ENSV: Zack raises target on Enservco on details of capacity expansion’s timetable

Zacks Small Cap Research

By Steven Ralston, CFA

NYSE:ESNV

This week, Enservco (ENSV) reported financial results for the second quarter of 2014 ending June 30, 2014, which were in line with the company’s pre-announcement on July 10th. In the 10-Q and conference call, management provided an update on Phase 2 of the company’s 2014 capacity expansion plan, along with details of the new $40 million credit facility with PNC Bank, a fraction of will fund Phase 2. Management also visited the primary fabricator’s work site and confirmed that the delivery timetable is on schedule.

Enservco continues to expand service capacity through the procurement of newly fabricated equipment. The 2014 capital expenditure plan is 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 frac-water "mega" heaters have twice the capacity of the company's legacy frac-water heating units, which were termed boxes. The new equipment will have the potential of generating annual revenues of approximately $20 million. The initial phase will be funded by internally generated cash flow.

Phase 2 is 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 will be funded with a portion of the new PNC Bank revolving credit facility.

During early August, management visited the primary fabricator’s work site, where over 60 of the fabricator’s employees are working exclusively on Enservco’s units. The visit confirmed that the delivery timetable is on schedule.

The 18 mega frac-water heaters being fabricated under the 2014 capacity expansion plan are higher margin equipment than the company’s other frac-water heaters. The new mega frac-water heaters have twice the capacity of the company's legacy frac-water single-burner heating units. Also, a mega heater can be operated by one person versus the two required for double-burner trucks. Along with lower labor costs, the mega heaters require less fuel.

In addition to the mega frac-water heater, Enservco is introducing 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 being made available to the company’s entire customer base through an active marketing campaign.

Enservco 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, the company is generating impressive and profitable revenue growth.   Despite the lower-than-expected revenues in the second quarter due to an unusual event, the company’s organic capacity expansion remains on track. Revenues are expected to increase significantly this winter season with record top-line and EPS expected in the fourth and first quarters. We reiterate our Outperform rating and raise our target to $3.45. Despite the lower-than-expected revenues in the second quarter, the company’s organic capacity expansion remains on track.

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