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ENSV: ENSERVCO announces full 2014 capacity expansion program & 2Q operational anomaly

By Steven Ralston, CFA


Yesterday, ENSERVCO (ENSV) provided an operational update concerning the second quarter and announced the second tranche of the company’s 2014 capital expenditure plan. The second quarter was impacted by a three-week work stoppage in the DJ Basin due to an accident at a hydraulic fracturing site. As a result, for the second quarter, management anticipates reporting a 7.5% Y-O-Y revenue decline  and an operating loss of approximately $1.0 million. Despite the operational disappointment, which is to some degree one-time in nature, the company’s organic capacity expansion continues with the announcement of capacity expansions in frac water heating (+90%), hot oiling (+52%) and acidizing (+133%) over the next three quarters.

Due to well-site accident in the DJ Basin during the second quarter, frac water heating operations for a large customer were halted for three weeks as an incident review and evaluation was conducted. Though it was determined that the accident resulted from the component failure on the equipment of another service provider, ENSERVCO lost frac water heating revenue while still incurring labor costs. As a result, revenues, operating margin and earnings for the second quarter will be below our original expectations. However, going forward, the announced capacity additions will increase our estimates for revenues and profitability.

During 2014, ENSERVCO will now invest approximately $16.0 million in capital expenditures. The first tranche is being funded by internal cash flow, while the second tranche will be funded with bank and commercial financing. The first phase of the capital expenditure plan announced in May consists of a $9.0 million program for the fabrication of 10 frac water "mega" heaters, 10 hot oiling units and two acidizing trucks. This new equipment will have the potential of generating annual revenues of over $15 million.

The second phase announced yesterday will be a $7.0 million program for the fabrication of eight frac water "mega" heaters, six hot oiling units and two acidizing units. The new frac water "mega" heaters have twice the capacity of the company's legacy frac water heating units, which were termed boxes. The annual revenue potential from the second tranche of new equipment is estimated to be at least $20 million, raising the estimated annual revenue potential for the entire $16 million capex plan to more than $35 million.

Overall, the total 2014 capital expenditure plan will significantly expand the capacity of the company’s current equipment fleet. The capacity of the frac water heating fleet should increase by 90% to 50 trucks (equivalent to 80 legacy frac water heating units, up from 42 units at the end of 2013). Hot oiling capacity ought to expand by 52% (41 hot oiling units, up from 27 at year-end) while the number of acidizing units is expected to increase 133% (seven acidizing units, up from three). To date, fabrication is on schedule. All units are anticipated for delivery in 2014 with the exception of six hot oil units, which are scheduled for delivery in the first quarter of 2015. Management plans to present details of the 2014 deployment schedule with the second quarter earnings report planned for mid-August.

ENSERVCO continues to grow capacity organically by serving expanding demand in both existing and new markets. The capex programs target higher-margin businesses: seasonal hot oiling, modestly-seasonal frac water heating and non-seasonal well maintenance work. The number of acidizing and hot oiling programs in the Rocky Mountain service region continues to expand. In addition, management expects to begin acidizing programs for three companies in the Texas Panhandle during the third quarter.

We reiterate our Outperform rating and maintain our target of $3.10. Despite the lower-than-expected revenues in the second quarter, the company’s organic capacity expansion remains on track. The disappointing results for the second quarter probably will provide an opportunity to accumulate long-term positions in the stock.


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