Enservco Corporation
Q3 2016 Earnings Call Transcript

Published: 14 Nov 2016

[Operator:]

Greetings and welcome to the Enservco Corporation's 2016 third quarter conference call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the 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, from Pfeiffer High Investor Relations. Thank you. Jay, please go ahead.

[Jay Pfeiffer:]

Hello and welcome to the Enservco's 2016 third quarter conference call. Presenting on behalf of the company today is President and CEO Rick Kasch, CFO Bob Devers and Senior VP of Field Operations Austin Peitz. 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 will 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 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 will turn the call over to Rick Kasch. Rick, please go ahead.

[Rick Kasch:]

Thanks Jay and thanks to you all for joining us today. As we have indicated in our press release this morning, Q3 financial results were pretty much in line with expectations. As you know, Q3 and Q2 are our off-season quarters and therefore revenue and margins are lower due to the lack of higher margin frac water heating activity. Our activities over these last few quarters have been largely focused on three key objectives. One, continue to provide superior service to our customers in order to retain those customers in the face of intense competition. Two, continue to carefully monitor our variable cost and look for ways to reduce expenses in ways that don't impact the quality of our service or operational safety. And three, continue to develop and exploit new opportunities to complement our legacy businesses and offset the seasonality and the impact of reduced activity due to lower commodity prices. Let me expand a little on this last point, which is important because while a lot of our competitors are cutting back on new initiatives, we have forging ahead in areas where we think we can develop new revenue streams that will not only help bridge us in the short run but also position us for more accelerated growth as commodity prices rebound. First, there is our continuing Eagle Ford expansion, which has resulted in combined acidizing and hot oiling revenues increasing 81% year-over-year in that market. These are primarily year-round maintenance services that are not dependent on cold weather conditions or drilling and completion activities. You will recall, we made the move into the Eagle Ford during a time when oil prices had already collapsed and it has proven to be a major positive for us both in terms of new revenue streams and retaining key people in keeping our assets working. I would also like to point out that Enservco was recently named oilfield services company of the year for the Texas region at fourth annual oil and gas awards for the Texas region at the 4th Annual Oil & Gas Awards in Houston. As you may recall that we won to same award for the Rocky Mountain region in 2013. Recognition from our peers in the industry, media and experts is always a nice thing, but is especially gratifying in light of the intense competition we have faced during the downturn and is a real testament to the deep commitment our Texas team has to providing excellent customer service. Second, we are also starting to get some traction with our new water transfer service line. As a reminder, we acquired water transfer equipment at distressed prices earlier this year and have been marketing this service to existing and prospective customers on both a standalone basis and as a component of bundled services, which benefits the operator on both price and convenience. In the third quarter, we were awarded our first three water transfer projects by customers in North Dakota and Colorado. This work will be performed during this fourth quarter. Again, this is an example of Enservco making some opportunistic moves to add new revenue streams in spite of the difficult environment. Our HydroFLOW is another example. Although we are not yet generating revenue from this new offering, we continue to make progress with successful proof of concept activities and field tests with several customers. HydroFLOW is a patented device that removes scale and bacteria from water at a fraction of the cost and in a more environmentally friendly way than traditional chemical treatments. As you know, we have the exclusive rights to this product in the oil and gas space and have higher expectations for making it an important component of revenue mix over time. Austin will provide some more color on this well as well as an update on our testing activities in other application we are exploring for HydroFLOW in just a moment. That said, we are happy to be moving into our heating season that starts here in quarter four and runs into early Q2 when we generate more revenue, gross profit and EBITDA from our higher margin heating services. The forecast of a cold winter in the northern tier the country due to La Niña effects is very encouraging. I will close my remarks with a few comments on the industry from our perspective. In Q3, we saw a continuation of positive signs of the recoveries underway. Based on comments from our customers during discussions regarding their servicing needs during the upcoming season, we share the opinion of about majority of our peers that the downturn appears to have established a bottom and that activity in a number of areas in other words, rig counts, mobilization of frac crews, completion and maintenance programs is on the rise. Now to be sure, we still face challenges and the industry is going to need steadily higher oil prices resulting in increased completion activity to return to the robust and highly profitable growth mode we enjoyed before the downturn. But we are very encouraged by recent trends. With that, I will turn the call over to Austin.

[Austin Peitz:]

Thanks Rick and hello everyone. Let me start with our Eagle Ford expansion initiative which has definitely been a bright spot for us over the past year. Since we talked to you last quarter, we have moved four additional hot oilers to our fleet in the Eagle Ford and are now up to 21 trucks and crews there. We also moved in another acidizing unit into Texas and now have four acidizing units deployed there. We have added new customers for both of these services and have expanded relationships with the few existing customers. Switching gears to our new service lines. In the third quarter, we won our first business in the water transfer with three customers in the Bakken and D-J. These are all new customers for Enservco as opposed to legacy customers and we won the business in part because we were able to offer a bundled service that also included frac water heating which saves the customer at price point in addition to a simplified procurement process. This is the first example of bundling capability we have been talking about since our first quarter asset acquisition. An ability to offer customers a one-stop shop option that could afford us a competitive advantage going forward. We are in discussions with several additional prospects for water transfer and I hope to have new customers in the fourth quarter and into 2017. Likewise, we have additional bundling option with the HydroFLOW product. The trial programs we told you about last quarter have yielded promising results and we are now discussing next steps with prospective customers in the oilfield as well as in other industries such as waste water treatment. Remember, this product has a long track record of success in industries and is starting to be widely accepted as being effective in removing bacteria and scale in certain applications. But because the technology is brand new to oilfield and to the waste-water treatment, prospective customers are being hyper vigilant in proving its effectiveness prior to abandoning the other processes that they have been using for years. Recently, the company we licensed the product from, HydroFLOW USA, has teamed with global engineering giant, CH2M HILL, on a major nationwide study to prove the effectiveness of HydroFLOW in waste-water applications. So there is a lot of and buzz around the technology that should only help us in our marketing efforts over the long haul. The benefit of HydroFLOW over old processes are compelling and we think it's only a matter of time, probably in the first quarter of 217 before we recognize our first revenues and see the sales cycle shorten as HydroFLOW proves itself. As Rick mentioned, we continue to see signs of increased activity among E&Ps in terms of drilling and completion activities. We are also seeing some resumption in maintenance activity that was deferred on producing wells and also the reopening of shut-in wells that will immediately require maintenance. This is particularly true in North Dakota where activity in most areas of operations in on the rise over the last several months. The growing number of our customers in several basins say they are stepping up drilling and completion activity, so once the cold weather sets in, we have a good opportunity to see growth over last year. So I would summarize by saying this. We are very optimistic about the traction we are seeing with our service fill lines as well as the predictions of increased activity in our legacy operations. With that, I will turn it over to Bob Devers. Bob?

[Bob Devers:]

Thank you Austin and hello everyone. Let me start off with our third quarter results. Total revenue in Q3 increased to $5.5 million from $5.3 million in the same quarter last year. This was primarily due to $1.5 million increase in construction services related to our dirt hauling contract and a $379,000 increase in acidizing due to our successful expansion of services in the Eagle Ford. These increases more than offset $790,000 decline in hot oiling due to industry downturn and price concessions and $718,000 decline in water hauling due to our decision to phaseout lower margin work. Gross profit for the third quarter was a negative $458,000 versus a gross loss of $47,000 in Q3 last year. This was due to lower revenue on our well enhancement services as will carrying cost related to our water management division and higher costs related to the dirt hauling contract. While we have done a good job of lowering our variable cost throughout the year, our fixed cost relative to our lower revenue base during these slower off-season quarters also weighed on our gross profit. General and administrative expenses were relatively flat year-over-year while patent litigation and defense costs declined 38% or $21,000. Depreciation and amortization expense increased 8% or $114,000 in conjunction with our acquisition of the water transfer assets earlier this year. Net loss in Q3 was $2.4 million or $0.06 per diluted share versus a net loss of $1.6 million or $0.04 per diluted share a year ago. Adjusted EBITDA was a negative $1.2 million versus a negative $831,000 in the same quarter last year. This reflected the decline in higher margin well enhancement service revenue as well as some price concessions and startup costs related to new business initiatives. Turning to our nine months results. Total revenue for the first nine months of 2016 declined 40% to $17.9 million from $30.2 million in the same period last year due primarily to a combination of reduced drilling and completion activity related to lower commodity prices and to the impact of warm weather in the first half of 2016. Frac water heating revenue was lower by $9.6 million, hot oiling was down $2.4 million and water hauling declined $1.8 million year-over-year. Year-to-date gross profit was $279,000, down from $8 million a year ago due to decreased activity in higher margin well enhancement operations, first half warm weather impact, startup cost in water management and dirt hauling and the effects of lower revenue on our fixed costs base. G&A expenses in the first nine months were reduced 7% or $221,000 due to cost reduction initiatives. Patent litigation and defense costs were down 78% or $384,000 year-over-year. Those improvements were offset by $716,000 increase in non-cash depreciation and amortization related to our increased fleet size and new water transfer assets. Net loss through the nine months was $5.8 million or $0.15 per diluted share versus net loss of $371,000 or $0.01 per diluted share in the same period last year. Adjusted EBITDA through the nine months was a loss of $2.1 million compared to a positive $5.3 million in the same period last year. Turning to our balance sheet. As of September 30, we had working capital of $2.5 million at a current ratio of 1.8

[Operator:]

[Operator Instructions]. Our first question comes from the line of Bhakti Pavani from Euro Pacific Capital. Please go ahead.

[Bhakti Pavani:]

Good morning guys.

[Rick Kasch:]

Good morning Bhakti.

[Bhakti Pavani:]

I just wanted to touch base on the HydroFLOW assets. Last month you guys provided a business update in which you talked about, you guys are in advanced talks with a gold mining company. I am just kind of curious how will the equipment be used? And when is the test expected to start?

[Austin Peitz:]

In the gold mining project, it's going to be used primarily to start off in the heat exchanges aspects of the whole project and we are contemplating, I would say, probably within the 30 to 45 days, the installation of the unit and then therefore moving up selling units to them relatively quick.

[Bhakti Pavani:]

And how long is the test expected to last?

[Austin Peitz:]

Well, that's just the first phase. There's multiple phases of that project into some of the dewatering aspects and some of the other segments. We will sell the units to them and then we will also provide them a service plan that will be done, a preventive maintenance program that will probably be done on a monthly basis to them. We are still working through some of those details, but the first step, once again, is the to sell one unit and then to sell many units there afterwards.

[Bhakti Pavani:]

Perfect. Thank you. The other was, there was also a mention about a new contract with a large E&P company as investing in HydroFLOW asset. Any kind of color on that or any progress that you guys have made with regarding to that E&P?

[Rick Kasch:]

Yes. We just completed a very successful trial with an E&P using the HydroFLOW process on cleaning bacteria and scale from water to be used in the frac, using a pit system where we could re-circulate the pit. We have a meeting with them this week to go over the final results and determine with them an ongoing program. In the oil and gas industry, on frac water is going to be different business model than the others. In the oil and gas, we will doing a rental model along with -- so at each one of the fracs we would actually rent them equipment on basically probably a per barrel basis versus, like Austin mentioned, with the mining company that we would just sell them units.

[Bhakti Pavani:]

Okay. The other question was, Austin did mention that you guys acquired three new customers in Bakken and D-J, just on the basis of the bundled service. Just kind of curious where those customers looking for water transfer asset? Or is because of the frac water heating?

[Austin Peitz:]

So the customers that we brought on, the new customers, were brought on for the water transfer division and then we took frac heating with that service.

[Bhakti Pavani:]

Okay. Just one last one. Since you guys are already halfway through the fourth quarter, how does the book or the interest look like for the heating seasons? And how should we expect, I know you don't give guidance, but compared to the first quarter and fourth quarter of last year, how does the activity look like?

[Rick Kasch:]

Well, this year is starting off similar to last year. However with the normal winter predictions and so forth, we anticipate increase in revenues later this quarter and of course for Q1.

[Bhakti Pavani:]

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

[Operator:]

And our next question comes from the line of Jeff Grampp with Northland Capital Markets. Please go ahead.

[Jeff Grampp:]

Good morning guys.

[Rick Kasch:]

Good morning Jeff.

[Jeff Grampp:]

I wanted to talk, maybe just kind of a bigger picture question for you guys. I have been hearing some other service companies talking about potentially looking at incrementally raising prices, if not late this year, maybe early next year. Just wanted to know if those are conversations you have had with any of the E&Ps? Or just strategically how do you think about positioning yourself far as pricing goes going forward?

[Rick Kasch:]

We are definitely very aware of the opportunities as there becomes a potential shortage of equipment out there but it's all based on supply and demand, right. And there is still enough equipment. But with the increased activity we believe that there is going to be in the very near future an opportunity, I don't know that we are going to get back to where we were at one point, but I think there is going to be an opportunity to get back a little bit of margin, not seeing any more going the wrong way which are additional price concessions, we think that they are stabilizing, a small opportunity to get back some of it in the near future.

[Jeff Grampp:]

Okay. That's great color. And just wondering on the water transfer business where you guys have had incremental business on. Can you guys just talk about how we should think about margins, assuming some more success on that side of things? Should that have an appreciable move on the margins, one way or the other?

[Rick Kasch:]

Well, you would definitely have a positive impact on margins. At least the business that we have been able to capture to-date has margins that are just about as good as the frac water heating and hot oiling margins.

[Jeff Grampp:]

Got it. And last one for me, just on obviously a ton of success in South Texas. Any other growth areas where you guys are having maybe some constructive conversations or looking at it? I know in the past you have talked about like West Texas and some other areas. Any meaningful update there relative to last quarter?

[Rick Kasch:]

You bet. So with the Eagle Ford expansion, the Eagle Ford formation runs about 50 miles across North and South and about 400 miles long. And with some of the customers that we are currently servicing in our current region of the Eagle Ford area, were in talks of moving further East with those folks and exploring some opportunities there for acidizing and for hot oiling. And geographic expansion within the Eagle Ford basin is in the near future. We are in some talks currently now as well as in West Texas in the Permian where activity levels are definitely on the big increase and a little bit of shortage of equipment due to some folks filing bankruptcy, going out of business, so on and so forth. So we are in talks internally about a couple potential geographic expansions.

[Jeff Grampp:]

Great. Thanks for the details. That will be it for me, guys.

[Rick Kasch:]

Thanks Jeff.

[Operator:]

[Operator Instructions]. We have another question coming from the line of Tom Dillon with William Blair. Please go ahead.

[Tom Dillon:]

Hi guys.

[Rick Kasch:]

Hi Tom. Congratulations to you Cubs fans out there.

[Tom Dillon:]

Thank you very much. Yes, the town has been pretty excited. Just a quick question on the customer front, customer visibility. Has you timeline for your order book lengthened at all? Are the conversations improving, starting to become more constructive around timing for their projects and their need for specific equipment, time and place, et cetera?

[Rick Kasch:]

Yes. So we are having a lot of conversations with our current customers and we are not seeing anybody that's got any decrease in activity through now until the first of the year. However, a lot of our major customers, legacy customers talk about at the beginning of first quarter, they are going to really step up and they have got a lot of activity planned. So it is lengthening some of our -- we are getting a little bit of longevity in our dispatch books for sure instead of more job-by-job basis. So that is definitely improving for sure.

[Tom Dillon:]

Okay. And then in terms of the competitors around you, have you seen assets being stacked and just not coming back to market? Or are you seeing those companies actually turn to bankruptcy and start to put those assets on the selling block?

[Rick Kasch:]

Well, unfortunately it's a combination. So some of our competitors, as we all know, some of the big majors have field bankruptcy, restructuring and all that. So we are dealing with that on one leg of the compensation. The other leg is, we have had numerous competitors go out of business and send those assets to auction. However some of the others, there is still a need for them that they sell fast. So there is still market for them. On the flipside of that, some of our competitors with some aged equipment, older equipment, they have just decommissioned some of those assets at this time. So kind of all of the above. It's been kind of crazy.

[Tom Dillon:]

Okay. All right. That's helpful. Thank you.

[Rick Kasch:]

Thank you.

[Operator:]

[Operator Instructions]. Okay. Seeing no further questions at this time, I will turn the conference back over to management for any closing remarks.

[Rick Kasch:]

Well, thanks again to everyone for joining us today. And as always, we appreciate your support. And we look forward to speaking with you again in the first quarter. Thank you much for joining us.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude our teleconference for today and we thank you for you time and participation. And you may disconnect your lines at this time. Have a wonderful rest of the day.