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ENSV: Zacks again raises target on ENSERVCO’s reporting of 1Q results

By Steven Ralston, CFA

NYSE:ENSV


Enservco Corp. (ENSV) continues to generate impressive organic growth of revenues and earnings through a strategy of capacity additions and geographic expansion. , the company is generating impressive and profitable revenue growth.  Concurrent with the first quarter earnings report, management announced details concerning the first phase of the 2014 capital expenditure plan, which should generate incremental revenues in excess of $15 million annually and continue to drive 30% top-line growth. We reiterate our Outperform rating and raise our target to $3.10.

On May 13, 2014, Enservco reported record quarterly revenue for the first quarter of 2014 ending March 31, 2014. Total revenues increased 35.9% to $25.24 million versus the comparable quarter last year, primarily due to strong demand for well enhancement services (frac heating, hot oiling and acidizing). Revenues of the Well Enhancement segment increased 40.5% to $23.1 million from $16.4 million in the comparable quarter last year, driven colder temperatures, capacity additions in the Rocky Mountain region (where revenues increased 35.4%) and approximately $3.7 million of incremental revenues in the Eastern USA region (where revenues increased 60.6%) from strong demand in the Marcellus (PA and WV) and Utica (OH) regions. However, revenues of the Fluid Management segment increased only 0.1% year-over-year and was impacted by higher labor costs and truck repair costs.

First quarter gross profit improved 11.9% to $8.95 million from $8.00 million in the comparable quarter last year. The gross margin contracted 762 basis points to 35.5% from 43.1% in the first quarter last year, primarily due to the effects of higher propane costs. The pricing structure in the DJ Basin was adjusted during January to a cost-plus pricing model, which is used now in all of Enservco’s service territories. General and administrative expenses increased 35.3% to $1.16 million versus $857 thousand primarily due to the addition of a CFO in April 2013 and Operations Manager in October 2013, and secondarily from higher investor relations and professional fees.

For the quarter, Enservco reported that net income from continuing operations increased 6.4% to $4.19 million versus $3.93 million in the comparable quarter last year. However, EPS were flat at $0.11 per diluted share primarily due to a 9.6 % increase in diluted shares from 34,998,234 to 38,347,173 as in-the-money warrants were exercised. Working capital improved significantly to $11.2 million versus $8.17 million on December 31, 2013.

Also, management revealed specifics about the 2014 capital expenditure plan. Many customers have informed Enservco that they anticipate significantly increasing the use of Enservco’s acidizing and hot oiling services this year, both in areas currently served by Enservco and in a new geographic market in Wyoming. Also, several customers anticipate higher utilization of Enservco’s frac-water heating services during the 2014/2015 cold season. One specific customer indicated the need for up to 20 frac-water heating units, a 500% increase versus the customer’s current usage.

Therefore, management has established a two-phase capex program. Phase one consists of a $9.0 million program for the fabrication of 10 frac water heaters, 10 hot oiling units and four acidizing trucks. The new equipment will have the potential of generating annual revenues of between $15 million and $20 million. The initial phase will be funded by internally generated cash flow. The specifics of phase two will be determined later in the second quarter after customer needs, fabrication capabilities and financing options are confirmed.

We reiterate our Outperform rating and raise our target to $3.10, which is determined by a valuation methodology based on the metrics of price-to-sales (P/S) and enterprise value-to-EBITDA (EV/EBITDA) relative to comparable high-growth oil service companies.

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