CSI Compressco LP
Q3 2019 Earnings Call Transcript

Published: 6 Nov 2019

[Operator:]

Good morning and welcome to CSI Compressco LP's Third Quarter 2019 Earnings Conference Call. The speakers for today's call are Brady Murphy, President for CSI Compressco LP and 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 [Yasik Muha], Vice President of Finance and Treasurer for TETRA Technologies, Inc. and CSI Compressco LP. Also in attendance today is Michael Moscoso, Vice President of CSI Compressco LP.[Operator Instructions] Please note, this event is being recorded. I would like to now turn the conference over to Mr. Muha for opening remarks. Please go ahead.

[Unidentified Company Representative:]

Thanks, Elisa. Good morning, everyone, and thank you for joining CSI Compressco's Third Quarter 2019 Results Conference Call.I'd 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 assumptions and analysis made by CSI Compressco 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 actual results may differ materially from those projected in the forward-looking statement.In addition, in the course of the call, we may refer to EBITDA, adjusted EBITDA, free cash flow, distributable cash flow, distribution coverage ratio, backlog or other non-GAAP financial measures. Please refer to this morning's press release or to our public website for reconciliations 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 is posted on our website, our Form 10-Q is planned to be filed with the SEC on or before November 7, 2019.With that, I will now turn it over to Brady.

[Brady Murphy:]

Thank you, Yasik. Good morning everyone and thank you for joining our third quarter conference call. I will start with an overview of our performance and results and then turn the call over to Elijio Serrano, who will provide more details on our financial results and updated projections.CSI Compressco had another outstanding quarter and delivered another set of record achievements. For the second quarter in a row, we achieved record highs in compression services margins which reached 53.2%. And utilization for our compression services fleet, which ended the quarter at 90.1%. Compression services revenue of $65 million increased 1% sequentially, while gross profits increased to $34.6 million from $34 million in the second quarter as gross margins expanded 50 basis points sequentially.Our compression services gross margins have continued to improve as we deploy – continue to deploy new fleet equipment to our core customers in our core geographies that generate at least 20% return on capital. We continue to realize the financial benefit of the leverage we get from deploying new equipment into clusters for core and well-capitalized customers where we can more effectively utilize our employees.Since the beginning of the year, we have increased our horsepower by approximately 71,000 while keeping our technician headcount flat, effectively improving our horsepower-to-technician ratio. Our management team are fully utilizing all the tools and data from our ERP system to focus on areas to drive efficiencies and reduce costs. In a period of rapidly declining rig count activity in the U.S. and uncertainty in the oil and gas industry, our business continues to deliver improved results underpinned by long-term outlook of increasing U.S. gas production.Third quarter of 2019 adjusted EBITDA of $34 million increased 4% over the second quarter of 2019 and is up 28% from the same period last year, despite a sequential revenue drop to $114 million from $136 million in the second quarter this year. This compares to $115 million in the third quarter of 2018. The sequential revenue decrease was a result, on timing of shipments for equipment sales and was consistent with our expectations. Despite this revenue decline, adjusted EBITDA improved sequentially from last year.Aftermarket Services revenue increased by 2.3 million sequentially to 20.4 million. We expect aftermarket services to end the year strong given the customer demands we're seeing for parts and services and strong aftermarket services backlog. We expect our revenue and profitability in the fourth quarter increase sequentially for aftermarket services. And as a reminder after market service business requires minimal capital investment and generates very good returns.Third quarter 2019 bookings for new equipment totaled 29 million, net of cancellations of approximately 4 million. Bookings were up from 19 million in the second quarter of 2019. Our backlog as of September 30 was 63 million up 3 million from the end of the second quarter and after third quarter shipments of 27 million. We expect to have one to two more larger orders in the fourth of 2019 or the first part of 2020 that we expect to fulfill our backlog for 2020 deliveries.The pipeline identified new unit sales opportunities remains in excess of 250 million as we continue to replenish our leads on global opportunities. While some customers have recently delayed orders partially due to lead times on key components coming down and not need to order equipment nine months to 12 months prior to delivery, we continue to see a healthy outlook for this business.Centralized gas lift continues to be an important application in high-demand for our compression services fleet. And we continue to deploy new higher horsepower fleet additions for our core customers in the early stages of oil production, particularly in the Permian Basin where we have our strongest market share position. Additionally, our increased focus on liquids artificial lift methods for aging oil conventional wells, such as our GAPL or gas assisted plunger lift combined with BAIS or our backside auto injection services has resulted in a fourfold increase in the number of GasJack sets, we have out working on this application since the beginning of the year.This new application was developed specifically for later life on conventional wells that are typically producing below 100 barrels of oil per day, where large horsepower compression system failed to achieve the desired lift efficiency in horizontal wells that will not support rod lift. In addition to reducing CapEx, it can be installed with wireline, avoiding the major expense associated with the well workover.Recent case studies have highlighted our success in increasing oil and liquids production by multiples as much as 5 times to 10 times resulting in multiple orders by customers in the Permian and SCOOP/STACK basins. Further, the increased utilization of GasJack fleet and these liquids applications require only minimal capital to deploy and enhances our return on capital. I'm pleased to say that October was our largest month ever for new GAPL orders. As our customers are looking to minimize capital investment while maintaining or increasing production.Our utilization for 1,000 and higher horsepower equipment focused on gathering systems in centralized gas lift was 97.1% at quarter end, up 30 basis points from the end of the second quarter 2019. Overall utilization for the entire fleet was at 90.1% up from 89.1% at the end of the second quarter and up from 86.3% at the end of the third quarter of 2018. This was a second consecutive quarter in which we accomplished record highs in utilization for our overall fleet since the fourth quarter of 2014. Out of our total horsepower and operations, 52.9% of the fleet is 1,000 or more horsepower in size.We're currently in discussions with our customers on their 2020 requirements for their large horsepower units to address – addressing centralized lift gas lift – centralized gathering and gas lift. Though I already mentioned, demand for that equipment is experiencing some modest slowdown. Given our disciplined approach on where and whom to deploy new equipment, we will not commit to any new orders unless we have a full customer commitment at prices that generate returns of capital of 20% or higher.With our growth plans and TETRA support, we expect to deploy approximately 101,000 horsepower of new equipment into our fleet in 2019. Elijio will further elaborate on projected total year capital expenditures as well as some early thoughts on capital expenditures for 2020.In summary we had a very strong quarter with revenue increasing sequentially across compression services and aftermarket businesses with overall adjusted EBITDA increasing 1.2 million sequentially or 4%. The gas compression business continues to be one of the strongest segments in the energy sector underpinned by long-term outlook for increased gas production, while overall drilling and completion spend will likely decline in the coming quarters, overall, oil and gas production is projected to further increase in 2020 which drives demand for our equipment and services.We will continue to work on improving our utilization and gross margins in our compression services business, while working with core customers to satisfy their requirements. Our aftermarket business is expected to have a strong finish to 2019 and continue to stay strong as we head into the New Year. Finally, we expect additional large orders to come in over the next several months to build out our necessary backlog for 2020 deliveries. I'll now turn the call over to Elijio.

[Elijio Serrano:]

Thank you, Brady. Brady touched on the key areas related to our operating results. I'll spend a couple of minutes focusing on cash flow, the balance sheet, capital expenditures, touch on updated guidance and our capital allocation strategy.Cash flow from operating activities were $27.4 million up from $8.7 million in the second quarter. Capital expenditures were $15 million for growth capital, net of cash receipt from sale of used equipment.In the third quarter, we added approximately 14,300 operating horsepower to our fleet. All of the additions are for equipment over 1,000 horsepower per unit in size. Also in the quarter, we invested $5.7 million for maintenance capital expenditures. Distributable cash flow of $15.8 million, improved 76% from the third quarter of 2018 and it was up sequentially. Our distributable cash flow coverage ratio with 33 times, which reflects our decision in December of last year to reduce the distribution to cash redeemed to Series Preferred Units with a final redemption completed on August 8, 2019.Distributions paid in the quarter were $477,000. At the end of September, 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 in August of 2022. Our ABL revolver was approximately $11 million as of September 30, and cash on hand was $15 million. And as a reminder, we don't have any maintenance covenants to comply with.Our leverage ratio at the end of September was 5.2 times. However, when annualizing our third quarter adjusted EBITDA, our net leverage ratio would be 4.9 times, well on our way towards the goal of 4.5 times that we committed to achieve at our investor conference in may last year in New York city. And that we reiterated, when we announced a reduction in distribution in December of last year, compared to a high of 7 times at the end of Q2 2018, our net leverage ratios has improved to 5.2 times.We expect 2019 total expenditures to remain at $65 million to $70 million, inclusive of $19 million to $21 million of maintenance capital expenditures. Our growth capital expenditures are estimated to be $46 million to $49 million that we expect to sell fund with cash on hand or cash flow from operations.And as previously mentioned, TETRA Technologies, that's our general partner has agreed to purchase up to $15 million, our 20,700 horsepower of compression equipment that will be deployed to our fleet to meet customer demands. This 20,700 horsepower is being leased from TETRA with CSI Compressco, having the right to buy the equipment anytime over the next five years at CSI Compressco's sole discretion. Some of this equipment is already in the field working for key customers.Year-to-date through September, we invested $53 million of capital expenditures, inclusive of maintenance capital expenditures and excluding approximately $14.6 million funded under the TETRA lease that I just mentioned. Between TETRA’s commitment to support us and our own capital plans, we believe we will satisfy our current customers’ demands and at the same time grow within the cash flows.Total horsepower expected to be added this year from all this initiatives is approximately 101,000 horsepower, an increase of almost 9% to our fleet. All targeting 20% returns on capital with very high fall-through margins. All the additions in new equipment have been over 1,000 horsepower in size and as Brady mentioned earlier, the fleet is now composed of 52.9% of units of the 1,000 horsepower or more each. During the quarter, CSI Compressco increased average active operating horsepower by more than 14,300.With respect to total year guidance, 2019 adjusted total year guidance remains between $125 million and $130 million, consistent with the prior guidance. This compares to $99 million of adjusted EBITDA that we achieved last year and represents a year-over-year growth between 26% to 31%. We expect 2019 revenues to be between $475 million and $490 million, which is also unchanged from the guidance we gave three months ago. This is an increase of between $36 million to $51 million from last year.We are very encouraged with our compression business that are getting a challenge in North America land market with a decline in rig count. So far the decline in the broader oil and gas North America market has not had any impact on our business, and in fact the business fundamentals have continued to improve in the last several quarters with all the uncertainty. During the midpoint of our full year, adjusted EBITDA guidance of $127.5 million and after accounting for approximately $40 million of cash interest expense, $20 million of maintenance capital expenditures and $3 million of taxes. We expect to generate approximately $57 million of distributable cash flow.This year $30 million of that $57 million was directed towards cash redeemed in the Series A preferred units and the rest were growth CapEx with approximately $2 million towards distributions. And as a reminder, the last Series A preferred unit redemption occurred August 8th of this year. With respect to capital allocation, we previously communicated our plans to direct approximately 50% of future distributable cash flow towards growth capital, on the assumption that the market continues to support the high margins we are achieving, that generate 20% return on capital.As we respond to some mixed signals from customers towards that timing of security additional fleet equipment in 2020, we are now expecting growth capital to be less than 50% of next year's distributable cash flow. When we reduce the distribution on December 20, 2018, we outlined two objectives. The first was to cash redeemed Series A preferred units to protect equity holders value by avoiding the diluted conversion of the Series A Preferred units into common units. We have completed that objective.We also communicated an objective of reducing the leverage ratio to 4.5 times or lower. This is the same goal and commitment we communicate at the Investor Conference we hosted in New York city in May, 2018. Our goals and objectives with respect to capital allocation have remained consistent over the past year. We intend to remain focused on the creation of unitholder value. While overall drilling and completion spend will likely decline in the coming quarters, creating some market uncertainty, we believe that it is even more important that we focus on the balance sheet by continuing to improve our leverage ratio.As a result, any material amounts of available distributable cash flow after meeting key customers’ requirements, which we believe to be less than 50% for the next years to distributable cash flow. We’ll be focused on delevering and improving our balance sheet, the retirement of debt transfer values to our equity holders from our debt holders. We expect to achieve our targeted leverage ratio of 4.5 times by the end of 2020 or potentially sooner, through a combination of continued improvements in adjusted EBITDA and open market purchases of the unsecured bonds.The timing of their retirement will be dependent on generating the targeted distributable cash flow and monitoring the market to see what our unsecured bonds are trading at. The available cash in the immediate quarters will go towards fulfilling customer orders, generating 20% returns on capital. The vast majority of the new capital is going to our top customers that are super majors or large independents with solid balance sheets and well-defined drilling programs.Beginning early next year, we expect to focus on debt reduction with more than 50% of next year's distributable cash flow targeted toward debt reduction. Currently, the unsecure bonds are trading around $0.90 for the dollar with a yield to maturity of slightly above 10%, which compares to the coupon of 7.25%. We expect that an improved leverage ratio and lower levels of total outstanding debt will create a path for us to successfully refinance the unsecured bonds that mature in August, 2022.Once those unsecured bonds are refinanced, the next maturity is not until the year 2025. With the unsecure bonds maturity being pushed out beyond 2025 and no maintenance covenants to comply with, this creates a significant opportunity for CSI Compressco to begin to direct distributable cash flow towards equity holders. But first, we will focus on improving our leverage ratio to a combination of improved earnings and debt reduction, and as this then create significantly more flexibility for the company to redirect capital towards distributions, unit buybacks or continuing to make investments back into the business to drive up earnings. If market conditions evolve, we will work with our Board of Directors to reassess our capital allocation priorities.Operator, with that, we'll now open the call to questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Praveen Narra of Raymond James. Please go ahead.

[Praveen Narra:]

Hey, good morning guys. I guess, if we could start on the larger horsepower items. So, can you talk about the length of the terms you're putting out there? Obviously you're getting good rates of return, but maybe the length of contracts. And if you could maybe give us an update on what portion of the large horsepower is on month-to-month at this point?

[Elijio Serrano:]

The big units Praveen, the 3,600 and above are going at two or more years, the [indiscernible] which is a 1,300 horsepower units are going at a year each. And we consciously did that because we believe that the demand for that equipment will provide us an opportunity to increase prices as a contract rollover. So rather than commit to three, four years in those and then get locked in into that type of margin over an extended time period. I think we called the market right because the units that we deployed a year ago that are rolling over are getting better price increases, than if we had tried to lock in at three or four year contract.

[Praveen Narra:]

Right. And any update on kind of what the month-to-month on the large horsepower is?

[Elijio Serrano:]

Right. So we're seeing high single-digit price increases on all large horsepower units that are rolling over from the one year contracts. So equipment deployed a year ago, that we believe to be very good pricing, we're still getting high single-digit price increases as they rollover in this market.

[Praveen Narra:]

Okay. On the smaller horsepower that's certainly gotten a lot better over the last year, you've talked about some of the different used cases for them. Can you talk about, how that changes to next year? I guess, are you seeing a wider set of operators take on that approach? Are you seeing the same operators that have kind of adopted it in 2019, expanding for 2020 or how should we think about the ability to roll some of that smaller horsepower equipment out in 2020?

[Brad Murphy:]

Yes, Praveen, this is Brady. We're very pleased with the acceptance and adoption of some of the new techniques that we have used with our GAPL application, as well as our BAIS system for injecting on the backside. And the results that we're getting, we believe we'll continue to support expansion of that application. And as you think about the smaller independence having difficulty getting access to capital to drove away into new production, we think, we have a perfect application that can – you get them some improved production results with very little capital investment in the end of returns that we're seeing for the applications when we deploy them are fantastic for our customers. So we're very optimistic about this solution continuing to gain traction as we head into 2020. And we've only introduced this solution really within the past year.

[Praveen Narra:]

I guess, maybe I'll ask one more and I'll hop off. Just on that point, can you give us an idea of what percentage of the fleet is being used for those kind of newer applications of just the small horsepower utilized fleet?

[Elijio Serrano:]

So Praveen, as you know the GasJack fleet represents about 9% of our total fleet. And right now the applications that Brady mentioned are the early phases. So I would suggest that it's a small section of that 9%, but it's probably the fastest growing application that we have out there.

[Brad Murphy:]

Yes. It's by far the fastest growing application of new sets that we're deploying Praveen.

[Praveen Narra:]

Perfect. Thanks guys.

[Operator:]

The next question comes from Darren McCammon of Cash Flow Kingdom. Please go ahead.

[Darren McCammon:]

Hi guys. Before we get to the questions, I just wanted to congratulate you on 76% increase in distributed cash flow over the last year. That's very impressive.

[Elijio Serrano:]

Thank you, Darren.

[Brad Murphy:]

Thank you.

[Darren McCammon:]

My figures show you are now trading at approximately 50% DCF yield or so, is that correct?

[Elijio Serrano:]

I trust your math.

[Darren McCammon:]

Okay, fair enough. So I saw that you turned free cash flow positive, congratulations on that. When you measure, you've been also very transparent on this call about your capital allocation, so that's great. One question I have is, when you mentioned your 4.5 times debt to EBITDA ratio target. Do you use trailing EBITDA or current quarter run rate?

[Elijio Serrano:]

So the 4.5 times is at the end of next year, that will be trailing 12 months EBITDA.

[Darren McCammon:]

Okay. And is that also what the banks tend to use?

[Elijio Serrano:]

Yes. That's what all creditors use as a standard computation.

[Darren McCammon:]

Okay. So that's more understandable. On Chesapeake gave a – I don't know if you know this, but Chesapeake gave a going concern warning yesterday. I was wondering what your exposure to them was or maybe to Williams, you does some work for them.

[Elijio Serrano:]

So I'll mention a little bit about the creditworthiness of customers, we'll avoid talking about any specific customer. Two-thirds of our compression services revenue is coming from plans that we call super majors or large independents. And the vast majority of the CapEx that we've allocated both last year and this year are going to our top three to five customers that are well-capitalized with very well defined drilling programs. I don't have concerns about the bankruptcy or the creditworthiness of our customers, especially taking into account that the compression fleet is moving gas to be able to create a cash stream for our customers.And in the very limited cases to where we have seen some Chapter 11 filings on the compression services site. We've pretty much been declared a critical vendor that allows our services to remain in place and we get funded from cash. So I'm not concerned about any exposure on creditworthiness on the compression services fleet.

[Darren McCammon:]

Thank you. That's helpful. Last question for me. I commend you on only buying units for committed customers at 20% of ROI. I'm wondering about your competitors, are you seeing any signs of increased competitive pressure?

[Elijio Serrano:]

So good question, Darren. I think, we've mentioned in the past that this industry is a bit unique in that. Once you align with a customer, customers don't tend to mix and match equipment so that if you go to a cluster of equipment in either basins out there, they don't have our equipment next to a competitor next to a competitor. They try to cluster the same service provider around a field to be able to hold one service provider accountable. Therefore, we don't get into price wars in terms of our customers trying to displace one service provider from the other.Therefore, we're not seeing pricing pressure and in fact, I mentioned earlier to one of the earlier questions that we're still getting high single-digit price increases. We're not seeing the market flooded with excess equipment out there, and in fact the lead times are still 30 weeks or more out there for key equipment. So we're not seeing any indications of pricing pressure for the equipment out there.

[Darren McCammon:]

Okay, thanks and congratulations again on a good quarter.

[Brad Murphy:]

Thanks.

[Operator:]

The next question comes from Steven Ruggiero of R.W. Pressprich. Please go ahead.

[Steven Ruggiero:]

Good numbers guys. Thanks for taking my question. And I'm glad you pointed out that you're deemed a critical vendor. Should any of your customers experience bankruptcy process that's so important. But let me – with regards to that, I just wanted to ask couple of questions on your receivables. What was your receivable balance at quarter end if you have that number? I know it was about $7.4 million after second quarter? And just as a follow-up to that, how well are you reserved for potential future bad debt expense in light of the bad debt expense you incurred this past quarter?

[Elijio Serrano:]

Good questions. So our receivables at the end of September were right at $68 million and we have very little exposure on the bad debt. Right now in the earnings announcement that we make, you’ll see that in the reconciliation tables in the back, we took $1.7 million write-off for a Chapter 11 filing. That was a unit that we sold last year to an engineering company that was a subcontractor for a midstream company. That engineering company got into a dispute with a midstream company and was not able to satisfy their obligation to us. That is a rare sale that we make to someone other than a midstream well-capitalized company, so I consider that a one off.So other than that one and also recognizing the first statement that you made and emphasizing the comment that we made is that being a critical supplier in moving gas and keeping the cash stream going has not really exposed us to bad debt expense historically.

[Steven Ruggiero:]

Okay. Thanks, Elijio.

[Operator:]

The next question comes from Eric Seeve of GoldenTree. Please go ahead.

[Eric Seeve:]

Hi guys. Thank you for the call. A few questions. First with respect to the bad debt expense, just trying to understand which line item on the P&L does that flow through? So what line items should we be adding it back to think about recurring earnings?

[Elijio Serrano:]

Good question, Eric. So that's reflected in the G&A line out of the P&L and the sale occurred under equipment sales were originally was booked as equipment sales on revenue. And then we book it as an expense on G&A.

[Eric Seeve:]

Okay, thank you. Different topic, can you talk a little bit about – you laid out in the press release your capacity utilization for the large horsepower units. Can you tell us what they were for the small units and the medium units?

[Elijio Serrano:]

Give me a second, let me pull that out. And on the large unit while I pull up that information, essentially we're fully utilized and anything less than a 100 is equipment either being moved between job sites or being down for recurring maintenance. So the small horsepower fleet, the GasJack is right around 72%. The midsized equipment is 87%. And as you recall, Eric, the midsized equipment at the prior peak was 89%. So we’re almost back up to historical utilization from the midsized equipment. And then the large horsepower is 97% at the end of September.

[Eric Seeve:]

That was great. I guess, lastly from end, when I – if I run the math and look at the average contract pricing on the compression services side from Q2 to Q3, it looks like it declined slightly, which seemed inconsistent with what’s going on in the marketplace in terms if you guys can continue to get price increases. Is that a function of the mix shift or what am I missing?

[Elijio Serrano:]

Yes. Eric I think we’ve done a little bit of this math in the past. The small units, the GasJack fleet is averaging right around $40 per horsepower per month per unit. The big units, the 1,300 size horsepower units are averaging about $15, $16 revenue per month per unit. So as the big fleet keeps increasing relative to the smaller fleet is going to represent a mix and average down total horse – revenue per horsepower per month. So though lead into reflect pricing – reinstate reflect the mix change in the fleet.

[Eric Seeve:]

Okay. Do you guys still disclose what proportion of the fleet is small versus large?

[Elijio Serrano:]

Yes. So not only will we have it in the 10-Q that we expect to file either later today, if not tomorrow morning. We also have it on our investor presentation that we’ll update, but when the 10-Q goes in, you’ll only be able to see those three groupings.

[Eric Seeve:]

Great. Thanks guys.

[Elijio Serrano:]

Appreciate it, Eric.

[Operator:]

[Operator Instructions] The next question comes from Jeremy Tonet of JPMorgan. Please go ahead.

[Charlie Barber:]

Hey, good morning. This is Charlie on for Jeremy. Just wanted to touch on the cost side of the compression services. Just thinking about efficiencies, kind of where costs have come out this quarter and last quarter seem to be a bit lower, especially relative to kind of the beginning of this year. Just thinking about next quarter and kind of a go forward run rate this feels like there’s some more efficiencies that can kind of be stripped out or kind of what you think kind of a good run rate is.

[Brad Murphy:]

Yes, so we mentioned on the call, I think deployed about 71,000 horsepower this year and kept our technician headcount flat. And we’ve done that a couple of different ways. One by deploying assets where we have existing asset base with our core clients, which allows us to be much more efficient. But we also have our team executing using our ERP system, scheduling manpower planning that is all really led to improved labor costs as a percentage of our revenue. And that’s a big part contributing to our improved margins.We also have some other efficiency gains that the team is benefiting from. And as we continue to deploy the remaining of our 2019 CapEx to these key clients in their core locations, we do expect – we have the opportunity to continue to increase those margins.

[Charlie Barber:]

Thanks. That’s helpful. Then one more for me. Some of your peers have been kind of talking more about how some of maintenance, routine maintenance has been getting pushed out a bit. Just curious what you’ve seen on that and how much you can really push deferred maintenance on these units.

[Elijio Serrano:]

That’s not really practical, Charlie. Because if you defer the maintenance, you’re going to have more downtime on the units and then obviously you’ll impact customer service quality. So we’re on a very rigid scheduled process of monitoring the hours, the runtime and the fleet of mechanics and technicians are constantly making the rounds to each unit and replacing components as necessary. So it’s not our practice to defer maintenance capital.Now on the aftermarket services side going into the last downturn, operators that own their own equipment, they tried to conserve cash, did push out a lot of maintenance capital and that’s why you saw a spike in aftermarket services. As we came out of the downturn, as we helped our customers try to catch up that maintenance. And also, if you saw our aftermarket services, tried to rebuild a lot of equipment from customers. So we’ve seen our customers do it to conserve the cash. We do not do it because it will impact service quality.

[Charlie Barber:]

Great. Thanks.

[Operator:]

The next question comes from Sharon Lui of Wells Fargo. Please go ahead.

[Sharon Lui:]

Hi. Good morning. Your Q3 utilization continued to increase sequentially. I guess, just based on your conversations with customers, do you think, I guess, the second half of this year represents like a fairly good level going forward, looking out to 2020? Or could it actually represent a peak level?

[Brady Murphy:]

Yes. I think for the high horsepower, as we mentioned, we're running at 97% utilization. We're pretty well maxed out and we feel pretty confident that we can sustain that that high level of horsepower – our utilization for our high horsepower. As we mentioned on the lower horsepower, some of the new applications that we're developing for the GasJack, we're seeing significant interest in and increased demand. So we feel pretty good about being able to move the needle on the lower end of the horsepower utilization as well. So we feel pretty good about maintaining or increasing our utilization going forward.

[Sharon Lui:]

Okay, helpful. And I guess based on your core region, maybe if you could touch on producer sentiment in each of the regions and whether any of their compression needs have materially changed from like the second quarter?

[Brady Murphy:]

Yes. So our largest market share position by far is the Permian basin. And our core customers we work with are, as Elijio said, the major, super majors or major independence. And we continue to see them increasing their activity levels and their needs for compression as we go into 2020. And we're very closely linked to them in terms of their planning process. The other two core regions for us, where we have over 70% of our horsepower deployed between the Permian, South Texas and the Mid-Con.Again, it really depends on the customers that you're linked to. In South Texas and the Eagle Ford, we will link to a super major and we know their demands. And again, pretty consistent with what we've seen from prior years from them. I think the SCOOP/STACK Midland – sorry SCOOP/STACK basin is probably from in terms of activity, the lowest of the three. But that's not been an area where we've been deploying a lot of our high horsepower in the recent year. It's really probably more of an opportunity for some of our lower GasJack applications for some of the independence. Is that helps?

[Sharon Lui:]

Great. Thank you.

[Operator:]

The next question is a follow-up from Eric Seeve of GoldenTree.

[Eric Seeve:]

Just on the SG&A front, it looks like in the last two quarters it was running right around the $11 million a quarter. This quarter, it was $11.3 million. But it sounds like, if we net out the bad debt expense, it would be more like $9.6 million. Just trying to understand, is that sort of step change lower in SG&A? Is that based on sustainable cost savings that you guys have implemented? How should we think about SG&A moving forward?

[Elijio Serrano:]

Yes. I think, I guess that if you're building your model that you model right above $10 million a quarter and that's a combination of us trying to streamline and use the ERP system in other technologies to keep our cost structure low.

[Eric Seeve:]

Great. Thanks, Eli.

[Elijio Serrano:]

Thank you, Eric.

[Operator:]

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

[Brady Murphy:]

Okay. We thank you again for joining us for the call. We appreciate your interest in CSI Compressco and this concludes our call.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.