Enservco Corporation
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Greetings and welcome to the Enservco 2016 First Quarter Earnings 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 would now like to turn the conference over to your host, Mr. Jay Pfeiffer, Investor Relations. Thank you. You may begin.

[Jay Pfeiffer:]

Hello and welcome to the Enservco 2016 first quarter conference call. Presenting on behalf of the company today is President and CEO, Rick Kasch; and CFO, Bob Devers. 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 Rick Kasch. Rick, please go ahead.

[Rick Kasch:]

Thanks, Jay, and thank you all for joining us today. Let me first start by saying that Austin Peitz, our Senior Vice President of Operations could not join us today. He is working on some business out of town. [indiscernible] just replaying the recording from our year end earnings call in March, because as we anticipated, our first quarter results look a lot like those of our fourth quarter. Despite a continuation of the challenges we experienced in Q4, primarily reduced the E&P activity and the El Nino effect. We nevertheless generated solid cash flow and positive EBITDA in Q1. We’re not ready to predict the bottom yet, but I can say that what we’ve been through is a worse event, then we’re in pretty good shape relative to many of our peers in terms of having resilient business model that strike the balance between drill dependence and recurring maintenance work and has the ability to deliver positive product metrics in spite of the strong headwinds that Enservco have incurred since its inception. Now during the first quarter, we continue to take steps to strengthen our business, despite these continuing headwinds. Let me give you three examples of that of our continued cost reduction. First, we continued our expansion in the Eagle Ford Basin in Texas, where hot oiling revenue increased more than threefold year-over-year. We have now deployed 18 hot oil trucks down there under high utilization with several operators. Not only have we increased our hot oiling capacity in Eagle Ford, but we were also successful in winning our first acidizing business there during the first quarter with the major E&P. We positioned the builders on the basis and we could significantly enhanced reduction on one of their low-producing wells. We completed the project and the wells production increased significantly. That success have led to additional projects under this E&P and they have all experienced that these are doubling of the oil and gas production. We have had to redeploy three additional acidizing units in the Eagle Ford, bringing the total number of units to four, enabling us to increase utilization of our acidizing and equipment in crews from our traditional areas of operations. But we’ve also received inquiries and are in discussions with other E&Ps and we have learned the success of acidizing and we are optimistic about signing some new MSAs in developing new acidizing and hot oil work in the Eagle Ford. Keep in mid both of these services are year around in those activity and not driller completion dependent. Second, subsequent to the end of Q1, we won a $2.6 million dirt hauling contract in Colorado. This new revenue stream still produce good margins. We will be monetizing over a six to eight months period beginning of this week and will give us the boost during our two off-season quarters. This project is enabling us to utilize equipment that would otherwise be idle and to retain key personnel then we would normally have to layoff and hope that they return in next season. The project requires 20 tractor trailer unit as well as loader and escalator and couple bulldozers. By the way this is where Austin is today, making sure that the work gives off to a good start. Within the lower activity increase and the dirt hauling project, we’re actually scrambling a little bit to drill some personal gaps, something we haven’t had to worry about in a while through get to the problem they have. The third example of steps we have taken to strengthen the company, in the first quarter we added two new lines to our service portfolio, water transfer and HydroFLOW bacteria and scale treatment. By the way of add to that acquisition that were made a favorable prices, which is confirm by an equipment appraisal recently done for our bank couple of weeks ago, although early marketing efforts for these service lines have been challenging due to the continued decline in activity over the last six months. We anticipate they will still make a meaningful contribution ones commodity price is recover. We are presenting some good water transfer opportunities, while compress margins and ultimate chapter and some new customers and putting more of our people in assets to work. We’re in the similar mode with HydroFLOW bacteria scale treatment product. We will now complete the installation of our first two field test units with the midsize E&P versus disposal well applications. And we are looking forward to see the results of those trails in the next month or two. We are also talking about long time customer about maybe HydroFLOW units in a frac water application. For those of who and maybe new to Enservco, HydroFLOW isn’t easy to implement low cost, green alternative to traditional chemical treatment used by E&Ps to eliminate powerful bacteria scale in water injected and some frac jobs for smaller wells. We think water transfer service is in our HydroFLOW products are still going to be great long-term businesses that complement in our other lines. These new lines can be bundled with our other services in order to reduce costs and simplify procurement for E&Ps would first to be able to single vendor versus multiple vendors. We think this is can be a – competitive advantage for us ones activity pickups again. As Bob will comment on further, our balance sheet at the end of the quarter remains strong and are reasonably completed equipment appraisal, we affirmed our collateral position and actually let to a slight increase in our net borrowing availability under our senior credit facility. We continue to enjoy the very good work in relationship with PNC Bank and I’m happy to report we are in compliance with terms of our credit facility and expect to continue that way through year end. With that, I’ll hand it over to Bob for a recap of our financial results.

[Robert Devers:]

Thanks Rick. Hello everyone. Total revenues for the first quarter declined 57% to $8.3 million from $19.1 million in the same quarter last year; similar to our fourth quarter, lower capital spending by E&Ps along with reduced frac water heating services due to the warm weather with the primary reasons for the decline. In addition, lower propane prices contributing nearly $1 million to the decline in revenue and price concession were approximately 6% of revenue. In terms of contribution by service line, frac water heating revenue declined $8.6 million year-over-year, making at the main contributor to lower revenue. Water hauling declined by $806,000, which was not unexpected due to our – service line. Acidizing revenue was down $300,000 and hot oiling revenues was down $1.1 million overall to the – $651,000 or 302% increase in hot oiling in Eagle Ford. Gross profit at the first quarter declined to $105 million from $7.9 million in Q1 last year. That translated a into year-over-year decline in gross margin from 41% to 19% primarily due to the lower revenue from higher margin frac water heating services and the impact of fixed costs relative to our lower overall revenue. Turning to our operating expenses, G&A expenses declined 16%, or 194,000 year-over-year, and patent litigation and defense costs declined 89%, or $303,000. These improvements were partially offset by a $425,000 increase in depreciation and amortization expense related to our larger fleet size and acquisition of water transfer assets earlier in the quarter. Adjusted EBITDA in Q1 was $651,000 as compared to $6.7 million in the same quarter last year. We reported a net loss for the quarter of $1.1 million, or $0.03 per diluted share versus net income of $2.9 million, or $0.07 per diluted share a year ago. The impact of additional depreciation expense over last year’s quarter accounted for one-third, or 1% of the EPS loss for the quarter. We generated $2.9 million in cash from operations in the first quarter compared to $6.2 million in the same quarter last year. Our balance sheet remains very solid. We have a working capital of $4.2 million and a current ratio of 2.5

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from William Bremer from Maxim Group. Please go ahead.

[William Bremer:]

Good afternoon, gentlemen.

[Rick Kasch:]

Hey, Bill.

[Robert Devers:]

Hey, Bill.

[William Bremer:]

Rick, very nicely done on the strategic environment and the expansion and hey, congratulations on landing a major E&P customer there. My first question is definitely on subsequent to the quarter. The nice award $2.6 million and that’s going to be – that’s going to impact in the current quarter and the third quarter. Does that – with that addition does that push you over year-over-year numbers in the second and third quarter?

[Rick Kasch:]

Well, Bill, as you know, we don’t give any guidance going forward on that. So it will be definitely a positive to our results. But keep in mind that activity is down from last year, and all servicer is not just the seasonal one.

[William Bremer:]

Right, right, okay. And then maybe just give us a little color now that the two acquisitions you have little more time to look them over and sort of introduce them to some of your clients. What has been the initial feedback of the new products that you’ll be offering?

[Rick Kasch:]

Well, we’re actually getting good feedback. The problem we’re running into is the decrease in activity and decrease in budgets. Right now lot of E&Ps just don’t want to spend the extra money unless they know for sure, they’re going to have a cost reduction on the other hand. So that’s why we’re doing some test trials, which is to show them what the products can do as far as the HydroFLOW and so probably it should reduced our costs. On the water transfer, as we said during the call here, it’s a difficult market out there. The competition is very stiff among those who have already in, in the business. But we are pursuing a couple of good opportunities,we will be – we hope we’re going to be able to land. But this just don’t know right now.

[William Bremer:]

And then finally if you look at the overall market, where would you feel though we are – things going to get a little bit better on some fronts, what’s your visibility look like at this time?

[Rick Kasch:]

Well, our visibility is getting better than anybody else, it’s not very good. But it does feel like maybe with the stabilization of prices – oil prices and so forth that we are seeing things kind of leveling out, we actually were seeing often these things in the last week or so even maybe a little bit of an uptick in activity in some of our areas. But we really don’t have a lot of good visibility into much users.

[William Bremer:]

Hey, we will take it as your emerge leaner than ever before. Thanks, Rick.

[Rick Kasch:]

Okay. Thank you, Bill.

[Operator:]

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

[Bhakti Pavani:]

Good morning, guys. Just a question on the new contract that you were awarded. And in the press release you guys mentioned that it has good margins. Could you may be provide more color on what kind of margins are we talking here about?

[Robert Devers:]

Well, we are anticipating somewhere in the 15% to 25% margins. Just to give you a little bit of color on the contract, is now within the E&P is actually – has the subcontractor to a project for the calendar year – below calendar year in Colorado. What we did is, as you noted, the duties of a good management team is that time like these is to find ways to earn revenue and alterative use of our equipment. And so – but this was an outcome of our people in the field looking for new sources of revenue, to utilize our belly dumps and construction equipment that we have. So it’s somewhat new to us. As far as from the project what it is strictly following, so we do think we are okay on those in March..

[Bhakti Pavani:]

Okay. And do you anticipate any future of lease on this business, or do you see spending revenues over the years?

[Rick Kasch:]

I don’t see focusing on us as a major serve to the client. I do see some revenue continuing possibly for the company that were self contracting to. As indicated to us, they have other work that they want us to consider doing after those projects are seized. Again, like I said, I’m not sure we want to continue to emphasize this service line, but it’s a good stock yes if you will for the slow months of ours.

[Bhakti Pavani:]

Okay, perfect. With regards to revenue from a geographical standpoint, how are the revenues distributed at this time, understanding that Eagle Ford has became the – one of the largest revenue trending area for you guys?

[Rick Kasch:]

So you’re asking geographically how the revenues are doing?

[Bhakti Pavani:]

Yes. What areas are doing really good, in fact, Eagle Ford has been, I mean, you guys have been really doing good in Eagle Ford?

[Rick Kasch:]

Yes, Eagle Ford has been doing very well. The rest of the markets are down, in fact, actually all of them. The biggest decline, of course, for the first quarter were here in the DJ and having Pennsylvania, where we do our frac water heaters. So it’s not a problem that on reserve to one geographical location reverses another.

[Bhakti Pavani:]

Okay. Also I did notice from the liquidity standpoint, your DSOs include significantly in Q1. Do you think we should be modeling those levels for the rest of the year?

[Rick Kasch:]

The ways you say about the level?

[Bhakti Pavani:]

The Days sales outstanding was down from the 79 to 39 in Q1, you were able to recover most of your receivable, so how should we…

[Robert Devers:]

Yes. Yes, this is Bob. Yes, we’re really focus on making sure we collect receivable and try to collect them quicker, given the environment of risk that we have out there. So we’ve make sure that days sales outstanding, I – we’ll try to keep it at that level, but I’m anticipating that I don’t think we’ll accrete the significantly the whole key management kind of at the level that it currently is.

[Bhakti Pavani:]

Okay, that’s it from my side. Thank you very much guys.

[Rick Kasch:]

Thanks Bhakti.

[Operator:]

Our next question comes from Tom Dillon from William Blair. Please go ahead.

[Tom Dillon:]

Hi, guys

[Rick Kasch:]

Hey Tom how are you doing. Tom?

[Tom Dillon:]

Good. Yes I was just curious how are your competitors behaving these days? Are they still pricing pretty rationally?

[Rick Kasch:]

Rationally I hope, I think I used that – they’re still price cutting at some point on, but just give you a little advice what I learned today. In one of our markets two competitors one closed the door and one filed for bankruptcy. And they were the ones who were on the cutting the markets for the business. So I think where we’re smart being away from doing them profitable business. But we’re still seeing a lot of the major competitors again we came out of season everybody was slow we were slow. So I think everybody everything is pretty much statuesque with what it was before.

[Tom Dillon:]

Okay and then outside of those Montana asset competitors, the one that are still at billing table – but have you seen any other selling cost closing our shop or started to hatch the way that the Montana’s were in terms of undercutting the bid?

[Rick Kasch:]

We’re doing a little bit what we’re actually hearing is that operators drivers coming from other companies saying that things were not going to how where they were or their payroll checks were bouncing stuff like that. So we have experienced some of that.

[Tom Dillon:]

Okay, all right, great. I’ll leave it at thanks guys.

[Rick Kasch:]

Thanks Tom.

[Operator:]

[Operator Instructions] Our next question comes from Jeff Grampp from Northland Capital Markets. Please go ahead.

[Jeff Grampp:]

Good morning Rick and Bob.

[Rick Kasch:]

Hey, Jeff.

[Robert Devers:]

Hey, Jeff.

[Jeff Grampp:]

Hey, just wanted to make sure we’re talking the same kind of margins here back on the sub-contracting work, but when you said 50% to 25% is that that’s on a gross margin not an EBITDA type of margins we should be thinking about right?

[Robert Devers:]

No that is in the EBITDA margin aspect. It has more cost.

[Jeff Grampp:]

Okay, thanks for clarifying that. And then in the press release you mentioned you guys have some opportunity to potentially contest that hot oiling capacity you guys have, can you kind of talk a little bit more about opportunity there timeline or any kind of incremental details you could provide on those opportunities you’re seeing there?

[Rick Kasch:]

Okay, yes the comment was a little brilliant and I think didn’t give the full picture of what we’re trying to get across. With the major E&P that we’re dealing with right now down and Eagle Ford on hot oiling is now using most of our 18 trucks. We’ve also been in discussions with actually bid on a couple of other pieces of business down there. And it’s kind of if we win it – for the kind of if win it, what are we going to do. So it’s going to be stretching our capacity. We’ll be looking at where we get trucks from as far as other markets we may have to take it and so forth. So it was just kind of a comment that that we get another winner too is going to be stretching our capacity.

[Jeff Grampp:]

Got it and Rick is there any definitive timeline more or less, I mean is this something coming up in the next several weeks or is it just kind of ongoing discussion?

[Rick Kasch:]

It could be anytime now we have bid was on one of these major ones with actually supposed to be awarded as of the 1 May and they keep pushing it back for some reason. So that could happen anytime, another couple of ones that we’re looking at probably wouldn’t know anything for another 30 days.

[Jeff Grampp:]

Okay, that that will be helpful detail. And then on the HydroFLOW side, you mentioned that you guys are rolling out the first kind of fuel test is going along here. Have you kind of have conversations with the customer on how things progressing after that, field test, I mean assuming success you will right into something all the – more comprehensive, is it kind of a wait and see and deliberate after the field test or just kind of wondered how that place out going forward?

[Rick Kasch:]

Okay, I will play out as we give the results and we’re good out of the E&P and show them a results and talk with them and kind of look at what costs savings or in one case, one of the applications we actually put the unit on a wellhead to help eliminate scaling and corrosion through the wellhead. They’ll actually be able to major how that increased to the flow form in these injection fields. So what’s down and we have to just go through with them, revenue, potential increase, cost reductions on chemicals and so forth and determine of price that we’re going to be charging them before that and then I think it will be up to them to decided how extent they want to go.

[Jeff Grampp:]

Okay, that’s helpful. And then last one from me kind of on that same line, you mentioned having the difficulty getting tracking on some of these new large services given that were couple months, since your last call of your and since you acquired these assets, I think you mentioned before maybe – I think some contributions towards a tail end of this year from those business line, does that still a fair expectations internally or do thing that that timeline maybe push back given some of initial difficulties you added again?

[Rick Kasch:]

Well, we are right now – anticipating I know much importance at lease since our fourth quarter. With in essence – to again reduce cost and so forth that laid off the water transfer employees and using a lot of them on the construction project that we were in the contract of $2.6 million. We have a sales that left on the transfer client to generate business and – but again with the market conditions right now, I’d have to said, people see an income of fourth quarter.

[Jeff Grampp:]

Okay, perfect. Thanks a lot guys.

[Operator:]

Our next question comes from William Bremer from Maxim Group. Please go ahead.

[William Bremer:]

Hey, Bob just a follow-up really it’s just housekeeping, should we be forecasting or we are that the pattern litigation stand at this point? I know we’re down to about some 50,000 quarter and then just an update on D&A going forward, should we utilizing fourth quarter sort of the run rate there.

[Robert Devers:]

Yes, on the pattern litigation, I would keep this – I don’t keep that as a evidence though litigation is still on our same condition, so I would probably keep it in a 40,000 to 50,000 range per quarter just for a moderation cost and some like that. On the depreciation and amortization expense, yes, I would going at the years what we have to first quarter is kind of run rate going after the rest of the year.

[William Bremer:]

Okay, great. Thank you.

[Operator:]

And there are no further questions. I’d like to turn the call back over to management for any closing remarks.

[Rick Kasch:]

Thanks Matt. So looking ahead I just want to show you that we’re focused on increasing our sales effort, maximizing utilization and carefully monitoring costs from a job-by-job and name-by-name basis. To ensure, we’re operating sufficiently as possible without sacrificing our quality of service. In closing I’d like to again recognize our entire team, who worked extremely hard to generate probably a good result under very difficult circumstances. Our people have always been and will remain strength of our company and their commitment to add funds day and day out is really the foundation of our success. Thanks again for joining us today and I look forward to updating you on our progress in our second quarter call sometime in mid August. Thanks and have a good day.

[Operator:]

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