CSI Compressco LP
Q1 2020 Earnings Call Transcript

Published: 4 May 2020

[Operator:]

Good morning, and welcome to CSI Compressco LP's First Quarter 2020 Earnings Conference Call. The speakers for today's call are Brady Murphy, President of CSI Compressco LP; Elijio Serrano, Chief Financial Officer for CSI Compressco LP and also for TETRA Technologies, Inc., which is the general partner of CSI Compressco LP; and Jacek Mucha, Vice President of Finance and Treasurer for TETRA Technologies and CSI Compressco LP. Also in attendance today is Michael Moscoso, Vice President of Finance for CSI Compressco LP. [Operator Instructions] Please note that this event is being recorded.I will now like to turn the conference call over to Mr. Mucha for opening remarks. Please go ahead.

[Jacek Mucha:]

Thank you, Kate. Good morning, and thank you for joining CSI Compressco's first quarter 2020 results conference call. I would like to remind you that this conference call may contain statements that are or may be deemed to be forward-looking. These statements are based on certain assumption analysis made by CSI Compressco, and are based on a number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the partnership. You are cautioned that such statements are not guarantees of future performance, and that actual results may differ materially from those projected in the forward-looking statements.In addition, in the course of the call, we may refer to EBITDA, gross margins, adjusted EBITDA, free cash flow, distributable cash flow, distribution coverage ratio, backlog, leverage ratio or other non-GAAP financial measures. Please refer to this morning’s press release or to our public website for reconciliation of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP, and should be considered within the context of our complete financial results for the period. In addition to our press release announcement that went out earlier this morning, and as posted on our website, our Form 10-Q is planned to be filed with the SEC on or before Friday, May 8, 2020.With that, I will now turn it over to Brady.

[Brady Murphy:]

Well, thank you, Jacek, and good morning everyone. Thank you for joining our first quarter 2020 conference call.I'll give a recap of our first quarter performance, discuss how the current market environment is impacting our business, and then turn it over to Elijio, who will provide more details on our balance sheet, cash flow and liquidity.Let me first start with a comment about the COVID-19 crisis. I'm pleased with the way our management team and employees have responded to the pandemic. We've made many strides to keep our employees, their families and our customers as safe as possible during these extraordinary times, all while ensuring business continuity for our valued customers.The partnership has implemented guidelines to keep our employees and working conditions safe as we navigate this on certain time together. We are following guidelines from the Center of Disease Control and Prevention and the Occupational Safety and Health Administration to keep our employees working in the safest environment possible. We’ll continue to monitor the changes in the guidelines and we’ll communicate new recommendations with all of the members of our organization as they have all will become available. I would like to personally thank all of our employees and their families for their continued efforts during this unprecedented period.Turning to our Q1 results. Despite the market disruption and deterioration due to the COVID-19 pandemic and subsequent oil price collapse at the end of the first quarter, CSI Compressco’s businesses performed relatively well and in line with our expectations for the first quarter. Compression services segment sequentially increased revenue, gross profit and gross margin from the fourth quarter levels.Compression services gross margins of 51.9% were up 350 basis points from 51.6% in the fourth quarter of 2019 and contributed $34.2 million of gross margin in the quarter. While aftermarket services and equipment sales declined sharply from the fourth quarter, the majority decline was from timing of equipment deliveries and seasonal slowdown to aftermarket business, as customers finalized their new capital budgets.First quarter adjusted EBITDA adjusted was $27.8 million, down $6.9 million sequentially primarily due to aforementioned aftermarket services activity and lower equipment sales. However adjusted EBITDA profitability increased sequentially by 270 basis points to 30.8% for the quarter.We also added 22,116 new horsepower, focused around centralized gas lift for key accounts with the vast majority of these new additions being deployed into existing clusters of equipment in the Permian Basin and South Texas. The added horsepower from a combination of capital expenditures and operating lease financing, the customer trend of deploying centralized gas lift as a cost effective and efficient means to help drive liquids production continue to drive demand for our compression services in the first quarter.As we move into the second quarter, the world, our industry and our businesses has changed very dramatically. The low oil price and unprecedented drop in the oil demand was met with a rapid response by our customers to cut capital spending for 2020 and more recently to shut in wells which is unique to this downturn. This downturn is also unique in that it comes with a steep and deep drop in oil demand following several years of production over supply. The speed of this downturn is also much faster and the lack of visibility makes it hard to predict when things will eventually recover.With excess compression horsepower in the market we are experiencing not only lower equipment utilization through equipment releases or customer requests to put units on standby, but also pricing pressures as customers try to reduce their cost. During the final weeks in March we experienced all three and which has accelerated through April and to May.As mentioned the biggest difference so far in this downturn is the speed of the impact to our business which has typically been more resilient than well site services and market downturns. This is mostly driven by rapid customers well shut-ins which as you would expect is occurring in liquid rich U.S. shale plays. This started at the end of March as our utilization dropped 350 basis points to 86.5% at the end of the quarter from a near all-time high of 90% at the end of 2019.Today we've heard from over 10 publicly traded operators who announced shut-in plans to their U.S. shale operations and we expect that number will grow. By the end of the second quarter we expect well shut-ins to impact nearly 20% of our compression services horsepower mainly the larger units.A portion of that 20% will be from units which are released and the rest will be from operating units going to standby rates. We expect our utilization will approach the low point of the 2015-2016 downturn by the end of the second quarter which was 75% for the entire fleet.In the most recent prior downturns it was over 18 months in the downturn before we reached the low port and utilization. We expect to be at those levels within a few months given the speed and magnitude of the current downturn.Please note that we do not exclude auto horsepower under repair from our calculation of utilization rates. But we do count units on standby as utilized when the client is being billed a standby service rate.Prior to the current downturn in a normal course of business, we have roughly 2% of our domestic horsepower on standby rates, but in this downturn we expect that over 10% of our domestic horsepower will be on standby rates by the end of May.In Q1 we added 13 new compressor units with 22,160 horsepower. We do not expect to add any additional equipment to our equipment, to our fleet beyond the equipment already committed to be delivered in the second quarter. Almost all of the equipment we've added since the beginning of 2019 has been in the 1,000-plus horsepower category which accounts for approximately 55% of our active horsepower fleet.Given the lack of new equipment orders over the past several months and poor near to mid-term outlook for demand of new compression equipment, we've decided to shut down our fabrication operations in Midland Texas. The closure of that facility is anticipated to happen early in the third quarter of 2020 as we complete fabrication of the remaining backlog.First quarter orders for new equipment sales were only $2 million and our backlog as of March was $30 million, the most of which was expected to be shipped in the second quarter of this year. We will come to sell our 38 acre Midland facility in real estate as we exit the fabrication business. When the market returns and along with the demand for new fleet additions, we expect to use an outsourcing relationship for the fabrication of our future fleet requirements.Unfortunately with every downturn, we have to respond and adjust cost structure quickly in order to remain profitable and to generate positive free cash flow. While we cannot control the length of the downturn, we understand what levers to pool to reduce cost and preserve liquidity.We've acted swiftly to the new current market conditions and implemented many cost-cutting initiatives. We've reduced our capital expenditures for the year, implemented headcount and salary reductions, reduced Board of Directors’ cash retainers, cut all discretionary travel and spending and suspended the 401-(k) matching program. We're also negotiating with many of our suppliers’ updated terms and pricing for key components across the supply chain.In summary, our first quarter performance was consistent with our internal expectations, but we realized that we are currently in a very different environment. The fundamentals of our business to support increasing volumes of gas production and centralized gas lift will be intact for many years to come, but in the immediate and foreseeable future, our focus is on keeping our employees safe and navigating through this downturn successfully and responsibly. Our first quarter results and results over the last two years have laid out a good foundation on how tech the market challenge is and we'll continue to progress and move forward.I’ll now turn it over to Elijio.

[Elijio Serrano:]

Thank you, Brady.Let me first touch on a few items that we’ve recently announced or filed with the SEC, then, I'll touch on our balance sheet, liquidity and cash flow. We pre-announced first quarter earnings on April 13. Adjusted EBITDA of $27.8 million came in at the lower end of the range of $27.5 million to $28.5 million that we preannounced.Revenue was slightly lower as we delayed a large shipment of - new equipment to a customer in Latin America that moved from the first to the second quarter, but the impact of this delayed shipment was a small impact on the adjusted EBITDA. We also incurred $5.4 million in a non-cash charge to write down the carrying value of our Midland fabrication facility and its related inventory given our plans to close this facility.Also on April 30, we filed an 8-K with the SEC indicating that we were notified by NASDAQ that the partnership’s common units have traded for 30 consecutive days below a $1, which is a minimum closing price required to maintain continued listing on the NASDAQ Global Market under rule 5450 of the NASDAQ listing rules.Under the NASDAQ listing rules, the partnership with 180 calendar days from the date of the notification to regain compliance. However on April 16, 2020, NASDAQ announced a rule change providing relief to listed companies which states that due to market conditions resulting from the impact of COVID-19 pandemic, the compliance period has been temporarily suspended with the effect that the days between April 17, 2020 and June 30, 2020 will not be counted toward the normal 180 day compliance period.Starting on July 1, 2020, the partnership will have a period of 180 days to regain compliance, but assuming it is still below the dollar rule. And to regain compliance, the closing price of the partnerships common units must be at least a dollar per unit for a minimum of 10 consecutive trading days prior to the expiration of the extended compliance period on December 28, 2020.If CSI Compressco’s unit price has not improved to over $1 by December 28, 2020, we will evaluate a reverse unit split to regain compliance and to remain actively listed on NASDAQ. It is important to note that this NASDAQ notice does not affect our ongoing business operations or our reporting requirements with SEC and it does not result in any default in, under any of the partnerships credit or debt agreement. The partnership remains in compliance with all credit and reporting agreements.Also on April 17, we commenced an offer to certain eligible unsecured bond holders to exchange any and all of their 7.25% outstanding 7.25% to senior unsecured notes due 2022 for newly issued 7.5% senior secured personally notes due 2025, and 7.25% senior secured secondly notes due 2027. On May 1, we issued a press release extending the first deadline from April 30 to May 15. The second deadline was originally communicated on May 14 remains unchanged.During this morning's earnings call we will not address any questions related to our proposed debt exchange and ask that everyone please read our previously issued press releases or Form 8-K filing. Any questions from our bondholders related to this process will be directed to our Bank of America Contact that is managing this process for us.Let me now touch on our balance sheet, cash flow and capital structure. In the first and second quarter, we will fulfill from customer growth capital requirements that were previously committed to. This amount in the first half of the year will total approximately $7 million. We are reducing maintenance capital expenditures for this year to be between $20 million and $22 million. And we’ll further evaluate this as the year progresses.Investments in technology to improve operating efficiencies will be between $3 million and $5 million. In the second half of the year, we expect total capital expenditures to be approximately $6 million per quarter. Distributable cash flow was $8.7 million in the first quarter down 44% from the fourth quarter from the lower EBITDA. Our distributable coverage cash flow coverage ratio was over 18 times down from the nearly 33 times in the fourth quarter of last year.Cash flow from operating activities improved sequentially to $13.4 million. This was primarily due to improvements in working capital distributions paid in the quarter were $477,000 or $0.01 per unit.At the end of December, total net - at the end of March, total net debt outstanding was $642 million, of which $350 million are the secured notes that mature in the year 2025, and $296 million are the unsecured notes that mature August 2022. Our ABL revolver balance was approximately $3 million as of March 31, 2020 and cash on hand at the same time period was $7.4 million. The $646 million of unsecured and secured bonds did not contain any maintenance covenants.CSI Compressco also has a $50 million asset base revolver, with a current borrowing base of approximately $25 million. Before letters out -- letters of credit outstanding, of which $3 million was drawn at the end of the first quarter. The ABL matures June 2023.Our ABL requires us to have a fixed charge coverage ratio of one time. If we are below this ratio, we must maintain a minimum of $5 million borrowing availability on the revolver. If we are above one time, there are no restrictions on our ability to borrow on the revolver.We are currently above one time, and therefore have no restrictions. CSI Compressco’s net leverage ratio improved to 5 times at the end of the first quarter of 2020, down from a high of 7 times at the end of Q2 2018. However, we expect this to increase as earnings decline for the reasons Brady mentioned earlier.Given the uncertainty in the market, we withdrew our previously issued full year revenue and earnings guidance, and will not be issuing total year guidance until we get more clarity from our customers on their plans.However, we expect pressure on earnings from the following areas. Number one, we have not added any new significant amounts to our backlog for the fabrication and sale of equipment to third parties if customers have stopped building gas process and gas drilling facilities. Brady mentioned that we are closing our Midland fabrication operations and releasing our staff. We will look to sell the real estate and buildings, but in this market, we cannot guarantee a sale. Therefore, we expect that any revenue or EBITDA from the sale of new units after the second quarter to be minimal.Number two, we are already seeing our customers reduce their demands for parts and components from aftermarket services and pricing pressure is increasing in this segment as well. Number three, utilization for our fleet declined by 350 basis points from December to March and the vast majority of that decline was in the last part of March as our customers began returning the equipment that represented excess horsepower in their network.The first quarter was mainly the rationalization of horsepower capacity on their network in relation to future volume expectations that are no longer going to materialize as they cutback drilling and completions activity. This has accelerated into April and May.Operators tend to have horsepower to their networks in advance of wealth and volumes coming online and when there is a turn in the market, they quickly rationalize this excess capacity. The first quarter saw minimal impact from their request - from requests for price concessions and minimal impact from customers asking us to sharing the equipment - sharing equipment in place or to go to standby rates.We expect that both the requests for price concessions and to put equipment on standby to accelerate technically in the second quarter and are already seeing this. It was an expectation that up to 20% of our horsepower will either be put on standby or return to us given the severity of the amount of production cutbacks that our customers are telling us, given the lack of demand or the lack of space for storage.This will impact our large horsepower fleet more significantly than we experienced in the last downturn. As the last downturn had a very small number of wells that were shut in or that let large horsepower units are doing centralized gathering or centralized gas lift they will be impacted.Turning new wealth means all compression needs are suspended until the world comes back online. We believe that if customers return units they anticipate that this will be a longer downturn, and it will pay the demobilization fee to return the equipment. We believe that if customers ask us to shut in the units, and leave them in their network and to go on standby that they anticipate bringing those wells back on line and want to, want to be prepared to do so.If a unit is returned to us, we do not considerate Eurolife when reporting our utilization percentages. If a unit is on standby and we continue to build the customer some amount less than the full operating rate, we consider Eurolife when reporting our utilization ratios.Our 2019 additions are one of more year contracts. Most of the other contracts are one or less year’s duration with a vast majority of them rolling of on an annual basis. We will reduce cost this unit going to stand by, but clearly this will impact earnings and cash flow unlike what we've experienced in the last downturn.Total utilization at the end of March was 86.5% and compares to 90% at the end of December and 75.2% at the value of the last cycle. The large units which represent slightly over 55% of our active fleet were utilized 93.5% at the end of March which compares to 97.9% at the end of December. This also compares to approximately 85% utilization at the Valley of the last cycle.And as previously mentioned we have around 2% of our horsepower on standby at any point in time, but we now expect in the next quarter to see over 10% of our horsepower maybe little larger horsepower units to go on standby rates reflecting the severity of this downturn.Therefore we - the impact to the revenue and earnings this cycle is expected to be more severe given how much more production is expected to be shut-in by our customers. Wells that are being shut-in are not currently restricted to small and mid-sized operators.Some of our larger stronger capitalized super major and large independent customers have announced plants were shut-in in wells. Between interest expense, maintenance capital expenditures, financing lease obligations and international cash taxes, our minimum cash outflows are $17 million to $18 million per quarter. This compares to our first quarter adjusted EBITDA of $27.8 million. In the valley of the last cycle our adjusted EBITDA declined to a quarterly run rate of $21.5 million with a low point of $19.5 million.We will continue to aggressively cut costs as you utilization rate declined and equipment goes on standby and we will look to monetize assets to the extent that we can as we manage to do this unprecedented downturn where the bottom is not yet clear. Our objective is to reduce cost to minimize the impact of lower earnings on cash flow.The US and global economies must rebound quickly for customers to be able to slow down the number of wells being shut-in and bring production back on line or working through the inventory buildup they have been recently reported that’s been recently reported. With that, we’ll open up the line for questions.

[Operator:]

[Operator Instructions] Our first question is from Praveen Narra from Raymond James. Go ahead.

[Brady Murphy:]

Praveen?

[Elijio Serrano:]

Good morning, Praveen.

[Brady Murphy:]

You might have to unmute Praveen. Operator, let's go to the next one and we’ll come back to Praveen.

[Operator:]

Okay. Our next question is from Brian DiRubbio from Baird. Go ahead.

[Brian DiRubbio:]

Good morning. Couple of questions for you, if you don't mind could you let me know what percentage of revenues you have under contract currently?

[Brady Murphy:]

So, everything on the compression services side is under contract, the only question is whether it's a month-to-month contract.

[Brian DiRubbio:]

Probably I guess the long-term?

[Brady Murphy:]

A one year contract or a multi-year contract. Everything that we deployed in 2019 was one or more years of contract. Everything else is rolling off on an annual basis, but we expect during 2020 to essentially our entire fleet roll out of the contract and then the question becomes with our customers ask us to renew it one or more year contract or renew it on a month-to-month basis, given their uncertainty.I expect that in this cycle given all the uncertainty they'll us to go on month-to-month contracts for the units, the large units as do have clarity on how do - how long to commit to the equipment.

[Brian DiRubbio:]

Got it. And the mobilization fee, are you going to break that out over the coming quarters?

[Brady Murphy:]

The mobilization fees essentially are passed through to the customer. For the big unit, it will range anywhere from $25,000 to $50,000 per month and we build it to the customer and they reimburse us for that. So there’s essentially no margin in the mobilization or the demobilization.

[Brian DiRubbio:]

Okay. And how can we think about sort of the mix you had in the last downturn of idle versus returned?

[Brady Murphy:]

I mentioned earlier that we run about 2% that is on standby at any point in time, but that we think that the amount of equipment to go on standby given the amount of shut-ins is going to be in excess of 10% of our horsepower. Now with respect to total utilization, we mentioned in the comments that last downturn it was 75.2% at the valley of the cycle for all equipment that was utilized equal to 75.2%.

[Brian DiRubbio:]

That includes standby correct?

[Brady Murphy:]

That is correct. And I mentioned earlier that the big units hit a bottom of 85% utilization in the last downturn.

[Brian DiRubbio:]

Okay. But Brady, again that includes standby, so can you provide any further color on sort of what percentage that was utilized, was on standby versus actively being used?

[Brady Murphy:]

Yes, historically we've seen around 2% that was on standby.

[Brian DiRubbio:]

Okay. So that 2% halt through the last cycle I guess.

[Brady Murphy:]

Correct. Because in the last cycle, we saw very few number of wells being shut-in at standby. They were essentially returning equipment if they didn't think they needed the horsepower capacity. We expected this go-round to be much more equivalent of standby but we have seen historically up 2%.

[Brian DiRubbio:]

Okay. In the last downturn, I think it was in 2016, there was a pretty mature working capital release that the company experienced. Any commentary sort of what specifically occurred in 2016 and is it possible for you guys to see a working capital release this year?

[Brady Murphy:]

No, in our press release, we published our balance sheet Brian and we think it's important to get the balance sheet out quickly. And if you do a quick review of net working capital total current assets versus total current liabilities minus cash, you see that we've got very little tied up in networking capital. We've done a very good job of managing the payables process, managing the invoice and then the collection process because we don't have a lot of cash tied up in working capital. So, I don't expect us to benefit significantly as the business slows down of monetizing working capital.

[Brian DiRubbio:]

Okay. Just two more, I guess [technical difficulty] the dividend, I know it's a de minimis amount of quarterly basis, but it is just about $2 million a year. Can you sort of explain the rationale why you're continuing to pay it given the stresses that you're seeing at this point?

[Brady Murphy:]

Right. That is a quarterly analysis and view that we do with our Board of Directors and in this market, we'll continue to do a very robust discussion with our board on the other distribution. But for right now, the Board has elected to leave it in place at a penny per unit and we also realized that many of our unitholders have a need for a minimum yield and recognized that in the last downturn we were not shy about reducing the distribution, and reduced it three times and then also recognized that when the market turned and earnings started to improve, we did not increase the distribution as we wanted to properly strengthen our balance sheet.

[Brian DiRubbio:]

Okay. Yes. I know you don't want to discuss about the exchange, but you're saving only about $5 million in cash interest on the proposed exchange offer, so just a little spending almost two years on the dividend. So, I'm trying to understand why the dividend was still paid in cash when your liquidity will only increase by about $5 million with that exchange offer?

[Brady Murphy:]

And I mentioned earlier any questions related to the exchange we're going to avoid discussing on this call, but just did reference such comments to our Bank of America representative.

[Operator:]

Our next question is from Eric Seeve from GoldenTree. Go ahead.

[Eric Seeve:]

I've got a few questions. The first is with respect to the units go on standby, obviously they're seeing a lower revenue during - as they contract and converge to standby, but I know that your operating expenses also declined. Can you give us a sense of what the impact on profitability is per unit as something transitions from regular operation to standby?

[Elijio Serrano:]

Yes, a couple of points Eric. First one is that, we're going to avoid getting into standby rates for competitive purposes. The magnitude of the concession that we make to our customers, we want to keep that tight.Recognize also that if a unit does go in standby we’re pretty much shutted in and we do not have to go out on a regular maintenance of those units and we can eliminate the cost. We don't need to refill it with lube and oil. We don't go out and change gauze and related components, so we pretty much eliminate all costs associated with it as part of the process, so then the question becomes the magnitude of the reduction from full operating rate to standby rate relative to the monthly cost that we avoid of maintaining that unit, but we prefer not to get into standby rates for competitive purposes.

[Eric Seeve:]

Maybe you can just talk you know directionally or just to sense of order or magnitude without speaking numbers?

[Elijio Serrano:]

It’ll clearly impact EBITDA, it’ll clearly impact earnings, it'll impact revenue. The question becomes the speed to where the customers requested equipment shut-in, the number of units that we have to put on standby and the magnitude of the decline when we pull guidance back out and pull guidance back because we saw that come in from customers and understood that it could be significant to the point that you mentioned earlier they're up to 10% of our fleet could go on standby in the coming months.

[Eric Seeve:]

Okay. Thank you. And can you talk a little bit about the difference you're seeing in the different sized units the small versus medium versus large in terms of - I presume the smaller and the medium are being sent back more in the larger are more going to get moved to standby is that consistent with what you're seeing and can you provide any more color on that?

[Elijio Serrano:]

Yes, your statement is probably accurate. I would suggest that I think that the pressure this cycle in the big unit is going to be more severe than the pressure on the big units from the last cycle. In the last cycle, we didn’t see almost any standbys for the - from our customers, here you've seen and there’s even some recent articles on some of the super majors and large independents that magnitude of the cuts that they're making. It's believed that as much as 2 million barrels of oil production that they will be produced in the United States which is about 20% of total U.S. production. Clearly we'll see our share of it with our fleet.

[Eric Seeve:]

Okay. And for the - are you finding this smaller and mid-size units more likely to be returned versus the large units likely to standby?

[Elijio Serrano:]

Yes. I think that in most cases comparable to the last downturn, we'll see small units and mid-size units return, and I would suggest that we'll probably see big units go more on standby than returned.

[Eric Seeve:]

Okay. Thank you. And then just lastly for me. Can you give us a rough sense of appreciating that all these end markets are being impacted, but can you give us a rough start to what proportion of the working fleet is on gas lift or oil production versus gas production versus compression per field gathering or however you think about it?

[Brady Murphy:]

Eric, this is Brady. Most of the horsepower that we've deployed over the last couple of years has been targeted toward gas lift for liquids production. I mean clearly we still have a portion of our fleet that supports gas production, especially the lower horsepower, single unit compression units. But having said last two years, 80% of the capital that we've deployed was targeted for liquid which gas lift, oil production, liquids production.

[Eric Seeve:]

But what is the implication in terms of the - I appreciate that most of the recent units you put out are for that activity, but what - that’s still a minority of the whole fleet. Can you just give us a rough time for the entire fleet at totality? What the - just ballpark breakdown is in terms of how much fleet activity there is?

[Elijio Serrano:]

So Eric, between 2018, 2019 and the first part of this year, we deployed almost 200,000 horsepower. And Brady mentioned that over 80% of that was to centralize gas lift. So, assume about 180,000 to 190,000 horsepower out of our fleet of 1.2 million horsepower.

[Brady Murphy:]

And we had - we had centralized gas lift units prior to the last couple of years, but it was not a big - not a big portion of our applications.

[Elijio Serrano:]

And then also Eric, when the world gets shut in, it doesn't matter whether it’s doing centralized gas gatherings or centralized gas lift, the unit is shut down for that well.

[Operator:]

Our next question is from Selman Akyol from Stifel. Go ahead.

[Selman Akyol:]

Thank you, and very much appreciate all the color that you guys are sharing. So, just want to make sure I heard a few things correctly. When I think about sort of large utilization, I think you said it was 93.5% at the end of the quarter, and then coming down by - okay, so then, in any thought it was good to go to sort of 10% to stand by. So, can I take that to 83 or should - would it be something that’s already been incorporated? I guess I’m just trying to understand where we might kind of see the bottom there?

[Elijio Serrano:]

So, the progression is that there, it went from December 97.9% to March 93.5%. We mentioned that at the value of the last cycle, it was 85% for the big unit both for 1,000 horsepower. We also mentioned that if a unit is returned, it is not part of our utilization. If a unit is on standby and we're building the customer some amount, we count it on utilization.So I would suggest Selman that utilization is going to be one factor to take into account to determine the impact on our business from this downturn, but also recognize that many of the utilized units are going to be at significantly lower rates, since they’re not on operating rates and there on standby rates. So even if we do approach the 85% utilization value from the last cycle, I think the severity is more significant because several of those units are going to be giving some amount built or standby these.

[Selman Akyol:]

Fully understood, and I appreciate that. And I guess is the, the other question for me, can you - with April now close, can you give what your utilization rate was at the end of April?

[Elijio Serrano:]

No, we prefer not to start publishing monthly numbers but we did mention several times that the acceleration of the equipment return, the pricing pressure the standby really gained traction toward the very back in the March and it has accelerated into April and May.

[Operator:]

Our next question is from Praveen Narra from Raymond James. Go ahead.

[Praveen Narra:]

Sorry about the mute. I guess if we can talk about just what the competitive dynamic is like. I know we normally don't see this in historical downturns and maybe too early to tell. But have you guys seen any competitive pressure from competitors trying to undercut to replace equipment or anything like that? Or has that not taken place?

[Elijio Serrano:]

So, I've mentioned in the past Praveen that I envision our business to be along the lines that everybody stays under swindling. We have our own set of customers. It's very difficult to swap out equipment given their high mobilization and the demobilization related costs and the time it takes to shut down a network to swap out the equipment. We're not seeing pressure from customers trying to place equipment by undercutting us. We're simply seeing customers try to reduce volumes and work with us in terms of price concessions, returning equipment or asking for standby rates.

[Brady Murphy:]

Yes. I think Praveen, just I’ll add a little more to that. I think clearly in this downturn we will see more competitive pressures that maybe traditionally, particularly as some compressed competitors really want to ensure that their units will stay on location or hope of a rapid recovery. We're not - we don't know when that's going to happen, eventually we believe it will happen, but there is certainly some competitive pressures in that regards.

[Praveen Narra:]

Right. So I guess if we think about pricing gains that we've seen since the last downturn, I guess given those gains, it seems fair to assume that some of those go away. But for customers under contract, I guess, is the question less about being replaced by somebody else? And so it's just what you're willing to give the customer in pricing reductions? Or how should we think about how much of that increase gets removed from this downturn?

[Brady Murphy:]

Yes. Praveen, we've seen the pricing pressure for sure would - as we've mentioned. We're clearly - I would say right now in the high single digits in terms of discounting that has taken place at this point, but I mean it’s all in negotiation between what’s on contract and what’s on standby, what pricing discounts that you can give to pass on to your customer and really it’s a customer-by-customer, negotiation including all three collectively.

[Praveen Narra:]

Okay. And then if I could, on the large horsepower units, can you talk about regional discrepancies that you're seeing? Obviously, it's tough to say that any place is strong, but is there any areas that are particularly weak or where you're seeing more intense pressures?

[Brady Murphy:]

I think where you're seeing the shut-ins announced is where you're going to see the most intense pressures and including the Permian has announce several shut-ins we've been impacted by that. As you know most of our horsepower, I think over 75% is still deployed between South Texas, Mid-Con and the Permian and if you look at where shut-ins in addition perhaps in the Bakken and you've seen some major shut-ins. Those are the areas where we're seeing the most pressure from that effect.

[Praveen Narra:]

Okay. And then I guess just last one for me. In terms of customers that have asked to go on standby, have they determined how long the standby they expect to last or is it somewhat indefinite? And then I guess, secondarily, have you seen anybody who has gone on standby then decide to return the unit and just using the standby as a time period when sort of assessing the damage?

[Brady Murphy:]

We haven't seen any customers go to standby and then turn around and return the units. I think it's still pretty early days in the process of getting negotiated rates and negotiated terms in place as it relates to standbys et cetera. The duration, honestly we don't have clear visibility into that. I think when we talk to most customers for sure, this will last through Q2 more likely into Q3, but beyond that it's really tough to try to pinpoint Praveen.

[Operator:]

Our next question is from Sharon Lui from Wells Fargo. Go ahead.

[Sharon Lui:]

Just the question in terms of, I guess timing of when you believe you could reach previous trough levels of 75%, is this something that you're thinking about by the end of the second quarter, third quarter or what's the thinking in terms of timing?

[Elijio Serrano:]

Sharon, if you can tell me if when inventory is no longer an issue in the U.S. economy rebound from the coronavirus, I can give you an answer to those too. But right now, it's really hard to predict, it's really going to be driven by the U.S. and global economies rebounding, going through the inventory buildup and allowing operators to bring wealth back on line and have a place to move the oil to…

[Sharon Lui:]

Okay. Based on your expectations, do you think utilization could be below, I guess previous trough levels and last longer than the previous cycle?

[Elijio Serrano:]

Yes. And again I'm not trying to be evasive on it, but it really is going to depend when operators can bring wealth back on line, if the economies remain in the environment they're at and inventory of oil buildup continues, you’re going to see operators extend those shut-ins for a longer period of time. In my opinion it's really dependent on when the economies rebound and we start moving oil and consuming oil.

[Sharon Lui:]

Okay. And how should we think about I guess the financial impact of the fab closures? Do you think its cash from neutral over the next few quarters or how should we think about that?

[Elijio Serrano:]

So peak-to-valley on a fabrication facility, we have seen revenue be as lowest as $40 million at the valley of the last downturn and be as high as $140 million at the peak of the cycle. We have generated anywhere from 8% to 10% margins on that business. We made the decision to close it and we're going to target getting this completed by the end of the second quarter so that we will not get into negative EBITDA or negative cash flow with the fabrication business. That is our intention, is to bring it down naturally to avoid any negative impact on EBITDA and cash flow.

[Sharon Lui:]

Okay. And I guess in terms of your guidance for corporate SG&A, is the expectation that you're still going to realize 20% cut by the third quarter?

[Elijio Serrano:]

Yes. We're moving aggressively with salary cuts, with benefit eliminations, with staff reductions. We're going to manage that incredibly aggressively and right now that's our target. If things slow down even more, we will get more aggressive.

[Operator:]

Our next question is from Brian DiRubbio from Baird. Go ahead.

[Brian DiRubbio:]

Just two quick follow-ups. Are there any one-time costs we should be thinking about associated with closing the fabrication business?

[Brady Murphy:]

Yes. We'll see some severance-related expenses. Also Brian, we mentioned in the press release that and also in the earnings script that we incurred a $5.4 million non-cash charge to write-down the value of that facility, and also to write-down the value of that arrangement probably we think will not be properly utilized as we based on the operations.

[Brian DiRubbio:]

Okay, but no sense, not cash is almost irrelevant at this point. Any sense of what the cash cost would be for severance?

[Brady Murphy:]

It will not be significant enough I think to impact our liquidity position.

[Brian DiRubbio:]

Okay. And just as finally on CapEx, I know you give the guidance for the rest of the year, but I mean is there any way you could cut that even lower or is that fair minimum CapEx at this point?

[Brady Murphy:]

So the maintenance CapEx that we talked about is to make sure that the units that are out there operating, continue to operate effectively and efficiently which is primarily swapping out engines every certain number of years, rebuilding compressors every number of years. And those are pretty much on the defined cycles. And if we try to delay those, we'll see equipment failures on the networks that are active.So we think that, that dropping the maintenance to the number that we have guided is appropriate for this level. If more equipment gets shut in or if more equipment gets returned then clearly those units did not have to go through the regulated schedule results and upgrade for the schedule that they're defined commission.

[Operator:]

[Operator Instructions] Our next question is from Eric Seeve from GoldenTree. Go ahead.

[Eric Seeve:]

You guys made some comments about liquidity and access the revolver. I was wondering if you could repeat those and it sounded like there was a - could you repeat what the relevant ratio is that governs that access?

[Elijio Serrano:]

Yes. Good question, Eric. So, we’ve got a $50 million facility that is based on AR and inventory, primarily domestic. And that determines the borrowing basis - the borrowing basis of approximately $25 million. And from that, we deduct letters of credit which are all about $3 million.If our fixed charge coverage ratio is greater than 1, we have to have a minimum availability of $5 million, if it's less than 1. If were greater than 1 times, we don't have any restrictions on using the ABL. We are currently above 1 time, and we do not have any restrictions on the ABL.

[Eric Seeve:]

Okay. And fixed charge coverage declined EBITDA over interest by CapEx?

[Brady Murphy:]

No, on the ABL just interest expense, which is about $48 million.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to Brady Murphy for closing remark.

[Brady Murphy:]

Thank you very much. We appreciate your interest in CSI Compressco, and thank you for taking time to join us this morning for our call. This concludes our call.