Enservco Corporation

Welcome to InserveCo's second quarter earnings call. At this time, all participants are in a 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, Jay Pfeiffer, Investor Relations. You may begin.

Hello, and welcome to InserveCo's 2023 second quarter conference call. Presenting on behalf of the company today are Rich Murphy, Executive Chairman, and Mark Patterson, 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 SEC filings. 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 website, a webcast replay of today's call will be available at insurco.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. And with that, I'll turn the call over to Rich Murphy. Rich, please go ahead.

Thanks, Jay. And good morning, and welcome to our second quarter earnings call. Yesterday, we announced financial results. and filed our Form 10-Q for the second quarter and six-month period ended June 30, 2023. We are pleased to report our ninth consecutive quarter of increased year-over-year revenue. As usual, credit goes to our field teams whose safe and reliable service delivery has engendered a high degree of loyalty among our Blue Chip customer base across all the basins in which we operate. In addition to driving higher year-over-year revenue for nine consecutive quarters, Our teams have also been instrumental in our efforts to operate more efficiently to reduce operating costs and improve profitability. We also benefited from colder weather, particularly in the west, that extended our heating season further into the spring. As you know, Q2 and Q3 are traditionally our slower off-season quarters due to warmer temperatures that keep our heating equipment on the sideline much of the time. So, the cooler weather was a welcome addition and we hope the beginning of a trend as many weather prognosticators are predicting more severe winter weather this year. Our heating business in the first and fourth quarters is responsible for the majority of our annual revenue and profitability in a given year. So we're cautiously optimistic that customer demand for heating services will continue to accelerate in coming months. Back to our second quarter results. Our profit metrics also showed continued improvement as both net income and adjusted EBITDA results were up year over year. Mark will get into the details in just a moment. Our balance sheet, a major focus for us in recent years, and a key element of our plans to enhance shareholder value, was further strengthened in the second quarter, and through six months, we achieved a 39% reduction in long-term debt as compared to the 2022 year-end balance. So with that, I'm going to have Mark take you through some of the numbers before I will close with some thoughts on our go-forward strategy.

Mark? Thank you, Rich. Beginning with our second quarter results, Q2 revenue increased 8% year-over-year to $3.7 million from $3.5 million on the strength of 147% increase in completion services. This was offset by a 7% decline in production services revenue. The decline in production services revenue was primarily related to our decision to exit our North Dakota operations. But that decline was substantially offset by significant gains within our more profitable Texas operations. Due to adjusted EBITDA improved by more than $500,000 to a loss of $1 billion compared to a loss of $1.6 million in the same quarter last year. Our bottom line in the second quarter improved by $1.3 million to a net loss of $2.6 million or 14 cents per basic and diluted share versus the net loss of 3.9 million or 34 cents per basic and diluted share in the same quarter last year. The reduced net loss was attributable to the combination of higher revenue and the impact of cost reductions across our business, including most notably a 43% decrease in SG&A expense in the quarter. Our SG&A run rate going forward will be in the range of $800,000 per quarter. That compares to an average of 1.2 to 1.4 million per quarter last year, a roughly 50% reduction. Turning to the six-month results, revenue through six months increased 5% year-over-year to 12.6 million from 12 million in the prior year. The increase reflected 12% growth in completion services, partially offset by the 2% decline in production services. Adjusted EBITDA through the six months improved by 1.3 million to nearly break even from a negative 1.4 million in the same period of last year. That's a pretty significant positive swing year over year and solid evidence that we're executing very well on our cost reduction plan. Net loss through six months was 3.6 million or 22 cents per basic and diluted share compared to a net loss of 800,000 or seven cents per basic and alluded chair in the same period last year. Remember in the year ago period, we booked a non-recurring 4.3 million gain on debt extinguishment, which skews the year over year comparison. Also in the second quarter, the company achieved significant cost reductions at both the operating and corporate levels through six months. Further to the issue of cost reductions, as we told you last quarter, we're focused very intently on right-sizing our business to align with projected revenue growth rates. This effort has included reducing personnel costs through headcount reduction at the corporate level and within our field teams during the less productive seasons, lowering our public company costs, including legal, accounting, and investor relations, reducing costs in real estate, rent, utilities, equipment, rent, repairs, insurance, and everything else. Regarding the latter, insurance, we've recently completed some insurance restructuring that we think should result in significant annual savings with higher limits, broader coverages, and better programs. So with that, I'll hand the call back over to Rich.

Thanks, Mark. I'll close with a few comments on two topics that are very important to me, both as Executive Chairman and as Insurfco's largest shareholder. The first is our dramatically improved balance sheet. And the second is our ongoing effort to augment our legacy businesses with new revenue streams, with an emphasis on year-round services that can help us reduce the seasonal aspect of our business. As we said in our earnings release, we have made tremendous progress in delevering our balance sheet over the past few years. In Q2, we eliminated another $1.8 million in long-term debt, bringing our total long-term debt balance down to $4.6 million, compared to $7.6 million at 2022 year-end. and compared to approximately $36 million at our peak debt period in 2019. We have funded this effort through a combination of debt restructuring concessions with lenders, equity sales, conversion to equity of convertible debt held by crossover partners, and the sale of non-revenue generating surplus equipment. The massive reduction in long-term debt does a couple of things for us. One, it should enable us to refinance our equipment loan at more favorable rates, which will lead to further cost savings. But more importantly, it translates into an enormous reduction in debt service, millions of dollars in cash that can be rechanneled to areas that will enhance shareholder value. And that brings me to the topic number two, expanding existing revenue streams and creating new ones. Our plans are to scale the business through organic growth, that is, wallet share expansion, new customer acquisition, and potential service line expansion, as well as M&A activity. We have initiatives underway on all fronts, Although for competitive reasons, we're not able to provide much detail until we're further along in the process, I can say that we have a non-binding letter of intent in place on one transaction that, if consummated, would add depth to our management team and strengthen our position in a key basin. So with that, thank you again for joining the call today. I'll be happy to take any questions you might have. Operator?

At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 1 if you wish to ask your question at this time. And one moment, please, while we poll for questions. And the first question today is coming from Jeff Gramp from Alliance Global Partners. Jeff, your line is live.

Good morning, guys.

Hey, good morning, Jeff.

Rich, I wanted to start maybe on the last point on the M&A topic and a related point being the balance sheet side of things. So you guys have obviously made tremendous progress on reducing the debt. It sounds like you no longer view the balance sheet as an impediment to M&A, but I guess just wanted to be crystal clear on that point. And would you like the debt to be lowered? Does that, you know, expand the breadth of M&A opportunities? Or do you feel you're sufficiently de-levered to go after the M&A opportunities that interest you guys?

Good question, Jeff. The balance sheet, ideally, I want to have zero debt because Coming from where we were at $36 million in debt to today, it's been a long haul. I'm proud of everyone involved with that restructuring and thankful for the banks to work with us. If we stuck with a steady state business that we currently have, I don't want any debt because we're seasonal and cyclical. Having both of those doesn't really bode well for debt. As we said in our remarks, the M&A, we're looking at getting out of this seasonality piece. And as we grow out of the seasonality piece, we'll be able to support a little bit of leverage. I'm somewhat debt adverse, though, and any kind of debt we take on would be probably to replace the expensive debt we currently have. So I don't know if that answers your question, but ideally... no debt. And, you know, that's just a larger shareholder. One day I dream of buying back shares and not talking about refinancing debt.

Yeah, understood. I appreciate that. That's helpful. And then on the production services business, you know, it was down a little bit year over year. It sounded like based on the press release, some of that was maybe due to just moving some equipment and presumably some downtime there. Can you give us a sense of like, I don't know, like a pro forma Q2 if all equipment was deployed in the areas that they currently are? And I guess ultimately just trying to assess, you know, how much of a headwind was that shift of equipment for you guys when evaluating the Q2 results?

It's kind of a little bit of a misnomer in terms of looking at the numbers because our Texas business is booming. I've said that in the past. If you just took Texas, it's up over 20% in the quarter. on a revenue basis. Where it gets netted out is we shut our North Dakota operations because we couldn't have a big enough... I moved a lot of that equipment obviously out of Texas, but we just couldn't... North Dakota is a tough place to do business. You need to have... I don't know how to... It's just a different world up there with regard to safety, winning customer bids. You have to go through a lot of Indian reservation type work. It's just not a great place to do business and When oil prices turn down, that's usually the first basin to go dark. So I made a strategic decision to say, hey, this equipment, particularly the hot oil, is better utilized in Texas. So we're actually comparing zero revenue in North Dakota in Q2 versus a bigger number, even though it's unprofitable revenue in North Dakota. This is basically the last anniversary of that basin. And we also did in second quarter in Colorado some – construction work, dirt hauling in Q2 last year, and I put an end to that as well because we just have certain profit metrics. If it doesn't meet a gross profit percent number, then we're not going to do the work anymore. So shutting down those two really offset the positive thing that's going on in Texas.

Got it. That's really helpful. And then last one for me, just kind of a bigger picture question, you know, rig counts have trended down, you know, in tandem with, with commodity prices here, broadly speaking. So just trying to think, you know, when we're looking at back half results or thinking about back half results for 2023, and there's going to be a little bit of a headwind there, presumably, but I know you guys have also made some really strong work, you know, both restoring margins and also maybe, you know, capturing market share in the markets you guys are in. So, Just wondering, big picture, you know, how do you guys think about kind of the gives and takes with broader industry activity levels relative to, you know, what you guys are achieving in the field?

I mean, so when we talk about that, we talk about three basins, right? We talk about Colorado, Texas, and PA for us. And Colorado is a fascinating basin because it's so consolidated now. They really have four or five big players left. That basin, I would – You know, I'm knocking on wood as I say it, but that basin is very strong right now in pricing versus last year. So we're very encouraged by that. And the fact of the matter is the fact that the big players, the Civitas and the Chevrons of the world, the Oxy, they tend not to drop rigs as quickly as the smaller guys. So they have five-year plans, and they're going through with that, and we're seeing strong demand from those players. The Texas market continues to be very low bus. That's the hot oil market. And PA can be determined. They usually don't start pricing PA for the heating season until September, so we'll wait, but we're very optimistic about some things we've got going on there.

Okay, great. Thanks for the time, guys.

Hey, thank you, Jeff.

Thank you, and once again, it's Star 1 if there were any other questions at this time.

And there were no other questions at this time.

I would now like to hand the call back to Rich Murphy for closing remarks.

Thanks, Paul. And I just want to say thank you to everyone who's been on this ride for the last couple of years and the leveraging effort. It's been long. We're at the tail end of it now. And I couldn't be more excited about the future and our current employees who have just grinded throughout this whole process to make this work. So thank you to our employees and our shareholders who've stuck with me during this period of time, and I'm looking forward to brighter times ahead. So thanks again, and look forward to catching up with everyone after Q3. Take care.

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