Enservco Corporation
Q4 2014 Earnings Call Transcript

Published: 18 Mar 2015

[Operator:]

Welcome to Enservco Fourth Quarter and Year-End Earnings Call. [Operator Instructions]. I would now like to turn the call over to your host Mr. Jay Pfeiffer, Investor Relations. Thank you. You may begin.

[Jay Pfeiffer:]

Hello and welcome to Enservco's 2014 fourth quarter and year-end conference call. Presenting on behalf of the company today is Chairman and CEO, Rick Kasch; CFO, Bob Devers and Austin Peitz, VP, 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 filing as well as other filings with the Securities and Exchange Commission. 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. As always management's ability to respond to questions during this call is limited by SEC Reg 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, 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 Kasch:]

Thanks, Jay and thank you all for joining us today. There are three central themes I would like to cover in today's call. One we achieved record revenue and profitability on our fourth quarter and fiscal 2014 after overcoming issues that tempered our success. Two, with a very ambitious and successful fleet expansion which is wrapping up this quarter we have positioned the company with a modern fleet and a balanced mix of services capable of taking on significantly more business with existing and new customers and major oil and gas producing regions throughout the United States and three with solid cash flows, a strong and relatively underleveraged balance sheet and plenty of capacity under our bank line we believe we’re not only going to be able to withstand the effects of oil price fluctuations and continue our organic growth that are also well-positioned to take advantage of the current market to pursue M&A opportunities that can be accretive to earnings and contribute to the expansion of our customer base, market share, service offerings and geographic footprint. I will begin with a brief recap of our financial highlights and then Bob will provide more in-depth details during his remarks. As noted in our press release this morning, we had a strong finish to the year, with Q4 adjusted EBITDA of 80% over last year to a record $5.3 million and earnings per share more than doubling the $0.07. For the full year we achieved a key record revenue of $56.6 million and a record adjusted EBITDA $11.5 million. In addition all three of our well-enhancement business lines, hot-oiling, acidizing and frac-water heating produced record high revenue levels. While we were very pleased with these results the real story in the numbers behind the results. This has to do with the effects of the various one-off issues we endured during the year that impacted everything from revenues to grows margins to the bottom-line. We addressed two of these issues in previous earnings call. In the first quarter it was the spike in propane prices that started in Q4 of 2013 and peaked in Q1 of 2014 that impacted revenues, pressed margins and skewed year-over-year comparisons. In Q2 there was a three week stand-down with one of our largest customers in the D-J basin and idled equipment while cruise around the clock waiting to return to work. During our Q3 earnings call I alluded to the unseasonably warm weather we were experiencing from October through mid-November and the impact it would probably have on our Q4 results. It ended up that during those first six weeks of the quarter frac-water heating revenues were down $1.7 million from the same period last year. We estimate that the impact on Q4 adjusted EBITDA was approximately $1.1 million. The last issue we encountered during the year was also in Q4 and resulted from the conversion of frac-water heating equipment to a bi-fuel system. Ironically although the bi-fuel system is now proving extremely valuable in winning new business and increasing market share in the Bakken, D-J and Marcellus-Utica markets, there was a decrease of $2.5 million in propane revenue for the comparative quarters and a corresponding estimated $500,000 decrease in adjusted EBITDA as customers began providing us propane or an natural gas to use rather than having us buy propane and pass the cost through to them at a mark-up. However in the long term this conversion will prove to be the right thing to do and will provide more profits to the bottom-line in the long term. Austin will explain this further in his comments. In total we estimate that the aggregate effect of all these issues that I’ve described lowered our full year revenue by approximately 3.1 million, lowered our adjusted EBITDA by $2.8 million and our earnings per share by $0.03 per share. The second point I wanted to discuss is that the successful conclusion of our 2014 CapEx campaign. We have nearly doubled the size of our well-enhancement fleet in all three of our service areas, hot-oiling, acidized, even frac-water heating. This expansion includes the equipment that came with the small acquisition we made in the Northern Bakken in early Q4. Our well enhancement fleet now has an average age of approximately 3 years. One of the youngest and most advanced in the country especially when considering our bi-fuel capabilities. Consistent with our past practice we will not budget our 2015 CapEx budget for another 60 days and so after the end of our heating season and after we have had the opportunity to sit down with our customers and review their plans for the upcoming year. This is probably very fortunate for us this year due to all the uncertainty coming out of E&P Boardrooms about their CapEx plans. Not only is the how much but as to where they will be spending their money. What we have heard so far has given us some encouragement and I will discuss that further in my closing comments. The certain point in my list was our financial condition. As you saw from our financial statements released this morning we have significantly improved the financial strength of the company. We have strong cash flow that we used to help finance our fleet expansion this past year. Our net adjusted EBITDA ratio is very strong and should be strong yet through the end of our season. I mentioned all this in the slides that we feel we’re in a great position to weather the turmoil we have been experiencing in our industry. Not only do we know that we will be a survivor that we will be able to grow the company organically and through acquisitions as long as we remain focused and make smart decisions on how we use our capital. You will recall that during 2014 we came close to making a couple of acquisitions that we eventually passed on due to our feelings of uncertainty of what was going to happen with oil prices versus the valuations of the targets and those feelings were ultimately validated. We’re going to continue to look at acquisitions as we believe there is going to be some attractive values out there that will meet our criteria of balancing revenue streams between recurring maintenance and the drill bed reducing seasonality, diversifying our service offerings and maintaining high gross profit margins. With that I would like to turn it over to Austin Peitz, our VP of Operations to add a little color on what he is seeing out here in the field. Austin ?

[Austin Peitz:]

Thank you, Rick and hello everyone. First I would like to address our conversion to bi-fuel capabilities with our frac-water heating units. We made this move as a means of giving our customers more fuel options, a green alternative and a way to save money by utilizing their own fuel sources to heat frac water. In the short term, as Rick mentioned it resulted in lower revenue from last propane sales. However I want to emphasize this was a very solid decision and in our best interest over the long term. One of the primary benefits was that happily introduced this option we added new customers immediately. It also helps us retain current customers being enticed with lower prices by competitors without having to reduce our own prices. Having the capability to use natural gas has in fact in some instances increased market share with some existing customers as an example during the few months we estimate that our market share in the D-J basin has increased over from 50% to as much as 75% as a direct result of this capability. We’re seeing growth in the Bakken and in the North-East specifically related to our ability to use natural gas. So in our view the short term losses will be insignificant compared to the long term benefits of increasing market share by customer loyalty. As Rick mentioned geographic expansion is one of our growth initiatives, in the past calls we have mentioned our desire to enter the Eagle Ford at the beginning of the year one of our customers requested we provide hot oil services in South Texas. We started with one unit at the beginning of the year and by the end of this month we will have six units in operation. We anticipate this market will grow significantly for us over the next several months. This is another example of our focus on growing not only our geographic footprint but also our recurring maintenance revenue stream. I would also like to give you a brief update on the Tioga, North Dakota acquisition that we did mid-fourth quarter. The yard is in full operation and is performing upto and even exceeding our expectations. We have picked up a lot of new work as we have had hoped for and we’re now performing services for customers of ours in the Southern Bakken area that operations near Tioga. As you will recall this location performs primarily hot oil services. However one of our customers having a frac water which may be performed on a year-around basis. With all the questions about future activities in the industry and no clear vision from our customers on firm plan we’re continuously striving to improve our operations, efficiencies and monitor expenses. We’re currently implementing a new cost tracking system to monitor all expenses on a daily basis at the yard level such as labor and repairs and maintenance which are two of our major controllable cost categories.

[Rick Kasch:]

Thank you, Austin. Now Bob will recap our financial results. Bob?

[Bob Devers:]

Thanks, Rick. And hello everyone. Let me start with an overview of our fourth quarter results. Revenue for the fourth quarter was record $18.3 million up 21% over the same quarter last year. As Rick indicated revenue growth from our increased feeding capacity and higher equipment utilization was tempered by a seasonally warm weather at the start of the quarter and lower propane revenues due to customers converting to alternative fuel sources. Gross profit increased $2.3 million or 58% to $6.2 million to the fourth quarter. Our gross margins improved to 34% from 26% in the same quarter last year. Operating expenses for the fourth quarter increased $900,000 from the same quarter last year to $2.5 million. Higher depreciation and amortization expense of $700,000 related to our fleet expansion combined with $300,000 increase in patent related legal cost were the reason for this increase. Net income for the fourth quarter grew by a 129% to $2.5 million or $0.07 per diluted share as compared to $1.1 million or $0.03 per diluted share in the fourth quarter last year. Adjusted EBITDA was a record $5.3 million up 80%, year-over-year from $2.9 million. We estimate adjusted EBITDA would have been $1.6 million higher if not for the negative impact on revenues due to the warm weather and lower propane revenues. Turning to the full year results, revenue for the full year increased 22% for the record $56.6 million, reflecting a larger fleet, improve utilization and new customer's growth in current service territories and geographic expansion areas. From a geographic perspective annual revenues from our Rocky Mountain region increased 30% to $33.8 million due in part to the expansion of services in Wyoming and North Dakota. Growth was also strong in our Eastern U.S. region about 19% from last year. Gross margin for the year came in at 27% of revenue versus 31% last year. In addition to the revenues as discussed earlier higher expansion related cost including cost to higher -- and train additional operators, cost to expand our safety program and cost to test and demonstrate our ability to use natural gas and well gas all contribute to a lower margin. Operating income for the year declined $1.3 million to $6.9 million. Lower gross margins and higher operating expenses including the $1.3 million increase in depreciation and amortization expense and a $370,000 increase in patent related cost were the primary reason for this decline year-over-year. Net income for 2014 was $4 million or $0.10 per diluted share versus $4.3 million or $0.12 per diluted share a year ago. Adjusted EBITDA for the full year was a record 11.5 million up from 11 million the year ago. The increase in adjusted EBITDA was tempered by several factors throughout the year including the fourth quarter impact as we mentioned earlier. The cash flow operations improved to $6.2 million up 17% from 5.3 million a year ago. Turning to our balance sheet, working capital improved $5.5 million to $13.7 million at December 31, 2014. Total current assets increased 29% of our current ratio improved to 3.41 from 2.21 a year ago. We ended 2014 with stockholders equity of $18 million up 40% from 2013. Our total liabilities to stockholder at equity remains relatively low at 2.2 to 1 at 2014. As we’re refinancing our existing term debt and funding approximately $16 million of CapEx, we ended the year with $28.6 million outstanding on our senior revolving credit facility with PNC Bank. We plan to use cash flow from operations over the next two quarters including the collection of year-end receivable to reduce this balance on this facility. As a reminder our facility with PNC is a $40 million asset based lending facility which allows us to borrow based on eligible receivables and appraised equipment. At the end of the year we had approximately $44 million of collateral value and $11 million available under the line of credit. The facilities did not scheduled principle payments until maturity in September, 2019 and allowed us to borrow at a spread over LIBOR rates. Our effective interest rate on outstanding loans at December 31, was just over 2.7%. Turning now to an update on our CapEx roll out, as noted in our news release this morning, as we plan we expect to have a final two hot oiling units from our 2014 CapEx program delivered by the end of this month following a great effort by our fabricator. With the conclusion of our CapEx program and including the acquisition we made in Q4 our expanded fleet will included 81 frac heating units, up 42 from last season, 55 hot oil units up 27 from last year and 7 acidizing units up 3 units from last year. With that I will turn it back over to Rick.

[Rick Kasch:]

Thanks, Bob. I will conclude with a few comments on oil price trends and the impacts on our business. First of all I’ve not crystal ball in my office so I know nothing more than the rest of you as to where prices are heading or ramp. What I do know are these things. One as often mentioned we’re managing our cost very closely including the redeployment of assets and personnel to areas where demand remains strong. Two, as mentioned earlier we’re in a strong financial position to weather this turmoil we’re experiencing. Three, couple of things to keep in mind in matter of business, timing of the impacts of the CapEx cut backs by the E&Ps could be fortuitous for us and that most of our heating season was unaffected and we will be entering quarters where our maintenance service are the predominant revenue producers. A lot of the talk we hear is about prices possibly rebounding towards the end of this year 2015 which could be in time for when our season starts up again. Another thing to look at is when the E&Ps do provide more details of where they are spending their money is to keep in mind where we do which of our services. As it was we perform frac-water heating services primarily in the D-J basin and in the Marcellus-Utica areas. We perform hot oiling in the Bakken, D-J, Kansas and Texas. So if you read about the E&Ps cutting back drilling in the Bakken because of high cost the impact on us are not that significant and that’s where we do the maintenance work of hot oiling etcetera. And four, although we don’t provide guidance I would mention that for the first quarter of this year we will experience the same issues as we did in Q4 regarding the propane revenue decrease and warm weather impact that we experienced from mid-January to mid-February. I will close by repeating that we feel that our actual results not to mention the results that we might have achieved haven't been for those various issues we encountered. Validates the strength of our business model and strategy and bodes well for our future and we have great confidence in the long term performance and growth of our company. With that we’re ready to take any questions. Rob

[Operator:]

[Operator Instructions]. Our first question comes from the line of Jeff Grampp with Northland Capital Markets. Please proceed with your question.

[Jeff Grampp:]

Just wanted to maybe talk a bit about what you guys are seeing in terms of utilization rates across your various well-enhancement services and I know in the past you guys have always seem to have far more demand than capacity but how are things being shapely lately and what's the outlook there and then maybe secondarily any commentary on the recent pricing that you guys have been seeing would be helpful. Thanks.

[Rick Kasch:]

It is going to vary by region but as a general concession the utilization on our equipment starting with frac heating is we have put our CapEx program into place last year to capture some of the market share that we will have to turn down due to the lack of equipment. So it enables us to capture some of that market share and as we talked about we’re gaining strengthen in our current region is where we’re offering the frac water heating services you know we’re gaining more market share and going back and rekindle some of those old relationships. So I want to give actual numbers like you know to and in the D-J basin, we’re probably serving 75% of all frac water heating that’s been performed at this time and another big region for us is the Marcellus-Utica and the frac water heating services. Our equipment they have got cold snap this winter and it's sustain really utilized here lately and we’re probably still servicing 70% of all the frac water heating that it's been performed out in the Marcellus-Utica region as well. Hot oil services, they are just still a strong demand. We elaborate recurring maintenance. I believe -- we believe that as the pressure comes on to maintain production and maintenance programs will be stepped up, it's a lower cost and a drill or a completion to capture the most the bigger capabilities by well and refill that we got to see an increase in that activity as this goes on and the pressure comes on. So the utilization is same, good and strong in the hot oil sector.

[Jeff Grampp:]

And then I guess kind on the pricing front, has there been any material change or anything on that front that you’ve seen from the operators in terms of concessions there?

[Rick Kasch:]

Overall we have had very good results as far as pricing concessions. If I was to take on an overall basis and take all of our revenue streams and what we do, we probably had an impact of maybe 3% as far as price concession. The most that we have had to do on a customer is probably 10% and the reason we did that was to gain more market share and it was primarily in hot oiling that we did that. And the frac heating as we were alluding to in our prepared comments we actually were maintaining our prices due to the fact that with the alternative fuel, the bi-fuel systems our customers were already recognizing substantial savings by using their own well gas or their own natural gas product so the savings that they had they didn’t have to come to us for more price reduction regarding through our expenditures that we have done on our equipment given them a substantial saving. So they recognize that and did not come to us for price reductions and it also plays back into the comments that we also made earlier as to us not being that significant of a portion of their completion cost, they are focused on the big guys, the $1 million type guys to where they can have significant reductions when they do that. So we have not had significant pressure. In fact we just signed an agreement with one of our major customers that go through June of 2016 to maintain our price levels at what they were tis last season. And so we have been very in what we have seen in the price.

[Jeff Grampp:]

And then on the M&A side of things can you guys just talk about what the landscape is out there now, if they are still being seeing a lot of wide bid-ask spreads between buyers and sellers. Is that still the case I think that tighten up for just kind of any commentary on the M&A front?

[Rick Kasch:]

As far as our experience right now is we’re seeing a lot of activity coming across our desk, it's kind of in the early stages. We haven't quite gotten into a lot of pricing negotiations in-depth to see what we’re sharing in our preliminary talks as it sounds like the spread, the bid and ask spreads I guess you call it are narrowing. I think we’re seeing also more flexibility in the structuring of an acquisition where in the past it used to be you shovel a pile of cash across the table and they would go their way, I think a lot of people are understanding with the uncertainty in the market you got to do some math, creative structuring and acquisitions these days. So that’s about what I can give you from our experience so far.

[Operator:]

Our next question comes from the line of Bhakti Pavani with Euro Pacific Capital. Please proceed with your question.

[Bhakti Pavani:]

In your prepared remarks you did mention about the lower propane revenues, just was curious as to what percentage of your customers are still using propane gas and when do you seen the transition being completed to LNG?

[Rick Kasch:]

The transition to what? I'm sorry I missed.

[Bhakti Pavani:]

The natural gas right now some of your customers are still using propane. I'm just curious to know what percentages of customers are still using propane?

[Austin Peitz:]

It would vary by market, by region. In the D-J basic currently, probably 60% to 70% of our workload is utilizing the natural gas now as a fuel source. It's going to be probably 30% of our customers are utilizing natural gas and there is 70% are still utilizing propane? I think it's going to give us a competitive edge in the selling point once we get a little color of our activity levels as to who to change and it's going to give us an edge of potential new market shares as well.

[Rick Kasch:]

Will customers will switch from propane to natural gas that are using propane?

[Austin Peitz:]

Potentially, yes. It's kind of hard to say.

[Bhakti Pavani:]

The other question was just looking at the capital spending. I'm sorry if I missed earlier, but the capital spending for the fourth quarter was about 11 million which was almost for the first three quarter it was 12 million. Just was kind of curious to know the reason for the steep increase and how much more needs to be paid in the first quarter for the remaining deliveries?

[Bob Devers:]

So the $11 million of CapEx in the fourth quarter, one of the big contributors to that was obviously the $4 million we spent on the Tioga acquisition, so that was one of the portion there. The rest of that was pretty much the CapEx, the payments we made under the CapEx program for 2014. As of the end of the year we have about 2 million just a little bit over $2 million left to pay on that CapEx program for the hot oil truck that we’re going to be receiving.

[Bhakti Pavani:]

Okay. All right. And just a last one from my side, you did experience a legal cost in the fourth quarter regarding the [indiscernible], was just kind of curious to know is there any kind of material payments that you expect in the first quarter or in 2015 with regards to legal cost?

[Rick Kasch:]

We at this point don’t know as far as the cost, I mean they were 100,000 or 150,000 in the first month or two but right now the case is of course as you know it's in it's early stages. We’re waiting to hearing in mid-April to address a pending motion that we have to dismiss in Enservco from the action but heat waves and to move the case to Colorado. So there won't be significant cost related to the pending litigation at this point. We’re not anticipating.

[Operator:]

[Operator Instructions]. Our next question is from Steven Ralston with Zacks Investment Research. Please proceed with your question.

[Steven Ralston:]

Could you talk about a couple of things? One is I noticed the G&A went down significantly here in the fourth quarter and in the commentary, it says you were controlling your costs, but is it more significant than that? Have you reined in your costs on the G&A side so that I can model it at a lower level going forward?

[Rick Kasch:]

Yes. You know, Steven, I don't know. Right offhand, I think most of it was just timing of some professional expenses and probably some of the timing of -- it's probably timing of professional expenses last year and probably some timings of some investor relations costs, I believe, is some of the main reasons why it dropped in the fourth quarter. I don't believe that there's anything significant with respect to that. Is there anything--?

[Steven Ralston:]

Do you expect in the future to still have professional expenses, per se, at a more normal level as opposed to a lower level like you had in the fourth quarter?

[Rick Kasch:]

Yes. It should normalize a little bit. With us pulling some of the patent-related costs out, that was part of the reason why it took some of the variation out of those numbers, but yes. It should stabilize. I think we--

[Steven Ralston:]

Okay, I understand that some of the patent litigation costs were in the G&A line in prior quarters.

[Rick Kasch:]

Yes, yes.

[Steven Ralston:]

And can you get into a little more detail on your tax expense being strongly profitable now that -- well, let's say the tax expense is inconsistent, and I also see this new line here on the balance sheet of -- okay, sorry. Income tax receivables.

[Rick Kasch:]

Yes, let me talk to you about that. So our effective tax rate, as you probably noticed, came down this year and is primarily due to a mix of revenue within various states. For example, we are doing some more work in states like Wyoming, which is still going to have a state income tax. So the next -- the revenue mix within the various states has allowed us to that has reduced our overall effective tax rate that you're seeing on the income statement. One of the big things and why you see some receivables in increases on deferred taxes on the balance sheet was due to -- at the very end of the year, the IRS allowed the bonus depreciation to continue for 2014. Of course, it was a big deal that allowed us to capture a lot of additional tax depreciation expenses. So what that did is basically put us from a taxpayer position for the majority of the year to being able to get -- recoup some of the tax payments we made during the year plus also go back and carry back some of our losses to prior years. So that's why you are seeing some of the changes on the balance sheet with respect to income tax receivable and payable.

[Steven Ralston:]

Okay. On the M&A front, well, you have a very modern and efficient fleet now and I'm sure most of these potential acquisition targets would have less modern equipment. Can you talk around that issue?

[Rick Kasch:]

Well, whenever we look at an acquisition, that's one of the key things that we look at. Austin goes and actually takes our mechanics. We go out and inspect the equipment, make sure that it's not something that's going to require enormous amounts of money to refurbish and pick up and so forth. So keep in mind that the equipment that -- for companies that are in our business, this equipment lasts for 20 years. It's very basic equipment, shouldn't require a whole lot of work. But that is a main focus that -- and when we look at any acquisition, whether it's in our business or if we're looking at diversifying into some of the services, that's a key focus for us is to look at the quality of the equipment.

[Steven Ralston:]

And to fund the acquisitions, your working capital has ballooned. But I noticed this one line of Accounts Receivable which actually increased a little bit more than sales increased. When do you expect that to be monetized? And I know you said you want to pay back some of your revolving credit line with that and give some sort of a guideline of how much you are going to use to repay versus how much you are going to hold back for M&A.

[Rick Kasch:]

Well, we will be looking at that, of course, as we go through basically, the second quarter. That receivable always pays down and we get some of the -- I think that was just kind of a misstatement. Our funds go in and then we pay down our line. It's a revolver. We use those funds to pay it down. So it's not -- we haven't said how much we're going to keep aside, if you will, foreign acquisition.

[Steven Ralston:]

Let me rephrase the question somewhat in that it sounds like as Accounts Receivable are paid, you're going to reduce your revolving credit line and if need be for an M&A opportunity, you would tap that revolving line again. Is that a fair representation?

[Rick Kasch:]

Correct. We would sit down with our bank and say, here's what we're looking at. We would like to draw this off the revolver foreign acquisition.

[Operator:]

Our next question comes from Rudy Hokanson with Barrington Research. Please proceed with your question.

[Rudy Hokanson:]

Several questions. First, on income statement. Why was the interest expense relatively lower in the fourth quarter giving your effective rate in the amount outstanding at the end of the quarter?

[Rick Kasch:]

Yes, it was a combination of the lower effective interest rate, as you mentioned. We also capitalized about $139,000 of interest expense related to our fleet expansion program. So that was part of the reason why that fourth quarter showed that drop.

[Rudy Hokanson:]

Okay, so the run rate would be similar just under a few hundred thousand dollars probably on a normalized basis. Or around $200,000. Okay, and then also, the fully diluted share count was less than I had estimated. Could you explain that? It might be just my problem but I thought when I was working with it, I had been coming up with a figure over $40 million.

[Rick Kasch:]

Yes, so the fully diluted as a -- a lot of folks will just take the full number of share -- of options and warrants and consider them as dilutive. Under the EPS calculation, you have to go through a calculation based upon stock price and determine what the effective conversion is of those options and warrant ads based on current prices and so you end up with a smaller dilution, I guess, rather than the total number of options and warrants outstanding.

[Rudy Hokanson:]

Okay so basically the stock price with the total effect, there's no other change that's going on?

[Rick Kasch:]

No, as you can see -- what you'll see is we've had a lot of conversion of the warrants -- almost all of the warrants that are now converted into shares. Some of those were converted on a cash basis, some on a cash flow sector size basis. So yes, there really hasn't been much changed in that, other than the conversion of those options and warrants and just in outstanding shares.

[Rudy Hokanson:]

Okay, one other financial question and then I have some operational questions. On an effective tax rate for 2015, what would be a good number to use? Would it be about 39% or should it be lower, given what you are noticing within the various states?

[Bob Devers:]

It's going to depend upon where we do the volume of work. But generally speaking, I think in the 38% effective tax rate is probably fair to say.

[Rudy Hokanson:]

On the operational side, I was wondering, Rick, are you seeing -- how are you going to plan -- again, not just what basins you want to focus on, but the timing on a lot of the activity? There's been a lot of headlines about the fact that so many companies and many of them good customers of yours have decided to postpone completions. And if the price does go up at the end of the year and they are postponing completions, you can get a huge rush on completion activity and again, we know that rig counts have been dropping. I was wondering if you could maybe talk about -- in another form than you have been, are you noticing that your market share -- like in the D-J Basin, is your market share going up on activities that is related to the new wells? And so maybe those two questions or you can rephrase them as you wish.

[Rick Kasch:]

No, that's fine. I think what we're seeing is of course we're coming into the tail end of our season, for instance in the D-J, so the actual activity of needs for heating the water, of course, is decreasing. But our market share of that need that there is substantially increasing because of the relationship that our guys have and the biofuel capability. So it's increasing but the overall need just of heating of water. So that's kind of the comment that I was making. It's kind of fortuitous for us was the timing that we get into most of the season. Now what you're talking about is the impact of next year is really going to be incumbent upon our manager -- area managers and Austin in that to be keeping close contacts with these BMPs just exactly what you are saying as to what is going to happen when -- Austin has mentioned a lot of these companies are doing exactly what you've talked about. They are drilling and putting them behind pipe and waiting for the price to come back and doing their completions when the price is back $60, $70, whatever. So yes, we could have that rush and Austin, and you guys, are going to have to be there listening and saying okay, it's up to $50, $55. People are talking $60, are you going to meet it? And then they are going to have to go and hire the guys and get them back in to do the work. So that's about the best we're going to be able to do and we may have to take some risks at some point to guess a little bit on the trend of the oil prices will even be ready because again the relationships that we have and again with that biofuel, we are the first call on a lot of these majors in these markets. So they are going to come to us and want us to take care of that business for them and we want to be prepared.

[Rudy Hokanson:]

Could you end up facing a risk where, because of the timing on this, your working capital needs and costs, etc., could hurt margins in the second half if there is a -- an unusual flow of demand?

[Rick Kasch:]

No, I don't think it would be any worse than what we suffered in the third quarter of this year. If you recall, we had to hire -- we had a large increase in capacity. We had to hire the new operators to handle that capacity when we ran into that Indian summer, unseasonably warm weather until mid-November. So we incurred a lot of labor costs during that period and so -- and we weathered that, so I don't see that suffering from that. Plus we have the hot oil business that is increasing -- will be increasing, have been increasing, will continue to increase and that will be providing us, of course, the working capital and so forth as we go forward. So I don't see it is a problem for us going forward.

[Rudy Hokanson:]

Okay, and then do you expect to have a special press release or call once you make a decision on your capital budget given that that's a rather critical point? And it's undecided right now?

[Rick Kasch:]

Yes, we will do something -- I guess probably won't -- may tie in to the first quarter call or not, but we will do something that -- if it doesn't tie in there, we will do a special release or call, something like that.

[Operator:]

Our next question is from William Bremer with Maxim Group. Please proceed with your question.

[William Bremer:]

I want to take this a little more topline initiative here. There is a wide range with the estimates that are out there for 2015 and, given the CapEx that you deployed, the assets you brought in, I was hoping you could sort of give us maybe a little granularity in terms of first half of 2015 versus first half of 2014 actually and maybe the back half to tighten things up there.

[Rick Kasch:]

I will trade you that for oil prices -- speculation prices. I know I'm being a little facetious there. Whatever. I'm sorry, but it's a tough one with everything that's -- like I said, we haven't seen enough out of the E&Ps to give you much more focus on that. As I said, the best I can give you is we going to have the impacts that we recognize so far, the propane price stuff, the warm weather in the first quarter. Beyond that, right now I just can't give you much. I know there is a wide variety out there, wide range. We're going to be trying to do some stuff here in the next 30 days. Hopefully we can provide some stuff after that.

[William Bremer:]

I'm assuming that the polar vortex and the weather that we did have, say, the last few weeks firmed things up a little bit in the first quarter. I mean, the first quarter has not concluded yet but still, there is quite a cold temperature in a number of your regions. Are you seeing the pickup because of that?

[Rick Kasch:]

Well, you had it for a short while. I can let Austin address it by region if you want.

[Austin Peitz:]

If you look at our frac water heating services specific, we did have a little bump in that cold temperature which increased activity levels. When you take hot oiling and acidizing into the realm of the mix, those stay flat whether it's 20 below or 20 above or 60 degrees. So the weather don't impact them like it does frac water heating. But we did see a little bit of an increased activity over the last couple of weeks because of the cooler temperatures.

[William Bremer:]

Rick, maybe a better way to ask this is your gross margins and the current pricing of what you're seeing. Do you expect those to be up year-over-year?

[Rick Kasch:]

It's a hard one because now you're getting into the propane price compared to last year. So if you are modeling [indiscernible] off last year, you've got that significant changes in propane revenues. So if you took last year's -- and I said it was flat with last year's, it would be way off because propane revenues, I think, were $7 million or something, last year's first-quarter revenues, that's going to be off significantly. And then you get into that mathematical impact on margins, again because of the change in the denominator and numerators. So it's going to be a little more complicated than that.

[William Bremer:]

Okay. And did I hear correctly, interest expense is going to be approximately $200,000 a quarter as a run rate?

[Bob Devers:]

Yes, that's probably fair to say. As we mentioned, our borrowings will come down, our outstanding debt will come down in the first two quarters as we are monetizing some of our receivables and using some of our cash flow. But yes.

[William Bremer:]

Okay. And then, fair to say that, based on the current stock price and the shares fully diluted should be sort of comparable to the fourth quarter with a slight increase that's been historic to the company. Is that fair to say?

[Rick Kasch:]

Yes, that's a good way to look at it. If you take your total options and warrants outstanding and kind of look at the relative amount that's on the diluted per share calculation, that should be fairly consistent.

[William Bremer:]

Right. Because we closed this quarter just below that $39 million fully in, okay? So I'm sort of saying from that point on. Okay. When will the K be filed, gentlemen?

[Rick Kasch:]

We are planning on filing that tomorrow.

[Operator:]

Our next question is from Tom Dillon with William Blair. Please proceed with your question.

[Tom Dillon:]

So, with another leg down in oil prices from last quarter's call. Are you starting to see new equipment prices come down at all? How are some of the suppliers reacting, given the acquisition department becoming more attractive with demand slowing?

[Austin Peitz:]

This is Austin. We haven't really done any work as far as pursuing additional equipment until we get a little more vision. I'm going to assume we are going to have a little bit more leverage if we go to a fabricated Table 1 of equipment and we will have some bargaining power in these times for sure. But to give you a direct answer, we haven't shopped that market yet. With our -- not determining what our future of our CapEx is yet.

[Tom Dillon:]

Okay. And then I guess to ask this a different way from the previous questions, have you seen an incremental increase in demand with a step down in oil prices? Or maybe can you just provide further details about the progression of demand month to month with these past few winter months?

[Rick Kasch:]

The demand for our services, is that what you are saying, Tom?

[Tom Dillon:]

Yes, the kind of the progression for demand month to month over these past few winter months.

[Rick Kasch:]

So in hot oiling services, with our Tioga acquisition, it's opened a whole new service area for us, so it's really driven the demand of our hot oil services through North Dakota, just by the geographic expansion, that is one of the big things. Our frac water heating services -- across the board once again, we've been able to go back and capture some opportunities that, in the past, we weren't able to capture due to -- you know, not having enough equipment and fleets in the field -- crews in the field. So we kind of went back and captured some of those opportunities with the downturn and being able to offer them the biofuel opportunities and some of those benefits, and capture some of those opportunities and rekindle those relationships.

[Operator:]

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

[Jeff Grampp:]

Just had a follow-up on I guess one of the -- about the geographic expansion. Obviously it's pretty exciting, you guys getting into the Eagle Ford. So maybe just some color on expectations or maybe expansion there with one customer you have or potential other operators that you can partner with. And then any other areas worth noting beyond D-J, Bakken, and the Appalachian Basin and any other expansion areas where you've had some recent success?

[Rick Kasch:]

Okay. So to kind of give a little bit of color on the South Texas expansion, we went down to South Texas for one customer, knowing that we needed a base to build on to start the operation. So we were currently going to -- we are getting to six units in operation and once again, these are hot oil units. We are in talks with -- at the corporate level -- with some big players in the market about big opportunities, even bigger than that with additional customer base. And some of these customers in South Texas also operate in West Texas Midland, Odessa area, another market we don't service at this time. So we're going to start to utilize those relationships and maybe even take it further on into West Texas if the opportunity prevails. But, there's a lot of big players and hot oiling is pretty essential to the operation of those wells due to the paraffin and also pressure trunks as well. So they serve multiple services. Customers that we service in other basins. So there's people we have good working relationships with that know us, and know our capabilities as well. That's going to be kind of the big geographic expansion. Another one we're really excited about is acquisition in North Dakota and we keep elaborating on it. We feel we are just on the tip of the iceberg. We are capturing some opportunities where, as Rick alluded to that one of our biggest price cuts was in percent. Well, we went to a big player and that was that player and gained huge market shares with one of the big E&Ps in North Dakota. And some of the people are being stubborn on their pricing and think that this is short-lived and we're going to catch of those opportunities and we see a lot of big growth opportunity in our current locations as well in North Dakota.

[Operator:]

And there are no further questions at this time. At this point, I would like to turn the call back over to management for any closing remarks.

[Rick Kasch:]

All right. Well, we want to thank everyone for joining us today and should you have any other further questions, feel free to give any of us that call. Thank you and enjoy the day.

[Operator:]

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