CSI Compressco LP
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Welcome to the Compressco Partners LP First Quarter 2015 Earnings Results. [Operator Instructions] Please note, this event is being recorded. I would now like turn the conference over to Timothy Knox. Mr. Knox, please go ahead.

[Timothy A. Knox:]

Good morning, and thank you for joining the CSI Compressco First Quarter 2015 Results Conference Call. I'd like to remind you, 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 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, adjusted 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 a reconciliation of non-GAAP financial measures to the nearest GAAP measure. 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 that went out earlier this morning and is posted on our website, our Form 10-Q is planned to be filed with the SEC on or before May 15, 2015. Now moving into the results of the first quarter 2015. This morning, I'll focus on our first quarter distribution, fleet growth and utilization, equipment sales and backlog and the overall performance of the business. I'll then turn the call over to James Rounsavall, our Chief Financial Officer, to cover more financial details, including SG&A cost and liquidity. On April 21, 2015, we announced the first quarter cash distribution of $0.495 per outstanding common unit, a 2.1% increase compared to the fourth quarter 2014 and an 11.2% increase over the first quarter of 2014. This distribution will be paid on May 15 to unitholders of record on May 1, 2015. At the end of the first quarter 2015, our compression services fleet consist of 6,496 compressor packages, totaling 1,121,799 horsepower, having grown the fleet by 94 compressor packages and 32,648 horsepower in the first quarter of 2015. At March 31, 2015, 968,978 horsepower were generating revenue, resulting in an operating horsepower utilization of 86.4%. Comparing the horsepower utilization to the prior quarter, we experienced a 1.3 percentage point decline, not totally unexpected given the pressure on commodity prices. However, with the first quarter net growth in the fleet, our total operating horsepower increased by 13,883. Breaking it down by horsepower class, total operating horsepower in the smallest category, that being less than 100 horsepower, declined, while operating horsepower in the 2 larger categories increased. Further, utilization in the 800-plus horsepower category remains robust in the mid-90s. Our growth capital expenditures in 2015 is focused on opportunities in the larger horsepower, with over 75% of our announced CapEx plan directed at the 2 larger horsepower classes. As the year moves along, we are further weighting our 2015 investments toward these larger classes in response to the current market. Moving into the results of operations for the 3 months ended March 31, 2015. We are pleased to report total revenues of $102.9 million and adjusted EBITDA of $31.2 million. Looking at our 3 lines of business, compression-related services generated $75.3 million, which represents 73% of our total revenue for the quarter. These revenues are down approximately $600,000 compared to fourth quarter of 2014, resulting from declines in higher-priced international business, offsetting increased revenues domestically. Where necessary, the labor force is being adjusted to better match current activity levels. Revenues in aftermarket services were $9.5 million, a slight increase from prior quarter levels and represent 9% of our total revenues. Sales of equipment and parts generated $18.2 million, or 18% of total revenue for the quarter. Compared with fourth quarter 2014, this is a $22 million decline. Revenues in this business line can vary quarter-to-quarter. In the first quarter 2015, we experienced larger variability than we anticipated as completion of some projects slipped into future quarters. Our equipment sales backlog at March 31, 2015, stands at $115 million, a $5 million decline from the $120 million that was presented at the end of the fourth quarter 2014. The velocity of equipment sales orders received has certainly slowed, which is not unexpected, given pressures on commodity prices and the resulting capital investment decisions of E&P and midstream companies. Before turning the call over to James Rounsavall, I'd like to reiterate our previously announced first quarter distribution of $0.495 per common unit. This is the 10th increase in the past 11 quarters and an 11% -- 11.2% increase to the distribution per unit over the same period prior year. With that, I'll turn the call over to JR.

[James P. Rounsavall:]

Thank you, Tim. To reiterate, CSI Compressco reported Q1 2015 consolidated revenues of $102.9 million, adjusted EBITDA of $31.2 million compared to $9.3 million in the first quarter of 2014, however, down $3.3 million from $34.5 million in Q4 of 2014, certainly impacted by the timing of equipment sales, as mentioned earlier. Cost of compression and related services as a percentage of compression-related services revenues was 49.1% compared to 54.3% and 48.7% at March 31, 2014 and December 31, 2014, respectively. So compared to the prior year, our cost of compression and related services as a percentage of compression-related services revenues decreased 5.1 percentage points, resulting in improved contribution margin of 51%. Despite a difficult period in the oil and gas industry, the acquisition of Compressor Systems is having the desired impact of improving our compression and related service financial results through the addition of larger, more profitable horsepower to our fleet mix. Compared to the fourth quarter of 2014, the slight decrease in contribution margin was due in part to delays in compression services in Mexico, which did pick up as the quarter progressed. Transaction cost in the first quarter of 2015 were minimal. As noted in the press release, we incurred $208,000 in transaction costs within SG&A, related to the acquisition of CSI, compared to $2.6 million of transaction cost in the fourth quarter of 2014. Excluding these transaction costs, our SG&A cost in the first quarter of 2015 were $11 million compared to $10.2 million in the fourth quarter of 2014, which included higher allocated year-end support costs, audit and professional consultancy, which can be higher in the first quarter for us. We are focused on reducing this trend in our SG&A cost. Our distributable cash flow was $21.3 million. Our unaudited March 31, 2015, balance sheet includes cash of $25 million. While lower than the year-end balance at December 31, 2014, we reduced DSO by several days and were able to minimize borrowings during the quarter. Our CapEx. Q1 2015 CapEx additions of $37.1 million include $2.2 million of maintenance CapEx. We added approximately 33,000 horsepower to the fleet, principally domestic compressor packages. While $37 million in total CapEx for Q1 2015 is much more than one quarter of our total $100 million plan for CapEx, it is proportional considering our net horsepower growth of 32,648, which is roughly 40% of our planned additions for the year. Long-term debt, $553 million, including $345 million of senior notes net and $208 million outstanding on our $400 million credit facility. Taking into account LCs, we have a current revolver availability of $185 million. I encourage you to review our Form 10-Q when it is filed. And at this time, I'll turn the call back over to Tim.

[Timothy A. Knox:]

Thank you, JR. As mentioned before, experienced tells us that the impact of a downturn in commodity prices on the compression sector is not as severe as it may be on other oilfield services. Through the first quarter, we've seen rig counts cut in half from recent highs, yet our fleet utilization dropped by only 1.2 percentage points. The improvement in oil prices experienced over the past 6 weeks is encouraging but certainly does not guarantee a recovery's in process. We will continue to monitor our performance and prudently manage the business to minimize cost, protect profitability and deliver appropriate returns to our investors. And with that, we would like to open up the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Praveen Narra at Raymond James.

[Praveen Narra:]

You guys did a good job on some cost reductions, but can you give us some more color on how these cost reductions came from on the labor versus input costs, like lubricants and fuels. How do you think about the cost reductions that have occurred and how that looks going forward?

[Timothy A. Knox:]

Well, with cost control -- and I'm sorry, I don't have the breakdown in front of me. Yes, there certainly are savings coming from fuels and lube oils. We've talked about that before. Just inherent to a downturn, petrol and related products do get less expensive. So a couple of other things we're doing. Where appropriate, some rightsizing has occurred. The number of the GasJacks being added right now is a bit smaller than it has been in the past. And we've had some attrition in that manufacturing shop that we have not backfilled at this time, although we're confident we can backfill that when the market turns around. Looking out in field operations, we've talked in our end-of-year call that the operations groups have been consolidated, working under a common leadership. Some synergies were found there. As well as in the sales force, some opportunities were found. We've also begun to migrate some of our financial services, some of our accounting efforts into the sponsors group, which is also leading to some synergy.

[Praveen Narra:]

Okay. And then just switching gears a little bit. It looks like equipment orders came in a bit soft. Can you give us a sense for how you expect that to trend over the course of the year? Is this partially just your customers figuring out what the market looks like going forward? Or how do you think about that?

[Timothy A. Knox:]

Well, no doubt the velocity of orders received has slowed as the budgets are cut with midstream companies when there's not pipeline projects and storage projects and even some of the E&P groups that like to purchase equipment. When those budgets are cut, we certainly feel the impact. That tends to always happen on the front end of a downturn. I can give you a bit of a comparison. 2009 and '10, speaking a bit from memory, but those equipment sales years were about 70% and 60% of the 2008. We'll call that a boom market. So I wouldn't be surprised if 2015 and 2016 see something similar if this cycle resembles what we saw in 2008 and '09. One of the things we've noticed with our inquiries, inquiries for sold equipment have picked back up. That group of applications and cost estimating is very busy right now. So the inquiries have picked up. Where we're not seeing orders placed, we also, in many cases, are simply not seeing the orders being placed with anyone. So it's not just the orders that we're not getting, it's orders not being placed. Ordering, in general, has slowed fairly significantly. Looking out, it's the crystal ball of when's the market going to pick back up. And when are those midstream, when are those gas processing plants, when are those gathering systems going to become a prevalent item in the market.

[Operator:]

[Operator Instructions] And our next question comes from Gabe Moreen at Bank of America Merrill Lynch.

[Gabriel P. Moreen:]

Just to be clear, Compressco's not revising its own CapEx guidance? Is that right?

[James P. Rounsavall:]

We are not revising CapEx guidance. That is correct.

[Gabriel P. Moreen:]

And is it fair to characterize it as just saying that you're still seeing good demand for the larger horsepower compressor units, and then that's why that's not happening at this point?

[Timothy A. Knox:]

Yes, we are -- as I mentioned, our largest class of equipment, utilization is up in the mid-90s, which we are comfortable with. There are places where equipment has come back. There are also places where our customers continue with projects that were in process. And we have the demand for that equipment that's being added.

[Gabriel P. Moreen:]

Got it. And then I guess I could have a broader question in terms of how much -- how far ahead of time customers have to give you notice in terms of turning back units in the field. And I guess sitting here in mid-May, how is that, I guess, trending? I think you mentioned the utilization exit rate from 1Q. Has things substantially changed in any of the horsepower categories you mentioned on the comments?

[Timothy A. Knox:]

Right. So where I would point you on that, like you remembered, our utilization only dropped 1.3 percentage points Q4 to Q1, from 87.7% to 86.4%. Something that we need to highlight is our utilization March 31, 2015, is about 2 percentage points above our utilization pro forma -- speaking pro forma of the combined company, about 2 percentage points above the March 2014 utilization level. So certainly, some silver linings in what's going on. When it comes to the amount of notice a customer gives us, many contracts are on month-to-month, so that's a 30-day notice. Of course, other contracts have more on that left on the initial 12-month or 24- or whatever it might have been.

[Gabriel P. Moreen:]

Okay. And in terms of what you're seeing, in terms of customer activity of late, it hasn't significantly shifted from what you're talking about or -- talked about in the introductory comments at least, intraquarter [ph]?

[Timothy A. Knox:]

Right. I would say that there's not been any significant shift at the end of the quarter compared to what was going on throughout the quarter that got us to this 86.4% utilization, a slight decrease from end of fourth.

[Gabriel P. Moreen:]

Got it. Okay. And then last question for me is just a lot of volatility in the units this morning. But can you just talk about sort of the trade-off and how you're viewing sort of the reward or lack thereof you're getting for increasing the distribution in the market and balancing that also with going into the commodity backdrop that we're in right now?

[Timothy A. Knox:]

Well, when it comes to the stock price, of course, we don't control it. And I've seen it earlier. And when you mentioned it, I just pulled up the chart there, and it is -- volatile's a good word for it. We don't control our stock price. We don't run our business off of the stock price. We do appreciate when there's stability, and we'd like to see it heading in the upward direction. But we will -- dividends -- or distributions, rather, are considered on a quarter-by-quarter basis. We have an overall direction we like to head. And we will continue to monitor that and then do our diligence to our investors in paying out an appropriate distribution.

[Operator:]

[Operator Instructions] At this time, I show no further questions. This does conclude our question-and-answer session. I would like to turn the conference back over to Tim Knox for any closing remarks.

[Timothy A. Knox:]

Thank you. I do appreciate the interest in CSI Compressco, and I thank everyone for taking the time to join us on this very busy morning of calls. And we're hoping to wrap ours up early, so you can get onto some other things. In closing, I would like to mention that I will be presenting at the NAPTP Conference on May 21 in Orlando. I look forward to seeing you there. And the material that I'll be presenting will be made available on our website. And with that, we'll conclude the call.

[Operator:]

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