Enservco - Q1 2024

Executive Summary

• Q1 revenue rose 10% year over year to $9.79M, driven by colder winter weather and pricing actions in completions (frac water heating); Adjusted EBITDA more than doubled to $2.22M and net income turned positive to $0.74M ($0.03 diluted EPS).
• Strength in Completion Services (revenue +21% YoY to $7.31M; segment profit +97% YoY to $2.90M) offset softer Production Services (revenue down to $2.49M; segment profit $0.36M).
• G&A fell 18% YoY on lower legal expense; operating income improved to $1.26M from a loss, reflecting efficiency initiatives and mix.
• Strategic catalyst: the pending acquisition of Buckshot Trucking (energy logistics) remains a focus; management now targets closing in early Q3 2024 and views it as “transformational” (adds year‑round, higher‑margin revenue).

What Went Well and What Went Wrong

• What Went Well

  • Significant profitability improvement: “first quarter results that materially exceeded the prior year” with Adjusted EBITDA +125% YoY and operating profit turning positive.
  • Completions outperformance on weather and pricing: colder winter drove higher frac water heating activity; price increases in Pennsylvania and Colorado aided revenue and segment profit growth.
  • Cost discipline: G&A expense decreased ~18% YoY, aided by lower legal costs (class action dismissal).

• What Went Wrong

  • Production Services weakness: revenue decreased to $2.49M and segment profit slipped to $0.36M on reduced acidizing in Texas and lower hot oiling in Pennsylvania and Texas.
  • Concentration/seasonality remains a risk: management reiterates frac water heating is highly weather‑dependent, with profits concentrated in Q1 and Q4.
  • No quantitative outlook provided; Buckshot closing dependent on financing and shareholder approval (management confident but timing pushed from “by end of Q2” to “early Q3”).

Transcript

Operator (participant)

...Welcome to the Enservco 2024 first quarter earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Wes Harris, Investor Relations for Enservco. Wes, you may begin.

Wes Harris (Head of Investor Relations)

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 non-public 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?

Rich Murphy (Executive Chairman)

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 a 125% year-over-year increase in adjusted EBITDA. Significantly benefiting this year's first quarter was 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 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 right size and take costs 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 an 18% year-over-year decrease in G&A expenses, 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 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 or capital. 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 (CFO)

Thanks, Rich. Our first quarter 2024 heating season saw a 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 right sizing 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 one-time legal and non-cash 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 to 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.

Rich Murphy (Executive Chairman)

Thank you, Mark. The strategic actions we took in 2023 placed us in a much better position as we moved 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 material financial improvement year-over-year, and we continue to have a solid outlook, not only on the completion service side of the business, but also in our production services segment. We base 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 good position to meet increased demand.

We enjoyed a solid start to 2024 and are really appreciate our team's efforts that allow us to capitalize on the 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 non-seasonal business to our portfolio with greater growth potential and synergies that our current service offerings do not offer. As 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 financial 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 integrating their team's assets and operations into our broader 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 (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star one on your phone at this time if you wish to ask a question. One moment, please, while we pull for questions. We did have a question come in today. The first question is coming from Jeff Grampp from Alliance Global Partners. Jeff, your line is live.

Jeff Grampp (Senior Analyst)

Good morning, guys. A couple questions on production services for you, Rich. So I know you guys commented that acidizing was a little bit weaker. You know, revenue is 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 at? Or can you get back to, you know, some of the more revenue levels from last year, where you were pushing, you know, kind of $3 million a quarter or so for that segment?

Rich Murphy (Executive Chairman)

Yeah, I think you, the way to think about our hot oiling business, which predominantly is in Texas. I'd say 85%-90% of our assets are in Texas in the southwest basins of Georgia to Carrizo. That they had some acid weakness in November and December, which is somewhat seasonal, and then it 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, you know, it's basically a nice cash flow generator. And the acid stuff will be a little more up and down at times, and we just had a slight downtick.

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, you know, the rates there are 2x-2.5x what they are in Texas. The consistency of that work, it's not what it is in Texas, so we're not gonna have as big a fleet, never gonna have big, huge fleet there, but it is very high margin. So that's the - I think, again, $3 million revenue business is probably a good number.

Jeff Grampp (Senior Analyst)

Okay, great. And then on the margin side, you know, 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?

Rich Murphy (Executive Chairman)

On the production side, it's just price, primarily with, I mean, with a little uptick from Pennsylvania. It's that, that's kind of the mix. I'd say about, you know, 80% is probably just price that in our Texas basin, and then 20% is the kick in from Pennsylvania, which is much higher margin. And we will continue to see that probably going forward. You know, we have a very strong market share position in those basins, and, you know, we're gonna continue to push prices tight with them. It's not a huge cost to our customers for the service we provide, so I think there is more opportunity there.

Jeff Grampp (Senior Analyst)

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

Rich Murphy (Executive Chairman)

Yeah, it'll be, we need shareholder vote to approve, 'cause we're gonna—it's a $5 million transaction, as we, we noted. 1.25 of it is going to be equity the Buckshot owners are gonna take, and then 3.75 is cash. And so we'll, we'll get the... We have to obviously put our proxy out. That's our shareholders meeting, which 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, you know, we—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.

And 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, you know, early July. The financing is not gonna be that difficult. We're already going down that route.

Jeff Grampp (Senior Analyst)

Okay, great. Best of luck, and we'll stay tuned. Thanks, Rich.

Rich Murphy (Executive Chairman)

Thanks.

Operator (participant)

Thank you. Once again, it is star one if you wish to ask a question today. There were no other questions from the lines at this time. I will now hand the call back to Rich Murphy for closing remarks.

Rich Murphy (Executive Chairman)

Well, I just wanna, on behalf of myself, a large shareholder and everyone on the call, who's also the shareholders, it's been a, it's been a, 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, you know, since I jumped in this seat in September of 2020, I can't think of a better position that this company's been in since then. So, I'm really looking forward to closing the Buckshot deal and then, you know, 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, on the progress of that as we move forward. Thanks again.

Operator (participant)

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