Enservco (ENSV.PK) is a young company to the public market, trading since 2010. The company operates a niche within an extremely large U.S. oil and gas industry by providing well-site services to energy & petroleum companies (E&Ps).
I first began following Enservco a few months ago, when it was added to the Bowser Database--a listing of 350+ companies that we use to follow potential recommendations. After reporting its results for the third quarter ending 09/30/12, the company received a Bowser Rating of 7 with a couple of red flags: lack of profitability and lack of working capital. (The Bowser Ratings system is a brief analysis of a company that examines twelve different aspects, for a total of 13 points. We consider anything above an eight to be good.)
Recently, however, ENSV has released a swarm of positive press releases: picking up 5 new master service agreements (MSAs), increasing its heating capacity, refinancing its credit facility, reporting dramatic increases in revenues and forecasting its first profitable fiscal year since going public.
On Friday, March 1, I interviewed three members of the company's management: Mike Herman (Chairman and CEO), Rick Kasch (President and CFO) and Austin Peitz (VP of Field Operations). I have included brief bios of each officer below the interview. Now, on to our conversation:
Thomas: Could you start by describing what it is that Enservco does as a well-site services provider?
Rick: Enservco provides well simulation and fluid management services. These are broken into four primary segments. The first is hot oiling, the second is frac water heating, the third is acidizing and the fourth is hauling of both production and fresh water. Except for frac heating, these are services that a well continues to require after it has been drilled, and therefore provides us with recurring streams of revenue.
Thomas: What is your largest segment?
Rick: At this point, frac water heating.
Thomas: Do you have master service agreements with most of companies that you provide these services to?
Rick: Yes, master service agreements or contracts.
Thomas: How many of these agreements and contracts do you currently have?
Rick: We have well over 100 MSAs and contracts, but I think even more important is the quality of our client list. We work with many of the largest exploration and production companies operating in the United States.
Thomas: Do your customers often renew their agreements?
Austin: The agreements remain in place as long as we hold up our end of the deal, which is basically keeping our safety and insurance records clean and up to date.
Thomas: So they don't expire or operate under a time frame?
Rick: No they are not dated. An MSA is an agreement between Enservco and the E&P that says we will provide a list of services at a given price whenever we are called on for those services.
Mike: To add to that, the MSAs allow us to work with the major companies. As Austin mentioned, the safety and insurance records are critical. Good news travels fast in our business and bad news travels faster. Our track record has allowed us to open up relationships with many major companies in the oil and gas industry.
Thomas: Do the MSAs give you exclusive access to service at certain well sites?
Austin: There is no exclusivity, but the MSAs do enable us to remain on a short list of service providers to major companies. E&Ps are now narrowing the number of vendors that they will work with, so that there are say 100 of the best companies on the list rather than a list of 1,000 that includes the best and worst. We've been able to maintain our position on these lists very well.
Mike: One other key thing to bring up is that a lot of the work that we do is driven by company men and women at the customers' local and regional areas. It's the local people and local relationships, along with our ability to do quality and timely work that has really allowed us to continue to do business. So while there is competition, as long as we continue to maintain our local relationships and quality of work, we will likely be the ones to get the call.
Thomas: How do you acquire new agreements and contracts?
Austin: A lot of times we have a sponsor within an organization. We don't just go to Exxon Mobil (XOM) and say that we would like to provide service to you. We have to be recommended by someone within the organization.
Mike: Also the corporate offices of our customers will move around local management. So, if we dealt with a certain company person in Kansas, and then he gets moved to another basin and needs heating services, he'll say 'I've worked with Enservco for so long that I'll call Austin and see if he can get equipment out here.'
Thomas: Do you have the manpower and equipment to continue expanding without negatively affecting the bottom line?
Rick: We have very high utilization of our equipment right now, and in fact we are seeing demand for more work than we have equipment for. So, in planning for next year, we intend to fabricate more equipment to address the demand we have had to turn away in the past.
Thomas: Is the demand that you are talking about coming from new clients or existing clients requesting more services?
Rick: Both. We're obtaining greater market share through adding new customers, but also our existing customers are bringing in more rigs and drilling more wells, which leads to more business for us.
Thomas: So your growth plan for the foreseeable future is to expand through acquiring new clients and providing more services to existing clients?
Rick: Yes. And, we'll also continue to expand geographically. We've gone from a few locations along the Colorado/Kansas border to the six active basins we now serve, and we're looking to expand beyond those as well. Moving forward we will focus on growing our working capital along with our manpower and equipment to increase our service capacity.
Thomas: How can you protect against the seasonality of your frac heating segment?
Rick: We can't protect against seasonality. It's a fact of our business that revenue in the second and third quarters will be lower than the first and fourth quarters. However, one thing we have done to partially mitigate that seasonality is expand into basins that have longer heating periods--9 to 10 months versus 3 to 4 months. We also are working to expand some of our year round services, such as acidizing.
Thomas: Do you have any comments about your many recent developments?
Rick: In January we doubled our revenues compared to January of last year. That's the result of a significant increase we have made in our heating capacity, but also the effects of just a normal winter, compared to the abnormally warm winter we saw last year.
Mike: On a different note, in the last several years we have not worked with a bank that has extensive experience working in energy. Late last year, we changed our bank to PNC, and we think it will be a game-changer for us. PNC has been very active in understanding our growth objectives and knows this space very well. That is important to us because access to capital has held us back in the past and we can only expand as much or as fast as our capital allows. The good news is that the business is there, we just need the capital to support it.
Thomas: So it sounds like you think PNC will provide the capital needed to expand your operating capacity?
Mike: To expand our service capacity we will utilize a combination of things. For instance, we currently have excess equipment that was used in well-site construction and other assets that we're going to divest of. Then we'll use those proceeds to acquire more equipment without involving more debt.
Rick: The current lines with PNC are not expansion lines, they are just a refinancing of the current debt that we had with a prior bank. But by refinancing with PNC, we now have the source to go to for expansion capital.
Thomas: Can you talk a little bit about Mike's conversion of subordinated debt to equity?
Rick: I'll let Mike talk about it more, but I think that it was an illustration of Mike's confidence in the equity opportunity presented by the company.
Mike: I would say that I viewed Enservco as one of the best places to make an investment for me, personally. The business and growth opportunity is there, we just have to increase our ability to facilitate our expansion. We wouldn't be with the customers that we have and in this position if our team had not done a great job building the business. Now, we need to continue growing through support at the corporate and banking levels.
Mike Herman became CEO, president and chairman in July of 2010. He later ceased serving as president, but remained the company's CEO and chairman. Mike has served as an officer of Dillco Fluid and Service, Inc. and Heat Waves Hot Oil Services-wholly owned subsidiaries of Enservco. He also has upper management experience with Pyramid Oil Company, Key Food Ingredients LLC and Telematrix, Inc. He is currently the chairman of Pyramid Oil Co.
Rick Kasch became executive VP and CFO in July of 2010. In 2011 he was appointed president, treasurer, and principal financial officer. Rick has served as the principal financial officer of the Company's predecessor (Enservco LLC), the principal financial officer, secretary and treasurer of Dillco since December 2007 and a manager and the principal financial officer for Heat Waves since March 2006. Currently, he is also the CFO of Key Food Ingredients LLC. He is a CPA, but does not hold an active license.
Austin Peitz recently became the company's VP of field operations, but has been with the company for some time. He joined Heat Waves in 1998 and eventually became the subsidiary's manager, leading its geographic expansion. In his current position, Austin assumes responsibility for all field operations for both Heat Waves and Dillco.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: The Bowser Report recommends a new company each month in its newsletter. This article IS NOT a recommendation, but it also does not rule out a future recommendation.