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Compressco Partners LP (NASDAQ:GSJK)

Q4 2012 Earnings Call

February 26, 2013 10:30 am ET

Executives

Ronald J. Foster – President

James P. Rounsavall – Chief Financial Officer

Analysts

J. Marshall Adkins – Raymond James

TJ Schultz – RBC Capital Markets

Operator

Good morning and welcome to the Compressco Partners LP Fourth Quarter 2012 Results Conference Call. All participants will be in 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 Mr. Ron Foster. Mr. Foster, please go ahead.

Ronald J. Foster

Good morning and thank you for joining the Compressco Partners fourth quarter results conference call. Before I begin my presentation, I must first remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and announcements made by Compressco and are based on the number of factors.

These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the company. You are cautioned that such statements are not guarantees of future performance and those 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 distributable cash flow or 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 10-K is planned to be released on or before March 15, 2013. I would like to get that out of the way.

Compressco Partners LP is a provider of compression-based production enhancement services, which are used in both conventional wellhead compression applications and unconventional compression applications, and in certain circumstances, well monitoring and sand separation services. We provide our services to a broad base of natural gas and oil exploration and production companies operating throughout many of the onshore producing regions of the United States. Internationally, we have significant operations in Mexico and Canada and a growing presence in certain countries in South America, Eastern Europe and the Asia-Pacific region.

At the risk of being redundant to those on the call, I’d like to take just a moment to discuss our business has changed to reflect more emphasis on oil and liquids production. We actually change some of our business language in the 10-K, but I just wanted to touch on that a little bit. We have mentioned many times that we apply our production enhancement technologies to both conventional and unconventional production.

Over time, both oil and gas, excuse me, over time both oil and natural gas wells exhibit declining pressure in production, production enhancement technologies are designed to enhance daily production and total recoverable well reserves. Our conventional compression-based production enhancement services are utilized to increase production by either de-liquefying the well, lowering the wellhead pressure and increasing gas velocity.

Our conventional applications include, production enhancement for dry gas wells and liquid loading gas wells, and backside auto injection systems, which we refer to as BAIS. Our unconventional applications are used primarily in connection with oil and liquids production and include vapor recovery and casing gas system application.

In certain circumstances in connection with our primary production enhancement services, we also provide ongoing well monitoring services and in Mexico, automated sand separation services. While our conventional applications are primarily associated with mature gas wells with low formation pressures, they are also effectively utilized on newer gas wells have experienced significant production declines.

Our field services are performed by our highly trained staff of regional service supervisors, optimization specialists, and field mechanics to get the most out of these wells.

Our call today will reflect the fourth quarter 2012 results for Compressco Partners. On January 18, 2013, we announced that the board of directors of its general partner declared a cash distribution attributable to the fourth quarter of $0.42 per common unit, this is an increase of little more than $0.02 over the previous quarter amount of $39.75 which was an increase of one penny prior to that. These distributions were paid on February 15 to unit holders of record on February 1, 2013.

Compressco Partners has managed by Compressco Partners GP Inc. which is an indirect wholly owned subsidiary of TETRA Technologies, Incorporated, which is the New York Stock Exchange company listed under TTI.

Looking back at 2012 in the quarter, we are very pleased with these results. I would like to address some financial highlights and settle little light on the operational performance.

Consolidated revenues for the quarter ended December 31, 2012 were $32.4 million versus $26.3 million in the fourth quarter of 2011. Income before tax for the quarter ended December 2012 was $5.9 million versus $4.2 million in the fourth quarter of 2011. Our highlights of the sequential year-over-year revenue growth of $6.1 million or 23% growth at the top line and income before tax for the quarter ended December 2012 of $5.9 million is roughly 40% improvement over the fourth quarter of 2011.

During mid-2011 we began strategies to improve our global position wellhead compression by deploying assets into attractive markets will provide the best returns on our capital. In addition to the capital investment required we challenged our Compressco team to improve our supply chain capability to efficiently upgrade and mobilized assets from the U.S. to markets such as Mexico Asia-Pacific and Europe. The organization responded addressing procurement, manufacturing of logistical challenges. We enhanced our processes to evaluate idle equipment for upgrade to mobilize or redeploy these units globally. In addition, we worked within the U.S. and Canada to increase utilization of our cold weather units in opportunistic market such as the Bakken.

Both fourth quarter and full year 2012 results reflected development of these strategies. We have seen continued improvement of field service fleet utilization in both domestic and international markets. The number of compressor units providing service has increased by 8.3% as the partnership utilized an average of 3,149 compressor units to provide services during the three months ended December 31, 2012 compared to an average of 2,907 compressor units utilized during the three months ended December 31, 2011.

At December 31, 2012 Compressco Partners had cash of $13 million with debt on the balance sheet of $10.1 million which JR will cover in more detail during this presentation. My final remarks on 2012 are that we have accelerated our focus on expanding unconventional resource applications and growing our business outside the U.S. The Compressco team diligently deployed assets into Latin America over 2012, Europe and Asia Pacific markets stood out the rest of the year while domestically focusing on unconventional application supporting associated gas from liquids production, vapor recovery and casing gas systems.

Following a strong 2012, I am very excited by the opportunities we see both internationally and within the U.S. While natural gas price expectations in the U.S. remain below $4 per Mcf, we maintain our focus on unconventional applications, and further deployment of our GasJack and V-Jack production enhancement units. We believe that our professional field service team, LEAN manufacturing, and supply chain focus position us well to benefit from the anticipated strengthening in demand for our conventional and unconventional service applications.

Internationally, we will continue to seek out and expand our operations into markets such as Latin America, Asia Pacific and Europe. The value propositions we provide our customer gives us strong incentive to utilize our services for both an economically sensible and environmentally sensitive solution to increasing production of the producing properties.

I will now turn it over to JR Rounsavall, CFO of Compressco Partners for a more detailed look at the financials.

James P. Rounsavall

Thank you, Ron. Over the next few minutes, I will cover the following topics, the financial highlights and some of the key focus areas. The financial highlights include following Ron’s conversation the top line revenue growth for the fourth quarter 2012 compared to the fourth quarter 2011 and the full year 2012 compared to 2011.

We experienced in the fourth quarter 2012 total revenue increase of 23%. Fourth quarter 2012 compression and other services revenue increased to 39% and fourth quarter 2012 EBITDA of $9.4 million. And the key focus areas that I will discuss today are the asset deployment, the fleet status and utilization, and working capital, CapEx and some balance-sheet items.

In asset deployment, as Ron mentioned, following our strategy deployment of assets outside the United States contributed significantly to the increase in compression and other services revenues primarily services in Latin America, reflecting assets deployed into Latin America starting back in 2011 and throughout 2012. In addition to the strong revenue growth we have experienced in our Latin America operations, compression and other services revenues also increased in the U.S., Canada and particularly Asia-Pacific during the fourth quarter 2012 compared to the prior year.

U.S. activity benefited from increased demand for our unconventional applications. During 2012, we have also been able to deploy cold weather units from Canada into the United States to support cold weather needs here. Another positive note we have seen recent increase for unconventional applications in Canada.

On fleet status, the average number of compressors and active service for the three months ended December 31, 2012 was 3,149 units, its 242 units higher than the prior period, an 8.3% increase as Ron mentioned. The revenue growth certainly followed the international fleet growth. We also generated positive U.S. fleet growth during the fourth quarter primarily new 20 horsepower and 40 horsepower VJack unit which Ron has discussed in previous calls.

Cost of compression and other services as a percentage of compression and other services revenues increased 3.3% for the quarter ended December 31, 2012 compared to the fourth quarter of 2011. Higher compensation cost including labor cost increases in the Mexico and the U.S. were factors. SG&A as a percentage of total revenues were 15.8% compared to 17% in the fourth quarter 2011 when we had higher levels of professional consultancy services following the offering on a lower revenue base compared to the fourth quarter of this year.

The effective tax rate for the quarter ended December 31, 2012 was 16.3%. During the fourth quarter, current income tax benefit was associated with book to tax timing differences. Consistent with prior releases, we have provided reconciliation from GAAP to non-GAAP financial measures and included that in the press release. On working capital and CapEx, that’s the final item I will address today before we turn it over to call, as we have experienced a greater mix of revenues outside the United States, monitoring our cash flows and receivable collections is certainly a key focus areas since overseas receivables can experience longer collection times.

At December 31 we had a cash balance of $13 million, with $10.1 million in debt. During the fourth quarter our cash flows in the fourth quarter reflect an increase in cash and cash equivalents of $2.3 million. Accounts receivable generated a source of cash of $1.8 million during the fourth quarter.

Our CapEx for the fourth quarter was $4.2 million and $21 million for the full year, with the majority of this being an expansion in capital expenditures. I certainly encourage you to review our Form 10-K when it’s filed.

And at this time we will turn the call over for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from Marshall Adkins with Raymond James. Go ahead sir.

J. Marshall Adkins – Raymond James

Good morning guys.

Ronald J. Foster

Fine, how are you?

James P. Rounsavall

We’re fine.

J. Marshall Adkins – Raymond James

You guys had tremendous top line growth here obviously driven by the 8% increase in units are active units and as well as the price per unit going up. Is that sustainable, I mean that, 20% plus top line growth is damn solid, can you continue that?

James P. Rounsavall

Well, certainly on a larger revenue base it’s going to be more and more difficult without a doubt. But all we see is that over 2012 we deploy the lot of units that we had idle into the fleet, and so we saw a good revenue increase and we’ll see a sustained revenue levels and then we’ll be of course looking at trying to increase that as well over the year.

J. Marshall Adkins – Raymond James

I presumed some of that revenue increase was pricing as well, is that accurate?

Ronald J. Foster

No.

J. Marshall Adkins – Raymond James

So prices stay the same as more…

Ronald J. Foster

Prices stay the same.

J. Marshall Adkins – Raymond James

Open up the utilization on the existing stuff.

Ronald J. Foster

Right, right. We are open to see as we get a higher percentage and always this question asking, and it's a difficult question to answer, but what our mix between conventional and unconventional is, but we estimated somewhere around the 27%, 28% as we continue to increase more into the unconventional side, we won’t be as price constrained as we are at $3.50 Mcf gas. So we hope amounts in the future or some price movement that will up impact some of the increase in the salaries that we saw both in Mexico and U.S.

J. Marshall Adkins – Raymond James

Should we read into this that if demand continues to ramp up as it as, you’re going to run out of these excess units that are sitting around that you’re going to start spinning money to build a bunch in new ones?

Ronald J. Foster

That's definitely a good scenario in terms of increasing our utilization further and we certainly have the capacity, the manufacturing capacity here in Oklahoma City and we're very – we have worked with our supply chain process to make sure we can rapidly move in that direction if the demand want.

James P. Rounsavall

Marshall, what we are seeing now is that a traditional application. We're not spending a lot of money on redeploying assets, but when we get a chance to put something in non-conventional or move units from Canada into the Bakken, where we may have to do some refurbishment those are the areas that we're investing in the gold capital side of an upgraded existing equipment. We are probably in the high 86 range on utilization now, so I would say that originally we had planned to not build new equipment until 2014. I would definitely say we will be building equipment in 2013 for increased demand.

J. Marshall Adkins – Raymond James

Right.

Ronald J. Foster

It will be, Marshall, yes it will be a higher proportion of new units in 2013 is our expectation.

J. Marshall Adkins – Raymond James

Perfect. Last one from me, costs jumped up. You mentioned Mexico, was this – was the cost kind of one-time deal to the expansion in Mexico or is this more kind of a run rate we should expect and a margin rate we should expect going forward?

James P. Rounsavall

That's a great question and it's a little bit of both. There are some cost increases in somewhere of Latin America with labor increases and union contracts and those things. But we also had some continually what I will call one-time expenses, legal expenses and those things to finish the finalization of partnership details that head us in 2012 which will – we won't see those in 2013. We were I guess a little surprised as some of the expenses that we did have in 2013 that weren’t in the original plan that we now have planned for some of the cost allocations (inaudible) agreement into Mexico. We've gotten those where we feel it’s a much fair basis so I won’t say it is 50-50, but we have seen some one-time expenses flesh out, but we will see a little higher run rate on some of the labor in some of the higher growth areas.

J. Marshall Adkins – Raymond James

Got it.

Ronald J. Foster

A good example is when you go into Bakken, you see higher – our service costs are obviously going to be higher, so we charged a higher price for our equipment out there. But – it’s any time here in the boomtown mentally you do have a little prostrate, its going to take a little while to flush out.

J. Marshall Adkins – Raymond James

Right. Thanks guys.

Ronald J. Foster

Thank you.

James P. Rounsavall

Thank you, Marshall.

Operator

Our next question is from TJ Schultz with RBC Capital Markets. Go ahead please.

TJ Schultz – RBC Capital Markets

Hey guys, good morning. I guess just first on distribution, may be you can kind of help me get it comfortable with kind of what coverage you are ultimately comfortable with, because if you take your 2013 outlook and your current distribution coverage looks pretty strong and your comment on distribution growth was I think that was kind of depended on continued strong demand and your ability to execute. So the question is really, what kind of coverage cushion do you want to keep or you get your arms around how sustainable some of this demand looks?

Ronald J. Foster

That’s one of those questions that we always like to kind of give the politically correct answer that our Board of Directors sets that and we look at that quarterly and we have a dedicated meeting when we look at that, but its going to be somewhere in the neighborhood of 1.2 to 1.25 is what we are targeting as a distribution coverage.

TJ Schultz – RBC Capital Markets

Okay. Yeah, I appreciate that. I mean that’s kind of your long term…

Ronald J. Foster

Yeah.

TJ Schultz – RBC Capital Markets

Okay.

Ronald J. Foster

I think we were somewhere around the 1.30, we brought it down slightly. So overall I think that’s where we want to be. We need to be able – to have enough nimbleness that we can spend some money to send units to an area that looks promising so we try to do what’s right so that we will have a [unit set of point].

TJ Schultz – RBC Capital Markets

That makes sense. I guess just on your profit outlook for 2013 and then taking the $20 million in CapEx for this year, it sounds like some of that is for kind of a new build allocation. I guess just with the CapEx, what is the ramp or contribution from that to your 2013 profit guidance or some of these growth initiatives more helpful to kind of what we look forward for 2014 and beyond?

Ronald J. Foster

It's twofold as well certainly as we deployed assets throughout – started back in 2011 and throughout 2012, there will be a full-year benefit of the assets deployed, and then the additional capital expenditures that were provided in the financial guidance, press release, as I mentioned a minute ago significantly, more proportionately new builds to then further expand into new opportunities and generate further revenue and profit growth.

TJ Schultz – RBC Capital Markets

Okay, but that $20 million is any of that impacting 2013 or is that stuff that you're going to spend to the year that will start impacting in 2014?

James P. Rounsavall

I see your question, I would say that we expect to 2013 in terms of CapEx by quarter to proportionately follow what we did in 2012 where we have the levels higher in the first half of the year, and then we'll see how it warrants based on the demand in the market as we move into the third and fourth quarters.

Ronald J. Foster

It's usually about, and in dollar where this number, but I’ll just [show] this out at approximately, which is about a quarter and a half lag before we spend the money until we actually get it into producing the revenue, quarter and half, two quarter lag…

James P. Rounsavall

Depending on where the assets going...

Ronald J. Foster

Right.

James P. Rounsavall

We can certainly deploy electric units.

Ronald J. Foster

Yeah.

James P. Rounsavall

Very quickly in the U.S. and gas jacks international. So Ron’s comment is a blended.

TJ Schultz – RBC Capital Markets

Okay. That’s all I got. Thanks guys.

James P. Rounsavall

Thank you TJ.

Operator

(Operator Instructions) There are no further questions in our queue. This will conclude our question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may not disconnect your lines.

Ronald J. Foster

Thank you.

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