Enservco Corporation
Q3 2014 Earnings Call Transcript

Published: 13 Nov 2014

[Operator:]

Greetings, and welcome to the Enservco Corporation 2014 third quarter conference call. [Operator Instructions] It is now my pleasure to introduce your host, Jay Pfeiffer, of Pfeiffer High Investor Relations. You may begin.

[Jay Pfeiffer:]

Thank you, Ronald. Hello and welcome to Enservco's third quarter conference call. Presenting on behalf of the company today is President and CEO, Rick Kasch; CFO, Bob Devers; and Austin Peitz, 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 Regulation FD, which prohibit 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, the 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.

[Richard Kasch:]

Thanks, Jay, and thanks to all of you for joining us today. Of course, I don't know what the weathers like we all are, but here in Denver, the polar vortex officially arrived. I woke up this morning looked at the weather app on my phone and it was zero degrees outside. So our Indian summer is officially over. If I had known our earnings release was going to cause temperatures to fumble like this, I would have scheduled this for a month ago, but we'll take what we can get. As most of you know, since revenues and EBITDA in our third quarter comprise less than 10% to 15% of our year's results. It's not as much about the numbers, as it is about positioning ourselves for the upcoming season, and achieving milestones on our strategic objectives. And don't misunderstand me, we're pleased to report record revenues for our third quarter, which on a year-over-year basis increased 20%. But more importantly, however, is that this growth was a result of our strategic focus on less seasonal recurring maintenance services, specifically hot-oiling and acidizing services, which grew by 81% and 36% respectively over a year ago. Geographic expansion into areas such as Wyoming, and expenditures for hot-oiling and acidizing units contributed to these gains. Yes, we did miss consensus revenues by about 10%, which was primarily due to the Indian summer's impact on frac heating that ended with this cold snap. Although, the one temperature did continue into October, we believe that with the intensity and anticipated length of this change in weather, we should be able to meet our revenue expectations for the fourth quarter. As Austin mentioned to me yesterday, this is the first time he'd seen where we have gone from zero to 100 in 3.4 seconds, especially at this time of year. Meaning that in 48 hours our D-J basin location, which accounted for two-thirds of our frac water heating revenues last season, went from having equipment sitting in yard to everything outworking, plus maybe more from our fabricator to meet customer demand. Usually, in the fourth quarter, our demand builds over the first few months, as temperatures gradually decline. We expect the same phenomenon to happen at our yard in the Pennsylvania this weekend, when the polar vortex is there. The good news about all this is that the extreme cold will cool the water significantly enough, such that even with periodic warm-ups over the next couple of months in temperature, heating should now be continuous through the remainder of winter. I should also mention that this cold snap has also increased the demand for our hot-oil units in all of our locations. In looking at our operating cost for the quarter, we need to discuss how positioning ourselves for the upcoming seasonal results in an increase in labor cost associated, we're starting to hire and train new employees that we need to operate the incremental pieces of equipment we placed in the service each season. A challenge we face each year is when to start this process and we don't know exactly when season is going to start. It could start in late September, October like it did last year or in November like it did this year. What we do know is that we have to have the crews ready when the season starts, because if we can't send the heater out when a customer calls, we can lose that piece of business for the entire season. Having the crews trained and ready each year, we believe its one of the reasons we've been able to grow market share from year-to-year. With a significant growth in the size of our fleet over the last 12 months, plus the nearly 40 units we will be adding to this year's CapEx program, we had to begin the process earlier this quarter than in prior years, to hire and train the additional 75 employees needed, we significantly increased operating cost above those of the prior year. Operating cost such as truck repairs and maintenance, which we generally perform during the third quarter to prepare for the upcoming season also increased significantly over the prior year, as a result of our fleet expansion over the last two years. As a result of the impacts on operating costs, I just mentioned, regarding labor and truck expenses and combined with additional G&A expenses resulting from our growth, our EBITDA for the quarter was less than we had expected. However, we view this as a short-term investment that positions as well for the next two quarters as well as for long-term growth and sustainable profitability. Our philosophy has been and used to judge our overall results on year-to-year basis, as we believe it provides a more accurate picture of our progress than quarter-to-quarter comparisons, which can be inevitably impacted by the timing of investments we make in our future. Being a small company, it's hard to absorb these kinds of growth related expenses, without some short-term impact on the bottomline, and therefore we're seeing in Q3's cost of revenue and profit metrics. That's the story behind our third quarter, and in a minute Bob will provide further details. I would now like to spend a little time on growth aspect of our business plan and how we are executing against it. We have set forth a two-pronged strategy towards growth, organic and acquisition. Both of these have had the following parameters as objectives, maintain our core business model of balancing revenue streams between recurring maintenance and drill bit dependence, lessen seasonality of revenue, diversified service offerings and maintain high gross profit margins. Our strategy for the organic component has been to fabricate new equipment and geographically expand into new territories. By directing CapEx towards hot-oiling and acidizing units and expanding into areas such as Wyoming, we have been successful on executing this component of our plan. And we need our parameters of increasing recurring maintenance revenue streams, lessening the seasonality of revenues and maintaining the high gross profit margins. As to the acquisition component, we have been very active in recent months in evaluating potential transactions, and were successful in closing a small and as described in our November 4 news release. In this transaction we again met our parameters of increasing recurring maintenance revenue streams, lessening the seasonality of revenues and maintaining high gross profit margins. Another benefit for us from this acquisition is that the yard and equipment is located in Tioga, North Dakota in the northern Bakken, where many of our legacy customers have operations that we can't economically reach from our operation in Killdeer in the southern Bakken area. As a result, this deal gives us that access to a host with potential new customers and enabled us to support the operations of our legacy customers north of the river. Austin, our Vice President of Field Operations has been up there in that area visiting clients and perspective customers since the acquisition, and I have asked him to give us a brief recap on his activity. Austin?

[Austin Peitz:]

Thank you, Rick. We have been meeting with current and perspective customers since we acquired the assets. As described in the press release, we would acquire 12 hot-oiling units. Of those 12, three are undergoing maintenance work to meet our standards and should be in the field working within 30 to 45 day. The remaining nine, seven of them plus the frac water heater we've purchased are deployed to the field and are outworking. The other two hot-oilings will be working as soon as we hire and train operators, which should be in the next two to three weeks. One of our first customers in the northern part of the Bakken is a large E&P that we serve south of the river and with whom we enjoy a very good working relationship with. We met with him immediately following the asset purchase, and they quickly engaged it in some of their projects in a new service territory. We have done all of the same thing with the other legacy customers. Also during our sales efforts we were approached by multiple customers we do business with, in other service locations about possible multi-million dollar frac water heating opportunities, now that we are in this part of the Bakken, and have the ability for natural gas and propane fired units for frac water heating. As Rick described earlier, this was an ideal situation for Enservco in many ways and we intend to make the most of it.

[Richard Kasch:]

Thanks, Austin. A final comment on M&A activity. Being a small well-financed and under-leverage company has its advantages, as we are very nimble and can be flexible in reviewing, pursuing and closing on M&A opportunities. In the case of the transaction we've just been discussing, we closed on this purchase within 10 days after hearing that the assets were available. In support of our efforts you'll recall that we recently closed on our new facility with PNC Bank, to help fund our CapEx program and to give us the added flexibility to pursue transactions like this one. Combine that with our ability to generate a significant amount of pre-CapEx cash flow and the fact that we're relatively deleveraged, and you can see how we're ideally positioned to move very quickly on opportunities as they arise. Given the current uncertainties in the industry, however, we will vet potential acquisitions very carefully focusing on those that maybe available at attractive valuations or offer low risk opportunities to capture market share in strategic growth areas. With that, I'll turn the call over to Bob, for some financial highlights.

[Robert Devers:]

Thanks, Rick, and hello, everyone. Let me start with the Q3 results. Third quarter revenue was a record $5.7 million, up 20% from $4.8 million in the same quarter last year. The increase in total revenue resulted from a 47% growth in our core well enhancement services to $3.4 million from $2.3 million last year, and restoring our commitment to grow our hot-oiling and acidizing services. This growth reflects the addition of new equipment, increased utilization of our existing fleet and continued geographic expansion. From a regional perspective, the majority of our revenue increase was from our Rocky Mountain territory, which increased to $2.8 million as compared to $1.8 million during the same quarter last year. It was primarily due to our hot-oiling and acidizing services at our new location in Rock Springs, Wyoming. As Rick explained, gross margin in the third quarter was heavily impacted by the pace for our investments in expansion initiatives. I'm referring in particular to the growth of our fleet, which carries higher maintenance, insurance and related expenses as well as higher headcount needed to support and operate the larger fleet. As a result, gross margin declined to a negative 9% of revenue from a positive 2% of revenue in Q3 last year. General and administrative expense in Q3 grew to $1.3 million from $860,000 year-over-year. This increase was primarily due to a $260,000 increase in non-cash stock-based compensation during the quarter, combined with higher professional fees related to the evaluation of the M&A opportunities. Depreciation and amortization expense grew to $885,000 from $544,000 year-over-year, tracking growth with our fleet over the past 12 months. As a result of the expansion related cost, our operating loss increased to $2.7 million from $1.3 million in Q3 last year. Our net loss in the third quarter was $1.8 million or $0.05 per diluted share versus the net loss of $919,000 or $0.03 per diluted share a year ago. Adjusted EBITDA in Q3 was a negative $1.5 million versus a negative $626,000 in Q3 a year ago. With respect to the nine months result, as was the case in third quarter, we achieved record revenue results for a nine-month period. Total revenue increased 22% to $38.3 million from $31.3 million in the same period a year ago. Gross margin year-to-date was 24% of revenue versus 33% the year ago, due to expansion-related cost and investments as well as higher propane cost in Q1 this year and downtime on a large frac water-heating project in Q2. General an administrative expenses through nine months increased to $3.6 million from $2.7 million, due to higher personnel cost, professional fees, stock-based compensation and our step up to the New York Stock Exchange. However, as a percentage of revenues, G&A remained at 9%. Depreciation and amortization expense grew to $2.3 million from $1.7 million year-over-year, reflecting the increased fleet size. Operating income was $3.2 million for the first nine months versus $5.8 million last year. Net income was $1.5 million or $0.04 per diluted share versus $3.2 million or $0.09 per diluted share. Year-to-date, adjusted EBITDA was $6 million versus $8 million a year ago. We generated $11.3 million in net cash from operations to the first nine months of 2014, up from $10.8 million a year ago. Turning to our balance sheet. We closed the third quarter with cash and cash equivalents of $1.8 million and working capital of $3.5 million. Our current ratio remains strong at just under 2

[Richard Kasch:]

Thanks, Bob. I had some additional comments that I'd like to add before taking questions. First of all in regards to the CapEx program that Bob just commented on in its relation to our growth point. Just to put it into perspective, we believe that the combination of the 2014 CapEx plan plus the Bakken asset purchase has the potential to add $41 million of annual revenue, which is more than the revenue for the entire first nine months of this year. Second, on our last call we told you that we had a developed a system that allows us to toggle between either LNG, CNG, well gas or propane as a fuel source for running our frac water heating units depending upon the customers preferences. This affords our customers a green alternative due to its cleaner burning quality and also offers them cost hedges. During the third quarter, we spent a fair amount of time fine tuning and demonstrating this system and our customers like what they saw. This system has now led to new customer relationships and increased business with existing customers in the D-J Basin, the Bakken and the Utica. Finally, one question we've been asked a lot recently is what do we see is the impact on our business due to recent volatility of oil prices. Well, we all pretend to know what prices will do, we remain convinced that over the long term that we'll be increasing demand for domestically produced oil and thus a ready market for the entire range of services we offer. In the meantime, as I have previously mentioned we are proactively taking reasonable strategic steps to insulate the company from short term oil price swings by investing in our hot-oiling and acidizing components of our revenue mix, as they are more geared towards year around maintenance activities. We are also emphasizing diversified diversity in our geographic footprint by focusing on location that have higher demand for hot-oiling and acidizing services as well as lower breakeven oil prices. In a way, we are fortunate for the timing of the current situation. In the near-term, say the next couple of quarters, which are our two big quarters of the year E&Ps are operating off of their 2014 CapEx budgets and have pretty much committed to contracts for completion of wells that will meet our heating services during the next few quarters. As you know, we don't set our CapEx budgets until after we've gone through this season and sit down with the E&Ps, which means we get the benefit of waiting to see what is going to happen with oil prices over the next few months and see what the E&Ps are going to be doing with their budgets. So regardless of what happens there, we do have various alternatives, because of our business model and of course our lack of leverage, et cetera. So let's say, E&Ps were to cut back drilling activity, we can direct our cash flow to CapEx for our hot-oiling and acidizing services or we could direct that cash flow for acquisition of companies in the hot-oiling and acidizing services. We could direct that cash flow at acquisitions for companies that are, let's say, in distress due to them being leveraged or having a lack of business due to their drill bed dependency. We could take that cash flow and pay off debt, there's other thing, and even share buybacks, now not likely with a small growth company, but those are our all alternatives we have. What if E&Ps continue, some of them have said with the same level of activity, this is not going to increase their CapEx budget. What we can do, the things that I mentioned before, we could still grow the CapEx. In the hot-oiling asset, we just may not increase frac water heating units since we would have enough units to handle the demand this year and so forth. So in closing, I just want to point out the strength of our companies business model in both, I guess what you could call the great and not so great times, since it relates to the volatility of oil prices. One other thing that I would like you keep it mind, as we've mentioned many times, should there be a switch in activity between oil and gas drilling, due to price changes and so forth, we do have the flexibility and have done it before to move between fields with relative ease and minor cost. So with that, I guess we're ready to take questions and I'll turn it back to the moderator. Bob?

[Operator:]

[Operator Instructions] Our first question is from Evan Richert with Sidoti & Company.

[Evan Richert:]

I won't ask you to predict the temperatures, but given the lower oil prices you touched on, if the winter is favorable like the last two years have been, do you expect there will be enough demand to operate the frac heaters and hot-oilers close to full utilization?

[Richard Kasch:]

Yes. We feel we're in the same situation we've been in prior years, is that we don't have enough equipment, even when our current fabrication is completed to meet the customer demand that we have currently. Again, at normal winter we just don't have the capacity to meet the demand that's out there. Austin, would you agree?

[Austin Peitz:]

Yes. Evan, I think what we did, we've put a big CapEx plan together prior to this season and we were all diligently out selling, and making sure that we had a plentiful of work, due to the size of the CapEx and stuff. And the truth is, is we kind of over sold it, which is a good thing. I mean, it enables you to do a few other things like pick and choose markets. So we kind of over sold our CapEx already sold, so we're anticipating full utilization.

[Evan Richert:]

And then as far as pricing goes, has there been any noteworthy changes for any of your services on how much you're charging?

[Austin Peitz:]

So far, Evan, what we've seen is we've been fortunate enough in all the services we provide, and we standby our quality of services as well. So we've actually gotten some price increases in some of our services, frac water heating, in particular. Some of the people that we did the natural gas stuff for utilizing that as a fuel source, they gave us a few price increases; hot-oiling trucks are staying relatively flat as far as pricing, and acidizing is relatively there as well.

[Evan Richert:]

And then back to the Bakken acquisition. Can you guys talk about how this kind of came about? I mean, I know you've been looking at acquisitions, but was the mindset more to get more hot-oiling trucks or were you targeting the Bakken, north Bakken specifically?

[Richard Kasch:]

It's kind of a combination, Evan, of two things. Its being familiar with area up there from our Killdeer operation and we have been running into, as we mentioned, the situation; we had customers in the northern Bakken area that we weren't able to utilize our services, because of the distance between some of their operations up north. We also had familiarity with a corporation that was getting out of the business of heaving in North Dakota that acquired a bunch of moms and pops back in 2007, 2008 going back to their core competencies. And we actually had tried to acquire some of their equipment earlier few months ago, were enable to do so. This opportunity was made aware to us and we found that buyer had not been successful in obtaining financing. We got a call, we called them on 39%, that would appear we're ready, able and willing, send us the documents we had with the prior seller. We actually knew the equipment relative -- in fact, that Austin had instrument knowledge and we proceeded with it from there. It met a lot of objectives for us, as I said, knowing that northern Bakken market and having customers that we knew very well, that we wanted to service, they wanted us, but it's just uneconomical for them to pay us the travel times to go from our southern location up there.

[Evan Richert:]

And then for future acquisitions that you touched on, would you be willing to do a deal before the spring. I know you usually wait till then for next year's CapEx, but if the right deal came along would you be open to doing a deal in the next quarter or two?

[Richard Kasch:]

Yes. We would be willing to look at the right deals to meet the objective, as I talked about diversification of services or meeting the high profit margins, helping us lessen seasonality and so forth if there were to meet those parameters, we very much look at opportunities.

[Evan Richert:]

And then last question, I'll hop back in line. Is there any one time cost you expect for either the Bakken deal in the fourth quarter with some of the maintenance of the equipment or for legal expenses from the Heat-On-The-Fly losses?

[Richard Kasch:]

There won't be any significant for the Bakken acquisition. The Heat-On-The-Fly there will be some, when I say significant, I'm sure there will be somewhere possibly in the $250,000 range of legal expenses as we get to that, geared up on the lawsuit for the patent. We have to file a response to the complaint by December 3. I haven't gotten the full estimate from the legal council, but that's about what they've given as an estimate at this point.

[Operator:]

Our next question is from John Daniel with Simmons & Company.

[John Daniel:]

Rick, I know you mentioned the near-term outlook look strong, however notwithstanding that view do you see the holiday slowdowns this year being perhaps more pronounced than what we saw last year and prior years.

[Richard Kasch:]

Nothing that we've seen or been told as of this point that will make it any difference in your prior years, but Austin if you've heard anything in the field?

[Austin Peitz:]

No. We're not hearing anything that was going to be relatively be different from like the traditional year. In fact, we're kind of excited about some of the opportunities that evolved into us in the Bakken with the acquisition of that new facility in Tioga, as far as frac water heating services, that we're going to performing in the Bakken that we haven't done traditionally in the past. And with the types of services, we're going to be performing I don't know that they're even going to have a shutdown for the holiday. So in some areas of service, it's going to be respectively the same year-over-year and in some other new service area it's going to be continued, I believe.

[John Daniel:]

And just my last one is, you mentioned potential M&A opportunities. Are there certain product lines that interest you more than others? Would those be in your current geographic basins focus or would you want to expand in the new ones. And then lastly, how do you characterize the volume of distressed opportunity, do you see that rising here?

[Richard Kasch:]

As part of the distressed opportunity, at this point it's a little early to see the effect of the volatility or any big declines and so forth having the impact. I think it's a little early. So we're not seeing a volume of these distressed companies. I think that we're going to keep our eyes out and have various investment banking firms and so forth advisors on the lookout for this to happen. But as far as the other aspects of the M&A, we're looking at acquisitions both in the diversity of services that we could offer to other customers, as well as companies that could provide us an entrée into markets that we're not into, such as the Permian, the Eagle Ford where we could take our services like hot-oiling and acidizing and provide those into those markets. And then like I said, services that those companies might have that we could bring into the nine different locations that we're in right now.

[Operator:]

Our next question is from Jeff Grampp with Northland Capital Markets.

[Jeff Grampp:]

Just kind of maybe want to get some high level comments on the various operating areas, and I think Bob kind of touched on some of them, its not like Wyoming is kind of ramping up, but anything kind of worth noting across the various areas or maybe more specifically some of the areas you guys are as a targeting as kind as kind of emerging opportunities.

[Richard Kasch:]

You're right, Jeff. We're very excited about what's happening in the Wyoming district as far as activity level. We've been out, in part of our selling efforts throughout the season, we've been targeting the northeastern Wyoming as well as we're in the southwest of Wyoming in Rock Springs, we're in the Casper, Douglas area. We're currently deploying assets to the market, utilizing that facility there to service. That's all brand new market share to us. Our efforts are going strong there, and we're in need, as Bob elaborated on a little ago, that we pushed on the fabricated for early delivery as well for some of our CapEx due to some demands there, we're pretty excited about. Just normal growth, I mean throughout the nation, we've obtained new market shares everywhere, so we've excited about this year.

[Jeff Grampp:]

And then just kind of wondering on, obviously you guys are incurring some extra kind of upfront cost to ramp up the business, do you guys see that spilling over at all into the fourth quarter or should we view that, I guess as kindly mostly behind at this point?

[Richard Kasch:]

You will see some of that cost, of course in October, as we ramp up the hiring costs into that part. And as I mentioned, you know the Indian summer extended into October, but Bob as well as I mentioned, with this cold snap and the way it happened, we think we should be able to recover for the quarter back to our expectations for the entire quarter.

[Jeff Grampp:]

And then just kind of on the truck fleet and how that's kind of ramping up, should we kind of expect when you guys say, trucking in October and what have you, is there kind of a lag time to when that goes out in the field or should we basically assume that when you guys take delivery on that, that's shooting right out and starting to get some revenue for you guys?

[Austin Peitz:]

As Rick elaborated on the Indian summer, the length of the summer stretched into October, so that's going to delay some of that, but from this point forward when a piece of equipment comes from the fabricator, it's going to be delivered to the field without much of a lag time at all.

[Jeff Grampp:]

And then just if I can sneak one more in maybe a question for, Bob. On the borrowing base with PNC, I know you guys are obviously adding a lot to the truck fleet, presumably having some more collateral. When is the next borrowing base redetermination on that or can you guys request an early redetermination there?

[Robert Devers:]

Yes. So the new revolving credit facility, as we place the equipment into service, we're allowed to put that into our borrowing base. It does have a feature were an appraisal is done every six months, and a redetermination is done at that point in time. So for example, the equipment that we're adding from the 2014 CapEx, that we're adding in this current period, it will be a reappraised here roughly in the October and November. Roughly the March, April timeframe will be another -- there will be desktop appraisal at that time and then another full appraisal like a year later. So there is like six months triggers on appraisal, but I don't anticipate that changing quite a bit.

[Richard Kasch:]

But availability is every month.

[Robert Devers:]

Correct.

[Richard Kasch:]

Gets added and goes up every month.

[Robert Devers:]

Correct. Yes. Availability is that, meaning is once we place that asset in service, we can put that into the borrowing base.

[Operator:]

Our next question is from Bhakti Pavani with Euro Pacific Capital.

[Bhakti Pavani:]

Just a couple of questions from my side. You did mention that it's your initiative to move to more or less seasonal revenues. So could you remind us, as of today how much of the percentage mix of revenues is seasonal versus non-seasonal? And how do you see that mix change going forward?

[Robert Devers:]

Well, in the prior year, we ran about 55% to 60% was frac water heating and we were anticipating in terms of moves that we're making that that will go more to a 50% to 55%, and then we're hoping to get it back to 50%, 50%. That's been our business model move.

[Bhakti Pavani:]

Also you did mention in your prepared remarks that with the introduction of the new bi-fuel system you are getting a lot of interest for those system. At this point, what percentage of your customers or what locations have demanded or have requested the new systems, if you can provide some color on that?

[Richard Kasch:]

So we're seeing our immediate needs, as we addressed in the Q3, we did testing and stuff. Our immediate needs are in the D-J Basin, and there is a customer we were anticipating utilize and natural gas as their fuel source. It was a big selling point to us in North Dakota. So that one took off and opened and a lot of opportunities we weren't even anticipating with the asset purchase and visiting customers for the hot-oil trucks. And we're starting to see some demand in the Marcellus-Utica, believe it or not that's been the last place to spark an interest in the natural gas as a fuel source. But we have our first customer going to be utilizing a piece of equipment that's bi-fuel, next week, in the Marcellus.

[Bhakti Pavani:]

Also just a follow-on on the previous one. What does that mean to the gross margins going forward or do you see gross margins moving in the upper direction, because of this adoption of new the system?

[Richard Kasch:]

As I think I mentioned maybe in our last call, we're going to drive the analyst nuts with the use of natural gas. Some of the customers that are going to use it are going to provide the natural gas, and therefore it's not going to be as propane was, where there was a pass-through billing. So you're going to see revenues actually possibly decline, but the actual profit dollars will remain the same or possibly go up, so the growth profit percentage will go up. The dollars will remain flat or go up slightly. So what we're going to be doing over the next month or so in the builds and billing and so forth go through. Bob and those people are going to be working on the impact of what that's going to do, and hopefully getting with the analyst and showing them what the impact is. But we have some customers that like I said are going to be providing the CNG or well gas and so forth. We have some that are continuing with propane and billing it through us. We actually have some customers that now want to provide the propane rather than us providing it. So we're going to have to do some analysis on all this, and how it's going to effect our revenues and therefore our gross profit percentages as we go forward.

[Operator:]

Our next question is from Philip Juskowicz with Casimir Capital.

[Philip Juskowicz:]

My questions have primarily been answered, but Rick can you just repeat what you said with the analyst, they're going to be driven crazy about, because I did miss that. Revenues potentially with the LNG would be going down and costs going to down too, and then did you say that the margins would then go up?

[Richard Kasch:]

In prior years for instance, where we had just propane as a fuel source, we were paying for the propane and pass it along to the customers. So you had, let's say, you had $10 of cost of propane. We had that in our cost to good sold, and then up in our revenues, when we've built the customer we had that $10 as revenue. Now, the customers are, let's say, using CNG, so therefore they are providing the CNG. So there is no more cost in our cost to goods sold, and there is no revenue up above that $10, but you have the same gross profit. So now you have the same gross profit, but a lower -- so if then your percentage of gross profit is higher, your dollars are the same. We're going to have to determine for you what that impact is, because we've got different customers, going different ways and that's why I meant it will drive you crazy.

[Austin Peitz:]

And just to add, I think the challenge on that is understanding the mix of customers using CNG versus propane.

[Operator:]

Our next question is from [indiscernible].

[Unidentified Analyst:]

A couple of questions. First of all, what's the headcount there now?

[Richard Kasch:]

The headcount total company-wise right now is approximately 125, soon to build up to about 175 to 180 during peak season.

[Unidentified Analyst:]

Now, I read in the release that you're in the process of hiring 75 new hires in that number?

[Richard Kasch:]

Yes. From the beginning, back in August time period roughly, until we get to peak of season we would hire 75 new operators.

[Unidentified Analyst:]

Well, I'd tell you the direction of my question or the purpose of my question is just to understand maybe what the impact on labor cost might be. I'm assuming that in this tight labor market, you need to pay up for these guys. And I'm just wondering how that affects your entire wage structure?

[Richard Kasch:]

Let me ask you to clarify what you mean by affect our wage structure?

[Unidentified Analyst:]

Well, I know there was a Y kind of guys that's working there now and I'm making X number dollars an hour, and you got to hire a new guy that's going to make an X-plus something per hour. I've got to adjust this guy back up to where I'm bringing the new guys in that.

[Richard Kasch:]

Well, let me answer it simply. I'll let Austin address it. But we have a set wage structure and when we're hiring the new guys they come in on the same wage structure. It's not like we're having to hire new guys at higher rate.

[Unidentified Analyst:]

So hiring guys is not an issue right now then?

[Richard Kasch:]

It's not where we're having to pay more to get new guys, no.

[Unidentified Analyst:]

Of those nine locations that you're operating in, could you share with us what might be the most exposed under a sustained pricing environment and lower price environment?

[Richard Kasch:]

Probably you're taking about like the oil price impact and people start dropping billing rates and so forth?

[Unidentified Analyst:]

Right, yes.

[Richard Kasch:]

Well, we have to go obviously basin by basin, and you have to look at where the drilling costs are the highest and you end up with, which is the most accepted basins and then which companies have the most leverage, our customers. And I don't know if I could look at that right now and go through all our customers.

[Austin Peitz:]

I can give you a rough off the cuff.

[Unidentified Analyst:]

The 20,000 foot, it would be fine.

[Austin Peitz:]

One of the areas that is probably going to be affected first is the decline in oil prices continue. It's going to be probably the Anadarko Basin, Cana-Woodford Shale down in North Texas, that areas of operation. And then probably it's going to be, after that I mean I'm going to say the Utica shale is the next. The fortunate thing for us that we feel very blessed that one of the most secured, the last place the delay in drilling rig down is going to be the D-J basin because of the listing cost per barrel. And that's where a lot of our focus is, so we're positioned. Of course, we don't want to see the price oil swing any lower, but I think we're positioned if it does.

[Unidentified Analyst:]

My last question is just on the balance sheet, just the opportunities ahead. For some time now, we follow the company for probably over a year now. And you had pointed out different opportunities. You've made selective acquisitions. And I'm just wondering or I guess from my end that I am just worried of you kind of overstretching yourself and getting ahead of your cash flow. And so how do you look at that in terms of balancing the opportunities and in terms of like where you want to be free cash flow-wise?

[Robert Devers:]

So I think if you look at us right now we're on a trailing 12 months and that's not looking forward into our big season coming up, we only had a net debt to EBITDA of about I think its $1.5 million situation. We're not going to look at anything, I would say to maxim our outsize would put us above $2 million in a quarter, maybe $2.5 million at the most. So we're pretty a conservative group here. So I think you could put some comfort in that. In our prepared remarks, I was trying to get that point across, we're not going to go -- even though there is opportunities, we're unleveraged, we have a lot of cash flow, free CapEx, we're not going to go out and get wild, but we're going to keep looking for opportunities that are accretive to our shareholders and things that we can handle, but we're not going to get crazy.

[Operator:]

Our next question is from Brandon Dobell with William Blair & Company.

[Brandon Dobell:]

Guys, as you think about the impact of the acquisition, does that change where we should expect the upcoming equipment deliveries to show up? I mean do you have any other good plan to move that equipment into areas, but those plans are different now than they were two months ago, before you made the acquisition. Do you have enough flexibility, what's the customer demand to make that happen?

[Richard Kasch:]

I think you'll see a little bit, Brandon, I don't know that it will be route changing, there will be some as, Austin mentioned, we've run into some good frac water heating opportunities up there that mentioned in our press release or some multi-million dollar opportunities that we are waiting here on. So if those come through we will divert some of the frac water mega heaters coming out up there, possibly some of the hot-oiling equipment up there to supplement what we have. But I don't think you will see 50% of the new equipment going up there.

[Robert Devers:]

Yes. And that's accurate and just to add to that a little bit, the thing that was so attractive to us on Tioga yard in North Dakota, it's a hot-oiling in North Dakota and then the frac heating came with it. So the hot-oil is not drilled, but dependent, it's one of the coldest parts of the country that really drives our business. And then we're looking at the potential for the frac water heating as icing on the cake that was an added plus. So in the frac water heating season is a lot longer in that part, that neck of the woods than it is in a lot of other areas. So we're looking at all opportunities closely, and seeing what makes us -- what serves us best for sure.

[Brandon Dobell:]

In terms of the bi-fuel equipment, are you guys at the point where all the new equipment orders that you're placing with the fabricators, are going to be bi-fuel equipment? And I don't think hear about retrofitting existing equipment. I guess was trying to gauge how stronger -- if the demand out there is strong enough, that you feel you've got a kind of retrofit stuff and if there's a cost going to be involve with that, or if you're now saying, look every piece of equipment we bring out here is going to be bi-fuel, because that's where the market is going?

[Richard Kasch:]

Every piece of equipment that we have coming out of fabrication is going to have the bi-fuel capabilities. We've determine the process by which is not a significant additional cost for us and is far outweighs the benefits that are in ability for us to attract customers. And on the retrofits we've also determined system, whereby the benefits of the customer attractions far outweigh the cost.

[Brandon Dobell:]

And then finally, I guess on the Q4 and Q1 modeling perspective. Just maybe if you can just remind us, if you look back at last year, some of the things that stuck out for you in terms of impacts on gross margin or operating expenses that we need to reminded of or investors need to be reminded of that create challenging comparisons, create easy comparisons, move things around between the quarters, just so we get the peak revenue season right here in terms of the impacts in the business last year versus this year?

[Richard Kasch:]

Well, the biggest thing that is off the top of my mind, and I'll have to ask Bob to jump in here as for the propane impacts on Q1 and Q2 and the repricing that we have to do with customers was the biggest thing that I can think of, I don't know if there was anything else that hits. Now, that for the propane was the biggest issue that we fought last year just because of the spike in prices, but that allowed us to go back and restructure our pricing structure where it was a rental on the equipment plus the fuel prices were protected no matter what it did.

[Robert Devers:]

It is Bob. I think the propane impacted. And I think we reiterated some of that in the Q documents. And then obviously, the first quarter Q has quite a bit of explanation on the propane cost, taking into the fact that it not only increased our cost of revenues, but also impacted our margins. So that's probably the area. And as Rick mentioned, now with having CNG, LNG issue, we'll have a little bit changes there too. But other than that we have seen good utilization in our hot-oil equipments. Some of the increase we talked about in the hot-oil equipment is because a higher utilization of our existing equipment plus the additional equipment we're bringing in. So that's been a very positive benefit from what we had last year. G&A cost will be a little bit higher because of some of the things we mentioned with respect to some of the legal cost and et cetera. So we don't expect that to be significant, but you would want to make sure we account for that going forward.

[Richard Kasch:]

We'll have some, I know it's not a significant component of our business right now in the next few quarters, but we didn't meet our expectations in the acidizing business because of the industry shortage in hydrochloric acid, if you follow that part at all, it was small portion of our projection, but that is supposed to be loosening up, as the write-offs.

[Robert Devers:]

Yes, it is primarily loosening up the supply prior to core gas.

[Richard Kasch:]

So you should see that coming back.

[Operator:]

Our next question is from Steven Ralston with Zacks Investment Research.

[Steven Ralston:]

Could you clarify some of the issues on the conversion of the equipment that's capable of using the LNG as a fuel source? It seemed that, in your answer to one of the questions, you finished testing the units and that the first one is going to be deployed in the Marcellus next week. But at the same time you said that all new equipment has this capability. Does that include the 10 that have already been delivered? Could you just clarify the issue?

[Austin Peitz:]

Sorry about that. Our first unit deployed to the Marcellus that has the bi-fuel capabilities. All of our fabrication that's coming out is a bi-fuel capability. And we've been utilizing natural gas as a fuel source for probably 45 days in the D-J basin for a multiple customers. So the units that are hitting the ground are all capable of bi-fuel and some of them are in -- well, all of them are in utilization units, some are still utilizing propane to bid another customer. But we're utilizing natural gas as our fuel source already.

[Steven Ralston:]

This is for about last one-and-a-half months.

[Austin Peitz:]

I'm sorry?

[Steven Ralston:]

For the last one-and-a-half months, you said 45 days.

[Austin Peitz:]

Yes.

[Steven Ralston:]

And also the press release is ambiguous just as equipment. I thought it was targeted towards the frac water heaters. Are you also doing this with the hot-oilers?

[Austin Peitz:]

No. It is just the frac water heating units. We're still utilizing propane on our hot-oil trucks.

[Steven Ralston:]

And I know this is a sensitive issue, but could you comment on the patent infringement, and specifically it seems like Heat-On-The-Fly is just litigious, that's my impression. I don't that yours? And also on the issue that some companies are already paying a licensing fee.

[Richard Kasch:]

Steven, as you can expect we really can't comment beyond what's in the 8-K and in the 10-K other than -- just a one thing should mention, our 8-K stated that there was one lawsuit that's going on up in the North Dakota impacted our two other lawsuits going against on the Heat-On-The-Fly to invalidate the patent that they have. Again, I'll just reiterate, after discussions with our attorneys and so forth, we don't -- we strongly did not feel we infringed on in any valid claims that they have. We're going to strongly defend ourselves on this. We've hired Texas council Fulbright & Jaworski. We have to file response to the complaint by the December 3, and we are in process of doing in, unfortunately I can't comment on your comments about them, but I'll leave that to you.

[Steven Ralston:]

And my last question, you anticipated entering the Texas panhandle with acidizing units. How is that progressing?

[Robert Devers:]

It's one of the areas that we struggled for supply of hydrochloric as there was a shortage of hydrochloric acid. And it's progressing slow. As Rick elaborated on that's one of the areas that was a little slower taking off just due to supply which resulted in not making a full projection, but its turning now. As far as the acidizing division, but it's turning now, we're seeing a higher demand.

[Operator:]

Our next question comes from the line of William Bremer with Maxim Group.

[William Bremer:]

I'd like to get back a little bit into the pricing aspect. And maybe I could ask the question this way. Have you had any enhanced or extended terms in some contract or maybe better yet, maybe give us a little more granularity on the customer mix new versus existing?

[Richard Kasch:]

Yes. I'll let Austin address that.

[Austin Peitz:]

Yes. We have seen a few opportunities come along. We're kind of locked up into contract that it's not like a take or pay contract, but we get exclusive rights, first right of refusal on the business basically, as long as we're capable of the services. We've got a few opportunities like that in place that we haven't traditionally in the past that we push for. That was a first part of your question. Can you repeat the second part?

[William Bremer:]

Pretty much the customer mix?

[Austin Peitz:]

New versus old on customer mix, I'm going to say that probably 70% of our business going forward to this season is on existing customers with expanded activities. The others 30% is going to be probably be new customers as far as existing customer in new a market share as well. So a lot of our increase in business is gong to be increased activities with our current customer lines.

[William Bremer:]

And then my final question is given the asset purchase, that's going to have approximately two months exposure for the fourth quarter roughly. Can you sort of give us an update on what your expectations are for the fourth quarter now?

[Richard Kasch:]

Unfortunately, we don't provide guidance, Bill.

[Operator:]

It appears there are no further questions at this time. I'd like to turn the call back over to Rick Kasch for closing comments.

[Richard Kasch:]

Well, again, I want to thank everybody for joining us today. As you can tell overall we're pleased with the direction more heading. We look forward to strong finish year for 2014 and a great start to '15. We feel this is one where we really start to see the benefits of the investments we've made in our people, our equipment, in our geographic expansion and the balancing of our service mix. We look forward to talking to you again in the near future. And as always, should you ever have any questions feel free to give us a call. Thanks a lot. Bye.