Enservco Corporation

Good day, ladies and gentlemen, and welcome to the InserveCo first quarter 2021 earnings call. At this time, all participants have been placed on listening mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jay Pfeiffer. Sir, the floor is yours.

Hello, and welcome to InserveCo's 2021 first quarter conference call. Presenting on behalf of the company today are Rich Murphy, Executive Chairman, and Margie Bill Meyers- Hargrave president and CFO as a reminder matters discussed during this call may include forward looking statements that are based on management's estimates projections and assumptions. Bill Meyers- 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. Bill Meyers- The company's business is subject to certain risks that could cause actual results to different materially from those anticipated in its forward looking statements. And Servco 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 public information. A webcast replay of today's call will be available at inservco.com after the call. In addition, the 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.

Thanks, Jay. Welcome, everyone, and thanks for joining our call. This morning, we released our first quarter financial results before the market opened. As stated in our news release, we did not enjoy the uptick in completions activity that we had hoped for in the first quarter. Despite the steady increase in commodity prices, And over the past six months, the demand for our frack water heating services did not approach the expected levels. While the pandemic and some unseasonably warm weather played a part, the fact is the operators that we served had been slow to commit budgets to drilling and completion activity. The good news is of those frack projects that were conducted in our service areas in the first quarter, we certainly won our fair share. And oddly enough, given my earlier comments about weather impact on the frack activity, We continue to heat water for one customer in Colorado today, and it's possible that project may even extend into June. Unfortunately, that's the exception rather than the rule this season. All that said, we do anticipate improved results over the next heating season, and here's why. First, the world is reopening, and the economic recovery now underway bodes well for our increased demand for oil, higher commodity prices, and increased drilling and completion activities. You may recall that back in February 2020, when the pandemic really kicked in, the domestic rig count plummeted from 790 to a low of 250 rigs in August of last year. Although the count has run back up above 400, it's still well below pre-pandemic levels. We are confident that if the rig count normalizes back to near 800, our equipment utilization will grow alongside. Our optimism is further buoyed by growing RFP bid activity from new and existing customers, as well as recent new customer wins. We're also encouraged by customer acceptance of up to 20% price increase for hot oil and services in several basins. We think we can achieve similar increases in the frack water heating business in the upcoming season. In addition, over the past couple of quarters, we continue to grow partnerships with two oil field services companies who refer us into their customer projects. And we have good reason to believe those relationships will continue to grow into the future. These services companies do a lot of water management work for producers and use us for water heating due to our solid reputation for reliability and safety. Lastly, we've been focusing more resources, time, and attention on our hot oil business, where we see good potential for expansion of a service that can generate revenue on a year-round basis. In March, we initiated a $400,000 CapEx program to refresh our hot oil fleet. That program is scheduled to conclude in September in time for our upcoming heating season. Right now, our Jorgenton yard that serves customers in the Eagle Forge Shale in South Texas is our most active area and has our largest concentration of high loaders with 19 units. We are also pursuing a good opportunity to capture market share in the Haynesville Shale, which encompasses East Texas, Southwest Arkansas, and Northwest Louisiana. We're still early in the process, but we're very excited about this expansion opportunity. Our sales team is doing a great job down there. We are in the process of deploying two hot oilers to the area and just recently found a permanent yard location. Ultimately, we believe this area can support up to another dozen hot oilers over the next 12 months. In the meantime, we are augmenting our traditional services with non-oil field services in order to keep our equipment and key field personnel working and contributing to revenue and profit. Specifically, we've been doing equipment hauling as well as dirt hauling, the latter for a customer that engaged us for initial project in May with the expectation of two additional projects in June and July. These three projects alone are expected to generate approximately $750,000 in total revenue in 2021. With that, I'll turn the call over to Margie to recap financial results.

Thank you, Rich. As noted in our press release this morning, but it bears repeating, we are moving forward with a much stronger balance sheet that was transformed through the addition of $12.5 million in fresh capital, the elimination of approximately $22 million in debt, and a right-sizing program that took approximately $4.2 million in annual expense out of our business. Accordingly, we believe we are well positioned to implement our growth strategy and deliver improved financial results going over the long term. Now to the numbers. Total Q1 revenue was $5.1 million, down from revenue of $9.4 million. in the same quarter last year. Production services revenue declined to 1.8 million from 3.2 million, but cut the segment loss to 123,000 versus the loss of 292,000 in Q1 last year. This is a reflection of our cost-cutting measures. Completion services revenue was 3.3 million in Q1, down from 6.2 million in the same quarter last year. We've reported a segment profit of $200,000 compared to a profit of $1.2 million in the same quarter last year. Total operating expenses in the first quarter declined 36% to $7.5 million from $11.6 million year over year due primarily to reduced customer activity and the resulting decline in production and completion expenses. On the corporate side, we reduced SG&A expenses in Q1 by 43% to 1 million from 1.8 million due to the right sizing activity. Q1 net loss was 2.2 million or 24 cents per share compared to a net loss of 2.8 million or 77 cents per share in the same quarter last year. The improved bottom line was primarily attributable to lower interest expense in the first quarter of 2021 due to the cessation of interest expense on our credit facility following our third quarter 2020 debt restructuring. Adjusted EBITDA in the first quarter was negative $940,000 compared to a negative $503,000 in the same quarter last year. Insurco used $2.6 million in cash from operations in the first quarter, up from $1 million in cash used in operations in Q1 last year. Cash provided by financing activities increased to $4.9 million from a half a million year over year due primarily to the public offering in February 2021, partially offset by the $3 million pay down of the company's credit facility. As noted in our first quarter queue in other income, we have begun receiving the CARES Act employee retention credits totaled $223,000 through March 31, 2021. Also, we just heard that this credit has now been extended through 2021, and we estimate that this credit to the company may be all in between $2 to $3 million in 2021 and will be recorded in other income. With that, I'll hand it back to Rich for some closing comments.

Thanks, Margie. I'll close by saying, despite the chaotic last few years in our industry, we believe there will be plenty of upside in coming years. I'll remind you that during our best year, we reported revenue of nearly $60 million with adjusted EBITDA of more than $11 million. And we accomplished that with a much smaller fleet than we have today. Given our expanded fleet size, our revenue capacity today is significantly higher than it was during our best years. As a result, we're approaching the future as though our best years are still ahead of us. Thank you again for your continued support of Insurfco. Operator, please open the call for questions.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, please press star one if you have any questions, and please hold while we poll for questions. And the first question is coming from Jeffrey Campbell from Alliance Global Partners. Jeffrey, your line is live.

Thank you. Good morning. Good morning, Jeff. Good morning, Jeff. Hi, Margie. You mentioned the hot oil price increases in certain markets. I was just wondering, are these increases possible elsewhere, or are they likely to be confined to these areas?

The price increases have been accepted across most of our basins, and so we're seeing it basically across the board. It depends by customer and how many trucks they're going to dedicate to us typically. There hasn't been a lot of pushback.

Okay, great. I want to hear a little bit more about your large oil field service partnerships. What services are they procuring and are you having to discount your price for their business? If so, is this being compensated for by the additional volume that they provide or might provide.

Hey, Mark, do you want to take that?

Thanks. Sorry about that. So from what I understand, no, there's no discount in pricing, but what they've done is they've started putting us on like their safety committees and getting us more involved in their operations. And so it's two large customers that we've had as customers before, but we've become much more of a partner with them, and all of the operations that we can do for them, they're bringing us in to do in different bases.

Okay, so does that, just kind of thinking about recent history, does this ultimately present the possibility for more business than you've had in the past, or is it more a continuation of what you've had through them? How should we think about that?

It's more business than we've had in the past. Okay, good.

And Jeff, I just also say that from a, from that being something that becomes more common, that is something that we think is a possibility. As we come out of this pandemic and the oil crash, they want to tighten up services. It's easier for an E&P company to deal with like two or three people versus 10 people on a frack job. So that could become a kind of a trend.

Okay. When you say that, do you mean, are you thinking about more, again, more work from these two guys, or are you thinking that you might be able to increase the number of partnerships that you can create?

Both. Okay.

Okay, so you said that the East Texas-Hainesville area could support, if I heard it correctly, could support up to 12 hot oilers in the next 12 months, and I thought that was interesting since Hainesville is generally thought of as a dry gas play, and East Texas does have some significant wet gas regions. So I was wondering, is there some oil production kind of hiding under the roof that will support these oilers, or are these gas wells that are needing your help?

Yeah, no, we do do some gas business. There is oil in the East Texas area. It's mostly... You know, without giving away too much, a lot of these people on the East Texas side, as you probably know, are independents. They're not the big guys. And we have some good inroads to a lot of these independents. So that's one reason. And it is primarily oil in the area. I could share actually with you. I just don't want to do it today.

Okay. It is a historically big oil field. I just didn't know if there was any more oil coming out or not, so that's good news.

Actually, our guys say the demand for our trucks is actually greater down there simply because it is older, and so they need more maintenance. And to keep the wells more prolific, it takes a little more work, and our hot oil is perfect for that.

Okay. You mentioned the non-oil field services, Revs, and you actually gave us a potential number for the year, which I thought was interesting. I guess what I'm wondering here is, should we be thinking about this as ultimately a higher utilization of existing equipment that you've got laying around, or is this something that could actually grow over time?

Yeah, I mean, I think it's utilization play, obviously. We want equipment What we're seeing right now with the oil pickup is, you know, as our equipment is getting to the point where it's fully operable, and we talked about our internal projects to be done in September, so we should have our full fleet ready to go. We're seeing, for the first time in a while, a lot of demand for our hot oilers, so it's a business decision whether we want to just take a group of our hot oilers and call them, this fleet is going to just be non-hot oil, or it's a little patchy. get to the point where East Texas needs 15 hot oilers, it'll be a price call. So the group that we did, I mean, just to put in context, the non-oil field business is a lot higher margin and a much bigger price point. But it's also not as consistent. So that's why we're trying to figure out how consistent that business is. The oil field business, when it's going, is fairly consistent.

lower margin it's lower margin right well i mean since the the since the hot oiling is also somewhat episodic i you know i guess you could think about trying to trade a higher margin episodic business for a lower margin episodic business but it's a nice problem to have yeah and we're trying to get the logistics right on i guess i was being worried there but just to get like all our trucks i just we don't want to move them too much so we want to

We want to see how consistent some of those now with the businesses, quite frankly. And, I mean, as you know, part of this – well, the key to this business is to get products in the right places with the highest price points. And that's a logistics issue for us. And we're working on that right now. It's nice, finally, to have those options, as you said, because the oil patch is starting to pick up.

Yeah, that's right. and um my last question was i was just a little bit confused by the reference in the press release the better upcoming results in the heating season since heating demand should be a month away notwithstanding the one customer you talked about in colorado so i was just wondering is this referring to advanced booking or an advanced look toward the winter heating utilization or is this something else that's nearer term yeah it's a good observation we have gotten

some looks already for business that we hadn't seen in the last couple of years. Just trying to, because rates are still haven't popped up to what the, I think the EMP companies might see that they possibly, they want to get some, some business probably locked in right now at current prices. So we are seeing a little bit of that.

Okay. Great. All right. Thanks. Appreciate it. Thanks for the call.

Thanks Jeff. Thank you. Once again, ladies and gentlemen, if you do wish to enter the queue to ask a question, please press star 1 on your phone. The next question is coming from Ed Wu from Ascendant Capital. Ed, your line is live.

Yeah, thank you for taking my question. My question is, what are you seeing out there in terms of the competition? Has it really changed much in the past three months as, you know, the commodity prices are improving and rig counts are improving?

Yeah, Ed. The competition, it's always been mom and pop, so people with three to five trucks, and it seems to be, as things pick up, I'll put it this way. When we're asking for price increases, there's no pushback, really, at this point, and now prices have gotten low. To me, that's a competitive signal. Either our competition has learned that they can't operate at a certain hourly rate, so they're saying we're just not going to do it anymore, or there's just less people out there doing what we're doing because of the pandemic.

Great. And then the other question is, I know you mentioned possibly 800 rates coming back. What are you hearing from your customers? Do they think the price increases for oil is sustainable long-term? We're through the roughest part. Or are they still very cautious of the business? And how quickly do you think we could ramp up back up to 800?

I think they're cautious. And you saw that in the first quarter with a sustained oil price at 60, that the completion activity outside of Texas was pretty sparse. So I think having been burnt over the last couple of years, It's tough to get financing, obviously, for new completion work. So I think the most prolific basins will be where they operate. And until they can put together, you know, they can generate cash flows for their investors, they're not going to go nuts. But that being said, 800 rigs is not, that's down significantly, as you know, from a couple of years back. This was well before $100 oil, but we used to run at 800 rigs. That was considered kind of light. So I think that's, You know, I think we have, because of that cautiousness, that we have probably a little runway here with stronger commodity prices.

Great. And then my last question is, you know, there's been some M&A, some kind of consolidation in, you know, the EMP space. You think that helps you or that potentially could hurt you?

I think it helps just because we're the biggest player in hot oil and heating. I know you're referring to the Bonanza Creek merger just recently, but we do business with both those players, Bonanza Creek and Extraction. So that's actually probably good news for us.

Great. Well, thank you, and I wish you guys good luck. Thanks, Ed.

Thank you. Once again, ladies and gentlemen, if there are any other questions, please press star 1 on your phone at this time.

And there were no other questions from the lines at this time. I'll hand it back to the management team for any final remarks.

I just want to say thanks to everybody for joining the call. All the investor support. As you know, I'm as invested in this company as anybody. So we are working hard for shareholders and the company and the employees are all bought into what we want to do. So I look forward to updating you on things over there in our upper point over the next couple of quarters. Thanks again.

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