By Steven Ralston, CFA
On August 13, 2013, Enservco (OTC BB:ENSV) reported quarterly financial results for the second quarter of 2013. Revenues, gross margin and net income were all well above our expectations. Total revenues increased 44.2% to a record $7.95 million versus the comparable quarter last year, primarily due to continued strong demand for well enhancement services (frac heating, hot oiling and acidizing). Revenues of the Well Enhancement segment increased 78% versus the comparable quarter last year, driven by cooler temperatures and especially strong demand in the Rocky Mountain region (+60%). Revenues of the lower-margin Fluid Management segment declined slightly. Gross profit increased 105% to $2.31 million as the gross margin improved 861 basis points to 29.0% from 20.4% in the comparable quarter last year. The growth of the higher-margin Well Enhancement Services segment was the primary contributor to the gross margin expansion.
For the quarter, net income from continuing operations was $192,081 (or $0.01 per diluted share) versus a loss of $347,112 (-$0.02 per diluted share) in the comparable quarter last year. Working capital increased to $7.78 million from $7.41 million at the end of the first quarter and versus $1.56 million on December 31, 2012.
The Well Enhancement segment continues to drive the company’s revenue growth and improving level of profitability. Both capacity additions (more frac heating, hot oiling and acidizing trucks), along with evolving fracking procedures that require higher frac fluid temperatures for better gel performance and emulsion inhibition. As a result, the frac heating season is being lengthened. In some basins, frac heating jobs are already beginning here in August which traditionally have not been requested until mid-September. In addition, the equipment being fabricated under the company’s capex program is scheduled to be delivered prior to the seasonally strong fourth quarter.
We reiterate our Outperform rating and target of $2.40, which is based on price-to-sales (P/S) and enterprise value-to-EBITDA (EV/EBITDA) valuation methodologies. Enservco is a small-capitalization company with a rapidly growing revenue profile that should continue to expand as management invests in the underlying businesses, deepens the company's presence in existing markets and expands into new service territories. The target was determined after evaluating the current price-to-sales and EV/EBITDA of comparable companies with rapidly growing revenues.
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