Enservco Corporation

Good morning and welcome to the NSERVCO Corporation fourth quarter and year end fiscal 2023 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. I would now like to send the conference over to Wes Harris, Investor Relations for NSERFCO Corp. Please go ahead.

Well, thanks, Gary, and hello, everyone. Welcome to NSERFCO's 2023 Fourth Quarter and Full Year Earnings Conference Call. Presenting on behalf of the company today are Rich Murphy, our Executive Chairman, and Mark Patterson, our 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 the actual results to 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 Regulation FD, which prohibits selective disclosure of material nonpublic information. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in today's earnings release. A webcast replay of today's call will be available after the call. Instructions for accessing the webcast are available in the earnings release. With that, I'll turn the call over to Rich Murphy. Rich, please go ahead.

Thanks, Wes, and good morning, everyone. We appreciate you joining us for our final earnings call for fiscal 2023 and what a year it was. First, we did several transactions, including myself personally, to help restructure the balance sheet and place the company on stronger financial footing. This allowed us to reduce our expensive Utica term debt to approximately 3.6 million as of today, a 33% decrease from the end of 2022 and a far cry from the over 34 million peak debt levels we had in 2019. We feel we're on the right track and we're executing on additional initiatives to promote a more stable and growing business that further shores up the balance sheet. More on that later. In addition to enhancing our financial position in 2023, we also took the opportunity to closely review all our operations to see where our assets would be best located from an economic perspective. As a result, we shut down our North Dakota operations in a strategic move to reallocate assets to a more productive operating areas that offer more potential for revenue and profit growth. It also provided the additional benefit of allowing us to convert underutilized assets to working capital to fund the heating season activities. The continued focus on deleveraging the balance sheet and improving market share and margins in the basins of which we operate has enabled us to begin the growth phase of the company turnaround. This is best exemplified by the recent buckshot announcement. I believe this is a great first step in transitioning the company towards a more consistent cash flow generator. The focus of our current operations has been on improving the pricing environment and gaining market share in the three basins we operate. This focus resulted in a 14% increase in quarterly gross profit margins and a 61% increase in annual gross profit margins. We continue to focus on ways to improve margins and deliver consistent profitability. As I said on our last earnings call, we believe we can continue to capture additional market share across our entire operating footprint. We feel we have a solid management team in place that continues to execute on all our strategic plan to transform the business. And finally, our efforts to expand our customer base, further rationalize the location of our assets to enhance profitability and drive increased efficiencies throughout the business is beginning to show in our financials. Our profit margins continue to improve. Our G and A expenses continue to decrease on a comparative basis and our adjusted EBITDA loss continues to decrease. This is a direct result of our focused execution on our multifaceted plan to optimize our operations and build a more sustainable business model with reduced debt. So with that, I'm going to have Mark take you through some of the quarterly and full year numbers before I provide a few closing comments. Mark.

Thank you, Rich. Our fourth quarter 2023 heating season saw about 13% fewer cold days, which primarily impacted completion services. Our frac water heating segment was a little softer than we had hoped at the launch of the season, but it was still solidly up year over year. Our hard oiling operation saw some weakness in demand as well due to several factors. The result was fourth quarter 2023 revenue of $6.5 million. That was flat with the fourth quarter of 2022. On a segment basis, production services revenue was lower at $2.2 million compared to $2.6 million a year ago. Fourth quarter 2023 completion services revenue increased 10% to $4.3 million from 3.9 million in 2022, mostly driven by strong growth in our Colorado operations. The fourth quarter adjusted EBITDA came in at 62,000, a loss. Yeah, it was adjusted EBITDA loss compared to adjusted EBITDA loss in the fourth quarter of 2022 of 77,000. That was a positive EBITDA in the fourth quarter of this year compared to even a loss of last year, which was 181% improvement. Net loss in the fourth quarter was $1.9 million or $0.75 per diluted share versus a net loss of $1.7 million or $0.14 per diluted share in the same quarter of last year. Turning to our four-year results, I think Rich summed up nicely the many initiatives that we executed during 2023, with results being a substantial improvement in reducing our adjusted EBITDA loss. Let's go through some of the details. All year 2023, revenue increased 2% year-over-year to $22.1 million from $21.6 million in 2022. The increase was attributable to growth in the completion services segment, which increased 11% year-over-year to $11.5 million from $10.4 million and more than offset a 6% decline in production services, which were $10.5 million versus $11.2 million year-over-year. The company's revenues generated from completions activity were strong during the fourth quarter of 2023, which in addition to increased volume benefited by the implementation of price increases for these services. most notably in our Colorado region. While year-over-year increases to our completions activity revenues were largely offset by decreases in our production services segment revenues, annual revenues and demand for production services continued to be strong in 2023. Total segment profit for 2023 increased 61% to $2.3 million from $1.4 million in 2022. due to the reasons I just discussed, coupled with our continued efforts to reduce our labor costs and downtime during our off-season months. Again, most notably in our Colorado region. The full year 2023, we posted an adjusted EBITDA loss of $1.5 million, which was a 46% improvement from the $2.7 million adjusted EBITDA loss we posted in 2022, along with higher total segment profit. we benefited from a 9% decrease in G&A, primarily due to reductions in personnel expenses and associated stock-based compensation costs year-over-year. Full year 2023 net loss was $8.5 million, or $0.42 per basic share, versus net loss of $5.6 million, or $0.48 per basic and alluded share in 2022. As a reminder, our 2022 net loss included a non-cash 4.3 million gain on debt extinguishment. Without this change, our net loss decreased 1.4 million year-over-year. We remain very focused on right-sizing our business and continue to look for and execute on ways to reduce our cost across the business. We've seen significant declines in our SG&E expense over the past two years and are getting closer to our internal goal of an annual run rate of 3.6 million excluding some one-time legal and non-cash items, such as stock compensation expense. Turning to the balance sheet, as Rich discussed, during 2023, we made material progress in reducing our debt levels. Echoing his comments, we remain squarely focused on improving the financial position of the company and executing on opportunities that not only enhance the balance sheet, but also provide incremental growth opportunities. I expect Rich will talk further about these efforts in its closing market. So with that, I'll turn the call back over to Rich.

Thank you, Mark. Exactly right. I do plan to discuss a very exciting opportunity immediately in front of us. But before I do that, I will spend a little time discussing the outlook of our existing businesses. The strategic actions we took in 23 have placed us in a much better position as we move into 24. As I said in my opening comments, We are seeing material financial improvements across the board, including in profit margins, reductions in G&A expense, and decreases in our adjusted EBITDA loss. We're steadily building momentum across our businesses and are encouraged by the continued drilling activity on our operating areas. Based on customer feedback, we expect further demand growth for our services and believe we are well-positioned to meet that demand. That said... Our current heating business is very dependent on cold weather, as you know. Unfortunately, we can't count on weather always being our liking, so over the past month, we have been evaluating opportunities to add a non-seasonal business with greater growth potential and synergies to our current service offerings. On March 20th, we announced what we expect will be a transformative transaction for Insurfco and our shareholders. We have reached an agreement to acquire Buckshot Trucking, LLC, or what I would refer to as just Buckshot. I won't get into all the details today, as you can get them from the press release we put out, but here are some highlights with a focus on the strategic rationale for the transaction. First, who is Buckshot? They were founded in 2017 and headquartered in Fort Lupton, Colorado. Their greater Rocky Mountain focus is complemented by an extensive presence of operations in Wyoming, Utah, North Dakota, and Texas, supported by a key base of operations in Casper, Wyoming. Buckshot focuses on hot oil, Hotshot trucking, dedicated freight services, and LTL, or less than truckload services, within the oil and gas sector. More important, why should Encirco acquire Buckshot? There are many reasons, but here are a few of the main ones. It allows us to enter the higher margin energy logistics services space with a business that has historically generated strong growth and cash generation without substantial new overhead. It provides year-round prospective growth with operational and financial visibility. It also provides incremental services for our existing and expanding customer base while providing a pathway for earnings and cash flow growth and improved predictability. And finally, it creates a new operating division that complements and expands our current strong market position in hot oil and acidizing services and track water heating, in addition to some non-oil and natural gas customers. Importantly, Buckshot founder and current owners Tony Sims and Jim Fate will continue to lead Buckshot and are financially incentivized to oversee and grow the business through an earn-out provision that is part of the transaction. As important, they are bringing their operating team with them. In short, Buckshot provides a strong complement to our current service offerings with the added benefit of not being winter weather dependent. Buckshot will also provide a substantial improvement in operational and financial visibility, which benefits our businesses, shareholders, and other stakeholders. We are targeting to close the transaction in the second quarter of this year. To sum up, 2023 was a much improved year for Insurco. With a full year of impact in the late third quarter 2023 edition of RapidHot and the potential addition of Buckshot, we believe we're solidly positioned for an even better 2024 and beyond. One quick comment on the stock price. As the largest shareholder, I've been focused on building a sustainable business model that can generate consistent cash flows. I believe stock prices ultimately reflect the company's future discounted cash flows. With an improved balance sheet, stronger operating business, and the buckshot acquisition pending, I am the most optimistic about our future since taking over in late 2020. In light of that, we have teamed up with Alpitri Group, a highly regarded IR firm, to enhance our future shareholder communications. With that, Thanks again for joining us on the call today. We will now be happy to take any questions.

Excuse me. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Jeff Gramp with Alliance Global Partners. Please go ahead.

Good morning, guys. Good morning. I wanted to talk first on the production services front. It looked like a really strong quarter there on the margin front in particular. Just hoping to dive into that a bit more and maybe looking forward prospectively into 2024, what kind of confidence you guys may have in the continuation of that kind of margin profile.

Yeah, I would say right out of the gate, pricing has increased, and we're getting more on standby rates. Obviously, weather was a bit of a headwind, but because of the standby rates – and the reality is since 2020, a lot of the competition, as I said before, has either consolidated or gone away because the business was so tough. So we're definitely seeing the impact of higher rates. uh better standby rates um and a more just a more rationalized market marketplace and we still have to continue jeff i think i don't think it's going to go back you know unless you see a a severe oil price decline or some type of economic hit but i would i would think that this kind of marketplace can uh it pervades up to 24.

Understood. Thank you. And maybe building on that, you guys had a press release last month talking about revenue being up, I think it was 15% in the first couple of months of Q1. Can you guys kind of talk about the main drivers there? I mean, I know weather wasn't a tremendous friend in driving that. So I assume it's more just kind of in Servco specific market share gains or pricing, but just hoping to better understand that dynamic.

Yeah. I mean, I think it's, In our remarks, with the Rapid Hot deal, Pennsylvania has a much more improved pricing format in first quarters. That's helped. Colorado has had a better pricing and margin scenario. That's obviously helped and offset any type of weather impact we've had. So I would say the combination of a stronger Pennsylvania and a basically stronger Colorado, which is we have a little activity in Wyoming, but that's basically our two basins at this point for heating, which is production.

Okay, great. And you keep teaming up here for my next questions I had. So on a rapid hot, I mean, I know a lot of the focus is on Buckshot here, given that that's obviously a big deal for you guys, but I don't want to lose too much sight of that deal as well. So just kind of curious if you can update us on the performance and integration there, and maybe just if you're seeing any change in the competitive dynamics, given that it was a fairly meaningful acquisition from a competitive standpoint in Appalachia.

Yeah, I mean, the integration is complete, and the integration went very nicely. Rapid Hot guys who run the yard now have done a tremendous job. The pricing in the Marcellus has always been better than it is out west, but you also have a shorter season. So the key to wanting to be in that basin for long term is the standby rates. And we've done a really good job on, I should say, the new team has done a very good job on standby rates. That being said, you know where that gas prices are. So we did have some headwinds in Pennsylvania with regard to weather this winter. But, again, the standby rates were very helpful in that aspect. And so that's been a pleasant surprise.

Okay. I appreciate the details, Rich. Thank you guys for this time. Yep. Thank you, Jeff.

Again, if you have a question, please press star then one. Please stand by as we poll for questions. Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Rich Murphy for any closing remarks.

I just want to say thank you to everybody, our employees, shareholders. It's been a long road. I think with the buckshot and the rapid-hot effects and the remarks, we're looking at a nice 2024 and forward. So we will be communicating more with the Al Pitcher Group, and I look forward to catching up with some of our shareholders face-to-face in 2024. And with that, enjoy the rest of the spring and talk to you in a few weeks. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.