Enservco Corporation
Q2 2015 Earnings Call Transcript

Published: 15 Aug 2015

[Operator:]

Greetings and welcome to Enservco Corporation 2015 Second Quarter Earnings Conference 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, Jessie. Hello and welcome to Enservco's 2015 second quarter earnings 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 thanks all of you for joining us. First of all I want to apologize for holding the call on a Friday afternoon in August that's the [indiscernible] I know it's vacation time, but we've been purposely traveling looking at acquisitions that was really the best we could do right now. I will start out with a reminder that Q2 is one of our two off season quarters along with quarter three where the impact of revenue and profitability plays a relatively minor role in shaping our full year results. We had what I would characterize a good quarter considering our industry continued to feel the effects of the oil price downturn and the results from slowdown in drilling, completion and maintenance activity which for us was further complicated or compounded by weather disruptions in some of our key operating areas. Let me give you a couple of data points to support my contentions. First, of the $1.6 million decline in revenue year-over-year, price concessions were only 4% of total revenues, in other words only 12% of the decline, which in our view appears to be much less than what our peers have suffered from price concessions and lost business. The significant drivers of our revenue decline were lower propane revenue which accounted for 43% of the decline and a decline in water hauling revenues which accounted for 45% of the decline. We have discussed reasons for reductions in propane revenues in prior quarters. The lower water hauling revenues were result of the conscious strategic decisions to reduce the amount of low to little margin water hauling services. Second, the quarter benefited from the initial contributions of two new revenue sources we brought on-stream resulting from our M&A and organic growth initiatives. The first one added incremental revenue in the northern Bakken where as you know temperatures stayed cooler longer and demand for frac water heating and hotter only and extends later into this spring and commences earlier in the fall. This was made possible by our Q4 2014 acquisition of equipment and real estate in Tioga, North Dakota where we picked new customers and are extending working relationship with existing customers well north of our chiller locations which serves the southern Bakken area. Austin will provide you some more detail in his comment. As we recorded in our first quarter conference call, the second new revenue stream comes from our move into the Eagle Ford basin in Texas. Austin is also going to update on that he can just meet. We believe these resources of revenue are strong validation of our M&A and geographical expansion strategies which are geared towards acquiring and/or redeploying assets that can provide services on a more year round higher margin basis and maintain our maintenance versus drill dependent balance. Unfortunately these new revenue streams were offset by extremely wet weather in April and May that resulted in flooding road closures and general logistical problems for our customers and for us and the conclusion of a couple of projects that had generated revenue for us in the second quarter last year. These projects were unusual in that they were one-off assignments outside of the normal scope of services so when they were concluded they were not replaced. Turning to our profitability, I want to provide a little color on the numbers behind the numbers. Operating income before depreciation and patent litigation costs was down approximately 420,000 in the second quarter. We estimate that 226,000 of this reduction in profit was attributable to price concessions that I mentioned and 152,000 attributable to the impact of lower propane revenues. The remainder of the reduction was related to an increase in expenses related to our fleet and geographic expansion, such expenses is included annual repairs and maintenance insurance supply and site overhead. In addition due to the increase size of our fleet we are having to retain more frac water heating operators through off season in preparation for the upcoming heating season. We this cost will eventually be more than offset when our utilization increase as we enter heating season. A decline in adjusted EBITDA in the second quarter was 310,000 not a big number relative to our full adjusted EBITDA total which as you know in 2014 was 11.5 million. This decline is primarily attributable to the temporary price discounts and the loss of profit from the decline in propane revenue mentioned previously. On the bottom line in other words earnings per share in addition to be an impacted by the factors I just mentioned we incurred higher depreciation expense related to our fleet expansion in fact one half of the increased in our per share loss was attributable to the increase in depreciation expense that doubled year-over-year. The other side of this point of course we now have a much larger fleet with which we enter the upcoming heating season and are position to continue growing into new markets and cash greater market share in traditional market. Again Austin will be providing some additional comments in that regards. However depreciation is the fact of life on a capital equivalent intensive business and is particularly impactful when we're judged on an earnings per share basis which in our view can be misleading. We think adjusted EBITDA is a much better metric for rating our performance and valuing our business. The takeaway I want to leave with you regarding the quarter's operations is that from both the revenue and profitability standpoint the impact of the industry downturn on ENSERVCO has been minimal relative to what we're seeing with other companies in our space. Now a few comments on M&A, as I mentioned at the beginning of the call M&A is become a very important activity for us in recent months and we have been spending a significant amount of time visiting potential candidates. Granted right now we don’t have a lot to show for it other than our [indiscernible] gas at acquisition last year. But that’s not for a lack of effort and activity on our part. We are approaching this process in a very prudent discipline way. We have reviewed numerous acquisition targets and have seen some terrific opportunities with company that has complementary services customer basis and/or geographic footprints. Where we are hitting a snag is in the area of valuation. We are not willing to over pay for these companies. We believe our patient will be rewarded this time build on in the company's increasingly feel the effect of the downturn on their balance sheets. We do currently have a couple of strong prospects that are in early stages of discussion. In the mean time we will continue to maintain a strong balance sheet with a solid banking relationship and are keeping our powder dry confident that we can get something done. As a reminder our acquisition criteria, our companies strong EBITDA margins that can accretive to our earnings, complementary services to fill the cross selling opportunities and a strong management team that will remain in place post acquisition to ensure continuity and customer retention. With that, I'll turn it over to Austin.

[Austin Peitz:]

Thanks Rick. As Rick mentioned the Texas expansion has made a positive impact on our gross in the second quarter. Right now we have nine hot oiling units running at good utilization working with companies such as EXPO, EP Energy and EOG and some smaller independent producers. But even with our strong reputation and connections with most of the major players in the E&P world, they remain somewhat of good board network in our new markets. But we can't complain too much about it since that's something we benefit from an earlier established service areas. In the meantime we're making steady progress in expanding our truck count in Texas in the very near future. By the way as we had anticipated the Texas operation operated at a breakeven level in the second quarter due to the normal start up and onetime cost associated with moving into a new market area and deploying additional assets and support equipment. This was also a result of one of our new major customers starting to make a significant impact on our utilization about half way through the quarter despite some challenges due to the heavy rainfall in the area. Also want to give you a quick update on Tioga operation and elaborate on Rick's comment about the extended heating season. The heating season in the Northern Bakken area last longer into the spring and began earlier in the fall, both very positive aspects of the region that will help generate additional revenues in the second and third quarters. We are putting extra efforts into expanding our frac water heating services in this market by leveraging our relationships we have made since the acquisition which was primarily performing hot oil services. This is a market where in the past we have never been able to obtain any significant frac water heating market share. At this time we are proud to report that we have received substantial support and have verbal commitments from some of the most active producers in the region to provide heating services for the upcoming season. Likewise we burn new hot oil business as well in this year. We expect both Texas and Tioga to begin contributing to profitability in the third quarter. Taking a broader perspective with the additional equipment that we have from last CapEx program we are pursuing opportunities we had to decline in the past due to our new equipment to meet our customer demand. We are anticipating debt utilization of our additional capacity in the upcoming season in fact our efforts have resulted in this obtaining new phase with major operators throughout many areas of our operation even in the current industry environment. We are also in the process of completing several additional MSAs that will benefit both our hot oiling and frac water heating operations. The reason this contributes to our positive outlook regarding the upcoming season is I believe is that these operators would not put the effort into processing new MSAs if they weren't planning on utilizing our services. In addition we’ve had discussions with several of our current customers who have been asking if we will be able to service them for the upcoming season. From what we’ve been told as of now it appears that even though there is the slowdown in overall activity there should be plenty of demand for our services as we gain market share and new customers as well. As everyone knows, a common topic in the industry right now is further price concessions. At this time knock on that wood; our customers are now requesting further discounted prices. With that I’ll hand it back to Rick now.

[Rick Kasch:]

Thanks, Austin. So as you can glean from Austin's comments the major fleet expansion we undertook over the past year was well timed. They can manage continuing and potentially growing opportunities in our existing service areas as well as the new areas of operation in Texas in the Northern Bakken. Without breaking our policy of not predicting specific levels of revenue growth, we can comfortably say that we expect that our strategy of doubling revenue capacity with our fleet expansion was sound when we're looking forward to see how it played out when temperatures start dropping beginning in September. And to take that a step further we are also well positioned to take advantage of even greater increases in demand for heating services once oil prices begin to recover in what we think will be the 2016 timeframe. So now we have Bob who will recap our financial results for the quarter and year-to-date. Bob?

[Bob Devers:]

Thanks Rick and hello everyone. I’ll begin with a brief recap of our second quarter results. Revenue in the second quarter declined 22% to 5.7 million from 7.3 million in the same quarter last year. The decline was primarily attributable to two factors one, propane revenues declined 682,000 due to the year-over-year decline in propane prices and a decrease in propane volume sold due to customers taking advantage of our bi-fuel capabilities and/or providing their own fuel source. And two, $718,000 decline in water volume revenue, a business we’re making conscious decisions to not [indiscernible] little or no margin. As Rick mentioned price concessions were not a major factor in the revenue decline amounting only to 4% of revenue in the quarter. In terms of revenue mix, hot oiling revenue excluding propane was down 14% year-over-year due to a cessation of two large hot oil projects. A hot oil project in the Bakken tied to a rail completion program and another hot oil project in the D-J Basin. Heavy rainfall and temporary price concessions also contributed to the year-over-year decline in revenue. [Indiscernible] revenue was down about $249 year-over-year as operators postpone or delayed the train maintenance programs. These revenue declines were offset by incremental hot oil revenues from our Tioga acquisition and expansion in the Texas. Gross profit for the second quarter declined to 139,000 from 749,000 last year due to a combination of factors. The temporary price concessions and lower propane revenues Rick mentioned start up the onetime cost related to our expansion in the Texas and unexpected downtime caused by the aforementioned wet weather in the second quarter. Gross margin for the second quarter declined to 2% of revenue as compared to 10% for the year ago quarter. Gross margins are typically lower during our second and third quarters due to the lower revenue base relative to our fixed cost components. Fixed cost also increased due to our fleet and geographic expansion. Total operating expenses in Q2 increased 578,000 to 2.5 million from 1.9 million in the same quarter last year primarily due to $713,000 increase in depreciation expense related to our fleet expansion and to a lesser extent a $56,000 increase in legal costs associated with our defense against patent infringement claims. Partially offsetting these increases was $192,000 decrease in general and administrative expenses resulting from cost saving measures implemented. A quick positive note on the subject to patent litigation expense, our patent litigation case has been stayed pending an appeal of a judge's ruling in North Dakota case that was favorable to our case. This has contributed to a $239,000 sequential decline in litigation costs in Q2 versus Q1. We expect ongoing expense to be minimal as long as this case has stayed. Lower revenues combined with other operating expenses led to an operating loss of $2.3 million in the second quarter versus an operating loss of $1.2 million in the same quarter last year. Adjusted EBITDA in the second quarter was a negative 621,000 compared to a loss of 311,000 a year ago. As Rick mentioned, the incremental loss this quarter is not significant in relationship to our full year adjusted EBITDA. Our net loss increased to $0.04 per share from $0.02 per share a year ago, but again 50% of this increase was due to an increase in non-cash depreciation expense stemming from our fleet expansion. During the second quarter, we generated $6.5 million of net cash flow from operations and used 6 million of these proceeds to pay down our senior credit facility with PNC Bank to $18.6 million. We currently have approximately 13 million available under [volume] the reduction in debt improved the loss term debt to equity ratio to just less than 1 to 1 as compared to 1.65 to 1 at our 2014 year end. Our relationship with PNC remained strong and they're on board with our growth strategy including our focus on M&A. We will close the second quarter with working capital of 5.9 million and our deferred ratio was a solid 3.9 to 1. Stockholders' equity totaled 20.1 million and our total liabilities to stockholders’ equity came in at 1.3 to 1. Looking now at our year-to-date results, first half revenue decreased to 24.8 million from 32.5 million in the same period last year, most of that decline was due to the decline in propane revenues previously described. Gross profit dollars declined to 8 million from 9.6 million but our gross margin increased to 32% from 29% due primarily to the mathematical impact of lower propane revenue and costs. First half operating expense grew by 49% to 5.4 million from 3.6 million a year ago. This increase was primarily due to a 1.4 million or 97% increase in depreciation expense due to our fleet expansion and a $322,000 increase in patent litigation expenses. General and administrative expense grew only slightly in the first half as we are continuing to carefully manage our cost structure. Operating income in the first half of 2015 declined to 2.7 million from 6.0 million last year reflecting lower gross margins and higher operating expenses specifically depreciation and litigation costs. Adjusted EBITDA on the first half of 2015 was 6.1 million down from 7.6 million a year ago. Net income was 1.3 million or $0.03 per diluted share versus 3.3 million or $0.09 per diluted share last year. The Company generated 12.7 million in net cash from operations in the first six months of 2015, up from 11.2 million in the same period last year and we used 10 million of the proceeds during the first half to pay down the PNC credit facility. As reported on our last call, we received 100% of our new fleet from the 2014 CapEx program including units in the Tioga acquisition, our expanded fleet numbers, 81 frac water heating units up from 42 last season, 59 hot oil units up from 27 last year, and seven acidizing units up from three a year ago. The average age of our well in hand fleet is only about three years. The expanded fleet gives us the horsepower we need going into that 17 season and positioned for an accelerated growth once oils prices rebound. In terms of CapEx we're waiting to make new fabrication decisions pending more priority in the E&P budget direction. At this point, we are not committed any CapEx for the 2015 and beyond maintenance revenue which we still expect to be in the range of 1.5 million to 2 million Right now any new equipment fabrication would probably come in the areas of hot oiling and acidizing and a lot of this depends on the pace of the volume going expansion in the Texas. With that, I'll turn it back over to Rick.

[Rick Kasch:]

Thanks Bob. Before I open the call to questions, I'd like to comment on what I believe is then an over action by the market on our share price in the context of the downturn in the industry. While there is no question that the industry downturn has negatively impacted the oilfield services sector as a whole with few if any public companies stock [indiscernible] we think its bit overdone in our case. While shares of companies like Halliburton are down 50% from their 52-week highs, Enservco is down in the range of 75%. That kind of evaluation is prevalent in light of the following. We are holding up very well by any number of measures in the middle of one of the biggest oil price decline environment in many years. Much better than it appears many of our pure service companies are. We have plenty of steam power along a strong balance sheet and a solid banking relationship. We have a large royal customer base comprised of [tax] E&Ps that value our work and in some cases are shrinking their vendor list to our benefit. We also have a diverse geographical footprint in most of the major basins in the U.S which press our risk and exposes us to new business opportunities throughout the country. We have and anticipate continuing to expand our operation through accretive organic and M&A activity. And we have one of that industry's most modern fleet which has recently doubled in size which in effect doubles our revenue capacity and allows us to service companies that we had to turn down in the past. We run a lean efficient operation and always put our shareholders' interests first. Finally I believe the market is not measuring our performance properly, many are just looking at our earnings per share when in fact we feel they should be looking at our EBITDA as a measure. That said I'll get off my soap box and I'll turn the call over to the moderator for questions. Moderator?

[Operator:]

[Operator Instructions]. Our first question is from the line of Brandon Dobell with William Blair. Please proceed with your question.

[Brandon Dobell:]

Could you may be talk about your expectations for cash from operations in the back half of the year relative to the first half of the year. I know there are some seasonality differences, I wanted to get a sense of how we should think about that and then maybe either Rick or Austin maybe as you look up from quarter end through now, I guess how much more or less predictable have the conversations with customers or potential customers become i.e. you're getting more confident you got a line on how they're going to act in the back half of the year or less compensate this?

[Rick Kasch:]

When you look to our cash flow going into third and fourth quarters we actually have deficit cash flow due to the build of receivables from the business increase. Looking strictly to that is we've always needed in our seasons to have a working capital line of maybe $5 million and $6 million in order to cover that until we get in through into the first quarter and then start monetizing receivables here in the second quarter. In regards to the predictability of our business going forward and what's happened and what we've seen I'll let Austin start with that.

[Austin Peitz:]

Well the first part of your question was [indiscernible] now. We've seen activity levels for us on the maintenance aspects actually increase somewhat and with the potential that continue to increase some of the feedback we're getting from our customers right now the ones that we're servicing on the year-over-year basis it looks like activity levels are going to sustain to basically what they are right now. There was an initial talks of increased activity until this last slide in prices now it appears that the activity levels are going to kind of maintain so, and that’s with our year-over-year customers. And so that the new customer which our make-up of our customers as a year-over-year comparison is going to be totally different and in years pass due to the broadening of our customers and geographic areas and just people we've had to turn down in the past due to lack of capacity. So looks like we're going be very successful and obtain in some additional market shares as well. So that’s going to help our utilization as well.

[Brandon Dobell:]

And it sounds like from your comments that forget the impact of propane for a second, looks just kind of core pricing has been relatively stable. I know it was probably a bit of a down tick Q1 to Q2. But it feels like you guys are seeing a lot less pricing volatility or pressure even as you transition from second quarter into third am I reading your comments correctly?

[Rick Kasch:]

Yes that’s correct we took our price concessions and discounts during Q1 when the first slide started to occur in the commodity price. And at this point in time there has not been any additional discussions or request from our customers or anticipate any on the further discounts.

[Brandon Dobell:]

And then final one for me. How do we think about the water hauling business back half of the year or in to next -- is there a bit more concerted effort to get out of that business or is it just the market's so slow that you're going to involuntarily say well we'll just kind of let it go as its going and how do we think about the I guess the trajectory on that revenue lines in the next two to three quarters.

[Rick Kasch:]

The one that Bob alluded to it became under a little bit of pricing pressure which we had created little to no margin at all, we're definitely in the market for an opportunity that would be a positive cash flow business and profitable business so we're not blind to provide in that service but we don’t want to do it for nothing in return.

[Austin Peitz:]

I think what you will see is that segment of our business that continues to be almost a breakeven type situation, we hope to improve that a little bit through this selective declining if you will of customers where the prices that they want us to achieve no need to doing it for practice.

[Operator:]

Thank you. Our next question is coming from the line of Jeff Grampp with Northland Capital Markets. Please proceed with your question.

[Jeff Grampp:]

Hi guys thanks for all the color earlier. Wanted to talk about the upcoming heating season and you guys seeing fairly bullish about it given the underlying macro environment, it's certainly good to hear, so just kind of wanted to get a little bit more color about how you guys are seeing that play out in terms of what's giving you that confidence? Is that discussions with the operator that you guys have worked with before is it rig counts and then uncompleted well inventory or just kind of more color on that and then kind of secondly Rick you kind of highlighted potentially seeing some year-over-year growth heating season to heating season, is that going to be top line and bottom line or just kind of wanted to drill down that a bit as well?

[Rick Kasch:]

Sure. As far as the upcoming heating season expectations, our comments there have been based on several meetings with lot of our recurring customers if you will from last season, actually them calling us wanting to know here is how much I'm going to need, how much equipment I'm going to need and that between what they saying and new customers we think we'll be at a very strong utilization, so that's coming from talking to the people in this field have nothing to do, we don’t look at rig counts and what's going on there, it's just a factor of -- I think I had mention it to you before. In prior years we never had enough equipment to satisfy the needs of our customers. With this decline in their activity that balance seems to becoming into equality and therefore we should see a fairly good results for this season and for your second half both in top line and bottom line.

[Jeff Grampp:]

Okay great to hear. And then just kind of thinking strategically about the prospect of the business going forward and I know doesn’t make a whole lot of sense to be expanding the business and spending growth CapEx right now but just kind of thinking moving forward is it fair to say that on annualized basis you guys can kind of continue with the current demand and show some profit in the free cash flow positive and continue to reduce debt or increase your drive path or is that a fair way to look at things?

[Rick Kasch:]

Yes. We know what we'll be generating next, cash paying down debt and or using it for an acquisition; we are not even near what I would call breakeven cash flow on an annual basis.

[Jeff Grampp:]

Okay prefect. And then last one from me, just kind of building on that thought and given your commentary Rick on the valuation gap between where you guys see things and where the markets maybe seeing things and missing things, have you guys considered a stock buyback or something of that ilk to kind of capture that gap in the interim here?

[Rick Kasch:]

We have -- in fact that question is in front of my Board as we speak, we're looking at it, we're trying to consider, of course what the benefits can be and then also the aspects of conserving our cash right now with everything in the industry either as again as I mentioned for acquisitions if we could find something, so I won't say no and I can't say yes but we are looking at it and discussing it.

[Operator:]

Thank you. Our next question is coming from the line of Rudy Hokanson with Barrington Research. Please proceed with your question.

[Rudy Hokanson:]

Thank you. A couple of things, one I saw a headline this morning talking about the El Nino that's building over the Pacific and that could have one of the biggest effects on the United States in decades this winter. Is there a contingency plan if this turns out to be a warm winter?

[Rick Kasch:]

Well our contingency plan would basically be with idling trucks, reducing personnel counts that kind of stuff. I believe I may -- I don't know if the article came out today I saw one about three week ago about that same subject and as I went through the detailed maps and the good news was is that it didn’t quite hit our -- for instance it was normal for our [indiscernible] up in North Dakota I think it was drier than normal they were expecting there but pretty much temperatures to be average, so drive for us is great, average temperatures is average temperature is great for us so that basically what I saw from at least [indiscernible] about what the impacts would be as far as temperature, moisture and so forth.

[Rudy Hokanson:]

Okay. Thank you. That’s a good insight. Also could you explain a little bit more watching that in the press release where you said you’re looking at acquisitions with good business models but poor models?

[Rick Kasch:]

What we mean by that is we are not going to buy company that has a business that can’t be resurrected for one thing and it has a good business model meaning while it was operating or continues to operate it still generates good profit margins, but the fact that they got themselves generally leveraged has effected them so to that let me give you just couple of the acquisitions we’ve looked at. One was the company that actually had some great expertise in the service they provided. They had some good activity until prices started declining, but they’ve gotten over levered and when the downturn came they didn’t have strong enough customer relation to maintain the business, so here is a company with a good business that very complementary to what we do, we’d love to get into it and they are having financial problems because their customer relationships which we know we could get them in to certain customers. But they don’t have and they’ve got debt that's eating them alive. So that was with one company. Another company we’ve been looking at, it actually is a good service, has about three or four different service lines within their company, but they were spending 52% or 55% of their EBITDA on debt service. They had gone -- not counting some expensive leases that they had which was cutting margins on that portion of business that we’re using leased assets for by 16%. So again that’s what we mean by that Rudy. A good business that was doing fine with everything as was going through the higher oil prices, but with lower price decrease in activity is something they got caught and are in financial trouble, so that’s what we call the bad financial model.

[Rudy Hokanson:]

Okay. Weill it more than likely be a service that would not be seasonal?

[Rick Kasch:]

Yes, that’s one of the primary factors we’re looking at is business that are not seasonal and maybe a little --

[Rudy Hokanson:]

Okay. And then just a follow up I think was on Brandon’s first question that on the water -- around the fluid handling, do I understand it correctly that this current run rate of about 1.7 million is sort of a steady state right now because you’ve got rid of some businesses that were unprofitable or is fluid handling which has never been a focus of you something, that you’re likely to keep phasing out so that we could see it become new or sold within the next 18 months.

[Rick Kasch:]

Let me address a couple of things that you bring up there, as far as the water hauling, we see a sustained running rate of probably 1.5 million a quarter based on where the business is at this time. We will continue to evaluate the business either being presented to us or that we’re doing for profitability and if it’s not there then we will perform those services and maybe redeploy assets. We would love to sell the major component of our water hauling as we’ve mentioned in the past, it happens to be in a very steady market current and there hasn’t been a lot of interest down there. But again we only have three million invested in it and that’s about what we get out of it. So we probably continue to see those levels of water hauling that I’m talking about but hopefully we’ll see some higher margins as we get more selective on our customers.

[Rudy Hokanson:]

Okay. And then on the issue of propane what kind of -- and if this has been asked in another way I apologize, but what do you think the sensitivity is going forward in terms of a drop in propane while it is propane revenues, I know that it’s been considered in the past where things were much stronger to be more of a pass through, but there is some profitability your impact on gross profit related to it and I was just wondering what you think the sensitivity of the revenue on the propane might be as your customers are finding that either want to use the bi-fuel or find another source on their own.

[Rick Kasch:]

We think that what we’re hearing from our customers as far as what they’ve been talking and asking about either using propane from us, they supply us using LNG or well gas. Things at the impact is not going to be significant it's pretty well leveled out at this point except for probably one or two customers it's all pass through is propane. So we don’t see a big sensitivity to our numbers going forward.

[Rudy Hokanson:]

Okay so that's pretty well over.

[Rick Kasch:]

Yes, go ahead.

[Austin Peitz:]

Yes, it's pretty much over but we came out of last year whenever we're comparing year-over-year financials out of record high propane prices to coming back currently to normalized pricing, so that's also comparing propane at some of its highest prices so it's kind of leveled out.

[Rudy Hokanson:]

Okay so third quarter should be both an issue of prices having come down last year, midyear and also a matter of customer demand probably stabilizing?

[Austin Peitz:]

Correct.

[Operator:]

Thank you. [Operator Instructions] Our next question is coming from the line of Bhakti Pavani with Euro Pacific Capital. Please proceed with your question.

[Bhakti Pavani:]

In your earlier comments you did mention that your expansion into Bakken and Eagle Ford has been certainly very promising just kind of trying to understand or get more granularity on that, what percentage of revenue did those two regions contribute in the quarter and how do we see that changing in the back half of the year?

[Unidentified Company Representative:]

Bhakti you have the percentage of those numbers, maybe we can get them for you here in Bhakti. I don’t think we have that right in our hands.

[Rick Kasch:]

And I can go and take the second half on that question real quick, as far as looking into the back half of the year the northern Bakken division and the Eagle Ford division. We anticipate will start contributing a lot more to the gross revenues of the businesses as well as the profitability as we alluded some of the fact that the northern Bakken region were haven't very good feedback from customers providing frac water heating services in fact we've had verbal commitments from two of the major players in the industry up in the Tioga area as far as providing frac water heating services from. For the upcoming season which is traditionally a market we have left untouched because of some competitor issues and stuff like that and now that we've got the relationship in place what we've established with the hot oil services. Its open some of those stores and we're excited about capturing some of those opportunities so we feel going into this upcoming season that takes us in Tioga both are going to contribute on a pretty good factor.

[Bhakti Pavani:]

Also with regards to the margin, how should we look about, are the margins expected to expand. I mean as you mentioned that the water hauling services which is kind of a breakeven service you guys are slowing phasing out of that, so just trying to understand how should we look about or see with respect to the growth margins especially for the upcoming heating season.

[Rick Kasch:]

As far as the water hauling impact again keep in mind that the water hauling is a smaller aspect of our business and therefore I don't see a major impact on our overall gross margins so as we go forward, also I wanted to stop back on your first point about the percentage of the business and so forth from these new markets. One thing that I want to put the caution on, I think it's Bob's got the number but keep in mind these operations in our seasonality so the percentage of revenues for Q2 is going to seem a lot higher than what it will end up being for the full year because of seasonality.

[Austin Peitz:]

And just with the number there, roughly the Texas and the Tioga markets accounted for about 20% of revenues, and as Rick mentioned that's probably quite a bit higher than what you'll see on a full year basis just because of the seasonality.

[Bhakti Pavani:]

Fair enough also with regards to the M&A, you did mention you guys are very actively looking for targets, just was wondering with regards to the target, is it going to be more like Tioga acquisition or are you guys open to acquiring more of a full sort of a company, how should we look about that or how should we think about that?

[Rick Kasch:]

Well, we're looking at two different kinds of acquisitions if you will; we're looking for companies operations that currently do what we do. And that's kind of the Tioga model if you will, and the other one is complementary services and that's one we're probably focusing on harder right now. There are some companies that have services that we can -- well let me put it this way, the same guy that call us for our let's say frac water heating services is the same guy that would call these companies we're looking at. So they're complementary in that regards and it would be primarily doing a company purchase and we're keeping our eyes out for any asset purchases.

[Bhakti Pavani:]

Okay with regards to the utilization in you prepared remarks you did mention that in the second quarter that the utilization was a bit low. Just kind of wondering how many consign or contractors do you have on your offer right now? And what was the utilization like in the second quarter?

[Austin Peitz:]

You ask like how many employees we have is that what I heard?

[Bhakti Pavani:]

Yes I mean are those like all full time or contractors?

[Rick Kasch:]

So throughout Q2 we don’t utilize contractor services. Our headcount throughout the second quarter and probably averaged, you have to bear with me give or take a few, but I'm going to say employees that go out and generate revenue, I'm going to say around the 80 number.

[Bhakti Pavani:]

And those are full time as of today?

[Rick Kasch:]

I was just giving you an average through the queue there and that’s -- we've actually been hiring a few. So today we might be up a little bit north of 90, not very much but as we continue our geographic expansion our headcount will continue to go up and as we approach the upcoming frac water heating season, our employee count will steadily incline.

[Bhakti Pavani:]

And with regards to the utilizations were those are like utilized or what was the utilization rate on --

[Austin Peitz:]

For the quarters the utilization has two components really if we look at, one is for instance in hot oiling operations, that utilization has been fairly high. That's been in a good 70% to 80% utilization, we do have however I think we mentioned earlier employees, operators that are tier one operators from frac water heating that we will maintain during the off season in order for them to be around when we get started up in again in the next season. So that utilization is significantly lower so we've got that combination of factors. And also the board on the risk comment what we've done this year with our focus on the hot oiling services we've taken this down turn in the frac water heating in the off season to cross train some of our employees to utilize among the hot oiling and frac water heating services side.

[Operator:]

Our next question is coming from the line of William Bremer with Maxim Group. Please proceed with your question.

[William Bremer:]

First and foremost let's start out with the weather impact on the second quarter. Can you sort of just give us a sense of all of the impact there? And do you believe you'll make up some of those sales or some of those services I should say in the third quarter?

[Rick Kasch:]

As far as our estimate is to how much business was affected by the range couple of 300,000 I think is basically where we're estimating at this point. You don’t really pick that up I mean its business that once you're gone or past its day and correct me if I'm wrong Austin but you just kind of push everything back. We can do double the work the next quarter make up for it. So that kind of lost business --

[Austin Peitz:]

But what it did do all the flooding in Texas and stuff it kind of hindered our start up as far as how soon we could have been the utilization factor we are today. So all the flooding that happened in Texas throughout the second quarter slowed down that activity level which if you look at the activity level today in Texas versus what it was during then it's significantly higher. So it delayed a lot of that kind of business.

[William Bremer:]

So which was about 500,000 of an impact.

[Austin Peitz:]

Yes.

[William Bremer:]

And Rick how do you look over your portfolio of services and where they are with all these shale and in terms of -- what is needed at this point in your opinion? I mean if capital wasn’t an issue what else would you like to add and what specific target in market would have like to have more capacity in?

[Rick Kasch:]

Are you talking geographic targets?

[William Bremer:]

Yes.

[Rick Kasch:]

The basic area that we're trying to determine right now is West Texas, the Delaware Permian areas and seeing what we can do there we did discover that the hot oil rate in that market are significantly lower than what we get in other areas. So we haven’t been real active in trying to expand down there. And Canada would be the other area that we still like to look into we've talked to a couple companies up there haven’t found anything that has been attractive to us on each criteria that we want. So those will be the primary two areas that we would look in to.

[William Bremer:]

And in terms of your swaps with potential new customers and clients can you give us a sense of are you close to possibly closing some large volume activity and how that talks been and can you secure that the pricing sessions are extremely modest and that's I think that's kudos to you and your team and the services that you provide in the industry or maybe just give us a sense of how the folks are going with new clients.

[Rick Kasch:]

Yes. So that kind of varies, we've kind of targeted where we want to be at and where we've really put in some efforts in, go back and talk about like the North Dakota stuff and the frac water heating in North Dakota, we’ve got verbal commitments as you guys know on the call that in our sector there is not really contracts available it's not something that really happens but we'd got verbal commitments for potentially up to three fully utilized cruise and even north of that are minor commitments in the Northern Bakken region which is a market that we've never touched before and that as far as in that volume. So that's some of the things that's promising and then you go out into Ohio, we've got commitments from some big players with the M&A activity in the Utica among the E&Ps out there, it's open from doors to follow some relationships that we've kind of fought to get into the door and years past, so there is some additional opportunities coming in the Utica that we've never been able to tap into. And then our DJ basin, we're having great talks and communications with customers that we've never been able to service in the past that are excited to come board to kind of bring a little bit of color on it. We've signed some big MSAs in the last quarter with some major producers within the Eagle Ford in North Dakota and in Utica all three of those areas, we've actually signed and completed an MSA in those areas and is what the big major players so they are not going to issue an MSA in this environment without the intend of utilizing our services and we're currently in the process of getting some stuff from one of the largest producers around in the area on the western slope that once they utilize our services for frac water heating in the upcoming season, so that's some of the stuff that brings some of the optimism manner in our future as far as our outlook because of the fact that they don’t issue MSAs in this environment, they are trimming vendors list and when they are trimming vendors list it also helps us in our current service areas to provide more market share of the work available.

[Operator:]

Thank you. It appears we have no additional questions at this time. So I'd like to turn the floor back over to management for any additional concluding comments.

[Austin Peitz:]

Thank you. One thing that I forgot to mentioned in session today is on the M&A candidates and so forth one of the things we're also looking for as I mentioned is complementary services, but what that leads to is to the ability for bundled service pricing which I think many of you know is the way of the future here in the oil field services industry so we are looking for services that we can go into bundled price gain market share maybe we give a slight discount on both services or three whatever number there is, but that is one of the criteria that we're looking for an acquisition. So with that as always, we appreciate your attendance on the call and your interest in Enservco and should you have any questions feel free to give any of us call. Thank you and hopefully we haven't ruined too much of your Friday.