Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ENSV > SEC Filings for ENSV > Form 10-Q on 13-May-2014All Recent SEC Filings

Show all filings for ENSERVCO CORP

Form 10-Q for ENSERVCO CORP


13-May-2014

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 month periods ended March 31, 2014 and 2013, and our financial condition, liquidity and capital resources as of March 31, 2014, and December 31, 2013. 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 customer's 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 for the fiscal year ended December 31, 2013. 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.

BUSINESS OVERVIEW

Enservco Corporation provides well enhancement and fluid management services to the domestic onshore oil and natural gas industry. These services include frac water 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
                                                                          March 31,
                                                                    2014              2013
FINANCIAL RESULTS:
Revenues                                                       $   25,242,045     $ 18,567,166
Cost of Revenue                                                    16,292,018       10,569,098
Gross Profit                                                        8,950,027        7,998,068
Gross Profit Percentage                                                    35 %             43 %

Income From Operations                                              7,112,579        6,577,159
Net Income                                                     $    4,185,956     $  3,934,031
Earnings per Common Share - Diluted                            $         0.11     $       0.11
Diluted weighted average number of common shares outstanding       38,347,173       34,998,234

OTHER:
Adjusted EBITDA*                                               $    7,866,386     $  7,209,714
Adjusted EBITDA* Margin                                                    31 %             39 %

* 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 Enservco's industry. See further discussion of our use of EBITDA, the risks of non-GAAP measures, and the reconciliation to Net Income, below.

Overview:

Revenues for the quarter ended March 31, 2014 increased $6.7 million or 36% due to record growth in our flagship well enhancement services. Additional frac water heating and hot oiling equipment, increased utilization of hot oiling equipment across our fleet, and the impact of sharp increases in propane prices experienced during the quarter all contributed to the revenue increase. See below for a more detailed discussion of these factors.

Although showing a decline in 2014 as a percentage of revenues, gross profit and Adjusted EBITDA margins remained comparable to the prior year when adjusted for the impact of the increase in propane prices mentioned above. This is due primarily to higher propane costs being passed along to customers with minimal markup thereby increasing revenues with no corresponding significant increase in profit.

Revenue Details:

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 by service offering and geographic region during the three months ended March 31, 2014 and 2013:

                                                       For the Three Months Ended
                                                                March 31,
                                                          2014              2013
 BY SERVICE OFFERING:
 Well Enhancement Services (1)                       $   23,073,131     $ 16,420,893

 Fluid Management (2)                                     2,038,760        2,036,745

 Well Site Construction and Roustabout Services(3)          130,154          109,528

 Total Revenues                                      $   25,242,045     $ 18,567,166

The Company only does business in the United States, in what it believes are three geographically diverse regions. The following table sets forth revenue for the Company's three geographic regions during the three months ending March 31, 2014 and 2013:

                                           For the Three Months Ended
                                                    March 31,
                                              2014               2013
             BY GEOGRAPHY:
             Rocky Mountain Region (4)   $    14,234,958     $ 10,511,661

             Eastern USA Region (5)            6,943,041        4,324,196

             Central USA Region (6)            4,064,046        3,731,309

             Total Revenues              $    25,242,045     $ 18,567,166

Notes to tables:

(1) Includes frac water heating, acidizing, hot oil services, and pressure testing.

(2) Includes water hauling, fluid disposal and frac tank rental.

(3) Includes construction and roustabout services.

(4) Includes the D-J Basin/Niobrara field (northern Colorado and southeastern Wyoming), the Powder River and Green River Basins (central Wyoming), the Bakken Field (western North Dakota and eastern Montana). Heat Waves is the only Company subsidiary operating in this region.

(5) Consists of 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 only Company subsidiary operating in this region.

(6) Includes the Mississippi Lime and Hugoton Field in Kansas, Oklahoma, and Texas. Both Dillco and Heat Waves engage in business operations in this region.

Revenues:

Revenues increased $6.7 million or 36% to $25.2 million for the three months ended March 31, 2014 primarily due to record revenues from our flagship well enhancement services. Revenues from both fluid management services and well site construction and roustabout services remained relatively flat in comparison to the same period last year.

Well Enhancement Services

Well enhancement service revenues, which includes frac water heating, hot oiling, and acidizing services continued to show record growth in 2014 increasing $6.7 million or 41% for the three months ended March 31, 2014. Increased customer demand particularly in the Rocky Mountain Region and Eastern USA Regions combined with increased heating capacity from the addition of new frac water heating and hot oil equipment were the primary reasons for our revenue increase in 2014. In addition, propane revenues also increased significantly due to a sudden and sharp increase in propane prices and a change in billing methods in our Rocky Mountain region.

Below is a more detailed discussion of the factors that impacted well enhancement service revenues:

(1) During 2013 and 2014, the Company expanded its heating capacity by investing in additional equipment to meet the growing demand for our frac water heating and hot oiling services. As part of this expansion, the Company purchased and fabricated four new hot oil trucks, six bobtail frac heaters and two double burner frac heaters which were placed into service at various times over the last six months increasing our hot oil and frac heating capacity by approximately 23% and 20% for 2014 as compared to the same period last year.

(2) Hot oil equipment utilization improved by approximately 40% over the comparable period last year resulting in an increase of revenues of approximately $746,000.

(3) Propane revenues for the quarter ended March 31, 2014 increased approximately $2.4 million from the comparable period last year due to an 80% increase in average propane prices from the same period last year. Propane used for frac water heating and hot oiling services are typically billed to customers on a "cost plus" method and accordingly any significant change in propane price will result in a corresponding change in revenue.

(4) Increased horizontal drilling and completion activity by new and existing customers in the Niobrara Shale/DJ Basin combined with our recent expansion into Rock Springs, WY have resulted in higher well enhancement service revenues in the Rocky Mountain region during 2014 as compared to the same period last year.

(5) Well enhancement service revenues in the Eastern USA region increased by approximately $2.6 million as compared to the same period last year due to continued expansion into the Utica Shale market where exploration and production activity and demand for our services increased over the first quarter of 2013.

Fluid Management Services

Fluid management service revenues, which represent about 8% of our consolidated revenues for the three months ended March 31, 2014, remained relatively flat at $2.0 million for the three months ended March 31, 2014. Slightly lower water hauling revenues in our Central USA region were offset by small revenue increases in other regions.

Well Site Construction and Roustabout Services

Well site construction and roustabout services, which represent less than 1% of revenues for the three months ended March 31, 2014 remained an insignificant part of our business and are provided as ancillary services with our other services.

Geographic Areas

Revenues in the Rocky Mountain Region, which primarily consist of well enhancement services, increased $3.7 million or 35% from the comparable period last year. The increase was due to several factors including increased propane revenues from the change to a "cost plus" billing method, increased drilling and completion activity by several new and existing customers in the Niobrara Shale/DJ Basin, and incremental revenues generated from the recent expansion of our service into Rock Springs, WY.

Revenues in the Eastern USA region increased $2.6 million or 61% primarily due to the continued expansion of our services into the Utica Shale market where exploration and production activity and demand for our services increased over the comparable period in the prior year. During the first quarter of 2014, the Company added two sizable customers in addition to experiencing revenue growth with its largest customer. Higher propane revenues related to costs billed to customers also was a contributing factor to our revenue increase in 2014.

Revenues in the Central USA region increased $333,000 or 9% from the comparable period last year primarily due to increased frac water heating revenues generated from a customer in the Texas Panhandle.

Historical Seasonality of Revenues:

Because of the seasonality of our frac water heating and hot oiling business, revenues generated during the first and fourth quarters of our fiscal year, covering the months during what is known as our "heating season", are significantly higher than revenues earned during the second and third quarters of our fiscal year. In addition, the revenue mix of our service offerings also changes among quarters 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. 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.

As an indication of this quarter-to-quarter seasonality, the Company generated revenues of $33.7 million (73%) during the first and fourth quarters of 2013 compared to $12.7 million (27%) during the second and third quarters of 2013. In 2012, the Company earned revenues of $20.8 million (66%) during the first and fourth quarters of 2012, compared to $10.7 million (34%) during the second and third quarters of 2012. While the Company is pursuing various strategies to lessen these quarterly fluctuations by increasing non-seasonal business opportunities, there can be no assurance that we will be successful in doing so.

Costs of Revenues and Gross Profit:

Cost of revenues for the three months ended March 31, 2014 increased $5.7 million or 54% from the comparable period last year primarily due to increased frac water heating and hot oil services combined with significantly higher propane costs from the same period last year. As a percentage of revenues, cost of revenues for the first quarter of 2014 increased to 65% of revenues as compared to 57% of revenues for the first quarter of 2013.

Gross profit for the three months ended March 31, 2014 increased to $8.9 million representing a $952,000 or 12% increase over the comparable period last year. As a percentage of revenues, gross profit for the quarter ended March 31, 2014 was 35% as compared to 43% for the comparable period last year. The decline in gross profit percentage was primarily due to the significant increase in propane prices from the comparable period last year. Higher operating costs in our fluid management business also contributed to the overall decline in our gross profit percentage from the same period last year.

Below is a more detailed discussion of the various factors that impacted gross profit percentage during the quarter ended March 31, 2014:

(1) Prior to January 2014, many of our frac water heating customers in the DJ Basin were billed on a per barrel of water heated basis which included the price of propane. As result, our gross profit percentage was immediately impacted once propane prices started to rise in December 2013 and was further impacted as prices continued to rise in January 2014. In late January and early February, the Company was able to renegotiate pricing for propane with these customers to a cost plus basis which is similar to the billing method we use in our other regions. Under this method, propane is billed at cost plus a fixed dollar per gallon mark-up. This change in pricing eliminated the negative impact on gross profit percentage due to increases in propane prices. However, management estimates that the impact to gross profits from the increase in propane prices under the old per barrel billing was approximately $500,000 for the quarter ended March 31, 2014.

(2) Higher propane prices also tend to reduce gross profit percentages on frac heating customers which bill propane on a cost plus basis. Typically, our mark-up on propane is a fixed dollar amount per gallon. As propane prices increase, this fixed dollar mark-up becomes a smaller percentage of the billed propane costs resulting in a lower gross profit percentages. The increase in propane prices also cause propane revenues to become a larger portion of total revenues. As a result, the lower propane margins tend to dilute our overall gross profit percentage. We estimate that the higher propane prices and corresponding impact to propane margins diluted our overall gross profit percentage in 2014 by approximately 4% to 5% of revenues.

(3) Gross profits for our fluid management business in Central USA decreased by $381,000 during the quarter ended March 31, 2014 as compared to the same period last year resulting in a drop in our consolidated gross profit percentage of approximately 1.5%. Higher labor costs and truck repair costs were the primary factors for the decline in gross profit.

The Company anticipates that propane prices will continue to fluctuate in the future based on the relative demand and availability of propane in different geographic areas across the United States. Since the Company passes along the cost of propane to its customers on a cost plus mark-up basis, fluctuations in the price of propane will continue to impact revenues, cost of revenues and gross profit percentages. Decreases in propane prices will tend to reduce well enhancement revenues and costs of revenues and may increase our overall gross profit percentage as the dollar value of lower margin propane revenue and cost of revenue becomes a lower percentage of total revenue. Conversely, increases in propane prices similar to what the Company experienced during this quarter, will tend to increase well enhancement revenues and costs of revenues and may decrease our gross profit percentage, as the dollar value of lower margin propane revenue and cost of revenue becomes a higher percentage of total revenue.

General and Administrative Expenses:

For the three months ended March 31, 2014, general and administrative expenses increased approximately $303,000 or 35% as compared to the same period last year. Higher personnel costs due to the addition of various operational and accounting personnel to support the Company's growth including a CFO in April 2013 and Operations Manager in October 2013 was the primary reason for the higher costs in 2014. In addition, franchise taxes were $105,000 lower during the comparative period last year due to a large credit received in March 2013. Higher investor relations and professional fees for the three months ended March 31, 2014 also contributed to the increase over the comparable period last year.

Depreciation and Amortization:

For the three months ended March 31, 2014, depreciation and amortization expenses increased $114,000 or 20% from the comparable period last year. The increase in depreciation expense was due to the additional depreciation from new equipment placed into service over the last 12 months.

Income Taxes:

For the three months ended March 31, 2014, the Company recognized an income tax expense of $2.7 million on pre-tax income of $6.9 million as compared to $2.6 million of income tax expense on pre-tax income of $6.6 million for the comparable period last year.

The effective tax rate on income from operations was approximately 39% for the three months ended March 31, 2014. 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 Enservco's 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
                                                           March 31,
                                                      2014            2013
       EBITDA*
       Net Income                                 $  4,185,956     $ 3,934,031
       Add Back (Deduct)
       Interest Expense                                253,524         315,015
       Income taxes                                  2,694,364       2,648,683
       Depreciation and amortization                   677,463         563,836
       EBITDA*                                       7,811,307       7,461,565
       Add Back (Deduct)
       Stock-based compensation                         76,344          68,719
       (Gain) on sale and disposal of equipment        (14,365 )      (306,457 )
       Interest and other income                        (6,900 )       (14,113 )
       Adjusted EBITDA*                           $  7,866,386     $ 7,209,714

*Note: See below for discussion of the use of non-GAAP financial measurements.

Use of Non-GAAP Financial Measures: Non-GAAP results are presented only as a supplement to the financial statements and for use within management's discussion and analysis based on U.S. generally accepted accounting principles (GAAP). The non-GAAP financial information is provided to enhance the reader's understanding of the Company's financial performance, but no non-GAAP measure should be considered in isolation or as a substitute for financial measures calculated in accordance with GAAP. Reconciliations of the most directly comparable GAAP measures to non-GAAP measures are provided herein.

EBITDA is defined as net income plus or minus interest expense plus taxes, depreciation and amortization. Adjusted EBITDA excludes from EBITDA stock-based compensation and, when appropriate, other items that management does not utilize in assessing the Company's operating performance (see list of these items to follow below). None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income as an indicator of operating performance or any other GAAP measure. Management uses these non-GAAP measures in its operational and financial decision-making, believing that it is useful to eliminate certain items in order to focus on what it deems to be a more reliable indicator of ongoing operating performance and the Company's ability to generate cash flow from operations. Management also believes that investors may find non-GAAP financial measures useful for the same reasons, although investors are cautioned that non-GAAP financial measures are not a substitute for GAAP disclosures.

All of the items included in the reconciliation from Net Income to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation, etc.) or (ii) items that management does not consider to be useful in assessing the Company's operating performance (e.g., income taxes, gain on sale of investments, loss on disposal of assets, etc.). In the case of the non-cash items, management believes that investors can better assess the Company's operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect the Company's ability to generate free cash flow or invest in its business.

Because not all companies use identical calculations, the Company's presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating the Company's performance against its peer companies because management believes the measures provide users with valuable insight into key components of GAAP financial disclosures.

Changes in Adjusted EBITDA*

For the three months ended March 31, 2014, Adjusted EBITDA increased 9% to $7.9 million as compared to $7.2 million for the comparable period last year. As a percentage of revenues, Adjusted EBITDA declined to 31% for the three months ended March 31, 2014 as compared to 39% for the same period last year. The decline in Adjusted EBITDA as a percentage of revenues was primarily due to the per barrel pricing issue in the DJ basin and overall increase in propane prices as discussed in the cost of revenues and gross profit section above.

LIQUIDITY AND CAPITAL RESOURCES



The following table summarizes our statements of cash flows for the three ended
March 31, 2014 and 2013:



                                                             For the Three Months Ended
                                                                      March 31,
                                                                2014              2013

Net cash (used in) provided by operating activities        $      (10,170 )   $    654,580
. . .
  Add ENSV to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ENSV - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.