Enservco Corporation
Q3 2017 Earnings Call Transcript

Published: 15 Nov 2017

[Operator:]

Greetings. Welcome to the ENSERVCO Corporation 2017 Third Quarter Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce 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 third 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 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 third quarter earnings call. Q3 marked our third consecutive quarter of year over year revenue growth in 2017 and once again it reflected macro tail-winds in the form of increased drilling, completion and maintenance activities by our customers driven by the ongoing stability of commodity prices and what is our typically slowest quarter of the year we achieved a modest 4% total revenue increase but keep in mind that last year's third quarter included 1.5 million in non-core construction revenue from a one off project we took in order to retain key employees during the downturn. So, when comparing our core services revenue on an apples to apples basis total revenue in the third quarter increased by 44%. Our well enhancement services segment made up of hot oil frac water heating and acidizing led the way with a 32% increase year over year despite the impact of Hurricane Harvey which flowed and in some cases while it worked in our Texas area of operation. Our new water transfer business also continued to be a growing contributor to our mix in the period at nearly $800,000 in revenue versus none the same quarter last year. Tuck dive into the numbers in more detail in just a moment but first I want to provide an update on the important strategic initiatives we are undertaking to drive long term profitable growth through increased utilization of our fleet. Many of you will recall that in 2014 prior to the downturn when Enservco delivered its best year as a public company with $56.6 million in revenue and $11.5 million in adjusted EBITDA. Based on that success the company conducted a CapEx of essentially doubled the size of the fleet. During the subsequent down term the larger fleet represented excess capacity and carrying cost [indiscernible] bottom line but now with recovering commodity prices and increased drilling completion and maintenance activity the larger fleet represents an opportunity for significantly higher revenue and earnings. The key to capitalizing this opportunity and our overwriting goal for the business is to drive to utilization rates we saw in 2014, but we're successful in doing this we believe we have the potential to nearly double our revenue and earnings capacity. We don't need polar vortexes and $100 oil. We think we need typical winners and oil in the range of $40 to $60 a barrel. We look at this as an execution play based on growing our market share to improve sales and marketing programs that leverage our reputation for a diversified services mix, safe operations and delivering excellent customer service, with this in mind as I alluded to last quarter we are making sweeping changes in our sales organization, we have brought on a new VP of business development to work closely with Austin to develop a dedicated sales organization focused on partnering with our district operations managers across all locations. We're establishing formal sales programs based on measurable performance metrics with increased accountability. We now conduct quarterly managers calls to ensure everyone aligned with our goals and objectives. We are improving the current sales pipeline reporting and monitoring to help improve internal forecasting and we are implementing a new logistic system to better manage fleet deployment maintenance and ensure we can respond quickly to customer demands. This all constitutes a major cultural shift for ENSERVCO's and takes time but we're making good progress and expect to have most of the changes implemented by year end. Again the ultimate objective is to drop buyer - utilization and unit profitability across all service lines and use additional cash flows to pay down debt, strengthen our balance sheet and position the company for continued growth. This will also give us added flexibility to introduce new services such as our water transfer business. We are focused on expanding the relationships we have with each of our customers. Remember we have an incredibly valuable customer base comprised of many of the leading EMPs in the United States along with majors and smaller independents and we are adding new customers every quarter. So the more services we can offer them, the more opportunity we have to increase our revenue per customer and on that subject of adding new service lines the strategy of a couple of benefits for us. First it allows us to offer legacy and new customers multiple services which simplifies their procurement process by consolidating business with a single provider and second when the new offering is a year around service like water transfer supporters are objective but more evenly distributing our revenue throughout the year and removing the lumpiness to cause us confusion with some investors due to large fluctuations on the top and bottom lines. Before I wrap my remarks, I want to briefly comment on the loan covenant issue referenced in our press release this morning. During what is always our slowest quarter we fell short on our fixed charge coverage ratio which was calculated on the first records of 2017 which included our strong first quarter and traditionally slower second and third quarters. So as a result we're working closely with our lender and believe we will have an amendment in place soon that will allow us to get back into compliance. Specifically we're working on a waiver to the fixed charge coverage ratio of testing for September, October and November but testing to resume December 31. This will allow us to get a full trailing 12 months on our calculation which gives us the benefit of having our stronger first and fourth quarters reflected in the calculation. In the meantime we have classified our debt as short term based on our solid pipeline and expectations for increased demanding Q4 we believe that we will be back in compliance by year-end. So in summary there are three things I'd like to take away from the call today. First, we reported three consecutive quarters of year-over-year revenue growth and we see that trend continuing as we move into our what should be a busy heating season. Second, with our customer base track record and increasing industry activity levels we believe we can better leverage our standard fleet driving higher utilization rates in the 2018 and lastly, we are implementing process across the company to help optimize operations including implementation of a business development organization. So that I'll turn it over to Austin to provide some color on customer activity and various areas of operation. Austin?

[Austin Peitz:]

Thanks, Ian. With higher commodity prices and equity levels increasing we found an uptick in all of our key basins during the particularly in Colorado, North Dakota, Oklahoma and Texas. Even in Pennsylvania which has been tough in the last couple years or so we're looking at a solid increase in work over the next two quarters on the strength of some tanker pay contracts that we haven't seen in a while. Breaking it down by service lines we see an increased demand for our frac water heating services to give you an idea we have a total of eight frac water heating crews working today whereas we had none at the same time last year. So we feel very good about this segment right now. We have three crews currently heating in it for a single customer in Oklahoma whereas last year we averaged 1.5 years with the same customer. We've also added new customers all the way from Oklahoma, North Dakota, Colorado, New Mexico and all areas in between ranging from majors to small independent. [Indiscernible] activities is also on the rise in Texas we were awarded first call with two major producers and are seeing increased activity with legacy customers both in the Eagle Ford and Austin Chalk following a slowdown due to Hurricane Harvey. Colorado is also very strong where we were recently awarded a project that will keep four crews working full time over the next year in the DJ Basin and also seen an uptick in work with other producers in the area. North Dakota is continuing to strengthen, we have seen more and more work at Wyoming and in Rock Springs throughout the Powder River Basin as well. On the affidavit of acidizing division we also had some delays and cancellations in Texas due to the hurricane that impacted our third quarter both [indiscernible] work come back around along with general resumption and regular maintenance activity with several other producers. We're also seeing an increase in activity in the maintenance work being provided in Kansas and Wyoming as well. Water transfer continues to be a nice little success story for Enservco, we're primarily focused on Colorado's DJ Basin as well as Oklahoma where we're working on RFP for a very large operator and in discussion with several others. We're also deep into the process of signing a new MSA with the large major we have never done work for and hoping we start supporting their frac and drilling programs in the near future. We expect water transfer to be lumpy in the early year [ph] but smooth out over time as we incorporate the service across our base and an increased utilization rates. With that I will turn it over to Tucker to summarize financial results. Tucker?

[Tucker Franciscus:]

Thanks, Austin. Appreciate that. Total revenue in Q3 increased 4% to $5.7 million from $5.5 million in the same quarter last year and again a year ago of third quarter included $1.5 million from a one-off construction contract we took during the downturn. We are not currently pursuing any additional construction work of this type. Going forward we will be focused on our well enhancement services which in Q3 grew by 32% year over year to 4 million from 3.1 million, that included frac water heating up 67%, hot oiling up 34%, 2.4 million from 1.8 million and acidizing down 25% to 804,000 from $1.1 million. As mentioned acidizing was negatively impacted by temporary extension of work due Hurricane Harvey. Operating loss in well enhancement segments was 121,000 versus an operating profit of 44,000 in Q3 last year. Water transfer revenue increased to 798,000 in Q3 versus no revenue in the comparable quarter last year. The second continues to be a bright spot for us but showed an operating loss of 25,000 due to carrying costs in equipment and water transfer personnel as well as the hydroflow product line. We continue to evaluate the hydroflow opportunity in conjunction with the hydroflow team. Water hauling revenue in Q3 was down slightly to 911,000 to 918,000. We had an operating profit in this segment of 110,000 due primarily to the reversal of a prior $250,000 accrual for worker's comp claim that has since been denied by the insurer. Total operating expenses in the third quarter were up 3% year over year to a 8.8 million from 8.6 million due primarily to cost associated with increased activity and the higher investments and fleet maintenance to gear up for anticipated customer demand in the fourth quarter. General and administrative expenses increased to 1.1 million from 967,000 in Q3. Depreciation and amortization expense was relatively flat at 1.6 million. The third quarter net loss was 2.5 million or $0.5 per diluted share versus a net loss of 2.4 million or $0.6 per diluted share in the same quarter last year. Q3 adjusted EBITDA with negative 1.3 million versus a 1.2 million in the comparable quarter last year. Turning now to nine-month results, total revenue increased 48% to 26.6 million from 17.9 million in the same period last year. Core well enhancement services again led the way with revenue up 70% to 21.8 million from 12.9 million. All three components of well enhancement services showed good growth. Frac heating revenue was up a 134% to 10.7 million from 4.6 million, hot oiling was up 26% to 8.0 million from 6.4 million, and acidizing increased 26% to 2 million from 1.6 million. Operating profit in the segment rose sharply to 4.9 million from 2.1 million year over year. Water transfer revenues through nine months increased to 1.9 million from 32,000 in the same period last year. The company incurred a net loss in this segment of 258,000 due to reasons previously cited. Water hauling revenue declined by 8% year-to-date to 2.7 million from 2.9 million and the segment reported an operating loss of 229,000. Total operating expenses increased 25% year to date to 32 million from 25.6 million in the same period last year due to costs associated with increased activity, waiver and maintenance investments in preparation for increasing demand in the fourth quarter and severance and related management transition costs in Q2. General and administrative expenses increased 18% to 3.4 million from 2.9 million last year. Depreciation and amortization expense declined slightly to 4.9 million from 5 million. Net loss through nine months improved year over year to 5 million or $0.10 per diluted share from 5.8 million or $0.15 per diluted share in the same period last year. We achieved a 3.1 million positive swing in adjusted EBITDA to 959,000 from a negative 2.1 million in the same period last year. Our fleet remains essentially unchanged from last quarter. Our capital spending through year-end will be primarily related to maintenance CapEx. As Ian mentioned we are focused on driving profitability in the business, as part of that we continue to look for ways to reduce costs, drive efficiencies throughout the organization without impacting safety or service quality. With that we will turn the call over to the operator for questions. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from the line of Bhakti Pavani with Euro Pacific Capital. Please proceed with your question.

[Bhakti Pavani:]

Just to talk about [indiscernible] Q4 and Q1 are the strongest quarters for the company and often mentioned in the remarks that you guys have seen a much better start to the frac water heating business. Could you maybe talk about what are the current utilization rates there right now and how do you see them improving over the quarter?

[Ian Dickinson:]

Well specific to the frac water heating utilization rates are still relatively low Bhakti and the season is just getting started. We do anticipate that utilization to increase notably move into the colder months of the winter. So specifically in terms of utilization I don't know exactly where utilization is in October and November but we're seeing an increasing trend.

[Bhakti Pavani:]

Yes, I mean I was going to say that it looks like I mean at least it's began with the warmer winter here at least in California. So is that sort of the overall weather trend are you noticing all over your client location I mean customer location or is it just specific to this geographic area?

[Ian Dickinson:]

Well I would say that our winter is off to a better start weather wise than same time last year. So we're encouraged by that but getting to the weather and so that kind of shift day and day out but in terms of a comparable to this time last year and Austin you can you confirm this for me, we are seeing colder temperatures here to start the winter in the basins we're active in.

[Bhakti Pavani:]

Okay, from the acidizing business 10 point [ph], I know you guys had some postponement in work due to hurricane so I'm just kind of wondering do you anticipate that business to come back entirely in Q 4 or do you anticipate that spreading down into Q1 as well?

[Ian Dickinson:]

We have already seen as Austin mentioned the recovery of [indiscernible] acidizing work and so it was a temporary downturn with the shutdown associated with the hurricane, it was larger customers also kind of delayed some of their maintenance work but that's come back online as well so it was a relatively short-lived downturn there and that acidizing work mostly in South Texas.

[Bhakti Pavani:]

With regards to improvement in activity have you seen any kind of improvement in pricing or have you been able to better negotiate the prices now or do you see the same pricing pressure that you witnessed last year?

[Ian Dickinson:]

I will let Austin weigh in here too and we're seeing some opportunities maybe as a general statement, some slight improvement in pricing. It really varies a bit on basin and service but as a comparison to this time last year I would say it was a slight improvement.

[Austin Peitz:]

Correct and to elaborate on what he is say it's exactly, each basin has its own little parameters so it's kind of specific to each geographic area that what we're seeing opportunities for improvement sort of some staying flat. So it's kind of all over the board but looks like there's positive news ahead of us.

[Bhakti Pavani:]

Perfect. I could see the trend that the water transfer business really picking up and expanding in revenue, but I'm kind of wondering at what level of revenue do you see that business line is generating a gross profit because it looks like you are still are doing the gross loss in that business?

[Ian Dickinson:]

So to answer that question Bhakti, while we're seeing kind of growing revenue in that segment, our relative utilization rates for our water transfer asset is still low it's in that 25% to 30% range. So as we start driving kind of in-excess of 40% we'll start seeing some gross profit production. The challenge was riding those low utilization rates we saw at the costs and carrying cost associated with the large fleet. So on a per project basis think of it as unit profitability on any given project we're seeing the ability to drive those gross margin targets that we're after.

[Bhakti Pavani:]

Got it. Also you did mention about that you guys on the new and with our customer that you haven't worked this before, could you maybe provide some more details as to what kind of services you would be providing, and do you anticipate getting or you know making any revenues on that contract in this quarter or next quarter?

[Ian Dickinson:]

Yes, without sharing kind of details on specifically who that customer is, there's an opportunity with them specifically around both frac water heating and water transfer and we think there is opportunity across all of our services, it is our expectation based on conversations with this customer that there will be some level of work in the fourth quarter, but we don't have any assurances of that at this point.

[Bhakti Pavani:]

Got it. One another question is while going through to the presentation there is a slide on the presentation that shows the revenue of 101 million, I'm just kind of curious does that include any acquisition and assumption of any acquisition or it's just the organic growth and where and how do you see that organic growth coming from?

[Ian Dickinson:]

So I'm glad you brought that up, Bhakti because I want to make sure that it's clear exactly what that slide is communicating and so what that looks at very simply is looking at the earning capacity of the business and what we've done is we've taken the average revenue per unit from 2014 and we simply applied that average revenue per unit to the current fleet which is mentioned earlier is roughly double such as you normalize for the water hauling units and so if I take average revenue per unit as we saw it in 2014 and just very simply apply it to the unit base by service that we sit on today, it comes out to a $101 million. What I've done also in that presentation slide is I've adjusted it at a high level for what we soon to be compressed rate continuing at 15% or 20% compression off of 2014 levels which would then mitigate that total earning capacity to something closer to 80 million to 85 million assuming 15% to 20% price compression remains. So it is not guidance, and it's not trying to set any expectation of when we'll get there, it's simply saying that in late 2014, early 2015 and with the addition of the water transfer assets and with the explosion out of South Texas we believe that our current base, our current fleet has the earning capacity as represented in this slide and when adjusted for price compression is 80 million, 85 million of top line and 20 to mid-20s in EBITDA. Does that make sense?

[Bhakti Pavani:]

Absolutely. Thanks for the clarification because that was actually quite confusing so it's really helpful to know that it's based on how much average revenue or how much money you can make per unit that has been applied to your current fleet so that this is what you can make when your utilization is at the top level correct?

[Ian Dickinson:]

Correct. And we just think it's important for our investors to understand that there is benefit to having increased our fleet in late '14, early '15. As we mentioned in the prepared comments that took some pressure on the business over the last two years of the downturn but where we sit today our company without having to add any additional equipment right just maintaining the equipment we have our maintenance CapEx and small ancillary equipment purchases, the company [indiscernible] has significantly more earning capacity than we had in 2014 and it is our focus and goal to execute on driving back utilization rates we saw on 2014.

[Bhakti Pavani:]

With regards to hydroflow business, I know the business is not currently making any revenue, but it has an ongoing cost associated with it. Have you guys thought about what your strategy is going to be from that business perspective? I mean do you intend to keep it or what's your plan for the business line?

[Ian Dickinson:]

We're working very intently on exactly that. We're in very productive conversations with the hydroflow team. We have been involved in a series of pilot projects with handful of our customers and we're vetting through in a very structured and detailed way on what that strategy might look like going forward. I have not come to a conclusion on whether or not that will be a service line that we see contributing to revenue or profits going forward but we will have more clarity on that the next time we call.

[Bhakti Pavani:]

One last one from my side, it related to the CapEx, what's your expected CapEx budget and do you - are you guys actively looking for any M&A opportunities at this time?

[Ian Dickinson:]

The answer to your first question, the CapEx budget is primarily focused on maintenance which is somewhat variable based on utilization levels obviously the more we're working equipment, the more maintenance CapEx may be required but we'll be in similar levels that we've seen historically. We don't have any in fact you know in 2017 we did a lot of work to get the entire fleet up and ready to go. So a lot of those investments have been made but we do plan to continue a similar regime moving forward. We have set aside a small amount of capital for ancillary new purchase equipment but there is nothing assumed in there that would be large CapEx program similar to what we did in '14 or '15. To your question regarding M&A, we're not actively pursuing M&A opportunities. We think that opportunity may present itself but our focus as I mentioned earlier right now is to drive utilization, delevering the business, in other words paying down debt and looking for opportunities to expand the footprint of services with each of our customers both current and prospective and any contexts for M&A will fall into those parameters we will be looking for ways to expand the share of wallet with current perspective customers as I mentioned in the prepared remarks. Does that answer the question Bhakti?

[Bhakti Pavani:]

It does, and I appreciate it. I guess that's it from my side. Thank you very much for giving or providing detailed answers.

[Ian Dickinson:]

Thanks, Bhakti. Appreciate it very much.

[Operator:]

Our next question comes from the line of [indiscernible]. Please proceed with your question.

[Unidentified Analyst:]

I just had a couple on the loan, can you just or are they related around the loan anyway, could you just outline the capital allocation priorities as it relates to the debt, obviously maintenance comes first and then what do you think the appropriate level of debt to run the business would be in your eyes and just as I was assuming you could delever it some as you get through Q4 and Q1.

[Ian Dickinson:]

Yes, so the debt facility is effectively a working capital line where the AR&R [ph] equipment as the borrowing base and it's predominantly there it will allow us to again the working capital we need to ramp into our busier season. Our CapEx, our maintenance CapEx is a relatively small investment that we need to make each year so it's not the predominant use of that facility. The core of that debt balances again related to the CapEx spend that I mentioned earlier we undertook in late '14 early '15 and with the downturn we've effectively carried that base line of debt through the last couple of years, I mean the original CapEx was around that 20 million mark and so again the facility is really more focused around our working capital needs, but I think there was a second part to your question. Your question around what I think the appropriate debt level is for the business, is that right?

[Unidentified Analyst:]

Yes.

[Ian Dickinson:]

So what's interesting you know any one of these pieces of equipment should have a one to two year payback depending on utilization levels and so if you think about a metric for what should be an appropriate amount of debt on the business depending on where we are kind of in a strategic cycle is I really wouldn't want to see more than that one to two terms of debt and that's simply to say that any major CapEx project we take on we would be looking at a return on that invested capital or return on investment within call it a two year period again depending on utilization level. So you know that's our focus is to delever the business. I want to be careful because I am giving my sense of what I think that appropriate debt level is and my general sense is that one to two turns is what we'd be targeting.

[Unidentified Analyst:]

Yes, I mean that business is barely cyclical so that could be anywhere from - I mean your run-rate now is for the last 12 months is a very low number but you could potentially do north of 20 if you got full utilization. So are you looking at more like a mid-cycle number to run into for that number too?

[Ian Dickinson:]

Yes, again I mean I just want to be clear on this point. If were to not take on any new capital projects, new equipment for example its really indefinite future we would eventually get that debt all the way down. It is our belief that it is important for us to continue expand the service lines, but we will only do that within the metrics I've described, right, so that the primary goal here is to drive the debt balance down and I would like to see us get to that metric of one to two terms on EBITDA

[Unidentified Analyst:]

And just one quick question on the waiver, I mean like this facility has been in place that long, did something change between when you put it in place and when you sought the waiver or was it just not something that you could put on there when they underwrote it.

[Ian Dickinson:]

Well so I think you know the important takeaway on this is that we're working with the lender as I've described earlier and then as we get to a full 12 months trailing calculation that will include both of our stronger quarters which is first and fourth and also include our typically slower quarters of second and third and we think once we get to a full trailing 12 that will be - that's really the intent of both the lender and the company which to get to that full trailing 12 calculation. So I think that's the best way I can answer it at this stage.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Dickinson for closing remarks.

[Ian Dickinson:]

Well thank you everybody for your time and attention. We certainly appreciate it and we look forward to talking to you again at the end of the fourth quarter and again very much appreciate your time and attention.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.