CSI Compressco LP
Q2 2013 Earnings Call Transcript

Published: 11 Aug 2013

[Operator:]

Good morning, and welcome to the Compressco Partners LP Second Quarter 2013 Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note that this event is being recorded. Now, I would like to turn the conference over to Ron Foster. Mr. Foster, please go ahead.

[Ron Foster:]

Okay, thank you. Good morning and thank you for joining the Compressco Partners’ second quarter 2013 results conference call. Before I begin my presentation, I must first remind you that this conference call may contain statements that are or maybe deemed to be forward-looking statements. These statements are based on certain assumptions and analysis made by Compressco and are based on the number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the company. You are cautioned that such statements are not guarantees of future performance and that activity results may differ materially from these projected in the forward-looking statements. In addition, in the course of our call, we may refer to distributable cash flow 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 as posted on our website, our 10-Q is planned to be released on or before August 14, 2013. Now, we get that out of the way. Compressco Partners LP is a provider of compression-based production enhancement services, which are used in both conventional wellhead compression applications and unconventional compression resource applications, and in certain circumstances, well monitoring and sand separation services. We provide our services to a broad base of natural gas and oil exploration and production companies operating throughout many of the onshore producing regions of the United States. Internationally, we have significant operations in Mexico and Canada and a growing presence in certain countries in South America, Eastern Europe, and the Asia-Pacific region. Our call today will cover the second quarter 2013 results for Compressco Partners. On July 19, 2013, we announced that the Board of Directors and the General Partner declared a cash distribution attributable to the second quarter 2013 of $0.425 per common unit. The second quarter distributions will be paid on August 15 to unitholders of record on August 1, 2013. Compressco Partners is managed by Compressco Partners GP Inc., which is an indirect, wholly-owned subsidiary of TETRA Technologies, Inc. which is a New York Stock Exchange listed company. Before I turn the call over to James Rounsavall, our CFO, I will address some key second quarter operational and financial items focusing on overall Compressco performance which includes Mexico, the U.S., and other international business, quality improvements that better fit our operations such as GasJack engine initiative and our outlook and guidance for the second half of 2013. Overall Compressco performance, the second quarter 2013 earnings before tax of $3.1 million were below our expectations. Mexico operations were impacted by customer budgets more than expected. However, our other businesses have continued to perform well evidenced by the year-over-year revenue growth and improved fleet utilization. The primary reason for Q2 shortfall in earnings and resulting lower distribution coverage was the downturn in our Mexican operations which started late in the first quarter. As discussed in our first quarter call, based on direct feedback with our customer, we expected our services would decline. However, budget reevaluations by PEMEX impacted our business more than anticipated with revenues in Mexico declining by $4.1 million sequentially compared to quarter one of 2013. The decline in Mexico revenues against the higher base of operations following our sequential investments in personnel facilities and equipment in 2012 and into 2013 led to the sequential decline in margins of 2.6%. As we entered the second quarter, we took actions in Mexico on personnel and as it became clear that the activity declines will be large than first expected, additional actions were taken to align our personnel staffing to the business needs and we are now taking actions to move equipment in the other areas of operation. We are pleased that the continued increase in fleet activity particularly in the United States where the majority of our second quarter expansion CapEx was directed. Sequentially, improvements in net set activity have helped our utilization percentages. We will continue to grow the headcount in the U.S. while we continue to improve our pricing on the U.S. businesses, which is up by 2% year-to-date. In addition our cost actions are gaining traction G&A actions will provide approximately $400,000 in salary saving this year. Outside the U.S. and Mexico our investments have contributed to year-over-year revenue growth across all of the businesses. Looking at the fleet for the first three months ended June 30, 2013. The average number of compressors in active service of 3,220 units is 1.45% higher than the first quarter and 295 units 10% higher than 2012. Within the U.S., we have benefited from continued deployment of our electric VJack units and new or upgraded GasJack units. Back in 2012, we started an initiative to improve our GasJack engine quality for both improved runtimes and reduced maintenance costs. This has resulted in a third party sourcing strategy that was implemented in late 2012. We have now begun to see reductions in engine refurbishment costs and have received positive input and feedback on the performance of the upgraded engines that have been installed from our field service technicians. This was a good move for Compressco. On the outlook for the remainder of 2013, while we don’t see a rebound in Mexico until next year, we will see steady improvement over the remainder of 2013 and based on the impact of the second quarter we have adjusted our 2013 guidance. We do remain confident in the intermediate and long-term outlook of our Mexican business and the continued strength of our U.S. and other international businesses. Following – I would like to turn it over now to JR Rounsavall, our CFO and then following his comments and questions I’ll have some closing comments as well.

[James Rounsavall:]

Thank you, Ron. Further covering our second quarter financial results at June 30, 2013 Compressco Partners total revenues increased 12.7% over the second quarter of 2012 on the strength of the United States utilization and a larger domestic fleet. Fleet growth in 2012, was all with in Latin America and our other international businesses having success and growth internationally in 2012 given the current demand our 2013 objectives are principally directed at scale and growth of the U.S. business. Year-to-date we have added 206 units to the fleet with 106 units added quarter-to-date and have achieved an average year-to-date utilization percentage of 84.3. Sequentially, as a result of the U.S. and other international businesses excluding Mexico, our revenues have increased $1.4 million. Sequentially on cost of compression and other services as a percentage of compression and other services revenues increased 2.6 percentage points. On that topic, during the second quarter as Ron mentioned we have taken cost reduction measures to align our organizational structure to our global operations, including reductions in headcount in Mexico, including service and administrative personnel, previously announced consolidation of our service management into dedicated, integrated service solutions group, concentrating on optimization, training, technical services and emissions compliance, the consolidation of our sales and marketing management into a focused combined resource. These actions resulted in overall second quarter severance costs of $216,000. Despite the severance included in SG&A, SG&A was flat compared to the first quarter 2013. On the balance sheet and cash flow, on the balance sheet side at June 30th, we had a cash balance of $9.5 million. Accounts receivable compared to March decreased slightly. We incurred $7 million of additional expansion in CapEx in our successes during the second quarter. As I mentioned, that’s focused principally on the U.S. and used primarily in unconventional applications, and on the liability side, $7 million of CapEx borrowing bringing the debt on our balance sheet to $21.5 million. In our un-audited second quarter combined statement and cash flows reflect an accounts receivable generating a source of cash of $300,000, which compares to a use of cash of $8 million in the first quarter 2013. Accounts payable use of cash of $1.5 million, as we have reduced primarily the affiliate payable with TETRA, and our investing activity for expansion CapEx for the first quarter of $7 million. To provide additional liquidity to our operations, we took actions to amend our credit facility, to increase our credit commitment to $40 million, while retaining an additional $20 million accordion feature. Regarding subordinations, Compressco also passed the second four quarter subordination period ended June 30, 2014. I now encourage you also to read our Form 10-Q when it is filed. And at this time, we will open the call up for questions.

[Operator:]

Thank you. At this time we will begin the question-and-answer session. (Operator Instructions) And the first question comes from Jim Rollyson with Raymond James.

[Jim Rollyson:]

Good morning guys.

[James Rounsavall:]

Hi, Jim. How are you? Good morning.

[Jim Rollyson:]

Good. Ron, let’s go back to Mexico.

[Ron Foster:]

Okay.

[Jim Rollyson:]

Obviously, you are not alone with the issues the budget issues that PEMEX has had up in the North, maybe if we could spend a minute going through kind of how many units or how much horsepower units you’ve got there today, what that was running maybe at the peak, what it’s down to now. And as we think about this going forward, it sounds like what’s down now is probably going to stay down through the end of the year until the budget resets, but you are talking about some units into other places, so just maybe how we should think about what’s happened, where we are today and where that – those units can go and kind of how that proceeds going forward?

[Ron Foster:]

Okay, well the great news is during the ramp up of 2012 we did put new units that we manufactured for the purpose into Mexico which are in demand right now in both the South Texas, Colorado areas. So, we do plan to relocate those while we write this out.

[James Rounsavall:]

Back into the first quarter and into late last year and into the first quarter, the revenues generated by our Mexican operations had gone over the 30% level and they are now back down into the mid-20 percentages. As Ron mentioned of course on the compression side the number of GasJacks or a tie-up as Ron mentioned that are very well suited to be transported back into South Texas principally and then we can re-direct units also coming out of the plant into other areas of the U.S. And additionally on that we have – we are reevaluating our third and fourth quarter CapEx to balance increased utilization which reduced CapEx Jim.

[Jim Rollyson:]

Okay. And so I guess from a margin standpoint, obviously your moving pieces in the quarter hit the margins, should we think I think implied in your guidance is that margins kind of gradually get better in the second half, is that – am I reading that right?

[Ron Foster:]

Yes, yes.

[James Rounsavall:]

That’s correct, Jim. Good point. As those units came off of location there was repair and maintenance to get them ready to be redeployed.

[Ron Foster:]

One of the things that we learned from 2008/2009 was is that even though it’s kind of that deals (indiscernible) payment later, we wanted to not just cold stack those units we wanted to get those units ready, where we could redeploy them and most of us noticed. And so we did have some margin here because of doing repair and maintenance on them as we took them offline.

[Jim Rollyson:]

And as – if we go through the next couple of quarters and you redeploy a bunch of those units in the South Texas or Colorado as you mentioned and then PEMEX renews their budget next year and things picked back up, are you going to supply that with new units I assume?

[Ron Foster:]

Either or, either or.

[Jim Rollyson:]

Okay.

[Ron Foster:]

We always have units that we could refurbish, but we just look at the utilization and do what’s best for the customers.

[Jim Rollyson:]

Okay. And last for me JR, maybe coverage dipped below one times in the quarter given what happened in Mexico, my math I guess from the second half with what your guidance implies you are back over one times is that kind of what you are seeing?

[James Rounsavall:]

Yes, sir.

[Jim Rollyson:]

Okay, thank you guys.

[Ron Foster:]

Okay, thanks, Jim.

[Operator:]

Thank you. And your next question comes from TJ Schultz with RBC Capital Markets.

[Ron Foster:]

Good morning, TJ.

[TJ Schultz:]

Hi, good morning. Can you just clarify for me the kind of timing on some of the cost reduction actions that you guys took specifically the Mexico, I think the press release said you started to notice a positive impact as the second quarter ended just kind of wondering how this flowed through and if we should expect more of the impact into the third quarter?

[James Rounsavall:]

Okay, I’ll cover that and then let Ron add any additional comments, but certainly we noticed activity at the end of the first quarter, we started taking actions in April, May from of course from what we’re seeing to this point May was the low point for Mexico including a large proposition of actions on people and repairs and maintenance on equipment, June takes backup both also in some activity on the compression side and we are looking for to as Ron mentioned slight positive sequential improvements as we move forward. There may be some additional actions as we continue to evaluate this on a daily basis, but we are – we exited the quarter with positive trend in Mexico there.

[Ron Foster:]

We just want to make sure that we’re nimble, we want to reduce the headcounts where it makes sense and now we’re looking at redeploying assets, so that will make sense as well. So, we are not sitting there with lot of cost piled up.

[TJ Schultz:]

Okay. And what’s your expectation on growth CapEx the rest of this year?

[James Rounsavall:]

Currently, our plans and I mentioned this a little bit on the last call, but we have modified it down even slightly. We had a run rate of 7 basically in the first couple of quarters, it will be at least half of that while we focus on the redeployment of assets appropriately from Mexico elsewhere and then continue to meet the demand that we are seeing in the U.S., which is very positive and we do have a very flexible manufacturing organization. And so we are capable of ramping it backup, but at this point in time, we think it will be about half of what it was in Q2.

[Ron Foster:]

Yeah, I mean, we certainly want to continue to grow in the U.S., where the makes sense up in the areas where I mentioned South Texas, Colorado, the Bakken and we will – we certainly have the runway ahead of us to provide units there if we have the – the demand keeps as strong at it is.

[TJ Schultz:]

Okay, thanks guys.

[James Rounsavall:]

Thank you, TJ.

[Operator:]

Thank you. And there are no more questions. This concludes our question-and-answer session. And now I’d like to turn the conference back over to Ron Foster for any closing remarks.

[Ron Foster:]

Well, thank you guys. My summary on the second quarter really just the highlight is that we continue to invest in expanding our fleet for unconventional resource applications. We have strong domestic market right now, allowing us to add net units in U.S. and increased pricing. Cost actions are gaining traction on the G&A costs and I misspoke a little bit in my script. I mentioned $400,000 that is an annualized salary reduction run rate not just what we’ll see from now to the end of the year. Cost actions are gaining attraction, we’re reducing those field operations in Mexico and we’re continuing to focus on efficiency and margin improvement.

[Operator:]

Thank you. The conference is now concluded. Thanks for attending today’s presentation. You may now disconnect your lines. Have a nice day.