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Executives

Ronald Foster - President

James Rounsavall - CFO

Analysts

Jim Rollyson - Raymond James

Igor Grinman - J.P. Morgan

Compressco Partners, L.P. (GSJK) Q1 2014 Earnings Conference Call May 8, 2014 10:00 AM ET

Operator

Good morning, and welcome to the Compressco Partners, L.P. First Quarter Conference Call. Our speakers today are Ron Foster, President of Compressco Partners, L.P. and James Rounsavall, Chief Financial Officer. (Operator Instructions) After today's presentation, there will an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I'd now like to turn the conference over to Mr. Ron Foster, please go ahead, sir.

Ronald Foster

Good morning, and thank you for joining the Compressco Partners first quarter 2014 results conference call. Before I begin my presentation I must first remind you that this conference call may contain statements that are or maybe deemed to be forward-looking statements. These statements are based on certain assumptions and analyses made by 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 company. You are cautioned that such statements are not guarantees of future performances, 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, 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 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 filed with the SEC on or before May 15 of 2014.

Compressco Partners L.P. 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 range 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, Canada and a growing presence in certain countries in South America, Europe and the Asia-Pacific region. Our call today will cover the first quarter 2014 results for Compressco Partners.

On April 21, 2014, we announced that the Board of Directors of the General Partner declared an increased cash distribution attributable to the first quarter 2014 of $.445 per common unit. The first quarter 2014 distributions will be paid on May 15th to unitholders of record on May 01, 2014.

Compressco Partners is managed by Compressco Partners GP Inc., which is an indirect wholly-owned subsidiary of TETRA Technologies Incorporated, New York Stock Exchange symbol TCI.

With those comments behind, I'll move into results of operations including our recent accomplishments and ongoing initiatives, partnership performance and fleet statistics. After that, I will then turn the call over to JR, James Rounsavall, for his comments on key financial metrics including cash flows, and then finish with some additional comments following our Q&A session.

Over the course of recent calls, I've been discussing our strategies to scale the business, enhance service offerings, drive supply chain and manufacturing synergies and maintain an efficient cost structure. We've built momentum in several milestones report during the quarter including, first, our common unit, price performance which is straightened in the range between $19 and $23 during the fourth quarter 2013, moved into the upper $20 range hitting a high of over $30 per unit recently.

Next, the announcement of our SuperJack high pressure three stage compression service launch including initial fleet acquisition follow the additional CapEx commitments for more units throughout 2014, and our results reported today include higher U.S. revenues and overall improved cost structure compared to the first quarter of last year, 2013.

Our first quarter distribution increase added another three quarters of a cent and represents our six quarterly distribution increase in the past seven quarters.

We entered 2014 with a broader service offering, compared to the first quarter of 2013 year-over-year our U.S. compression and other services business has experienced 12% revenue growth driven by fluids-related activity where we've seen about a 6% increase in the percentage of U.S. revenues derived from these activities.

Vapor recovery services have been a large contributor to the overall increase. We've grown our total fleet over 200 units compared to the prior year including V-Jack electric offerings and also expanded our horsepower offerings to include high pressure three-stage compression packages.

As we announced earlier in the year we acquired 18 three-stage SuperJack compressor packages in our service contracts. We plan to continue to invest in three-stage compression, and have approximately $10 million of additional investment in 2014 earmarked in the 90 to 300 horsepower range.

We've seen upside from existing investments in Argentina, and recognized the potential for additional services and share-related opportunities down the road and have taken measures using four contracts to mitigate currency exposure in Argentina as well.

Compared to the first quarter of 2013, Argentina revenues grew significantly. Our Canadian compression service business is also seeing a 5.5% uptick in service revenue, and within our other international operations we see continuing emerging opportunities in Europe and Asia-Pacific.

On the cost and efficiency side we started a major supply chain initiative in 2013 to improve overall GasJack engine compressor quality. As we move deeper into 2014 we can see the benefits from this initiative through lower engine compressor costs and expense trends. We anticipate additional quality runtime benefits over time as a percentage of engine compressors are replaced over time.

We've also enhanced our focus on inventory management and quality. Following the reorganization of our U.S. operations in 2013 build service, manufacturing and supply chain are working more closely with our suppliers on parts management and quality issues.

Moving forward we expect to leverage our new Oracle JD Edwards systems in reporting to provide additional capabilities to our managers in our efforts to gain additional efficiencies and better working capital management. JR will add more color on our business systems projects during his comments.

Looking at the fleet as of March 31 of 2014, the number of compressors in active service of 3,398 units is 28 units or 1% lower than end of the fourth quarter of 2013, a 249 units higher or 8% higher than the first quarter of 2013. Year-over-year we have grown our total fleet by 211 units or 5% compared to the end of the first quarter of 2013, achieving an average year-to-date utilization of 84.8% during the first quarter of 2014.

Following JR's comments, I'll have some closing comments after the Q&A session. And I'll now turn it over to JR for additional comments on our results and financial position.

James Rounsavall

Thank you, Ron. Further covering our first quarter financial results at March 31, 2014 Compressco Partners' total revenues decreased by 3.1% compared to the first quarter of 2013, due to decreased compression services revenues. Compared to the prior year first quarter compression and other services, revenues decreased 1.7 million.

The first quarter of 2013 was a recent peak in revenue activity for our Mexico business as noted through recent calls. In our business outside Mexico, revenues increased in the U.S., Canada and Argentina compared to the first quarter of 2013. Revenues in the U.S., Canada and Argentina increased as percentages of the total reflecting a shift in revenue mix supporting demand for liquids and oil-related services.

U.S. compression services revenues accounted for more than 62% as the total partnership Q1 2014 revenues. Increased demand for unconventional compression services, particularly vapor recovery contribute to the increased U.S. services revenues during the first quarter of 2014 compared to the first quarter of 2013.

Sequentially compared to the fourth quarter of 2013 our compression and other services revenues were flat or down to less than [half] (ph) -- 1% demonstrating the overall improvement in our businesses outside Mexico over this past year. We also know the 3.3 percentage point reduction in the cost of compression as a percentage of compression services revenue during the first quarter of 2014 compared to the prior year first quarter. This decrease is driven by overall lower cost particularly in the U.S. and Mexico as we've mentioned we are seeing the benefits of U.S. field service cost and quality initiative, our lower cost structure in the U.S. and lower cost structure in Mexico compared to the prior year period.

SG&A was down 4.3% compared to the first quarter of 2013. In addition to lower equity compensation expense we are further leveraging shared services and business support with TETRA reducing our overall cost structure. Compared to the fourth quarter of 2013, SG&A decreased over 8% despite seasonal audit and K1-related expenses.

Our effective tax rate was 12.1% in Q1 2014 compared to 13.7 in the first quarter of 2013. The shift in business and increased MLP business in the U.S. reduced the taxable mix of income.

Our current distribution as Ron mentioned is $0.445 per unit represents a 15% increase from our minimum quarterly distribution per unit and a 4.7% higher than the annualized distribution of $1.70 in the first quarter of 2013.

Looking at the balance sheet at the end of March 2014, our cash balance was just under 13 million at 12.6 million. Accounts receivable decreased on strong cash flows, particularly for Mexico. PP&E, we invested $6 million in CapEx during the first quarter 2014 focused on expanding CapEx on domestic V-Jack units, GasJack additions and upgrades and cold weather compressor packages for both the Bakken and Canada.

2014 CapEx includes the development of multiple technology tools to scale our business and provide enhanced reporting and operational data capture for analysis. In addition to the ERP system, JD Edwards, we're also upgrading customer relationship management tools for sales and paving the way for more automated compressor fleet management process for operations in synergy with manufacturing.

We're also upgrading our field data capture systems for our mechanics, and we're pleased to report a progress on that project with the launch later in the second half of this year.

Cash flows are a key focus, and we've had a very solid first quarter. Our unaudited first quarter combined statement of cash flows reflects accounts receivable generating a source of cash of 5.3 million; accounts payable, source of cash of just under a million. Investing activities of 7.9 million, which is mostly expansion in CapEx. As previously mentioned, in financing activities we borrowed 2.2 million bringing debt on the balance sheet to 32.2 million.

We finished the first quarter with a fleet mix of 93% GasJack, up to 7% on V-Jack and still less than 1% on the SuperJack compressor packages. As Ron mentioned, we have capital commitments and with more units arriving each month. Compressco service offerings provide both electric and natural gas powered solutions to our customers and horsepower ranging from 40 to over 200 horsepower. I encourage you to review our Form 10-Q when it's filed.

And at this time, I'll open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Jim Rollyson of Raymond James. Please go ahead.

Jim Rollyson – Raymond James

Good morning, guys.

Ronald Foster

Hi, Jim.

James Rounsavall

Good morning.

Jim Rollyson – Raymond James

Ron, I completely understand why revenues for compression services were down year-over-year, obviously that was related to Mexico, but when you think about it sequentially the last couple of quarters you have been running north of 28 million bucks a quarter, and then you slid a little bit in the first quarter despite adding in the gas lift. Is there some weather-related kind of shortfall there or just maybe a little explanation of why things slipped just a little bit?

Ronald Foster

There are several reasons. One, U.S., Mexico and Argentina targets were slightly below our expectations, and from a trended view, every year first quarter we used to experience some budget decisions by customers that can impact up or down our utilization as their base adjustment to their new budgets. We also continue to callback some discounts from the days when natural gas prices were very depressed, and in some cases customers have decided to release several units because they didn't want to pay the higher prices, and we understand that. We can use those to deploy the other applications.

So I think some of its a little weather-related. We had pretty tough weather, so we were not able to deploy some units in areas that we are -- we will see pick up in those areas, now that we are seeing more normalized weather patterns, but just some of its noise, first quarter noise.

Jim Rollyson – Raymond James

Okay. So, someway it all should bounce back as we go through the rest of the year, that's good. On Mexico specifically, how do you think about that for the balance of the year? How much idle capacity do you have down there and in your conversation I think you mentioned in the press release that there are some prospects for things getting busier. Do you think you can get back to where you were back in late 2012, early '13, this year, next year? Is there enough opportunity down there to get back there at some point in time?

James Rounsavall

Yeah, this is JR, and I'll key it up and let Ron finish it. In terms of utilization in Mexico, we obviously monitor closely, we are in the low 70s there percentage, and are in dialog with them on a weekly basis in terms of their needs and their units. We are not expecting to further reduce the units that we have there and in fact they are, they remain optimistic as we've communicated and sticking to our plans that we will continue to see the steady, I would use the word steady uptick in the utilization throughout the remainder of this year with it being stronger in the second half of the year.

Jim Rollyson – Raymond James

Okay. On the SuperJacks, I think you said $10 million is the budget to deploy additional capacity throughout the rest of this year. Some sense of maybe how many additional units or how many more horsepower that equates to? And just how you see customer opportunity for even extending beyond this year for continuing to deploy additional, basically gas lift units?

Ronald Foster

Well, right now we have 50 of them teed up in the $10 million worth of CapEx. We've deployed four of those. We're expecting to see those start rolling into our facilities right now, I mean they're scheduled out to between now and in October. We will have all 50 of them in place by probably late October.

Jim Rollyson – Raymond James

Okay. It sounds like prospects beyond that are pretty good.

Ronald Foster

In addition to the 18 that we acquired earlier in the year, so -– and then there was two additional ones that we have on service contract, so bring us up to around 70 units.

Jim Rollyson – Raymond James

Okay, helpful. And last question from me, just in thinking about distribution growth, you mentioned you've for the last, the most of the last six quarters you had nice solid growth in distributions. You went for about $0.50 through the last couple of quarter has been three quarters of a cent of growth. How do you think about that one going forward? Is it sequential increases tied to some coverage ratio that you are kind of looking at, or is …

James Rounsavall

Exactly.

Jim Rollyson – Raymond James

Three quarters of a cent the number or …

James Rounsavall

Well, we try to maintain about a 1.2 coverage ratio on results. The Board of the GP meets and we have a nice discussion and we try to keep it right there at about 1.2.

Jim Rollyson – Raymond James

Okay, that's perfect, helpful and I appreciate it guys. Thanks.

James Rounsavall

Okay, thank you.

Ronald Foster

Thanks, Jim.

Operator

Thank you. Our next question comes from Igor Grinman of J.P. Morgan. Please go ahead.

Igor Grinman - J.P. Morgan

Hi, good morning, guys.

Ronald Foster

Hi, Igor, good morning.

Igor Grinman - J.P. Morgan

Few quick ones from me, so given what you saw this quarter in year-to-date as your prior guidance for '14 left largely in tact. I mean may have missed about on Middle East, but I'm just wondering if there is a confirmation of it.

Ronald Foster

No. We feel comfortable with the guidance that's released.

Igor Grinman - J.P. Morgan

Okay. Can you talk about what you assume for sales of compressors and the guidance range, just asking because the number has been pretty strong in 1Q and 4Q of last year relative to historical levels, just curious if you can provide color on that?

James Rounsavall

Yeah, certainly. Go ahead, Ron.

Ronald Foster

I would say first sales are lumpy and the first quarter of last year, we were finishing up a project for a major customer that we got a one time, one off event. And then usually see in the fourth quarter as customers have budget money available they want to usually use that as for capital expense and so some years we saw a few and some years we saw a few more. So again, I'd use the word lumpiest, not very scientific, but that's really the way it plays out.

James Rounsavall

And where we have seen the strongest demand recently includes Europe and Asia-Pacific and so we remain optimistic that those orders will continue to come in from time to time and that we certainly can meet and deliver to those orders and factor that in. it makes the quarterly -- it makes quarterly forecasting a challenge as you can imagine that as Ron said, we stick with our guidance.

Igor Grinman - J.P. Morgan

Okay. And just another modeling kind of oriented question here, what's a good SG&A run rate to use so that dip a little bit here in 1Q versus a pretty steady quarterly run rate throughout 2013. Just wondering if some cost cutting initiatives taking place here or kind of taking this followed on forward as a good number?

James Rounsavall

That's an excellent question. The first quarter, I feel comfortable with the first quarter in that we have -- we have achieved some cost reductions and although we had the K1 and higher related audit expenses at the end of the year. We are, we do have in the next few months at summer, the roll out of the system and certain items that are period expenses and straitening and that type of thing. I did not expect to see an uptick that we will have some one off type cost as we roll through the roll out of our greatly anticipated project that will certainly provide benefits and efficiencies down the road after go-live.

Igor Grinman - J.P. Morgan

Okay, great. Thanks, guys. That's all from me.

Operator

Thank you. (Operator Instructions) There are no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Ron Foster for any closing remarks.

Ronald Foster

Okay. On the closing side, first, I'd just like to make everyone aware that we are making significant investments on both equipment and technology to further position the partnership of growth and cost efficiencies both on the equipment side, system side, people side, work committed to providing high quality production enhancement services. We have additional improvements, enhancement as outlined today. We continue to cost effectively leverage our sales and service infrastructure, and planning to further reduce SG&A as per Igor's comment.

We are continuing our focus to seek out value added investments both organically and through the M&A process with a stage to grow the scale and grow the partnership at further value to our unitholders. And lastly, I'd just like to note that both myself and James Rounsavall will be presenting at the 2014 NAPT MLP investor conference in Jacksonville, Florida in the next couple of weeks. So if you are planning to attend, we look forward to seeing you there. Thank you.

Operator

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

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