CSI Compressco LP
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Welcome to the Compressco Second Quarter 2015 Results Conference Call. [Operator Instructions] Please note, this call is being recorded. I would now like turn the conference over to Timothy Knox, President. Mr. Knox, please go ahead.

[Timothy Knox:]

Thank you. Good morning, and thank all of you for joining the CSI Compressco second quarter 2015 results conference call. I would 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 records for the period. In addition to our press release announcements 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 August 15, 2015. This morning we will discuss our second quarter distribution, fleet growth and utilization, equipment sales and backlog, and an overall performance of the business. I'll then turn the call over to James Rounsavall, our Chief Financial Officer, to cover more financial details. On July 21, 2015, we announced the second quarter cash distribution of $0.50 per outstanding common unit, a 10.5% increase over the second quarter of 2014 distribution. This distribution will be paid on August 15 to unitholders of record on July 31, 2015. At the end of the second quarter 2015, our compression services fleet consist of 6,519 compressor packages, totaling 1,138,656 horsepower, having grown the fleet by 23 compressor packages that add 16,857 horsepower. At June 30, 2015, 952,443 horsepower were generating revenue, resulting in an operating horsepower utilization of 83.6%. Comparing to the first quarter of 2015, our total operating horsepower decreased by 16,535, a 2.8 percentage point decline in utilization. Utilization the smallest category that being less decline the most to approximately 80%. Utilization of the 800 plus horsepower category remains the strongest holding in the mid-90s as we continue to grow this category. Our growth capital expenditures continue to be focused on opportunities in larger horsepower, with over 80% of our 2015 CapEx directed at the two larger horsepower classes, the response to the customers' needs and our desire to capitalize on positive growth opportunities even in that market. I'd like to take a moment to update you on a critical component of integrating the compressor systems business into the partnership. For the month of June 2015, over 50% of the legacy CSI fleet business was operating in accordance with and invoiced as MOP qualifying revenue. Exiting the second quarter over 60% of the legacy CSI fleet business has now been converted to MOP compliance service contracts. We anticipate continued progress toward our goal of 80% contract conversion. Our after-market service line in 2015 was down compared to the robust first quarter results. We are anticipating that revenues in this line will rebound in our coming quarters with several projects currently in process and an increasing productivity. In the permanent parts sales business, we recorded $49 million in revenue, which is up significantly from the first quarter of 2015. Our equipment sales backlog at June 30, 2015, stands at $87 million, a $28 million reduction from the $115 million reported last quarter. This is a result of $16.5 million in equipment sales bookings in the second quarter which is substantial step up in bookings compared to the first quarter 2015 and we continue to hear it's increasing equipment sales potation activity. Let me offer some clarification, while we reported parts equipment and parts sales together, our backlog at equipment sales alone do not include parts in that backlog. Before turning the call over to James Rounsavall, I'd like to reiterate our previously announced second quarter distribution per common unit. This is the 11th increase in the past 12 quarters with eight consecutive increase and 10.5% increase in distribution per unit compared to the second quarter of 2014. I will also reiterate that guidance offered is this morning's press release, results of the second quarter gave [ph] in our previous revenue guidance of $460 million to $480 million for the full year. We are updating our guidance on income before taxes to a range of $6 million to $10 million and EBITDA to a range of $120 million to $130 million for the full year. We expect adjusted EBITDA, which is EBITDA exclusive of equity compensation, CSI transaction rate expenses, and amortized finance cost to be in the range of $125 million to $135 million. With continued high utilization of our over 800 horsepower compression services equipment and production focus gathering in midstream applications were increasing our anticipated CapEx for 2015 to $105 million, and now forecasted 2015 depreciation and amortization at $82 million. With that, I'll turn the call over to JR.

[James Rounsavall:]

Thank you, Tim. For the three months ended June 30, 2015, we had total revenues of $126.5 million, and adjusted EBITDA of $31.5 million. The second quarter 2015 revenues represent a new record for the partnerships. Adjusted EBITDA of $31.5 million compares very favorably to the $10.4 million reported in the second quarter of 2014. These results continue to demonstrate the positive impact of the CSI acquisition. Our compression and related services generated revenues of $72.8 million which represents 57% of total revenues for the quarter. Compared to the second quarter of 2014, our compression and related services business increased almost $43 million. Geographically, our U.S. and Mexico businesses represent positive year-over-year growth, although their international locations have reduced activity levels. Similar to the United States, our business in Mexico has benefited from acquisition, and subsequent deployment of larger horsepower compression fleet asset. Compared to the first quarter of 2015, compression and related services revenues were down approximately $2.5 million or 3%, not surprising given the current pressure on energy services. Cost of compression and related services as a percentage of the compression related services revenues was 51.5% compares to 54% at June 30, 2014. Again, this points to the financial benefits of the CSI acquisition and profitability in the higher horsepower categories. As I mentioned, revenues in the after-market services were $4.7 million for the second quarter of 2015 that represent 4% of the total revenues. Sales of equipment and parts generated $49 million in revenue, 39% of the total revenues for the quarter. Revenues in this business line can vary from quarter-to-quarter. And SG&A, our SG&A for the first quarter of 2015 were $10.6 million which compares to $11.2 million in the first quarter of 2015. On a year-to-date basis, our SG&A is less than 10% of total revenues. We continue to seek reductions in our SG&A and will realize additional cost savings with a future standardization of business support and construction. Our distributable cash flow was $20.6 million, allowing for increased distribution and 1.19X coverage ratio. Our Q2 2015 fleet capital expenditures were $19.6 million which consists of $17.6 million in growth and $2 million of maintenance CapEx. We added approximately 16,900 horsepower to the fleet, larger – possibly larger horsepower domestic compressor packages. Through the first half of 2015, our fleet capital expenditures of $56 million including $4.2 million in year-to-date maintenance CapEx. Net position at June 30, 2015, $545 million including our senior notes, $345 million, $200 million outstanding on our $400 million credit facility, no cash on hand at June 30th. I encourage you to review our Form 10-Q when it's filed. And at this time, I'll turn the call back over to Tim.

[Timothy Knox:]

As mentioned in prior calls, the related stability for the compression services sector compared to a larger oilfield service market, while the U.S. rig count has declined by almost 55% in the past 12 months, our fleet utilization has declined by less than 3% in that same comparative period. On a pro forma basis, second quarter 2015 revenues increased $17.1 million or 16% from $109.4 million in the same period of 2014. Again, on a pro forma basis, second quarter 2015 compression related services revenue increased $2.6 million or 4% compared to the second quarter of 2014, and similarly on pro forma basis, charge EBITDA $28.8 million in the second quarter of 2014 to $31.5 million in the second quarter of 2015. We will continue to monitor our performance and prudently manage the business with focus on serving our customers, minimizing costs, taking profitability and delivering appropriate returns to our investors. With that, I'd like to open it up for questions.

[Operator:]

[Operator Instructions] The first question comes from Andrew Bird of JPMorgan. Please go ahead.

[Andrew Bird:]

Hey, good morning.

[Timothy Knox:]

Good morning.

[James Rounsavall:]

Good morning.

[Andrew Bird:]

So, I guess the first quarter is on fabrication. How much cushion do you see towards the end of the year with a current backlog and – on teams like there is an acceleration of new additions on to the backlog versus the fourth and first quarter, and how do you see that momentum carrying forward into the second half so much you've seen quarter-to-date so far?

[Timothy Knox:]

We've certainly experienced an increase in the level of enquiries from our customers. Six months is a long time for the trend but it appears that perhaps December 2014, four of last year were that in core level bottomed out. That didn't translate into a bit higher bookings or we're hoping that trend continues, now we certainly are looking at our backlog on a very regular basis. Currently our shop is well loaded and the labor is a good match and the capacity of the shop is a good match to the workload. We'll keep looking at that daily, weekly and each month as projects go to the shop and fortunately in that line of business there is some lead time to do the things necessary to make sure we're matching our capacity with the work load as the market continues to evolve a bit here.

[Andrew Bird:]

That's very helpful. And on the bottom, you talked about in December, I think you and peers have said in the past specifically contract compression services tend to lag that initial wall and low point. Would you say that sequential decrease in per unit pricing this quarter whereas it was kind of flat last quarter, is that that kind of six months lag time that we can expect to see? And I guess the second part of the question is, could some of that – it's a second and third quarter type of phenomenon and could we see further pricing pressure potentially into this quarter and then kind of a leveling out to a new normal?

[Timothy Knox:]

We have certainly experienced a decrease in the volume of requests, the pricing adjustments. We are now working with our customers, if [Technical Difficulty] we can't be successful. I do think that there maybe some pressure for us. Three months ago we saw oil sitting up close to 60 and now we're back in the high 40s. So I think there maybe some pressure in the coming months, however, I think that we are perhaps the majority of it. Prices did not ramp up in a way they had ramped in maybe 2006, 2007 and 2008, so we haven't seen may be that same massive pressure on prices. You mentioned also utilization and some of that lag, I don't think utilization is totally bottomed out yet, we've said from the start of the downturn that have a 12 month but a four quarter cycle what it took. So I think we might see a little bit – a little more decline there, especially in the smart horsepower as we go through the third quarter and hopefully level out in the fourth quarter.

[Operator:]

[Technical Difficulty].

[Unidentified Analyst:]

Yes, apologies. Tim, where we are on the point of the last downturn, you are obviously see what the private company CSI at that point in time. With the pro forma entity going forward, is there anything that or the folks from Legacy compressed over doing any differently this time than you would have – in a downturn especially as a private company in terms of cost initiatives and things like that?

[Timothy Knox:]

I don't think there is anything being done differently because of the acquisition or the merger of the companies. I think that by no means just as I think, I think a lot of service companies learnt something in the 2008 to 2009 downturn, I think that there has been a quicker response to go out and make sure we're in contact with the customers and making certain that we're getting the contracts in place that allow them [Technical Difficulty] upto the weekend as well. One unique difference here would be that we're converting CSI legacy rental contracts into a compression service with an associating MLP complying contract. In that we've said along was a place where there might be some price adjustments as well. So we've seen that in the mix. And again, I'll reiterate what I said a moment ago, we're happy to report that we in the month of June invoiced more than 50% of the legacy CSI compression services businesses in MLP complying format with MLP complying services and we actually ended June with over 60% of that business, now sending in a MLP complying agreement.

[Unidentified Analyst:]

Great. So that sounds like it's tracking nicely ahead of expectations there?

[Timothy Knox:]

Yes. So internally we have, we're on course with the model that we gather back in time of acquisition. From the start – to get to our roughly 80% expectations.

[Unidentified Analyst:]

Great, and then last question for me. It's kind of housekeeping, in the total CapEx increase to $105 million is it fair to assume that that – and that's a total CapEx number I'm assuming that growth, is it fair to assume that the incremental $5 million is directed towards growth, not maintenance in other words?

[Timothy Knox:]

Yes, certainly you are correct. The 100 near low – the $105 million is total capital expenditures for fleet growth, non-fleet growth, maintenance CapEx. The additional $5 million will certainly help in directed towards fleet growth. In addition, as we move forward the rest of the year, it's possible there is some other places we had intended to spend some money are also going to get redirected towards largely growth. And we'll have more vision ability there ourselves and so then we can share mortgage detail with you guys as the next quarter goes by. In fact, merely where you placing the assets and services mostly [Technical Difficulty] type of thing?

[Unidentified Analyst:]

In Eagle Ford in Permian basis, remain active.

[Timothy Knox:]

Great, I guess. Thanks a lot, Jim. Have a god one.

[Unidentified Analyst:]

Thanks.

[Operator:]

The next question comes from Martial Atkins, Raymond James [ph]. Please go ahead.

[Unidentified Analyst:]

Good morning guys. Hey Tim, could you give me a little more color on the reduction and utilization, I mean obviously you guys done way better than most of our drilling related companies but what I'm looking for is color – more specifically on may be the size of horsepower sounds like your large horsepower holding off rock solid but it's more – probably the vapor cover gas tight stuff is pulling off. I just want to get your impression of what's going on there and where that – where we should see that going through the rest of the year?

[Timothy Knox:]

Right. I think there is a natural tendency to compared utilization to some peers, it's difference with CSI Compressco having a larger amount of small equipment and the pressure in the down turn lower oil price and $73 gas price – there is pressure on that small horsepower equipment, it's mentioned earlier that, that smallest group is down around 80% utilization and I have also mentioned that the largest equipment is up in the mid-90s. We've never broken down utilization in too much detail by horsepower class, it's something we need to take into consideration because the questions are always there and we need additional data point that would help some people so we need to take that acceleration [ph]. Moving forward, like I anticipated some of the same, I anticipate that the pressure, lower oil prices, low gas prices, the pressure is on that small equipment and the larger infrastructure equipment is stickier.

[Unidentified Analyst:]

Should we read into that if it's more levered to the oily side or is there a geographic consideration here?

[Timothy Knox:]

No, I don't think so. I think that again, it's – at low gas prices there is also pressure in dry gas prices, there is pressure on that small equipment on marginal wells. The larger could have deployed in a Permian Basin and the Eagle Ford, a lot of that's also going into Shale Plays.

[Unidentified Analyst:]

All right. Switching gears, cost savings, you brought down your SG&A – with the merger there is obviously some opportunity to realize costs savings, fuel costs I suppose have come down. Where are we on the progress here or have we already captured most of the cost savings fuel side and just synergy side or do we have more go?

[Timothy Knox:]

I think there is always room to go on improving our cost structure and we're going to stay focused on that. I'll say that some of the modelling that was done on the front of this with synergy even cost, just a cost in general let's call it, it was a different market, it was $100 oil and a lot more activity. So into this little bit apple and oranges, some of the – we're doing well on integration, again we mentioned the word on the contract conversion. JR also mentioned that we'll have a lot of savings once we are on one business management system as we do continue to have a little bit of additional support cost for legacy CSI business in one system and then pushing that data over into the CSI Compressco in that sponsored company. So we have some work left there.

[Unidentified Analyst:]

That sounds rightly said and a ring to my say, maybe we're 80% there versus the cost that you thought, we might go to ring out few months back?

[Timothy Knox:]

And with some savings that have occurred in some of those operations and then there is some other areas, I don't think it would be too far out there which some of those – with some of those savings that are realized and I also say there is a lot of work to be done to get the data systems switched over. So, at cost standpoint, you're probably not too far off but a lot of effort has to go into getting everything move to the single ERP.

[Unidentified Analyst:]

Alright, last question for me and you can allude this. Six months ago, I don't think any of us forecasting oil would be $45 right now, but there it is. How you – let's just say, oil stays at about $50, how big of an issue is that for you assuming gas holds up and high twos or three – is this whole thing hard water or is it not as big deal as the gas price?

[Timothy Knox:]

Oil fitting with gas at two or three, I think that our industry would probably start levelling out as I said, maybe as far as utilization goes and demands for horsepower I think that oil, if we see oil sitting at $45 or $50, and that we don't see the production of gas and the demand for gas, it does not go up because the gas prices is also – if gas production goes up and compression has to work with it, so you're leaving out one of the factors there. I think what impacts us the most keeping our oil flat prices and flat production of gas, I think that it certainly impacts from a sales business, the fabrication business. And some of that reflected our backlog currently and even as we look forward in the 2016 at some of our internal planning.

[Unidentified Analyst:]

Perfect, thank you.

[Operator:]

The next question comes from Gab Moreen of Bank of America Merrill Lynch. Please go ahead.

[Gab Moreen:]

Good morning. Most of my questions have been asked and answered, so two quick ones. One is in terms of the additional growth CapEx decline as well as any additional SG&A savings you might be able to clarify in the year? I just was wondering if there was any updated 2015 EBITDA guidance. As far as my question I guess is, deploying that extra horsepower, is that something that's hit 2016?

[Timothy Knox:]

Some of them will hit '16 very calendar month, so not a great big boost, spend a $1 million on a piece of equipment and one month's revenue on it and making it the numbers here but mildly $18,000. So the guidance is added into the year – don't do a lot for the given year. It is in our out letting guidance, certainly it is, as is kind of the deferred look of SGA and all other cost initiatives, yes those are in the EBITDA guidance.

[Gab Moreen:]

Okay, thanks Tim. And then just curious – I don't know if you did on this basically with distress that's out there and you procured conversations with producers around positively purchasing their compressor in terms of their own fleet, is that something you've seen at all?

[Timothy Knox:]

Not a lot and quite frankly, I probably would, we have initiated some of those conversations but it is not been looking as I expected.

[Gab Moreen:]

Interesting. Alright, thank you, Tim.

[Timothy Knox:]

Thank you, Gab.

[Operator:]

The next question comes from TJ Shot [ph] of RBC Capital. Please go ahead.

[Unidentified Analyst:]

Hey guys, just one thing from me. If you could just talk about the Mexico market a little more, it sounds like it's part of that pro forma year-over-year growth. Just maybe expanding on what the opportunity is set – is there for you guys, is it really a function of trying to get higher horsepower stuff into the Mexican market, just anymore color. Thanks.

[James Rounsavall:]

I'll start and Tim would – it's a combination of both, the smaller horsepower business and deployment of larger assets and from the deal side, post CSI acquisition, business is 8% or 9% over the revenue base, there had been impression, opportunities across our horsepower space but most significantly are the additional larger horsepower assets that were part of CapEx towards the end of last year and into the first quarter of this year.

[Timothy Knox:]

And was there a follow-up question?

[Unidentified Analyst:]

No, sorry. That it's, great. Thanks guys.

[Timothy Knox:]

Thank you.

[Operator:]

[Operator Instructions] And the next question comes from Solomon Equel [ph] from Stifel. Please go ahead.

[Unidentified Analyst:]

Hi, this is Tim Howard on for Solomon, thanks for taking my questions. I had a question relating to the horsepower revenue. Should we see that creep upto the end of the year as the smaller horsepower comes offline? [Indiscernible]

[Timothy Knox:]

So, if I understand your question correctly, I think you have a math the other way around, when it comes to revenue, dollars per horsepower on the cost side, as well as revenue side is higher on the smaller equipment. So $1 per horsepower goes the – again, now as to answer the question properly, at first off, as prices decline and the dollars for horsepower revenue obviously declines with it. And as we grow with the CSI acquisition with a focus on larger horsepower, large equipment to the fleet, and that also has an impact on the $1 per horsepower revenue.

[Unidentified Analyst:]

Got it, okay. And then just one question on the backlog, has anyone opted out of their commitments thus far?

[Timothy Knox:]

At very front end of this downturn, I think we talked about this in one of the prior calls, a very front end of the downturn, we had a customer come back in and reward a settlement that was fairly role to both of us, it was a win-win on a small amount of equipment, they just did not see the need for – now we've had some delays on some equipment in the shop that has certainly come to play in our – we turned to first two quarters. But we had not had any cancelations or for that matter any discussions on cancellations since that perhaps six months ago.

[Unidentified Analyst:]

Good, thank you.

[Operator:]

And we have a question from Jordan Stevens, Casting Capital [ph]. Please go ahead.

[Unidentified Analyst:]

Hey guys, just two questions. One, I think you may have mentioned this but what was in the cash balance at the end of the quarter?

[Timothy Knox:]

$32 million.

[Unidentified Analyst:]

Okay. And you even said there was, I believe $200 million drawn on the rolling credit facility?

[Timothy Knox:]

Net of cash.

[Unidentified Analyst:]

Great, net of cash, okay, perfect. And then I just wanted to see if you had any updates on kind of process in terms of trying to get into the Marseilles?

[Timothy Knox:]

Sure, we can choose that a bit. We're mainly focused – Ron Foster, our Senior Vice President is very much engaged in that effort, he has become quite familiar with Pittsburgh in the past few months, staying a lot of time in the area with existing customers we serve in other areas, also meeting potential customers working with our sponsored company. Tetra [ph] has a footprint there. But it's a good problem to have, the equipment is in the Marseilles but we see to be the right equipment for Marseilles. It's the same equipment as most highly utilized in our current footprint, two are working through that issue of build more or earmark more so that we can get that processed a little bit further along. I said before, it's roughly 18% of the gas production in the U.S. now, just Marseilles for the entire Northeast and we have 0% market share. It's a huge opportunity for us that we are no way ignoring. Now we're just working through it while – kind of strange to say, but while we have a limited amount of equipment even in this correct market climate.

[Unidentified Analyst:]

Got it. So do you have any thoughts as to whether you can sequentially start to see some business there by the end of the year or any guidance you can provide on general timing?

[Timothy Knox:]

I think I just need to put that off. Hopefully in the third quarter call we will have something we can share with them hopefully.

[Unidentified Analyst:]

Okay, thanks guys. I think that's it for me.

[Operator:]

This does conclude our question-and-answer session. I would like to turn the conference back over to Timothy Knox for any closing remarks.

[Timothy Knox:]

Thank you. And in closing, I would like to take this opportunity to recognize that on Tuesday of this week we're celebrated the one year anniversary of all of the acquisition for Compressor Systems. It's easier to see the benefits of the expanded compression offerings, their capabilities and competencies, even with the challenges that current environment. We appreciate all and thank our 4,900 plus employees, our suppliers, our investors, of course our customers who trust us to partner with them in their success. Thank you all for your interest in CSI Compressco and thank you for taking the time to join us this morning. And that concludes the call.

[Operator:]

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