CSI Compressco LP
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Welcome to the CSI Compressco LP Fourth Quarter 2015 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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 CSI Compressco GP. Please go ahead.

[Tim Knox:]

Good morning and thank you for joining the CSI Compressco fourth quarter and full year 2015 results conference call. Joining me today will be Elijio Serrano, Chief Financial Officer for both CCGP and TETRA Technologies, who owns a general partner. I’d like to remind you that 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 then 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 reconciliations of non-GAAP 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 announcement that went out earlier this morning and has posted on our website, our Form 10-K is planned to be filed with the SEC on or before March 15, 2016. Again thank you for joining us. We do appreciate your interest in CSI Compressco. I want to start by sharing with some of the results and key financial indicators that we used to measure our business. I’ll discuss changes to our fleet and fleet utilization, equipment sales and backlog, the overall performance of the business and our outlook into 2016 and then I’ll turn the call over to Elijio Serrano, Chief Financial for CSI Compressco and also Chief Financial Officer for TETRA Technologies, who owns a general partner to cover more financial details. Total revenue of 99 million for the fourth quarter of 2015 is a decline of $30 million or 23% from the record high $129 million recorded in the third quarter. With the majority of the decline attributable to a $24 million decline in our lowest contribution segment equipment and part sales, adjusted EBITDA at $29 million is $3 million or 10% decrease from the 32 million in the prior quarter. Fourth quarter distributable cash flow of $19.4 million is a decrease of 2.4 million or 11% compared to the third quarter of 2015. Throughout 2015, we’ve continue to invest in our compression services fleet, the most profitable segment of our business with $84 million in fleet growth capital expenditures for the year including 80 million in the fourth quarter which added 23,210 horsepower of new equipment. In addition to the investment, we also look to optimize a fleet and retired 353 compressor packages totaling 45,123 horsepower of older ideal equipment in our under 800 horsepower categories. Also during the fourth quarter, we sold 178 GasJack packages totaling 8,188 horsepower to one of our existing customers they were previously operating under a compression services contract. Combined with the few other small used equipment sales, these transactions resulted in a fleet consisting of 5,992 compressor packages totaling 1,127,540 horsepower at year end, an increase of 38,389 horsepower from the prior year. At December 31, 2015, 924,961 horsepower was generating revenue resulting in an operating horsepower utilization of 82%. Our investments have continued to be and primarily focused at our over 800 horsepower category which grew by approximately 72,000 horsepower in 2015 and were utilization finished the year at 89.9%. 18 much into the commodity price downturn, the stickiness of the larger horsepower equipment is holding up well. While the entire compression services industry is objected to the pressure of the low commodity price environment, the smaller horsepower segments especially the 100 horsepower and below continue to be the more stressed. Low natural gas prices such as the sub $2 value seen recently can change the economics and marginal wells to the compression and sometimes even production is not economically feasible for responding to our customers with competitive rates to utilization as equipment and ended 2015 with 76.2% utilization of equipment 800 horsepower and below. Compared to the downturn of 2009 and 2010, total fleet utilization at year end was approximately 350 basis points higher than our prior experience even when including the 45,000 horsepower that was retired or approximately 600 basis points higher than prior experience after the retirement of 45,000 horsepower. As you may expect, we continue to find the best opportunities and situations in the Permian Basin and South Texas where our market position is a strongest, pushed up $2 natural gas placing some additional pressure on the dry gas markets of the San Juan Basin in Barnett Shale. Compresses services revenues were $67 million for the quarter, an 8% decline from prior quarter and a 12% decline from same quarter prior year, a result of lower horsepower utilization and lower pricing in the current market that is begun to take effect from discounts provided earlier in the year. With commodity prices at roughly $30 for oil and $2 for gas and customers indicated the sustain prices around $50 and $2.50 respectively where they need to operate, we anticipate that some continued and new request for discounts may occur. We continue to see improvement and efficiency to fill operations measured by a verity of internal key performance indicators. For example, the average operating horsepower supported by each for mechanics has increase 10% in the past year and the cost of services per horsepower, per month has decreased by 10% in the past year. As we enter 2016, we have dramatically reduced growth capital believing that our existing fleet will provide adequate equipment to serve customer needs and component lead times had shorten such a ramping up manufacturing should not be a problem should demand exceed our expectations. Total growth CapEx in 2016 is planned at $8 million to $18 million, 8 million of which is currently in process, allowing us to focus available cash on paying down debt and managing liquidity. Investments that are made in the fleet will continue to be focused on the most highly utilized prices of assets that being larger multistage compression in the 1,400 horsepower range as well as opportunities for multistage midsize equipment of about 400 to 700 horsepower where the market maybe a bit under supplied. We continue to execute on the conversion of legacy compressor systems incorporate rental agreements to MLP-compliant services, allowing us to capitalize on the tax efficiencies of the MLP structure exiting the fourth quarter 2015 approximately 78% of legacy CSI fleet business has now been converted to MLP-compliant service contracts. Our aftermarket services segment showed strong results consisted with the prior quarter recording $7 million in revenue. In the equipment part sales business, we recorded $25 million in revenue, a reduction from prior quarters as has been expected with the ongoing decline in equipment sales bookings and backlog. Our equipment sales backlog at December 31st, 2015 stands at $24 million, a $12 million reduction from the 46 million reported last quarter. This is a result of very modest fourth quarter new equipment sales activity with 40 million build, $8 million in bookings and $6 million reduction in backlog in conjunction with the financial settlement of a cancel project. Used equipment sales were boosted in the fourth quarter by the previously mentioned sale of 178 GasJacks operating under compression service contracts prior to that time. While we’ll continue to pursue new equipment sales opportunities aggressively in order to improve our book-to-bill ratio, we will also continue to implement cost control initiatives to align our manufacturing capacity with a reduced level of activity as we have been doing since the onset of the current downturn. And 2015, we reduced the labor component of manufacturing by approximately 33% in headcount. With continue reduction in manufacturing early on in 2016 including the idling of our Oklahoma City facility. Before turning the call over Elijio, I’d like to comment on our previously announced fourth quarter distribution of $37.75 per common unit, a twelve and one half cent decrease per common unit from the prior distribution. After nine quarters of consecutive increases through distribution, this was a difficult decision to make but in light of continued uncertainties in a depress market, we fully believe the decision to be one of several prudent measure that we are talking to ensure we maintain a strong balance sheet by managing cash and debt. Please note the distribution comes with the coverage ratio of 1.52 times in the fourth quarter also thought to be appropriate for the given market conditions. With that, I’ll turn the call over to Elijio Serrano.

[Elijio Serrano:]

Thank you, Tim. Compression services revenue of $67 million declined sequentially by 8% primarily due to the lower utilization of our smaller horsepower equipment. Utilization of our larger horsepower equipment are the equipment over 800 horsepower remain strong at 89.9%. Compression services gross margins of 51%, improved by 50 basis points over the third quarter and we’re only slight below the fourth quarter of a year ago, despite the pricing pressures that Tim mentioned earlier. The improved margins are due to the changing mix of more revenue coming from our higher horsepower equipment that carries better margin and are continued focus on cost. Compression services, is and will continue to be the primary driver of our profitability. In the fourth quarter, 86% of our gross profit dollars came from compression services. Revenue from equipment and part sales declined from $49 million in the third quarter to $25 million in the fourth quarter as we work down out backlog. Gross margins on equipment sales were strong at 17.8%. And so result of the declining backlog and the reduce demand for building new equipment; we have undertaken a series of very aggressive cost actions over the past 90 days. If you go back to the beginning of last year and take it through the actions that we will implement by this coming March, we will have reduced our headcount in manufacturing and fabrication by approximately 180 staff or approximately two thirds of direct labor and support headcount. In addition, we have implemented salary reductions that approximate 4% to 5% of base salaries of certain employee groups. Our cost model for manufacturing and fabrication is highly variable, allowing us to quickly adjust to activity levels. During the fourth quarter, we undertook a very thorough of our infrastructure, operating cost and fleet of equipment. In addition to the manufacturing and fabrication headcount reductions, we have also been optimizing our cost structure in all areas. We have consolidated facilities, reduced the size of our sales team and aggressively renegotiated the prices with many of our suppliers to reduce cost. As part of this process, we took a charge of $11.8 million to right down and we hire 45,000 horsepower of older underutilized equipment. The vast majority of the compressor packages retire are less than 200 horsepower each. We intend to continuously right size our cost structure to the changing business environment to ensure we have a strong and healthy company. In addition in this part of our annual goodwill and intangible assets, we view and reflecting the weaker market environment and/or weaken of price

[Tim Knox:]

Thank you, Elijio. I have mentioned in prior calls that we’ve highlighted again here today, the relative stability of the compression services sector compared to the larger oil field services market. In 2015 the U.S. rig count has declined over 60% monthly averaging gas prices declined over 40% and monthly average West Texas and immediate prices by over 35%. And the same period our fleet utilization’s declined by less than 9%, prior to the horsepower retirement that I mentioned earlier and less than 6% with retirement of these assets counted for. Now operating 82% utilization has reported for December 31, 2015. The compression services fleet remains the economic engine of CSI Compressco financial performance providing over 60% of full year 2015 revenue and over 85% of full year 2015 profit dollars. We will continue to monitor our performance and prudently manage the business with a focus on minimizing cost, protecting liquidity as well as profitability and delivering appropriate returns to our investors. With that, we’d like to open it up for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Andrew Burd of JPMorgan.

[Andrew Burd:]

Hi, good morning. Thanks for taking my question and congrats on strong coverage again. On the distribution cut, can you give any color as to the kind of time horizon that you were looking at and what catalysts in the future might revisit distribution policy either upper bound?

[Tim Knox:]

Andrew, let me start and sure Elijio have some comments about it too. I’m not the first to say that we are 18 months into a six-month downturn and there is lot of speculation, a lot of optimism that the second half of this year will be the time that we see the supply demand change and we see the oil price recover but that optimism was also existed early in 2015 looking towards the end of 2016. So Elijio talked about a little bit but distribution cut is something that can be recovered from quite quickly if the market allows. So we just looked out the year and looked it where we were, looked at where the market was and made the decision that to have an impact on debt as we would like if the market stays down we need to take the action now rather than put it off until a point in the future. We didn’t want until we did have a distribution coverage issue should the market stayed depressed but Elijio let me have you add more.

[Elijio Serrano:]

Yeah Andrew, what we normally do it is part of our planning cycle and then ongoing monthly basis we always looking at rolling 12 month forecast and projection and as part of our annual budgeting process that we just completed, we’ll look beyond that kind of 12 month horizon and will do sensitivity analysis and will look at several downsizing areas and do what if analysis and we have modeled is if the market not only remains bad but keeps getting worse, how do we protect the balance sheet. And based on that analysis, we decided that we will make a 25% proactive reduction just in case a lowercase scenario kicks in.

[Andrew Burd:]

I think that is very helpful and obviously the conservative option definitely good to protect the equity value in this market. I guess on cost savings, can you how much word is left the chop there, you gave some really good numbers but as we think about impact in 2015 you know how many, is it possible to quantify the incremental savings versus the fourth quarter that you are expecting going forward in ‘16.

[Tim Knox:]

Andrew, I will start with that and let Elijio get into some of the specific numbers. Certainly throughout 2015 there were cost reductions put in place whether that is with lower lube oil prices, cost savings from our suppliers. Unfortunately there is a reality in the services business and then the manufacturing business labors have been component of it so staff reductions that have occurred. With manufacturing of course the staff has to be there and you maintain that labor while the backlog is being is worked down and then as it works now as other adjustments has to be made. So those ramped up in the fourth quarter and we will be able to get more specific after the first quarter, but we’ve also have reductions in 2016 already. And Elijio you can talk about some of the numbers.

[Elijio Serrano:]

Right, so we thought during the call, mentioned three specific items. One of them is, we referenced and we have implemented a salary reduction that was implemented in the last month and has not yet been reflected in the result that we have reported, number-one. Number two, as we worked on the backlog as Tim mentioned we done a serious of significant cost reductions in Midland on the manufacturing fabrications side that are not yet reflected in the result we have reported at the fourth quarter. So we will see the benefit of those beginning call at March 1st forward. Then the last one we talked about system implementation and we are going to be working at from the next 12 to 18 months and we believe that we can get a material benefit of that initiative beginning early in 2017, that we equate to somewhere between $4 million and $6 million on an annualized basis. So I would say that some of those three has some significant benefits that are forthcoming.

[Andrew Burd:]

Yeah, it sounds like some great tailwinds. Two housekeeping questions first is can you - the non-cash costs and compressors sold add back to DCF, is that included in adjusted EBITDA?

[Elijio Serrano:]

No.

[Andrew Burd:]

Okay. And then second, sometimes obviously the leveraged calculation can be sensitive with smaller companies with $100 million EBITDA. Elijio, is there any tips you can give us in terms of accurately calculating the bank covenant debt-to-EBITDA calculation because I know sometimes there are some adjustments made?

[Elijio Serrano:]

The only significant item I would say is that we get to add back in some cases unusual times clearly goodwill impairment and fixed assets write-off are non-cash charges on those don’t impacted and we also have to take into account to three letters of credit that might be up to at about $10 million or so I think letters of credit, everything else is not material.

[Andrew Burd:]

Okay, and final question Elijio, I apologize if this is a crazy question, but what point does CCLP stocks get so cheap that TETRA buys the remaining piece that it lesser-known or adds to its position.

[Elijio Serrano:]

Interesting question, if you look at the price were trading at, which is around $4, between $4 and $5 a unit

[Andrew Burd:]

Great, that’s all the questions I had, thank you.

[Operator:]

And our next question comes from Selman Akyol of Stifel.

[Selman Akyol:]

Thank you, good morning.

[Tim Knox:]

Good morning.

[Selman Akyol:]

I think you gave the number and I just missed it, what was that the balance at the end of the quarter?

[Elijio Serrano:]

The depth balance at the end of the quarter was - net debt witches kept after $10 million of cash is $570 million.

[Selman Akyol:]

Gotcha, thank you and I guess I understood your comments correctly you sounded like probably have $30 million to $40 million beyond the needs of your distribution you could use to anticipate reducing debt, am I thinking about it correctly?

[Elijio Serrano:]

Right, so, first of we’re not intending to give any guidance for 2016 because there is too much uncertainty. But if you simply take a look at last year’s cash flow from operations of $102 million, back off maintenance capital, back of a $51 million of distribution, you got quite a bit over $30 million of cash still available to pay down debt, offset weaker earnings or investing good capital.

[Selman Akyol:]

Gotcha, that’s helpful thank you and then I am just wondering, can new I guess it talk about you know the outlook for the Eagle Ford and maybe some of other basins but I was most interested in Eagle Ford just kind of what you see going down there?

[Tim Knox:]

Selman, in all the basins we have customers that are looking for ways to reduce cost and investments curtail obviously, unfortunately we operating in Eagle Ford and West Texas and remain in touch with customers, trying to help them optimize where they can looking for opportunities and pickup market share. And in West Texas, I’m sorry I don’t know what the real count is this week but of course it’s been declining less than other areas, so our outlook is to throughout the year hold on our pick up a little bit what we can, but I don’t think that I would point any of the exploration and production companies having unexpectedly high activity.

[Selman Akyol:]

Okay, thanks very much.

[Operator:]

The next question is from Mike Scrappily [ph] of Nomura.

[Unidentified Analyst:]

Hi, thanks for taking my questions. First one can you tell me how price utilization are tracking so far in 1Q compared to 4Q?

[Tim Knox:]

Unfortunately we can’t talk about what is going on in the first quarter I did mention that with some $2 gas and some $30 oil it is certainly continues to put more pressure on the producers and there are places fair for those customers continue to look for ways to operate profitability and look forward service providers or discount. So I will not be was surprised to see some continued pressure on prices and so if we look at the fourth quarter 2015 compared to the fourth quarter of 2014 you can find the our dollars per horsepower per month is down about 12% and totaled way across the full-year and then the decline in dollar for horsepower, you have to be careful with it. As the company’s average horsepower per compressor package increases and the dollar for horsepower in we are actually goes down. At 50 horsepower compressor package might have a charge of about $2000 per month but 500 horsepower certainly doesn’t bring $20,000, it is more like maybe $10,000 and if you double that again at 1000 horsepower is not bringing 20, it is $15,000. So you got to be careful about with horsepower per month but we have had decrease about 12.5% in 2015 from start in to the year and I would anticipated a bit more pressure going forward. On utilization we talked about utilization after our retirement utilization at 82%, I also mentioned how when compared to the suppliers downturn it is still fairly positive, supplier downturn, sorry a bit from memory here at 2009 I think we ended the year somewhere down around the 76% utilization this downturn has been longer and this downturn that let utilization held up better.

[Unidentified Analyst:]

Thank you and also I just questions on the revolver on the AVL, is for barring bit usually $400 million base today so first and foremost asset-based facility said the bird it is the cash flow based facility than the living. Every time in $400 million facility and it is the availability is that 5.29% EBITDA so 400 and Maritza liable this kind of hundred million dollars This is - I would add we think it is more than sufficient given the way we expect them to be free cash flow little positive.

[Unidentified Analyst:]

Okay and then I think you also mentioned the command of 5.2 funds times to leverage currently is that something done on five attempts I think you said they into the area just check the data when he steps down times, September or this year.

[Tim Knox:]

At this okay all right thank you

[Operator:]

The next question comes from Sam Wexler of Riverbridge Capital.

[Sam Wexler:]

Hey guys wondering if you could tell me how much of your Russian revenue comes from over 800 horse power recruitment and then maybe if you could talk about different if there is any impressing plan and in the overall in the 804 for full-year below the 800 or so.

[Elijio Serrano:]

So the Ravenna coming in from the 800 plus, so if you look at the split some of the equally category the area hundred to 800 and over 800 however I think that there are more focused on the profitability in the revenue coming from each of those classes and for margins are much stronger in over 800 and your second question please repeat it.

[Sam Wexler:]

Maria seeing difference in placing trends in the over 800 versus under other two categories I guess

[Elijio Serrano:]

Less on the over 800 and keep in mind what the larger units most of the larger units are deployed in gathering systems that are connected to infrastructures as it is much harder to displace to work versus some of the smaller units that are mobile and easy to transport so we are seeing less price and the we have the smaller unit.

[Sam Wexler:]

Great can you quantify that in terms of percentage pricing pressure you saw in Q4?

[Elijio Serrano:]

I would say that historically be published or said in recent call that the pricing pressure on this smaller units has been high single digits low double-digit the pricing pressure that we have seen on the larger units has been met single digits.

[Sam Wexler:]

Okay, thanks.

[Operator:]

And our next question will come from Zak Halstead of Aegon.

[Zak Halstead:]

Hey guys thanks for the call has there been any discussion at your level or at the GP it to certain look at the ones given they are treating the $.50-$.60 range

[Elijio Serrano:]

Zak but our credit facility does not offer the opportunity to take a look at the bonds I think as we discuss options with our banks into the future that is certainly one area that is very tempting to find a solution.

[Zak Halstead:]

Excellent, thank you.

[Operator:]

[Operator Instructions] And our next question will come from Praveen Narra of Raymond James.

[Praveen Narra:]

Hey, good morning guys.

[Tim Knox:]

Good morning,

[Praveen Narra:]

Well thanks there was a little bit of Watford Turtle for could you naturally given the environment could you give us a sense of where that utilization kind of trended over the beginning of this year.

[Tim Knox:]

Praveen, I am not sure I understand the question.

[Praveen Narra:]

I guess in terms of the utilization trend you see over the course of January and February have that deviated enough if the trend we have seen during 4Q in terms of for horsepower

[Tim Knox:]

The trend is not distinctly different than what has been for the past 18 months compared to prior 12 months certainly again the current commodity prices are putting pressure on producers and the closer have more pressure there is

[Praveen Narra:]

Okay, but there hasn’t been any acceleration of conversation or acceleration of the utilization of fund

[Tim Knox:]

Not since end of December things have not the trends have not changed

[Praveen Narra:]

And I know that we talked about last quarter potential going into the opportunities is that conversation you guys still having other opportunity still out there on hold

[Elijio Serrano:]

No I would say that we have been evaluated opportunities better when we do this we want to look at the concentration of assets either in geographically and with that deals to subverting and also what were counterparty we would be absorbing and in the situations that has been presented to us those have not has been encased we are comfortable therefore we didn’t act we will continue to evaluate them and again back to whenever we are very focused on returns we expect for and if then only not so we can try to look at them but we have not seen any financially impact to us

[Praveen Narra:]

Okay perfect and then if I got ask is the cost of ERP system is that included in 2016 is that part of 8 million committed

[Elijio Serrano:]

So we guided $20-$30 million for the full-year 2016 which apportioned in the four ERP system I think for almost 2 years between 16 and 17 and it is part of $20-$30 million and a dust we can turn it on and off and we have not yet made any significant cash outlays in that area

[Tim Knox:]

And this is a bit more clarification I mentioned growth Of 18,000,000 to 2016 than 8 million is Karl complete grow that is already in process

[Praveen Narra:]

Okay perfect thank you very much guys

[Operator:]

And this concludes our question-and-answer session; I would like to turn the conference back over to Tim Knox for any closing remarks.

[Tim Knox:]

There have been several questions we addressed few things about what is the first we are looking like so let’s cover this a couple of points 2016 certainly began with further challenges reducers as well as energy service sector West Texas immediate struggling to stay away about 30 fighting to stay about $2 US recounts fallen almost 25% year to date and to down our hundred and 75 rigs our management is develop a business plan designed to navigate the challenges but specific revenue and cost initiatives for 2016 that have already been implemented they will continue to be measured reinforced and adjusted as necessary to maximize the changes throughout the year we are committed to diligently manage your business for the well-being of our shareholders customers and employees alike and confident that we will continue to demonstrate the success throughout this time down cycle and poised for success when market conditions return in our favor I would like to mention enclosing that on Thursday, March 3 we will be participating in Capital Link Annual MLP Forum in New York City. We hope to see some of you there I’ve made ourselves available for you at or outside that event. The material presented there will be posted on our website extra week. Thank you for your interest CSI Compressco and thank you for taking the time to join us the small morning this concludes the call.

[Operator:]

Thank you, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.