Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Headquartered in Denver, Colorado, Enservco Corporation (OTCQB:ENSV) is a fast-growing micro-cap oilfield services company that provides well enhancement and fluid management services to domestic onshore oil and gas exploration and production companies. More simply, for the most part, it provides essential support services for fracking operations. This article addresses recent developments that will positively affect revenue and hopefully earnings for Q4 -13 and Q1-14. To develop needed context and fully appreciate the significance of this growth story, it may be helpful to catch-up by reading my first ENSV article last September here. The story remains intact.
When I started this article last week, ENSV was trading at $1.47 with a 52-week high of $1.65 and low of $0.32. Half-way through my writing, it spiked to $1.93 but has since fallen back to $1.80. I believe ENSV is still undervalued, but based on recent price action, maybe not so overlooked, and it is my hope that this article is timely enough for SA readers to benefit from what I believe will be very surprising revenue and earnings reports in the first half of 2014. Following are the positive developments that I believe will propel this stock to $2.50.
Oil And Gas Production Growth
The nation is in the midst of an oil and natural gas drilling boom that is expected to last throughout the decade and horizontal drilling coupled with fracking are the keys to the boom. At last glance, 2014 looks to be another very good year for oil and natural gas production.
Possibly the most significant development that will positively affect revenue and earnings are the bitterly cold winter conditions within ENSV's operating footprint. Its crews and apparatus are operating at 100% of capacity and get paid for every degree that they have to raise the temperature of the fluids being used to frac. In other words, the colder the weather, the more they get paid. The company has recently placed several new frac-heater trucks into service to address increased demand and has committed nearly $9 million to acquire additional apparatus that when fully deployed, should generate an additional $12 million of annual revenue.
The company was featured at the LD Micro Conference in Los Angeles three weeks ago and played to overflow crowds interested in learning about ENSV's compelling growth story which may explain the recent price spike on higher than normal volume. Here are the contents of that presentation.
Discussions with a company representative revealed that efforts are underway to up-list the stock from the OTC "Pink Sheets" to a more notable exchange. This could involve a reverse stock split to raise the share price to meet minimum price listing requirements and would certainly increase the stock's exposure. Of all the good things that are happening with ENSV, I believe this could be the most significant catalyst to increase shareholder value.
As mentioned in my previous article, the appropriate security valuation methodology for ENSV is comparative analysis of similar oil service companies. ENSV's mix is relatively unique among public oil services companies since the majority of revenues are derived from services provided during the hydraulic fracturing process or well site workovers. Therefore, the industry comparables should be such that a significant portion of revenues are derived from similar services since the character of reoccurring revenues and the related profitability are usually assigned higher valuation multiples. Additionally, ENSV is experiencing rapid double-digit revenue growth, (60% year over year as of December 1st) and comparable companies should share these same attributes. The following companies offer good comparisons for those wanting to dig deeper: Exterann Holdings (EXH), Key Energy Services (KEG), RPC Inc. (RES), Newpark Resources (NR), Basic Energy Services (BAS), C&J Energy Services (CJES), Nuverra Environmental (NES) and Flotek Industries (FTK).
The most meaningful valuation metrics for ENSV are price-to-sales (P/S) and enterprise value-to-EBITDA (EV/EBITDA) due to the character of the company's enterprise, namely a small-cap company with a rapidly growing revenue profile that should continue to expand over time as management invests in the underlying businesses, deepens the company's presence in existing markets and expands into new service territories. P/S valuation incorporates a company's ability to generate revenues and cash flow.
The average P/S multiple of the industry comparables is 2.3 vs. ENSV's current multiple of 1.5. The average EV/EBITDA multiple is 9.5 vs. ENSV's 5.4. In other words, ENSV is trading at a 35% discount to the industry average P/S multiple and a 43% discount to the average EV/EBITDA multiple. ENSV is currently trading at 11.2x 2013 estimated EPS and just 9.0x 2014 estimates. The five-year annual earnings growth rate is estimated to be 25%, possibly higher should the Midwest experience harsher than normal winters.
ENSV is not widely followed, but Zacks has an "outperform" recommendation and generously contributed information to this article. Indications are that ENSV is still undervalued and mostly overlooked by mainstream analysts. If its current growth trends continue and the oil and gas boom stays on track, which there is no reason to believe otherwise, I believe this stock will still double from present levels over the next 24 months, and offer attractive short-term gains (30%) over the next six months. I am long ENSV but with that being said, there is the risk of capital loss, especially with micro-cap stocks, so conduct your own research and speak with your investment advisor about ENSV.