CSI Compressco LP
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Good day and welcome to the Compressco Partners LP Third Quarter Results Conference Call. All participants will be in listen only mode. (Operator Instructions) After today’s presentation, there will an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I’d now like to turn the conference over to Mr. Ron Foster, President and Director. Mr. Foster the floor is yours, sir.

[Ronald J. Foster:]

Good morning and thank you for joining the Compressco Partners third quarter 2013 results conference call. Before I begin my presentation I must first remind you that this conference call may contain statements that are 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 performances and that actual results may differ materially from those projected in the forward-looking statements. In addition in the course of the call we refer to EBITDA, 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 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 filed with SEC on or before November 15, 2013. Compressco Partners LP is a provider of compression-based production enhancement services, which are used in both conventional wellhead compression applications and unconventional compression applications, and in certain circumstances, well monitoring and sand separation services. We provide our services to a broad range 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 third quarter 2013 results for Compressco Partners. On October 21, 2013, we announced that the Board of Directors and the General Partner declared an increased cash distribution attributable to the third quarter 2013 of $0.43 per common unit. This increase marks the fourth distribution increase in the past five quarters. The third quarter distributions will be paid on November 15 to unitholders of record on November 01, 2013. Compressco Partners is managed by Compressco Partners GP Inc., which is an indirect wholly-owned subsidiary of TETRA Technologies Incorporated, a New York Stock Exchange listed company. With those comments behind, let me move into several key operational topics including overall company view and fleet statistics, our North American operations and emerging service offerings. I will then turn the call over to James Rounsavall, JR, for his comments on the financial statements including cash flows and then finish with some additional comments following our Q&A session. Overall comment, a real solid quarter with strong earnings before tax and net income growth compared to the second quarter 2012 and a robust 1.23 distribution coverage ratio against a highest distribution level of $0.43. Our sales efforts in the U.S. markets that we serve continue to generate strong net set activity and speak volumes for our team efforts. As discussed in the second quarter call, we were seeing signs of slightly improved demand for our services in Mexico, investments and dedicated efforts into other areas such as Argentina, Canada and European markets are also generating revenue growth. Our management team continues its focus on efficiency and cost control within all areas of operations such as sales, service and G&A. These trends and determinant efforts are reflected in the third quarter 2013 results including earnings before tax of $5.3 million, which increased by $2.3 million or 73% compared to the second quarter of 2013. Our current distribution of $0.43 per unit represents a 11% increase from our minimum quarterly distribution or MQD of $0.38 to $0.75 per unit. Looking at the fleet for the three months ended September 30, 2013, the average number of compressors in active service of 3,346 units is 126 units or 4% higher than the second quarter of 2013 and 321 units or 11% higher than third quarter of 2012. We have grown our total fleet by 300 units or 8% compared to the third quarter of 2012. This fleet growth in 2013 continues to follow a strong U.S. demand for unconventional applications, primarily associated gas recovery. Year-to-date, we have added 251 units to the fleet with 45 units added quarter to-date while achieving our average year-to-date utilization of 85.3%. The current split of service applications between conventional and unconventional in the U.S. business now approximates greater than 30% for unconventional applications. Compressco’s Latin America operations while down compared to the third quarter of 2012, improved sequentially compared to the second quarter of 2013. Our investments into Argentina have performed to our expectations while we have also seen steady improvements in demand for our compression services in Mexico compared to the second quarter of 2013. In addition to the second quarter staffing reductions in Mexico, we took additional reductions during the third quarter to align our personnel staffing to the business needs. We also took actions to move equipment from Mexico and redeploy to areas of operation within the U.S. specifically for unconventional services. Lastly, we are very excited to discuss emerging service opportunities. As part of our growth strategy, we see the benefits, opportunities and synergies for our sales and service organization in the adjacent horsepower range between 80 and 300 horsepower. This mid-level horsepower high discharge pressure segment has attractive customer opportunities for our compression services within this range and several other areas we currently support with service infrastructure. We’re again acquiring assets, skills and training to provide these mid-horsepower compression services, primarily to gas lift markets in the horizontal oil drilling shales. Following JR’s comments, I will have some closing comments at the Q&A session. We now like to turn it over to JR.

[James P. Rounsavall:]

Thank you, Ron. Further covering our third quarter financial results at September 30, 2013 Compressco Partners’ total revenues increased 4.5% over the third quarter of 2012 compared to the prior year third quarter compression and other services revenues increased $1.2 million, reflecting strong demand for unconventional applications in the U.S. as Ron mentioned, and increased demand for compression services in Argentina, partially offset by reduced service levels in Mexico. In the third quarter of 2012, Mexico provided higher levels of well monitoring and sand separation services. Sequentially, compression and other services revenues increased over 6% compared to the second quarter of 2013. Revenue growth was driven primarily by increased compression services in the United States and Argentina. We also recorded increased sales of compressors and parts in both domestic and international markets. We are also pleased to see a 6.3 sequential percentage point reduction in cost of compression as a percentage of compression services revenues. This is driven by continued cost and efficiency focus, particularly in the United States of Mexico. Cost savings measures in Mexico reduced labor and related expenses by $500,000 sequentially in the third quarter. SG&A was down slightly compared to the third quarter of 2012. Sequentially, SG&A was $238,000 higher than the second quarter. The third quarter, SG&A cost included higher non-recurring professional consulting expenses. Our effective tax rate for the quarter was 21.4%, an 18.1% year-to-date. The mix of income between the LP including its international subsidiaries and our U.S. federal taxpaying ID entity, which includes the sales of compressor units are drivers to our effective tax rate. On the balance sheet side, at September 30, we finished with a cash balance of $10.1 million accounts receivable. We continue to see DSO improvement during the third quarter on improved collections in Mexico. $4.8 million in fixed assets in additional expansion CapEx during the third quarter focused principally on the United States and used primarily in unconventional applications with the approximate fleet investment split evenly between GasJack, and V-Jack units, and some mid-horse power compression unit and 3 million CapEx borrowing bringing debt on the balance sheet to $24.5 million. Our unaudited third quarter combined statements cash flows reflect accounts receivable generating a source of cash of $1.7 million during the third quarter, which follows a use of cash of $8.2 million in the first quarter of 2013 and $300,000 source of cash in the second quarter. Accounts payable use of cash of $2.3 million due as we reduced the affiliate payable with TETRA. And the investing activities as I mentioned in fixed assets mostly expansion capital expenditures for the third quarter of $4.8 million. As Compressco announced on October 15, we have entered into a new asset-based credit agreement. The new credit agreement includes the maximum credit commitment of $100 million and includes an uncommitted $30 million expansion feature. The actual credit availability is determined by calculating the applicable borrowing base. I encourage you to review our Form 10-Q when it’s filed and at this time I will open the call for questions.

[Operator:]

Thank you, sir. We’ll now begin the question-and-answer session (Operator Instructions) Our first question comes from Joe Mcmanamon [ph] of Raymond James. Please go ahead.

[Unidentified Analyst:]

Good morning guys.

[Ronald J. Foster:]

Good morning, Joe.

[James P. Rounsavall:]

Hi, Joe.

[Unidentified Analyst:]

I was wondering if you could maybe shed some light on Mexico going forward into 2014, maybe that the timeframe for when you see maybe significant improvement with the budget issues?

[Ronald J. Foster:]

Hey good question. Well, we continue to see assets going back to work in Mexico was slightly improved as we had talked about in the second quarter call. We do see some during the fourth quarter some of the contracts that we work under are going through the rebate process, which is normal. We are well positioned there. We have a strong management team in Mexico, long-term presence and infrastructure there. So we feel very confident in retaining those contracts. It’s very difficult right now in this budget time our PEMEX to say a lot more than that.

[Unidentified Analyst:]

Okay, and in terms of coverage, you guys saw a big improvement this quarter to 1.23, is that a level you expect to stay around going forward or do we see some more growth essentially?

[Ronald J. Foster:]

But we liked the area at 1.2, that gives us kind of issued for that target with our Board of Directors and that gives us a little power and little – little running room so.

[Unidentified Analyst:]

Okay. And last question…

[Unidentified Company Representative:]

And, okay, go ahead. Go ahead Joe.

[Unidentified Analyst:]

Okay. Last question, do you have any, are you guys going to – go into any acquisitions in the future maybe just shed some light on your M&A prospects?

[James P. Rounsavall:]

Joe, this is JR. We continually seek opportunities one of the areas as Ron mentioned we’re excited that I would say leverages our organic opportunities is do the purchase of mid horsepower compression, Ron can certainly focus on that. That’s a key area of us and the gas lift markets that those units would serve primarily in the United States initially, where we have our existing infrastructure and footprint. With that said, we continue as working as a team on our M&A to evaluate options as it presented or available to us.

[Unidentified Analyst:]

Okay. All right, great. That’s all I have. Thanks.

[James P. Rounsavall:]

Thank you.

[Operator:]

(Operator Instructions) Well it appears that we have no further questions at this time. We’ll go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Ron Forster. Sir?

[Ronald J. Foster:]

Thank you. Well my summary on our third quarter 2013 again, good quarter overall and at above our expectations for improving operations. Compressco continues to invest in expanding our fleet for unconventional resource applications and now for mid horsepower high discharge pressure applications and the gas lift for horizontal shale oil resource plays. Sales and service quality remain in our focus with a challenge to our team to maintain and seek efficiency in our day-to-day operations. This combination will provide our unitholders with solid returns as we look to continue our trend, decreasing distribution. Thank you very much for participating in the call.

[Operator:]

Now we thank you gentlemen for your time. The conference call has now concluded. We thank you all again for attending today’s presentation. At this time, you may disconnect your lines. Thank you and take care everyone.