Enservco Corporation

Greetings and welcome to the Inserveco third quarter 2023 earnings conference call. At this time, all participants are on a listen only mode and 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, Mr. Rich Murphy. Sir, you may begin.

Hello, and welcome to InserveCo's 2023 third 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 filings with the SEC. The company's business is subject to certain risks that could cause actual results that differ materially from those anticipated in its forward-looking statements. NSERVCO 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 nonpublic information. A webcast replay of today's call will be available at NSERVCO.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. Good morning, and welcome to our third quarter earnings call. Yesterday, we announced financial results for the third quarter and nine-month period ended September 30, 2023. You may recall that up until this quarter, Insurco had reported nine consecutive quarters of year-over-year revenue increases. This quarter that trend ended, but for what we believe was in our best interest for the long term. Specifically, we shut down our North Dakota operations in a strategic move to reallocate assets to more productive operating areas that offer more potential for revenue and profit growth. Our former North Dakota operations generated 1.1 million of revenue for the first nine months of last year. As a result, third quarter revenue was down slightly on a year-over-year basis and the streak was broken. As we now move into our more active quarters, and with oil prices and customer demand where they are, we remain quite optimistic about our chances of starting and maintaining a new streak. And despite our quarter three revenue decline, we are still 3% ahead of last year's revenue pace for the nine month period. As I mentioned, the North Dakota exit was a calculated move to focus our resources in more active areas. It is also expected to have the additional benefit of allowing us to convert underutilized assets to working capital to fund the heating season activities. We are in discussions with a third party to acquire North Dakota real estate and equipment that's expected to generate in the vicinity of 1 million cash that will further strengthen our balance sheet. In any case, we're excited to be moving into fall and winter when cooler temperatures drive increased demand for our heating services. As you know, our fourth and first quarters are when we generate the bulk of our revenue and profitability. So we're looking forward to seeing what we can accomplish over the next six months or so. This quarter and going forward, we're also going to benefit from the addition of Rapid Hot Operations in our eastern operating area, the Marcellus Shale. Rapid Hot provides frack water heating services to E&Ps in the Appalachian Basin, encompassing Ohio, Pennsylvania, and West Virginia. We acquired the company late in the third quarter, so we didn't get much revenue impact in that period, but that's going to change in Q4 when we'll begin enjoying the full benefit of RapidHot operations. We also believe we can continue to take market share across all our entire operating footprint. In addition to strengthening our existing position in the region and contributing incremental revenue, RapidHot had the added benefit of providing more depth to our management team. Specifically, Mike Lade, the former president and CFO of RapidHot, joined in SERFCO as chief of staff Mike is a CPA who brings more than 30 years of executive experience with private and nicely listed companies, including extensive work in the energy sector in operations, corporate development, M&A, and capital formation for emerging growth companies. Mike is also an accomplished turnaround specialist who understands how to drive profitable growth and pursue opportunistic M&A activity. We further strengthened our team with the addition of RapidHot managing member Steve Wild, who encircles board of directors, Weil is a 40-year energy executive, having served as an executive, board director, and chairman of private and public energy companies. He was the founder, CEO, and chairman of Enven Energy Corp., a deep water exploration company that earlier this year was merged in a transaction valued at nearly $1.3 billion. His energy leadership encompasses global oil services, commodities, deregulated power, and upstream oil and gas. He has successfully managed to close more than $20 billion in M&A transactions and financing projects. Steve is the second new director to join our board in the past seven months, and we are building a team capable of managing and directing a much larger enterprise, which is what we intend to do. We are steadily building momentum across our businesses. We are encouraged by improving margins and continued joint activity in our operating bases. Based on customer feedback, we expect further demand growth for our services and believe we are well positioned to meet that demand. So with that, I'm going to hand the call over to Mark Patterson, our CFO, to take you through some of the numbers before I provide a few closing comments. Mark?

Thank you, Rich. Our third quarter revenue decreased 6% year over year to $2.9 million from $3.1 million in the prior year. On a segment basis, production services revenue was lower at $2.6 million compared to $2.8 million a year ago. Completion services revenue was basically flat at $0.3 million. As Rich noted, our exit from North Dakota played a big part in the overall revenue decline, along with lower hot oiling activity in our Colorado and Pennsylvania markets. Most of this was offset by nice increases in our hot oiling and acidizing activity in our Texas region. Q3 adjusted EBITDA with negative 1.5 million, which compares to a negative 1.3 million in the same quarter of last year. And that loss in the third quarter decreased slightly to 3 million, or 13 per basic and alluded share compared to a net loss of 3.1 million or 27 cents per basic and alluded share in the same quarter last year. Turning to the nine month results, revenue through nine months increased 3% year over year to 15.6 million from 15.1 million. The increase was attributable to growth in the completion services segment, which increased 11% year over year to 7.2 million from 6.5 million and more than offset a 3% decline in production services, which were 8.4 million versus 8.6 million year-over-year. As previously mentioned on this call, the former North Dakota operation generated 1.1 million of revenue during the first nine months of 2022. The North Dakota exit also helped improve our adjusted EBITDA result by 42% through nine months to a negative 1.5 million from a negative 2.6 million in the same period of last year. The nine-month net loss of $6.6 million or $0.35 per basic and diluted share versus the net loss of $3.9 million or $0.34 per basic and diluted share in the same period of last year. Recall that in the year ago, the net loss included $4.3 million of gain on debt extinguishment. So absent that, our net loss would have been much improved over the prior year. As we told you last quarter, we're very focused on right-sizing our business and continue to look at ways to reduce costs. This includes headcount, public company costs, legal, accounting, insurance, investor relations, and other areas. We've seen significant declines in our SG&A expenses over the past 18 months and are approaching our internal goal of an annual SG&A run rate of 3.6 million, excluding some one-time legal and non-cash compensation. One final highlight, we recently closed $1.6 million convertible debt financing that include participation from lead investors of Rapid Hot, as well as in Servco Board and our larger shareholder crossover partners. I think it's important that our stockholders understand that our senior people, including our board, have a lot of skin in the game that reflects their optimism about the future prospects of the company. So with that, I'll turn the call back to Rich.

Thanks, Mark. I want to close with a few words about our ongoing successful efforts to transform our balance sheet. To recap, we closed the third quarter with just $4.2 million in term debt relating to our equipment financing. That's a $1.1 million reduction from the 2022 year end and an impressive $32 million reduction from our peak debt in 2019. This much-improved balance sheet gives us greater financial flexibility as we explore opportunistic M&A transactions and look to add new revenue streams. So again, With improved balance sheet, solid customer demand, and the addition of quality depth to our leadership teams, we're looking forward to optimizing our opportunities in the current heating season and capitalizing on new growth opportunities over the long term. With that, thank you again for joining our call today. I'll be happy to take any questions. Operator?

Thank you. At this time, we will be conducting our 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 the line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. We have a question from Jeff Gramp with Alliance Global Partners. Your line is live.

Good morning, Rich. Good morning, Mark. Good morning. I wanted to ask about RapidHot here. I know we're only not even, I think, a couple months into closing this, but how much integration is there needing to be done there? And just for context, can you kind of discuss the size of that fleet or maybe historical revenue just to better understand how impactful that business can be in the upcoming heating season?

Yeah, I mean, the basin itself is – I mean, we had about 14 to 16 bobtails in that basin, and Rabbit Hot had about the same. But it is a – the integration itself is pretty simple. We've basically combined our operations. We've moved all the equipment to the Rapid Hot operation yard, which we saved some costs there. As far as the revenue opportunity, last year was probably a bad example. One of the reasons that the two of us were kind of forcing each other's hands, it was pretty warm last winter in the Marcellus, and we take a lot of weather risks. We're trying to mitigate the weather risks as we go forward through better terms with our operations. our service providers, and they're open to it because, you know, listen, that basin will have no heating services if margins don't improve. So the margins tend to be better, but the seasons tend to be shorter. Last year was basically a year for all of us and that didn't generate a lot of revenue. So, you know, we were around $2.5 million in revenue, $2 to $2.5 million in revenue last year. uh, Rappahalos probably a little less. I think the combined entity can do with better pricing. Um, it won't be one plus one equals two. Um, and I, I think, well, I was going to say, I think Jeff, one of the things I'm seeing, this is my second season, um, at the helm here. And there is a change, not from us, but from our customers, as far as willingness to work with us. Um, Because last year we saw a lot of times we got call-out work, whether it was Colorado, and we just didn't have equipment. And a lot of people have left this business, the heating business. And the E&P customers understand that. So they want to make sure they lock up their equipment for the season and they're not left stranded or getting very expensive call-out work. So there's been a fundamental shift in kind of the mindset of our customers, which is good. It's good for all of us because it was an unhealthy environment from 2020 to 2022. for service guys.

Understood. Thanks for that. That's helpful. And on the pricing side, I think the release referenced some stronger pricing action that you're seeing. Is there a way to quantify that, maybe relative to last year? And then is that specific to frack water heating or is that kind of across all your service lines?

Across all, we continue to see rates going up on the daily rate and the hourly rate, even for hot oiling. The heating business, we're seeing a combination of price. I don't want to give a percent cause it kind of goes across the board, but it's, it's, you know, a low end with 10% and a high end, probably 25. Um, but that's both Colorado, uh, and PA. Well, primarily right now in the heating space is Colorado, Wyoming and PA, um, with North Dakota being gone. The, um, yeah, so I think you're seeing that 10 to 25%, but what we're seeing more is, is term and term is critical. I mean, to get, a 30-day term locked up with a healthy standby rate. So if it's not cold, we're still getting paid. And that was always the thing that disappeared in 2020. And that's the thing that our industry, quite frankly, needs to be healthy. So with a lot of the equipment being just leaving the industry, you're starting to get that type of 30-, 60-, 90-day term back in play. And that's, you know, if it happens to be hot in February, you know, we still get paid, you know, a lesser rate, but you know, it's still, that's a very important feature.

Understood. Yeah. That's, that's definitely a big change relative to the last couple of years. And last one for me, just broadly on, on M&A Rich, any kind of updated commentary there in terms of what you're seeing and, and would you consider your, yourselves kind of back in, in the market effectively, or is there kind of a digestion period for, that you'd want to get through with RapidHot before, you know, kind of getting more seriously back into the M&A market?

No, we're looking at stuff. We're definitely in the market. And as you can see from our remarks with the board, we have a very good team right now to execute on some M&A, whether it be, you know, transformative or niche type tuck-in stuff. With the balance sheet where it is, Jeff, we feel like we can go. The RapidHot integration is pretty much complete just to be, We're right now just ramping up through the season and trying to sign, you know, get all our contracts signed and dotted. Pennsylvania is the last basin because it gets coldest last to locking on your bid activity. So, yeah, we're looking at, you know, nothing pending tomorrow, but we're looking at arriving stuff. And the activity is that the options are, I won't say plentiful, but there's a lot of, industry businesses that would fit well with what we do.

Okay. Great to hear. Thank you guys for the time. Hey, thanks, Jeff.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star one at this time. Okay. As we have no further questions in queue, I will hand it back to Mr. Murphy for any closing comments he may have.

I want to thank everyone on the call, and particularly the employees of Insurfco, who over the last three years have done yeoman's work to get us to where we are with this balance sheet where we are. And, you know, our customers. I think we're in a good spot now as we enter the winter season, and I couldn't be more excited to get through this fall and winter and see the outcome come March. So I look forward to catching up with investors and everyone as we march through the winter. So thanks again for your time. Take care.

Thank you. This concludes today's conference and you may disconnect your lines at this time. We thank you for your participation.