Bought ENSV this morning. Market Cap is only 115M. Here's a write-up:
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Enservco Doing Better Than Well
The provider of hydraulic-fracturing services can't keep up with demand.
Enservco ( ENSV : NYSE)
By Maxim Group ($3.11, Sept, 4, 2014)
We are initiating Enservco with a Buy rating and $5 price target.
We believe revenue growth has been strong & entirely organic, driven by capacity additions from customer requests. Enservco's well-enhancement service lines have compelling earnings before interest, taxes, depreciation & amortiza-tion (Ebitda) margins, with the bulk ranging from 35%-45% and some lines approaching as high as 60%. Demand for the company's services has outpaced capacity and capital expenditure is being utilized to dampen seasonality and expand geographically.
Sustained high oil prices and the recovery in natural-gas prices have driven increased capital expenditures by U.S.-based exploration and production companies, which then rely on service providers to aid in the extraction and development of the resources. Recent advances in hydraulic-fracturing (frac) techniques require that frac water be heated within a specific temperature range prior to being driven down a borehole, and, once completed, producing oil and gas wells often require periodic (two to four times or more annually) maintenance-related services, such as hot oiling or acidizing, to ensure adequate flow rates. As the industry's only national provider of frac water heating, hot oiling, well acidizing, and water-hauling services, Enservco stands uniquely positioned to service both the nearly 1.1 million existing oil and gas wells and the estimated 40,000-45,000 new wells drilled annually.
Enservco's well-enhancement service lines (representing about 80% of fiscal 2013 revenue) have very attractive margins. A single frac water heating unit costs the company about $225,000 to fabricate, but can generate annual revenue of about $650,000; double-burner frac water heating units cost about $325,000 to fabricate with annual revenue of about $1.3 million; and the newly designed "mega" frac water heating units, which can perform the work of a double burner unit, but with one operator, cost about $300,000 to fabricate and can generate about $1.3 million in revenue. All three types of burner boxes have Ebitda margins ranging from 35%-45%. Similarly, a hot oiling unit costs about $425,000 to fabricate and can generate annual revenue of about $500,000 per year with Ebitda margins between 35%-40%, and an acidizing unit costs about $500,000 to fabricate and, depending upon the basin, can generate annual revenue of about $1.5 million with Ebitda margins between 40%-60%.
Capital expenditure is being utilized to balance the fleet mix, reduce seasonality, and drive growth in higher-margin services. At the beginning of July, management finalized its $16 million capital-expenditure plan for fiscal 2014. The plan will add 18 mega frac water heaters, 20 hot oiling units, and four acidizing units to the fleet, and management estimates that these additions will generate more than $35 million of incremental revenue.
Our thesis and price target are supported by an enterprise value (EV)-to-Ebitda analysis that compares Enservco to a broad group of oilfield- and industrial-service providers. Currently, shares of Enservco are trading at an EV/Ebitda multiple of 4.1 times our 2016 earnings-per-share estimate of 32 cents on a revenue base of $98.6 million -- a discount to its peer group of 6.6 times. Our 2016 target price of $5 is based on Enservco trading at 6.6 times our 2016 estimate, in line with its peer average of 6.6 times, but a about 61% upside to the current price. For fiscal 2016, we see the capital investments made in both fiscal 2014 and fiscal 2015 driving top-line growth of about 28%, with EPS accelerating about 40% year-over-year.
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