CSI Compressco LP
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Good morning, and welcome to the Compressco Partners L.P. Third Quarter 2014 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tim Knox, President and Director of Compressco. Please go ahead, sir.

[Timothy A. Knox:]

Good morning, and thank you for joining the Compressco Partners Third Quarter 2014 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 forward-looking. 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 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, distributable cash flow, distribution coverage ratio or other non-GAAP financial measures. Please refer to this morning's press release and to our public website for a reconciliation 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 complete context of financial results for the period. In addition to our press release announcement that went out earlier this morning and is posted in our website, our Form 10-Q is planned to be filed with the SEC on or before November 14, 2014. Next, I'd like to take a minute to introduce myself. As I'm new to this conference call, again, my name is Tim Knox. Following the acquisition of Compressor Systems on August 4, 2014, I was named President of Compressco Partners. I've been in the industry for about 23 years, starting with Dresser-Rand in the early '90s and then worked for Compressor Systems for a little over 18 years, serving as President and CEO of CSI since October 2010, and again named into this role with the acquisition. Ron Foster, who served as the prior President of Compressco, remains with and very active in the organization. Ron brings his 30 years of industry experience and 12 years with Compressco into this larger organization, and Ron has been serving as President at Compressco since 2008. Ron is on the call with us this morning and may participate in the question and answer. Compressco Partners is a provider of compression services and equipment for natural gas and oil production, gathering, transportation, processing and storage. Compressco Partners consists of a fleet of over 6,000 compressor packages providing in excess of 1 million horsepower, utilizing a full spectrum of low-, medium- and high-horsepower equipment. Compressco Partners' equipment and parts sales business includes the fabrication and sale of standard compressor packages, custom-designed compressor packages and engine-driven oilfield fluid pump systems designed and manufactured at our facilities in Midland, Texas and Oklahoma City, Oklahoma. Compressco Partners' aftermarket service business provides compressor package reconfiguration and maintenance service. Compressco Partners customers comprise a broad range of natural gas and oil exploration companies, midstream, transmission and storage companies operating throughout many of the onshore producing regions in the United States as well as in a number of foreign countries, including Mexico, Canada and Argentina. On October 20, 2014, we announced that the Board of Directors of the general partner declared an increased cash distribution attributable to the third quarter of 2014 of $0.46 per common unit. The third quarter distribution will be paid on November 15 to unitholders of record on October 31. Compressco Partners L.P. is managed by Compressco Partners GP Inc., which is an indirect wholly-owned subsidiary of TETRA Technologies, trading on the New York Stock Exchange as TTI. Our call today will focus primarily on the partnership's financial results for the third quarter 2014, including a status update of our business integration, review of the combined compressor fleet and third quarter results of operations, including the impact of our acquisition of CSI to the combined business. I'll then turn the call over to James Rounsavall for his comments on the details of the CSI acquisition-related costs, other nonrecurring items and the balance sheet and cash flow items. After some question and answer, I'll conclude with some final comments. Since joining the partnership in conjunction with Compressco's acquisition of CSI, I've had the opportunity to meet with numerous Compressco employees and enhance my understanding of the legacy Compressco business. Likewise, many of the key managers of Compressco have had the opportunity to learn more about CSI. Shortly after the acquisition, we announced the executive leadership team, including members from both organization. Integration teams led by the executive group members representing sales, operations, engineering, manufacturing, finance, accounting and other disciplines were formed and have been working to identify best-fit functional organizations for the combined entity going forward. We anticipate wrapping up this process within the fourth quarter, rolling out and then working from the defined organizational structure early in 2015, if not sooner. 90 days into this new company, I'm very pleased with the progress made and appreciative of the outstanding efforts being put forth by the employees. At the conclusion of the second quarter 2014, prior to the acquisition of CSI, the partnership compressor fleet consisted of over 4,000 compressor packages, totaling just over 187,000 horsepower, which were primarily the 48-horsepower GasJack units. The August 4 acquisition of CSI added over 2,200 compressor packages, totaling in excess of 860,000 additional horsepower. The CSI fleet significantly expanded our compression and related services offering, with equipment now ranging from 20 horsepower to 2,370 horsepower per compressor package. At the end of the third quarter 2014, our fleet consists of approximately 6,350 compressor packages totaling almost 1.1 million horsepower. As of September 30, over 920,000 horsepower were generating revenue. Moving then into results of operations for the 3 months ended September 30, 2014. Our single-segment compression operation consists of 3 lines of business

[James P. Rounsavall:]

Thank you, Tim. It's been a very active quarter and we're pleased to report so many accomplishments. That's the acquisition of CSI, of course; an ERP implementation at legacy Compressco; and the start of the integration process within the new organization. I'll take a few moments to walk you through the impact to some of the nonrecurring charges in this quarter. Third quarter 2014 income before tax provision, excluding nonrecurring items, is $6.7 million. It includes a full quarter of legacy Compressco and the CSI results from August 4 forward. The unusual items includes costs related to the acquisition of CSI of $9.7 million, including $2.1 million within SG&A and $7.6 million within other expense. During the third quarter 2014, we implemented TETRA's Oracle ERP, configured to meet the Compressco business. As part of this project, we incurred $900,000 of training and noncapital-related costs, which are reflected in SG&A. This system serves as a platform to add the CSI business in the future and leverage activities under the omnibus services agreement. We recorded a tax benefit in the third quarter. The impact of the CSI transaction costs and other nonrecurring items impacted the quarter results. Removing the $900,000 ERP cost and $9.7 million CSI-related transaction cost discussed above, effective tax rate in the third quarter 2014 would've been 11%, representing primarily taxes on foreign earnings. The stepped-up basis on the acquisition asset will result in reduced tax payments over time. Distributable cash flow was $19 million, which afforded us the opportunity to declare distribution of $0.46 per common unit, as Tim mentioned. Our coverage ratio of 1.21 was consistent with our expectations. Our unaudited September 30, 2014, balance sheet includes a cash balance of $21.2 million. And CapEx, we had additions of $20.4 million, including $18.5 million in expansion CapEx. We added approximately 17,000 horsepower to the fleet, principally in domestic compression packages. Our long-term debt of $510 million includes $345 million senior notes and $165 million on -- outstanding on our credit facility. I encourage you to review and read our Form 10-Q when it is filed. And at this time, we will open the call for questions.

[Operator:]

[Operator Instructions] The first question will come from Gabe Moreen of Bank of America Merrill Lynch.

[Gabriel P. Moreen:]

A couple of questions for you. Could you just talk about, I guess, CapEx expectations and horsepower deployment maybe for 2015 in terms of Compressco's owned horsepower as opposed to third-party sales?

[Timothy A. Knox:]

Certainly. As we've previously stated, we anticipate in 2015 to have $90 million to $100 million spent in growth CapEx, which is -- it's a blend in the -- we hate to keep talking about legacy Compressco and legacy CSI, but in the old CSI business, we would be targeting average 1,000 horsepower-per-unit packages. And of course, we're also going to continue to grow the GasJack product line. So we have this interesting mix of 48 horsepower as well as 1,000 horsepower. I'm not sure it's worthwhile talking about the average of those 2. But $90 million to $100 million in growth CapEx, somewhere out in the 80,000 horsepower addition to the fleet.

[Gabriel P. Moreen:]

Got it. And then also in terms of the equipment sale backlog, has that changed at all over the last couple of weeks? Or anything trending differently than you'd seen previously?

[Timothy A. Knox:]

The equipment sales business is a long-lead product, so over the couple of -- last couple of weeks now, there's no changes in the trends. Right now, sitting with about $140 million in backlog, and by that we mean orders where we have the purchase order in hand. It's a contracted sale. And that has been a fairly stable value, maybe running in the $130 million to $150 million over the past, well, throughout the diligence period, so over the past 6 months for sure.

[Gabriel P. Moreen:]

Got it. And then, I guess, the last question for me is just sort of the larger-picture question. I know there wasn't much overlap between legacy Compressco and legacy CSI. But in terms of customer behavior, mix, utilization, have you seen any customers drop you guys or go elsewhere? I'm just curious just to make sure that everything -- you feel the integration's gone well culturally and practically.

[Timothy A. Knox:]

So culturally, for the employee base, the large majority of our roughly 1,000 employees in the U.S. are conducting business as usual, and like I mentioned, we're working through some integration teams and will soon be internally rolling out org charts and some of those issues down to the -- every employee level. From a customer standpoint, certainly no defection. It's been quite the opposite. We've had customers -- there are some similarities in customers, of course, in the gas production and -- oil and gas production business and the gas compression business. But we've had some customers where one or the other of the 2 companies, which previously not able to offer maybe the little equipment the customer needed or maybe not the big equipment the customer needed. And so we're actually benefiting from that already, but there's been no issue with customers deciding to go elsewhere. Of course, I'm not sure why they would want -- or make that decision when there's simply a larger offering than there used to be.

[Operator:]

Our next question will come from Jeremy Tonet of JPMorgan.

[Andrew R. Burd:]

It's actually Andy for Jeremy. A quick question about the recontracting of legacy CSI operations into more MLP-friendly contracts. What's the progress with that? And kind of how can we think about the tax situation going forward?

[Timothy A. Knox:]

Well, of course, it's very important to us to get the 800 whatever-it-is thousand horsepower [indiscernible] into the MLP universe and that's something, obviously, planned from the beginning and a big part of the acquisition was done. So the contracts have been developed. Contact has been made with our customers or many of our customers. And of course, this is not new for Compressco. Compressco went through the conversion a few years ago. It's also not new for our customers because so much of the compression supplier business has moved from rentals to a compression service over the years. So no big shock. Nothing new, either to us or to the customers. We've said during the time of the acquisition, the economics were put together anticipating a 12- to 18-month cycle to get contracts converted, so we are consistent and confident with that. And also, stepped-up tax basis of the assets shield us from U.S. income tax during this 12- to 18-month period, so it's moving in line with where we thought it would when these conversations started.

[Andrew R. Burd:]

And then second and final question, it seemed like the 2Q utilization -- or excuse me, third quarter utilization exit rate was fairly good relative to history. Any type of color you can provide quarter-to-date in terms of -- specifically with the gas lift operations and the commodity weakness that we've seen? Has that acceleration kind of persisted into the quarter? Or might there be some headwinds in that business? Or have you just seen business as usual?

[Timothy A. Knox:]

Yes, we're seeing business as usual, yes, business as usual.

[Operator:]

Our next question will come from John Woodial [ph] of Raymond James.

[Unknown Analyst:]

I was just curious, given the increased level of debt that you all have had, is there some kind of a long-term target in mind for your leverage ratio?

[James P. Rounsavall:]

Yes. This is JR. We do have a -- over time, the target to decrease that leverage ratio down in the mid-3s.

[Unknown Analyst:]

And then also, I was just wondering what is the best way that it would be able to look at the way your gross margins would progress with time.

[James P. Rounsavall:]

Excellent question. Certainly, we're going through and have started the conforming process this quarter with our new results to take the CSI business and the Compressco business and align the financial statement reporting. So that this quarter is the baseline in terms of those product lines and product service line margins in terms of our -- the new combined partnership baseline results. And then we've, of course, on the call, discussed the nonrecurring items that were included within SG&A and other expense, so that everyone can take those into account as well.

[Operator:]

Our next question will come from Matt Harris of GSO Capital Partners.

[Matt Harris:]

Quick technical question. Just looking at the most -- I guess, the presentation from the bond roadshow, there was a pro forma LTM EBITDA, 1 17 without synergies. And then you're reporting here -- so it's $14 million. Are you saying that we're supposed to add that kind of $10 million back to that to get to where you would've been if you had CSI for the full quarter and there weren't the reoccurring charges -- the nonrecurring charges?

[James P. Rounsavall:]

Yes, for the period from August 4, it's not -- the first full quarter will be the fourth quarter.

[Matt Harris:]

Yes, I guess what I'm saying is if you took 2 quarters of CSI and a full quarter of legacy, you should've been more like in the $22-ish million or $21 million kind of dollar EBITDA area, based on this LTM number. So what I'm thinking is that the add backs that you -- all I've seen is the press release, so I didn't see any adjustments or anything. So I'm basically just asking is the $9.7 million of unusual items, should we be adding that back to EBITDA?

[James P. Rounsavall:]

Yes.

[Matt Harris:]

Okay, cool. So you're actually slightly ahead of this 1 17 number and probably haven't realized the synergies yet, I would assume?

[James P. Rounsavall:]

Right, that's starting the integration process. As Tim mentioned, those teams formed, reporting in, developing their plans and so forth and rolling out the organizational charts.

[Matt Harris:]

So you would say adjusted EBITDA, the kind of true cash flow for the quarter was closer to like $22 million, $23 million?

[James P. Rounsavall:]

Yes, $25 million and an 11% tax rate.

[Matt Harris:]

Right. And then just a more macro question. How do you -- looking at possibly kind of a lower-commodity deck next year, how are you feeling about kind of the supply of compression? Like, is there a lot of new build compression coming into the market? Or are you pretty comfortable where you are and not too worried about that?

[Timothy A. Knox:]

We're very comfortable with where we are and what our growth plans are. You can look in the industry to determine where other people are and what growth is planned there. We have a customer base that we're very comfortable with, and of course, always wanting to grow that, so we feel comfortable with the commodity prices doing what they're doing. Of course, this whole oil and gas industry is obviously cyclic. We've been through cycles before. Was counting this morning, trying to count how many of my 23 years had significant cycles and, of course, this was not significant yet. Compressions, historically, have been less sensitive than other service businesses to commodity prices. If gas is moving, gas is being compressed. We've seen some, oh, some write-ups and reports indicating that U.S. consumption might go from the 25.5 Tcf a year up to 30.5 Tcf a year by 2019, so that bodes well for the need for compression.

[Matt Harris:]

How much of your compression -- like, how much of your utilized fleet today is compressing gas coming from liquids-directed drilling, approximately?

[James P. Rounsavall:]

You look at the legacy Compressco business, the mix is still roughly -- we're in that 70%, 30%, call [ph] the small horsepower below 100% and...

[Timothy A. Knox:]

State [ph] which way.

[James P. Rounsavall:]

70% related to -- 30% liquids related.

[Timothy A. Knox:]

Right. So what we've been seeing and according to the rough numbers that we're speaking to in generality, for new equipment going to the fleet, probably 80% of the new equipment is going out into the liquid-rich plays, going to the Eagle Ford, going to the Permian basin. But of course, we've got a significant amount of horsepower deployed in the Barnett Shale and Haynesville and other dry gas areas, and gas prices right now look pretty good compared to maybe 2 years ago.

[Matt Harris:]

It might -- so in the event that commodity prices do stay low, it might hurt your growth a little bit. But it's not going to hurt your base business. It's 70% gas, 30% liquids directed.

[Timothy A. Knox:]

Yes, again, I'm very comfortable with the growth plans we have. The fact that we have a significant backlog in the manufacturing or in the sold equipment business also gives us a nice bit of headroom to make adjustments if necessary, if the market does turn. But I'm very comfortable with our growth plans, and that equipment will be deployed and utilization will remain strong for us.

[Operator:]

[Operator Instructions] And at this time I show no additional questions in the queue. I would like to turn the conference back over to Tim Knox for his closing remarks.

[Timothy A. Knox:]

Well, I just want to say I appreciate everyone's time this morning. I appreciate your interest in Compressco Partners. I look forward to our next call where, for the first time, we will get to report on a full quarter with the CSI in the business. With that, just thank you for your time.

[Operator:]

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.