Zacks has initiated coverage of Enservco Corp. (OTC BB:ENSV) with an Outperform rating and a target of $2.40.
Enservco is an oilfield services company that provides well enhancement and fluid management services to domestic onshore E&P companies. Enservco is focused on two distinctive sub-sectors of the oil & gas services industry: production-related services and hydraulic fracturing. 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 hydraulic fracturing to release tight gas and shale oil & gas.
Management is implementing an organic growth strategy of geographic expansion and capacity additions (with custom-fabricated service trucks), which is driving dramatic, double-digit, year-over-year revenue growth. 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.
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. Approximately 55% 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. Enservco is a prime beneficiary of the megatrend towards developing domestic unconventional oil & gas resources. Therefore, Enservco is less susceptible to the traditional cyclicality exhibited by upstream capital spending budgets of oil and gas companies.
Enservco, through Heat Waves and Dillco, currently operates a fleet of 25 frac heating trucks, 27 hot oiling trucks, three acidizing vehicles and 75 water hauling trucks with two double-burner frac heating trucks, six single-burner frac heating trucks, four hot oilers and a well acidizing truck expected to be added to the fleet by the fourth quarter of 2013.
Our price target 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. Price-to-sales valuation incorporates a company’s ability to generate revenues and cash flow. The classic valuation parameter for large-cap companies, such as Schlumberger (SLB) and Halliburton (HAL), is EV/EBITDA, which is known to be the highest correlated metric and relatively reliable determinant of stock price in the Oil Services & Equipment company universe. Evaluating the current price-to-sales and EV/EBITDA of comparable companies with rapidly growing revenues, our target for Enservco stock is $2.40.
A copy of the full research report can be downloaded here >> Enservco Report
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