Earnings Transcript for ENSV - Q1 Fiscal Year 2023

Operator: Good day, everyone, and welcome to the Enservco 2023 First Quarter Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Jay Pfeiffer. Sir, the floor is yours.

Jay Pfeiffer: Hello, and welcome to Enservco's 2023 First 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 2 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. :

Richard Murphy: Good morning, and welcome to our first quarter earnings call. I'm pleased to report we are resuming regular earnings calls after taking several quarters off last year when we were focused on restating our financial statements. A lot has transpired in the meantime. And today, in addition to recapping a successful first quarter, we're going to review some of the other progress we've made over the past year and give you some insight into our plans for growing our business and building shareholder value.

Today, I also have the pleasure of introducing to you, Mark Patterson, our new Chief Financial Officer, who joined the company approximately 1 year ago with a mandate from the Board to strengthen our finance and SEC reporting function and help further deleverage our balance sheet. In a moment, Mark will speak to these efforts and provide a recap of our Q1 results. The first quarter of 2023 marked Enservco's eighth consecutive quarter of increased year-over-year revenue. This trend partially reflects a rebound, following the prolonged industry downturn that began in the mid-teens and extended to the COVID shutdowns when commodity prices bottomed out. :

It also reflects the resilience of our business, which is a product to our deep customer relationships and our dedicated field personnel who have been successful driving higher revenues in spite of sharp fluctuations in commodity prices over the past couple of years. Profit metrics in the first quarter also improved. Gross profit was up 56% and adjusted EBITDA more than tripled in the quarter. Our balance sheet, a major focus for us in recent years and a key element of our plans to enhance shareholder value was further strengthened in the first quarter with an equity capital infusion and an additional 15% reduction in long-term debt since year-end. Before I hand the call over to Mark, I want to share with you a few of the reasons we're so excited about having him on board. :

Mark is a seasoned finance executive who has extensive experience in leadership roles with growth companies, both large and small. [indiscernible], he's the former CFO, Director and/or Financial Officer of multiple publicly traded companies that have gone through periods of rapid growth and consolidation. Mark is also a rare CFO in my experience, as a strong entrepreneurial track record as well as a deep and varied operations experience to augment his financial acumen. He is the founder and owner of BetterWay Logistics, a fast-growing private freight brokerage, and shortly understand firsthand how to staff, manage and grow profitable businesses. We are fortunate to have Mark on board and look forward to his ongoing contributions to our growth ambitions. So with that, I'll turn the call over to Mark. Mark? :

Mark Patterson: Thanks, Rich. I do remain excited about joining the Enservco team. The company has a solid foundation of blue-chip customers, proven operations teams in the field and a broad geographic footprint. Against the backdrop of recovering energy industry, we have tremendous opportunities to grow our revenue and improve our profits. Having worked our way through a lot of distractions over the past year, we're now turning our attention to doing just that. Before I comment on those topics, let me recap our first quarter results.

Revenue increased 4% year-over-year to $8.9 million from $8.6 million. The increase was attributable primarily to continued growth in our customer demand, a solid performance from our fast-growing Southwest hot oil operation and expected price increases in certain markets. The higher revenue in conjunction with ongoing cost reduction initiatives drove a 56% increase in gross profit for the quarter, coming in at $2 million, up from $1.3 million in the same quarter of the prior year. Net loss in the quarter was $1 million or $0.07 per basic and diluted share versus net income of $3.1 million or $0.27 per basic and diluted share in the same quarter last year. The year-over-year comparison was skewed by some nonrecurring events that need explanation. :

Specifically, the first quarter of 2023, net loss included approximately $400,000 of expenses that we anticipate to be nonrecurring, including $300,000 in legal costs and $100,000 for restricted stock issuance. Also note that net income in Q1 of 2023 included a $4.3 million gain on extinguishment of debt related to the company's first quarter debt refinancing. The point being, absent these 2 factors, our Q1 net loss this year would have been significantly lower or improved over the last years. Continuing adjusted EBITDA, which was also impacted by nonrecurring expenses during Q1 of 2023 was up 255% to $0.7 million compared to adjusted EBITDA of $0.2 million in the same quarter last year. :

We believe adjusted EBITDA is a more accurate reflection of our profit picture, and we're happy that this important measurement has returned to a growth mode. Turning now to our cost-cutting efforts, which is a key area of focus for our team. We've been making a concerted effort to rightsize our business to align with projected revenue growth rates. This involves reducing personnel costs through headcount reduction and looking closely at field staffing levels across our operations footprint. We're also focused on lowering our public company costs, legal and accounting primarily, which have been sharply higher due in part to last year's restatements, the class action lawsuit and our recent public offering and related activities. :

We're carefully examining every line item, including real estate rents, utilities, equipment repairs and [indiscernible]. We don't plan to overlook a single line item in our quest to create a leaner, more nimble and productive organization from top to bottom. We're targeting significant improvements in gross margin levels at our SG&A run rate that will set us up to increase EBITDA margins in a meaningful way going forward. When you look at other publicly held businesses, not just in our space but across the spectrum, investors reward those companies that are driving costs down, even though they're not necessarily increasing revenues. In our case, we believe we can do that, we could do both. :

We can drive our cost down and increase our revenue. A few words now in strengthening our balance sheet. As mentioned in our press release today, we continue to delever our business in the first quarter. Our long-term debt declined to $7.2 million from $8.4 million at year-end. The debt balance represents roughly an 80% reduction in long-term debt since reaching a peak in 2019. In other words, over the last few years, we reduced our long-term debt from approximately $36 million to $7.2 million. That's an extremely important accomplishment for Enservco that I'm not sure is fully appreciated by the investment community. We're not done. There are several additional debt reduction initiatives in the world. And if those are completed, we'll further reduce our debt and convert the dollars we spend on debt service and to positive cash flow. :

With that, I'll hand it back over to Rich for some closing remarks. :

Richard Murphy: Thanks, Mark. Building on the subject of debt reduction, a strong delevered balance sheet is a key building block for shareholder value, because every dollar we take out of debt service directly enhances our cash flow. Consequently, we are focusing a lot of attention here. And as Mark mentioned, we hope to have more positive news to report in coming quarters. As you may know, our proxy statement contains an important proposal, we are asking shareholders to approve at the upcoming June 13 Annual Meeting. Specifically, Proposal #2 would enable crossover partners to convert up to $2.5 million in promissory notes to equity. This will reduce our $7.8 million debt balance to under $5.5 million.

It would also translate into an additional $250,000 in annual cash savings on debt service. And as a bonus, it would bring in cervical back into compliance with a NICE American stockholders' equity requirement of $6 million. So if you received your proxy statement and not yet mailed in your proxy card, please consider this proposal carefully and vote in favor of the measure, as recommended by your management team and Board of Directors. We believe that debt conversion and improved financial condition will enable us to refinance our $5.6 million equipment financing loans at a more favorable rate. Our current facility carries an interest rate of -- in the mid-high teens that we hope to reduce into the 12% range. :

If we are successful, this would result in a decrease in the monthly cash outlay required to service this debt by approximately $80,000 to $90,000 per month. In summary, assuming a positive shareholder vote on Proposal 2, debt conversion and a successful debt refinancing, we have the potential to dramatically reshape our balance sheet, improve cash flow and give us critical financial flexibility to continue executing our business plan. Further to the subject of our business plan, we are focused on driving additional organic revenue growth by adding new customers, expanding wallet share with existing customers and potentially adding new service lines that would either be developed internally or acquired through an M&A transaction. :

We are also focusing more heavily on our hot oiling business, where we have made inroads with both, new and existing customers, particularly in Southwest Texas, where we have steadily added teams and equipment to service the growing demand there. As those of you who have followed us for a while know, our business has traditionally been highly seasonal with second and third quarters less active than cooler first and fourth quarters when frac water heating activity increases. We are committed to reducing the seasonality by adding more year-round services, which again can potentially be done either internally or through M&A. With this growth and expansion in mind, in April, we strengthened our Board of Directors with the addition of Kevin Chesser, who has also joined as Chairman of our Audit Committee. :

Kevin is a CPA and a highly accomplished and respected finance executive, who brings to the Board a wealth of relevant experience in all major aspects of public company finance and SEC reporting. Before I open the call to questions, I want to thank our shareholders for their confidence and support and in particular, our long-time shareholders for hanging in that with us to a typical couple of years of dealing with distractions that had nothing to do with building our business. Moving ahead, we're looking forward to seeing what we can accomplish with a lot of these distractions now behind us. With that, operator, you may now open the call to questions. :

Operator: [Operator Instructions] Your first question is coming from Jeff Gramp from Alliance Global Partners.

Jeffrey Campbell: In your prepared remarks, Rich, you mentioned a refinance on the debt side of things. I was curious to dig into that a little bit more, given some of the uncertainty with some of the regional banks that's getting a lot of headlines. Is it -- it sounds like it's fair to assume that given the dramatic improvement in your balance sheet that you don't expect that to be a meaningful impediment to a potential refinance. I guess first, can you just confirm that that's a fair read? And if you guys have any sense of kind of the timeline, is that a calendar '23 event? Or how do you see that playing out?

Richard Murphy: Let me talk first and then Mark, you could jump on a follow-up. I mean the reality is our debt is getting so low that compared to the value of our equipment, it's becoming much easier. So when I talk about under $5.5 million in debt, that's coming from $36 million, couple of years back. And that was a real tough call to try to get that refinance.

From a regional bank standpoint, we're looking at a variety of different lenders, both regional bank and nontraditional. As you can imagine, oilfield services and E&P small. E&P have a tough time getting lenders to come to the table. That's actually changed over the last year or so, I would say, at least from our vantage point. So I think it's going to be a mix of term sheets from a variety of lenders, and we'll just have a beauty contest and see what the best one is -- best terms are. And reality also is we could stick with our current lender and use that to see if we can refinance that debt at some level.:

Mark? :

Mark Patterson: Yes. I think Rich touched on the fact that most of the regional banks were kind of isolated from -- simply because, they're so focused in cash flow lenders and being in lending to the industries that are favorable and popular that they're not really looking too heavily at the energy services sector right now.

So as Rich pointed out, I think there are a lot of equipment lenders that more asset-driven than cash flow driven and probably the likely lending spot. So it will be an improvement from where we are but probably not as favorable as if we could just walk into our local regional bank and get a borrowing that was close to the prime lending [indiscernible]. :

Jeffrey Campbell: Got it. Understood. That's helpful. I appreciate that. And can you guys give us a sense kind of leading-edge pricing, and I know maybe it's hard to bifurcate by service line. But maybe on a sequential basis or on a year-over-year basis or whatever it's easier for you guys to kind of parse out, just curious the directional way you guys are seeing in your ability to take on price?

Richard Murphy: So there's basically 2 different service lines, right? There's the hot oiling, which is primarily our Southwest Texas world, we're seeing real strong pricing. I mean I think I had last time at the conference call was well over a year, but our pricing was in the $125, $115 an hour in range. I mean some of our hot oiling, that's significantly higher, and it's more edging closer to the $180 to $185 an hour. So that market has seen significant pricing and very stretched in as far as equipment availability, so which usually precedes price increases.

And so it continues strong. The heating is seasonal. We had a very -- we saw the first quarter strong heating environment, still fairly competitive in Colorado. We feel like that's going to rationalize itself over time, again, not much new equipments coming into that market. And you've got a very consolidated operator market and only 4.5 big operators in the DJ Basin. So I don't see any real capital coming to this market, and I don't -- which, to me, even at $70 to $80 oil, there's no capital coming in what we do. So I think there's an opportunity for continued price increases over time. That being said, where the prices are now are very good margins for us. :

Jeffrey Campbell: Great. Okay. Understood. And maybe tying into that, that last point and lack of capital coming into the industry, tying that in with the balance sheet improvements that you guys have had, do you guys get the sense seeing as that you're kind of sufficiently cleaned up from a leverage balance sheet perspective to the point where you can more seriously entertain M&A opportunities? Are there a couple more steps that need to take place? Just kind of curious what you guys kind of see as kind of maybe the near or medium-term outlook as it relates to M&A opportunities?

Richard Murphy: Yes. As I remarked, I said twice, we're looking at M&A as a potential growth vehicle. We couldn't have said that 2.5 years ago or 2 years ago even, because our balance sheet was still [indiscernible]. Now it's not an issue whatsoever. So I think there's going to be a lot of opportunities in the M&A space, and there's not a lot of publicly held oilfield services companies anymore. There's the big 4 or big 3, if you will, and then a few little guys. Everyone else is private.

And as I said, about access to capital, the banks aren't loving oilfield services even at $70, $80 oil. So capital is king right now, and we do have a public currency in that's something that gives us a clear advantage over some of our other peers, and we intend to use it now. We couldn't use it 2 years ago. :

But that being said, I'm a value guy, I'm a cash flow guy. That's my background. This has been a real hard hill decline, not seeing all the -- trying to delever this balance sheet potentially got to the top of the hill basically. Anything we do will be cash flow focused. :

Operator: [Operator Instructions] Thank you. That concludes our Q&A session. I will now hand the conference back to our host for closing remarks. Please go ahead.

Richard Murphy: Yes. I just want to say thank you to everybody. It has been a long road. I think we're getting near the point now where it gets fun again where we can grow the business. So stay tuned, and we look forward to talking to you all in August with our second quarter results. Take care. Thanks.

Operator: Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.