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Enservco Corp (ENSV-OTCBB)

Current Recommendation Outperform

Prior Recommendation N/A

Date of Last Change 08/07/2013

Current Price (08/07/13) $1.25

Six- Month Target Price $2.40

OUTLOOK

SUMMARY DATA

Risk Level Above Average

Type of Stock Small-Blend

Industry Oil-Field Services

Zacks Rank in Industry N/A

Enservco Corp. is an oilfield services company providing well enhancement and fluid management services to domestic onshore E&P companies. Through an organic growth strategy of geographic expansion and capacity additions, the company is achieving double-digit, year-over-year revenue growth. Enservco benefits from both the megatrend of hydraulic fracturing to develop unconventional oil & gas resources in the U.S. (frac water heating) and the stability of providing ongoing water hauling services and workover services (hot oiling and acidizing). Coverage is initiated with an Outperform rating and a price target of $2.40.

52-Week High $1.35

52-Week Low $0.32

One-Year Return (%) 184.09

Beta 0.84

Average Daily Volume (shrs.) 64,583

Shares Outstanding (million) 31.8

Market Capitalization ($ mil.) $39.8

Short Interest Ratio (days) N/A

Institutional Ownership (%) 22

Insider Ownership (%) 59

Annual Cash Dividend $0.00

Dividend Yield (%) 0.00

5-Yr. Historical Growth Rates

Sales (%) N/A

Earnings Per Share (%) N/A

Dividend (%) N/A

P/E using TTM EPS 11.4

P/E using 2013 Estimate 7.8

P/E using 2014 Estimate 5.0

Zacks Rank N/A

ZACKS ESTIMATES

Revenue (in millions of $)

Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec)

2011 9.3 A

4.5 A

4.5 A

5.66 A

23.9 A

2012 9.5 A

5.6 A

5.5 A

10.8 A

31.5 A

2013 18.6 A

7.0 E

6.8 E

14.5 A

46.9 E

2014 65.7 E

Earnings per Share (EPS is operating earnings before non recurring items)

Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec)

2011

$0.04 A -$0.04 A

-$0.05 A

-$0.02 A -$0.07 A 2012

$0.01 A

-$0.02 A

-$0.02 A

$0.04 A

$0.02 A

2013

$0.11 A

-$0.01 E

-$0.01 E

$0.08 E

$0.16 E

2014

$0.25 E

Zacks Projected EPS Growth Rate - Next 5 Years % 25

Small-Cap Research Steven Ralston, CFA

312-265-9426 [email protected]

scr.zacks.com

111 North Canal

Street, Chicago, IL 60606

August 8, 2013

ENSV: Initiate coverage with an Outperform rating and price target of $2.40

Zacks Investment Research scr.zacks.com

KEY POINTS

Enservco Corp. is an oilfield services company that provides well enhancement and fluid management services to domestic onshore E&P companies. The majority of the company s service offerings are reoccurring in nature, justifying a premium valuation multiple.

Enservco is focused on two unique segments of the oil & gas services industry: production-related services and hydraulic fracturing.

The company provides the ongoing services for the transportation and disposal of fluids (water hauling) that accompany the process of oil & gas production, along with the recurring, maintenance services (hot oiling and acidizing) undertaken during workovers.

Also, Enservco is a prime beneficiary of the megatrend towards developing unconventional oil & gas resources in the U.S. through hydraulic fracturing.

Through its Heat Waves and Dillco subsidiaries, Enservco has a geographic footprint over multiple basins and has strong relationships (over 100 MSA s) with many operators in the oil and gas industry, including numerous majors.

An organic growth strategy of geographic expansion and capacity additions (custom-built service trucks) is driving dramatic, double-digit, year-over-year revenue momentum.

Management also considers and evaluates potential acquisition candidates to augment the company s growth potential.

A significant banking relationship with PNC Bank was established in November 2012. The company s debt was refinanced, and a revolving credit line will facilitate the development of a larger fleet.

We initiate coverage of Enservco Corp. with an Outperform rating and price target of $2.40.

OVERVIEW

Headquartered in Denver, Colorado, Enservco Corporation is an oilfield services company that provides well enhancement and fluid management services to domestic onshore exploration and production (E&P) companies. Well Enhancement Services (69% of revenues in 2012) is comprised of frac water heating, hot oiling, acidizing and pressure testing, while Fluid Management (30% of revenues) involves water hauling, fluid disposal and frac tank rental. Operations related to Well Site Construction and Roustabout Services (1% of revenues) were discontinued in 2013. Enservco provides well-site services through two operating subsidiaries: Heat Waves Hot Oil Service and Dillco Fluid Services.

Enservco s unique business profile differs from most oil and gas equipment service companies in that the company's business mix is skewed towards production rather than drilling. Approximately 55% of revenues is derived from recurring, maintenance work related to production (hot oiling, freshwater and saltwater hauling, water disposal and acidizing) and 45% of revenues originates from drilling wells (frac heating, frac fluid hauling and frac tank rental). In addition, drilling-related revenues are derived from hydraulic fracturing, a well stimulation technique benefiting from a secular upswing in the U.S. Therefore, Enservco is less susceptible to the traditional cyclicality exhibited by upstream1 capital spending budgets of oil and gas companies.

Enservco is focused on two unique sub-sectors of the oil & gas services industry: production-related services and fracking. Management completely avoids the cyclical oilfield equipment industry, which provides rigs, drill bits, valves, pumps, flow control equipment etc. that are needed for the process of drilling new wells. Rather, Enservco concentrates on services related to the ongoing production of oil & gas resources and the megatrend of fracking to release shale gas.

1 Upstream refers to exploration and production while the downstream segment includes refining and marketing of petroleum products and midstream encompasses transportation, such as pipelines.


Oil & natural gas operations use and produce significant quantities of fluids. Enservco provides a variety of services for the transportation, storage and disposal of fluids that are involved during both the production of oil & gas and the development or remediation of wells (drilling, fracking and workovers). Enservco, through Heat Waves and Dillco, currently operates a fleet of 75 water hauling trucks.

Operators of oil and gas wells desire to optimize the productivity of their wells through production management. There are a variety of methods to optimize well performance, including the implementation of scheduled maintenance services to enhance the flow of production. Hot oiling and acidizing are two effective stimulation and workover procedures, both of which improve the permeability in production wells: one (hot oiling) for removing paraffin, tar and other organic deposits and the other (acidizing) for dissolving scale precipitation and fines that have migrated and are blocking the movement of hydrocarbons. Enservco operates 27 hot oiling trucks and three acidizing vehicles with an additional four hot oilers and one acidizing truck expected to be added to the fleet by the fourth quarter of 2013.

The current energy boom in North America is being driven by the development of domestic shale gas resources, which requires horizontal drilling and hydraulic fracturing. The development of unconventional shale plays offer considerable opportunities for Enservco s offerings of frac heating, frac fluid hauling and frac tank rental services, especially in areas of cold weather where frac fluids must be heated during the fracturing process. For example, it is cold or cool up to four months a year in western Pennsylvania (Marcellus shale formation) and up to 10 months a year in North Dakota (Bakken shale formation). Generally, frac fluids must be heated to at least 80 °F at the well site, and advanced techniques require temperatures of at least 90 °F. Heat Waves Hot Oil Service operates 25 frac heating trucks and the rental of 15 frac tanks. Frac fluid hauling is completed with the water hauling trucks mentioned above.

CORPORATE HISTORY

Today s Enservco Corp. had its beginnings in March 2006, when Michael Herman acquired a majority interest in Heat Waves Hot Oil Service LLC, an eight-year-old regional provider of hot oiling, frac heating acidizing, pressure testing and water hauling services in eastern Colorado and western Kansas. The following year, in May 2007, Mr. Herman formed Enservco LLC to hold Heat Waves, along with other various oil and gas service-related ownership interests. A few months later, in December 2007, Enservco LLC acquired Dillco Fluid Services (a 33-year-old provider of water hauling, well site construction and frac tank rental services based in Hugoton, KS) for approximately $5 million. In the following year, the remaining interest in Heat Waves was acquired by Mr. Herman for approximately $2.0 million. Between 2009 and mid-2010, various transactions augmented Enservco LLC assets, including the purchase of disposal wells, frac tanks, trailers, dozers and other construction equipment.

Timeline of Enservco Corp.

March 31, 2006 Majority interest in Heat Waves Hot Oil Service acquired

May 2007 Enservco LLC formed to hold Heat Waves Hot Oil Service

December 2007 Enservco LLC acquires Dillco Fluid Services (Hugoton Basin)

2008 Enservco LLC acquires assets of Hot Oil Express

2008 Remaining interest in Heat Waves Hot Oil Service acquired

July 26, 2010 Enservco LLC merges with and into Dillco Fluid Service

July 27, 2010 Dillco Fluid Service merges with Aspen Exploration

December 30, 2010 Changed name to Enservco Corp.

2012 Heat Waves terminates operations serving Uintah Basin in UT and WY

In mid-2010, through a series of transactions, the operations of Enservco LLC (Limited Liability Company) merged with a public shell company, Aspen Exploration, ultimately creating publically-traded Enservco Corp. by the end of the year. Aspen Exploration was originally incorporated on February 28,


1980 as a Delaware corporation. After entering the natural gas exploration and production industry, Aspen ultimately was focused on gas operations in the Sacramento Valley of northern California. During the first half of 2009, Aspen disposed of all of its oil and gas producing assets and later distributed most of its cash assets to shareholders. On July 26, 2010, Enservco LLC merged with and into Dillco Fluid Service, with Dillco being the surviving entity. As a result, Dillco briefly became the parent holding company of Heat Waves Hot Oil Service LLC and other assets utilized by the company. On the following day (July 27th), Dillco Fluid Service (the accounting acquirer) merged with publically-traded Aspen Exploration (the legal acquirer) in a reverse merger. Since Dillco had significant business operations while Aspen no longer had any, Dillco s financial statements became the surviving entity s operative financial statements while Aspen Exploration contributed its public corporate structure. Also, Aspen s June financial fiscal year was changed to the accounting acquirer s calendar year. A reverse merger is a common technique for a private company to bypass the lengthy and complex process of becoming a publically-traded company. On December 30, 2010, the company officially changed its name from Aspen Exploration Corporation to Enservco Corporation.

At the time of the reverse merger when Aspen issued 14,519,244 shares of common stock to the shareholders of Dillco, namely Michael Herman (COB & CEO) who owned 90% and Rick Kasch (CFO) who owned 10%. Today, Michael Herman controls 16,089,320 shares (48.9% of the shares outstanding). Cross River Partners LP owns 4,414,500 shares (13.4%) and Rick Kasch owns 1,546,924 shares (4.7%).i Michael Herman has been the Chairman and control person of Heat Waves since March 2006 and Dillco Fluid Service since December 2007. Michael Herman controls 18,200,320 shares (53.6% of the fully diluted shares). Cross River Partners LP owns 3,214,500 shares (9.5%) and Rick Kasch owns 2,614,424 shares

In November 2012, Enservco refinanced debt with PNC Bank. The company s $11 million of debt with Great Western Bank was swapped into a three-year 4.89% note.ii As part of the refinancing with PNC, Enservco was required to raise at least $1.25 million in equity capital through a private equity placement and register the shares with the SEC by filing an S-1 prospectus in a timely fashion. A private placement of 5,699 Units (each Unit consists of 1,000 shares and warrants to purchase 500 shares at $0.55 per share) raised $1,994,800 in November 2012. On June 21, 2013, a prospectus was filed with the SEC covering the potential sale of 23,431,054 shares out of the 31,825,294 shares outstanding. Under the S-1, Michael Herman and Rick Kasch are permitted to sell a significant portion of their holdings, though both have indicated it is not their intention to reduce their holdings. In addition to the three-year $11 million floating-rate debt, Enservco has a $5 million revolving line of credit with PNC Bank at 3.25% plus LIBOR.

ORGANIC GROWTH

Organic growth is reflected by year-over-year increases in revenue after excluding any impacts from currency exchange and acquisitions/divestitures. Though positive effects of strong pricing and cost cutting can drive organic growth, in Enservco s situation, capacity additions from fleet expansion and improvements in equipment utilization rates are the stronger contributors to revenue growth and margin expansion. In addition, geographic expansion and new fracking techniques, which require higher water temperatures, enhance the drivers of organic growth. In addition, the increased activity in the onshore US market of unconventional oil and gas production provides a favorable macro-trend to further bolster the demand for Enservco s well enhancement services.

Examining the progress of revenue growth by segment reveals that Enservco is delivering strong organic growth in the Well Enhancement Services segment. Fueled by strong demand for frac heating and hot oiling services, both in existing service regions and new areas into which the company has expanded, management has embarked on significant capacity expansion programs in 2012 and 2013.


During 2012, two new hot oilers and five double-burner frac heating trucks were purchased and fabricated. The units were deployed into the Rocky Mountain region where heating season tend to be longer (usually starting in mid-September versus mid-November) enabling better capacity utilization. Moreover, progress in the implementation of hydraulic fracturing require higher slurry temperatures, which has resulted in extending the heating season in several basins from about four months to as high as ten months.

During the first quarter of 2013, the revenues of the Well Enhancement Services expanded by 125%. The dramatic rise was due to both a significant increase in heating capacity and a return to customary cold winter- season temperatures. The Eastern USA region also particularly benefited from the company s expansion into the Utica shale play, which increased the region s contribution from 14% to 23% of total revenues.

Revenue Growth (YOY)Well Enhancement Services

1Q 2Q 3Q 4Q Year2011 N/A N/ A N/ A N/ A 35.9%2012 10.2% 81.7% 43.0% 133.0% 56.8%2013 125.4%

Fluid Management 1Q 2Q 3Q 4Q Year

2011 N/A N/ A N/ A N/ A 28.7%2012 -10.9% -8.5% 15.7% -0.1% -0.7%2013 -8.7%

For 2013, management s organic growth should benefit from the $4.7 million capital investment into additional new frac heating, hot oiling and acidizing trucks in preparation for the upcoming seasonally strong fourth and first fiscal quarters. The expansion of frac heating capacity by 40% and the hot oiling fleet by 15% should enable the continuation of the momentum of organic revenue growth. The well enhancement segment s strong growth should continue to impact the company s revenue mix.

Due to the nature of frac heating and hot oiling, quarterly analysis of revenue growth and gross margin aids in the examination of organic growth and its level of profitability. Seasonal variation can be observed with the first and fourth quarters demonstrating higher growth rates and gross margins. The Fluid Management segment (water hauling) does not exhibit the robust growth rate of Well Enhancement Services; therefore, in the first quarter of 2013, Fluid Management only represented 10% of Enservco s revenue base.

Gross Margin AnalysisEnservco Corp.

1Q 2Q 3Q 4Q Year2011 37.4% 15.3% 12.8% 23.9% 25.4%2012 30.9% 17.6% 5.2% 36.7% 26.1%2013 44.0%

Also, the revenue growth of the Well Enhancement Services segment in the first quarter of 2012 appears inordinately low in comparison to other quarters. In that quarter, the frac heating and hot oiling components of the Well Enhancement Services segment were affected by higher-than-average temperatures and moderate weather resulting in modest 10.2% YOY top-line growth. However, in the first quarter of 2013, growth accelerated to a rate of 125%. The rapid increase was driven by the multi-


dimensional effects of normal weather, capacity additions, new customers and geographic expansion. However, for analytical purposes, it should be noted that first quarter revenue growth of the Well Enhancement Services segment over two years (from 2011 to 2013) was at a compound annual growth rate (CAGR) of 57.6%.

Enservco Corp.(% of revenues)

2009 2010 2011 2012 1Q 2013Fluid Management 48% 40% 40% 30% 10%Well Enhancement Services 42% 54% 58% 69% 89%Well Site Construction & Roustabout 10% 6% 2% 1% 1%

100% 100% 100% 100% 100%

2009 2010 2011 2012 1Q 2013Eastern USA (Heat Waves) 0% 26% 28% 11% 23%Rocky Mountains (Heat Waves) 19% 7% 29% 52% 57%Central USA (Heat Waves & Dillco) 81% 67% 43% 37% 20%

100% 100% 100% 100% 100%

Enservco is well-positioned to benefit from the U.S. energy renaissance, which in part is being driven by advances in horizontal drilling and hydraulic fracturing. The increased tempo in drilling activity, especially in pursuit of shale oil & gas along with tight gas, increases the demand for Enservco s well-site services. This macro-trend provides favorable conditions for the company s top-line growth. As E&P companies accelerate redevelopment of existing basins, requests for well enhancement services has allowed Enservco to expand into the Marcellus shale region in 2010, Bakken shale and Niobrara shale fields in 2011, the Mississippi Lime play in 2012 and the Utica shale in early 2013.

Enservco s existing customers have announced major 2013 capital expenditure plans: Anadarko Petroleum and Noble have announced major drilling programs targeting the D-J Basin, EQT Corp. is spending $860 million to drilling the Marcellus and Utica formations in the Appalachian Basin and Gulfport Energy has allocated approximately $500 million for the Utica shale play.

Enservco, therefore, represents a compelling organic growth opportunity driven both by external and internal factors. The resurgence in the U.S. oil & gas industry is largely due to advances in horizontal drilling and hydraulic fracturing that are able to unlock tight hydrocarbon-based resources in U.S. basins. E&P companies are ramping up development of tight oil and gas in shale and sandstone formations. Management is taking advantage of the favorable macro-trend by adding organic-growth-enhancing capacity, along with expanding the company s geographic reach through the opening of operations centers strategically located to serve U.S oil & gas basins on a national level. Although Enservco is well-positioned for continued organic growth, management also continues to evaluate acquisition opportunities.

ENSERVCO S COMPETITIVE ADVANTAGE

Enservco exhibits several attributes of competitive advantage, namely differentiation, operational effectiveness and customer satisfaction. With a fleet of modern, well-maintained vehicles, Enservco distinguishes itself from many local competitors that utilize dated trucks. Not only are employees enabled with up-to-date equipment, but also trained to provide a high quality level of service. As a result, Heat Waves and Dillco enjoy a strong reputation for reliable service that has established long-term relationships with customers within existing areas of service and prompted referrals for new business in other basins.


Enservco s modern fleet positions Heat Waves and Dillco to outperform most competing providers. Major capacity expansion and refurbishment programs have been implemented during the last two years. For 2013, $4.7 million has been allocated toward fabricating new equipment and $1.3 million toward enhancing existing equipment. Two double-burner frac heating trucks, six single-burner frac heating trucks, four hot oilers and a well acidizing truck are expected to be field-ready for the seasonally strong fourth quarter. During 2012, Enservco purchased and fabricated five double-burner frac heating units, two hot oil units and two water hauling trucks. In addition, seven additional water transports were leased. The tempo and tenor of capacity enhancement differentiates Enservco from the majority of competitors.

In addition to investing in new equipment, Enservco also promotes a culture of quality service to achieve a high level of operational effectiveness. In an industry where high employee turnover is common, Enservco nurtures the retention of experienced employees and supplements their knowledge base with training to ensure safe, reliable performance. A combination of modern equipment and quality service allows Heat Waves and Dillco to perform at a higher level than many of their competitors. As a result, Enservco has gained competitive advantage by offering quality customer service and value.

Enservco s competitors include a multitude of locally- or regionally-focused companies, including mom-and-pops, but few maintain a fleet of modern equipment and perform at high, consistent standards of service. Many smaller operators do not have the resources and guiding principles to provide the level of service and expertise that Enservco s management strives to maintain. Almost all compete on the basis of being in close proximity to the oil and gas field being serviced and often rely on past relationships in the community. The industry is very fragmented. When procedures such as hot oiling, frac fluid heating and water hauling are contracted, customers prefer utilizing companies with whom they have had positive experiences or about whom they have received exemplary references. Management has generated competitive advantage for Enservco by adopting a business strategy of providing well-site services with modern equipment that is operated by experienced and conscientious workers.

In the oil and gas industry, Master Service Agreements (MSAs) allow for field services (such as drilling, well enhancement and production services) to be easily and quickly contracted. MSAs do not obligate a company or contractor to commit to any particular work, but if a job is requested, an MSA allows both parties to complete work orders rapidly by referencing the more extensive provisions contained within the previously-executed MSA. Often, MSAs are negotiated, executed and in place between parties who regularly conduct business together, especially for on-site services performed on a repetitive or scheduled basis, such as water hauling, hot oiling and well acidizing. Thereby, operators can respond to operational changes in a timely manner.

One of Enservco s major attributes of competitive advantage is the number of active MSAs in place under which the company may receive work orders. Enservco has over 100 MSAs with E&P companies including ExxonMobil, Chesapeake Energy, Anadarko Petroleum, Noble Energy, EQT, XTO Energy, EOG Resources, Occidental Petroleum, Gulfport Energy, SandRidge, Statoil, Whiting, El Paso, Devon, Hunt Oil, Hess, ONEOK, Kodiak Oil & Gas, Stone Energy, Pioneer Energy Resources and others. Oil and gas companies are increasingly consolidating contractor lists and choosing companies that have the reputation of being a reliable provider of quality services. Management has concentrated on creating and cultivating these relationships to be on the short list of service providers. In some cases, Heat Waves and Dillco have attained preferred provider status.

As a consequence of delivering high quality well-site services with positive customer experiences, Enservco has developed a large core of loyal customers who are willing to recommend the company s services both internally and externally. Enservco benefits from this strong reputation, especially when employees at E&P companies change firms and recommend (and sometimes insist) that Heat Waves provide well-site services for their new employer s projects. In addition, there have been situations when the frac operators have persuaded E&P companies to use Heat Waves. As a result, Enservco has been able to leverage its service model because management is eager to expand geographically both by providing deeper and more expansive coverage in existing basins, and also by developing new operations centers in other basins.


Currently, demand for frac heating during cooler months is greater than existing supply, primarily due to the adoption of and advances in hydraulic fracturing. Management s challenge is to deal with this market that is experiencing rapid growth while maintaining smooth and reliable execution of operations.

Management has pursued a strategy of providing differentiated services with distinctive operational effectiveness. In a broad sense, Enservco has gained an edge over many rivals by being able to perform at a higher level than competitors. The company s reputation has resulted in deeper penetration of existing service territories and, through referrals, geographic expansion into other basins.

HEAT WAVES HOT OIL SERVICE and DILLCO FLUID SERVICES

Enservco conducts well enhancement and fluid management operations through Heat Waves Hot Oil Service and Dillco Fluid Services.

Heat Waves Hot Oil Service (80% of revenues in 2012)

Headquartered in Denver Colorado, Heat Waves Hot Oil Service provides frac heating, hot oiling, fluid hauling, acidizing, pressure testing, water hauling and water disposal services in Kansas, Oklahoma, Colorado, New Mexico, Texas, North Dakota, Montana, Wyoming, Pennsylvania, West Virginia and Ohio. Heat Waves has several operations centers, which are usually composed of shop and equipment yard supporting approximately 30 vehicles, along with a maintenance shop, offices and living quarters for between 10 and 32 employees. Located in Platteville, CO (serving the Denver-Julesburg Basin); Carmichaels, PA (Marcellus shale and Utica shale); Killdeer, ND (Bakken formation), Cheyenne, WY (Niobrara formation) and Garden City, KS (Mississippi Lime formation), the properties of the operations centers range in size from 1.5 to 13.3 acres of land with shops between 3,200 to 11,700 square feet. Heat Waves employs approximately 80 of the Enservco s 125 full-time employees.

Founded in April 1998, a majority interest in Heat Waves Hot Oil Service was acquired in March 2006 and the remaining interests in 2008. Heat Waves provides both well stimulation (frac heating and acidizing) and maintenance (hot oiling and water hauling) services to oil and natural gas companies. Since 2006, the geographic scope of operations has expanded from the initial service area of Kansas, Oklahoma, eastern Colorado and northern New Mexico to Pennsylvania ((Marcellus shale), North Dakota (Bakken shale), Wyoming (Niobrara formation) and most recently, eastern Ohio (Utica shale). Also, Heat Waves has deepened its presence in Kansas (Mississippi Lime). The company focuses on fluid management services for hydraulic fracturing jobs and workovers (hot oiling and acidizing) to enhance the production of existing wells.

Dillco Fluid Services (20% of revenues in 2012)

With operations centers in Kansas and Oklahoma, Dillco Fluid Services is primarily a provider of fluid hauling and disposal services to energy companies working in the Hugoton gas field in western Kansas and northwestern Oklahoma. Dillco also offers frac tank rentals.

Originally founded by Gene Dill in 1974, Dillco Fluid Services was acquired by Enservco in December 2007. Today, Dillco owns and operates 26 trucks. Fluid hauling trucks have a capacity of up to 140 barrels (5,880 gallons). Also, Dillco owns four salt water disposal wells, three of which are currently in operation. Fluid hauling (both fresh and produced water) is Dillco s primary source of revenue.


Dillco owns 15 frac tanks, which are offered for rental. Frac tanks can store up to 500 barrels (21,000 gallons) of water at the well site during the hydraulic fracturing process, but can also be used for storage of other fluids, such as produced water, backflow, etc. Dillco s service area includes southwestern Kansas, the Texas panhandle, northwestern Oklahoma and northern New Mexico with operations centers in Garden City, KS; Hugoton, KS; Liberal, KS; Protection, KS and Keyes OK. Dillco employs approximately 40 of the Enservco s 125 full-time employees.

Heat Waves and Dillco own 229 pieces of equipment that service the oil & gas industry, of which 129 are specialized trucks used for hot oiling, frac heating, water hauling and acidizing.

Enservco s Equipment Inventory

Equipment Inventory May 2011

May 2012

May 2013

Hot oiling & Frac heating trucks

452 55 513

Water hauling trucks 80 75 75

Acidizing trucks 5 5 3

Frac tanks 25 15 15

Construction units 25 25 15

Misc. 45 70 70

TOTAL 225 245 229

An immaterial amount of revenues is generated from the rental of frac tanks and from providing pressure testing; however, these services contributes to the level of satisfaction and loyalty of customers.

SERVICES PROVIDED BY ENSERVCO

Hot Oiling

Hot oiling has been and continues to be an integral part of oilfield operations. Over time a producing well experiences a buildup of deposits that restrict production. Heavy organics, such as paraffin and tar-based oils, especially resins and asphaltene, accumulate and form into solids, creating blockages in the well s casing, tubing and surface flow lines. Hot oiling is a technique for removing these deposits.

Hot oiling is usually the first method utilized for removing hydrocarbon-based scaling. Many wells, along with their flow lines, are hot oiled for contaminates control on a scheduled basis before the flow of oil is interrupted and production is noticeably restricted.

Enservco uses specially-designed trucks with heating units, hoses, connections and all the other equipment needed to perform the hot oiling process. The truck-mounted heating unit raises the temperature of oil, which is obtained from storage tanks onsite. The heated fluid is then pumped under pressure into gathering lines and into the cased wellbore. As the liquid circulates through the casing and back up through the tubing, the hydrocarbon deposits are melted, dislodged and then transported within the fluid to the surface where processing equipment removes contaminates.

2 30 hot oiling trucks and 15 frac heating trucks. 3 27 hot oiling trucks and 24 frac heating trucks.


Heat Waves Hot Oiling Truck

Hot oiling downhole can potentially foul the formation. During a hot oil job, some of the fluid flows into the formation. As it reaches the formation, the hot oil cools. Potentially, the dissolved heavy organics can re-solidify and be deposited within the formation reducing permeability and impairing flow paths of production hydrocarbons. Therefore, it is important that the melted deposits are not re-deposited in the formation. In order to prevent such damage, usually chemicals are added to the hot-oil treatment to prevent precipitation of the dissolved heavy organics or the processing equipment on the surface must be sufficiently efficient to prevent saturation of melted hydrocarbons within the hot oil fluid.

Enservco s Heat Waves subsidiary provides not only hot oiling services, but also heating of oil storage tanks, which reduces produced water contamination and improves the quality of the crude oil delivered to the refinery. In colder weather, heated oil flows more efficiently from storage tanks to transport trucks. Hot oil trucks can also provide steam cleaning services to wash production equipment and storage tanks. In 212, Enservco began offering steam cleaning with a single crew and is expected to add a second crew this year.

As an ancillary service, Heat Waves can provide pressure testing of the well s casing, tubing and flow lines using its hot oil and pressure trucks. Certain pressure tests are required by regulatory and administrative agencies. For example, the integrity of the casing must be tested to the maximum anticipated treating pressure prior to fracture stimulation. Also, the pressure must be monitored during the fracking process in order to control the pressure inside the wellhead and treating lines. Pressure testing generates an immaterial amount of revenues, but contributes to the level of satisfaction and loyalty of customers.

Frac Heating and Frac Tanks

Hydraulic fracturing is process that creates additional fissures in hydrocarbon-bearing rock formations to create additional flow paths for hydrocarbon-based resources to travel from underground formations to the surface. After the perforation of the steel and cement casings in the well bore that passes through a reservoir, additional spaces of porosity and permeability are created by fracking. A slurry mix of water, a propping agent (usually sand) and chemicals is injected under high pressure through the perforations into the targeted production zone. The fill material fractures the rock and creates additional fissures to better release and extract oil and gas held by the formation.

In order to increase the efficiency of the fracturing process, it is a common practice in the oil and gas industry to raise the temperature of the water used in the slurry of a hydraulic fracturing job, especially in cold environments. About 90% of the slurry is composed of water, approximately 9% a propping agentiii

and the remainder chemical additives (stimulants, dispersants, biocides and/or friction reducing polymers)iv. The exact recipe for the frac fluid depends on the characteristics of the formation, the working conditions, the operating company, etc. To ensure that the components mix properly, the water should be heated to the optimal, predetermined temperature, which is determined by the operator of the hydraulic fracturing job. In addition, warmer fluid can permit the use of fewer chemicals. At colder temperatures, the heated slurry prevents freezing and allows fracking operations to continue unimpeded by the weather. Depending on the depth of the formation, the cost for drilling a horizontal lateral and hydraulic fracturing can range between $3 and $8 million. Lease owners have timetables that may


require well completions throughout the year, including during the winter months when frac heating is mandatory in most of the U.S.

Heat Waves Double-Burner Frac Heater Truck

During the frack job, the heated frac fluids are pumped down-hole by the frac service provider, and large quantities of heated slurry are injected into the subterranean, hydrocarbon-bearing formation. Immense amounts of water are consumed, and on-site are dozens of high capacity frac tanks, along with a temporary fluid reservoir. Frac tanks are used to store fluids during all phases of the fracking process. With a capacity of up to 500 barrels (21,000 gallons), frac tanks can be used for temporary storage of produced water, completion fluids or production, itself.

Enservco s Heat Waves subsidiary owns and operates specialized frac heater trucks that are designed to heat the large amounts of water stored in both reservoirs and frac tanks. Generally, frac service providers seek frac fluid to be around 90 °F downhole, though technique advances are trending towards even higher temperatures. Also, depending on the weather and the season, it may be necessary to raise the temperature of the water to as high as 140 °F on the surface.

The pumping stage lasts from 20 minutes to about four hours. During this time, the heating of the frack fluid provides significant benefits. First, the lower viscosity of the heated slurry allows the fluids to better invade the formation through the perforations of the well bore, improving the eventual placement and geometry of the fracture systems. Second, warm fluid reduces contraction of the downhole well casing and minimizes the possibility of a catastrophic casing failure.

Heat Waves Frac Heater Truck Dillco Frac Tank

The slurry is pumped under pressure into the hydrocarbon-bearing formation to create cracks and fissures. The resulting fractures, which can extend up to 1,000 feet from the well bore into target formation, establish flow paths of higher permeability from large zones of the reservoir, freeing up more trapped crude oil and/or natural gas. When the fracking solution cracks the rock formation, the proppant (usually sand or ceramic beads) is deposited and helps resist the closure of the fractures by propping the cracks and fissures open.

Depending on the depth of the formation and the length of the horizontal lateral, from one to up to 13 million gallons of water are needed to complete a frac job. For example, approximately six million gallons of water are used in a hydraulic fracturing job in the Bakken formation. Roughly one million gallons will return from the well as flow-back. Therefore, 1,200 truckloads of water are transported to the well site, and over 200 truckloads are required to transport flow-back fluids from the well site to disposal wells.


Water Requirements For Hydraulic Fracturing Texas Shale Playsv

After the fractures are created, the well pressure is released and some percentage of the fracturing fluid (aka flow back) returns to the surface through the wellbore. Generally, between 5% and 50% of the fracturing fluid is recovered during the ensuing three weeks depending on the porosity of the shale. Some shale is under-saturated and retains water in the smaller pores and micro-fractures of the rock; for example, flow back from Haynesville shale may be as little as 5%. On the other hand, Barnett and Marcellus shales tend to return as much as 50% of the fluid to the surface as flow back.

Enservco provides a variety of fluid management services for the hydraulic fracturing process: from delivering fresh water to the site to providing frac tanks for water storage; from heating the frac water to trucking completion and flow-back fluids to disposal wells. Also, during cold seasons, some of Enservco s frac heating trucks are used to heat water flow lines in order to prevent freezing. Some water flow lines are up to 10 miles in length, and frac heaters must be set up every few miles to keep the water warm and running.

Fluid Hauling (fresh water, produced water, frac fluids, etc.)

Salt water almost universally accompanies the production of oil and gas found in porous rock formations. As a result, the oil and gas industry unavoidably produces enormous amounts of waste salt water, and its disposal is a regular maintenance task that must be carried out on a periodic basis.

All subsurface reservoirs of oil and gas contain oilfield brine, which is brought to the surface concurrently with oil or gas. Once on the surface, it is known as produced water, which is composed of the water trapped in the underground formations with the hydrocarbons (formation water) and any water injected into the formation to facilitate the removal of oil and gas through enhanced oil recovery operations. In the United States, it is estimated that at least 7.5 barrels of salt water are produced with every barrel of crude oil4. In addition, relatively small quantities of fluids used in the drilling, completion and production operations (such as drilling mud, fracture fluids and well treatment fluids) are mixed in with the oilfield brine waste stream.

The practice of waste saltwater disposal into underground formations began in the 1930s. Today, the process is highly monitored and regulated with operators of oil and gas wells being responsible for disposing of saltwater in an environmentally safe manner.

Generally, produced saltwater is disposed in one of two ways: the waste water 1) is utilized in enhanced oil recovery (EOR) programs5 and returned into the reservoir from which it was extracted or 2) is injected into authorized deep-subsurface porous rock formations by means of saltwater disposal wells. Nationally, approximately 95% of produced water from domestic onshore wells is injected underground. Over half

4 Produced Water Volumes and Management Practices in the United States, Department of Energy, Argonne National Laboratory, Environmental Science

Division, ANL/ENS/R-09/1, 2009, page 28. The results omit many states with mature oil fields, such as Oklahoma, which do provide separate statistics of salt water produced by oil wells and gas wells. The accepted adjusted figure is 10 barrels of salt water are produced with every barrel of crude oil. 5

Enhanced oil recovery with water is also referred to as water flooding or steam flooding.


(approximately 55%) is injected into producing formations for enhanced oil recovery6 while about 39% is injected into non-producing formations for disposal.7

When onsite management of produced water is impractical or unfeasible, operators typically transport the saltwater by truck (and in some cases by pipeline) to a commercial disposal facility. Many small producers find off-site disposal a feasible and economical alternative to constructing and operating onsite disposal facilities. Additionally, an increasing number of small producers have reached the maximum capacity of onsite disposal wells and must utilize off-site commercial disposal wells to maintain production.

Dillco Water Hauling Truck

Both Heat Waves Hot Oil Service and Dillco Fluid Services transport fluids, including 1) produced water and flow-back fluids from producing wells to disposal wells, 2) drilling and completion fluids to and from well locations and 3) water to fill reservoirs or frac tanks at well locations. Heat Waves and Dillco own/lease and operate 75 water hauling trucks with hauling capacities ranging from 80 to 140 barrels. Water hauling accounted for approximately 30% of the company s revenues during 2012.

Fluid Disposal (Salt Water Disposal Wells)

The practice of waste saltwater disposal into underground formations began in the 1930s. Generally, produced saltwater is disposed in one of two ways: the waste water 1) is utilized in enhanced oil recovery (EOR) programs8 and returned into the reservoir from which it was extracted or 2) is injected into authorized deep-subsurface porous rock formations by means of saltwater disposal wells. Nationally, approximately 95% of produced water from domestic onshore wells is injected underground. Over half (approximately 55%) is injected into producing formations for enhanced oil recovery9 while about 39% is injected into non-producing formations for disposal.10

When onsite management of produced water is impractical or unfeasible, operators typically transport the saltwater by truck (and in some cases by pipeline) to a commercial disposal facility. Many small producers find off-site disposal a feasible and economical alternative to constructing and operating onsite disposal facilities. Additionally, an increasing number of small producers have reached the maximum capacity of onsite disposal wells and must utilize off-site commercial disposal wells to maintain production.

The process of fluid disposal is highly monitored and regulated with operators of oil and gas wells being responsible for disposing of saltwater in an environmentally safe manner. According to the U.S.

6 Produced Water Volumes and Management Practices in the United States, 2009, page 29.

7 Ibid, page 29.

8 Enhanced oil recovery with water is also referred to as water flooding or steam flooding. 9 Produced Water Volumes and Management Practices in the United States, 2009, page 29. 10 Ibid, page 29.


Environmental Protection Agency (EPA) 11, oil and gas related injection wells are classified as Class II wells and must meet EPA s minimum requirements for Underground Injection Control (UIC) programs. Class II wells are sub-divided into three types: II-R (enhanced recovery), II-D (disposal) and II-H (hydrocarbon storage). Currently in the United States, there are approximately 144,000 Class II wells in operation injecting over 2 billion gallons of brine underground daily12. Most are in four states: Texas, California, Oklahoma and Kansas. Representing about 20% of all Class II wells, salt water disposal wells are designed and constructed to inject brine and other fluids associated with the production of oil and natural gas into authorized underground formation zones in a manner such that surface soils and local aquifers (especially underground sources of drinking water) are not polluted or contaminated.

Salt water disposal wells are highly regulated by both Federal and State agencies. Congress enacted the Safe Drinking Water Act in December 1974. As a result, the EPA set requirements for protecting the nation s underground sources of drinking water and promulgated Underground Injection Control regulations, which were subsequently strengthened to comply with the waste disposal amendments of the Resource Conservation and Recovery Act. For Oklahoma, the primary enforcement responsibility over oil and gas injection and disposal wells under the Underground Injection Control program was delegated in April 1982 to the state government of Oklahoma and is administered by the Oil and Gas Conservation Division of the Oklahoma Corporation Commission. Any underground injection well facility not subject to the jurisdiction of the Oklahoma Corporation Commission, is overseen by the Oklahoma Department of Environmental Quality under Statute 252:652 (Underground Injection Control). In addition, local government and municipalities often enact supplementary local regulations and permitting procedures. These stringent requirements for permitting, well completion, injection procedures, well monitoring and field inspections minimize the risk of potentially contaminating fresh water sources through the construction and operation of salt water disposal wells.

Enservco, through its subsidiaries, owns and operates three salt water disposal wells13 (SWDWs) in southwestern Kansas and northwestern Oklahoma, which primarily receive produced water from wells in the Hugoton gas field. Two other SWDWs are owned but currently inactive. The salt water disposal wells (SWDWs) are maintained as an ancillary part of Dillco s water hauling services, though SWDWs owned by third parties are also used. Located in close proximity to the producing wells of Enservco s customers, the disposal wells are licensed by state authorities and operate in accordance with the guidelines and regulations of the Environmental Protection Agency.

Acidizing

Acidizing is one of the most widely used workovervi and stimulation practices in the oil and gas industry. The rate of flow of a well can be significantly improved through acid treatments, which increase the permeability of the formation and remove materials blocking the movement of oil and natural gas in the immediate vicinity of the well casing. The acidizing process involves pumping large volumes of specially-formulated, highly-reactive acidic solutions into the well under pressure (but below the reservoir fracture pressure). Most acidizing treatments utilize hydrochloric acid (HCl), but also hydrofluoric, acetic, formic, sulfamic and chloroacetic acids are used, depending on the characteristics of the underground reservoir.vii Also, the solution contains inhibitor additives to protect the steel casing, a sequestering agent to inhibit the precipitation of iron and a suspending agent to aid in the clean-up after acidizing. The solution chemically reacts with and dissolves contaminates, especially the accumulated scaling blocking the perforations of the well casing and materials (particularly limestone and sandstone) that have migrated and then block the pores of the near-wellbore underground oil and gas bearing rock formations. After allowing the solution to react with contaminates over a period of time (soaking), the treatment fluids are removed in a process known as backflush. Acid stimulation plays an important role in increasing well productivity by removing scale build-up and fines migration and the resulting improvement of hydrocarbon flow to the well bore. Heat Waves operates three mobile acidizing trucks.

11 Report on the Environment, U.S. Environmental Protection Agency, Washington, D.C., EPA/600/R-07/045F (NTIS PB2008-112484), 2008. 12 U.S. Environmental Protection Agency website: water.epa.gov/type/groundwater/uic/class2. 13 I.B. REGIER 1 in Meade, KS; BARNES 1-9 in Texas, OK; and SIMMONS 1-7 in Texas, OK.


GEOGRAPHIC EXPANSION

Enservco currently provides well-site services to numerous companies in four major, proven, oil and gas basins: Denver-Julesburg (targeting Niobrara shale formation in CO and WY), Hugoton (Mississippi Lime in KS and OK), Appalachian (Marcellus shale in PA and WV and Utica shale in OH) and Williston (Bakken shale in ND).

CEO Michael Herman began the formative process of Enservco when he acquired a majority interest in Heat Waves Hot Oil Service LLC in March 2006. At the time, Heat Waves provided hot oiling, frac heating acidizing, pressure testing and water hauling services in eastern Colorado and western Kansas. The next year, Enservco acquired Dillco Fluid Services, which provided primarily water hauling services in the Hugoton gas field in southwestern Kansas and later expanded into nearby areas in adjoining states (northwestern Oklahoma, the Texas panhandle and northern New Mexico). The primary operations centers of Heat Waves and Dillco are in Garden City, KS and Hugoton, KS, respectively.

Timeline of Geographic Expansion

March 2006 Invest in Heat Waves working in Denver-Julesburg Basin in CO and WY

December 2007 Add Hugoton Basin (KS) operations by acquiring Dillco Fluid Services

Mid-2008 Heat Waves enters Uintah Basin (UT and WY)

January 2010 Expand to Appalachian Basin (PA & WV) with facility in Carmichaels, PA

September 2011 Enter Williston Basin (Bakken formation) in ND and MT

September 2011 Expands in D-J Basin (Niobrara formation) - new facility in Cheyenne, WY

May 2012 Begin offering water hauling & acidizing services for Mississippi Lime out of Garden City, KS

August 2012 Exit operations in Uintah Basin due to irrational pricing by competitor

December 2012 Began operations through MSA agreements for Utica shale formation (OH)

In mid-2008, Heat Waves began serving customers operating in the Uintah Basin in northeastern Utah by providing frac heating, hot oiling, water hauling and acidizing services out of an operations center located in Roosevelt, Utah. However, during 2012, a local mom-and-pop company began offering oil & gas services at cost, and management decided to terminate operations in the Uintah Basin due to the irrational pricing practices by a competitor. The facilities in Roosevelt were sold and Heat Waves equipment was redeployed to more stable and active operations centers.


In early 2010, Heat Waves expanded into the Appalachian Basin through the request of a large, longtime customer to provide frac-heating services for the development of the Marcellus formation in southwestern Pennsylvania and northern West Virginia. Heat Waves opened an operations center in Carmichaels, PA in January 2010. Within a year, frac heating, hot oiling and water hauling services were being provided to 12 major exploration and production companies in the region. At the present time, four of the five largest operators developing the Marcellus in southwestern Pennsylvania are customers of Enservco. In December 2012, Enservco entered into master service agreements (MSAs) with five major E&P companies which are targeting the Utica shale formation in eastern Ohio, where fracking techniques require higher fluid temperatures than in the Marcellus. Therefore, demand for frac fluid heating services in Ohio should extend throughout most of the year. In the first quarter of 2013, revenues generated from the Eastern USA region increased just over $3.0 million due, in part, to the company s expansion into the Utica.

During September 2011, Enservco dramatically expanded its footprint in the Rocky Mountain region. In the north, a new operations center was opened in Killdeer, North Dakota to serve operators in the Bakken shale play with a service fleet of frac heaters and hot oilers. In the central Rockies, the company augmented its base of operations addressing Niobrara play in western Colorado and southeastern Wyoming. The opening of an operations center in Cheyenne, WY supplemented the company s initial foray into northern Colorado and eastern Wyoming when the yard in Platteville, Colorado opened its doors prior to 2010.

Currently, Enservco s most significant territories are the Denver-Julesburg (D-J) Basin in Colorado and Wyoming and the Hugoton gas field in Kansas and Oklahoma, the latter being the service area of Dillco Fluid Services.


NIOBRARA FORMATION (Denver-Julesburg Basin aka Denver Basin)

The Denver-Julesburg Basin is situated on the eastern side of the Rocky Mountains and extends across northeastern Colorado into southeast Wyoming. Having produced oil and gas since 1881 (from the Florence field in Fremont County), the D-J Basin now has more than 20,000 producing oil and gas wells. One of the most prolific formations within the D-J Basin is the Niobrara formation, which occurs at depths ranging from 3,000 feet to about 8,200 feet. The USGS describes the Niobrara in the Wattenberg field as a self-contained petroleum system which contains both source (organic rich shale) and reservoir (carbonate) rocks and is categorized as a tight (low-permeability) basin-center gas field. The Wattenberg field is located northeast of the Denver metropolitan area and the Silo field is situated in Wyoming very close to the border with Colorado.

The U.S. Geological Survey assessment report of 2002 estimated the potential of the Denver Basin Province from all five Total Petroleum Systems (TPS) to be 104.23 million barrels of oil, 2.519 trillion cubic feet of gas and 51.81 million barrels of natural gas liquids (NGLs). The Niobrara-related Assessment Units [namely, the Niobrara-Codell (Wattenburg field area), Niobrara Chalk and Fractured Niobrara Limestone (Silo field area)] are estimated to contain 39.83 million barrels of oil, 1.314 trillion cubic feet of gas and 33.55 million barrels of NGLs. Also, as of 2002, the USGS indicates that wells across the Denver Basin have produced from more than 245 million barrels of oil and 2.15 trillion cubic feet of natural gas, with the most notable production from the Wattenberg field located in Weld County.

In 2012, Colorado produced 49.3 million barrels of oil, a 26% increase from the 39.2 million barrels produced in 2011, which was a 20% rise over 2010. Last year marked the second-highest production in the state s history following 1956, when Colorado produced nearly 58.6 million barrels of oil. Much of the increase is attributable to the Niobrara, particularly the Wattenberg field which was discovered in 1970. The adjacent Spindle field was discovered in 1972. Wells in the D-J Basin Niobrara Formation in the D-J Basin

The Niobrara is composed of multiple layers of alternating shale and chalk with a complex naturally-fractured system with curving geometries. Production from the Niobrara has been enhanced to economically-feasible levels by hydraulic fracturing, which has increased the formation s permeability. However, well productivity has been highly dependent on unlocking the matrix porosity and natural


fracture permeability. The Niobrara is composed of discrete intervals: three-or-four 30-to-40 feet thick, brittle chalk intervals separating the four-or-five rich organic shale intervals, each with its own unique fracture system. Also challenging is the variability of the Niobrara s thickness, which ranges from 50 feet in South Dakota to more than 600 feet along the western flank of the D-J Basin.

Cross Section Stratigraphic Section of Denver Basin

Many oil and gas companies are making heavy investments into unconventional development (horizontal drilling and hydraulic fracturing) of the Niobrara formation in the Denver-Julesburg Basin. Among Enservco s known existing customers are Anadarko Petroleum (APC), Chesapeake Energy (CHK), EOG Resources (EOG), Noble Energy (NBL) and Whiting Petroleum (WLL). EOG Resources was one of the early movers into the Niobrara and controls oil and gas leases on over 400,000 net acres in Colorado and Wyoming. In 2009, EOG drilled a productive wildcat well (Jake 2-01H) well near the Colorado-Wyoming border which produced 50,000 barrels of oil in the first 90 days, including 14,000 barrels from the first eight days of production. Through mid-2010, Noble Energy had completed four horizontal wells into the Niobrara at the Wattenberg field. The most prolific was the Gemini well with a 4,000-foot lateral and a 16-stage fracturing procedure. During the first 60 days, Gemini produced 30,000 barrels of oil equivalent (BOE).

The two largest operators in the Niobrara in the D-J basin (Noble Energy and Anadarko Petroleum) are both customers of Enservco and have each announced multi-billion dollar drilling programs. In December 2012, the management of Noble Energy announced plans to spend $1.7 billion in Colorado during 2013 as part of a five-year investment program. Focusing on the development of Wattenberg field, Noble drilled 85 horizontal wells into the Niobrara in 2011, 200 in 2012 and 300 are expected to be completed in 2013, primarily focusing on the Wattenberg field. Noble Energy owns mineral rights on approximately 640,000 acres in the D-J basin. Extensively using 3D-seismic, downhole micro-seismic, acoustic and temperature data, Noble Energy s management believes that the company has determined the methodology to drill and space wells at multiple depths, which will optimally exploit different layers in the Niobrara formation in order to maximize recoveries of liquid-rich

MARCELLUS FORMATION (Appalachian Basin)

In the Appalachian Basin, Marcellus Shale occurs as a subsurface formation usually at a depth of a mile or more below the surface (shallow in Ohio but generally as deep as 7,000 feet in northeastern and central Pennsylvania). Found beneath much of Ohio, West Virginia, Pennsylvania and New York, as well as portions of Maryland, Kentucky, Tennessee, and Virginia, the Marcellus is relatively expensive to access due to the shale s depth and the need for horizontal drilling and hydraulic fracturing.


Prior to 2005, most of the recoverable gas from Marcellus wells was considered to be contained within fissures and pore spaces. Initial rates of production were high as the free gas residing in vertical fractures and small pores readily produced gas. High initial flow rates declined rapidly to low steady rates within about one year after the free gas had been produced and as the slowly-released adsorbed gas became the main constituent of production. At the time, the Marcellus was not considered to be an important gas resource.

In 2003, privately-held Range Resources drilled a well into the Marcellus formation in Washington County, Pennsylvania using the modern techniques of horizontal drilling and hydraulic fracturing. The first gas production from the well began in 2005, and the output was significantly higher than previous wells drilled into the Marcellus. The application of horizontal drilling and fracking had increased the production of absorbed gas by creating a path for the absorbed gas to travel to the pore spaces and then pass onto the well bore.

Estimates of undiscovered, technically recoverable gas from the Marcellus increased significantly since this application of modern drilling techniques. Prior to the Range Resources well, estimates were fairly low; for example, in 2003, the U.S. Geological Survey estimated that the Marcellus Shale held about 1.93 trillion cubic feet of undiscovered, technically recoverable natural gas and 11.5 million barrels of undiscovered, technically recoverable natural gas liquids gasviii. However, in 2008, two professorsix

estimated that the Marcellus could produce 363 trillion cubic feet of natural gas over the next few decades using these advanced drilling practices.x Subsequently, in 2011, the U.S. Geological Survey significantly increased its estimate, which reflected the use of modern drilling techniques. The new assessmentxi estimated that about 84.2 trillion cubic feet of natural gas and 3,379 million barrels of natural gas liquids are contained by the Marcellus Shale formation. Today, the Marcellus is generally considered to be a "super giant" gas field.

Several companies are actively drilling or leasing Marcellus Shale properties, namely Range Resources, North Coast Energy, Chesapeake Energy, Chief Oil & Gas, East Resources, Fortuna Energy, Equitable Production Company, Cabot Oil & Gas Corporation, Southwestern Energy Production Company and Atlas Energy Resources.

Between 2005 and 2007, more than 375 gas wells were authorized in Pennsylvania. Since 2007, the number of drilled wells in the Marcellus Shale has grown significantly, according to the Pennsylvania


Department of Environmental Protection. While only 27 Marcellus Shale wells were drilled in Pennsylvania during 2007, four years later in 2011, the number expanded to 2,073 wells.

Marcellus Shale wellsdrilled in Pennsylvania

per calendar year2007 272008 1612009 7852010 1,3862011 2,0732012 N/A

Although many of these wells may yield millions of cubic feet of natural gas per day initially, the longer term yield of Marcellus Shale wells is still unclear. Some industry experts estimate that the production of profitable quantities of gas may continue for decades. In addition, when the yield of the Marcellus Shale wells begins to trail off, the wells may be recompleted in order to produce from the Utica formation, which is around 8,000 feet deep, that is a few thousand feet below the Marcellus. Not only is the Utica deeper than the Marcellus, it is also thicker and more geographically extensive.

BAKKEN FORMATION (Williston Basin) The Bakken Shale formation occurs within the Williston Basin Province located in northeast Montana, North Dakota and parts of Saskatchewan and Manitoba. Classified by the USGS as component of the Bakken-Lodgepole Total Petroleum System, the Bakken formation consists of 1) a lower shale member, 2) a middle sandstone member and 3) an upper shale member; each successive member is more geographically extensive than the preceding underlying member. The upper and lower members are petroleum source rocks consisting of organic-rich marine shales.

Over time, the U.S. Geological Survey increased its estimated mean undiscovered petroleum-related resources for the Bakken formation. The 1995 assessment only estimated the potential recovery of 151 million barrels of oil. In April 2008, by applying additional oil discoveries to the Bakken formation, along with advances in drilling and production technologies, the USGS issued a report substantially increasing the estimated mean amount of recoverable oil-related resources to be 3.645 billion barrels of oil, 1.848 trillion cubic feet of natural gas and 148 million barrels of natural gas liquids.xii


Very recently, at the end of April 2013, the US Geological Survey released an updated oil and gas resource assessment. The new estimate incorporated information from over 4,000 wells that had been drilled since 2008, which provided significant geologic data about both the Bakken and

Three Forks formations. Prior to the drilling during the last few years, very little information was available about the Three Forks formation. However, a better understanding of the Three Forks reservoir and its resource potential allowed for its inclusion in the new assessment. The USGS estimated mean undiscovered, technically recoverable volumes of 7.375 billion barrels of oil, 6.723 trillion cubic feet of natural gas and 527 million barrels of natural gas liquids in the Bakken and Three Forks formations in Montana, North Dakota and South Dakota.

Not only have resource estimates increased but also rate of production has accelerated. Between 1995 and 2007, approximately 105 million barrels of oil had been produced from the Bakken formation. However, since 2008, the Bakken and Three Forks formations have produced 450 million barrels.

SEASONALITY

Historically, Enservco s businesses have experienced seasonality, primarily due to the climate-based demand changes for the services of frac heating and hot oiling that are offered by Heat Waves. The colder weather months of October through March generate a substantial percentage of the company s annual revenues, on average about 64% over the last three years. During the colder months, successful fracturing requires that large amounts of water be heated to properly prepare the frac slurry. Frac heating trucks are also used to heat water flow lines in order to prevent freezing. Incremental demand for hot oiling arises during cold weather periods from services such as heating oil in storage tanks to reduce its viscosity for ease of handling and transport.

Quarterly Revenues as a % of Annual Revenues2010 2011 2012 Average

1Q 32% 39% 30% 34%2Q 18% 19% 18% 18%3Q 18% 19% 17% 18%4Q 32% 24% 34% 30%

Typically, less frac heating and hot oiling are required during the summer season. Consequently, the warmer weather months of April through September have generated only 36% of the company s annual sales. Water hauling from producing wells (primarily Dillco in the mid-West) is not as seasonal since operating wells in the lower 48 produce water regardless of weather conditions.


Owing to the seasonality of Enservco s business mix, sequential quarter comparisons are usually not meaningful. Moreover, a warmer-than-normal winter can negatively impact revenues, which was the case in the winter of 2011.

Management is striving towards moderating the company s seasonality. Efforts to expand into regions that have less variation in demand during the year are being pursued. For example, Enservco entered the service area of the Utica formation in Ohio where demand for frac water heating extends over most of the year, specifically during nine-to-ten months annually. Furthermore, relatively-new advanced techniques for hydraulic fracturing necessitate higher downhole temperatures and are extending the frac heating season for Heat Waves in Colorado and Wyoming. Lastly, management is working towards expanding services that tend to be schedules during non-winter months, such as acidizing. Through a multi-prong effort, management is attempting to mitigate the seasonality of the company s revenue base.

RECENT NEWS

On May 16, 2013, Enservco announced a major $6 million capacity expansion plan. During 2013, management plans to allocate $4.7 million toward fabricating new equipment and $1.3 million toward enhancing existing equipment. The equipment (including two double-burner frac heating trucks, six single-burner frac heating trucks, four hot oilers and a well acidizing truck) is expected to be field-ready for the seasonally strong fourth and first quarters. The new equipment has the potential of generating annual revenues of approximately $10 million and will increase the company s frac heating capacity by 40% and hot oiling fleet by 15%. The capital expenditure program will be funded by internally generated cash flow.

Concurrent with the capacity expansion release, Enservco also announced that April sales increased 85% versus the same month last year due to several factors including cool spring temperatures, the company s expanded geographic footprint and the implementation of advanced hydraulic fracturing techniques that require higher temperatures.

On May 2, 2013, Enservco reported record quarterly revenue, gross margin, net income and EPS for the first quarter of 2013. Total revenues increased 94.9% to $18.6 million versus the comparable quarter last year, primarily due to strong demand for well enhancement services (frac heating, hot oiling and acidizing). Revenues of the Well Enhancement segment increased 125% to $16.5 million from $7.33 million in the comparable quarter last year, driven colder temperatures, capacity additions in the Rocky Mountain region (two hot oilers and five double-burner frac heating trucks) and approximately $3.0 million of incremental revenues in the Eastern USA region from strong demand in the Marcellus (PA and WV) and the company s expansion into the Utica (OH). However, revenues of the Fluid Management segment declined 8.7% year-over-year due the departure of an employee who left Dillco to set up his own service business. Despite the substantial increase in revenues, general and administrative expenses only increased 0.4% to $907,073 versus $903,360. The gross margin expanded improved 1,303 basis points to 44.0% from 30.9% in the comparable quarter last year.

For the quarter, Enservco reported that net income from continuing operations increased 958% to $4.01 million (or $0.11 per diluted share) versus $378,757 ($0.01 per diluted share) in the comparable quarter last year. Earnings benefited from a sizeable decrease in depreciation expense ($759,000) since the estimated useful lives of the company s trucks, equipment and disposal wells was increased during a reassessment in the second quarter of 2012. Working capital increased significantly to $7.41 million versus $1.56 million on December 31, 2012.

Concurrent with the earnings release, management announced an agreement to provide well-enhancement equipment and services to Warrior LLC, a Certified Indian energy service company operating out of New Town, ND (Bakken formation) and serving the nearly million-acre Fort Berthold Indian Reservation.


VALUATION

The appropriate security valuation methodology for Enservco is comparative analysis of similar oil service companies. Enservco 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 work overs. Therefore, the industry comparables should be carefully chosen such that a significant portion of their revenues are derived from similar services since the character of reoccurring revenues and the related profitability are usually assigned higher valuation multiples. Accordingly, Oil Services & Equipment and E&P companies ought to be avoided. In addition, Enservco is experiencing rapid double-digit revenue growth; the more accurate comparable companies should share this same fundamental attribute.

The applicable valuation parameters for Enservco are price-to-sales (P/S) and enterprise value-to-EBITDA (EV/EBITDA) due the character of the company s enterprise, namely a small-capitalization 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. Price-to-sales valuation incorporates a company s ability to generate revenues and cash flow. The classic valuation parameter for large-cap companies, such as Schlumberger and Halliburton, is EV/EBITDA, which is known to be the highest correlated metric and relatively reliable determinant of stock price in the Oil Services & Equipment company universe. Though the risks associated with newer, smaller companies, such as Enservco, are greater than that for more established companies with longer track records, in our view, so are the growth prospects.

The average P/S multiple of the industry comparables is 1.3 versus ENSV s current multiple of 1.0; the average EV/EBITDA multiple is 8.9 versus ENSV s 4.9. In other words, Enservco s stock is trading at a 22% discount to the industry s average P/S multiple and a 45% discount to the average EV/EBITDA multiple. Under normal circumstances, our target would be $1.95. However, management's aggressive growth plan and its successful implementation, to address the fundamental factor of rapidly growing revenues, the average P/S multiple of comparable companies with revenues growing at a double-digit rate is 1.6 versus 1.3 for the industry mean. In addition, the average EV/EBITDA multiple is 11.0 versus 8.9 for the industry. Based on evaluating the current price-to-sales and EV/EBITDA of comparable companies with rapidly growing revenues, our target for Enservco stock is $2.40.

% Chg P/E EPS Gr Rev Gr Price/ Price/ EV/YTD CFY 5Yr Est Last Yr Book Sales EBITDA

ENSERVCO CORP 74.3 7.8 25.0 27.7 3.8 1.0 4.9S&P 500 19.0 15.7 10.8 N/A 4.4 2.7 N/A

Industry Mean 49.7 41.2 13.5 28.6 3.8 1.3 8.9Industry Median 27.8 18.4 15.0 7.9 1.6 1.0 6.7

EXTERRAN HOLDINGS 35.6 45.4 5.0 4.5 1.1 0.6 7.2KEY ENERGY SVCS -10.9 46.2 9.0 6.1 0.7 0.5 5.6RPC INC 19.2 18.6 15.0 7.5 3.5 1.8 6.1NEWPARK RESOURCES 43.2 14.4 16.0 8.3 1.8 0.9 8.2BASIC ENERGY SVCS 3.1 58.8 N/M 10.6 1.4 0.4 5.4C&J ENERGY SVCS 0.0 13.7 20.0 46.6 1.8 1.0 4.8NUVERRA ENVIRONMENTAL -28.3 31.7 25.0 124.4 0.9 1.6 18.9FLOTEK INDUSTRIES 65.2 24.9 18.0 20.9 5.9 3.3 15.0

Industry Comparables


BALANCE SHEET & PROJECTED INCOME STATEMENT

ENSERVCO CORP.Year ending December 31 2010 2011 2012 1Q/ 2013

(12/ 31/ 2010) (12/ 31/ 2011) (12/ 31/ 2012) (3/ 31/ 2013)ASSETSCash and cash equivalents 1,637,807 417,005 533,627 803,271 Accounts receivable, net 4,101,331 4,505,254 7,791,342 13,420,456 Marketable securities 365,786 150,793 0 Prepaid expenses and other current assets 315,521 593,291 802,020 1,288,099 Inventories 300,527 549,432 273,103 264,884 Income taxes receivable 634,941 - - -Deferred tax asset 20,041 187,170 153,466 142,745 Total current assets 7,375,954 6,402,945 9,553,558 15,919,455

Property and Equipment, net 14,452,298 14,759,039 15,020,890 13,801,019 Fixed Assets Held for Sale, net - 412,831 304,429 71,342 Non-Competition Agreements, net 420,000 180,000 30,000 15,000 Goodwill 301,087 301,087 301,087 301,087 Long-term portion of interest rate swap - 0 16,171 22,374 Other Assets 71,537 64,770 630,891 723,068

TOTAL ASSETS 22,620,876 22,120,672 25,857,026 30,853,345

LIABILITIES AND STOCKHOLDERS' EQUITYAccounts payable and accrued liabilities 2,066,353 2,954,687 3,585,785 3,520,176 Income taxes payable 0 0 0 1,509,297 Line of credit borrowings 1,050,000 2,263,227 2,151,052 1,234,447 Current portion of long-term debt 3,107,122 3,867,658 2,236,343 2,229,883 Current portion of interest rate swap 0 0 24,048 13,476 Total current liabilities 6,223,475 9,085,572 7,997,228 8,507,279

Long-Term LiabilitiesDeferred rent payable - 22,044 20,860 20,127 Subordinated debt - related party 1,700,000 1,477,760 0 Long-term debt, less current portion 8,657,675 8,020,435 10,570,928 9,909,737 Deferred income taxes, net 1,434,282 387,487 451,662 1,586,869 Total long-term liabilities 11,791,957 9,907,726 11,043,450 11,516,733 Total liabilities 18,015,432 18,993,298 19,040,678 20,024,012

Stockholders' EquityCommon stock 108,894 108,894 159,127 159,127 Additional paid-in-capital 5,489,823 6,112,674 9,864,363 9,933,085 Accumulated earnings (deficit) (1,150,011) (3,117,267) (3,202,337) 731,694 Accumulated other comprehensive income 156,738 23,073 (4,805) 5,427 Total stockholders' equity 4,605,444 3,127,374 6,816,348 10,829,333 TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 22,620,876 22,120,672 25,857,026 30,853,345

Shares outstanding 21,778,866 21,778,866 31,825,294 31,825,294


ENSERVCO CORP.Years ending December 31 2009 2010 2011 2012 2013E

Revenues 15,388,746 18,641,286 23,904,384 31,497,787 46,895,922 Cost of Revenue 13,489,099 14,422,412 17,828,834 23,286,561 29,500,304 Gross Profit 1,899,647 4,218,874 6,075,550 8,211,226 17,395,618

Operating ExpensesGeneral and administrative expenses 1,486,124 2,540,859 3,515,213 3,550,438 3,636,073 Depreciation and amortization 4,423,934 3,992,367 4,188,052 2,960,153 2,534,719 Total operating expenses 5,910,058 6,533,226 7,703,265 6,510,591 6,170,792 Income (Loss) from Operations (4,010,411) (2,314,352) (1,627,715) 1,700,635 11,224,826

Other Income (Expense)Interest expense (699,125) (728,241) (699,230) (902,152) (1,200,801)Gain (loss) on sale and disposal of equipment (79,785) (71,003) (119,023) (5,739) 156,457 Gain (loss) on sale of investments 0 188,186 0 24,653 0 Unrealized derivative gain (loss) (140,733) 0 0 0 0 Other 7,472 153,557 (49,765) 10,870 14,113 Total other income (expense) (912,171) (457,501) (868,018) (872,368) (1,030,231)Income (Loss) From Continuing Ops Before Tax (4,922,582) (2,771,853) (2,495,733) 828,267 10,194,595 Income Tax (Expense) Benefit (972,882) 926,188 897,923 (426,779) (4,518,458)Income (Loss) From Continuing Operations (5,895,464) (1,845,665) (1,597,810) 401,488 5,676,137

Discontinued OperationsLoss from discontinued operations 0 0 (605,650) (797,636) (118,918)Income tax benefit 0 0 236,204 311,078 46,378 Loss on discontinued operations, net of tax 0 0 (369,446) (486,558) (72,540)Net Income (5,895,464) (1,845,665) (1,967,256) (85,070) 5,603,597

Other Comprehensive Gain (Loss)Unrealized gain (loss) on available-for-sale securities 0 156,738 (133,665) 17,506 0 Unrealized gain (loss) on interest rate swap, net 0 0 0 (4,805) 10,232 Reclassification into earnings, net of tax 0 0 0 (40,579) 338 Total other comprehensive gain (loss) 0 156,738 (133,665) (27,878) 10,570 Comprehensive Income / Loss (5,895,464) (1,688,927) (2,100,921) (112,948) 5,614,167

Earnings (Loss) per Common Share - BasicIncome from continuing operations (per share) (0.41) (0.10) (0.07) 0.02 0.18 Discontinued operations (per share) 0.00 0.00 (0.02) (0.02) (0.00)Net Income (per share) (0.41) (0.10) (0.09) (0.00) 0.18

Earnings (Loss) per Common Share - DilutedIncome from continuing operations (per share) (0.41) (0.10) (0.07) 0.02 0.16 Discontinued operations (per share) 0.00 0.00 (0.02) (0.02) (0.00)Net Income (per share) (0.41) (0.10) (0.09) (0.00) 0.16

Basic weighted average shares outstanding 14,519,214 17,641,876 21,778,866 23,389,151 31,825,294 Diluted weight average shares outstanding 14,519,214 17,641,876 21,778,866 24,316,869 34,998,234

Gross Margin 12.3% 22.6% 25.4% 26.1% 37.1%


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Zacks SCR uses the following rating system for the securities it covers. Buy/Outperform: The analyst expects that the subject company will outperform the broader U.S. equity market over the next one to two quarters. Hold/Neutral: The analyst expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters. Sell/Underperform: The analyst expects the company will underperform the broader U.S. Equity market over the next one to two quarters.


The current distribution of Zacks Ratings is as follows on the 1,024 companies covered: Buy/Outperform- 15.2%, Hold/Neutral- 77.3%, Sell/Underperform 6.4%. Data is as of midnight on the business day immediately prior to this publication.

i On a fully diluted basis, Michael Herman controls 18,200,320 shares (44.5% of the fully diluted shares). Cross River Partners LP owns 4,414,500 shares (10.8%) and Rick Kasch controls 2,614,424 shares (6.4%). ii Originally structured as a three-year floating rate (4.25% plus 1-month LIBOR), management hedged the floating rate note with PNC Bank into a fixed rate note with the interest rate determined as 4.25% plus 0.64% (4.89%). iii Proppant are small particles within fracturing fluid designed to hold fractures open after hydraulic fracturing. Sand is often used as proppant, but man-made materials, such as high-strength ceramic beads (sintered bauxite) and resin-coated sand, are also being used. iv The chemicals in fracking fluid may include demulsifiers, corrosion inhibitors, friction reducers, scale inhibitors, biocides, breaker aids, solvents, alcohols, surfactants, anti-foam agents, viscosity stabilizers, clay stabilizers, diverters, emulsifiers, iron control agents, pH control agents and/or buffers. v Cooley, Heather, Hydraulic Fracturing and Water Resources: Separating the Frack from the Fiction, Pacific Institute, June 2012, page 16. vi Workovers are downhole operations that repair or stimulate an existing production well in order to sustain, restore or increase production in the geologic intervals in which the well is currently completed. Often necessary in older wells, workovers may consist of repairing damaged casings, removing sand buildup, acidizing treatments and/or replacing the old rods, tubing, down-hole pumps, pumping units and/or motors so that the systems can function more efficiently. vii Typically, hydrochloric acid or acetic acid is used on blockages of limestone (calcium-carbonate minerals of calcite and dolomite) while hydrofluoric acid is effective on problems related to sandstone/silica. viii Assessment of Undiscovered Oil and Gas Resources of the Appalachian Basin Province, USGS, released February 3, 2003. ix Terry Englander (Professor of Geoscience at The Pennsylvania State University) and Gary Lash Professor of Geology at the University of New York at Fredonia). x Terry Engelder, Gas Yield from Marcellus Shale Goes Up, Charleston Gazette, November 4, 2008 xi Assessment of Gas Resources in the Marcellus Shale, Appalachian Basin, USGS, released August 23, 2011. xii Assessment of Undiscovered Oil Resources in the Devonian-Mississippian Bakken Formation, Williston Basin Province, Montana and North Dakota, released April 10, 2008; The USGS estimated that a range between 3.0 to 4.3 billion barrels of oil were technically recoverable with a mean value of 3.65 billion barrels.

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