Enservco Corporation [ENSV] Conference call transcript for 2023 q3
2023-11-16 21:15:05
Fiscal: 2023 q3
Operator: Greetings, and welcome to the Enservco Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. And a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, [Mr. Rich Murphy Jay Pfeiffer]. Sir, you may begin.
Jay Pfeiffer: Hello, and welcome to Enservco's 2023 third quarter conference call. Presenting on behalf of the company today are Rich Murphy, Executive Chairman; and Mark Patterson, Chief Financial Officer. As a reminder, matters discussed during this call may include forward-looking statements that are based on management's estimates, projections and assumptions as of today's date and are subject to risks and uncertainties, disclosed in the company's most recent 10-K as well as other filings with the SEC. The company's business is subject to certain risks that, could cause actual results to differ materially from those anticipated in its forward-looking statements. Enservco assumes no obligation to update forward-looking statements that become untrue, because of subsequent events. I'll also point out that management's ability to respond to questions during this call is limited by SEC Reg FD, which prohibits selective disclosure of material nonpublic 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 Rich Murphy. Rich, please go ahead.
Rich Murphy: Thanks, Jay. Good morning, and welcome to our third quarter earnings call. Yesterday, we announced financial results for the third quarter and nine-month period ended September 30, 2023. You may recall that - up until this quarter, Enservco had reported nine consecutive quarters of year-over-year revenue increases. This quarter, that trend ended, for what we believe was in our best interest, for the long-term. Specifically, we shut down our North Dakota operations in a strategic move to reallocate assets to more productive operating areas that offer more potential, for revenue and profit growth. Our former North Dakota operations generated $1.1 million of revenue, for the first nine months of last year. As a result, third quarter revenue, was down slightly on a year-over-year basis, and a streak was broken. As we now move into our more active quarters and with oil prices, and customer demand where they are, we remain quite optimistic about our chances, of starting and maintaining a new streak. And despite our quarter three revenue decline, we are still 3% ahead of last year's revenue pace for the nine-month period. As I mentioned, the North Dakota exit was a calculated move, to focus our resources in more active areas. It is also expected, to have the additional benefit of allowing us to convert, underutilized assets to working capital, to fund the heating season activities. We are in discussions with a third-party to acquire North Dakota real estate and equipment that's expected to generate in the vicinity of $1 million in cash that will further strengthen our balance sheet. In any case, we're excited to be moving into fall and winter when cooler temperatures drive increased demand for our heating services. As you know, our fourth and first quarters are when we generate the bulk of our revenue and profitability. So, we're looking forward to seeing that we can accomplish - what we can accomplish over the next six months or so. This quarter and going forward, we're also going to benefit from the addition of rapid hot operations, our Eastern operating area, the Marcellus Shale, Rapid Hot provides frac water heating services to E&Ps in the Appalachian Basin encompassing Ohio, Pennsylvania and West Virginia. We acquired the company late in the third quarter, so we didn't get much revenue impact in that period, but - that's going to change in Q4, when we'll begin enjoying the full benefit of Rapid Hot operations. We also believe we can continue to take market share across all our entire operating footprint. In addition to strengthening our existing position in the region, and contributing incremental revenue, Rapid Hot had the added benefit of providing more depth, to our management team. Specifically, Mike Lade, the former President and CFO of Rapid Hot joined Enservco's Chief of Staff. Mike is a CPA, who brings more than 30 years of executive experience with private and NYSE-listed companies, including extensive work in the energy sector in operations, corporate development, M&A and capital formation for emerging growth companies. Mike is also an accomplished turnaround specialists, who understand how to drive profitable growth and pursue opportunistic M&A activity. We further strengthened our team with the addition of Rapid Hot managing member, Steve Weyel, to Enservco's Board of Directors. Weyel is a 40-year energy executive having served as an executive, Board Director and Chairman of private and public energy companies. He was the Founder, CEO and Chairman of EnVen Energy Corp. a deepwater exploration company that earlier this year, was merged in a transaction valued at nearly $1.3 billion. His energy leadership, encompasses global oil services, commodities, deregulated power and upstream oil and gas. He has successfully managed to close more than $20 billion in M&A transactions and financing. Steve is the second Director to join our Board in the past seven months, and we are building a team capable of managing and tracking a much larger enterprise, which is what we intend to do. We are steadily building momentum across our businesses. We are encouraged by improving margins, and continued drilling activity on our operating basis. Based on customer feedback, we expect further demand growth for our services, and believe we are well positioned to meet that demand. So with that, I'm going - to hand the call over to Mark Patterson, our CFO, to take you through some of the numbers before I provide a few closing comments. Mark?
Mark Patterson: Thank you, Rich. Our third quarter revenue decreased 6% year-over-year to $2.9 million from $3.1 million in the prior year. On a segment basis, Production services revenue was lower at $2.6 million, compared to $2.8 million a year ago. Completion services revenue was basically flat at $0.3 million. As Rich noted, our exit from North Dakota played a big part in the overall revenue decline, along with lower hot oiling activity in our Colorado and Pennsylvania markets. Most of this was offset by nice increases in our hot oiling and acidizing activity in our Texas region. Q3 adjusted EBITDA was negative $1.5 million, which compares to a negative $1.3 million in the same quarter of last year. And net loss in the third quarter decreased slightly, to $3 million or $0.13 per basic and diluted share, compared to a net loss of $3.1 million or $0.27 per basic and diluted share in the same quarter last year. Turning to the nine-month results. Revenue through nine months increased 3% year-over-year to $15.6 million from $15.1 million. The increase was attributable to growth in the Completion Services segment, which increased 11% year-over-year to $7.2 million, from $6.5 million and more than offset a 3% decline in production services, which were $8.4 million versus $8.6 million year-over-year. As previously mentioned on this call, the former North Dakota operations generated $1.1 million of revenue, during the first nine months of 2022. The North Dakota exit, also helped improve our adjusted EBITDA result by 42% through nine months, to a negative $1.5 million from a negative $2.6 million in the same period of last year. The nine-month net loss was $6.6 million or $0.35 per basic and diluted share versus a net loss of $3.9 million, or $0.34 per basic and diluted share in the same period of last year. Recall and in a year ago, the net loss included $4.3 million of gain on debt extinguishment. So absent that, our net loss would have been much improved over the prior year. As we told you last quarter, we're very focused on rightsizing our business and continue to look at ways to reduce cost. This includes headcount, public company costs, legal, accounting, insurance, investor relations and other areas. We've seen significant declines in our SG&A expenses over the past 18 months, and are approaching our internal goal of an annual SG&A run rate of $3.6 million, excluding some one-time legal and non-cash compensation. One final highlight, we recently closed $1.6 million convertible debt financing that, include participation from REIT investors of Rapid Hot, as well as Enservco Board and our largest shareholder Cross River Partners. I think it's important that our stockholders understand that our senior people, including our Board, have a lot of skin in the game that, reflects their optimism about the future prospects of the company. So with that, I'll turn the call back to Rich.
Rich Murphy: Thanks, Mark. I want to close with a few words, about our ongoing successful efforts, to transform our balance sheet. To recap, we closed the third quarter with just $4.2 million in term debt relating, to our equipment financing. That's a $1.1 million reduction from 2022 year-end and an impressive $32 million reduction, from our peak debt in 2019. This much improved balance sheet gives us greater - financial flexibility as we explore opportunistic M&A transactions and look to add new revenue streams. So again, with improved balance sheet, solid customer demand and the addition of quality depth to our leadership teams, we're looking forward to optimizing on opportunities in the current heating season, and capitalizing on new growth opportunities over the long-term. With that, thank you again for joining our call today, and I'll be happy to take any questions. Operator?
Operator: Thank you. [Operator Instructions] We have a question from Jeff Grampp with Alliance Global Partners. Your line is live.
Jeff Grampp: Good morning, Rich. Good morning, Mark.
Rich Murphy: Good morning, Jeff.
Mark Patterson: Good morning.
Jeff Grampp: Wanted to ask about Rapid Hot here. I know we're only not even, I think, a couple of months into closing this, but how much integration? Is there needing to be done there? And just for context, can you kind of discuss the size of that fleet or maybe historical revenue, just to better understand, how impactful that business can be in the upcoming heating season?
Rich Murphy: Yes. I mean, the basin itself is - I mean we had about 14 to 16 bond tails in that basin and Rapid Hot had about the same, but it is a - the integration itself is pretty simple. We basically combined our operations. We've moved all the equipment, to the Rapid Hot operation yard, which we save some cost there. As far as the revenue opportunity, last year is probably a bad example. And one of the reasons that, the two of us were kind of forcing each other's hand, it was pretty warm last winter in the Marcellus, and we take a lot of weather risk. We're trying to mitigate the weather risk as we go forward through better terms with our service providers, and they're open to it, because listen, that basin will have no heating services if margins don't improve. So, the margins tend to be better, but the season tends to be shorter. Last year was basically a year of fall that didn't generate a lot of revenue. So, we were around $2.5 million in revenue, $2 million to $2.5 million revenue last year. Rapid Hot was probably a little less. I think the combined entity can do with better pricing. It won't be one-plus-one equals two. And I think - well I think Jeff, one other thing, is I'm seeing this is my second season at the helm here. And there is a change, not from us, but from our customers as far as willingness to work with us. Last year, we saw a lot of times we got to call out work whether it's Colorado and we just didn't have equipment. And a lot of people have left this business, the heating business so - and the E&P customers understand that. So, they want to make sure they lock up their equipment, for the season and they're not left stranded, or getting very expensive call out work. So there's been a fundamental shift in kind of the mindset of our customers, which is good. It's good for all of us, because it was an unhealthy environment from 2020 to '22 for service guy.
Jeff Grampp: Understood. Thanks for that. That's helpful. And on the pricing side, I think the release referenced some stronger pricing action that you're seeing. Is there a way to quantify that, maybe relative to last year? And then is that specific to frac water heating, or is that kind of across all your service lines?
Rich Murphy: Across all, we continue to see rates going up on the daily rate and the hourly rate even for hot oiling. The heating business, we're seeing a combination of price, I don't want to give a percent, because it kind of goes across the board, but it's the low end with 10% and the high end, probably 25%. But that's both Colorado and PA, well, primarily right now in the heating space is Colorado, Wyoming and PA with North Dakota being gone. Yes. So, I think you're seeing that 10% to 25%, but what we're seeing more is term and term is critical. I mean to get a 30-day term locked up with a healthy standby rate. So if it's not cold, we're still getting paid. And that was always the thing that disappeared in 2020. And that's the thing that our industry quite frankly needs to be healthy. So with a lot of the equipment being, just leaving the industry, you're starting to get that type of 30, 60, 90-day term back in play. And that - if it happens to be hot in February, we still get paid a lesser rate, but it's still - that's a very important feature.
Jeff Grampp: Understood. Yes, that's definitely a big change relative to the last couple of years. And last one from me, just broadly on M&A, Rich. Any kind of updated commentary there in terms of what you're seeing? And would you consider yourselves, kind of back in the market effectively? Or is there kind of a digestion period that you'd want to get through, with Rapid Hot before, kind of getting more seriously back into the M&A market?
Rich Murphy: No, we're looking at stuff. We're definitely in the market. And as you can see from our remarks with the Board, we have a very good team right now to execute on some M&A, whether it be transformative or niche type tuck-in stuff. With the balance sheet where it is, Jeff, we feel like we can go. The Rapid Hot integration is pretty much complete, just to be we're right now just ramping up for the season and trying to significant. Get all our contracts signed and done and Pennsylvania is the last basin, because it gets coldest last to lock in on your bid activity. So yes, we're looking at - nothing pending tomorrow, but we're looking at driven. And the M&A activity is that the options are I won't say plentiful, but there's a lot of interesting businesses that, would fit well with what we do.
Jeff Grampp: Okay. Good to hear. Thank you guys for the answer.
Rich Murphy: Thanks, Jeff.
Operator: Thank you. [Operator Instructions] Okay. As we have no further questions in queue, I will hand it back to Mr. Murphy for any closing comments you may have.
Rich Murphy: I want to thank everyone on the call and then particularly employees within Enservco, who over the last three years and done yeoman's work to get us to where we are with this balance sheet where we are, and our customers. I think we're in a good spot now as we enter the winter season, and I couldn't be more excited to get to this fall and winter and see the outcome become large. So, I look forward to catching up with investors and everyone, as we march to the winter. So thanks again for your time. Take care.
Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.
