Enservco Corporation
Q4 2017 Earnings Call Transcript

Published: 22 Mar 2018

[Operator:]

Greetings and welcome to the ENSERVCO Corporation 2017 Fourth Quarter and Year End Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Jay Pfeiffer, from Pfeiffer High Investor Relations. Thank you. You may begin.

[Jay Pfeiffer:]

Hello and welcome to the ENSERVCO's 2017 fourth quarter and full year conference call. Presenting for the Company today are Ian Dickinson, CEO; Dustin Bradford, CFO; and Austin Peitz, Senior Vice President of Field Operations. As a reminder, matters discussed during this call may include forward-looking statements based on management's estimates, projections, 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 Regulation FD, which prohibits selective disclosure of non -- 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, and welcome everyone to our fourth quarter and year rend earnings call. Q4 marked our fourth straight quarter of year-over-year revenue growth in 2017 and helped us achieve our best full year revenue and adjusted EBITDA results since our record 2014 campaign prior to the industry downturn. Our success this year was due a number of factors, most notably the rebound in commodity prices, and resulting increase in drilling, completion and maintenance activity by customers in all the major basins we serve. But there’re other factors applied that are less apparent and these involves some institutional changes we’ve been making that are designed to create a platform capable of generating sustainable long term revenue, profit, growth in spite of commodity price fluctuations. So today in addition to recapping ourselves with 2017 financial results, I am going to review some of the changes we’ve made and continue to make, some of this may sound familiar, but I think it bears repeating because it can be very useful for current and prospective stockholders in understanding the scope of our business opportunity and why we’re so excited about the future. But first a quick recap of Q2 2017 highlights, revenue growth was strong year-over-year, including a 112% increase in Q4 and a 66% increase for the full year while enhancement revenue includes our three core legacy services of fracking, hot oiling and acidizing was up a 158% for the quarter and 94% for the year. Full year revenue from our newest service offering, water transfer increased a 1000% year-over-year to 2.1 million, and now represents approximately 5% of overall revenue. We are building on this momentum with our current and prospective customers. It is important to note that our customers appreciate our ability to deliver this critical service and see it as a natural extension of the completion services we already provide them. We will continue to invest in additional assets as demand dictates, balancing purchased equipment with rented capacity to ensure we maintain our balance sheet discipline. In terms of profitability, adjusted EBITDA grew 2.4 million in Q4 and 3.4 million for the full year. Those were material improvements over the prior year. Also want to point out that 2.7 million or about 40% of our 6.9 million net loss for the full year was comprised of 1.9 million increase in tax spent due to the change in income tax rate and the valuation allowance on our deferred tax assets, and approximately 800,000 in severance and transition related costs. Other highlights for the past year including winning a number of new customers including several major E&Ps, we’ve also done a good job retaining market share in most basins, and in some cases expanding our share. Austin will provide some additional color on these points in just a moment. As noted in our press release this morning, our improved financial results this year are notable and they were achieved at a time when our corporate and regional management teams were heavily focused on a major overhaul of our organizational structure and business processes. So I want to commend all involved for their ability to embrace and adapt to new ways of managing our business while at the same time continue to execute at a very high level in the areas of winning new business and fulfilling commitments through our existing customers. Let me take a step back and tell you how we came to be on this path of transforming the way we do business. When I joined ENSERVCO in May of last year, I was struck by three things, one was the quality of our team and here I am talking about the people at all levels of the organization who are very engaged and very good at their job and dedicated to excellence, safety and customer service. The second was our customer base, it is extremely difficult for a relatively small company to build a customer base like the one we have. One that includes most of the largest household names in E&P community as well as many medium sized and smaller producers. And it is hard to overstate the importance and value of these relationships. Similarly, the master service agreements or MSAs that we have are also highly valuable, in some cases they take years to acquire and are wholly dependent on our proven ability to safely and reliably execute on-time services for our customers. They are also keyed to our historical ability to move from base -- from one base into another with the same customer. In summary, our customer list and associate MSAs are extremely valuable assets. And I don't think have been fully factored into our valuation by some investors. The third thing that struck me was that the Company -- was that the Company’s impressive growth prior to the downturn was achieved without the benefit of a formal sales organization. Sales were being well managed by our Senior Vice President of Field Operations, Austin Peitz, in conjunction with our regional location managers, who have the dual responsibility of managing operations in various basins throughout the country. As I said the results were impressive but we think we can be even stronger with a benefit of a full-time dedicated sales organization to support the efforts of Austin and our field personnel. So, in 2017, we hired Mike Bradbury as our VP of Business Development and then hired three Regional Sales Managers with plans to add two more in the coming months. This new team is working closely with Austin to implement formal sales processes and strategies that we think will drive new customer wins and deepen relationships with existing customers. This will also free up our location managers to focus additional time on optimizing fleet management and executing on customer commitments. As part of this effort we’ve realigned our compensation programs in a way that not only provides individual incentive but rewards employees who are working more collaboratively to the benefit of the Company and all its stakeholders. And before actually it's too far from the subject to fleet management, another initiative we undertook in 2017 was a thorough evaluation of fleet deployment processes and procedures. Remember, we have geographic footprint that covers most of your major U.S basins and we typically add equipment deployed and/or traveling between northern Boston to South Texas and from New Mexico to Pennsylvania and point in between. Too often, we have been in reaction mode, as we attempted the fulfill customer request moving truck over the map without the support of a readily available technology that could help streamline the process and optimize our fleet utilization. So in 2017, we invested in a GPS logistic system for our power unit to give the better handle on truck location and utilization which enabled us to make much better decisions on fleet deployment. All these changes I’m talking about are designed to drive higher utilization rates and increasing unit profitability. As I said before I firmly believe with the fleet size that is nearly double since our banner year in 2014, we can achieve some pretty impressive results if we get back for the team utilization rates, we enjoyed in 2014 and by way as I’ve also said before we don’t need a $100 oil to accomplish this like we had three years ago, we think as long as oil stays between $40 and $60 a barrel. We can drive the 2014 utilization rates if we simply execute on our sales and fleet optimization initiatives while continuing to deliver superior service with a strong safety record. In summary the tailwinds I’ve reference on previous calls remain at our back, the promising economic outlook, resilient oil price environment increased drilling completion and maintenance activity a aggressive CapEx plans and now its like ENP all leading indicators of revenue and profit growth for ENSERVCO. In the near-term will remain focused on increasing shareholder value by increasing equipment utilization and unit level profitability across all our service lines. We will accomplish it by driving profitable growth across her current service offerings, pay down debt to increase free cash flows optimize our processes and practices that increase communication and operating efficiencies and lastly, ensuring a safe and rewarding environment for employees and stakeholders. We believe strong execution on these core business objectives will allow us to take advantage of further opportunities to expand our service offerings through targeted M&A activity. The growth potential in ENSERVCO enormous and the entire team here is energized and motivated to make it happen. With that I’ll turn the call over to Austin for some field level comments. Austin.

[Austin Peitz:]

We’re maintaining a very brief pace in our key operating areas, not only with our loyal legacy customers who struck with our us through the down turn but with new customers coming online as result of our aggressive marketing efforts and reputation for reliable services. Today I’m going to breakdown our highlighted by service line and location and give you a better feel for what’s driving growth of each revenue category. I’ll start with back water heating services. Revenue in this segment grew 267% in the fourth quarter and 175% for the full year. As I mentioned, customer retention rates are solid and we’re winning new customers the wide geographic area. We’re having a great season in the Bakken where we’re heating water for a major customer on a project that has potential to extend all way end of June. We’re also going strong in DJ Basin, Powder River basins, we have added new customers and MSAs with producers, ranging from small and medium to one very large measure that we think is going to engage us for a couple of our services. New Mexico and Oklahoma have also shown good year over year growth. Pennsylvania got off to a slower start to season, but we expect it to finish very strong. Hot oiling services revenue grew 37% in the fourth quarter and 29% for the full year. Our South Texas, Eagle Ford and Austin Chalk operations continue to lead the way, but we are also seeing increased activity across other basins as E&Ps pursued deferred maintenance projects. Remember, maintenance is typically year round worked for us. In the Powder River basin, we are adding customers and are contemplating a permanent facility there to serve strong demand for all of our service offerings. The activity in the Bakken also continues to increase with work over rigs and maintenance activities, which again gives us a good opportunity in our off season second and third quarters. In the DJ Basin, we are working on two projects including one with a major player that is keeping four units busy on a daily basis. Acidizing revenue increased a 168% in the fourth quarter and 64% for the full year. Once again, the drivers renewed maintenance activity with the mix of legacy and new customers. Our acidizing operations continue to be performed in South Texas, Wyoming and Kansas. Moving on to water transfer, our revenue grew 79% in the fourth quarter and more than tenfold for the full year. We are currently working for four good sized producers in Colorado and Wyoming on both frac water and flow back water transfers. We are particularly excited about a pending project with a large major that we recently completed an MSA with. We currently have a growing pipeline of high probability opportunities and our focus is getting to full utilization on our transfer equipment. On the pricing front, we are seeing some strengthening here and there -- and expect to continue drifting upward as customer demand increase, and the labor market continues to tighten to be – to the point that service companies like ENSERVCO are forced to increase wages in order to attract and to retain quality employees. So, that’s a quick view of what we’re seeing in the field. With that I’ll turn it over to Dustin for a recap for financial results.

[Dustin Bradford:]

Thanks, Austin. Total revenue in our fourth quarter increased a 112% to 14.1 million from 6.7 million in the same quarter last year. And remember, the year ago fourth quarter included 600,000 from a single construction contract that we took during the downturn. So at an apples-to-apples basis, total revenue actually grew by closer to a 133% year-over-year. Well enhancement services revenue increased a 158% year-over-year to 12.9 million from 5 million year ago. We achieved double digit growth in all three components of the well enhancement segment including frac water heating up 267% to 7.6 million from 2.1 million, hot oiling which was up 37% to 3 million from 2.2 million, and acidizing which was up a 167% to 1.6 million from 600,000 a year ago. Operating income in the well enhancement segment grew sharply to 3.9 million compared to just 92,000 in Q4 of last year. Water transfer revenue increased 79% to 272,000 in our fourth quarter of 2017 from a 152,000 in the comparable quarter last year. As Ian mentioned, we have an opportunity to grow revenue in this segment throughout 2018. In Q4 water transfer produced an operating loss of 280,000 due partially to costs associated with the HydroFLOW product line. As of January 1st of this year the Company terminated its exclusive agreement with HydroFLOW, but we maintained an ongoing working relationship. Water hauling revenue in Q4 was 1.0 million up 10% from 915,000 a year ago. We had an operating loss in this segment of 66,000. So do operating expenses in our fourth quarter increased 35% year-over-year to 13.5 million from 10 million due primarily to the higher direct cost and delivering services. General and administrative expenses increased to approximately 1 million from approximately 900,000 in the fourth quarter of 2016, the decrease sequentially from 1.1 million in Q3. Depreciation and amortization expense decreased 15% o 1.6 million from 1.9 million due to certain of our assets becoming fully depreciated. We reported a significantly reduced net loss in the quarter of 1.9 million or $0.04 per diluted share versus a net loss of 2.7 million or $0.07 per diluted share in the same quarter last year. Our fourth quarter loss includes a 1.8 million charge for income taxes this charge included a $585,000 increase in tax expense for 2017 resulting from the impact of the change in federal statutory income tax rate on our differed tax assets. And 1.2 million increase in the valuation allowance on our deferred tax asset. Our pretax loss in the fourth quarter improved to a $61,000 dollars loss in 2017 from a 3.6 million pretax loss in the same period last year. In the fourth quarter adjusted EBITDA grew to 2.4 million from a negative 1.2 million in a comparable quarter last year. As a reminder due to the capital intensive nature of our business we believe adjusted EBITDA is an important metric for investors to evaluate our operating performance and health of our business. I’ll turn now to full year results. Total revenue increased 66% to 40.8 million from 24.6 million in the prior year while enhanced and services revenue increased 94% to 34.7 million from 17.9 million, as in Q4 all the three components of our well enhanced and services segment shows strong double-digit growth for the full year. Frac water heating revenue was up 175% to 18.4 million, and 6.7 million. High oil and services revenue was up 29% to 11.1 million from 8.6 million and acidizing grew 64% to 3.6 million from 2.2 million. Operating profit in the segment was up 8.8 million 2.2 million year-over-year. Water transfer revenue for the year increased tenfold to 2.1 million from 184,000 in 2016. The Company incurred an operating loss in the segment of $538,000 due to reasons previously cited. Water hauling revenue declined 4% year-to-date to 3.7 million from 3.8 million and the segment reported an operating loss of $295,000. Total operating expenses increased by 28% to 45.5 million from 35.6 million last year, due to cost associated with increased activity labor and maintenance investments in preparation for increasing demand in the Q4 and Q1 heating season and severance related management transition cost incurred in Q2. General and administrative expenses increased by 18% to 4.5 million from 3.8 million last year depreciation and amortization expense declined to 6.5 million from 6.9 million due to turn equipment becoming appreciated. Our net loss for the full year improved by 1.7 million year-over-year to 6.9 million which is inclusive of 6.5 million in depreciation and amortization or 13%, $0.13 per diluted share from $8.6 million loss, or $0.22 per diluted share, last year. As I mentioned in my remarks in the fourth quarter, the change in the federal statutory income tax rate and the valuation allowance on our deferred tax assets combined for a 1.9 million increase to our 2017 net loss. We achieved the 6.7 million positive swing and adjusted EBITDA to 3.4 million from a negative 3.3 million in 2016. Our fleet remains essentially unchanged from last year. Our capital spending in Q1 will be -- will continue to be primarily related to maintenance CapEx. And with that, we’ll turn the call over to the operator for any questions. Operator?

[Operator:]

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

[Bhakti Pavani:]

Just wanted to understand Austin in the prepared remarks, you did mention about how changes or what kind of changes you are seeing in the frac water heating business especially when it come to utilization and pricing, And you did talk about the increasing labor costs. So my question is, how do you compare or how do you see the utilization improving in the Q1 of 2018 versus the last quarter? And would the improvement in pricing cover for the increased labor costs?

[Austin Peitz:]

So, we definitely experienced an uptick in activity at the end of fourth quarter and that momentum period on into the first quarter Bhakti. So, we are very excited about where we were at the end of the fourth quarter and where we are today. So, can't give you a high level on that and then labor costs, it’s our biggest holdback on the business is finding valuable labor, it’s a very hard commodity to come across talent and it’s starting to get expensive in some basins, but we’ve really put a lot of effort into our recruiting efforts at their corporate office, we’ve actually got somebody in-house as a full time recruiter trying to combat some of that, and recruiting out of states, so I think we’ve got a good process in place to kind of overcome some of the hurdles.

[Ian Dickinson:]

Yes and this is Ian. What we're were using -- we are finding opportunities as Austin mentioned earlier to increase prices, so we are combating some of those challenges with increased pricing to our customers.

[Bhakti Pavani:]

So, let me ask you this and maybe rephrase the question, so what percentage of pricing increase are you guys witnessing on a quarter-over-quarter basis?

[Ian Dickinson:]

I’m sorry the question, what was the percent?

[Bhakti Pavani:]

Yes, of pricing increase I mean is that -- has the pricing increase 10%, 15%? Or is it still at the same level? Or what are you seeing in the pricing market?

[Ian Dickinson:]

Yes, it depends on basin and it depends on specific customers. It’s in the somewhere in the 5% to 10% range, if we were to look across kind of the blended average, it’s important to note though and Austin can expand on this. A lot of pricing that we put in place, we negotiated back earlier in 2017, as part of the commitment for the work. And so we found some spots where we’ve been able to take pricing up, but we think that opportunity will be more robust here in 2018.

[Austin Peitz:]

For surely and a lot of our new opportunities as what we -- that we uncovered throughout the season is what we've really seen the really the opportunity for the increase opportunities.

[Bhakti Pavani:]

Okay with the regards to utilization, would you guys may be more willing to produce further granularity on what percentage your fleets are utilized in hot oiling, frack, water heating and advertizing business?

[Ian Dickinson:]

Yes, so as I mentioned, I believe on the last call, we established liquidation metric as the business didn’t have historically. As a reminder, the business had looked at average revenue per unit. The challenge with that is the conflatable [ph] pricing with hours. And so when we set the base line for what we determined a 100% utilization to be, we set that at eight hours a day 25 days over a month. So, the 25 days out of the month assumed sometime for transport and maintenance than the eight hour days and equivalent to an eight hour workday or 40 hour workweek regular time. So again that’s our 100% utilization metric is eight hours a day, 25 days a month. In terms of where we are seeing utilization, you know we are targeting to get to -- we were somewhere around 45% utilization, across the entire fleet in 2017. As it's described in our investor presentation deck, back in 2014, we were roughly about 80% utilization under those metrics and that’s the long-term goal for us as to get back to utilization rates we saw in 2014. And we believe we got the environment industry and commodity price-wise to do that, as I mentioned earlier on this call. We're seeing -- we're happy with what were trending on utilization. Obviously, I’ll give you an example, with frac water heating we will run over a 100% utilization as we got 24 ops we got trucks working 12, 14, 18 a day week straight. And so anticipating over quota 100% utilization during our heating season, and as we get obviously in the store season that utilization drop. Frac water heating is by far the most seasonal, we do have some seasonality with our hot oiling and actually a counter seasonal dynamic with our acidizing and really no seasonality with our water hauling or water transfer. But our utilization rates are tracking at anticipated level here in fourth quarters, as we move into first quarter. I’m not sure that answers yours question fully Bhakti, but hopefully that's thoughtful.

[Bhakti Pavani:]

A little bit thank you. I wanted to talk about the water transfer business, you know the revenue is to compare in the fourth quarter with the third quarter, it was significantly below. So just wanted to understand what happened in the business? I mean why such a decline, and also if you could talk about the HydroFLOW assets, I know that is terminated exclusive agreement. Is there going to be a one-time cost associated with that in Q1, if you could maybe provide additional colors?

[Ian Dickinson:]

Let me start by answering your question first run HydroFLOW. There is no incremental cost. We terminated the agreement, working directly with HydroFLOW and came to that conclusion together. So no cost associated with that termination, we no longer have any purchase commitments in 2018. We did as we mentioned maintain a working relationship with HydroFLOW, and we will be looking for opportunities as they present themselves, but it is no longer at least in 2018 is not a core focus for the business.

[Austin Peitz:]

And to touch about your question on the water transfer revenue down in the fourth quarter, that’s simply just due to a large project that it was just timing and that project actually pushed into the first quarter, so it wasn’t revenue that we lost or an opportunity that we lost it was just timing by the customer.

[Bhakti Pavani:]

Just housekeeping question, you did mention that you guys are planning to hire more people. Would that imply or should we assume an increase in G&A expense going into Q1, and overall 2018 at this time?

[Ian Dickinson:]

Well, we are making investment in the sales organization, it’s a relatively small investment, so we are -- we’ll maintain SG&A levels to similar levels that we saw in 2017, but I think we’re going to see a payback on this investment for the reasons I described previously on the call. But we really don’t have any large G&A requirements beyond kind of current course Bhakti.

[Bhakti Pavani:]

And just last one on the capital expenses. What are sort of the capital expense expectations for this year? Is it going to be mostly maintenance? Or do you plan to expand your fleet on the water transfer side?

[Ian Dickinson:]

Well, it’s mostly maintenance, so the bulk of our CapEx will be maintenance CapEx. In a similar range to I believe the 2017, that’s A -- it’s very -- it dictated a bit on our level of utilization and so we’ve got a range, but the range is within kind of that 2017 level, it’ll be up a little bit just based on higher utilization expectations. As it relates to incremental CapEx or new assets, we will look as I mentioned earlier to add additional water transfer asset, that if need be. But we’re going to do that in a very measured way. We’re very conscious to, to ensure that we are continuously strengthening our balance sheet, but we’ve got a facility in place now with East West Bank that will allow us to invest in incremental equipment as need be. And most likely that will be in water transfer, at least as it relates to our current service offerings.

[Operator:]

[Operator Instructions] And our next question is from Gary Ribe from Macro Consulting. Please go ahead. Q - Gary Ribe I just had one or two, if you just wouldn’t mind indulging me. You guys are going to generate a good amount of cash through this quarter. Do you guys have kind of a target leverage ratio that you’re thinking of? I know that you’ll get EBITDA up and you'll generate some cash. Is there kind of a target that you guys are looking at running with like on an annualized basis?

[Ian Dickinson:]

What I have said on I think on previous calls and various times that I really don’t believe this business should have -- it should be talking about -- that should be about one turn on EBITDA. But I want to qualify that just by saying to the extent we are growing, we’ll continue it to invest in assets, we need those assets to generate revenue. But to the extent we kept the business just as it is today, and made no changes or no incremental investments, you know, the goal will be to pay that debt effectively all the way down. Any one of these pieces of equipment should really have a roughly a two year payback. Back in 2013, 2014 when things were really blown and going, you can pay off a $0.5 million in six month, right Austin.

[Austin Peitz:]

Yes sir.

[Ian Dickinson:]

So, our goal is to deliver the business, but I think in terms of our metric, one and one and half turns on EBITDA is I think a healthy level, depending on how we're growing, yep.

[Gary Ribe:]

Yes, I got you. So, you will get some lift on EBITDA and then there will be some natural deleveraging that occurs, and then from there, you guys would look to be opportunistic on the investment front. Is that kind of if I am reading between the lines on that?

[Ian Dickinson:]

Yes, that’s a good summary. And keep in mind, the assets that we have currently today, they have got a long useful life and its relative young fleet. And so, we've got a lot of runway ahead of us on the current asset base.

[Gary Ribe:]

And it looked to me like you guys made a number of investments in fourth quarter that kind of like ran their way through the income statement and probably hit EBITDA little bit. Can you kind quantify that as it you know kind of a million dollars worth of expense that you end through the kind of gear up for future growth? Or is it what’s kind of the ballpark on that? I am just curious.

[Ian Dickinson:]

So, maintenance CapEx, we had -- fourth quarter was higher than the previous quarter, but that was in response to the growing demand, but that you know that obviously CapEx. I mentioned the investment we made in the sales organization and some investments we made in GTS system and the implementation of that. I don’t have an exact number. I don’t know Dustin, if that something we can quantify here at, it's not usually, may be not a $0.5 million range.

[Dustin Bradford:]

Yes, and primary what we did in the fourth quarter was, getting our equipment fully ready to the deployment. So, that’s the bulk of that spend was in the fourth quarter and really throughout 2017.

[Gary Ribe:]

Got it and the commentary you guys were providing was, I thought very optimistic and you guys seem very optimistic. The first quarter is basically done seeing the trends continue to -- would you expect a similar kind of like lift that you saw in the fourth quarter year-over-year directionally similar magnitude?

[Ian Dickinson:]

Yes, I mean, I guess what I would say is that, as Austin mentioned earlier and we’ve mentioned before. The momentum that we experienced in Q4 just continued into Q1. And so in terms of order magnitude quarter over quarter kind of message, I don’t we’re prepared to talk about that specifically but we’re seeing a continued momentum, we’re happy what our utilization rates are its the team is motivated and energized by what we are seeing again just saw that activity level continuing to January, February into March. So, I hope that helpful.

[Operator:]

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 your time and attention on the call today. We’re excited about the prospects for continued profitable growth in 2018 and look forward to speaking again following the March 31st close of our first quarter. So, appreciate everybody’s time. Thanks so much.