ENSERVCO's (ENSV) CEO Rick Kasch on Q4 2015 Results - Earnings Call Transcript

| About: Enservco Corp. (ENSV)

ENSERVCO Corporation (NYSEMKT:ENSV)

Q4 2015 Earnings Conference Call

March 31, 2016 01:00 PM ET

Executives

Jay Pfeiffer - IR

Rick Kasch - President and CEO

Bob Devers - CFO

Austin Peitz - SVP of Field Operations

Analysts

Brandon Dobell - William Blair

Jeff Grampp - Northland Capital Markets

William Bremer - Maxim Group

Bhakti Pavani - Euro Pacific Capital

Gregory Macosko - Montrose Advisors

Operator

Greetings and welcome to the Enservco 2015 Fourth Quarter and Year End Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jay Pfeiffer, Investor Relations. Thank you. You may begin.

Jay Pfeiffer

Hello and welcome to Enservco's 2015 year end conference call. Presenting on behalf of the company today is President and CEO, Rick Kasch; CFO, Bob Devers and Senior VP of Field Operations, Austin Peitz.

As a reminder, matters discussed during this call may include forward-looking statements that are based on management's estimates, projections and assumptions as of today's date and are subject to risks and uncertainties disclosed in the company's most recent 10-K as well as other filings with the SEC. The company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements.

Enservco assumes no obligation to update forward-looking statements that become untrue because of subsequent events. I’ll also point out that management's ability to respond to questions during this call is limited by SEC Reg FD, which prohibits selective disclosure of material non-public information.

A webcast replay of today's call will be available at enservco.com after the call. Additionally, a telephone replay will be available beginning approximately two hours after the call. Instructions for accessing the webcast or replay are available in today's news release.

With that, I'll turn the call over to Rick Kasch. Rick, please go ahead.

Rick Kasch

Thanks, Jay and thank you all for joining us today. First of all, I want to apologize for the change of dates of this call. The postponement was needed as we could not issue our audited financial statements until we received a signed amendment from PNC Bank which will be addressed later in this call. And as all of you know, things don't move quite as fast as you would like when you have to get all the requisite approvals from attorneys, bankers and auditors.

As mentioned in our news release this morning, I'm very pleased with our performance, given the difficult circumstances we faced in 2015. Unlike many of our peers however, we were able to report positive EBITDA and strong cash flow for the year. We nearly doubled our cash flow from operations for the year and were able to pay down our debt by 8.2 million, a move that strengthened our balance sheet at a time when many others are having difficulties in that regard with some unfortunately having to file for bankruptcy protection.

So, all in all, we’re managing to generate good results, considering the state of the energy industry and the message I want to convey today is we believe Enservco is one of the companies positioned to not only survive this downturn, but to thrive when the inevitable rebound occurs.

Now, the difficult circumstances I referenced a moment ago came together in 2015 to comprise something of a perfect storm I guess you could call it. By that, I mean, in addition to the year-long trend of E&Ps reducing capital spending, El Niño brought unseasonably warm temperatures in both of our 2015 heating quarters, in other words the first and fourth, which are traditionally our strongest quarters in terms of revenue and profitability. In addition to these two circumstances, a substantial drop in propane prices combined with E&P’s transition away from propane during the early part of the year contributed to an additional $6 million decline in revenue year-over-year.

I’d like to briefly address each element of this perfect storm one at a time, because I think it helps to put our results in the proper perspective. As far as the industry downturn goes, by now, it's no secret that the sharp drop in oil and gas prices during the year caused E&Ps to slash their CapEx budgets and dramatically reduce their drilling, completion and maintenance activity, particularly during the last part of the year This has resulted in fierce competition for what business remains, which has in turn of heads, led to price concessions that for us amounted to approximately 7% of revenue in the fourth quarter and 4% to 5% of revenues for the full year.

Adding fuel to the fire of commodity price declines, the El Niño effect had a pretty dramatic impact, as I said, on our first and fourth quarters, particularly in the area of frac water heating, which is our largest component of annual revenue and profits. Please bear with me while I share a few weather statistics from the National Oceanic and Atmospheric Administration or NOAA that tells the tale as well as provides us some good news.

2015 was the hottest year on record, record warmth stretched from Canada to Texas and from California to the East Coast. The El Niño of 2015 matched the 1997/98 edition as the strongest on record. And the 2015 version was the first El Niño rated in the strong to very strong category in nearly 2 decades. It’s this last point I want to focus on about the fact that it's been 20 years since an El Niño of this magnitude. What this tells us is what happened this year in terms of warming is not a common incurrence, which bodes well for us over the long-term.

Even more encouraging to us is a recent NOAA forecast that a La Niña is headed our way in the fall. And as you probably know, a La Niña is a kinder gentler global weather phenomenon that results in cooler than normal temperatures. A normal cold winter would be a very welcome thing for our business. So what steps have we taken to mitigate this perfect storm?

First of all, we took some defensive measures in the form of cost reduction. We have significantly lowered our headcount and reduced other expenses at both the corporate and field levels. We implemented compensation reductions starting with senior executives and continuing through field personnel. We’ve taken a lot of cost out of our business and continue to find ways to trim expenses without compromising our service. Our focus on cost restructuring helps us maintain fairly consistent margins for the full year in comparison to the prior years, which Bob will address in a moment.

We’ve also taken proactive measures. One example is our continued expansion into the Eagle Ford basin in Texas, where we have steadily increased our truck count since first entering the area and establishing an operations base there in the first quarter of 2015. Due to customer demand, some of which has been caused by a couple of competitors going out of business in this market, we have continued to add staff and equipment to this market and we currently have 17 hot oil trucks working out of this yard and we believe there's potential for more growth.

This geographic expansion was a very timely move that has paid off, allowing us to redeploy assets, personnel, equipment from markets where utilization was suffering due to customers deferring maintenance work. It would probably be appropriate for me to mention that our work in the Eagle Ford which does consist solely of year round recurring routine maintenance work performed by hot oil trucks and crews is a good example of the strength of our business model, which as you know emphasizes maintaining a balance between drill dependent and recurring maintenance type services. It was this balance that helps us be a survivor of the last turndown in 2008, 2009.

Another proactive measure was our recent asset acquisitions that added new service capabilities in the areas of water transfer and equipment rental and also brought us an exciting growth opportunity in the form of a technology that gives E&Ps an alternative to chemical treatment of water using fracking and injection and disposal well applications.

In regard to the water transfer and equipment rental business, although it's still early in the game, we’ve just recently been encouraged by some new potential business leads even in this environment of depressed commodity prices. We're going to see if these leads come to fruition. If they don't, then our fallback position will be to be park that equipment and bide our time until the business opportunity improves. The good news is our carrying costs on the equipment are only roughly 175,000 per year, which is a very manageable number.

The technology I just referenced is sold under the name of HydroFLOW, which is a device that uses patented hydropathic, electrical induction technology to remove bacteria and scale from water. E&Ps need to eliminate bacteria and scale from water using fracking or an injection or disposal wells or they will risk costly damage in the form of downhole scaling and corrosion. E&Ps have traditionally used chemicals to accomplish this task and of course as you know, chemicals have their side effects.

HydroFLOW offers a lower cost, green alternative to the chemical treatment that can achieve up to a 95% bacteria kill in certain circumstances. In just a moment, Austin will give you some color on where we are with our rollout plans for HydroFLOW.

I’ll close my initial remarks with a quick comment on our banking relationship with PNC Bank, something I suspect is on many of your minds. Although we were not in violation of any covenants as of the end of the year, we met with them recently at our initiative by the way to discuss the impacts of the industry downturn, the warm weather, et cetera on our ability to meet covenants going forward. PNC was understanding and cooperative and as a result we agreed to some modifications to our loan agreement that we will believe -- that we believe will allow us to meet covenants through 2017.

I should note that our borrowing rate did increase by 175 basis points from our historical effective rate of 3% to 3.5%. Bob will get more in depth on this in a moment and you can get more of the details from the actual amendment, which was filed with our 10-K yesterday.

With that, I'll hand it over to Austin Peitz for a few comments on what he's seeing out there in the field.

Austin Peitz

Thanks, Rick and hello to everyone. I would like to start off with a brief overview of our current operations. As you have heard from all the energy companies’ earnings calls, it's hard times in the oil and gas industry. E&Ps are scrutinizing every dollar spent and we on the services side have to compete for every job. Nevertheless, we continue to sign new MSAs and are winning our share of new business. We continue to leverage our strong customer relationships and focus on capturing every opportunity that makes good business sense for us.

To assure profitability, we performed an in-depth gross profit analysis on all potential new work and also when we have request for additional price concessions. We have scale back operations in areas where activity levels have dropped and redeployed assets to areas that are more active and where we have the ability to capture additional profitable work. Although we have had to endure price concessions to preserve certain key customer relationships, we have held our ground and resisted accepting jobs at negative margins like some of our peers are doing.

We are also looking for and finding ways to trim expenses and reduce our cost structure in ways that don't impact the quality of service we provide to our customers. We have made some difficult but necessary decisions to reduce our headcount and adjust compensation rates. All of these moves are designed to keep Enservco in a stronger position as possible during this downturn.

In the meantime, we have enjoyed some success in expanding into new areas such as the Eagle Ford in Texas which continues to be a success for us. In addition to giving us a profitable recurring revenue stream that is driven by routine production maintenance work it has opened the door to additional opportunities in other areas of Texas where we have a lot of irons in the fire with new potential customers.

We are beginning to see some competitors leave certain areas of operations due to financial problems which in turn is allowing us to capture additional business opportunities. We've also opened up some new business relationships in Oklahoma which for the time being will be servicing from Arkansas location. In our search for these opportunities, we are aggressively pursuing needs for our water transfer business. There are some headwinds that you would expect when launching a new business in this kind of environment, but we have developed some strong prospects that we are pursuing and are confident that over the long-term water transfer will become a solid service line for us.

As Rick mentioned, our new product offering is pretty exciting and pretty timely and in addition to our services portfolio. We spent the last month or so gearing up our marketing strategy and getting up to speed with the technology of the product itself and the test equipment that monitors and validates HydroFLOW’s effectiveness on a given job site. Next week we will begin installing our first field test units with the midsize EMPs that is keenly interested in the benefits the product offers, namely an easy to implement, low-cost, nonchemical alternative to what they're doing currently to eliminate bacteria and scaling problems.

I should add that when we initially acquired the rights to this technology, those rights were limited to frac water related applications. We subsequently negotiated the exclusive rights for injection and disposal wells whey they need to remove bacteria and skill components is just as pressing. The new service line has the potential to grow into a meaningful revenue component for us and will be based primarily on a model of renting or leasing the equipment to customers and will be a competitive advantage that will tie directly to our water transfer business.

To sum it all up, we and by that I mean individuals of all levels in this organization are committed to making the tough decisions that are necessary to ensure that Enservco would be a survivor of these rough times. We believe there will be quite a bit of attrition among all foodservice companies before the downturn is over and that will work to our benefit when the industry ultimately recovers.

With that, I'll hand it over to Bob for a recap of our financial results.

Bob Devers

Thanks, Austin, and hello, everyone. Let me start off with our fourth quarter results. Total revenue in Q4 declined to $8.6 million from $18.3 million in the same quarter last year. As Rick and Austin both mentioned, reduced capital spending by E&Ps along with the impact of warm weather were the primary reasons for this decline. In addition price concessions of approximately 7% also contributed to this decline.

In terms of revenue by service line, the biggest contributor to the decline in revenues was frac water heating which came in at $7.2 million lower at $4.2 million for the quarter as compared to $11.4 million a year ago. This is where the warm weather and reduced activity really hit us the hardest.

Our all-in [ph] revenue in Q4 was $2.9 million versus $3.9 million last year, a decline partially offset by the new revenue stream from our geographic expansion into the Eagle Ford. Advertising revenue for the quarter was minimal as operators continued to delay recurring maintenance programs.

Gross profit in the quarter declined to $2 million from $6.2 million last year. Despite our successful efforts to reduce variable cost in line with our drop in revenue, our fixed cost components and cost of revenues resulted in a year-over-year decline in gross margins from 34% to 23% which is still a very respectable margin.

We continue to take steps to reduce our cost structure, including some of – including reducing some of the fixed components. Total operating expenses in Q4 were up 9% to $2.7 million from $2.5 million last year due to a $427,000 increase in depreciation and amortization expense attributable to our 2014 fleet expansion and $141,000 increase in G&A expenses attributable to higher stock-based compensation expense year-over-year.

These increases were partially offset by $339,000 decrease in patent litigation defense cost. We expect litigation cost to remain low for the foreseeable future since the judge in our case granted a stay order pending the appeal of a judge's ruling in an unrelated in North Dakota and in response by the US patent office on an appeal of its decision that the underlying primary patent was invalid.

Adjusted EBITDA in Q4 was $1 million as compared to $5.3 million a year ago. The company reported a net loss for the quarter of $890,000 or $0.02 per share versus net income of $2.5 million or $0.07 per share a year ago.

Turning now to our full-year results, for the year ended December 31, 2015, total revenue decreased to $38.8 million from $56.6 million in 2014. Of those $17.8 million decline approximately $5.9 million was due to lower propane sales in the first quarter 2015 relative to the prior year. This included lower propane prices as well as lower volume sold to customers’ use of our bio-fuel system in their own fuel sources. The reminder of the decline was attributable to reduced customer spending and the warm weather which impacted our two largest frac water heating locations, the DJ Basin and Marcellus Shale.

Gross profit for 2015 declined $5.3 million to $10 million from $15.3 million last year. This was due to a combination of factors including reduced activity in our higher margin frac water heating service due to reduced capital spending by our customers, warm weather, lower gross profit on propane sales and price concessions. Some of these declines were offset by our cost reduction efforts and lower diesel prices.

The good news is our gross margin for the year remain relatively constant at 26% versus 27% a year ago. Total operating expenses in 2015 increased 27% to $10.6 million from $8.4 million a year ago. The increase was entirely attributable to a $2.4 million increase in depreciation and amortization expense related to our 2014 fleet expansion.

General and administrative expense and patent litigation both decreased year-over-year. Inclusion of the $2.4 million year-over-year increase in depreciation expense, we reported an operating loss of $620,000 versus operating income of $6.9 million last year. Despite some of the challenges in 2015, our adjusted EBITDA in 2015 was $6.3 million down from the $11.5 million a year ago.

Net loss for the year was $1.3 million or $0.03 per share versus net income of $4 million or $0.10 per diluted share last year. Depreciation expense was approximately $0.11 per share in 2015 as compared to $0.06 per share in 2014. In other words, of the $0.13 per share decline between years 40% was attributable to the increase in depreciation expense.

The company generated $12.1 million in cash from operations in 2015 up from $6.2 million last year. We used $8.2 million to pay down debt and $4.5 million to pay the remaining portion of our 2014 fleet expansion. Despite the difficult industry environment, our current receivable aging is in good shape and our write-ups during the year were relatively minor.

As Rick mentioned, we recently met with PNC Bank and made some modifications to our revolving credit facility. Highlights include a reduction in the revolving credit limit from $40 million back to the original amount of $30 million. We don't see this reduction as significant as we don't anticipate a need to borrow more than $30 million.

In addition, a new covenant was added which requires us to maintain a minimum availability level through March 2017. Our leverage and fixed charge coverage ratio covenants were changed to springing covenants and would only be tested for compliance if we fail the new availability covenant. As mentioned earlier, the applicable margin on advances was increased to 175 basis points, which is still in a relatively low effective rate.

Our balance sheet remains in good shape as we close the year with the current ratio of 2.9 to 1 and long-term debt-to-equity ratio of 1.2 to 1, down from 1.7 to 1 at the same time last year. Working capital at year-end was $6.5 million. Stockholders’ equity totaled $17.9 million and our total liabilities to stockholder equity came in at 1.6 to 1, an improvement over 2.2 to 1 in 2014 year-end.

We currently have approximately $9 million of excess collateral under our line of credit. After taking into consideration the availability limitation from our recent amendment, we have approximately $1.5 million of current availability, which we believe is sufficient to meet our cash flow needs.

Regarding our fleet status, we currently have 81 frac water heating units and 56 hot oil trucks, and 7 acidizing units. The average age of our well enhancement fleet is about three years. In addition, we have a significant amount of water transfer assets that we were able to acquire at a good price. So again we have young, modern fleet and equipment inventory with plenty of capacity to grow revenues as oil prices rebound and activity increases. At present we are not contemplating any new CapEx programs and our capital expenditures through the remainder of 2016 will be limited to maintenance CapEx.

With that I will turn it back over to Rick for some closing remarks.

Rick Kasch

Thanks, Bob. Just a few closing remarks. In spite of the perfect storm of challenging events in 2015, we performed well overall. We countered the lower revenue by adjusting our cost structure which helped us maintain our gross margins. We generated substantial cash for the year and were EBITDA positive in both the fourth quarter and for the full year, two things that many of our peers were unable to accomplish and because of these accomplishments, our balance sheet remains in a very strong position.

Going forward, we are going to continue to evaluate our cost structure and take whatever steps are prudent to maximize profitability and maintain financial strength. We have some new services that will promise to further diversify and increase our revenue streams and help decrease the seasonality of our business. These new services when coupled with the increased revenue capacity of our modern gives us confidence that we're well-positioned to resume the profitable growth trends we established over the years prior to the instability in commodity prices and the unfortunate El Nino impact.

The point is, Enservco is weathering the storm and will be more than a survivor that will be a stronger, better company on the other side.

With that, I'll turn the call over to the moderator for questions. Adam?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brandon Dobell from William Blair. Please go ahead.

Brandon Dobell

Couple of quick equipment questions first, thanks for the detail on the number of trucks and units. Any color on I guess how many of those with the frac heating trucks, the oil trucks are parked versus going to actually outworking, I guess I'm trying to get a better idea just of kind of figure out what utilization looks like now so trying to feel for how much more business you guys could take on without having to add any additional equipment.

Rick Kasch

To answer that question in the broad overall we can take on a lot more business. The question about frac water heaters, as you know this is the end of our season anyway so I don't know what percentages would you say Austin is being used.

Austin Peitz

So right now probably on frac water heating we're probably approximately 35 to around 35% utilization of our frac water heaters. And I would estimate off the top of my head on the hot oil trucks we're probably approximately 60% utilized right now on the hot oil trucks.

Brandon Dobell

The trucks that are in yard to just kind of you know or in areas that are waiting for business to come back not just seasonal trends but just overall demand environment. Let's say a truck sits for a while how much money it costs you kind of get it ready to be you know back and fully operational in the field and along with that will there be any issues or delays in finding people to let's say business to pick up could you react pretty quickly or it’s going to take you a while to find the right people to employ?

Rick Kasch

So the first part of the question on the equipment Brandon is its relatively a minimum amount of capital requirements, it's just a maintenance you know real simple maintenance going over for you know the ability to redeploy to another basin or two to be fired back up. On the other hand the employee question, right now we're you know as everybody on the call would understand that it's pretty easy to hire people. However it's kind of a specialized person that runs the equipment CDL, Hazmat need pretty good industry knowledge. So they’re available however you got more to pick from. So the employees are not an issue and as we redeploy market to market we're also utilizing some of our current staff and it's like more of a gradual buildup than it is an instance just big abundance of workload.

Brandon Dobell

As we think about capital spending or just a cash flow dynamics this coming year, I would imagine the capital outflows are going to be pretty modest but any color around how much we should expect CapEx just to keep the equipment kind of ready to go would be this year compared to what it was in '15 would be helpful.

Rick Kasch

You nailed that pretty well there is not going to be any new equipment CapEx, our only CapEx that we're planning on is maintenance CapEx, which we envision to be about $250,000 over the remaining three quarters.

Brandon Dobell

And then final one from me, as you think about the past let's call it eight weeks or even 12 weeks and I know there are some seasonal factors in here that may mess this question up a little bit but looking at pricing on a month-to-month basis, I know it's still going to be down versus last year but any signs that pricing is kind of found a stable floor. Are we still seeing pricing pressures from the customers and is there any particular service line that kind of stands either good or bad on that pricing question?

Rick Kasch

You bet. So pricing, the price concession request have definitely slowed down over the last 30 to 60 days. However, we're seeing some opportunities where you know in regards to the hot oil aspects in South Texas where we have opportunities to bid on bigger packages of work. And you know there were as we stated in the deal that we recognized sit down with Bob and Chris we run an in depth profit analysis and measure profitability matrix and then we're having an opportunity to give small additional price concessions for larger volumes of committed work so that's something on the positive side for us. However the frac heating you know a lot of that pricing is set before season throughout the season here we did have to enter into some negotiations but in the frac water heating we haven't had to renegotiate any prices since January and don't foresee any further - and we feel that we're - yeah to clarify the rate was as mentioned, we feel we are bottomed on the hot oiling aspects so we don't anticipate any further requests.

Operator

Thank you. Our next question comes from the line of Jeff Grampp from Northland Capital Markets. Please go ahead.

Jeff Grampp

Wanted to maybe go to the HydroFLOW and get a little bit more color on what Shell got going there. On this test that you guys have coming up, can you kind of talk about future business opportunities assuming some success with this operator whether it would be future or a more robust rollout with this operator or kind of proof of concept that you can get to other operators or just kind of expectations on that line of the business we progress throughout the year.

Rick Kasch

Sure, I think as we've indicated it's going to be a slow build and we don't see a lot of contribution from it maybe even until the fourth quarter. We're doing this like you say proof of concept. We'll probably know the results of that in 30 to 45 days that we'll be able to utilize and then go out to other EMPs but it's going to be again like I said a slow build but we think once we get the proof of concept done maybe with couple more clients in there. We honestly think it could become quite significant as the results that we're hearing about from other HydroFLOW distributors have been I don't know if we can use the word incredible but they have been more than expected and very encouraging, so. But again it's not going to be a big number for us until at least the fourth quarter.

Bob Devers

And then to elaborate a little bit on Rick's points there one of the things that we're kind of excited about is it kind of follows our traditional business model that there is going to be two sides to it, there is going to be a production side that's ongoing. Little less margin but it's consistent for long time periods. And there is going to be the completions side of it that's for treating the water in the hydraulic fracturing and process which has increased margins and in a lot of utilization potential once the industry renounces. So it's going to be kind of a twofold deal, but like our current business model with production and completion activities.

Jeff Grampp

And then just to clarify you guys quoted this as being your first field trial, is this first under Enservco's operatorship or did the prior owner of the technology conduct any field tests on this?

Rick Kasch

This is the first one under our ownership, the prior one has done some on disposal wells which is where the results have been very, very encouraging but we're going to have to do our own proof of concept here to go out.

Jeff Grampp

And then I'm shifting over to this Oklahoma area where you guys are trying to expand. Can you just maybe give us a little bit more details on how things are trending there is this looking like Eagle Ford version 2.0 or maybe just kind of compare how your efforts are trending there relative to the experience that you guys have seen in the Eagle Ford?

Rick Kasch

Well we're not seeing the results right now equal to what we experienced in the Eagle Ford. There's a lot more competition for the business, a lot of mom and pops in the area that have been there for 10, 20 years that are just kind of difficult to dislodge. So we do have significant sales efforts going on there, we hope to pick up some maybe in the water transfer business but I would not call it Eagle Ford 2.0 at this point.

Jeff Grampp

And then last one for me maybe for Bob, I saw on the K that the credit facility balance I guess as of a day or two ago was a little over 23 million. Is the expectation that that's going to move down in 2Q since that's typically when you guys start to see the receivables get worked down and if that is indeed the case is there any kind of estimate about what that number could be in terms of you know where the revolver ends up exiting 2Q?

Bob Devers

Yeah, it will - existing Q2, yeah it will come down slightly but is going to pretty much stay around that 23 million. With them in the floor, fourth quarter heating season we don't have the amount of receivables like we had in prior years to reduce that as much we had before hand. We'll reduce it a little bit but it's probably going to stay in that 22 million range by the time we - 22 million to 23 million range by the time we exit Q2.

Operator

Thank you. Our next question comes from the line of William Bremer from Maxim Group. Please go ahead.

William Bremer

Just want to get a sense, I want to go back to the HydroFLOW when it's all set and done and we're looking forward towards the back half of '16, will this be more like a MSA type of arrangement and give us a sense, I'm sort of hearing that pricing here could be a nice catalyst going forward for you, is that true?

Rick Kasch

I don't know if I'm seeing what you said about the pricing being the catalyst.

William Bremer

Yeah, it seems as though the pricing on this new HydroFLOW seems to be higher than your core. I just want to confirm that.

Rick Kasch

Oh, maybe you're talking about margin.

William Bremer

Yes, I am.

Rick Kasch

Yeah it's a great margin because basically it's a device that you hook to the pipeline or whatever and then you just have some monitoring periodically and so there is not you know the need for manpower on a day-to-day basis. So margin should be higher than what we're seeing off of our core work.

William Bremer

And I also saw in the release that you're sort of providing a little bit of a headwind in terms of the first quarter now given El Niño, the warmer temperatures as well as the current stance of oil and gas prices. Are we to assume that where -- are you talking year-over-year or are you talking more sequentially it's going to be sort of in that range in terms of top line revenue?

Rick Kasch

Well, we generally look at our numbers on a year-over-year basis, and you're right with your assumption that all those things continued to impact Q1, the weather, the E&P, decline in activities probably have been more significant payment [ph]. So we expect Q1 to be significantly down from last year.

William Bremer

Okay, all right. Bob, one for you, given the PNC amendment, I am assuming of course interest expense tweaks up here based on what you just mentioned $23 million, and I’ll assume your weighted average is in that -- now that 5 to 5.25 range. What will be a nice run rate to utilize the interest expense throughout 2016 now?

Bob Devers

Yeah, so you’re pretty good on with your effective rates. Our effective borrowing rate was -- on the PNC facility will be roughly 5% trailing up towards 6% towards the end of the year. We have a hedge that we put in place towards the end of the year that will kick in place, it will give us a little bit higher interest rates, but it will protect us long-term.

From a financial standpoint, when you factor in some of the debt amortizations, the debt cost amortization stuff probably would be in that 7.5% range from a financial statement standpoint. But our borrowing rate from PNC is roughly in that 5%, going up to 6% rang, about 450,000 in the quarter.

William Bremer

Got you. And I wanted to touch base on another housekeeping in terms of depreciation and amortization, we just sort of see – sort of utilized the current run rate that we’re seeing because of the additional of equipment that you had and how we look at that going forward?

Rick Kasch

We got all our CapEx in primarily by the end of first quarter last year, so going forward, 1.7 million roughly per quarter should continue to be the depreciation.

Bob Devers

It’s little bit higher because – it is Bob, it’s little bit higher because of the water transfer acquisition that we had at the first of the year, but yes, roughly in that 1.7 million range is a good number going forward.

William Bremer

All right. And then lastly, as you look upon your products going forward and your services going forward, what -- at this point what intrigues you, because it looks as though the two that you did subsequent to the quarter, real nicely in your product suite and really give you that, in my opinion, that full compass of services to your end customers. What else could be added at this point?

Rick Kasch

We want – it could be added to the platform to make it a more complete -- you got things like water storage, the upfront type poseidons, tanks whatever that could be. Then you got on the back side flow back work, cleaning, recycling water, would be good add-ons to that platform. So we would have – in fact, we have a little chart that we have in one of our presentations that talks about how we can turn eight calls that an E&P makes to service vendors to one by the time. And what we can do that now, it would expand to like 10 or 12 if we added on those others to the platform.

William Bremer

Okay. That makes sense. Thank you.

Operator

Thank you. Our next question comes from the line of Bhakti Pavani from Euro Pacific Capital. Please go ahead.

Bhakti Pavani

Good morning guys. Just kind of curious to know about the water transfer business, I know you do not expect much business, but what kind of a margins are we looking at for that business?

Bob Devers

So what we are doing right now is as we go out and pursue these opportunities, we are doing once again the in-depth cost analysis and profit margins. And when we’re submitting bids, we’re trying to stay in that 20% gross profit margin line right now and it’s simply just competitive aspects and then trying to get it on the backside on the cost, managing our labor cost and our operations is how we’re achieving that 20% margins on our analysis that we do.

Rick Kasch

Yes, and where we have an advantage Bhakti is we got that equipment at a very low cost, so when we go out there competing with others, they are having to if you will amortize the cost, new prices or full price whatever you want to call it, so we an advantage there. Now, when Austin was talking about that, he was just talking about the water transfer, not the HydroFLOW.

Austin Peitz

Yes.

Bhakti Pavani

With regards to – moving to the HydroFLOW, you did mention that it’s kind of a monitoring device. I am kind of wondering, with the new test that you are going to do, how many devices are you going to implement for this and how many devices do you have or do you obtain the de-acquisition?

Austin Peitz

Okay. So the first part of your question, just for clarifications, it’s not really a monitoring device, it's something that treats the water on a continuous basis. That helps the – it has the bacteria kill aspect, corrosion aspect and it helps with scaling issues. I mean, we go out and monitor it with our test equipment to validate the effectiveness of what it's doing. So that’s the clarification there.

The field trial we’re going to do is going to take two units initially. We will be monitoring on a daily basis at first as we’re trying to expedite the time it takes to monitor and show the effectiveness of it. And currently we own 11 units in-house, so roughly 20% of our equipment would be utilized during this first test run.

Rick Kasch

And going forward, just to explain that, two units Austin was talking about was just on one injection well. So there is a lot of – and we have the exclusive on injection disposal well, so as you probably know, there is a lot of wells out there and once we get that rolling, that's where we feel it can be significant.

Bhakti Pavani

Interesting. With regards to the units, how – I am trying to understand, if you need to expand the units or maybe have more units, is it kind of difficult to produce or what kind of things do you need there?

Rick Kasch

The US distributor has access. As long as it would take us to get equipment would be six weeks, if they have to go order from their supply.

Bhakti Pavani

I am sorry, go ahead.

Austin Peitz

And I was just going to clarify, we don’t have any maximum or any limit to that. I mean it's basically whatever the need is.

Bhakti Pavani

And from the cost standpoint, how much business unit cost each unit?

Austin Peitz

Well, there is various sizes that range from anywhere from 10,000 to 35,000, the ones we’re looking at are probably close to 25 to 35.

Bhakti Pavani

Okay. That’s it from my side. Thank you very much guys.

Operator

[Operator Instructions] Our next question comes the line of Gregory Macosko from Montrose Advisors. Please go ahead.

Gregory Macosko

Yes, thank you. Most of my questions have been answered. But one, with respect to the gross margins, given the restructuring you've done, if we look out and get back to normal level of production and operation, are you expecting that those gross margin on average should be significantly higher, any estimates there?

Bob Devers

Well, of course, we don’t provide guidance, but you’re correct, it would be a significant increase in the profit margins due to restructuring, the cost restructuring and aspects because they are – it’s impacted right now of course as we said by our fixed costs and so when the revenue comes down, it's a bigger hit to the margin and conversely on the way up. Incremental revenues for us are very profitable.

Gregory Macosko

And I may have missed the first part of it when there was a discussion on equipment utilization, but did you give a sort of a percentage utilization of the overall fleet?

Bob Devers

What we can do – what you may have missed is in the frac heaters, it's a seasonal business, we’re at the end of the season and so forth. And I think Austin estimated right now maybe 35% of our fleets in business 45 days from now will be zero. On the hot oiling, he was estimating probably at least 60% utilization on the hot oil trucks.

Gregory Macosko

Thank you very much.

Operator

[Operator Instructions] Ladies and gentlemen it appears we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Rick Kasch

All right. Well, thanks Adam, and again I would like to thank all of you for adjusting your schedules to allow for us to have the call today. We thank you all for your support. And again as always, should you have any questions, we are all available for you to contact. So with that, we will let you go and have a great weekend. Thanks. Bye.

Operator

Thank you ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time, thank you for your participation and have a wonderful day.

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