By Steven Ralston, CFA
Yesterday, on November 14, 2013, Enservco (OTC BB:ENSV) reported financial results for the third quarter of 2013. Total revenues declined 7.7% to $4.8 million versus $5.2 million in the comparable quarter last year, primarily due to an unexpected 18% decline in Fluid Management revenue coupled with the impact of severe flooding in the area of the Denver-Julesburg Basin during September that significantly tempered the growth of revenue from the Well Enhancement segment. Enservco common declined 8.3% to $1.22 on the news. These unusual events have pressured the stock providing a buying opportunity.
Revenues of the Well Enhancement segment increased only 10.8% to $2.33 million from $2.11 million in the comparable quarter last year, driven by capacity additions in the Rocky Mountain region but hampered by approximately four weeks of flood-related business interruption. The flooding severely disrupted oil and natural gas operations in the region of D-J Basin; Anadarko Petroleum announced that about 650 of its wells in the area had been shut down while Noble Energy idled 758 oil and gas wells. Both temporarily suspended well completion projects.
The revenues of the Fluid Management segment declined 18.1% year-over-year due to water hauling customer transitioning in Kansas that resulted in about five weeks of lost revenue. With the third quarter being a seasonally slow period, the effects of the Colorado flood and the loss of a significant water hauling customer had an usually large impact on revenues.
The fourth quarter should be minimally effected by these unusual events since oil and gas operations are returning to normal in Colorado and Enservco has secured higher margin work from a new customer to replace the majority of the lost water hauling revenue in Kansas. In addition, the company has been commissioned to perform year-round hot oiling work in Wyoming’s Green River Basin, which, when totally implemented, is expected to generate more than $4 million in incremental revenue annually.
General and administrative expenses increased 36.6% to $890,675 versus $652,208, primarily due to higher stock-based compensation costs combined with warrant exercise costs. The gross margin contracted 379 basis points to 3.1% from 6.8% in the comparable quarter last year. For the quarter, Enservco reported a net income loss from continuing operations of $919,420 million (-$0.03 per diluted share) versus a loss of $472,204 (or -$0.02 per diluted share) in the comparable quarter last year. Working capital increased to $5.09 million versus $1.56 million on December 31, 2012.
Concurrent with the earnings release, management announced an incremental $4.0 million capacity expansion plan for four hot oil units and four frac heating units with delivery expected during the first quarter of 2014. During 2013, management allocated $4.7 million toward fabricating new equipment (two double-burner frac heating trucks, six single-burner frac heating trucks, four hot oilers and a well acidizing truck). The four hot oilers and three frac heating trucks have already been delivered with the remainder being expected to be field-ready within the next 30 days for the seasonally strong period of the year. The new equipment from the $4.7 million capex program has the potential of generating annual revenues of approximately $10 million and was funded by internally generated cash flow. The $4.0 million program is being funded by a $3.0 million equipment term loan from PNC Bank and $1.0 million received from recent warrant exercises.
We reiterate our Outperform rating with a target of $2.25, 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 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.
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By Steven Ralston, CFA