CSI Compressco LP
Q3 2016 Earnings Call Transcript

Published: 4 Nov 2016

[Operator:]

Welcome to the CSI Compressco LP Third Quarter 2016 Results Conference Call. The speakers for today’s call are Tim Knox, President and a Director of CSI Compressco GP; Derek Coffie, Chief Financial Officer CSI Compressco and Elijio Serrano, Chief Financial Officer of TETRA Technologies Incorporated, who owns a general partner. Please also note today’s event is being recorded. I will now turn the call over to Mr. Knox.

[Timothy Knox:]

Good morning and thank you for joining the CSI Compressco’s third quarter 2016 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 assumptions and analysis made by CSI Compressco and based on a number of factors. These statements are subject to 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, adjusted EBITDA, free cash flow, distributable cash flow, distribution coverage ratio or other non-GAAP financial measures. Please refer to this morning’s press release or to our public website for reconciliations of non-GAAP measures to the nearest GAAP measure. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context for 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 9, 2016. Again, thank you for joining us this morning. We certainly do appreciate your interest in CSI Compressco. I’ll start our discussion by highlighting a couple of recent actions that have been executed to support the Partnership and then share with you some of the results and key financial indicators that use to measure our business. I will discuss changes to our fleet and fleet utilization, aftermarket services, equipment sales and backlog, the overall performance of the business and our outlook as we continue to operate in a challenging business environment and begin to see signs in what may indicate the bottom of the cycle and then as mentioned, I will then turn the call over to Derek Coffie, to cover more financial details. Yesterday, on November 3, we finalized an amendment to our credit facility that increases our leverage covenant to 5.95 times EBITDA for the next seven quarters and as previously announced, we have completed preferred equity offerings totaling $80 million and used those proceeds to lower the balance of both our outstanding senior notes and our revolver. These actions are a part of our continuing effort in maintaining financial flexibility to operate our business through the cycle of downturn and pending recovery. In a few moments, Derek will share with you more details regarding these financial mechanisms. Exiting the third quarter of 2016, our compression services fleet consisted of 1,128,329 horsepower, a reduction of 2345 horsepower compared to prior quarter. Quarter-end utilization was 75.2% with 848,365 horsepower utilized and 8783 horsepower reduction in utilized horsepower. It is encouraging to note that while this is a decline in revenue generating horsepower, it is the smallest decline in the past four quarters and sequentially smaller declines have been announced for two consecutive quarters. Combining this with commodity price improvements, increases in drilling activity and other energy service activity datapoints, we could be seeing the bottom of the market for demand at compression services. At a more granular level, we noted utilized horsepower increases in the third quarter compared to the second quarter in both our Permian Basin region and our Western region, as well as continued improvement of activity and opportunities in the Scoop and Stack Place in Oklahoma. With oil prices showing extended stability of above $40 level for the past six months, hopefully turning towards $50 and as were gas price is maintaining above $2.50 at the beginning of the summer, we’ve seen increased 2017 planning activities from our numerous customers throughout these regions as well as in Niobrara DJ Basin, the Eagle Ford and the Bakken. Utilization of larger equipment, 800 horsepower and above dropped by less than 1500 horsepower with utilization remaining above 84% exiting September and signed late in the quarter at the supply of larger compression services equipment maybe tightening. For our 101 to 800 horsepower range, utilization was 70% and for our smaller equipment, 100 horsepower and below utilization was 63%. Moving on to the highlights of our third quarter financial results, compression services revenues were $53 million for the quarter, an 8% decline from the prior quarter with gross margins improving slightly to just over 49%. The decline in revenue is symptomatic as previously provided competitive price concessions rolling into the full quarter as we strive to maintain utilization and grow market share in the areas we operate, as well as continued pressure on pricing that we believe has begun to show its signs of stabilization. Aftermarket services inclusive of parts sales saw a dip in revenues in the third quarter at $8.3 million that was margin improvement providing a highest gross profit dollar quarter of the year for this product line. In recovery cycle, this is often a second number business that shows early improvement as the owners of compression equipment begin to spin to restock inventories and recover for maintenance that may have been put off our cash with it its tightest. We will continue to seek out and pursue opportunities vigorously in line with such activity by our customers. In the equipment sales business, we recorded $9.3 million in revenue for the quarter, of which approximately $1.3 million came from used equipment sales. Our new equipment sales backlog at September 30, 2016 was $21 million an approximate $4.5 million reduction from prior quarters as we booked orders totaling approximately $3.5 million in the third quarter. Year-to-date bookings were just under $11 million in new equipment sales or an indication to levels which expenditures have been cut and development projects postponed during what may proved to be have been the bottom of the downturn. Enquiry level was up and customer activity appears to be increasing providing some optimism for this segment heading into 2017 which must be balanced with a cautious look at project lead times and the rate at which this business segment has historically recovered. Total revenue of $70.7 million for the third quarter of 2016 is a decline of $5.4 million or 8% from the $76.1 million of revenue reported in the second quarter of 2016. With $4.7 million of the revenue decline attributable to reduced compression services revenues $1.2 million attributable to reduced aftermarket services revenues and a $500,000 increase in our equipment sales revenue. Sales, general and administrative expenses for the quarter ending September 30, 2016 were $9.2 million, which is also the average quarterly SGA expense for the first three quarters of 2016. Through managed control, this is a 16% reduction from the average $10.8 million per quarter in 2015 and allowing it for the $900,000 in the cost associated with our preferred equity issuance; you can see the trajectory toward an even more pronounced result. Headcount in the third quarter declined by 46 or 6% to 713 aggregating to a 24% decline from where we started the year. Wage reductions and compensation-related expenditure cuts have been extended through the end of 2016. Adjusted EBITDA $24 million is in the $800,000 or a 3.5% decrease to the $24.8 million in the prior quarter. Third quarter distributable cash flow of $12.7 million is a decrease of $2.5 million or 16% compared to the second quarter of 2016. Free cash flow was positive at $6.2 million in the third quarter of 2016 prior to the quarterly distribution. Year-to-date maintenance capital expenditures totaled $6.5 million and year-to-date growth capital spending is $4.6 million including $4.2 million invested in our ERP implementation project that remains in process. As we enter the final few months of 2016, and continue to scrutinize cash outflows, we remained focus on utilizing the assets, our disposal of maximized revenues and profits while minimizing capital out pay. We predict full year 2016 capital expenditures will be held to $19 million to $20 million. This includes $11 million to $12 million in maintenance capital as we expect comparative higher maintenance CapEx in the fourth quarter as we conduct some necessary maintenance in the field and prepare for some anticipated projects. 2016 spending on our enterprise resource planning is forecasted $6 million with $1 million to $2 million directed at other growth opportunities. Once fully implemented in 2017, we anticipate $4 million in annual savings from our ERP project. As previously announced, our third quarter distribution is flat with that of the prior three quarters at 37.75 cents per common unit and is at a calculated distribution coverage ratio of 0.99 times. With that, I will turn the call over to Derek.

[Derek Coffie:]

Good morning everyone. As Tim mentioned earlier, adjusted EBITDA was $24 million, down $800,000 from the second quarter. We have completed an equity offering totaling $80 million with Series A Convertible Preferred Unit purchase agreement and used $50.9 million of those proceeds to repurchase and retire $54.1 million or $7.25% senior notes adding 6% discount. The Series A preferred units which carries an 11% coupon rate require us to pay quarterly distribution to holders in the form of additional preferred units and our convertible into common units over a period of 30 months beginning March of 2017. Preferred convertible units are treated as debt for GAAP purposes as the number of common units to be issued upon conversion is variable depending on market price of our unit at the time of conversion. A mark-to-market or fair value calculation we perform each quarter take into the account the price volatility of our units among other things – other factors. If our unit price changes relative to the closing price of $879 at the time of issuance of the preferred units, it will result in an adjustment to our ability in a non-cash adjustment to our P&L. For Q3, this mark-to-market paradigm adjustment result in a $7.2 million increase in the liability for preferred units and a non-cash charge to the P&L. For debt covenant purposes, the Series A Preferred Units are not treated as a liability. The $77 million is a non-cash charge that doesn’t impact dividends. Other non-recurring cash cost of $3 million relating to equity offering can then excluded from adjusted EBITDA, which are reflected in SG&A. On November 3, we executed an amendment to our credit facility which increases our maximum leverage covenant beginning Q4 of 2016 from 5.75x to 5.95x through June 30, 2018. And then stepping down to 5.75x for the third quarter – third and fourth quarters of 2018 at 5.0x thereafter. The minimum interest coverage covenant declines from 3 to 2.25 through June 30, 2018 and then steps up to 2.75 thereafter. Our revolver commitment amount will reduce from $340 million to $315 million. Funded debt for covenant purposes includes few notes, bank revolver funded amounts, outstanding letters of credit and surety bonds. Funded debt at the end of the September was $521 million, compared to $590 million at the end of June. As mentioned earlier, we used $50.9 million of the equity offering to repurchase and retire senior notes resulting in an annualized reduction in interest expense of $3.9 million and a one-time gain of $3.2 million on retiring the notes below par. We also used $25 million of the proceeds of the preferred issuance to reduce our revolver as part of amending our credit facility. As on October 3, 2016, the outstanding balance on our revolver was $214 million. Our leverage ratio for Q3 was 4.83, against a covenant of 5.75 versus a leverage ratio of 5.04 for the prior quarter. To manage cash flow, our organization is focused on timely invoicing, aggressively pursuing all outstanding receivables. DSO at the end of September was 41 days. This is a 11 day improvement from the end of June. Distributable cash flow in the third quarter was $12.7 million, a decrease of $2.5 million from the second quarter of this year. The coverage ratio decreased from 1.19 times at the end of June to 0.99 times at the end of September. Since we combined the two companies in August 2014, we have been able to reduce our bill-related and SG&A cost by $55 million in the fourth quarter of 2014 to $38 million in the past quarter. This is an annualized cost reduction of almost $70 million. This has been achieved through the rationalization of our infrastructure and facilities, strong desired cost reduction initiatives and internal streamlining. By reducing our annual cost budget to $70 million, we have been able to absorb the impact, lower activity and pricing pressures without materially impacting our gross margins. The next round of cost reductions will be achieved through the use of technology as we complete the implementation early next year of our new ERP system. We started this project earlier this year and are already seeing some benefits. Future save process have been defined allowing us to identify the operational efficiencies to achieve annualized savings of more than $4 million. Customer Relationship Management or CRM, which is part of our sales force software application, has been implemented to give us better visibility to our sales opportunity pipeline in connection to our customers from sales calls receiving orders. Additionally, as part of the sales force, we have implemented a credit portal that streamlines our internal processes. We remain committed towards investing during this down cycle and projects that have quick paybacks to protect our profitability. With that, I will turn it back to Tim.

[Timothy Knox:]

Thank you, Derek and at this time, we would like to open up the call for questions.

[Operator:]

Thank you, sir. [Operator Instructions] Today’s first question comes from Marshall Adkins of Raymond James. Please go ahead.

[Marshall Adkins:]

Good morning guys. A couple questions, obviously great job at managing costs and Derek, you went through a lot of the details on how that was done. I want to get clarification – it sounds like in your discussion, a lot of these cost reductions are sustainable even as we go through the upturn that we are looking for. Would you address that? I mean, is that accurate? And explain a little bit why?

[Timothy Knox:]

So, Marshall, this is Tim. I’ll start and – so, as things picked up - the back up and as we deploy more equipment, we are looking forward and deploy more equipment in the field, it will obviously add people, right, to support the additional work that’s being done, but certainly, at a ratio, whether it’s a machine per mechanic or horsepower per technician or whatever, and the ratio below that of which where we were – I am sorry above that in which, more horsepower per mechanic then we are with the time we combine the companies. Part of that is simply just the density we have in certain areas and in further looking forward to implementing where our field service techs are able to do a lot of data entry on a handheld device, take out some of the paper work time. Just things like that. So, headcounts may go back up, as we deploy but not at the same rate that the same level it came down and then of course at our back office things that absolutely are sustainable getting – it would be implementing sales force or simple examples like that or simply getting all of our business to operate on a single ERP as oppose to having on a monthly basis connect fields, CSI to the old Compressco financials.

[Marshall Adkins:]

Okay, good. Pricing, pricing was weak. What’s going on there? Is it structural or is it a mix issue? Address the pricing trends.

[Timothy Knox:]

You can follow the mix. We have few quarters ago, heard talking about the horsepower utilization in different categories and the small horsepower which on a dollar per horsepower basis, is the highest revenue, again just on horsepower. But the smallest horsepower is what has continued to come down. So our average horsepower per units gone up, that naturally drives down the dollars per horsepower in revenues. However, certainly, pricing pressures for 24 months now have been a major factor. We talked a little bit about it and pretty happy to be sustaining margins and not giving that decline in revenue in all to an impact on the bottom-line. So, a mix, at this point, the product mix is not changing that dramatically like it had a few quarters ago. Now it’s more of the current market level of pricings becoming the norm if you will throughout the fleet.

[Marshall Adkins:]

All right, last one from me. You mentioned this last quarter is probably the bottom – tell me what you are seeing out there from a customer enquiry perspective or anything else that gives you confidence that there were things start moving up to the right from here?

[Timothy Knox:]

So, I am probably too conservative and I am probably too close to too many loggers. So, I won’t say that was the bottom, I’ll say that it looks like and we see signs that this may have been a bottom or that we may be very close to the bottom. From the customers’ perspective, we’ve seen a lot of third quarter notes that guys like you put out lots of encouragement in our customers’ plans and in their results within their plans going into 2017 and of course, then there is the anecdotal each of our people out representing our products and services is becoming more and more busy, more and more opportunities that we are responding to in all the product lines.

[Marshall Adkins:]

Perfect. That’s what I was looking for. Thanks guys.

[Operator:]

And our next question comes from Andrew Burd of JPMorgan. Please go ahead.

[Andrew Burd:]

Hi, good morning. First question on the Delaware Permian, obviously a lot of excitement there and it’s fracking your backyard. How are you positioned to take advantage of the trend and would it be enough to maybe propel a recovery in fabrication?

[Timothy Knox:]

So, Andy, with fabrication, keep in mind, a lot of the fabric– most of the fabrication business is selling equipment. Right now, our fleet with idle horsepower where it is and with our direction, our desire right now to not put a lot of capital into the fleet when we have other equipment. We are going to keep deploying the idle fleet getting it back out to work. Certainly, our time of the old compressor sits in business starting in the Permian Basin, we do have a lot of equipment there, a lot of people there, a lot of relationships and connections there. So we are excited that the Permian, the Delaware continue to lead the pack. We do think we are very well positioned and yes, that could be a significant thing for us if all that holds.

[Andrew Burd:]

Okay, I guess, the genesis of the question was actually kind of, if – assuming that there are some participants in the Delaware Permian that choose to do their own compression. How would your fabrication located in the basin? Is that advantage relative to a competitor or do you see that there is not a lot of need for in-house compression and that people in the emerging areas will mostly do outsourced compression?

[Timothy Knox:]

So, I mentioned earlier, we picked up of a little bit of orders, solid equipment orders in the third quarter and those actually are going into the general Permian Basin. So our location and when we talk about shipping 2000 and 3000 horsepower compressor packages, the shrinked bill coming out of the Gulf Coast or coming out of other parts of the country could easily be $20,000, $30,000, $40,000. So, when dollars are extremely tight and monitor – we do have a freight advantage. We’ve also got the advantage of a lot of people that can go assist with start-up and go support the product right there in the backyard as you called it. So, I do think it helps us. I am glad we’ve got our fabrication facility sitting where it is right now. Now, conversely, there was a time when everything we are shipping out of ports in the Gulf and it was hard to justify the freight at the mid-month. But it is particularly a time we are pretty excited about it.

[Andrew Burd:]

Great and we’ve seen a lot of M&A announced recently, not necessarily in your space, but with E&Ts are with midstream, how does that create – I guess, an opportunity or a challenge to the extent that some of your historic customers are either divesting assets or acquiring assets or vice versa, just some commentary on how the landscape has changed since before the cycle and as you look to who you are kind of expecting orders from should the cycle turn?

[Timothy Knox:]

So, you are exactly right as M&A at the customer level occur, there are situations where, maybe worthy incumbent and have most of the work with the acquiring company that’s a good position. Sometimes you have most of the work with a company that was acquired and the acquiring company works for the competitor that can be good or bad, it gives you a chance and reduce your products to a new company, but on the other hand some overriding supply agreement might make it difficult to keep equipment out. So, I don’t think I want to talk too much about what we are targeting and who we are targeting with at the moment. But that is a factor that – a supplier, it’s ourselves has to be very cognizant of and again, if we are worthy incumbent on the acquiring company, let’s go find a way to pick up what they just bought and if we are the incumbent of the company that has been acquired, then hopefully it allows us to get ourselves as part of a new purchasing group that we’ve never talked to before.

[Andrew Burd:]

Now, that’s really helpful. The last question just on the balance sheet and coverage. The balance sheet is obviously looking in a much shape, congratulations on getting the deal done during the quarter. Looking at distribution coverage right around one times this quarter and certainly reasons to be optimistic on some parts of the business going ahead, but as these preferred start to gradually convert, I think over 30 months into common units, how are you viewing the current distribution, kind of hovering at one right now, given that there is the amount of distributions you will have to pay will start inch up over time?

[Timothy Knox:]

Right, so, as the number of common units increases and fortunately it does it over time, it does it slowly over time, with the recovery, we look towards revenues and profits going up directionally with that in support of it, in line with it. And we are looking forward to recovery at some point in the future and hopefully sooner rather than later, we are pleased this quarter to be able to provide the investment partners with the stable distribution even with the coverage ratio less than 1 to 1 – 1 – 100 at a point below, 1 to 1. If you do the quick math and just the hypothetical case with a coverage ratio of 0.9 to 0x, the same distribution the impact to that will be a bit over $1 million or 1, 100th turn on the leverage ratio. So it’s on the upswing in the downturn recovery cycle and if we are materially close to 1 to 1, we believe there might a logic in absorbing the difference right now. But every distribution decision that’s made by the Board of Directors will continue to be reviewed in light of distributable cash and leverage ratio and liquidity and journal business climate and all of the other important factors that go into the considerations and we’ll make the prudent decisions for the long-term health of the partnership as we go.

[Andrew Burd:]

Great, great. That’s a great answer, good to hear. Thanks for taking my questions.

[Timothy Knox:]

Thank you.

[Operator:]

And our next question today comes from Selman Akyol of Stifel. Please go ahead.

[Selman Akyol:]

Thank you. Good morning. Couple of quick ones from me. First of all, on the ERP, since I guess, no more expenses associated with as you roll into 2017?

[Derek Coffie:]

Yes, we said, some expense associated with that. The total project that we will impart are like maintenance piece of that or equipment piece as other option $10.8 million in total. So the total spend will go up.

[Elijio Serrano:]

And Selman, this is Elijio. Good morning. The majority of the cost we are incurring this year is all capital expenditures. Any P&L impact will be, when we start doing training our staff which is not expected to occur until Q1. So no P&L impact, a little bit of cash in the fourth quarter as we get ready to take the system live early next year.

[Selman Akyol:]

Okay. And then also, can you just talk a little bit more about what you are seeing in the Stack and the Scoop Permian? Lot of excitement around that, maybe what your position looks like today and just what you are seeing from there?

[Timothy Knox:]

So, Selman, out in that area, keep in mind that, both companies have operated in that area for a long time and of course, Compressco and the GasJack product was founded out in Western Oklahoma. So, just kind of mixing it in with other work that we do, even though our small equipment utilization in whole continues to drop, we’ve had a lot of success, whether it’s getting back on just some old marginal wells in the area or some of the new development, that’s one of the brighter areas for us with the small equipment right now and up into some of the mid-size horsepower giving it on gas lift, hopefully looking ahead a bit, we will see more gathering and more plants going in the coming 12, 18 months a chance to get more large horsepower deployed out in that area. That’s kind of the general cycle.

[Selman Akyol:]

Gotcha, thanks. And then, just last one from me. Can you just talk about what drives the revaluation on the Series A Preferreds?

[Elijio Serrano:]

Hey, this is Elijio. Yes, so the convertible preferreds that we issued are going to be settled primarily in equity. So we’ll issue common units in the future. We’ve got the option as – through the instrument that we can settle it in cash if we want up to half of the amount. But because, we are going to settle it in all likelihood in units. The valuation of that debt is related to the expected price of the units. So when we issued the units back earlier this year, they were right under $9 and today the unit price has run up recently to over $10, treating it little bit down today, but it’s come up significantly. So there is a revaluation of mark-to-market adjustment that is done on the expectation that when we issue units, it’s higher than what they were at that time. Now if the unit price were just as an example – were to drop to 7 bucks, we have a gain on the revaluation. So it’s going to move up and down depending on what the unit price is doing on the assumption that we are going to settle this with units. And it’s obviously all non-cash. The $80 million is the number we still settled at. The number of units might vary as we begin converting this into common units in the future.

[Selman Akyol:]

Got it. Okay, very helpful. All right that does it for me. Thanks.

[Operator:]

And ladies and gentlemen, the next question comes from Jordan Stephens [ph] of Cassidy Capital [ph.

[Unidentified Analyst:]

Hey guys. Just had one quick question on the amendment to the revolver now converted to ABL. I guess, obviously, understanding, want the call it a bottom yet, but just kind of looking at the runrate EBITDA figures and the like, it would imply that there is very adequate room even other the 5.75 times, I guess, little more color on kind of the rationale for getting a slight bump there?

[Elijio Serrano:]

So the opportunity we took is that we received proceeds from an equity offering and whenever you receive proceeds, if you are going to use it to pay down the revolver, you want to try to leverage it as much as you can to your benefit and knowing that the banks have shown an inclination toward pushing covenants in this sector to as high as 5.95 and we are at 5.75, we asked the banks to push it up to incremental 20 basis points and they were very accommodating in doing so.

[Unidentified Analyst:]

Got it. So there is nothing, no specific expectation, frankly as much just given, extra room for maybe there is opportunities next year, some reason where you want to ramp things up and you just want to take advantage of that when you have the opportunity?

[Elijio Serrano:]

Everybody was in the 5.95 plus, we thought we are bit late into that club. We asked they did so and that gives us borrowing capacity if the market recovers strongly and we have to start investing in growth capital quickly.

[Unidentified Analyst:]

Got it. Okay, thanks. That’s helpful.

[Operator:]

[Operator Instructions] Our next question comes from Mike Gyure of Janney. Please go ahead.

[Michael Gyure:]

Yes, on the, I guess, the spending front, as you look out, let’s say into 2017, and that kind of has a little bit to do, I guess with the last question, with your increased flexibility under the loan agreement, I guess, where you are looking to potentially start when you do start to spend some growth CapEx, what are you looking at sort of expanding currently the fleets or are you looking sort of at anything else out there?

[Timothy Knox:]

Yes, so, I mentioned earlier that that larger horsepower segment is most like we are seeing it tight now. It’s our fleets are now 84% utilized and I mean, I don’t know what the magic number is, but something up from 90% you are getting towards on that a lot to at the cycle to your customers. So as things improve, it is great to have the flexibility and if the rates are right, the higher are as right, we would continue to grow that part of our compression fleet. We have got some equipment up in the 2000 horsepower range, but not a lot and we’ve talked before, but continue to grow that largest to the larger fleet component as well. So again, we will look at the IRRs as the opportunities present themselves, but it’s nice to have the availability.

[Michael Gyure:]

And I guess, one more kind of – sort of in a different perspective, kind of, I guess, as I look at the balance sheet, I look at kind of the values of your compression equipment. Obviously, we haven’t taken a charge to write the value of that equipment down. So, you probably feel comfortable on the downside that there is not exposure. How do you feel about I guess, the value of that equipment compared to where you think the market or replacement market would be for today, you imagine there is some upside potentially there if you would add the mark-to-market that portfolio of assets to value?

[Elijio Serrano:]

Good question. So we’ve gone, lucky for us, we’ve gone through a couple of valuations. One of them is the result of moving to an ABL facility and that valuation, the initial valuation that all we receive tells us that the equipment remains in the balance sheet properly valued as we absorbed pricing pressure and our margins have held in there quite firm. It sounds as that the value that were carried on the balance sheet still is quite comfortable for us and if this a pattern near the bottom, clearly that talks well about the earnings that we can generate from the equipment and that the carrying value that we have is appropriate and it more than supports the slightly over $300 million revolver that we have in place that’s backed by the value of the assets. So right now, the valuation is more than 2x what we’ve got on the revolver.

[Michael Gyure:]

Great. Thanks very much.

[Operator:]

And our next question comes from Charles Marshall of Capital One. Please go ahead.

[Charles Marshall:]

Good morning guys.

[Elijio Serrano:]

Good morning.

[Charles Marshall:]

Just wondering if you could kind of elaborate as we sort of approach what you call, maybe sort of bottoming here of the market here shortly and as maybe we expect utilization start picking back up. Is it right to think that potentially there should be some margin compression that additional costs are going to be needed to get the fleet back into service? I mean, could that 49-ish sort for runrate you had sort of in the past three quarters. Can we see that maybe tick down slightly as you are spending more to get that fleet back into service. Is that the right way to think about it?

[Timothy Knox:]

I think there will be some expenditures getting in the fleet back in service. So, but I don’t think, it’s going to be a big material number. Keep in mind that the profit margin is on the entire amount of revenue and if incrementally we are preparing making up a number here, but 1% increased utilization at quarterly rate or whatever it’s that fairly small number folding into the much larger number.

[Charles Marshall:]

Okay. Understood. And there is revenue, there is revenue that follows right after as well right.

[Timothy Knox:]

Right.

[Charles Marshall:]

Makes sense. And maybe to looking at a little bit prematurely here, but as I think about modeling this out, obviously lot more room now on the balance sheet with the leverage covenant stepping up then we start picking up maybe a recovery scenario, I mean, can you just remind us in terms of maybe future distribution growth and of course obviously taking the preferreds into consideration, what type of indicators are you looking for in terms of coverage and leverage for maybe to start resuming payouts going forward?

[Timothy Knox:]

Chuck, I just think it would be premature for me to try to lay out of the plan such as that. Obviously, just to at 0.99 right now. We’ve seen that coverage ratio come down over this downturn from where we historically were. You can go back in history and look that in a not downturn that a company operated with a 1.2, not a consistent coverage ratio, but a 1.2 mindset let’s say. So, again, I think it’s premature to get into the talk of increasing the distribution right now. Let’s just get the recovery started first.

[Elijio Serrano:]

And Chuck, I’ll add as CFO of the General Partner, our perspective is that, we currently want a strong CSI Compressco to have the ability to participate in a market recovery. We have always said that our target coverage ratio was in the 1.1 to 1.2 range. Now we are very comfortable if it drops short-term to 0.9 as an example for a short period of time, because as Tim mentioned earlier, 0.9 versus 1.0 is simply about $1.3 million impact on debt, which is not a big number given the $0.5 billion of debt that would carry and the annualized EBITDA that near the $100 million range. So, small fluctuations in the short time period are not of a concern to us. Long-term, we want a healthy 1.1 to 1.2 coverage ratio.

[Charles Marshall:]

Got it. That makes sense. That’s it for me guys. Thank you.

[Operator:]

And ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Mr. Knox for any closing remarks.

[Timothy Knox:]

Thank you and thank you guys for the questions. Over the past six months, West Texas Intermediate Crude Oil prices improved from the mid-30s to cycling into the high 40s, while Henry Hub Natural Gas Prices have improved 50% from the low $2 to just in the $3. Since the low point of 404 rigs reported operating in North America in late May, we’ve seen the rig count rise by almost 40% to over 550. Of the roughly 150 rig increase, 50% of the rigs have been added in the Permian Basin, the largest of our five operating regions and where we have 45 years of compression services experience adding the whole of Texas, where we are strongly represented throughout and you find almost 65% of the growth in drilling activity. As we mentioned before, we are optimistic that these commodity price improvements in the measureable rig count increase will increase demand for all segments whether it’s services and products we provide and we believe that our personnel and assets are well positioned to respond to an increase in demand. To close, I mention that on Thursday, [Tuesday] December 6, I’ll participate with TETRA Technologies at the Cowen & Company Energy and Natural Resources Conference in Manhattan and on Wednesday, December 7 we will participate at the Wells Fargo Securities Research Energy Symposium also in Manhattan. Additionally, Elijio will participate in the Capital One Securities Energy Conference in New Orleans on December 8. We hope to see some of you at those events. Thank you for your interest at CSI Compressco. Thank you for taking the time to join us. That concludes our call.

[Operator:]

And thank you, sir, for your time. This does conclude today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.