Enservco - Q2 2024

Executive Summary

• Q2 revenue was $3.8M (+1% y/y) with net loss of $2.3M (-$0.08/share), improving y/y but down sharply q/q as seasonality normalized after a strong Q1; Adjusted EBITDA loss narrowed to $(0.67)M from $(1.10)M y/y.
• Portfolio transformation advanced: exited Colorado frac water heating, closed Buckshot Trucking (immediately accretive year-round logistics), and executed a share exchange/financing with Star Equity to bolster equity and liquidity; management said recent transactions mean 3Q/4Q results should be “materially improved” with Buckshot contributing from mid-August.
• No quantitative guidance provided; management emphasized integration of Buckshot and debt restructuring (Utica facility) as near-term priorities and reiterated intent to regain NYSE American compliance after equity enhancements and debt conversions.
• Catalysts/risk: execution on Buckshot scaling (including brokerage launch), Utica restructuring, NYSE appeal outcome; macro/seasonality risks persist for legacy operations and financing risk highlighted by receivables funding agreement-.

What Went Well and What Went Wrong

• What Went Well

  • Adj. EBITDA loss narrowed y/y to $(0.67)M (vs. $(1.10)M) on flat revenue and improved operations; YTD Adj. EBITDA turned positive at $1.57M.
  • Strategic actions closed: sold Colorado frac water heating assets to reduce seasonality and pay down Utica; closed Buckshot (TTM ~$9.5M revenue, >$2M EBITDA per call) to add year-round logistics; Star Equity deal added equity and short-term financing-.
  • Management tone confident on integration and outlook: “materially improve… beginning in the second half of 2024,” with 5 months of Buckshot operations reflected in 2H24; focus on regaining NYSE compliance (equity raised/converted)-.

• What Went Wrong

  • Seasonality and mix: revenue fell q/q from $9.8M in Q1 to $3.8M in Q2; Production Services revenue declined y/y (acidizing weaker), driving operating loss of $(1.10)M.
  • Bottom-line still negative: Q2 net loss $(2.33)M; other expense swung to $(0.81)M, increasing total other expense and pressuring net results.
  • Listing risk persists pending NYSE appeal despite equity actions; company also entered a sale of future receivables agreement for working capital, underscoring tight liquidity-.

Transcript

Operator (participant)

Good morning, everyone, and welcome to the Enservco 2024 second quarter earnings call. At this time, all participants have been placed on a listen-only mode. If you have any questions or comments during the presentation, you may press star one on your phone to enter the question queue at any time, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Wes Harris. Sir, the floor is yours.

Wes Harris (Head of Investor Relations)

Well, thank you, Matthew, and good morning, everyone. Welcome to Enservco's 2024 second quarter earnings conference call. Presenting on behalf of the company today are Rich Murphy, our Executive Chairman, and Mark Patterson, our Chief Financial Officer. I would note that 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 and 10-Q, 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. This conference call also includes references to certain non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are contained in our earnings release. Finally, 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, we'll turn the call over to Rich. Rich?

Richard Murphy (Executive Chairman)

Thanks, Wes, and good morning, everyone. We appreciate you joining us for today's call. Consistent with our first quarter success, our second quarter results reflect an improved year-over-year performance across the board, including a 39% improvement in our Adjusted EBITDA loss. As a reminder, our business has historically been very cold weather dependent, and this seasonal nature has led to the fourth and first quarters each year being the most financially significant in terms of profitability. While I'll let Mark discuss the financial details of the second quarter in his comments, I believe the most significant achievement of the second quarter and to date in the third, has been the efforts by our team to reposition the company in the marketplace.

All the collective hard work paid off in the last week with the closing of a number of strategic transactions, and I, along with the full board of directors, want to thank everyone for their dedication and support through this extended but critical process. For the past 18 months, we spent considerable effort evaluating and executing several strategic initiatives designed to enhance our financial position and further rationalize our asset base. This included a focus on reducing reliance on our seasonal heating services businesses. In the fourth quarter of 2023, we exited frac water heating in North Dakota, which had been an underperforming market that was negatively impacting profitability. We sold certain equipment and real estate as part of the exiting North Dakota. In addition to these efforts, we executed on several opportunities to rightsize and take costs out of the business, and this carried into 2024.

We continue to focus on ways to improve margins and deliver consistent profitability as we focus on improving the pricing environment and getting market share in the basins where we operate. We entered 2024 on better operational and financial footing due to our multifaceted efforts in 2023 to deleverage the balance sheet, as well as improved market share margins. While our frac water heating services business benefited from improved seasonal conditions in this year's first quarter, that carried into the second quarter, we recognize that additional enhancement to our asset base and financial position was necessary, necessary to increase value for our stockholders. We announced in March and recently closed our immediately accretive acquisition of Buckshot Trucking. We view Buckshot as a great step in transitioning the company towards a more consistent cash flow generator that is less seasonal and not as subject to commodity risk.

In short, we have welcomed into Enservco an energy logistics business that generates strong year-round cash flow with significant growth prospects and an expanded customer base. I would note the transition will not require substantial new overhead or capital. Most important, I want to welcome previous owners, Tony Sims and Jim Thate, as well as the rest of the Buckshot team, to the Enservco family. In 2024, we continued to evaluate opportunities to reduce our reliance on seasonally focused businesses. Complemented by the Buckshot acquisition, we recently announced the sale of Heat Waves' Colorado-based frac water heating assets, with the net proceeds being used to pay down certain of the company's debt obligations, including a specific focus on the Utica facility. Importantly, following the paydown, we expect to engage with Utica to restructure the remaining facility.

To be clear, we are not completely exiting the frac water heating business. The company will continue to provide both frac water heating and hot oil services across the Marcellus-Utica basins, where last year's Rapid Hot acquisition bolstered our market share and contributed to significant improvement in operating results in the region. We also recently announced closing on a strategic agreement with Star Equity Holdings, including an exchange of respective equity investments between the companies and a short-term debt financing used to help facilitate the closing of the Buckshot acquisition. This agreement aligns the company and Star for potential future growth, with Star's commitment to a long-term partnership and operational excellence. In addition, it strengthens our leadership and oversight with the addition of Star's CEO and director, Rick Coleman, to Enservco's board of directors.

Last, and certainly not least, was a significant enhancement in our equity position as the Buckshot and Star transactions, along with debt conversions from Cross River Partners improve the balance sheet. This provides improvement for the key shareholder equity metrics that's required for Enservco to regain compliance with the NYSE American listing standards. We look forward to continuing our discussions with NYSE American. So with that, I'm gonna have Mark take you through some of the quarterly numbers before I provide a few closing remarks. Mark?

Mark Patterson (CFO)

Thank you, Rich. As Rich discussed, we are pleased to once again post year-over-year quarterly improvement across the board, with the second quarter benefiting from improved pricing, longer winter, and increased activity levels compared to the same period in 2023. Having said that, given the recent closing of multiple transactions Rich outlined, our financial performance for the three and six months into 30 June are not indicative of future results, which we believe will be materially improved beginning in the second quarter and second half of 2024. As a result, my discussion today concerning our second quarter results will be limited, and I would point folks to our recently filed 10-Q and other SEC documents for more details concerning our historical operating and financial performance, as well as that of Buckshot.

Our second quarter of 2024 revenue was $3.8 million, second quarter of 2023, with the increase coming primarily in completion services revenue, and it was partially offset with lower production services revenue, namely, the acidizing revenues were lower in the period. Both completions and production services revenue were primarily impacted by relative activity levels. Net loss in the second quarter was $2.3 million, or $0.08 per diluted share, versus a net loss of $2.6 million, or $0.12 per diluted share in the same quarter last year. Our second quarter Adjusted EBITDA loss was $700,000, compared to a loss of $1.1 million in the second quarter of 2023. That's a year-over-year improvement of 39%.

We remain very focused on right-sizing our business and will continue to evaluate and execute opportunities that reduce costs across the business. Turning to the balance sheet, in 2023 through 30 June of this year, we made material progress in reducing our debt levels. We remain focused on further improvement in the financial position of the company, and Rich discussed the various transactions we recently executed that have materially improved our business portfolio, financial position, and growth. Our third quarter will benefit from around 2 months of operating and financial impact from the collective transactions, with a full quarter of net benefit in the fourth. Bottom line, we're looking for a much stronger remainder of 2024 and further material financial improvement in 2025. So with that, I'll turn the call back over to Rich.

Richard Murphy (Executive Chairman)

Thank you, Mark. A primary focus for the remainder of the year will be ensuring a seamless integration of Buckshot's people, assets, and operations into our existing businesses. We will work closely with the Buckshot team to execute on our already identified near-term growth initiatives. I won't go through all the benefits afforded by each of the strategic transactions we recently closed. I would encourage everyone to read through our 9th and 12th August announcements discussing the transactions and respective strategic rationale in more detail. What I would say is that these collective announcements represent the culmination of our efforts over the past year and a half to materially improve and reposition our asset base to drive more predictable operating performance and cash flow. We also remain focused on regaining compliance with the NYSE American listing standards, evidenced by the incremental shareholders' equity driven by the collective recent transactions.

In short, we believe the repositioned Enservco 2.0 will prove to be the true value creator for stockholders. We are confident we will be in a strong position as we enter 2025 and capitalize on the additional opportunities for prudent growth in our energy, logistics, and service offerings across the country. 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 are in a good position to meet increased demand. In conclusion, we remain focused on executing our multifaceted plan to optimize our operations and build a more sustainable business model designed to promote further visibility and enhance financial performance for the benefit of the company and its stockholders. With that, thanks again for joining us on the call today. We'll now be happy to take any questions. Operator?

Operator (participant)

Certainly. Everyone at this time, we'll be conducting a question-and-answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone. Your first question is coming from Jeff Gramp from Alliance Global Partners. Your line is live.

Jeff Grampp (Analyst)

Good morning, Rich. Thanks for the time.

Richard Murphy (Executive Chairman)

Hey, good morning, Jeff.

Jeff Grampp (Analyst)

I'm curious if we could get a little bit. I know we have some past historical info on the logistics business, but can you just maybe at a high level talk about, you know, how that business has been performing thus far, and you know, what your kinda outlook is for that business over the remainder of 2024 into 2025, at least at a high level?

Richard Murphy (Executive Chairman)

Okay, so. And I'll let Mark jump in here as well, but, trailing twelve months is about, or we've got a little over $9.5 million revenue, over $2 million EBITDA. That's a business that has approximately, let's say, 28-29 trucks, and does no brokerage work. So, Mark is a and I'll talk for Mark in a second. He's got an expertise in the brokerage world of trucking, so. When we overlay brokerage with Buckshot and we were able to build the asset base up a little bit, we have an opportunity to really enhance those revenues, and the EBITDA from where it is. But they are actually improving on that nine. They have some decent organic growth without us doing anything right now.

They're growing at a nice clip. And then, with the brokerage entering new markets, we have, we have a real big opportunity in front of us, and I'll, I'll pass over to Mark for, do you have anything to add?

Mark Patterson (CFO)

Yeah. So, you know, Buckshot is a very solid company that has been built and led by a couple of very enthusiastic, very talented guys. What we want to do is complement them and help them be able to partner with other carriers, other entities for capacity, and then introduce the services throughout the broader energy sector, not just in oil and gas, but also wind and solar. We've tested the waters with Buckshot. There's a lot of demand in their areas. There's a lot of acceptance of Buckshot, and now all we really have to do is be able to say yes and continue to market the business and expand. So that's kind of where we are.

The numbers are, you know, roughly, as Rich said, $9-9.5 million in revenue on trailing twelve basis, a little over $2 million in EBITDA. That EBITDA is influenced at the private company, so, you know, it'll be a little bit skinnier on the expense side going forward, as it's not run as a private entity.

Jeff Grampp (Analyst)

Understood. I appreciate those details. Do you guys have kind of a rough timeline or goalpost in terms of when that brokerage business could be kind of a little bit more tangible or see some contribution from that?

Richard Murphy (Executive Chairman)

Mark, why don't you take that?

Mark Patterson (CFO)

Yeah. The brokerage business is at hand. You know, Tony and Jim have had to turn away opportunities. We've connected them with some trucking companies that are well situated in the industry that can accept some of those loads and partner with them on it. So the brokerage business is at hand. The company just has not historically gone out and gotten their brokerage authority, their bond and their insurance. Those things are all relatively quick, you know, one or two weeks, and all that's in place, and then the company can really increase. And, you know, we could do it through partnerships with other carriers through co-brokerage.

We could do it direct, but you know, more than anything else, we want to tap into the demand within the existing Enservco customer base, as well as the demand that Buckshot has had and hadn't been able to to capture on their own. We got a call yesterday from one of our very large clients on the frac watering side in Colorado. It's a very well-known company, very well positioned. You know, they were congratulating us, and you know, their response is, "Hey, we're ready to go on some of the hotshot activity as soon as you guys are ready." So we think it'll be widely accepted and ramp very quickly.

Richard Murphy (Executive Chairman)

I would just say that they do about 65% of the business in the Rockies, and I say Rockies as Wyoming, Colorado, and they go up as far as North Dakota, and they do about 35% in Texas. They don't do much in Carrizo and Georgetown, where we have our hot oiling business, so that's a market we can tap into pretty quick. They don't have a presence in either the Marcellus we could tap, and we had about 30 customers with MSAs in Southwest Texas. So, I mean, there's gonna be some opportunity for, as Mark said, the brokerage business is gonna be, I think, could be a huge opportunity, but there's gonna be organic growth and there's gonna be blockages.

Jeff Grampp (Analyst)

Okay, great. Appreciate all those details. For my follow-up, on the hot oiling side, just curious, Rich, maybe get a bit of an update there on what you're seeing in the market, both from a demand standpoint as well as pricing. You know, we've seen some industry commentary from some service companies about, you know, some pricing concessions, things of that nature. But given you guys, you know, have good market share and a little bit more in a niche service, just wondering if there's any installation there, just overall temperature check on the market. Thanks.

Richard Murphy (Executive Chairman)

Yeah. Hot oiling continues to run it like a... I always say, as I said you in the past, Jeff, a $900,000-1,001,000 monthly revenue run rate. That continues, where I would say we've seen no concessions. We're, we're actually seeing we're pushing price in our market. And so we,Yeah, that, that continues to run real nice. There's a reason we didn't sell it. It's an all year round business. It, it's just, it generates cash flow. And when it's complemented with Buckshot, I think there's, there's actually some driver synergies in that... with Buckshot and in the hot oiling business. There's obviously MSAs, they're synergistic.

But yeah, I'm very happy with that business, and we continue to want to try to expand maybe into additional markets, but right now we're gonna continue to dominate the market we're in.

Jeff Grampp (Analyst)

Okay, great. Appreciate the update, guys. Thank you.

Richard Murphy (Executive Chairman)

Thanks, Jeff.

Operator (participant)

Thank you. That concludes our Q&A session. I will now hand the conference back to Rich Murphy for closing remarks. Please go ahead.

Richard Murphy (Executive Chairman)

Yeah, I just wanna thank the shareholders and the patient shareholders. It's been a three-year grind to get this company into a position where we can really start to grow again, and, you know, we're there today. So, real excited. I don't think the stock reflects all the hard work we put in to get here, but, I think that over time, cash flow will make that a certainty. So again, thanks again, and I look forward to updating you guys in the next quarter with all we got going on with Buckshot. Take care.

Operator (participant)

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