Compressco Partners (GSJK) Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: CSI Compressco (CCLP)

Compressco Partners LP (GSJK) Q2 2014 Earnings Conference Call August 7, 2014 10:30 AM ET

Executives

Ron Foster - SVP and CMO

James Rounsavall - CFO

Analysts

Jim Rollyson - Raymond James

Jonathan Sisto - Credit Suisse

Operator

Good morning, and welcome to the Compressco Partners LP Second Quarter 2014 Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will an opportunity to ask questions (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Ron Foster, Senior Vice President and Chief Marketing Officer. Mr. Foster, please go ahead.

Ron Foster

Good morning. Thank you for joining the Compressco Partners’ second quarter 2014 results conference call. Before I begin the 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 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 Compressco. You are cautioned that such statements are not guarantees of future performances, that actual results may differ materially from these 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 Web site 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 Web site, our 10-Q is planned to be filed with the SEC on or before August 14, 2014.

Compressco Partners L.P. is a provider of compression-based services, which include production enhancement service used in both conventional wellhead compression applications and unconventional compression applications, and in certain circumstances artificial lift, well monitoring and sand separation. 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, Canada and a growing presence in certain countries in South America, Europe and the Asia-Pacific region.

On July 11, 2014, we announced that the Board of Directors of the General Partner declared increased cash distribution attributable to the second quarter of $0.4525 per common unit. The second quarter distributions will be paid on August 15th to our unitholders of record on July 21, 2014.

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

Our call today will focus on the second quarter 2014 results for Compressco Partners. I will also take this opportunity to comment on our headline driving transformational acquisition of Compressor Systems Inc. that closed on Monday. For a complete discussion of the CSI business and their financial results, I will have to refer you to the public filings, including press release announcements, respective supplement and Form 8-Ks for more information that will be discussed on today’s Q2 call.

Moving into the second quarter results, I will cover quarter performance highlights, partnership performance and fleet statistics, then turn the call over to Jay Rounsaville for his comments on key financial metrics including cash flows.

We’re very pleased to report Compressco Partners’ second quarter 2014 results that include net income growth of 97% compared to the second quarter of 2013, higher U.S. revenues and overall improved cost structure compared to the second quarter of 2013, continued distribution growth. Our recent distribution increased $0.75 to $0.4525, increased the annualized distribution of $1.81 per unit and represents our seventh quarterly distribution increase in the past eight quarters, very proud of the Q2 results at Compressco Partners.

Looking at revenue growth, we’ve continued our focus on utilization and controlled growth with expansion CapEx to balance our improved operating results. Compared to the prior year, our revenue growth has continued to benefit from liquids related services within U.S. and the gradual improvement in compression services revenue in Mexico. Both the U.S. and Mexico recorded very strong revenue growth compared to the second quarter of 2013.

Total compressor packages and service has increased by 245 compared to June 20, 2013. The total fleet has grown by 123 compressor packages compared to the prior year period, including V-Jack electric offerings and the SuperJack three-staged compression packages, pointing to higher increase in utilization.

On the cost side, we have held the line on adding headcount except for field service technicians as needed for increased utilization in the U.S. to improve our overall profitability. With these actions, combined with a lower cost structure in Mexico, Compressco has seen improved margins and help align our SG&A despite cost pressures for labor and facilities in many of the basins where we operate.

I’ll now turn the call over to Jay Rounsavall, CFO of Compressco Partners for additional comments on our results and financial positions. And after JR’s comments and following question-and-answer we’ll have some brief closing comments. JR?

James Rounsavall

Thank you, Ron. Further recovering our second quarter financial results at June 30, 2014 Compressco Partners’ total revenues increased by 14% compared to the prior year second quarter, including increases in both compression revenues and sales of compressors and parts.

Compared to the prior year’s second quarter, compression and other services revenues increased 3.3 million. As Ron mentioned, we continued to see revenue growth in the U.S. and reported very strong compression services revenue growth in Mexico compared to the second quarter of 2013. This includes our well monitoring and sand separation services in Mexico. While still down from levels experienced previously back including the first quarter of 2013, we have experienced, as discussed previously on our calls, gradual improvement in our Mexico business.

In the U.S. business, compression services revenues accounted for more than 60% of total Partnership Q2 2014 revenues. The increased demand for liquids related and unconventional compression services, particularly vapor recovery, continues to contribute to the increased U.S. service revenues during the second quarter of 2014, compared to the second quarter of 2013. Sequentially, compared to the first quarter of 2014, our compression and other services revenues increased 2 million with notable improvement in both the U.S. and Mexico.

On the cost side, we have focused, as Ron mentioned, headcount increases to support the compression service delivery. Compared to prior year, U.S. headcounts basically flat while the number of field service technicians has increased. Lower cost structure in Mexico has also been a positive factor, as Ron mentioned.

On the SG&A side, SG&A for the quarter was 5 million, including 855,000 of cost incurred during the quarter related to the CSI acquisition. Excluding these costs, SG&A will be down slightly compared to the prior year as we continue to maintain lower business report staffing and utilize the omniscient services agreement with TETRA as possible and appropriate.

Our effective tax rate was just under 10% in the second quarter of 2014. The increased MLP business in the U.S. reduced the taxable mix of income. The current distribution of $0.4525 per unit is 6.5% higher than the annualized distribution of $1.70 in the second quarter of 2013.

On the balance sheet side, we ended the quarter with 10.8 million in cash. We had another strong quarter in cash collections with DSO down from year-end and strong collections in the U.S. and Mexico on the accounts receivable side. PP&E, we spent 5.6 million on CapEx during the second quarter. And as Ron mentioned, that was focused on the domestic fleet on GasJack additions and upgrades and the addition of V-Jack units to the fleet.

We finished the second quarter with a compressor fleet with 187,000 horsepower. The majority of that fleet is in our GasJack. And Ron mentioned, year-over-year, we have grown our fleet while also increasing utilization by 2.7 percentage points. And we’re certainly pleased with those results. I encourage you to review also our Form 10-Q when it is filed.

And at this time, we would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jim Rollyson with Raymond James.

Jim Rollyson - Raymond James

Good morning guys.

James Rounsavall

Hey Jim, how are you?

Jim Rollyson - Raymond James

Great, congrats on getting the CSI deal closed. And I have a couple of questions around that for you this morning. Maybe first just what your thoughts are on the timeline of kind of integrating both companies over the next few quarters. How do you see that playing out, timing wise?

James Rounsavall

We have begun and starting Tuesday morning on the integration plan. We have retained an outside consultant to help us through the integration plan in addition with our corporate development folks there in the Woodlands. And my new role will be looking at starting very quickly on getting sales and marketing integrated together so that we can move forward. I would expect the biggest first-half that we’ll have is will be focused on contract conversions so that we can get MLP qualified income into the new combined company.

Jim Rollyson - Raymond James

And is that something, if you go back in history obviously that took you a while the first time around, I am guessing, given the number of MLP compression guys out there today and customers as well. But that will be an easier process this time around. Just maybe some thoughts on, is that a 12 month process of an 18 months process or how long would you guess that conversion takes?

Ron Foster

Well, there is a couple of ways to answer that. One is that we have some similar customer basis where we already have complaint MLP contracts on the Compressco side. So, we will attack those first and try to get some good wins on our belt. But overall I think we’re looking at somewhere in 80% to 85% conversion range in the next 18 months with big chunk of that coming very quickly with the combined customer base.

Jim Rollyson - Raymond James

That’s helpful Ron. Just thinking about 3Q, obviously we’re going to have some noise between I imagine charges for still-related to the CSI deal like you had in the second quarter, and just a partial quarter contribution. Any thoughts on what SG&A, DD&A, that kind of stuff and just we’re going to get basically little over -- little less than two months of operations, I suspect. But just so we can basically model this out reasonably accurate so you guys don’t surely pointed out but just any color you can have around that will be great.

Ron Foster

Sure. I think we provided a lot of information in the pro forma, the SG&A, we’ve disclosed a level of transaction cost as well in the 8 million. As you have seen, we’ve disclosed this quarter just under a million. And we’ll carve those out, obviously in the third quarter, Jim. I would say as a start directionally correct the pro forma financial combined SG&A on a quarterly basis. We’re not going to be into, far into the integration process and synergies and so forth. So, I think that’s a good place to start.

Jim Rollyson - Raymond James

Okay. Thanks guys appreciate it.

Ron Foster

We kind of focused on the first-full quarter, which will be Q4.

Jim Rollyson - Raymond James

When your distributions are going to up meaningfully?

Ron Foster

Yes.

Operator

Our next question comes from Jonathan Sisto with Credit Suisse.

Jonathan Sisto - Credit Suisse

Congratulations on the deal as well. Ron or JR, if I could, you call out the growth CapEx next year 90 million to 100 million and understanding you can’t talk too much about the forward here. But allocation of that as far as geographic mix maybe in the U.S., if you could?

James Rounsavall

Sure. I think, I’ll start with the guidance that we have given. And the starting point I would use is if you take the pro forma information out there and take the averages and look at and back out the maintenance CapEx that we’ve given, you can see some horsepower, some growth there, incremental horsepower. And even just using an average revenue, you can barely quickly model some earnings, how we see the earnings and distributions potentially falling out.

Also there is some geographic disruption guidance on the CSI legacy business and then in our filed documents as well. And then I would also mention that in the Compressco investor presentations, we have highlighted concentration including our customer basis strong in the mid-continent, Texas and the San Juan Basins. So, I think with all those data points you can put it together in fairly concisely.

Jonathan Sisto - Credit Suisse

Thanks for that. And then kind of the prepared remarks there was a hint that Mexico and business starting to show some life. Just maybe you could offer just a little bit more color around that, I think that’d be helpful.

Ron Foster

If you go back a year ago, our Q1 was kind of probably the high point and then due to budget problems whatever we saw a ramp down and since then we’ve been seeing a gradual increase in both the compression and also the well monitoring activities. And continue to see that over the next couple of quarters.

James Rounsavall

And it’s been driven by where we were impacted in the prior year in oil related activities. We’ve shifted not only we shifted compression, some compression assets back into the U.S. as we previously discussed, and utilize those in South Texas and elsewhere. With the assets that we do have in place, we’ve seen utilization improvement and redirected those compressors into gas activities, principally in the Northern Mexico.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ron Foster for closing remarks.

Ron Foster

Since the IPO prospectus that we filed three years ago, Compressco has committed to our intentions to grow the Partnership, the combined strategy of organic growth and M&A activity.

During 2012, we leveraged our international footprint to grow and scale the Partnership, while developing new offerings, such as our electric V-Jack compressor packages. During 2013, we balanced international growth with emerging opportunities in the U.S. for our unconventional services aimed at liquid-rich resource plays and also began moving into the adjacent horsepower space of higher discharge product offerings for artificial lift and gas lift through our new SuperJack compressor offering.

On a parallel path, we also targeted acquisition opportunities. Earlier this year, CSI organization launched a formal process to sell the business and we have the opportunity to participate, and through that process became the successful bidder. Announcement on Monday to finalize this transaction marks another major milestone in the history of Compressco Partners.

The combined business, just want to touch on that briefly before we leave, we have the capability now to meet larger scale production gathering and processing compression needs and also broaden our customer base, adding new fleet units and sales packaging capabilities. Both companies are very complementary to each other and will be an exciting and vibrant player in the compression space.

I want to thank you for attending our call today. JR?

James Rounsavall

Thank you, Ron.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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