Compressco Partners' CEO Discusses Q4 2012 Results - Earnings Call Transcript

May. 7.13 | About: CSI Compressco (CCLP)

Compressco Partners LP (NASDAQ:SPNC)

Q1 2013 Earnings Conference Call

May 7, 2013 10:30 AM ET

Executives

Ronald J. Foster – President

James P. Rounsavall – CFO

Analysts

Jim Rollyson - Raymond James

TJ Schultz - RBC Capital Markets

Operator

Good morning and welcome to the Compressco Partners First Quarter 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, President and Director. Please go ahead.

Ronald J. Foster

Good morning and thank you for joining the Compressco Partners first quarter 2013 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 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 distributable cash flow or other non-GAAP financial measures.

Please refer to this morning's press release or to our public website, the 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-Q is planned to be released on or before May 15 of 2013.

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.

Our call today will cover the first quarter 2013 results Compressco Partners. On April 19, 2013, we announced that the Board of Directors of the General Partner, declared an increased cash distribution attributable to the first quarter of 2013 of $0.425 per common unit. This represents a third sequential increase to our distributions.

The first quarter distribution, where we pay on May 15 to unitholders of record on May 1 of 2013. Compressco Partners is managed by Compressco Partners GP Inc., which is an indirect wholly-owned subsidiary of Tetra Technologies Incorporated, which is listed on the New York Stock Exchange under the symbol, TTI.

I will address some key first quarter operational highlights and overview of our financial performance, before I turn the call over to our CFO, James Rounsavall. First quarter 2013 highlights, our sequential year-over-year top line revenue growth of $8.3 million or 39% over the prior year. Our revenues in the U.S. and Canada, benefitting from increases in average prices for natural gas and oil, income before tax for the quarter of $5.3 million compared to $3.3 million in the first quarter of 2012, with all of these factors contributing to our third sequential distribution increase.

In the first quarter 2012 call, I summarized our service offerings, including conventional and unconventional applications. During the first quarter 2013, these unconventional applications utilized primarily in connection with oil and liquids production, and including vapor recovery and casing gas system applications, continue to drive incremental U.S. and Canadian revenue growth. Following on the strength of the fourth quarter and prior year investments in Mexico, our results outside the U.S. continue to be highlighted by Mexico.

In certain circumstances in Mexico, in connection with our primary production enhancement services, we also provide an ongoing well monitoring services, and automated sand separation services. These services were also in higher demand in Q1 2013 compared to the prior year period.

Looking at the fleet for the three months ended March 31, 2013, the average number of compressors in active service, 3,174 units is 9.1% higher than the prior year period. We generated positive first quarter revenue growth in Latin America, the U.S., Canada and other international locations.

Within the U.S., we have benefitted from continued deployment of our electric VJacks. Canada has benefitted from higher utilization levels, supporting unconventional applications in the Cardium basins. As March drew the quarter to a close, we did begin to see service level declines in Mexico due to budgetary reevaluations by our major customer.

Feedback from our client in Mexico indicates that this is a temporary decline, while they assess their budget funding. Nonetheless, we have taken cost reduction measures to mitigate the impact of the lower activity.

We remain confident in the intermediate and long term fundamentals of our Mexico business. While the demand for unconventional applications has helped us grow the U.S. and Canadian revenue base, we have also seen some improvement in natural gas prices in the 2012 and through the first quarter of 2013. As prices firm up, we look forward to addressing the [allowable] discounts, and pricing pressure on our domestic business, primarily conventional applications.

In addition to planned pricing actions, we have initiated necessary cost measures summarized as follows; we have taken reductions in headcounts in Mexico for service personnel, consistent with current activity levels. A consolidation of our service management into a dedicated, innovative service solutions group, to concentrate on optimization, training, technical services and emission compliance, and a consolidation of our sales and marketing management into a focused combined resource, to reduce SG&A overhead.

These actions, combined with our focus on pricing actions should generate improved margins over time. At March 31, 2013, Compressco Partners had cash of $9.4 million, with debt on the balance sheet of $14.3 million, which JR will cover in more detail during his comments.

A summary on the first quarter 2013, that Compressco continues to invest in training our fleet for unconventional resource applications. Our international growth strategy has contributed to revenue and profitability and increased distributable cash flow.

During 2013, our strategy to diversify our domestic revenue base by expanding our envelope to address unconventional applications, supporting associated gas and liquids production, (late) recovery in casing gas production is on track. Internationally, we will continue to seek out and expand our operations in the markets providing growth opportunities. As mentioned, we remain optimistic on improved natural gas pricing, well within our conventional production enhancement efforts as well.

Following JR's overview, I will have some closing comments after the Q&A session. I will now turn it over to James Rounsavall. CFO of Compressco Partners for additional comments on the results and financial position. JR?

James P. Rounsavall

Thank you, Ron. Further covering our first quarter financial highlights; we were certainly pleased to report solid sequential distribution increase, additional expansion, capital expenditures, focused principally on the U.S. fleet growth, and expansion internationally outside Mexico. The benefits of improved U.S. and Canadian natural gas prices, and improved U.S. and Canadian revenues and utilization.

The deployment of assets outside the U.S. contributed to the continued increase in compression and other services revenues, primarily, services in Latin America. Units manufactured, upgraded, and placed into the U.S. and Canadian operations during Q1, support our objective to further diversify our conventional and unconventional revenue (inaudible).

During the first quarter 2013, over $4 million of expansion CapEx was weighted towards the U.S., including cold weather units, gas jacks and electric 20-horsepower and 40-horsepower VJack units. The remaining $3 million was directed at further diversification of our international revenues, including Canada and Argentina.

Cost of compression and other services as a percentage of compression and other services revenues, increased 4.1% for the quarter ended March 31, 2013 compared to the first quarter of 2012. Higher compensation related expenses include increases in Mexico, following the revenue growth there, and in the U.S., where we had pay increases at the beginning of the year.

As Ron discussed, we are taking actions to improve both pricing and to reduce costs. SG&A was flat compared to first quarter 2012, as increases in administrative, salary and personnel-related expenses were offset by decreases in bad debt and other administrative expenses. At March 31, we had cash balance of $9.4 million compared to $13 million at December 31, with $14.3 million in debt.

During the first quarter, our unaudited statement of cash flows reflect a first quarter decrease in cash and cash equivalents of $3.6 million. Accounts receivable generating the use of cash of $8.3 million during the first quarter. Accounts payable, a source of cash of $6.4 million, due to activity growth and the affiliate payable costs and services, the investing activities, mostly expansion, capital expenditures for the first quarter of $7.9 million, up from $4.2 million in the fourth quarter of 2012.

As just noted, our balance sheet changes reflect an increase in accounts receivable of $8.2 million, on both higher and higher international DSO, principally, Mexico. We currently estimate that a substantial portion of our aged Mexico receivables, will be collected by late Q2, or early Q3 of 2013. To provide additional liquidity to our operations, we are taking steps to exercise our accordion feature on our credit facility.

I encourage you to review our Form 10-Q when it's out, and at this time, I will open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Jim Rollyson with Raymond James.

Jim Rollyson - Raymond James

Good morning guys.

Ronald J. Foster

Good morning Jim.

Jim Rollyson - Raymond James

Ron, maybe you could delve into Mexico a little more, just kind of with this budget reassessment maybe, how many units that's going to impact you, kind of how you think that plays out from a fourth quarter to first quarter to second quarter kind of unit count in Mexico, and maybe impact on margins in the upcoming quarter and just, kind of your general plan?

Ronald J. Foster

Sure. Well, of course, anytime, with budget reductions like that, it becomes a little challenging to the business, and that's where we have diversified so much into the unconventional side in the U.S. We believe the biggest budget reductions are going to hit the exploration side, and not the production side, but in the short term, we will see some -- what I look at more is catching the catching the brass, and I think that's kind of what I tried to say in the script was that, probably, April they will reassess some of the budgeting and then as production requirements hit, they will look at -- primarily, in the northern region, bringing those units back to work. So at this point, it's kind of a moving target. We know that there will be some budget reductions in practice, but we don't know to the full extent yet. We have taken some cost measures in Mexico, but it's really kind of a very [fluid] situation right now.

Jim Rollyson - Raymond James

So with what you know at the moment, how do you think you are -- what kind of impact you think this has on margins, given obviously the revenue impact is the short term thing, but you are also working on kind of taking the cost measures, do you think margins stayed relatively flat for you sequentially, or do you think margins stayed relatively flat for you sequentially, or do you think that [dims] margins a little bit, before this all catches back up?

Ronald J. Foster

I think the margins -- we are not that concerned with the margin impact, as much as the revenue impact. So you saw a decline in April, and what we are hearing is that, we should see a pick back up second half of the year, and be (inaudible). But now, where it was, very close to that. But we haven't seen that -- we have a cost pressure on the margin side there, it has been more of a kind of like stopping the work flow, till they figure out what the budget situation is.

Jim Rollyson - Raymond James

Got you. Maybe just switching back to the U.S., kind of what you are seeing in terms of pressure demand, what areas, applications, do you think give you the best opportunities this year, and is gas back here close to $4, is that starting to have any positive impacts on your conventional gas [track] business or just maybe a little color on the U.S.?

Ronald J. Foster

Sure. The U.S. is, where we see a lot of excitement, especially when I mentioned in the investor side, the cold weather. The cold weather side of our business, where we are using units in the Northern part of the United States and may require a little upgrade to the application, and they require buildings. So we see good demand there for unconventional -- Rockies, further north of the Rockies, and so I'm real excited about that. We are also seeing just the conventional play, South Texas, where it is a gas market. Some of the East Texas operations, where we are doing testing again, where we are setting machines, so we see an uptick there. Our utilization numbers are very pleasing, with the fact that we have to -- for the first time, we have been building new units to deploy into the U.S. marketplace.

Jim Rollyson - Raymond James

Thanks and then the last one for me, the SG&A, D&A both came in a bit lower than what we were thinking. Maybe JR, some thoughts for the rest of the year?

James P. Rounsavall

Certainly, the SG&A, we have -- as Ron mentioned, we have taken some actions there to do some restructuring in the U.S., so we are expecting a lower run-rate. On the equity comp side we had higher, there were some 200,000 or so higher in the fourth quarter than the first quarter, that's tied to that things in that period. So at least right now, we expect a lower run rate on SG&A and we will probably continue to look for opportunities to cut costs as well.

Jim Rollyson - Raymond James

Do you think this quarter's run rate is pretty fair going forward, more or less? And how about on depreciation?

James P. Rounsavall

Well, we do expect another $5 million or so of CapEx in the second quarter. So I would say if you look at our CapEx projections, they are going to mirror last year, in terms of higher in the first quarter then down in the second quarter, and then our projections are, that this will go down in the third and fourth quarter, similar to last year, and we will unlikely see a significant demand change, that will lead us to --

Ronald J. Foster

And I would just add that, we are not spending CapEx on things we don't have orders for. So we are seeing demand drive the increased CapEx.

Jim Rollyson - Raymond James

Got you. Okay. That's helpful. Thank you.

James P. Rounsavall

Thanks Jim.

Ronald J. Foster

Thank you.

Operator

The next question comes from TJ Schultz with RBC Capital Markets.

TJ Schultz - RBC Capital Markets

Hey guys, good morning. I'm going to stay on Mexico. So I guess this is your largest customer, 26% of 2012 revenue. So just really want to get a feeling for what amount of this is at risk here? I mean, you mentioned that this sounds temporary, but your borrowings indicate that you require to bid on new contracts this quarter for the majority of that revenues. So has this bid process been pushed back, is it cancelled or is that still up in the air?

Ronald J. Foster

It's right on track for the extension that we received, take us through the end of June, and we are currently working with our Mexico team to bid those contracts. You want to add something to that, JR?

James P. Rounsavall

Just to say that you are absolutely right, TJ, and as mentioned in our Form 10-K and certainly, we are going through the process of making updates for the 10-Q as well. But at this point in time, no further comment to Ron's.

TJ Schultz - RBC Capital Markets

Okay. But I guess, how are you bidding if budget constraints are still up in the air? I mean, what's the timeframe that you expect for them to have some resolution there?

James P. Rounsavall

It's JR. The current declines in activity are based on the current budget, and not the next year's budget, which goes into effect on October 1.

Ronald J. Foster

The contracts will be rebid for the process that starts at, I guess, July 1, and that's when we expect to see some pickup.

TJ Schultz - RBC Capital Markets

Okay.

James P. Rounsavall

I guess I am just trying to -- I am struggling how to answer that correctly, because it is such a fluid situation. But right now the current budget that we are working under, they've said that they have had reductions and they have always spent their budgets in some of the regions, and so they are kind of catching their breath, I guess is the best way to say that, in deciding where they need to allocate their funds. One of the things that we believe very strongly is that, the production enhancement opportunities will be a stronger motivator for them to spend money on, than exploration.

TJ Schultz - RBC Capital Markets

Okay. Can you -- how aggressive have you got on the cost reductions there, if you can sort of quantify that, and then how quickly can you ramp that back up, assuming you go through this bid process successfully?

James P. Rounsavall

That's a great question TJ, its JR. The team in Mexico, absolutely on top of it and has monitored daily, the information that they are receiving from the customer, and have appropriately taken action in the short term, while making sure, and I would say fairly significant reductions in terms of staffing to the level of work presently, but while also making sure, we could bring people back on as work is provided and service call outs for oil production, as those services come back.

TJ Schultz - RBC Capital Markets

Okay. Fair enough. Thanks guys.

Ronald J. Foster

Thanks TJ.

Operator

[Operator Instructions]. The next question comes from [Sidney Michaelson, Private Investor.]

Unidentified Analyst

Hello.

Ronald J. Foster

Good morning.

James P. Rounsavall

Good morning.

Unidentified Analyst

Yes. To ask, I believe his name is Jim, on the units you have say in Mexico, Argentina, worldwide really, can you share with -- how many units you have, other than what's posted, I guess in the U.S. and possibly Canada? How many units do you have in the field, overall?

James P. Rounsavall

Sure, this is James Rounsavall. In terms of our geographic mix, and I will reference also our 10-K but, the revenue base is split basically, 60% or so in the U.S., we have 31% in Latin America, Canada is just below 4%, and then the rest of the world is 5.7%. So as Ron mentioned, a lot of diversification between 2011 and 2012 into Latin America, particularly Mexico, and then we are seeing recovery in Canada and other international opportunities as well, such as, in Asia Pacific.

Unidentified Analyst

Okay. You have 60% of what figure? Roughly, 3,000 units. (inaudible). And are they all in the United States or some are in Canada, some are in Mexico, what?

Ronald J. Foster

Well 60% of the 3,000 units --

James P. Rounsavall

Of our revenues.

Ronald J. Foster

Of our revenues are in the U.S.

Unidentified Analyst

Okay. That doesn't say how many units are in the field basically, and you have mostly used 3,000 figure, is that it?

Ronald J. Foster

Well we have deployed, 3,174 units on service in our fleet.

Unidentified Analyst

What about worldwide then?

Ronald J. Foster

(Inaudible).

Unidentified Analyst

Okay. I will let (inaudible). Thank you.

Ronald J. Foster

Yes sir. Thank you.

Operator

With no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Ron Foster, for any closing remarks.

Ronald J. Foster

In closing today, I think it was a good quarter with sequential increases in the distribution. Certainly, we have some challenges ahead, but remain optimistic in our strategy of increasing the domestic footprint and the unconventional applications continue to diversify our revenue stream.

(Inaudible) say, when I close the value propositions we have provided our customer, it gives a strong incentive to utilize our services from both an economically sensible and environmentally sensitive solution, to increase production of their producing properties.

With that, thank you very much. I appreciate you attending our call today.

Operator

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

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