Earnings Transcript for ENSV - Q1 Fiscal Year 2024

Operator: Greetings. Welcome to the Enservco 2024 First Quarter Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

And I will now turn the conference over to your host, Wes Harris, Investor Relations for Enservco. Wes, you may begin. :

Unknown Executive: Well, good morning, and thank you, operator. We welcome everyone to Enservco's 2024 first quarter earnings conference call. Presenting on behalf of the company today are Rich Murphy, our Executive Chairman; and Mark Patterson, our 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 Regulation FD, which prohibits selective disclosure of material nonpublic information.:

This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings release. A webcast replay of today's call will be available after the call. Instructions for accessing the webcast are available in the earnings release.:

So with that, I'll turn the call over to Rich Murphy. Rich? :

Richard Murphy: Thanks, Wes. Good morning, everyone. We appreciate you joining us for today's call. We began 2024 with solid first quarter results that outperformed last year on a number of key financial metrics, including revenues, segment and operating profit and net earnings as well as 125% year-over-year increase in adjusted EBITDA. Significantly benefiting this year's first quarter with substantial profit growth in our Completion Services segment that is primarily comprised of our frac water heating business. As a reminder, this business is highly seasonal with any potential profits focused on the first and fourth quarters. Financial success during those periods is dictated by winter weather, the colder for longer the better. As such, we were pleased to take advantage of the colder winter weather on average for the first -- for this year's first quarter versus the same quarter last year.

The first quarter of 2024 also benefited from our concerted efforts over the past couple of years to drive increased efficiency across the businesses. These efforts have been multifaceted, including shutting down our North Dakota operations in 2023 and reallocating assets to more productive operating areas that offered increased potential for revenue and profit growth. In addition to these efforts, we executed on several opportunities to rightsize and take cost out of the business. The success of our combined efforts contributed to a 10% increase in our quarterly gross profit margin. In addition, the first quarter benefited from 18% year-over-year decrease in G&A expense, primarily due to lower legal costs. We continue to focus on ways to improve margins and deliver consistent profitability as we focus on improving the pricing environment and gaining market share in the basins where we operate.:

While improved seasonal conditions benefited for our frac water heating services business in the first quarter, this does not overshadow another key highlight of the first quarter, that being the announcement of our intention to complete the acquisition of Buckshot Trucking by the end of next month. As we discussed on our last call, our focus on deleveraging the balance sheet and improving market share and margins in the basins in which we operate has enabled us to begin the growth phase of the company's turnaround. We view Buckshot as a great first step in transitioning the company towards a more consistent cash flow generator. As important, we believe adding Buckshot to our existing business will prove transformational as it helps us transition away from a primarily seasonal business subject to commodity risk to a logistics business that generates strong year-round cash flow with significant growth prospects. I would note the transition will not require substantial new overhead for capital.:

So with that, I'm going to have Mark take you through some of the quarterly numbers before I provide a few closing statements. Mark? :

Mark Patterson: Thanks, Rich. Our first quarter 2024 heating season saw surge in cold days in January within both Pennsylvania and Colorado regions. These cold blasts primarily impacted our Completion Services. As Rich mentioned, our seasonal focused frac water heating business enjoyed solid growth from 2023 that was mostly driven by increased activity levels and pricing adjustments in our Colorado and Pennsylvania operations.

On the Production segment side, our hot oiling and acidizing operations saw a bit of weakness in demand that we view as temporary and mostly driven by some decreased demand for our acidizing services. The net result was first quarter 2024 revenue of $9.8 million, that was 10% higher than the first quarter of 2023.:

On a segment basis, Production Services revenue was lower at $2.5 million compared to $2.9 million a year ago. First quarter 2024 Completion Services revenue increased to $7.3 million from $6 million in 2023. First quarter adjusted EBITDA came in at $2.2 million compared to $1 million in the first quarter of 2023, a year-over-year improvement of 125%. Net income in the first quarter was $0.8 million or $0.03 per diluted share versus a net loss of $1 million or $0.07 per diluted share in the same quarter last year.:

We remain focused on rightsizing our business and continue to evaluate and execute opportunities to reduce costs across the business. As we've discussed in the past, we've seen significant decline in our SG&A expenses over the past couple of years, and we're getting closer to our internal goal of an annual SG&A run rate of $3.6 million, that excludes some onetime legal and noncash expenses such as stock compensation expense.:

I would like to remind our shareholders that the previously filed class action lawsuit was dismissed and Plaintiff's Counsel has indicated there will be no further appeals. As you know, the cost of that defense was significant over the past year.:

Turning to the balance sheet. In 2023, we made material progress in reducing our debt levels. We remain focused on improving the financial position of the company including further reducing our overall reliance on seasonally focused business activities.:

The Buckshot acquisition clearly places us on the right path and we will look for additional accretive opportunities that enhance the balance sheet through increase year-round cash flow, visibility and provide incremental opportunities for profitable growth.:

So with that, I'll turn the call back over to Rich. :

Richard Murphy: Thank you, Mark. The strategic actions we took in 2023 placed us in a much better position as we move into 2024. Further supported by a strong heating season in the first quarter and the related positive impact of our frac water heating services business, we posted a material financial improvement year-over-year, and we continue to have a solid outlook, not only on the Completion Services side, of the business, but also in our Production Services segment. We based our view on customer feedback, which points to further demand growth for our services. Combined with our strategic efforts over the past year to rightsize the business further rationalize the position of our assets and enhance our financial position, we feel we are in a good position to meet increased demand.

We enjoyed a solid start to 2024, and I really appreciate our team's efforts that allow us to capitalize on solid market conditions presented in the first quarter. However, we continue to recognize the importance of moving our overall business away from the overreliance on cold weather conditions that occur substantially during the first and fourth quarters of the year. In short, we clearly recognize the importance of adding a nonseasonal business to our portfolio with greater growth potential and synergies that our current service offerings do not offer.:

As I mentioned in my beginning comments, we previously announced the acquisition of Buckshot as being truly transformative for Enservco and its shareholders. In short, Buckshot provides a strong complement to our current service offerings with the added benefit of not being winter weather dependent. Buckshot will also provide a substantial improvement in operational and financial visibility, which benefits our business, shareholders and other stakeholders. We are targeting to close the transaction by end of June and are currently evaluating financing alternatives for the transaction.:

We look forward to evaluating and executing additional opportunities that further evolve our business away from seasonal to a more year-round business activity to drive long-term cash flow generation, profitability and shareholder value.:

In conclusion, we remain focused on executing our multifaceted plan to optimize our operations and build a more substantial business model with reduced debt. Supporting our efforts is the continued strength of our current operations. In addition, we look forward to completing the Buckshot acquisition and quickly integrate their team's assets and operations into our part of the business. Finally, we will continue to evaluate opportunities to build further visibility and enhance financial performance for the benefit of the company and its shareholders.:

With that, thanks again for joining us on the call today. We will now be happy to take any questions. Operator? :

Operator: [Operator Instructions] The first question is coming from Jeff Grampp from Alliance Global Partners.

Jeffrey Grampp: A couple of questions on Production Services for you, Rich. So I know you guys commented that acidizing was a little bit weaker. Revenue was still up sequentially, though, but just kind of curious how you guys kind of handicap future performance there. Is this kind of a steadier state where Q1 was that? Or can you get back to some of the more revenue levels from last year where you were pushing kind of $3 million a quarter or so from that segment?

Richard Murphy: Yes. I think the way to think about our hot oiling business was predominantly is in Texas, that's in 85% to 90% of our assets are in Texas, in the Southwest basins of the [indiscernible]. They had some acid weakness in November and December, which is somewhat seasonal, and then it's carried over to January. But in general, I would look at that business as a $3 million revenue business pretty consistently. We're back to that trend rate. And it's basically a nice cash flow generator and the assets will be a little more up and down at times, and we just had a slight downtick.

And the other 10%, I will say on the upside in the hot oiling, we have started hot oiling efforts in Pennsylvania, which is starting to gain traction and the rates there are 2.5x what they are in Texas, the consistency of that work. It's not what it is in Texas. So we're not going to have as big fleet -- never going to have a huge fleet there, but is very high margin. So that's the -- I think, again, $3 million revenue business is probably a good number. :

Jeffrey Grampp: Okay. Great. And then on the margin side, even though the revenue was down a bit year-over-year, you guys still had some nice margin performance there. Is some of that maybe Pennsylvania contribution that you just mentioned, Rich? Or how are you guys kind of seeing the margin progression of that business?

Richard Murphy: On the production side, it's just price primarily with -- I mean, with the little uptick from Pennsylvania. It's -- that's kind of the mix. I'd say about 80% is probably just price -- in our Texas base and 20% is the kick in from Pennsylvania, which is much higher margin. And we will continue to see that probably going forward on -- we have a very strong market share position in those basins, and we're going to continue to push prices high because we are not -- it's not a huge cost to our customers, the service we provide. So I think there is more opportunity there.

Jeffrey Grampp: Okay. Great. And on the acquisition side, I know you mentioned you look to close this in another month or 2. Can you kind of connect the dots for us as kind of the next steps. I know you have the vote and financing, does one necessarily need to come before the other? Or just any kind of guidance or color you can give, how you see the next couple of months playing out?

Richard Murphy: Yes, it'll be -- we need a shareholder vote to approve because we're going to -- it's a $5 million transaction as we noted, $1.25 million is going to be equity that Buckshot owners are going to take and then $3.75 million is cash. And so we'll get -- we have to obviously put a proxy out, that's our shareholders meeting with aiming for that at the end of June, early July. And then as soon as that happens, we should be able to close. We may fund sooner than that and just wait for the vote with -- if the vote doesn't go through, the deal wouldn't go through, but obviously, just to be clear, the vote requires 50% of a quorum, as the largest shareholder, I'll be voting for it, and other insiders. So we basically have the vote. So we're pretty confident that this thing will close in early July. The financing is not going to be that difficult. We're already going down that route.

Operator: [Operator Instructions] And there were no other questions from the lines at this time. I will now hand the call back to Rich Murphy for closing remarks.

Richard Murphy: Well, I just want to -- on behalf of myself, a large shareholder and everyone on the call who's also shareholders, it's been a long road to get from our $36 million in debt to where we are today. And I appreciate all the patience, but we are really -- since I jumped in the seat in September of 2020, I can't think of a better position this company has been since then. So I'm really looking forward to closing the Buckshot deal and then transforming this business to an energy logistics company and being a dominant player in that space.

So I appreciate all your patience and look forward to updating you on the progress of that as we move forward. Thanks again. :

Operator: This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.