Enservco Corp.
/ (ENSV-NYSE MKT)Current Recommendation / Buy
Prior Recommendation / N/A
Date of Last Change / 08/07/2013
Current Price (05/27/15) / $1.57
Six- Month Target Price / $2.60
OUTLOOK
Enservco Corp. is an oilfield services company providing well enhancement and fluid management services to domestic onshore E&P companies. Through an organic growth strategy of capacity additions and geographic expansion, management has dramatically increased the company’s revenue and profit potential.Though the seasonally weaker second and third quarters of 2015 are expected to be lackluster, as in prior years, the company will enter the usually seasonally strong fourth quarter with the full complement of 2014’s capacity additions. We maintain ourBuy rating.SUMMARY DATA
52-Week High / $3.8952-Week Low / $1.36
One-Year Return (%) / -44.91
Beta / 0.08
Average Daily Volume (shrs.) / 54,577
Shares Outstanding (million) / 37.65
Market Capitalization ($ mil.) / $59.1
Short Interest Ratio (days) / 2.63
Institutional Ownership (%) / 22
Insider Ownership (%) / 37
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 29.7
Earnings Per Share (%) / N/A
Dividend (%) / N/A
P/E using TTM EPS / 22.4
P/E using 2015 Estimate / 14.3
P/E using 2016 Estimate / 9.8
Zacks Rank / 4
Risk Level / Above Average
Type of Stock / Small-Growth
Industry / Oil-Field Services
Zacks Rank in Industry / 29 of 37
KEY POINTS
Enservco Corp. is an oilfield services company that provides well enhancement and fluid management services to domestic onshore E&P companies. The majority of the company’s service offerings are reoccurring in nature, justifying a premium valuation multiple.
Enservco is focused on two segments of the oil & gas services industry: production-related services and hydraulic fracturing.
- The company provides the ongoing services for the transportation and disposal of fluids (water hauling) that accompany the process of oil & gas production, along with the recurring, maintenance services (hot oiling and acidizing) undertaken during workovers.
- Also, Enservco is a prime beneficiary of the megatrend towards developing unconventional oil & gas resources in the U.S. through hydraulic fracturing.
- Hence, the company benefits from both the megatrend of hydraulic fracturing to develop unconventional oil & gas resources in the U.S. (frac-water heating) and the stability of providing ongoing water hauling services and workover services (hot oiling and acidizing).
Through its Heat Waves and Dillco subsidiaries, Enservco has a geographic footprint over multiple basins and has strong relationships (over 100 MSA’s) with many operators in the oil and gas industry, including numerous majors.
An organic growth strategy of capacity additions (custom-built service trucks)and geographic expansion hasdramatically increased the company’s revenuepotential.
During 2015, management is poised to aggressively pursue acquisition opportunities. The company is solid financially with record working capital and a substantial revolving credit facility. This period of depressed oil prices should create a buyer’s market for well enhancement service assets. With experienced personnel to accurately assess potential acquisitions and equipment, this environment may provide attractive opportunities to buy-and-refurbish rather than build.
In 2014 Enservcointroduced two more efficient and lower-cost platforms: a mega frac-water heater and aliquefied natural gas (LNG) fuel powered frac-water heater.
Currently, management does not have any plans to increase capacity through a capital expenditure program but is diligently investigating the acquisition of capacity in the current “buyer’s market” in the oilfield services industry. However, with incremental hot oiling and acidizing jobs from multiple customers being attained in the Eagle Ford Basin, there is the possibility a capital expenditure program for hot oiling and acidizing units could be announced later in the year.
The seasonally weaker second and third quarters of 2015 are expected to be lackluster, as in prior years. However, the company will enter the usually seasonally strong fourth quarter with the full complement of 2014’s capacity additions. The tenor of the oil market, as well as weather, will determine capacity utilization and pricing that Enservco will garner.
When the oil industry resumes normalized exploration activity, initially the demand may be significant due to the backlog of DUCs (drilled-but-uncompleted-wells). Estimates for DUCs range from 3,000 to 5,000 wells.
In the meantime, management has positioned the company to better withstand an environment of lower oil prices. New capacity additions were relatively skewed towards maintenance services (acidizing and hot oiling) while the drilling-related frac water heating additions are competitively positioned as modern, efficient units with bi-fuel capabilities. In addition, management is diligently reducing costs.
We maintainourBuy rating.
RECENT NEWS
Financial Results – 1Q 2015
Enservco was impacted by unseasonably warm weather in the DJ Basin during the first quarter, which contributed the company’s top-line declining by 24%. Also, the adoption of its innovative bi-fuel system, which longer-term should permanently raise the company’s margins, reduced propane sales, which accounted for $5.9 million of the $6.1 million revenue decline.
The dynamic of introducing bi-fuel capabilities is both a competitive advantage to gain market share and, at the same time, a method to structurally raise the company’s margins by, in effect, divesting low margin propane sales by allowing the customer use well gas (or some other alternative fuel source). During the quarter, despite the sales decline, the gross margin increased to 41% from 35% in the comparable quarter last year. This interesting dynamic is expected to significantly enhance the company’s valuation multiple during the next up-phase of domestic exploration activities.
The effect of the oil price downturn was mitigated by price concessions (up to 10%) in the frac water heating business, which resulted in increased market share not only from business wins, but also from the contracting market as many E&P companies are leaving wells behind pipe (forgoing completion by fracking after the well has been drilled).
Financial Results – 4Q & YE of 2015
On March 18, 2015, Enservco reported financial results for the fourth quarter and year end of 2014. For the year, revenues increased 21.7% to $56.56 million (a record level) from $46.47 million in 2013, primarily due to the capacity additions to the company’s service fleet. Full year adjusted EBITDA increased to $11.5 million (also a company record) from $11.0 million in the prior year. The balance sheet improved significantly with working capital increasing 67.2% to $13.66 million and stockholders' equity increasing 40.5% to $18.04 million. Enservco’s capital expenditure/capacity expansion plan will be budgeted in approximately 60 days after management confers with its customers to review their plans for 2015.
Enservco’s 2014 capacity expansion program increased frac heating capacity 93% (from 42 to 81 units), hot oil capacity by 118% (from 27 to 59 units) and acidizing capacity 133% (from 3 to 7 units). The estimated annual revenue potential of the entire 2014 capacity expansion program is approximately $35 million. The new frac-water heaters have bi-fuel capabilities, allowing customers to have the option to toggle between using propane or LNG, which is a cleaner-burning fuel source and which can be supplied by the customer or sourced externally. The new fueling system has been a catalyst for winning new business and also for increasing the company’s frac water heating market share in the D-J Basin (where share has increased from 50% up to 75%), Marcellus-Utica (where share is now 70%) and Bakken markets. Also, the company’s "mega" heaters have twice the capacity of the company's legacy frac-water heating units, and are counted as two units.
During both the fourth quarter and year, Enservco faced certain headwinds and disruptions, and therefore, we have not yet seen the company fire on all cylinders. In the first quarter, a spike in propane prices raised costs and pressured the company’s gross margin. The second quarter was impacted by a safety-related stand-down by a large customer in the D-J Basin, while the fourth quarter’s revenues were diminished by unseasonably warm temperatures through mid-November. We await a year without unusual circumstances in order to see the full earnings power of Enservco.
OVERVIEW
Headquartered in Denver, Colorado, Enservco Corporation is an oilfield services company that provides well enhancement and fluid management services to domestic onshore exploration and production (E&P) companies. Well Enhancement Services (84% of revenues in 2014) is comprised of frac-water heating, hot oiling, acidizing and pressure testing, while Fluid Management (15% of revenues) involves water hauling, fluid disposal and frac tank rental. Operations related to Well Site Construction and Roustabout Services were discontinued in 2013, but now “Other” accounts for 1% of revenues. Enservco provides well-site services through two operating subsidiaries: Heat Waves Hot Oil Service and Dillco Fluid Services.
Enservco’s unique business profile differs from most oil and gas equipment service companies in that the company's business mix is skewed towards production rather than drilling. Between40% and 45% of revenues is derived from recurring, maintenance work related to production (hot oiling, freshwater and saltwater hauling, water disposal and acidizing) and 45% of revenues originates from drilling wells (frac heating, frac fluid hauling and frac tank rental). In addition, drilling-related revenues are derived from hydraulic fracturing, a well stimulation technique benefiting from a secular upswing in the U.S. Therefore, Enservco is less susceptible to the traditional cyclicality exhibited by upstream[1] capital spending budgets of oil and gas companies.
Enservco is focused on two unique sub-sectors of the oil & gas services industry: production-related services and fracking. Management completely avoids the cyclical oilfield equipment industry, which provides rigs, drill bits, valves, pumps, flow control equipment etc. that are needed for the process of drilling new wells. Rather, Enservco concentrates on services related to the ongoing production of oil & gas resources and the megatrend of fracking to release shale gas.
Oil & natural gas operations use and produce significant quantities of fluids. Enservco provides a variety of services for the transportation, storage and disposal of fluids that are involved during both the production of oil & gas and the development or remediation of wells (drilling, fracking and workovers).
Operators of oil and gas wells desire to optimize the productivity of their wells through production management. There are a variety of methods to optimize well performance, including the implementation of scheduled maintenance services to enhance the flow of production. Hot oiling and acidizing are two effective stimulation and workover procedures, both of which improve the permeability in production wells: one (hot oiling) for removing paraffin, tar and other organic deposits and the other (acidizing) for dissolvingscale precipitation and fines that have migrated and are blocking the movement of hydrocarbons.
The current energy boom in North America is being driven by the development of domestic shale gas resources, which requires horizontal drilling and hydraulic fracturing. The development of unconventional shale plays offer considerable opportunities for Enservco’s offerings of frac heating, frac fluid hauling and frac tank rental services, especially in areas of cold weather where frac fluids must be heated during the fracturing process. For example, it is cold or cool up to four months a year in western Pennsylvania (Marcellus shale formation) and up to 10 months a year in North Dakota (Bakken shale formation). Generally, frac fluids must be heated to at least 80 °F at the well site, and advanced techniques require temperatures of at least 90 °F.
Litigation
On October 8, 2014, Heat-On-The-Fly, LLC filed a patent infringement suit against Enservco and Heat Waves Hot Oil Service, LLC in the United States District Court for the Northern District of Texas (Civil Action No. 3:14-cv-03631). The complaint alleges that Heat Waves infringes on two patents held by HOTF (Patents 8,171,993 and 8,739,875, both of which are entitled “Water Heating Apparatus for Continuous Heated Water Flow and Method for Use in Hydraulic Fracturing”).
Heat-On-The-Fly has been litigious with energy companies concerning these patents. Some companies have licensed the patents on a non-exclusive basis. Other energy companies are seeking to invalidate the patents. The United States Patent Office has agreed to reexamine Patent 8,171,993 in its entirety.
Enservco and Heat Waves deny any patent infringement, citing among other points, that Heat Waves has been offering water heating services prior to the filing of these patents. However, during 2015, the company spent $562,486 on Patent litigation and defense expenses.
ORGANIC GROWTH
2014 Capacity Expansion Program
Enservco continued to expand service capacity through the procurement of newly fabricated equipment. The 2014 capital expenditure plan was comprised of two Phases. Announced in May, Phase 1 consists of a $9.0 million program for the fabrication of 10 mega frac-water heaters, 10 hot oiling units and two acidizing trucks. The new mega frac-waterheaters have twice the capacity of the company's legacy frac-water heating units, which were termed boxes. Also, a mega heater can be operated by one person versus the two required for double-burner trucks. Along with lower labor costs, the heating unit requires less fuel. The new equipment will have the potential of generating annual revenues of approximately $20 million. The initial phase was funded by internally generated cash flow.
Phase 2 was a $7.0 million program for the fabrication of eight mega frac-water heaters, six hot oiling units and two acidizing units. The annual revenue potential from the second tranche of new equipment is estimated to be at least $15 million, raising the estimated annual revenue potential for the entire $16 million capex plan to more than $35 million.The second tranche was being funded with a new PNC Bank revolving credit facility.
In addition to the mega frac-water heater, Enservco introduced a new liquefied natural gas (LNG)fueling system for the frac-water heating units this year. Customers can have the option to toggle between using propane or LNG, which is a cleaner-burning fuel source and which can be supplied by the customer or sourced externally. The new fueling system is available to the company’s entire customer base through an active marketing campaign. The first units were deployed in late September to customers in the D-J Basin, followed with a frac-water heater delivered to the Marcellus later in the year.
Enservco continues to grow capacity organically by serving expanding demand in both existing and new markets. The capex programs target higher-margin businesses: seasonal hot oiling, modestly-seasonal frac-water heating and non-seasonal well maintenance work. The number of acidizing and hot oiling programs in the Rocky Mountain service region continues to expand. In addition, new acidizing programs will be performed in the Texas Panhandle.
Overall, the total 2014 capital expenditure plan significantly expanded the capacity of the company’s current equipment fleet. All units were anticipated to be delivered in 2014 with the exception of six hot oil units, which are scheduled for delivery in the first two months of 2015. In addition, the acquisition in North Dakota added 13 units to the field. The combination of increased capacity through the fabrication of units and the acquisition is anticipated to be capable of increasing the annual revenue base by $41 million.
Acquisition of Assets (Bakken Shale Region)
On October 31st, Enservco closed on the acquisition of a package of oilfield service assets, including 12 hot oil trucks, a frac water heating unit and a 6-acre operating yard near Tioga, North Dakota. The acquisition allows Enservco to economically serve the northern Bakken Shale Region of the Williston Basin. The total purchase price was $3.7 million.
Management anticipates that the assets have the potential to add over $6 million in incremental revenues annually. Prospective customers for the hot oiling and frac water heating services include both those had been served by the prior owner of the assets and Enservco’s existing customers with operations in the northern Bakken Shale area.
The closing on the operating yard (which contains a maintenance shop and office facility), is contingent on a successful environmental Phase 1 review. Enservco will lease the property until the real estate transaction closes. Of the 13 units, six hot oilers and the frac water heating unit are currently in the field, three are undergoing maintenance to bring them up to Enservco’s standards and three require the hiring of operators before they can be deployed.