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ENSV > SEC Filings for ENSV > Form 10-Q on 14-Nov-2013All Recent SEC Filings

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Form 10-Q for ENSERVCO CORP


14-Nov-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information regarding the results of operations for the three and nine month periods ended September 30, 2013 and 2012, and our financial condition, liquidity and capital resources as of September 30, 2013, and December 31, 2012. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion.

Forward-Looking Statements:

The information discussed in this Quarterly Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements, other than statements of historical facts, included herein concerning, among other things, planned capital expenditures, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as "may," "expect," "estimate," "project," "plan," "believe," "intend," "achievable," "anticipate," "will," "continue," "potential," "should," "could," and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, among others:

capital requirements and uncertainty of obtaining additional funding on terms acceptable to us;
price volatility of oil and natural gas prices, and the effect that lower prices may have on our customers' demand for our services, the result of which may adversely impact our revenues and stockholders' equity;
a decline in oil or natural gas production, and the impact of general economic conditions on the demand for oil and natural gas and the availability of capital which may impact our ability to perform services for our customers;
the broad geographical diversity of our operations which, while expected to diversify the risks related to a slow-down in one area of operations, also adds significantly to our costs of doing business;
constraints on us as a result of our substantial indebtedness, including restrictions imposed on us under the terms of our credit facility agreement and our ability to generate sufficient cash flows to repay our debt obligations;
our history of losses and working capital deficits which, at times, were significant;
adverse weather and environmental conditions;
reliance on a limited number of customers;
our ability to retain key members of our senior management and key technical employees;
impact of environmental, health and safety, and other governmental regulations, and of current or pending legislation with which we and our customers must comply;
developments in the global economy;
changes in tax laws;
the effects of competition;
the effect of seasonal factors;
further sales or issuances of our common stock and the price and volume volatility of our common stock; and
our common stock's limited trading history.

Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in our filings with the SEC and in Part II, Item 1A of this Quarterly Report. For additional information regarding risks and uncertainties, please read our filings with the SEC under the Exchange Act and the Securities Act, including our Annual Report on Form 10-K, as amended for the fiscal year ended December 31, 2012. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

OVERVIEW

The Company provides fluid management and well enhancement services to the domestic onshore oil and natural gas industry. These services include frac heating, hot oiling and acidizing (well enhancement services), and water hauling, fluid disposal, frac tank rental (fluid management services) and other general oilfield services. The Company owns and operates a fleet of more than 230 specialized trucks, trailers, frac tanks and other well-site related equipment and serves customers in several major domestic oil and gas fields including the DJ Basin/Niobrara field in Colorado, the Bakken field in North Dakota, the Marcellus and Utica Shale fields in Pennsylvania and Ohio, the Green River and Powder River Basins in Wyoming and the Mississippi Lime and Hugoton Fields in Kansas and Oklahoma.

RESULTS OF OPERATIONS

The following table shows selected financial data and operating results for the
periods noted.  Following the table, please see management's discussion of
significant changes.

                                        For the Three Months Ended        For the Nine Months Ended
                                               September 30,                     September 30,
                                            2013             2012              2013            2012
FINANCIAL RESULTS:
Revenues                              $      4,803,503   $  5,204,348      $  31,318,304   $ 20,243,521
Cost of Revenue                              4,656,508      4,848,019         20,799,074     15,930,345
Gross Profit                                   146,995        356,329         10,519,230      4,313,176
Gross Margin                                         3 %            7 %               34 %           21 %

Income (Loss) From Operations              (1,287,351)      (823,382)          5,959,817      (485,009)
Net Income (Loss)                     $      (919,420)   $  (472,204)      $   3,205,518   $  (634,020)
Earnings per Common Share - Diluted   $         (0.03)   $     (0.02)      $        0.09   $     (0.03)
Diluted weighted average number of
  common shares outstanding                 32,262,639     21,778,866         35,636,278     21,778,866

OTHER:
Adjusted EBITDA* from continuing
  Operations                          $      (626,456)   $  (236,681)      $   8,099,688   $  2,179,331
Adjusted EBITDA* Margin                           (13) %          (5) %               26 %           11 %

* Management believes that, for the reasons set forth below, adjusted EBITDA (even though a non-GAAP measure) is a valuable measurement of the Company's liquidity and performance and is consistent with the measurements offered by other companies in our industry. See further discussion of our use of EBITDA, the risks of non-GAAP measures, and the reconciliation to Net Income, below.

Overview:

Despite an eleventh consecutive quarter of year over year revenue growth from our core well enhancement services (frac water heating, hot oiling and acidizing), overall revenues for the three months ended September 30, 2013 declined 8% over the comparable quarter last year due to an 18% decline in fluid management revenues. As discussed under "Historical Seasonality of Revenues" below, the third quarter is our lowest revenue generating quarter and has a higher percentage of water hauling revenues than other fiscal quarters. As a result, gross margins during the third quarter are typically much lower than gross margins during our other fiscal quarters and are generally more sensitive to revenue and cost fluctuations. The decline in quarterly revenues combined with existing fixed costs resulted in lower gross profit and therefore a larger loss from operations and a larger negative EBITDA.

Notwithstanding the decline in revenues and profitability for the three months ended September 30, 2013, revenues and profitability for the nine months ended September 30, 2013 were significantly higher than the comparable period last year due to the results of the first six months of 2013. Increased heating capacity from the addition of new equipment combined with strong customer demand as compared to the prior year for frac heating services in the Rocky Mountain and Eastern USA regions during the first and second quarter of 2013 were the primary reasons.

Colorado Flooding:

In September 2013, flooding in northern Colorado impacted a significant portion of the oil and gas operations in the DJ Basin, one of our core operating areas. Several of our customers, including two of our largest customers, have substantial operations in the region and were adversely impacted by this flooding. Most of our customers shut-in their wells in advance of the flood and temporarily suspended their drilling and completion activities. Damaged roads and bridges combined with extensive surface flooding continued to disrupt customer operations and drilling activities into mid to late October. These customer delays and disruptions reduced our equipment utilization during September/October 2013 and tempered our revenues and earnings in the Rocky Mountain region for the quarter ended September 30, 2013. The flooding did not damage any of our facilities or equipment, but did delay the fabrication of our new heating equipment by approximately 4-5 weeks.

Following is a more detailed discussion of the changes in operating results.

Revenues:

Although the Company does not have segmented business operations, which would require segment reporting within the notes of its financial statements, we believe that revenue by service offering and revenue by geographic regions are important to understanding our business operations. The following tables set forth revenue from continuing operations by service offering and geographic region during the three and nine months ended September 30, 2013 and 2012:

                                       For the Three Months Ended        For the Nine Months Ended
                                              September 30,                    September 30,
                                          2013              2012            2013             2012
BY SERVICE OFFERING:
Fluid Management (1)                 $     2,422,106    $  2,958,423   $     6,570,914   $  7,267,620

Well Enhancement Services (2)              2,334,692       2,107,406        24,522,534     12,645,099

Well Site Construction and
Roustabout Services(6)                        46,705         138,519           224,856        330,802

Total Revenues                       $     4,803,503    $  5,204,348   $    31,318,304   $ 20,243,521



                                     For the Three Months Ended          For the Nine Months Ended
                                            September 30,                       September 30,
                                          2013              2012            2013            2012
BY GEOGRAPHY:
Eastern USA Region (3)               $      308,330      $   429,974   $    5,526,031   $  1,969,195

Rocky Mountain Region (4)                 1,768,065        1,625,897       16,728,013      9,909,310

Central USA Region (5)                    2,727,108        3,148,477        9,064,260      8,365,016

Total Revenues                       $    4,803,503      $ 5,204,348   $   31,318,304   $ 20,243,521

Notes to tables:
(1) Services include water hauling/disposal and frac tank rental.
(2) Services include frac water heating, acidizing, hot oil services, and pressure testing.
(3) Consists of operations and services performed in the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia) and the Utica Shale formation (eastern Ohio). Heat Waves is the Company's only subsidiary operating in this region.

(4) Consists of operations and services performed in the D-J Basin/Niobrara region (northeastern Colorado and southeastern Wyoming), the Green River and Powder River Basin (southern Wyoming), and Williston Basin/Bakken field (western North Dakota and eastern Montana). Heat Waves is the Company's only subsidiary operating in this region.
(5) Consists of southwestern Kansas, northwestern Oklahoma, Texas panhandle, and northern New Mexico. Both Dillco and Heat Waves engage in business operations in this region.
(6) Amounts herein represent our Dillco construction and roustabout services. During 2012, the Heat Waves' construction and roustabout service line was discontinued. See Note 3 to our consolidated financial statements accompanying this report for more details.

Revenues:

Revenues from continuing operations for the three months ended September 30, 2013 were $4.8 million, which was a $401,000 or 8% decrease from the comparable period last year. An 11% increase in our more profitable well enhancement services from the comparable quarter last year was offset by a decline in fluid management revenues of $533,000 or 18% over the same period last year. The decline in fluid management revenue was primarily attributable to the lost revenue from a low margin water hauling customer in the Central USA region which had been declining since early 2013. The Company had been working to replace this business with higher margin business and finalized a service agreement with a new customer in September 2013 which should replace most of the monthly revenue lost from the previous customer. As mentioned above, well enhancement service revenues increased $227,000 or 11% over the comparable quarter last year despite tempered revenues from the Colorado Flooding in September 2013. Hot oil service revenues in both the DJ Basin and Bakken field increased over the comparable quarter last year due to customer growth and the addition of two new hot oil trucks in late 2012.

Revenues from continuing operations for the nine months ended September 30, 2013 were $31.3 million, representing an increase of $11.1 million or 55% over the comparable period last year. Approximately $9.0 million of this increase was attributable to revenue growth in the first quarter of 2013 as compared to the first quarter of 2012. Increased heating capacity combined with the impact of cooler winter temperatures across our service territories during the first half of 2013 resulted in an increase in well enhancement revenue in all regions as compared to the same period last year with the most significant increase of $6.8 million occurring in the Rocky Mountain region.

Specific factors that increased revenues during the three and nine months ended September 30, 2013, as compared to 2012:

(1) During 2012 and the beginning of 2013, the Company expanded its heating capacity by investing in additional trucks and equipment to meet the growing demand for our frac heating and hot oiling services. As part of this expansion of trucks and equipment, the Company purchased and fabricated two new hot oil units and five double-burner frac heating units which were deployed into our Rocky Mountain region;

(2) Increased horizontal drilling and completion activity in the Niobrara Shale/DJ Basin by several customers resulted in higher frac heating service during 2013 as compared to the same period last year;

(3) During the first quarter of 2012, the Company's Well Enhancement Services of frac heating and hot oiling were affected by higher-than-average temperatures which reduced customer demand for heating services. During 2013, temperature and weather patterns were more in line with historical averages, thus increasing the demand for our frac heating and hot oiling services; and

(4) Revenues in the Eastern USA region (the southern Marcellus Shale formation covering southwestern Pennsylvania and northern West Virginia) increased by approximately $3.6 million during the nine months ended September 30, 2013, as compared to the same period in 2012, with the majority of this increase associated with Well Enhancement Services (more specifically, frac heating and hot oiling). This increase was primarily due to our expansion into the Utica Shale market (located in eastern Ohio) where exploration and production activity and demand for our services increased over 2012.

Specific factors that decreased revenues during the three and nine months ended September 30, 2013, as compared to 2012:

(1) Fluid Management services within our Dillco Fluid Service, Inc. operations (part of our Central USA region) decreased by approximately $737,000 during the nine months ended September 30, 2013, as compared to the same period last year. The loss of a member of our Dillco Fluid Service, Inc. operations management team in 2012 who started his own business, combined with continued competitive pressures to reduce water hauling rates has resulted in the loss of water hauling business. The Company has tried to maintain its pricing in this competitive market to prevent further dilution to its existing gross margins. During the third quarter of 2013, the Company secured contracts with several new customers which will replace most of the revenue lost earlier in the year from certain lower margin customers.

Historical Seasonality of Revenues:

Because of the seasonality of our frac water heating and hot oiling business, the second and third quarters are historically our lowest revenue generating periods of our fiscal year. In addition, the revenue mix of our service offerings also changes as our Well Enhancement services (which includes frac water heating and hot oiling) decrease as a percentage of total revenues and Fluid Management services and other services increase. The first and fourth quarters of our fiscal year, covering the months during what is known as our "heating season", have historically made up approximately 65% to 70% of our total fiscal year revenues, with the remaining 30% to 35% historically occurring in the second and third quarters. Thus, the revenues recognized in our quarterly financials in any given period are not indicative of the annual or quarterly revenues through the remainder of that fiscal year.

Costs of Revenues and Gross Profit:

Cost of revenues for the three months ended September 30, 2013 decreased $192,000 or 4% from the comparable period last year. As a percentage of revenues, cost of revenues increased to 97% of revenues as compared to 93% of revenues for the comparable quarter last year. Gross profits for the three months ended in September 30, 2013 decreased to $147,000 or 3% of revenues as compared to $356,000 or 7% of revenues during the comparable quarter last year. As noted above, the third quarter is typically our lowest revenue period of our fiscal year and accordingly, due to the fixed cost components of cost of revenues, gross margins during the third quarter are typically lower and more sensitive to revenue and cost fluctuations. Lower fluid management revenues combined with higher equipment lease costs contributed to the decline in gross profits and margins from the comparable period last year. In addition, labor costs associated with training new personnel for the upcoming heating season further reduced our gross margins for the quarter ended September 30, 2013.

Cost of revenues for the nine months ended September 30, 2013 increased $4.9 million or 31% from the comparable period last year. Despite the drop in gross margins during the most recent quarter, cost of revenues as a percentage of revenues for the nine months ended September 30, 2013 declined from 79% of revenues during comparable period last year to 66% of revenues for the nine months ended September 30, 2013. As a result, gross profits for the nine months ended in September 30, 2013 increased $6.2 million or 144% from the comparable period last year and gross margins improved from 21% for the nine months last year to 34% for the nine months ended September 30, 2013. Increased revenues from higher margin well enhancement services during the first two quarters of 2013 were the primary reason for the overall increase in gross margin and gross profits.

Specific factors that increased gross margin during three and nine months ended September 30, 2013 as compared to 2012:

(1) Well enhancement service revenues, which typically generate a higher gross profit margin than other services, increased to 49% and 78% of consolidated revenues for the three and nine months ended September 30, 2013 as compared to 40% and 62% during the comparable periods last year. Despite the overall drop in gross margin in the most recent quarter, the overall year to date gross margin increased due to more revenue generated from the higher margin well enhancement service revenues;

(2) Labor costs as a percentage of revenue were higher during the comparable periods last year due to unseasonably warm weather which resulted in lower utilization of field personnel; and

(3) In prior periods, the Company realized a reduction in costs of revenues through the implementation and maintenance of several cost-reduction programs and policies. Due to the significant increase in revenues from continuing operations during the first nine months of 2013, the Company was able to benefit from these cost-reduction programs and policies and our gross profit margins from each incremental dollar of revenue showed a significant increase in profitability.

General and Administrative Expenses:

For the three months ended September 30, 2013, general and administrative expenses increased approximately $238,000 or 37% as compared to the same period last year. Higher stock-based compensation costs related to the issuance of options combined with higher investor relations costs were the primary reasons for the increase in costs over the comparable period last year.

For the nine months ended September 30, 2013, general and administrative expenses increased approximately $483,000 or 20% as compared to the same periods last year. Higher stock-based compensation costs, higher investor relations costs, and higher legal and accounting costs associated with preparing a registration statement related to the Company's private placement transaction in November of 2012 were the primary reasons for the increase in costs over the comparable period last year. As a percentage of revenues, general and administrative expenses decreased three percentage points for the nine months ended September 30, 2013 as compared to the same periods last year.

Depreciation and Amortization:

For the three months ended September 30, 2013, depreciation and amortization expense increased $16,000 or 3% from the comparable period last year. Higher depreciation and amortization expense from new asset additions in 2013 and 2012 were almost completely mitigated by elimination of depreciation expense related to assets sold earlier this year.

For the nine months ended September 30, 2013, depreciation and amortization expense decreased $722,000 or 30% from the comparable period last year. During the second quarter of 2012, the Company reassessed the estimated useful lives of its property and equipment and increased the estimated useful lives of its trucks and equipment and of its disposal wells. This change in accounting estimate reduced depreciation and amortization expense by approximately $860,000 for the nine months ended September 30, 2013 as compared to the same period last year. This decrease was partially offset by slightly higher depreciation expense on new property and equipment additions during 2012 and 2013.

Income from Continuing Operations:

For the nine months ended September 30, 2013, income from continuing operations increased $6.4 million to $6.0 million as compared to a loss from continuing operations of $485,000 for the comparable period last year. As discussed above, increased revenue from well enhancement services contributed to an $11.1 million increase in revenues and a 13 percentage point improvement in gross margins (21% to 34%) as compared to the same period last year. Lower depreciation and amortization expense due to the change in useful lives discussed above also contributed to the improvement in income from continuing operations.

Management believes that this improvement in our results of operations reflects the beneficial effect of our expanded and increased operations (as discussed throughout this report), a focus on obtaining profitability, and the benefit of a normal winter and increased heating capacity at the beginning of 2013. We believe that as long as we are able to control our costs and increase our revenues as a result of our expanding geographical regions and service areas, our financial performance will continue to improve over the long run, although on a quarter-to-quarter basis, there may still be periods of loss due to the seasonality of our operations, as discussed several times herein.

Our operations in early 2012 were negatively impacted by unseasonably warm weather which reduced our operating cash flows and limited our available working capital. The lending arrangements entered into in November 2012 improved our working capital and enhanced our cash flows and has led toward greater operational flexibility. This has enabled the Company to acquire more equipment and continue to expand its operations geographically. That, plus cooler weather during the first half of calendar year 2013 as compared to 2012, has contributed to improved operating results and therefore an improvement in current assets and working capital, as further discussed in the Liquidity and Capital Resources section.

Income Taxes:

For the three months ended September 30, 2013, the Company recognized an income tax benefit of $604,000 on a pre-tax loss from continuing operations of $1.5 million as compared to a $425,000 income tax benefit on a pre-tax loss from continuing operations of $798,000 for the comparable period last year. For the nine months ended September 30, 2013 the Company recognized income tax expense of $2.2 million on pre-tax income from continuing operations of $5.5 million as compared to an income tax benefit of $464,000 on a pre-tax loss from continuing operations of $805,000 for the comparable period last year.

The effective tax rate on income from continuing operations was approximately 40% for the three and nine months ended September 30, 2013. This effective tax rate, as compared to a generally expected federal corporate tax rate of 34%, is primarily due to state and local income tax.

Adjusted EBITDA*:

Management believes that, for the reasons set forth below, Adjusted EBITDA (even
though a non-GAAP measure) is a valuable measurement of the Company's liquidity
and performance and is consistent with the measurements offered by other
companies in our industry.  The following table presents a reconciliation of our
net income to our Adjusted EBITDA for each of the periods indicated:

                                       For Three Months Ended         For Nine Months Ended
                                            September 30,                  September 30,
                                          2013           2012           2013           2012
EBITDA* from continuing
operations:
Income (Loss) from continuing
operations                           $    (919,420)   $ (372,507)   $   3,279,233   $ (340,863)
Add Back (Deduct)
Interest Expense                            247,346       211,411         813,052       638,244
Provision for income taxes                (603,835)     (425,175)       2,210,169     (463,904)
Depreciation and amortization               543,671       527,503       1,693,871     2,415,881
EBITDA* from continuing operations        (732,238)      (58,768)       7,996,325     2,249,358
Add Back (Deduct)
Stock-based compensation                    117,224        59,198         446,000       248,459
(Gain) on sale and disposal of
equipment                                   (6,842)     (251,875)       (313,299)     (253,411)
Interest and other income                   (4,600)        14,764        (29,338)      (65,075)
Adjusted EBITDA* from continuing
operations                           $    (626,456)   $ (236,681)   $   8,099,688   $ 2,179,331

EBITDA* from discontinued
. . .
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