Enservco Corporation
Q1 2015 Earnings Call Transcript

Published: 16 May 2015

[Operator:]

Greetings and welcome to Enservco Corporation First Quarter Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Jay Pfeiffer, from Pfeiffer High Investor Relations. Thank you, sir. You may begin.

[Jay Pfeiffer:]

Thank you, Adam. Hello and welcome to Enservco's 2015 first quarter conference call. Presenting on behalf of the Company today is Chairman and CEO, Rick Kasch; CFO, Bob Devers; and VP of Field Operations, Austin Peitz. 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 prohibits selective disclosure of material non-public information. A webcast replay of today's call will be available at enservco.com after the call. In addition, a telephone replay will be available beginning approximately two hours after the call. Instructions for accessing the webcast or phone replay are available in today's news release. With that, I'll turn the call over to Rick Kasch. Rick, please go ahead.

[Rick Kasch:]

Thanks, Jay and thank you all for joining us today. By now I am sure you have all listened to your share of earnings calls describing the effects of the oil price downturn on the services industry for the first quarter. The good news is from our standpoint the impact has been minimal compared to some of our competitors. As a matter of fact in light of the some of the macro headwinds and other challenges that we alluded to last quarter, we had a pretty solid quarter in terms of profitability, cash flow and overall demand for our well-enhancement services, let me tell you why I say this. First from a revenue standpoint, 5.9 million of our $6.1 million decline in revenues in the first quarter was attributable to changes in propane revenues that we've discussed on previous calls. By this I mean the cost of propane which we provide to customers with a small markup was significantly higher in the year ago first quarter where prices were in the $2 to $2.50 range and where today we actually bought some for close to $0.50. In addition customers’ migrations to our new bi-fuel system which give customers natural gas alternatives to propane contributed to the 5.9 million declined. So again nearly all of our revenue decline was due to a drop in lower margin propane sales as opposed to decreases in customer activity or significant price concessions around our core service offerings. In fact in March frac water heating revenues exclusive of the propane revenues were actually up 27% and hot oil revenues exclusive of propane revenues were up nearly 5%. Continuing along the line of revenue analysis, the obvious question that follows is why not more revenue growth given the significant expansion of our fleet over past year, the answer to this is similar to what we discussed last quarter that being the unusual warm weather patterns experienced in the D-J Basin which is our largest frac water heating market. Last quarter we experienced an extended warm summer weather at the beginning of the season and now this quarter we experienced unseasonably warm weather in February and March. We consulted NOAA the National Oceanic and Atmospheric Administration weather staffs and found that out of the total of 59 days in February and March 60% of them were from 20% to 50% warmer than the historical average for those days those are some pretty dramatic numbers and it's clear that had we experienced normal winter this year, our top-line revenues would have been higher. As Bob will discuss in more detail later on in this call, our decline in gross profit in Q1 was due primarily to the warm weather which in turn resulted in decreased utilization of equipment and crews and to a lesser extent the lower propane revenues I mentioned before and price concessions in certain markets mostly in the form of temporary discounts. So as our numbers reflect weather and propane issues aside, we had a pretty solid quarter in terms continued customer demand for our hot oiling, acidizing and frac water heating services. In addition our innovative bi-fuel system has helped us to solidify relationships with major customers and develop new ones resulting in recent market share gains that Austin will talk about a little later. To the experience during the period when a lot service companies are facing significant price and profitability challenges, I feel our business model of keeping a balance between services that are affected by drilling activity and those that are here around recurring maintenance has proven to be the right one. A quick word on pricing pressures resulting from E&P cost cutting efforts. It is no secret that some of our customers are sailing back drilling and completion programs shifting capital to higher margin basin requesting price concessions and reducing or delaying certain maintenance related work. We’ve been able to mitigate the impact of this trend with increases in market share to some selected price concessions, our bi-fuel initiative and deploying resources to new and/or more active basins. In our hot oiling operations we offered up 10% temporary discount in a few markets to retain and increase our market share. The results have been good so far. We actually had a 4% increase in hot oiling revenues in Q1 despite the 10% discount and also the deferral by some customers of routine maintenance. Eventually this deferred maintenance work is going to have to be performed in order to retain the efficiency of the wells at which time we should experience a bump in these revenues. This is similar to what we experienced in the prior down markets to our frac water heating service line the impact in the first quarter of price concessions was under 2% of frac water heating revenues. I would now like to address our growth plans for the near future; first regarding CapEx for 2015. We believe that our 2014 CapEx strategy which doubled the size of our fleet over the prior year and by the way of detail one that is increased by its service line was the correct strategy and positions us for revenue growth give a normal winter and just the fact that we have the additional capacity to perform work we previously had to turn down due to lack of equipment and can now expand into other markets such as the Eagle Ford. Should drilling activity rebound along with oil prices, we should experience an even bigger impact from our expanded fleet. We are still evaluating industry conditions to see how E&P budgets shake out before making decisions on new equipment fabrication. At this point we have not committed to any CapEx for 2015 other than maintenance spending which should be in the range of $1.5 million to $2 million. If we determine to fabricate any new equipment it would potentially be in areas of our hot oiling and acidizing services depending upon the success of our expansion initiatives into Texas. To supplement this organic growth M&A is becoming a larger focus for us. We believe the industry downturn creates a bias market and presents us with a rare opportunity to make some acquisitions at valuations we weren’t seeing less than even a year ago. Over the last couple of months I’ve had probably 10 to 15 opportunities cross my desk. I remember the Company is generating solid cash flows, has a strong and relatively underleveraged balance sheet with plenty of capacity under our bank line. We are into a lot of service companies, small ones especially in the same boat. So consequently we are aggressively pursuing acquisition opportunities to meet our criteria which are; one, strong EBITDA margins in the 20% to 30% range; a diversification of services that we can provide to our customers along with them being one to save a life trust to provide that; the target has to have a strong management team that will remain in place post acquisition to ensure continuity with our field personnel and customer bases; four, that it contributes to our business model of maintaining a balance between drill dependency and incurring year around work; and five, is either immediately or in the short-term accretive to our operations. With that I’d like to turn it over to Austin Peitz our VP of Field Operations to add a little color on what he’s seeing out there. Austin?

[Austin Peitz:]

Thanks Rick. Good afternoon everyone. First of all, I’d like to bring everyone up to speed on current operations we’re taking full advantage of our customer relationships we have developed and therefore we are able to make moves to increase market shares across all areas of operations we serve. These efforts in conjunction with pursuing many new opportunities we believe will position us to weather the storm in the event that slowdown in activity in the industry last with an extended period of time. Our current expansion opportunity into the Eagle Ford Shale located in South Texas started in early 2015 when one of our existing customers asked us to move some hot oil equipment into the area. We started with one unit and are currently operating six units on a daily basis. Based on the activity this far we now anticipate we’ll have up to 15 hot oilers deployed into the South Texas market by the end of Q2 or early Q3. We are currently leveraging our relationships from other basins to expand our customer risk in South Texas market, including names such as XTO, Chesapeake and EOG, which is one of the largest producers in the Eagle Ford which we are proud to say recently moved up to number 1 call. I should add to this move into Texas has resulted in us establishing new master service agreements with major players in the area. As you know, MSAs are extremely hard to receive especially in these times when E&P companies are reducing the number of vendors on their list. Our services play a big role in the Eagle Ford due to the ongoing level of maintenance activities required to produce the wells in the areas due to the higher paraffin content and the oil that's being produced. We anticipate this market has the potential for substantial growth for us. This is important for several reasons. It underscores our commitment to expanding our geographic footprint and extending our leadership position as the national provider in the hot oil niche we serve. In addition the expansion enables us to maintain utilization of hot oilers during our traditionally two slower quarters in the middle half of the year and of course this fulfills our objective of increasing of reoccurring maintenance revenue. In addition to the move into the South Texas, I would like to give you a quick update on our acquisition in Tioga, North Dakota, made in November of last year. This move has been very encouraging for us. Our hot oiling services have been impacted in a positive way with new customers and existing customers in a new area of the Bakken. In addition to hot oiling, we have entered into the frac water heating market in the region with one of the biggest producers in the Bakken. They have an ongoing plan of drilling and completion activities at this time which will help us utilize additional frac water heating equipment during our traditionally slower heating months due to the higher temperature requirements of the water being used. Needless to say this acquisition has met and exceeded expectations especially given the current environment. As Rick mentioned earlier our move with the bi-fuel capabilities led directly to new customer wins and expanded businesses with existing customers in multiple service areas. We estimate that our market share in the D-J Basin alone has increased approximately from 50% to 75% of all frac water heating being completed during the first quarter. During the first quarter we had just got started heating water for a major player in the Bakken that was utilizing natural gas for our fuel source when they put a hold on their completion activities due to the decline in price of oil. We were recently put on notice that they will be starting completion operation beginning soon and we will be providing these services in the near future. I also want to take the time to mention that we have begun taking steps to control cost through implementation of manager bonus programs that are focused on profitability and as much as revenue. I'll close by saying that while customers changing focus and objectives have had a substantial impact on our business, we have taken advantage of our expanded fleet and started many new relationships with additional customers in many basins. And when oil prices rebound we will be positioned to take full advantage of our increased fleet in many areas coupled with many new customers as well as our current customer list. And with that, I will hand it back to Rick now.

[Rick Kasch:]

Thanks Austin. Now Bob will recap our financial results for the quarter. Bob?

[Bob Devers:]

Thanks, Rick, and hello everyone. I am going to provide a brief recap for the first quarter results. Revenue in the first quarter was down 24% to $19.1 million from $25.2 million last year primarily due to the $5.9 million decline in propane revenues as Rick mentioned earlier. Basically in propane revenues, our revenues were basically flat compared to the same period last year. As Rick mentioned anticipated revenue growth from our recent fleet expansion was tempered by warm weather in the D-J Basin and a slowdown in drilling and completion activity across the industry due to low crude oil prices. Gross profit margin in Q1 grew to 41% from 35% year-over-year due to the mathematical impact of lower propane sales. In terms of dollars our gross profit for the first quarter was down $944,000 or 11% year-over-year to $7.9 million. The decline in gross profit was due to several factors including approximately a $400,000 impact related to warm weather in the D-J Basin and approximately $370,000 impact due to temporary price concessions and approximately $200,000 reduction in gross from propane sales. Total operating expenses in the first quarter increased 69% to $2.9 million from $1.7 million in the same quarter last year due to three factors. Number one, we had a $645,000 increase in depreciation and amortization related to our fleet expansion; we had a $267,000 increase in legal costs related to our ongoing defense of patent infringement claims; and three we had a $263,000 increase in G&A expense which is really related to the timing issue of certain discretionary bonuses, bonus payments made in the first quarter versus the natural oil increasing costs. Net income in the first quarter came in at $2.9 million or $0.07 per diluted share versus $4.2 million or $0.11 per share a year ago. Adjusted EBITDA in the first quarter was $6.7 million or 35% of revenues compared to $7.9 million or 31% of revenues a year ago. The $1.2 million decline was primarily due to the $944,000 decrease in gross profit we talked about earlier and the $263,000 increase in general and administrative expenses. As to the balance sheet, working capital remains strong at $3.3 million down only slightly from $13.7 million at year-end. And our current ratio was a solid 3.2

[Rick Kasch:]

Thanks Bob. One perfect key scenario is that working capital remained strong at $3 million and $13 million down only slightly. Thank you. So in closing I guess I’ll reiterate this and in spite of dealing with a couple of challenges that were largely out of our control in the first quarter that’s been the warm weather and declining oil prices. We’re proud of our performance and particularly our continued profitability and cash generation. We have a growing satisfied customer base in some of the best basins in the country; a large modern fleet capable of generating significant revenue growth; a diversified services mix; and a balance sheet that affords a sustained power during this oil price downturn and tremendous flexibility in pursuing M&A growth initiatives. In short we believe we’re well positioned to growth our business and enhance shareholder value over the long-term. As always we appreciate your support. With that I’ll open the call to questions, operator?

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of William Bremer with Maxim Group. Please go ahead with your question.

[William Bremer:]

Nice quarter guys considering the underlying environment which we’re in the first quarter and hopefully now we’re starting to hold these levels of 60 and call it 65 on Brent going forward with. First and foremost given the utilization and your capacity, any more movement Rick in terms of your underlying equipment to the better shales where do you have better pricing?

[Rick Kasch:]

As Austin alluded to in his comments the Eagle Ford and Texas are primary targets right now. We’re actually looking at some also in the Permian area. But Texas is basically where our focus is now and we are seeing the higher rates down there than we experienced in other market sector.

[Bob Devers:]

With that being said, we had a little bit interested some Southern Oklahoma activities with customer lines as well, so we’re definitely looking into that.

[William Bremer:]

And in the past seasonally second quarter and third quarter we get these low, how should we look about the rest of the year as we’re forecasting on numbers? Considering what we had I thought gross margins came in pretty respectable this first quarter. Can you give us some granularity in terms of the underlying pricing that you’re currently having as well as the modifications that you’ve done in your strategy over the last year to help soften the seasonality of your underlying business?

[Rick Kasch:]

Two things and Bob with the answer to your question. One is that the pricing aspects have not been that significant in relation to our total overall operations. As I mentioned in our talks and so forth in the hot oiling, which has been if we call it the most significantly impacted that was about our little 25 and a 6% impact in the month of March for instance, even last for the quarter. Our frac water heating discount as I mentioned was under 2% of revenues and the course in each next couple of quarters frac water heating is almost not existent and so the impact should not be a significant in comparison to prior years we don't give guidance of course as you know but mid quarters that we expect looking at nothing that would change with trends if you will that the middle quarters will be profitable to moderately profitable and we’ll shift the increases in our hot oil business was the expansion in the Texas that we've had so that's where we did. To looking into next year -- into season we think we are well positioned with our customer relationships that we have and have been working with and seen some of the activity a little bit coming back with of the more of the fact that if you remember in the past we haven't had enough equipment to meet our customer demands. This year with the extended fleet we did and course them the in warm weather mitigated our ability for growth impact of revenues in the first quarter. so given the normal winter that coming up we have the expanded fleet that will be able to generate revenue growth over the next season might be unable to provide services if you had to termed out before.

[William Bremer:]

Where just to clarify did you say that next few quarters, the next couple of quarters is a possibility for profitability to the bottom line?

[Rick Kasch:]

Yes. We call it that a break even set of quarters, during the two break even could possibly, with the cost control that we've put in the various yards as well as the increase in the hot oiling activities that we've picked up and we have referred to could very well in that area.

[Operator:]

Thank you. Our next question comes from the line of Brandon Dobell with William Blair. Please go ahead with your question.

[Brandon Dobell:]

Couple of things, I want to focused I guess first on pricing you mentioned from a concessions that you gave in the first quarter how do we think about those same kind of dynamics playing out here in the second and through running season we've heard a number of service companies talking about either discounts or concessions or just pricing structures becoming linked to oil prices, I want to see how you guys think about -- if you are doing that or how you guys think of that as a potential dynamic for revenue growth?

[Rick Kasch:]

Okay. Look first of all is that kind of mentioned frac water heating goes to it's almost nonexistent in the second quarter and third quarters so their relay won't be price concession impact or activity decline impact for those quarters. As far as the hot oiling was structure that we came up with and I actually have to give the credit to Austin for it he’s trying to become a financial guide here.

[Brandon Dobell:]

Perfect.

[Rick Kasch:]

But what can we did on our concessions that we did offer in the hot oiling was we tied it to the price -- with WTI price for the same period. So, we said okay will give you a 10% discount of our standard rates until such time as it depends on which basing we're in because of the difference in cost in each Basin for instance it could be $70 in the D-J or 75 up in the Bakken whatever. But until prices rebound for a sustained period of time and then the discounts goes away and we actually have I think at least one customers sliding scale, one of our major customers. So what the benefit of that is going to be for us of course is when oil does rebound up in to the hopefully in 65-75 range that resident going in and trying to beg for pricing increases from procurement our discount just automatically goes of our invoice and we're back to full prices.

[Brandon Dobell:]

Got it, okay. And then you mentioned sounds like holding off the time being and not surprisingly on incremental CapEx this year what would you guys need to see for that decision to change in either I guess in a small way right adding a little bit of equipment or in a major way and I guess part of that question would be how do you think about the lead times that your fabrication guys are going to need an order to get the equipment delivered on a time frame that you think is good.

[Rick Kasch:]

Just part of you are correct on our CapEx that right now we are not committed to anything and not planning on anything what would change that would be the success of market penetration in the Eagle Ford and Permian Basin that Austin and his people are currently attempting, meeting with live to major customers down there and if we can get into a consistent routine -- the beauty down there is that these companies will use two, four, five, hot oil trucks every day, every week for every year so it’s just continuing year around maintenance work. If we can work our way into that and substantially increase the need of hot oil trucks then that would be what we would do. Based on the comment that we had in press release here maybe going to ’15 in the Eagle Ford in the next quarter or two that might generate a need for maybe a $3 million, $4 million CapEx from the hot oil trucks. We also are looking at acidizing as these markets seem to be crying out to some acidizing services, but we’ll have to see in there because as things decline what we experienced in the past is some kind of major start dropping down into the same size jobs that we do. So, -- but we haven’t -- we don’t really yet. As far as the fabrication often we -- if we decided to turn it on to more order, so if we decided to turn on a $3 million to $4 million of CapEx program our fabricated is kind of committed to a certain time frame, $3 million to $4 million would be the rollout roughly eight hot oil units which could be successfully done in about 120 days pretty easy, he’s ready to go after last year to this year for sure.

[Brandon Dobell:]

And then final one from me Rick you mentioned M&A not surprisingly seems like the amount of stress in the industry is probably going to be higher in the Q2, Q3 time frame than it has been even in Q1. So how do you think about the I guess that fine line between acquiring a company or waiting till it get to the point where it’s so stressed that the assets are up for sell kind of on an involuntary basis or at a distressed level where you can pick up the same kind of equipment and maybe even people at a price that really is just about the asset value as opposed to the ongoing business value. How you think is there a time frame around what you think the stress really gets to some of your smaller peers or you’re already having those kind of conversations?

[Rick Kasch:]

First of all, I would have to look at the different types of acquisition that we have. Our peers are just coming up seasonally, when they put money in their pockets and so forth and they’re feeling -- feel fairly good. Some of them are [indiscernible] going to have a lot less activity and they’re getting realistic actually step by frac water heating companies within the Bakken and I think they had a truck that’s something out in Pennsylvania took their projection of revenues from 2.5 million and 14 actual to 800,000 for ’15. So of them were getting realistic in that aspect. As far as waiting it out we don’t have a particular time table we’re looking at these acquisitions and are deciding from the criteria that I went through one of the things that we’re not going to buy somebody else’s problems. And so kind of what we’re looking for would be financially somebody with a bad financial model, not a bad business model. So again that’s going to some of those guys would level up or starting to feel the pain. I guess what I can comment on is that we’re starting to see valuations becoming more realistic. And the way we’re going to structure these acquisitions where we’re going before we’re seeing 5x - 6x acquisitions, what we’re doing is telling the people upfront when we sit down to talk with these opportunities we right upfront we said look that’s not the world that we believe it is right now. We see a 3x to 4x and out of that multiple we’re going to give you part of the cash upfront instead of the prior 18 months where they just push the pilot cash cost table on a 5x or 6x. We’re saying we’re going to be part of that as the cash less -- some stock maybe, but we’re going to earn out a balance of it, just because of the uncertainty in the industry and also our lack of knowledge of certain services. So with that but we’re also structuring it in a way that with that earn out if they can go above their targeted EBITDA they’ll actually be able to earn a higher multiple on that base projection. I am not afraid to pay for what I get I just don’t want to pay for not getting it.

[Brandon Dobell:]

Got it. Okay, perfect. Appreciate it, thanks a lot.

[Rick Kasch:]

And let me address something to build drummer in your question about profitability on the quarters mixture of what my comment was with on the EBITDA basis whether we get to an earnings per share I don’t think it’s going to be a significant amount. But after all the depreciation everything it’s probably going to be closer to a break ever or loss. Next question?

[Operator:]

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

[Jeff Grampp:]

Just I guess first one to start off with just a quick clarification one, on the kind of expectations or plans to get up to the 15 hot oiling units in the Eagle Ford. Is that kind of within your fleet right now or do you guys need some growth CapEx to be able to have those units out there?

[Rick Kasch:]

I think to get to a full 15 units we were absolutely fit out and really out the small CapEx plan. We can get most it with deploying assets out maybe some markets that quite getting the same utilization or maybe still in the little bit of pricing pressure we would redeploy into South Texas.

[Jeff Grampp:]

Okay, perfect. And then I noticed you guys kind of hinted that hot oiling work maybe slow up a little bit in the first quarter with some deferrals, have you guys seen that continuing into 2Q and then maybe just kind of basing this either on conversations with operators are on the last commodity downturn, when do you guys generally see things turnaround in terms of the hot oiling demand?

[Rick Kasch:]

So, this kind of slows down but the deferral that is going to tight a little bit more to West Texas prices, some of are places of operation such as out in the -- out in the Kansas market and so this they begun operations already. Some other places where higher cost produce -- they are still deferring some of their activities. It kind of just changes; some of these are new areas of operation for us. So we weren’t there in 2009 we have a good picture on some of the stuff that we currently, -- we’ve been in those markets for some quite some time it varies by basin sometime 60-90 day window, they start to turnaround on their maintenance programs for sure.

[Jeff Grampp:]

Okay, that’s helpful. And then last one from me on the bi-fuel option here I think you guys mentioned in the last call there was maybe two-thirds, one-third in favor of guys still using propane, can you talk about how that kind of trended as you exited the heating season and maybe how do you guys think that how will the split kind of look on exiting season.

[Rick Kasch:]

Yes, I think by the end of the season here that number of two-thirds utilizing propane and third using the natural gas abilities I think it’s going to come down even more closer to fifty-fifty split, 50% using propane and 50% using natural gas as source. It looks like there is still movement, we’re still working out some buzz utilizing well gas now and it down here in the domestic states where [Delora] 48, well that’s kind of a new thing. We’re not using LNG or CNG, using the actual well head gas. So we’re working side-by-side with some of our customers kind of refine some of the processes.

[Bob Devers:]

And Jeff keep in mind that even with the significant decline in propane pricing the LNG they provide us is basically their owned byproduct. So they’re saving money even if the low propane price is right now when they utilizes this, which I think one of the reasons that we’ve been able to not take big pricing concessions on equipment rental basis for say excluding propane is due to the fact that we’ve been able to offer a lot of our price concessions by partnering with them, utilizing natural gases of fuel source instead of propane.

[Jeff Grampp:]

All right, great. Thanks for the color guys.

[Operator:]

Thank you. Our next question comes from the line of Rudy Hokanson with Barrington Research. Please go ahead with your question.

[Rudy Hokanson:]

Hi. Thank you. A number of questions, one, I just want your clarification with the patent losses the $266,000 that was expensed during the quarter. Where do you see that going forward, what’s the status of law suit right now?

[Rick Kasch:]

Good question Rudy. The best thing to do on the overall cost based on what you can read in our 10-Q we anticipate that cost declining significantly over the next couple of quarters. We’ve had some favorable happening in not just our case but in other cases and one in North Dakota and with the patent office, where -- what I can say that the judge in North Dakota invalidated the patent, now that’s subject to appeal, that’s not a final order and then the same thing happen in the patent office, where they rejected all of the claims of their patent, but again that subject to appeal. So it’s not over, till it’s over, we used to say. But we do because of this we feel that expenses should decline significantly in the future.

[Rudy Hokanson:]

So for the sake of modeling, would it be fair to take in the next couple of quarter a couple of hundred dollars out each quarter of SG&A?

[Rick Kasch:]

We’re going to have -- for April, I mean this is all recent happening so we still have expenses in April with 100 [grand] or something like that. So it wouldn’t be as dramatic because in second quarter, third quarter you could again I’ve got to caution that if things were to flair back up the cost could come back.

[Rudy Hokanson:]

Okay. And then on the timing of the bonuses the 263,000 is that basically something that was just in the first quarter then or is there anything that goes forward with that?

[Rick Kasch:]

That was just in the first quarter.

[Rudy Hokanson:]

Austin mentioned and I couldn’t quiet hear it about in one area being put unnoticed to be ready to come back. Could you clarify that a little bit better with that -- with hot oiling and was that a particular basin what implication was that that you’ve already been put on noticed to come back?

[Rick Kasch:]

So what that was we just begun providing a large quantity of frac heating services in early Q1 in the Bakken for one of the bigger players up there and that it was with EOG and they put us on the vendor list simply due to the fact utilize the well gas being produced, it’s the regulation stiffen up there for the flare gas. We were actually burning flare gas heat and frac water so we’re serving multiple purposes. When oil prices declined they seized operations as far as the fracing operations, well they reached out to us recently and so they’re going to go ahead and start bringing some crews back on and be ready to go back to heat frac water.

[Rudy Hokanson:]

Okay, so again the heating the frac water because of the acquisition you made last November from the comments you had that area in the Bakken requires some of the frac heating capabilities that you have, so they won’t that equipment won’t be totally idle in the second and third quarter, is that the best way to read it?

[Rick Kasch:]

It’s not this time of the year it will be more of a few pieces of equipment because it’s not -- you’re not dealing with all the freezing issues and stuff once it comes Q4 and Q1 during the colder months then be quite a few more pieces of equipment, but Q2 and Q3 it’s got the potential to keep utilization of four to six units on a minimal basis.

[Rudy Hokanson:]

And then again given everything that you said in the added equipment that you do now having your arsenal, looking at the seasonality second and third quarter should have and especially with going into the Eagle Ford, there should be up revenue in each quarter, correct?

[Rick Kasch:]

Yes, that’s what we’re expecting and especially in the hot oiling sector and acidizing division now frac water heating once again as Rick alluded to the E&P cut backs it’s traditionally we go our equipment goes idle this time of the year it’s just that up in the Bakken there is a chance that we’ll get from frac heating in Q2 and Q3.

[Rudy Hokanson:]

And going back to what you said as well Rick I am just wanting make sure I am clear on this is that and looking at the earnings in each quarter it will be somewhere around breakeven but we should take in effect what we’re looking at our other parts of the modeling that there is an additional $645,000 in each quarter due to the greater amount of equipment or roughly $650,000 given the timing and some of the stuff coming in at the end of the quarter. But something like that that’s going to be hitting the bottom line before we see a penny one way or the other?

[Rick Kasch:]

Well, my comments again were on the EBITDA we see that as a breakeven and possible profitability depending on these efforts in Texas. When you start looking at the bottom line we’ve got to throw in depreciation, et cetera. So we will be at a loss which would probably be comparable to the prior year.

[Rudy Hokanson:]

So EBITDA actually breakeven compared to like 1.3 in the second quarter last year?

[Rick Kasch:]

Yes, the breakeven to might be slightly negative but it should improve by that time because again of those efforts in Texas.

[Rudy Hokanson:]

Okay, but that time the EBITDA line and that’s what you were saying?

[Rick Kasch:]

Correct.

[Operator:]

Thank you. Our next question comes from the line of Steven Ralston with Zacks. Please go ahead with your question.

[Steven Ralston:]

Good afternoon. Is there a dynamic occurring that because of your new platform your bi-fuel system then it clearly seems that your customers are preferring it for various reasons? And unfortunately it’s happening during the tough environment. But it seems like during this period ENSERVCO’s revenue base has been lower and will grow from that point going forward when there is a recovery, but the margins will be higher. So looking out a few years the revenue base will basically be on a little lower curve but growing but the margins will be higher -- and it seems like it would be both on the EBITDA margin and the gross margin because when you take extra propane cost you're higher margin company.

[Rick Kasch:]

Right, if you're talking margin I thought you were talking about the revenue line I was going to say that hasn't declined and gone down other than for the propane sales.

[Steven Ralston:]

Exactly but your reported revenues are going to be starting at a lower base because of this transition period and then hopefully growing at the normal path it would have with Capex program, but the resulting company Enservco will have higher margin company, which has very significant implication in evaluation.

[Rick Kasch:]

Right, you're correct.

[Steven Ralston:]

Okay because it seems like, this is you're going to backwards, there is going to be a constant migration to the bi-fuel system where the customers are using their own well gas or supplying their own fuel and so that margin seems to be now higher margin and then in Enservco and I am miss-reading that?

[Rick Kasch:]

No, you're right on target there.

[Steven Ralston:]

Okay and I have also heard that fracking may be stimulated by using finer size [propane], there are a lot of wells that's been postponed at least the completion phase for the fracking and they're looking at methodologies to basically complete the well but not have full production and by using finer size [propane] they can basically get lower production and the well will last longer so they'll have minimal production now while prices are low and when prices increase then they can ratchet up the production of well. Are you hearing anything alike that that might stimulate it over the short terms or near term this year?

[Rick Kasch:]

The only thing maybe relative to what you're referring to Steven is, I know there is started to become some refrac going on that existing well try to enhance current production, get them closer back to the IP, but as far as you know known the profit size and stuff, I couldn’t tell you one or another that relates to that.

[Steven Ralston:]

But I would assume that if the fracking completion process restarts they'll still need hot water fracking services according to the new methodologies they used now and using higher temperature oil and water.

[Rick Kasch:]

Yes, it's correct, that is very correct.

[Operator:]

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

[Bhakti Pavani:]

Most of my questions have been answered but just a couple, the hot oiling unit that you're referring to in the Eagle Ford and you expect that units to go up to 15 by the end of Q2, Q3. I was just wondering is that for single customer you're talking about?

[Rick Kasch:]

No that's -- a portion of that is one customer probably 40% of 15 units is a one customer, we're currently in the process of signing an MSA with one the biggest players down there that could utilize [600] units, so 15 units is kind conservative. We're currently servicing 3 to 4 different customers at this time right now.

[Bhakti Pavani:]

And that's all exclusively in the Eagle Ford?

[Rick Kasch:]

Yes, ma'am.

[Bhakti Pavani:]

Okay and the new MSAs that you refer to -- I am sorry I miss heard but you did mention about signing the MSAs with XTO, Chesapeake and EOG, are those are the customers that you're referring to?

[Rick Kasch:]

No that was the part of the comments we said that who our existing customers that we have in other basin that we're trying to get into that work down there in Texas, so it's not new MSA it's just get their people in the Eagle Ford to want to use us that we already have an MSA.

[Bhakti Pavani:]

And the MSAs that you're signing are those exclusive for hot oiling services or frac water or kind of combined?

[Rick Kasch:]

In South Texas -- it's we're trying to get acidizing on them, it's same from the word go but definitely hot oiling there is not really any frac water heating occur than other.

[Operator:]

Thank you. Ladies and gentlemen, we have no further question at this time. I would like turn the floor back over to management for closing remarks.

[Rick Kasch:]

Okay, let me thank you all for joining us today. One thing that we forgot to mention was some of the activities that's going on, I do see several questions about, that has to do with company's leaving their well behind pipe, not doing the completion, waiting for the price to rebound. We are experiencing that I can let Austin go into more in depth in that but you probably seen the same articles, where up in the Bakken, they’ve got 900 to a 1,000 wells behind pipe yet to be completed. Of those our customer that Austin was talking about, the firm they used has the majority of those so that’s where this increase of activity in coming back into the Bakken is significant for us. So, with that I’ll close. Again as always should you have any questions for any of us, please feel free to give us a call. And thank you for your support.