CSI Compressco LP
Q4 2013 Earnings Call Transcript

Published: 27 Feb 2014

[Operator:]

Good day and welcome to the Compressco Partners, L.P. Fourth Quarter 2013 Results Conference Call. All participants will be in listen only mode. (Operator Instructions) Please note this event is being recorded. Today we have with us Ron Foster, President and Director of Compressco Partners GP and James Rounsavall, Chief Financial Officer. I’d now like to turn the conference over to Ron Foster, please go ahead, sir.

[Ronald J. Foster:]

Good morning and thank you for joining the Compressco Partners fourth 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 may be deemed to be forward-looking statements. These statements are based on certain assumptions and analysis made by Compressco and are based on a number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the 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 may 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 announcements that went out earlier this morning and as posted on our website, our 10-K is planned to be filed with SEC on or before March 15, 2014. 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 markets, 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, Canada and a growing presence in certain countries in South America, Europe and the Asia-Pacific region. Our call today will cover the fourth quarter 2013 results for Compressco Partners. On January 21, 2014, we announced that the Board of Directors of the General Partner declared an increased cash distribution attributable to the fourth quarter 2013 of [$0.4375] per common unit. This increase marks the fifth distribution increase in the past six quarters. The fourth quarter distributions were paid on February 14 to unit holders of record of January 31, 2014. Compressco Partners is managed by Compressco Partners GP Incorporated, which is an indirect wholly-owned subsidiary of TETRA Technologies Incorporated, which is listed on a New York Stock Exchange under TTI. With those housekeeping comments behind me, let’s move into several key operating topics including the overall company view and fleet statistics, our North American operations and more on the SuperJack series and compressor packages. After those I will turn the call over to James Rounsavall, CFO of Compressco Partners for his comments on key financial metrics including cash flows and then finish with some additional comments following the Q&A session. Overall, very pleased to report a great quarter with several milestones as highlighted in our press release and in my discussion today. We finished 2013 strong with high utilization, a quarterly high PBT, introduction of the SuperJack and a 1.46 coverage ratio on increased cash distribution. Looking back at 2013, we entered with momentum leveraging expansion of CapEx into our international markets. As 2013 progressed opportunities for our U.S. and Canadian compressor fleet supported by our sales, service and business support teams resulted in a solid trend of net compressor sets, increased utilization and improving profits. On the cost and efficiency side, we continued our supply chain focus for key components such as the GasJack engine compressor and are starting to see the benefits from this and other quality improvement initiatives in addition to a continued focus on cost control. These trends and focused efforts are reflected in fourth quarter 2013 results including earnings before tax of $6.1 million which increased 15% compared to the third quarter 2013. Our current distribution of $0.4375 per unit represent a 13% increase from our minimum quarterly distribution, MQD up $0.3875 per unit. Looking at the fleet for the three months ended December 31, 2013, the average number of compressor in active service at 3,426 units is 25 units or 1% higher than the third quarter 2013 and 228 units or 7% higher than the fourth quarter 2012. Year-over-year we’ve grown our total fleet by 252 units or 7% compared to the end of the fourth quarter 2012 achieving a average year-to-date utilization of 85.6%. Our fourth quarter 2013 manufacturing schedule also included higher levels of compressor packages sold to customers in both international and domestic markets certainly a factor for the quarter. We finished 2013 with year-to-date revenues of $121.3 million up 12% from 2012. Geographically the U.S. and Canada increased as percentages of the total reflecting the shift in revenue mix supporting demand for unconventional services. U.S. and Canada revenues account for 65.1% of our 2013 revenues compared to 63.5% of our 2012 year-to-date revenues. Liquids and oil related services have grown throughout 2013 and represent 30% of our Q4 2013 revenue mix, a primary driver to our U.S. revenue growth in 2013. Compressco’s Latin America service levels are down compared to the fourth quarter of 2012 when we continued to benefit from higher activity in the northern region of Mexico primarily in the [indiscernible] field. Our Argentina have performed to our expectations and we will continue to monitor overall economic climate there closely. The newest addition to our compressor fleet is the SuperJack. As I noted in the third quarter results conference call we see customer opportunities for compression services using three stage high pressure discharge packages within the 80 to 300 horsepower range in several of the areas we currently serve. We’ve acquired compressor packages in this adjacent horsepower range to provide gas lift services primarily in the horizontal shale oil drilling resource plays. I will now turn the call over to James Rounsavall, CFO of our Compressco Partners for additional comments on our results and financial position and I will have closing comments at the Q&A session.

[James P. Rounsavall:]

Thank you, Ron. Further covering our fourth quarter financial results at December 31, 2013 Compressco Partners’ total revenues increased 8.3% over Q3. In Q4 2013 we recorded increase sales of compressors and parts in both domestic and international markets as Ron mentioned, the timing of which are difficult to predict and have certainly benefitted the fourth quarter. Compared to the prior year fourth quarter compression and other services revenues decreased $1.8 million as Ron mentioned reflecting reduced activity levels in Mexico comparatively which we’ve discussed during 2013. In the fourth quarter 2012, Mexico provided higher levels of well monitoring in conjunction with production enhancement services. And as highlighted in our release, in the U.S. We’ve seen our compression and other services revenues increase compared to the prior year based on demand and conventional applications in the U.S. and increased demand for compression services in Argentina. We’re pleased to see a 1.8 sequential percentage point reduction and cost of compression as a percentage of compression services revenues during the fourth quarter of 2013 compared to the prior year fourth quarter. This decrease is driven by our continued cost and efficiency focus particularly in the U.S. and Mexico. SG&A was down 8% compared to the fourth quarter of 2012 and was flat sequentially. Our effective tax rate was 11.4% year-to-date, increased business in the partnership MLP businesses in the U.S. reduced the taxable mix of income overall. On the balance sheet and cash flow summary at December 31, 2013 our cash balance was $9.5 million, we continued to see DSO improvements again in the fourth quarter on overall U.S. activity levels and improved collections in Mexico, $4.6 million in expansion CapEx focused principally on domestic business including the acquisition of SuperJack compressor packages and fleet upgrades, $5.6 million borrowing bringing debt on the balance sheet to $30 million. Our unaudited fourth quarter combined statement of cash flows reflect accounts receivable generating a source of cash, accounts payable use of cash of $6.7 million primarily due to reducing the AFO etcetera. Investing activities with mostly expansion CapEx of $4.6 million and our U.S. fleet showing a fifth consecutive quarterly increase. We finished 2013 with an overall fleet mix of 95% GasJack compressors and remaining 5% VJack in our initial investment of SuperJack compressor packages. These investments and service offerings provide both electric and natural gas powered solutions to our customers and horsepower ranging from 40 to over 200 horsepower. I encourage you to review our Form 10-K when it’s filed and at this time we will open the call for questions.

[Operator:]

Thank you. (Operator instructions) Our first question comes from Jim Rollyson with Raymond James.

[Jim Rollyson:]

Good morning, guys.

[Ronald J. Foster:]

Hi, good morning Jim.

[James P. Rounsavall:]

Good morning.

[Jim Rollyson:]

Great results. On that topic, Ron if you look at 4Q and you look at the earnings you posted and EBITDA you posted, think about that going forward. Trying to understand the sustainability of 4Q because it seems like the compressor package sales that tends to be more lumpy, but I also presume you didn’t get that much benefit from the gas lift business, help me understand maybe apples-and-apples between say 4Q and 1Q and how repeatable is doing $0.40 a unit?

[Ronald J. Foster:]

Well, always sales are lumpy and they come at unusual times and they’re good when they happen. But, the biggest driver is, we’re seeing much better fundamentals in the national gas market place for both our conventional services and then continued demand in the out conventional side. We’ve invested in the SuperJack units because we see good demand from our mark E customers in the gas lift market place which is driven by an AFE expenditure not a lease operating expense. So, we think that’s a very positive sign and expect that would continue to show growth.

[James P. Rounsavall:]

Jim, this is JRR, I will add as in our financial guidance release that we do expect, we tend to see some seasonality in that first quarter it always a challenge for us, although we’re very optimistic of where we stand moving into 2014 as Ron mentioned with the fundamentals as we see them. We do expect Latin America to be flat and a challenge for us as it has been, we watch that carefully and great leverage with TETRA down there to leverage those operations in Mexico. And so, lot of focus on that as you mentioned, the unit sales hard to predict but that compression business, we see a U.S. and Canada strong and Latin America flat and then improving in the second half of the year.

[Jim Rollyson:]

Okay that’s helpful. Just on the gas lift business Ron, you had a little bit of contribution, but you finally got in the business with the acquisition of the units you bought from customers, is the plan for now just to continue to organically add units to those customers maybe what are the prospects for expanding beyond those customers or I presume you guys are still looking on the M&A side, just a little color on how you see the gas lift side of your business progressing through the year or next few years?

[Ronald J. Foster:]

Great question. Obviously, there is a, we’re following a parallel path to accelerate the organic side of that to continue to acquire units for the SuperJack line in gas lift business, but at the same time we’re also targeting different acquisitions that we’ve identified in some of the domestic liquid rich resource plays.

[Jim Rollyson:]

Okay. And last one, just relative to the, I think, you said the unit count was up 7% in 2013, when you look at what’s going on demands where customers today, how do you think the growth rate looks in 2014?

[Ronald J. Foster:]

We’re optimistic at this point, as mentioned in our guidance we’re increasing our overall CapEx to an estimate of $34 million for 2014 and based on where we see those greatest demands we will adjust between VJacks, GasJacks and SuperJacks, but we’re planning to expand more than we did in 2013.

[Jim Rollyson:]

Okay, helpful, again thanks.

[Operator:]

(Operator Instructions) Our next question comes from [Indiscernible] with JP Morgan.

[Unidentified Analyst:]

Good morning.

[Ronald J. Foster:]

Good morning.

[Unidentified Analyst:]

Yes, I had a quick question on chiming in of Eger, on 2014 guidance I was wondering whether you can provide more color specifically to I guess how much of the cost cutting efforts are, I guess in the guidance and also the breakdown between compressor sales and compression services?

[James P. Rounsavall:]

Sure, this is JRR. I will take the first piece of that. As we look on the cost side, where we see opportunities in 2014 not only in the U.S. and Canada, U.S. in particular and Mexico are that as we continue to have net set increases, our unit density and the ability to leverage off on the SuperJack side that existing infrastructure, we see that as very positive for us and we will contribute to them on the margin side through leveraging that infrastructure. Same thing in Mexico, we’ve taken actions throughout 2013, we continue to look at that business while preparing for the upside that we see later in 2014. And so, our plan is focused on, we did not put into the plan Q4 levels consistently throughout 2014 on the compressor sale side or parts. It’s focused on compression on that base business growth and the uptick that we see later in 2014 coming through from Latin America.

[Ronald J. Foster:]

And I just kind of like to second JRR’s comment that our SuperJack market entry into an adjacent wellhead compression strategy, so we’re able to leverage our existing infrastructure. It’s not like we’re having to go out and build our service infrastructure to enter a new market, we already have that in place. So, we see that as being a very good opportunity.

[Unidentified Analyst:]

It’s helpful, that’s it for me.

[Ronald J. Foster:]

Thank you.

[Operator:]

(Operator Instructions) Our next question is from Jonathan Sisto with Credit Suisse.

[Jonathan Sisto:]

Good morning gentlemen.

[Ronald J. Foster:]

Good morning.

[Jonathan Sisto:]

Ron, maybe you could talk about the regulatory landscape and how that may benefit vapor of covering some of those applications?

[Ronald J. Foster:]

Sure. As we’ve seen over the past several years we’ve added emerging environmental farming in United States, reductions in the BOC omissions as a [indiscernible] organic compounds and in 2015 it go in effect, we see Quado regulations which are going to require more emphasis on vapor recovery of tank batteries, reduced flaring, reduced omissions in the atmosphere and then as we see even in the well testing business, we’re using some technology there to recover the gas instead of just winning that to atmosphere as well. So, we see that as a good signal for us, as we mentioned earlier in the call, a lot of our pickup in 2013 fourth quarter was due to the conventional side, vapor recovery and so we do benefit from these new environmental regulations.

[Jonathan Sisto:]

And you touched upon the growth in your units year-over-year, kind of rolling out some new ERP systems and processes right to the guys in the fields have a little bit better handle on inventory and where jobs are on demand, can we speak to that?

[James P. Rounsavall:]

Yes, we’re investing in enhancing scaling our financial and business support systems, we’ve a program in place working alongside with TETRA and third party consultants on that and a primary objective, you just hit on it, primary objective of that program is to scale the business for the future and to provide much greater insight throughout our business into the profitability by compressor and so forth. So, we’re excited about that program, we’re excited about the future that will present to us in terms of greater analytical and capabilities to run the business.

[Ronald J. Foster:]

As an efficiency driven investment for sure.

[Jonathan Sisto:]

Have you guys put kind of a timestamp on when you hope to be done with all that implementation?

[James P. Rounsavall:]

Yes, in the second half of the year.

[Jonathan Sisto:]

Oh, great, okay. Thanks guys.

[Ronald J. Foster:]

Thank you.

[Operator:]

(Operator Instructions) There appears to be no further questions, so this concludes our question and answer session. I would like to turn the conference back over to Ron Foster for any closing remarks.

[Ronald J. Foster:]

Okay, great. I’m proud of the efforts demonstrated throughout fiscal 2013 with Compressco, our commitment to provide to high quality production enhancement services responding to the market drivers and evidenced by our quality initiatives, investment to upgrade our fleet and new service offerings are providing the platform for revenue growth. We’re cost effectively leveraging our sales and service infrastructure to expand the product offerings as I mentioned such as the SuperJack series of compressors. And we continue to seek out value added investments both organically and through the M&A process with the stated goal of escrow and to scale and grow the partnership to add further value to our unit holders. Thank you for attending the call today, thank you for your support.

[Operator:]

The conference is now concluded, thank you for attending today’s presentation, you may now disconnect your line.