By Steven Ralston, CFA On March 20th, Enservco (ENSV) reported record fourth quarter and full-year revenues for 2013. Revenues and earnings set records for both the fourth quarter and the year. Despite the very strong topline and some pressure on the gross margin due to high propane costs in the Denver-Julesburg (D-J) Basin during the month of December, financial results were in line with estimates, which were recently revised by analysts due to management’s pre-announcements concerning strong revenues and propane pricing. Indications of a very robust first quarter of 2014 prompt price target increase.
For the quarter, total revenues increased 39.7% to $15.16 million versus the comparable quarter last year, primarily driven by strong demand for Well Enhancement Services (revenues +46%). Despite the significant increase in revenues, the top line could have been more robust if the flooding in Colorado during September had not extended the delivery schedule for frac heating trucks from November to between late-February and early-March. The gross margin was compressed by 555 basis points from 32.3% in the comparable quarter last year to 26.5% due to a steep increase in propane costs that affected the company's margins in the D-J Basin during the fourth quarter. Pricing agreements in the D-J Basin for frac water heating fees historically have been on a per-barrel-of-water-heated basis. Fortunately, Enservco entered in to pricing agreements that contained propane price adjustment triggers allowing for renegotiated frac water heating fees that pass along changes in the cost of propane. The new pricing structure in the D-J Basin is now permanent and mirrors the pricing agreements that the company has in place in other basins. General and administrative expenses increased 32.5% to $1,265,609 due to higher stock-based compensation, investor relations costs and professional fees. However, total operating expenses increased only 10.1% since depreciation and amortization declined 27.4% due to an accounting change in the estimated useful lives of trucks, equipment and disposal wells that became effective in the second quarter of 2012.
For the year, Enservco reported that total revenues from continuing operations increased 47.5% from $31.5 million to $46.5 million. Revenues of the Well Enhancement segment increased 72.0% from $21.6 million to $37.2 million, driven by capacity additions and increased customer demand in the Rocky Mountain region (revenues +60%) and Eastern USA region (+136%). The increase in revenues from the Rocky Mountain region was driven by increased drilling and completion activity in the Niobrara shale of the D-J Basin, while the impressive revenue increase in the Eastern USA region was a result of the company's further expansion into the Utica shale play and the addition of two sizable customers. During 2013, the company deployed two new hot oil units and five double-burner frac water heating units in the beginning of the year; four additional hot oil trucks near the beginning of the fourth quarter; and three additional frac heaters and a double burner frac heater in December.
The revenues of the Fluid Management segment, which represent approximately 19% of total consolidated revenues, declined 5.2%, primarily due to water hauling customer transitioning in Kansas that resulted in about five weeks of lost revenue. Having lost a low margin water hauling customer during the third quarter, a higher margin service agreement was reached with a new customer in September. Fourth-quarter fluid management revenues returned to the level of the fourth quarter of 2013.
In 2013, the gross margin increased by 602 basis points to 31.3% from 25.2% in 2012, despite the impact from higher propane costs in the D-J Basin during the fourth quarter. For the year, net income from continuing operations increased 990% to $4.38 million (or $0.13 per diluted share) versus $401,488 ($0.02 per diluted share) in 2012. Earnings benefited from a sizeable decrease in depreciation expense ($2.07 million), again since the estimated useful lives of the company’s trucks, equipment and disposal wells were increased during a reassessment in the second quarter of 2012. Working capital increased significantly to $8.17 million versus $1.56 million on December 31, 2012. During the year, the company received net proceeds of $1,246,300 from the exercise of warrants, and the number of shares outstanding increased 9.4% to 34,822,536.
Concurrent with the earnings release, management announced that the remaining four hot oilers (that are part of the 2013 capex program) are expected to be delivered within the next 60 days. Also, two new acidizing trucks are on order. Currently, Enservco has 47 burner boxes, 27 hot oilers and three acidizing trucks in the field.
Management expects to announce the company's 2014 capex program in May. Capital expenditures will be focused on higher margin services (frac water heating, oil heating units and acidizing trucks) with particular emphasis on year-round services (oil heating units and acidizing trucks). Also under consideration is the advancement of the new acid dock in Rock Springs WY, the expansion of well enhancement capabilities in Elko County NV and the development of new territories in both northern Texas and southwestern Texas (Eagle Ford shale).
Having received an approval letter on March 5th, management was successful in up-listing Enservco's stock. On March 10th, ENSV began trading on the NYSE MKT Exchange, which should benefit the company through increased institutional investor ownership and increased share liquidity.
We reiterate our Outperform rating and raise our target to $2.80, which was driven by management’s comment that the first two months of 2014 generated revenue of about $19.3 million, which already exceeds the revenues generated during the entire three months of the first quarter of 2013. We, therefore, estimate that the revenues generated in the first quarter of 2014 will be approximately 50% above the comparable quarter last year and are incorporating that estimate into our valuation methodology, which is based on price-to-sales (P/S) and enterprise value-to-EBITDA (EV/EBITDA).
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On March 20th, Enservco (ENSV) reported record fourth quarter and full-year revenues for 2013. Revenues and earnings set records for both the fourth quarter and the year. Despite the very strong topline and some pressure on the gross margin due to high propane costs in the Denver-Julesburg (D-J) Basin during the month of December, financial results were in line with estimates, which were recently revised by analysts due to management’s pre-announcements concerning strong revenues and propane pricing. Indications of a very robust first quarter of 2014 prompt price target increase.