CSI Compressco LP
Q4 2014 Earnings Call Transcript

Published: 28 Feb 2015

[Operator:]

Welcome to the CSI Compressco LP Fourth Quarter 2014 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Shari Mattern. Please go ahead.

[Shari Mattern:]

Good morning and thank you for joining the CSI Compressco LP fourth quarter 2014 results conference call. Today's presenters will be Tim Knox, President and Director of CSI Compressco LP, and James Rounsavall, Chief Financial Officer. I would like to remind that you 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 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 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, distributable cash flow, distribution coverage ratios and 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 Form 10-K is planned to be filed with the Securities and Exchange Commission on or before March 31, 2015. I would now like to turn the call over to Tim Knox, CSI Compressco's President. Tim?

[Tim Knox:]

Thank you, Shari. We will be covering several topics today, including fourth quarter results and our 2015 guidance. I'll later turn the call over to James Rounsavall, our CFO, to cover the financial details, including nonrecurring items and liquidity. On January 20, 2015, we announced a fourth quarter cash distribution of $0.485 per outstanding common unit, a 5.6% increase compared to the third quarter of 2014 and an 11% increase over the fourth quarter 2013 distribution. This distribution was paid on February 13 to unitholders of record on January 30, 2015. Following up on what was presented in our last call regarding integration of the businesses, significant progress has been made. We introduced the new name, CSI Compressco, along with a new logo and NASDAQ ticker, CCLP. The sales organization under the leadership of Senior Vice President, Ron Foster, has combined in a way that leverages strengths of both former organizations to serve and remain focused on our customers. Likewise, the field service organization, under the leadership of Vice President Brad Benge, has been defined and implemented, operating as a consolidated team, again focused on the customer. I'm pleased to have these major initiatives behind us and look forward to continued progress with integration of business systems. At the end of the fourth quarter 2014, our compression services fleet consists of 6,402 compressor packages, totaling 1,089,151 horsepower, having added about 50 compressor packages and about 17,000 horsepower in the fourth quarter. At December 31, 2014, over 955,000 horsepower were generating revenue, resulting in an operating horsepower utilization of 87.7%. This compares to 85.8% of horsepower utilization at September 30, 2014, with approximately 35,000 net additional horsepower deployed in the fourth quarter. To further highlight the utilization improvement, year-end 2013 pro forma utilization of the combined fleet was 83.7%, with approximately 850,000 horsepower generating revenue. So, net horsepower additions in full-year 2014 for approximately 63,000 horsepower, while net horsepower utilized increased by approximately 95,000 horsepower. Moving into the results of operations for the three months ended December 31, 2014, for the full quarter CSI Compressco were pleased to report another partnership record with total revenues of $124.8 million and EBITDA of $31.3 million. Looking at our three lines of business, within compression-related services we continued to experience strong demand as indicated by our utilization improvements, generating revenues of $75.9 million for the quarter which accounts for 61% of the quarter's revenue. Revenue from aftermarket services was $9 million for the fourth quarter or 7% of the total. Our activity continued primarily in the Permian Basin and Western U.S.. In this aftermarket business, our technicians may maintain, repair, overhaul, rebuild or reconfigure customer-owned equipment. And that work is performed on location or sometimes in one of our regional service facilities. Sales of equipment and parts, at $40 million, represents 32% of our total Q4 2014 revenue. The majority of this fourth quarter 2014 revenue came from sales to midstream customers. We ended the fourth quarter 2014 with a backlog of approximately $120 million in new equipment sales. Before turning the call over to JR, I'd like to reiterate our previously announced fourth quarter distribution of $0.485 per unit. This is the ninth increase in the past 10 quarters and brings us to an annualized distribution of $1.94 per unit. The 1.7 coverage ratio for the fourth quarter reported in our press release this morning is unusually high for the Partnership, but we believe appropriate given the current business climate. With that, I'll turn the call over to JR.

[James Rounsavall:]

Thank you, Tim. It has been a very busy 2014. And we were pleased to report several accomplishments, including the formation of CSI Compressco LP, the organizational structure in place, ninth distribution increase in the past 10 quarters, record Q4 2014 revenues of $124.8 million, Q4 2014 EBITDA of $31.3 million and the increased service fleet utilization, as Tim discussed. With the announcement of the management teams, we're now operating more and more as CSI Compressco. The MLP contract conversion is a top initiative, with intrinsic value to the Partnership and to our customers. To update you briefly on the MLP contract conversion initiative, in our previous calls we have mentioned that we expect this conversion process time line to cover 12 to 18 months. Once the Partnership name changes were wrapped up in early December, we moved into full swing on the conversion process. We have a focused team and they are engaged with our customers. Several conversions are in place, with many more in the works. Another major initiative for 2015 is the discovery effort for the further implementation of JD Edwards EOne software and related business systems such as electronic field service data capture within the legacy CSI operations. We have included system-related costs within our 2015 business plan and CapEx and see both short-term and long-term benefits to streamlining our business support systems. Unusual items in the fourth quarter 2014 include costs related to the acquisition of CSI of $2.6 million which are included within the SG&A line item on the income statement. We recorded a tax benefit in Q4 2014. CSI transaction costs impacted the quarter, as the acquiring entity was our U.S. subsidiary corporation. Our distributable cash flow was $28.4 million. And our unaudited December 31, 2014, balance sheet includes cash balance of $34 million, CapEx data is additions of $22.1 million which includes $19.2 million in expansion CapEx. As Tim mentioned, we added approximately 17,000 horsepower to the fleet during the fourth quarter, principally domestic compressor packages. Long-term debt, $540 million, including $345 million of our senior notes, net, and $195 million outstanding on our $400 million credit facility. After taking into account LCs and bonds, we have current availability of $226 million. Our 2015 guidance would support additional borrowings of between $100 million to $150 million, based on the leverage ratios allowed in the credit agreement. I encourage you to review our Form 10-K when it is filed. And at this time, I will turn the call back over to Tim to discuss 2015 guidance.

[Tim Knox:]

Thank you, JR. While we have certainly seen a decline in the price of oil and natural gas for the past few months, we continue to see a forecast of growth in global energy consumption, albeit at a slower pace than previously predicted. Experience tells us that the impact of the downturn in commodity price on the compression sector is not as severe as it may be on other oilfield services. The necessity for compression is tied to production, not to a commodity spot price. Reiterating the information that you may have seen in the press release this morning, we provided 2015 guidance on the following items, revenues of $460 million to $480 million, EBITDA of $125 million to $135 million, and total capital expenditures of $100 million. Of the $100 million in capital expenditures, $83 million is for 99,000 horsepower of new service fleet equipment, $3 million for non-fleet growth, and $14 million for fleet maintenance. And with that, I would like to open it up for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Jeremy Tonet at JPMorgan.

[Andy Burt:]

It's actually Andy Burt here for Jeremy. First question is around the distribution. Obviously there was some nice coverage for the quarter. And the fourth quarter distribution guidance and was rationalized from the level provided when CSI was acquired, given the downturn in commodity prices. Given that reset of expectations, how do you think about the distribution policy going forward? And if things were to -- if the outlook were to get marginally better going forward, what might that mean? And might we see some of that growth that had been expected for this fourth quarter distribution?

[Tim Knox:]

We want to continue to highlight that we did achieve a 5.6% increase over the third quarter. And 11% over the one-year prior. We're not putting guidance out on distributions. I think anyone can go back and look at the history of Compressco, now CSI Compressco and see where the traditional coverage ratio. or where the sweet spot has been for us. It certainly is below the 1.7. With the integration, with the downturn, we felt a conservative approach was the right thing last quarter. And we're going to continue to look at quarter by quarter. When the business picks back up, certainly we'll be in line with the strategy that's been in place the whole time, that strategy being protect the long-term stability of the Partnership and just maintain a growth strategy.

[Andy Burt:]

And then switching gears, you had mentioned the synergies from the CSI merger. Roughly what inning do you think we're in, in terms of realizing the synergies from the merger?

[Tim Knox:]

When you make changes which we have, it takes a while for that to take hold. Over the course of 2015 -- so in making some changes and making some integration, I think we're in maybe seventh-inning stretch. I think that as the year goes along, we will be capitalizing on those -- either cost savings or the additional revenues that may be acquired from doing some cross-sellings. We're also going to work to get a new software program, a new enterprise resource management system that TETRA and Compressco already use. And we're going to get that implemented in the old CSI system. That is only on the front end right now.

[Andy Burt:]

And in terms of your COGS and OpEx, is there any savings that's being realized with these lower commodity prices, like lubricants for machinery or fuel prices for work crews going out to the job? And any type of quantification of what those types of expenses represent as a piece of the whole would be helpful.

[Tim Knox:]

So I don't have a number to give you, although I can walk you through some of it. Certainly, vehicle fuel prices, when we buy diesel or gasoline, we're buying at the pump just like anyone else is. And if I remember correctly, vehicle fuel accounts for 4% or 5% of our total service cost of goods sold. Lubricants -- and these big engines certainly do use a lot of oil. And we change it, of course, on a regular basis to maintain the equipment. The lubricants account for about 15% of the total cost of goods sold. So fuel savings, you can look at the pump yourself and figure that out. And on oil, absolutely, through some of the integration and through some reworking of contracts, we're saving perhaps 15% already in the price of lubricants. We're talking with our suppliers. Parts in general that go into our packages are about 30% of our cost, the service cost. And we're talking with our suppliers about finding ways to help us save some money on that.

[Andy Burt:]

Okay. And those savings, would they be passed through to customers or would you be able to keep those?

[Tim Knox:]

In a market like this, it's not unusual to have a call from a customer where they are looking for way to reduce their operating expenses, as well. So our intention is to continue to serve the customers, to stay focused on them, help them be profitable, while also managing and maintaining the profitability of our business.

[Operator:]

The next question comes from John Woodiel at Raymond James.

[John Woodiel:]

First off, good quarter. Great color on the outlook overall and the guidance that you all gave. I was hoping to get a little bit more information on what you all thought about the wellhead compression business, what you all have seen in the first quarter and what kind of declines you all have seen within pricing in that segment.

[Tim Knox:]

Well so as I mentioned, the compression sector is not as impacted sometimes by commodity prices and certainly not impacted as quickly. I haven't looked in a week, but drilling rigs are down 25% or whatever it is, and rates are down, as well there. We talked about utilization being up through December and our fleet is well deployed. Again, we have customers that will occasionally call and look for ways to help support their business and we want to work with them wherever we can. History tells us that an extended downturn in commodity prices comes to affect us 9 to 12 months later, so we're not in that window yet. And maybe commodity prices have stabilized a bit from the fall we were seeing -- the freefall we were seeing in December and early January. So utilization, at this point, is holding up. Rates, at this point, are holding up. But again, we're working with some customers.

[John Woodiel:]

And then my other question I had is there's a lot of uncertainty within Pemex and Mexico in terms of their budget and their general operations. I was just curious, can you all remind us how much of your fleet is based out of Pemex opportunities? And can you also give us a little color on what you're seeing within regards to that?

[Tim Knox:]

Certainly, when Compressco acquired Compressor Systems, the fleet makeup changed a bit. Compressco more heavily -- not heavily dependent, but had a larger portion of their fleet out with Pemex. The old Compressor System business out of -- using rough numbers -- out of 859,000 horsepower, there was -- rough numbers again -- 10,000 or 15,000. So it wasn't a huge -- or isn't a huge part of the old Compressor Systems business. So first I just want to kind of quantify that and remind people that Compressco has changed a bit over the past six months. But JR, do you have some of the details of the --?

[James Rounsavall:]

Right. In terms of the horsepower mix, the total international, much smaller portion. Of course, Mexico is a big piece of that, but we're talking about total horsepower of around 40,000 out of the total fleet. So, it's certainly -- with the addition of the CSI acquisition back in the third quarter -- completely changes the landscape. We certainly are sensitive to what's going on in Mexico and watching it carefully, and have built into our 2015 guidance expectations in Mexico that were down compared to 2014, what we thought, but it's a smaller part of the mix.

[Operator:]

The next question comes from Gabe Moreen at Bank of America Merrill Lynch.

[Gabe Moreen:]

Just a question on the CapEx guidance for 2015. I'm just wondering I guess the confidence and visibility in terms of that incremental CapEx deployment. Is that $100 million-ish a number that basically you feel like you've gotten reverse inquiries on and you feel really good about placing that. at this point? Or is that something, a number that could change. given the backdrop here?

[Tim Knox:]

So one thing to keep in mind is with some of the big engines -- again, Compressco has changed a little bit here over the past six months -- but with some of the big engines and big compressors, lead time is a little bit different. So some of that equipment is already on order. We have already got the purchase orders out. And then we'll, of course, do the packaging and finish that equipment. But the rest of the question is, absolutely. Everything that we're adding to the fleet had a customer that it is intended for, that we're following up with, confirming and reconfirming their need for the equipment. We're getting very positive feedback. We have additional customers indicating they have needs for equipment. Typically in our larger horsepower band is where that is. But at this point, yes, I feel very comfortable with our -- with the additions we're planning in 2015.

[Gabe Moreen:]

And then just a follow-up question to that. How does it work in terms of customer cancellations and penalties associated with that if they were to cancel contracts?

[Tim Knox:]

So with the fleet additions, where we mentioned we have 99,000 horsepower planned, that equipment is not typically under a firm contract when we first put it into our plan. The contracts usually come into play within the last -- I don't know few weeks, couple of months before it comes off the shop floor, when we firm up a contract. So with the fleet, no, there's not a cancellation in place. But don't confuse that with the sold equipment business, where I mentioned our backlog of $120 million. In our sold equipment business, we're invoicing that on progressive billings. We don't order anything until we have the purchase order in hand. And in those situations, if there is a cancellation clause, it always has a metric for at least a direction of calculation back into the final cost to the customer. So we're protected on the sold equipment side.

[Gabe Moreen:]

And then just switching gears to the balance sheet, seems to be in decent shape. Is deleveraging a goal here? Or do you just feel comfortable where the balance sheet is in terms of debt to EBITDA metrics and the like?

[James Rounsavall:]

Right. So we're comfortable with where we're, including on the low end of the 2015 -- lower end of the guidance. We've ran our stress tests and continue to, as we always do, focus on the cash side, DSO, cash collections and managing the free cash flow.

[Operator:]

The next question comes from Andy Gupta at HITE Hedge.

[Andy Gupta:]

A couple questions for me. Just to follow up on Gabe's question, is there a target leverage level that you are targeting? I know you've got two covenants, one on the senior debt and one on consolidated debt.

[James Rounsavall:]

Right. So, compared to what we previously discussed which was mid-3, 3.5 in terms of on coverage, our focus right now in the short -- as we look at 2015, is to continue to grow distributions. We see the utilization coming into the year strong and are going to accept. We're well within our ranges and our covenants and up into 4s which is -- in terms of our leverage ratios.

[Tim Knox:]

Andy, so I would say that last summer, when we were up at your place in Boston and meeting with you guys, and throughout our road show last summer, with the CSI acquisition we're looking at leverage of about 3.5 and hoping to work that down. The market has changed a bit, certainly. But as JR mentioned, 3.5 and 4 and we're comfortable with that. We can look back at businesses that have been in this sector that have operated there for years, there and higher.

[Andy Gupta:]

And just to confirm, did you say you continue to expect to grow the distribution through the year?

[Tim Knox:]

So, we're not giving guidance on distribution. But certainly Compressco, now CSI Compressco, has increased distributions nine of the past 10 quarters. The one that was not an increase was flat. Certainly our strategy is to protect long-term stability of the Partnership and then maintain the growth strategy we've had.

[Andy Gupta:]

And on the growth CapEx, if I take out the $17 million in maintenance and improvement -- the $83 million, do you expect that to be funded with cash and debt capacity? Or you think you need equity for that?

[Tim Knox:]

Just a small point of clarification that I want picked up on is maintenance CapEx, $14 million. There's about a $3 million non-fleet growth, some other things that we're doing besides of the fleet with the software systems and other. So the maintenance CapEx about $14 million and growing from that $86 million. JR, I'll let you speak to funding.

[James Rounsavall:]

Right. We're comfortable with our liquidity and would use borrowings to fund CapEx.

[Andy Gupta:]

Okay. And one final one for me. The 99,000 horsepower addition, is that a net number after any units you plan to retire or a gross? And if you can please share the split between gas lift and the larger compressor units in this number, that would be very helpful.

[Tim Knox:]

So definitely a gross number, that money is we're putting into about 99,000 horsepower of new equipment. We do retire equipment from our fleet. It's one of those numbers you can budget and plan for, but it's not one of the numbers you always hit right on. I would estimate selling 15,000 horsepower of older equipment is likely in the coming year. So the 99,000 gross perhaps that turns into 80-ish, low 80,000 net. And I'm sorry, I already forgot the other question.

[Andy Gupta:]

The question was about the split between gas lifts and the larger compressor units in the 99,000.

[Tim Knox:]

So we're concentrating growth in the coming year on the larger horsepower equipment, the equipment that is most highly utilized and you can find that a little bit just in the number. The $100 million in the 99,000 gross fleet additions, that within itself points towards this larger horsepower being built. Because the cost of the smaller horsepower, on a dollar per horsepower basis, is higher.

[Operator:]

Our next question comes from Selman Akyol at Stifel.

[Selman Akyol:]

So real quickly, in terms of the backlog, down from $140 million the prior quarter to $120 million. I presume that's just in line with prices coming off. But I just want to check, is there anything seasonal within that number as well?

[Tim Knox:]

I would not say it's seasonal. I would say that you're correct. Prices come down and much, much more than the fleet. The sold equipment business, we do tend to see some reaction on commodity prices. A midstream company might hold off on a new -- changing a line pressure someplace or somebody might hold off on some additional plants they want to build. So in a downturn, it's not uncommon to see the velocity with which new equipment sales orders are received. It's not uncommon to see that slow down. Fortunately, history tells us it cycles back the other way.

[Selman Akyol:]

Okay. And then just in terms of 2015, do you have any mile markers we should be looking for in terms of contract conversion, say, by mid-year or by the year-end?

[James Rounsavall:]

Our intention is, as we progress throughout the year and our investor presentations, is to continually update that information. We felt for this call, given that that name change in early December was a key gating item that really speed things up and got things going compared to the plan, the plan hasn't changed and we have some key wins in place and working on others. And so, that's where we're comfortable where we're right now. And we'll give probably more color and details on that as we move through the coming weeks and first quarter and so forth.

[Tim Knox:]

And the other thing to keep in mind is that with the purchase of CSI, we've got some net operating loss to deal with. So at the -- there's no current impact on the Partnership with the conversions, but way up on the priority list of initiatives.

[Operator:]

[Operator Instructions]. There are no further questions. I would like to turn the conference back over to Tim Knox, President for any closing remarks.

[Tim Knox:]

Well, I certainly appreciate everyone's interest in CSI Compressco and thank you very much for taking time this morning to join us. In closing, I would like to mention that I will be presenting in New York next week on Thursday, March 5th. We'll be at the second annual Capital Link MLP Investing Forum at the Metropolitan Club. Certainly hope to see some of you there. The materials to be presented will be available on our website in advanced of the forum. And with that, we will conclude the call.

[James Rounsavall:]

Thank you.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.