Enservco Corporation

Good day, ladies and gentlemen, and welcome to the InserveCo's second quarter 2021 earnings call. At this time, all participants have been placed on a listen-only 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 second quarter conference call. Presenting on behalf of the company today are Rich Murphy Executive Chairman Marjorie 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 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. 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 non-public information. A webcast replay of today's call will be available at inservco.com. after the call in addition a 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 today we announced our second quarter of financial results after the market closed the highlights were one

a return to year-over-year revenue growth, and two, solid improvement in our profit metrics. On the revenue side, I credit our sales team and field personnel who have worked extremely hard on customer acquisition and retention efforts under incredibly challenging conditions during the pandemic. On the profit side, there were many factors at play. Chief among them, a sharp focus on cost cutting that has positioned us as a much leaner organization capable of generating improved gross and net margins as we scale the business. Total revenue in the second quarter increased 44%, driven by stable to rising commodity prices and a steadily increasing U.S. rig count. We experienced an uptick in customer activity in the majority of our operating areas and achieved year-over-year revenue increases in all three of our core service areas, track water heating, hot oiling, and acidizing. We also achieved good growth in our non-oil field service area, and based on recent customer commitments, expect that trend to continue in the second half of the year. The biggest driver of revenue growth was our hot oiling business, which grew 58% year over year based on renewed activity in North Dakota and Pennsylvania, and continued momentum in South Texas, where our Jordanton yard has our largest concentration of hot oilers to serve a growing customer base there. As we told you last quarter, we are also moving aggressively to meet demand for our hot oiling services in East Texas and recently opened a new yard in Longview to serve new customers in the Haynesville Shale and other fields in the Arkansas, Louisiana, and Texas region. You may recall that in March of this year, we kicked off a $400,000 CapEx program to refresh our hot oiling fleet. Before we're done, we think the investment will be closer to $480,000, but it will be worth every penny because the demand is there for hot oiling. Unlike frack water heating, it is a more non-seasonal business that can contribute revenue and profit on a year-round basis. The CapEx program is scheduled to conclude in the September-October time frame. As I said earlier, we enjoyed year-over-year growth in all revenue categories in Q2. Crack water heating grew 2%, while acidizing grew 191%, which is a good sign in that acidizing is an expensive undertaking for EMPs, and the increased activity could be viewed as a bullish sign that capital budgets are loosening up. And lastly, our non-oil field services revenue more than doubled in the quarter, reflecting our focus on augmenting traditional revenue streams while keeping our personnel and equipment working. On the topic of ancillary services, we continue to look at potential M&A transactions that can add profitable revenue streams. Anything we would do in this area would likely be small, EBITDA-positive tuck-in transactions that would add complementary and preferably non-seasonal services to our mix. The increased revenue in the second quarter contributed to a 63% improvement in our net loss and a 24% improvement in adjusted EBITDA loss. As I mentioned, our lower cost structure is playing a big part in this, but our bottom line is also benefiting from the effects of our bank refinancing and the impact of the CARES Act tax credits, which Margie will get into in more detail in just a minute. So to recap, we're pleased with our second quarter performance. As you know, Q2 and Q3 are our slower off-season quarters that generate considerably less revenue and profit than the fourth and first quarters that constitute our heating season. That said, however, it is nice to return to year-over-year growth mode, and we're working very hard to maintain our momentum in the current third quarter and carry it into what we hope will be a very productive heating season commencing in September. Unlike where we were at this time a year ago, we are now buoyed by a much stronger balance sheet. following a transformational debt refinancing, as well as two equity infusions that have put us in the strongest financial condition we've been in some time. One more comment on our debt refinancing. As you know, our bank became a large equity stakeholder in the company as part of the refinancing, and we enjoy a good relationship with them. Our note matures in October 2022. We expect to address our options later this year, early 2022, after we get a feel for how strong our upcoming heating season is. We're excited by our year-over-year revenue growth and hope to maintain that momentum in Q3, and particularly in our Q4 and Q1 heating season, when we traditionally generate the majority of our revenue and profit. Accordingly, we think it's prudent to wait a few quarters before we address the debt refi. With that, I'll turn the call over to Margie to recap financial results. Margie?

Thank you, Rich. And Servco reported Q2 revenue of $3.1 million. a 44% increase of a revenue of $2.1 million in the same quarter last year. As Rich said, it's nice to be back to reporting revenue increases again, and it's exciting to see growth across all of our service lines. We attribute these improvements to increased customer activity driven by higher commodity prices, new customer wins, and price increases we instituted over the past several months particularly for our hot oiling services. Production services segment revenue increased 61% year over year to 2.2 million from 1.4 million. The segment generated a loss of 117,000 compared to a segment loss of 431,000 last year, a 73% improvement that resulted from a combination of higher revenue and the positive impact of our cost-cutting measures. Completion services segment revenue in Q2 increased 13% to $858,000 from $758,000 a year ago. The segment loss improved by 35% to $491,000 compared to a loss of $758,000 in the same quarter last year, due again to higher revenue and lower costs. SG&A expenses in Q2 totaled $1 million, which is a 20% improvement over $1.2 million in the second quarter last year. This improvement reflected cost-cutting measures and lower personnel and stock-based compensation costs, partially offset by higher public company costs related to the share offering that brought in approximately $12.5 million in our fourth and first quarters. Depreciation and amortization expense were flat year over year at 1.3 million. Total operating expenses in the second quarter were also flat at 6 million despite the 44% revenue increase. Q2 net loss was 1.6 million or 14 cents per diluted share, which represented a 63% improvement over the net loss of 4.4 million or 18 cents per denuded share in the same quarter last year. The reduced net loss was primarily attributed to three things. One, our successful cost cutting measures that have taken approximately 4.2 million in annualized costs out of the business. Two, a $536,000 decrease in interest expense year over year following a deleveraging effort that has eliminated approximately 24 million in debt since September of 2020 and a capitalization of interest on the restructured debt. And three, the booking of $1.3 million in CARES Act payroll tax credits into other income in the second quarter. While I'm on the subject of other income, we anticipate booking an additional $1.2 million in CARES Act payroll tax credits over the next few quarters In addition, in July, we learned that our PPP loan was fully forgiven, so we expect to book another $1.9 million from that into other income in the third quarter this year. Adjusted EBITDA in the second quarter was a negative $1.6 million compared to a negative $2.1 million in the same quarter last year, a 24% improvement. Turning to our six-month results, which remember include the impact of a tough first quarter when commodity prices and rig counts were lower than those in the pre-pandemic year-ago first quarter. Total revenue for six months ended June 30, 2021, with $8.2 million versus $11.5 million in the prior year. Production services revenue was $4.1 million versus $4.6 million year-over-year. The segment generated a loss of $240,000, which was a 67% year-over-year improvement over the loss of $723,000 due to the cost-cutting initiatives and the improved second quarter performance. Completion services revenue for the first half was $4.2 million compared to $6.9 million in 2020 and generated a segment loss of $334,000 versus a segment profit of $455,000 year-over-year. Total operating expenses for the six-month period were reduced to $13.5 million from $17.7 million in 2020 due to lower work volumes and our cost cutting program. SG&A expenses improved to $2 million from $3 million year-over-year, reflecting cost cuts. and depreciation and amortization expense was flat at 2.7 million. Net loss through six months improved to 3.8 million, or 37 cents per diluted share, compared to a net loss of 7.2 million, or $1.95 per diluted share in 2020. The improvement was attributable to cost cuts, lower interest expense, and the benefit of payroll tax credits. Adjusted EBITDA was a negative 2.5 million versus a negative 2.6 million in the prior year. And with that, I'll now open the call to questions.

Operator? Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 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. Please hold while we poll for questions. Your first question for today is coming from Jeffrey Campbell. Please announce your affiliation, then pose your question.

Good afternoon. This is Jeffrey Campbell with Alliance Global Partners. First, Rich, I just want to make sure I understood the allusion to second half 21 growth that you were referring to. Is that specific to the non-oil field trucking business or were you referring to all of the Insurfco silos?

All the Insurfco silos.

Great. On the cost counting front, I mean, just looking at the financials, it looks like it's primarily been in SG&A. Was this mainly reduced headcount or is there something else going on?

Marge, why don't you take that?

You know, there's also some more in COGS as well that you can see in our gross profit. But there was about a little over 50% or so was in SG&A. And it's really a combination of a couple different things. The largest piece is headcount. It's really things like moving our headquarters and subletting, looking at what the expenses are and what's really in this market right-sized for this size company and what's going on in the market. So we've looked at actually every single expense we have and we continue to do it every week and think through, is that necessary? And that also contributed to our lower SG&A expenses.

Okay, thank you. Go ahead, Rich. I'm sorry. Yeah, I think a lot of that, Jeff, is going to be scalable, too. You'll see it as revenues come back. You're not going to see the cost elevate like they've had in the past. It's just a much better run company today. Our employees that are with us today, they have a keen sense of keeping costs in check and making sure that we're doing jobs that are cash flow positive. So it's just a different mindset, I would say, just beyond the cost-cutting.

Okay, well, that's helpful. I just wonder if we could dig into the year-over-year revs growth just a little bit. First, and I don't expect you to be too specific, but maybe you can indicate a trend or something in general. How did your pricing in the second quarter of 21 compare to a year ago?

So, it's really hot oiling we're talking about second quarter. So, that's We've seen increases across almost all our customers, say 90% of our customers in the 20, 25% range, and then even greater with some of our customers that got down. Now, every job is priced a little bit different in the hot oiling business. But in general, I would say we're north of 25% mark on all our customers year over year. That being said, if you go back to 2019 Q2, we're probably getting close to where we were there. So I think there's more upside because 2019 wasn't a great year as well in terms of price.

And since hot oiling is essentially a necessary maintenance for economic oil wells, I was wondering what are the specific drivers of this arcotex growth that's

you know supported adding an additional facility and you know this sounds like that it's it's really doing well and what's going on there to drive this well the there's a lot of work over rig activity with a higher commodity price EMP budgets or start capex budget to start to open up the first thing it's opening up is what the ducks want you know what you want to get it wherever there's a work over rig there's typically a hot weather filing behind it like I always said in the past so what we're seeing a lot is a lot of people want to get oil out of the ground right now, but they're, they're not getting the bank financing to do new drill programs. So whatever they have completed wells or wells that were dug, but they shut in, they're being opened up. And, um, that's one aspect of it. The other one is, is maintenance. So, um, on the maintenance side, it's, it's taken paraffins out of basically out of, we go on a maintenance program for a lot of our companies and we'll take, you know, will burn off a lot of paraffins, and they sell the oil for a higher price than they would with the paraffins in there. So it's a combination of the maintenance plus the ducts and new wells coming online. Okay.

Well, I mean, one of the reasons that I asked that, too, is just, you know, when I think of Haynesville and East Texas, I mean, those are pretty mature basins at this point, and you're getting enough work that you're adding units there. So I just wondered if There was maybe something along the lines that some other performers that don't have your safety and maybe don't do quite as good a job as you do, maybe you're winning some business from them and capturing some market share. Is that possible as part of it as well? It is.

It's a fascinating base in Arkansas, Louisiana, Texas, eastern Texas area. There's no big majors in there. Um, it's who, you know, we're fortunate enough to have one of our business development guys who grew up there and his father owned an independent energy company there. So he, he's got a lot of network. Um, we're starting small. We're building our, we doubled the size of our fleet there already. Um, but it's, I mean, we're competing against, I keep pushing our business development guys. I'm like, who's the biggest operator. And it's just a, it's like, if you, if you have more than two hot oilers in that basin, you're, you're considered big. So, um, There's a huge opportunity for us to go and win a lot of work in that area. It is a very – it's a different environment than the South Texas environment where you're dealing with the EOGs and the Devins of the world. But I kind of like it because you can – the pricing is better in that environment, you can imagine. Okay.

Now, that's helpful because, you know, it just – in a way, it seems odd that there's – this growth in a pretty well-worn area, but that all makes sense. And I was wondering, finally, particularly for the hot oiling, with the little bit of visibility you gave us on the second quarter continuing to perform, are you starting to see any more visibility or durability in the hot oiling business, meaning maybe people are Is this still kind of a deal where everybody books everything at the last minute, or is there a little bit more forward-looking aspect to the business that you're doing?

That maintenance stuff that I talked about, a lot of taxes, quite frankly, that's starting to see a little more advanced booking. You see volume discounts, too. It's not discounts, but volume. If they need five or six hot oilers, they want to lock those up. and they'll give you more advance notice. But it's, for the maintenance side, it is, you know, for the work over rig stuff, that tends to be stuff that's thought about it in advance as well. And then we do get a lot of call-out work still. And we can, if we have the availability, we service it. We used to always have the availability. It's not as, we don't always have the availability today. That's the way I describe it. Okay.

All right. Well, that's very helpful. I appreciate the color.

No worries. Thanks, Jeff.

Your next question is coming from Ed Wu. Please announce your affiliation and pose your question.

Yeah, Ascendant Capital. Congratulations on the quarter, guys. My question is, you know, as oil seems to be stabilizing around a $70 price point, are, you know, a lot of your drillers much more confident heading into, you know, the back half of this year, especially as it looks like, you know, COVID seems to be, you know, past its worst?

Yeah, I always hesitate to give a forward-looking statement like, you know, that, but we, listen, we're looking year over year, so I can clearly say that we hear more of a buzz. We have a more robust business development team than we did a year ago, so I'll, you know, caution with that, but, you know, our business development guys are, definitely hearing more buzz about needing our trucks this heating season than last year. Um, so there's a little bit of excitement around that. Um, but like anything, there's no long-term contracts. There's MSAs in this business. We have obviously MSAs with all the big guys being one of the biggest players, if not the biggest player in the heat, um, in the U S. So, you know, we're pretty excited, but obviously it's a tempered, we're coming off COVID. So everyone's a little bit shaken up the last two years. So, But we're excited with what we're hearing.

What about the competitive landscape? I know obviously a lot of drillers went out of business. Was there a lot of hot oilers out of business that aren't going to come back? Or are you seeing some of the competitors sit out for a while and slowly come back as demand comes back?

You know, what we're seeing more, Ed, is particularly the DJ, but even Wyoming. I mean, you saw Crowhart Williams merge on the WAMSutter. You have, you have in a DJ, you've got extraction and there's been two or three big guys just come together, Noble and Chevron, obviously. So it's this, there's fewer players and bigger players. And to me, that means you want to deal with people that have good safety records that have a real infrastructure around your business. versus just a guy with a truck, you know? So, and, and someone that can, that has, you know, five or six trucks that they can, they can get to you. Cause the last thing you want to do on a job is, you know, get a call and have the heating guy hold up the whole $6 million frat job. So, um, I think that bodes well for us and we have, you know, we're working on our butts off on, on solidifying these relationships and we've got relationships with a lot of these, these big players that have merged. So, um, That's kind of the landscape I see today versus it's different, which is fewer players and bigger players.

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

Hey, thanks, Ed.

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Well, so I just want to, as a closing note, thank two groups. One is the employees of Insurfco. They've persevered during the worst downturn since the 80s narrow patch. I think we've come out leaner and tougher and real focused on the next phase here, which is the upturn. I also want to thank the shareholders. These are probably the two groups that beat up the most. I'm one of them, one of the biggest shareholders, and we are keenly focused on generating free cash flow over the next couple quarters. And if we're successful in that, I think we'll see some dramatic impact on our share price. So with that, as always, I appreciate your time and attention on the call today, and we look forward to talking to you again on the close of our third quarter. Thanks again, operator.

Thank you, ladies and gentlemen. This does conclude today's conference call. If you have any questions, you may disconnect your phone lines at this time and have a wonderful day. Thank you for your