity with those assets, specifically here for the near term in the Austin Chalk. But I'll let Austin add to that.

[Austin Peitz:]

Exactly. What we've seen in the Permian was 40% to 50% less gross revenue potential with our cost remaining about flat of other areas of operations such as Austin Chalk or the Eagle Ford. So it was tricky business decision for us to chase the better margin potential with the utilization.

[Tucker Franciscus:]

And just to add, this is Tucker here. It shows the nimbleness of company to be able to take advantage of an opportunity like that, and through those, Austin and his team for being able to capitalize on it.

[Bhakti Pavani:]

Absolutely. Also with regards to Austin Chalk, you mentioned there are three units and three crews currently operating. Is that -- I mean, are they like solely servicing one customer? Or do you see any further opportunity to grow business there?

[Austin Peitz:]

Yeah, for sure. No, we're servicing multiple customers at this time and multiple service lines as well. So we're pretty excited about water transfer activities to follow in the near future in that area as well as adding units for hot oil and acidizing in the near future.

[Bhakti Pavani:]

But that wouldn't mean that you're redeploying it from the Eagle Ford right? The opportunities in the Eagle Ford still remain?

[Austin Peitz:]

Correct, there is other areas of operation we can pull units from where the utilization in a 100% yet, that’s what we will be pulling from [indiscernible].

[Bhakti Pavani:]

Perfect. With regards to water transfer, you did mention that one of the E&P kind of postponed their project, what’s kind of the status on that? Is the project has come on in third quarter or still not?

[Ian Dickinson:]

We don’t have the ability to trying and give you a full update on that. We will keep an eye on that project coming back on line. What we have done successfully is more than offset that project with new opportunities within our pipeline. So and that’s part of the growth process that we’re focused on here is making sure that we have got a pipeline of opportunities across all the basins we service that can combat timings challenges like the one we experience in Q2.

[Bhakti Pavani:]

Okay, perfect, guys. Thank you very much. I’ll take rest of my questions offline. Thank you.

[Operator:]

[Operator Instructions] And our next question comes from Avinash Kanth, a private investor. Please go ahead.

[Q –Unidentified Analyst:]

One or two questions. The first question I had was, in the first half of the year, you have seen a pretty significant growth overall in revenues. Now I understand the puts and takes that you are talking about, but could we expect a meaningful year-over-year growth in revenues in the second half of the company’s revenues -- business this year?

[Ian Dickinson:]

This is Ian. I guess what I would say is that I don’t see any reason not to assume that we will see a continuation of the trend. We had pretty bullish plans for the remainder of third quarter and then fourth quarter. So I don’t see any reason, and I am really confident we will continue to see a continuation of the trend.

[Q –Unidentified Analyst:]

Right. So we are talking about like we have seen more than 60% growth in the first half, now on a percentage basis, should we expect some can close to a 50% growth second-over-second half of this year?

[Ian Dickinson:]

As you probably are aware, we really don’t provide guidance. What I would tell you is what I mentioned already, which is I don’t see any reason for change in the trend, and we have got every component of the business working hard to take advantage of the opportunities presented to us across all the basins.

[Q –Unidentified Analyst:]

Right. The second question I had was in terms of that profitability or to achieve profitability. What are we doing to get our breakevens or where could we expect our breakeven?

[Ian Dickinson:]

I am sorry, the question was where we could we -- can you ask question once again?

[Q –Unidentified Analyst:]

Where could we expect our breakeven revenues given the current mix of business?

[Ian Dickinson:]

Well, I don’t know if I can answer that question specifically for you. Obviously, for our business with the large successor base utilization is a primary driver of margins for us, roughly speaking we got approximately a 40% fixed-cost dynamics. And so as we grow top line, we will see more and more of that revenue drop to the bottom line. And that’s really a statement, I think, we can make across all service sets. But I’ll come back to the statements I have made previously, which is one of the primary goal for us is to drive utilization back to levels we saw in 2014 and do so on a way across the basins and services we provide, the basins and the services we provide throughout those basins. Well, thought-out strategies that optimize not only the utilization but also the rates that we can obtain from our customers. So that’s the focus. That’s what will drive profitability for the business is increase optimization and doing that in a very thoughtful and strategic way not only our term customers, but new customers what we’re pursuing.

[Q –Unidentified Analyst:]

So if you talk about the model, if you talk about the profitability model in the second half of the year, it tends to be a bit different, especially in the coming quarter. Should we expect not only revenues to grow but profitability also to grow in the September quarter?

[Ian Dickinson:]

Well, I think we had some unique costs in Q2 that we don’t anticipate in Q3 or Q4. So I think we’ll see some efficiency there. Again, as we drive utilization and pricing optimization, we will see the impact to the bottom line.

[Q –Unidentified Analyst:]

And could you give us some trend of the utilization rate? How has it been lately over the past two, three quarters? Where are you attending?

[Ian Dickinson:]

Well, it’s going to be fairly in line with, which is in terms of revenue increases. So the utilization is they certainly correlated to that. So we’ve seen increased utilization in the range of the revenue increases. We are seeing some in certain pockets – As Austin was communicating, we’ve seen recovery in pricing, but most of the increase in revenues has been driven utilization and the ramp of our newer business line, the water transfer business.

[Q –Unidentified Analyst:]

And for the newer business lines, have you seen any pricing pressure there or you continue to get the same margins?

[Ian Dickinson:]

Well, I don’t know if I would say we’re seeing necessarily pricing pressures. I mean, we operate in a competitive environment, and so what separates us from our competition is our ability to service our customers with the employee base and the quality of equipment that we have. It’s about reliability and doing what we say we’re going to do. So we think about our competitive differentiator in that way. Pricing is certainly a dynamic that comes into play, but it’s very much on a case-by-case, basin-by-basin perspective.

[Q –Unidentified Analyst:]

Final question a bit broader, though. Of course, we are talking about generally year-over-year growth being meaningful in 2017, how much of that seems to becoming organically by just growing utilization rates and increasing activity? And how much of that is coming from winning new – so getting into new areas. I understand some of the water business is kind of new, but beyond that? Because what you are trying to figure out is that going forward from here on, how does the company expect to outgrow its peer group or grow the standard grow that will be getting from the industry groups?

[Ian Dickinson:]

Well, I think it’s a combination of uptake in demand that we saw in the first half of the year and also our ability to take market share. As you might recall from our first quarter results, we want premium customers in the DJ in Q1. So it’s going to be a combination of both up-tick into the market, but we're really looking at ways to take market share and we’ve been successful of doing that and I expect to see us continue to do that.

[Q –Unidentified Analyst:]

So maybe if you could talk a little bit about the new customer wins you’ll have maybe in the second quarter, or what are you expecting in third and fourth quarters if you are working on some?

[Ian Dickinson:]

We're working on a broad pipeline of opportunities that includes some notable new customer acquisitions. I think we'll be able to report on that the next quarter, but that's a primary focus for us. We obviously want to take care of the customers that we're servicing today, and they remain our top priority, but we're always looking for opportunities to support a broader base of customers and I think we've been successful in initial conversations and attracting new customers. We saw the success the in the first half of the year, I don't anticipate that trend changing here in the second half.

[Unidentified Analyst:]

So if you were to acquire significant new customers, would you put out -- in between the quarter or you wait for the quarter to end and then talk about it?

[Ian Dickinson:]

I haven't decided yet. We'll take that as it comes. But if there is a notable announcement to make, we want to keep obviously our investors and the market in general informed our progress. So to the extent there is a material announcement to make, we certainly will.

[Unidentified Analyst:]

So of course the line of credit was a big deal, I believe. Of course, this was kind of pending and this was something that we believe it’s out of way now. What is the catalyst that investors should look for going forward? This is my final question.

[Ian Dickinson:]

Okay, I think I understand your question. When you say catalyst, can you just be a bit a more clear?

[Unidentified Analyst:]

Catalyst more for the company's business, and from investor’s perspective, what is it that we should be looking out for to see -- or what could we measure management's performance against as we go forward? Because where the team is new and they're trying to expand and do things, what should we looking out for to see, okay, if we are trending towards that, what's the internal goal out there? Like you want to grow 50% from here? You want to grow at a CAGR of 30% for the next 3 to 5 years? What's the management's goal going forward? What do you want to achieve? A little bit profitably, whichever way, you can play that whichever way you want.

[Ian Dickinson:]

Sure. Well, I’ll come back to what I said earlier when the primary drivers for us is driving increased utilization and making sure that we are deploying our assets in a most efficient way possible. And so that will be in large part the metrics that we'll focus on here is increased utilization. As you may recall, within the company effectively double the fleet in late 2014, early 2015, and then water transfer assets in early 2016. So this is about execution for us we need to drive utilization of this, again, relatively young fleet and do it at a price point that drives margin. So we have some discipline in a way that we're approaching it. But that's going to be the primary metric that take success our ability to drive utilization both through potential uptick in demand but also through the process of taking market share.

[Unidentified Analyst:]

Thanks. And again, thanks for clearing.

[Ian Dickinson:]

Thank you. Good questions, appreciate it.

[Operator:]

[Operator Instructions] And if there are no further questions, I'd like to turn the floor back over to management for any closing comments.

[Ian Dickinson:]

Well, as always, we appreciate everyone's time and attention on the call today and look forward to talking again on our third quarter conference call. Have a nice afternoon, everyone. Much appreciated.

[Operator:]

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.