CSI Compressco (NYSE: CCLP) is a service and equipment provider in the oil and gas industry. The company provides compression services and equipment to companies in the United States and around the world. As per the third quarter, the company provided a total horsepower of 1,128,329 from its fleet of more than 6,000 compressor packages. As I will highlight later was a decline from the previous quarter.
The company's products are used during the production, gathering, transportation, processing, and storage of natural gas and oil. The company also sells new and refurbished equipment to the same companies. CCLP designs its equipment at its facilities in Midland, Texas, and Oklahoma. It also sells equipment and parts manufactured by third-party manufacturers. The company has 713 employees. It competes with major companies such as Basic Energy Services (NYSE: BAS), Frank's International (NYSE: FI), Halliburton Company (NYSE: HAL), and Key Energy Services (NYSE: KEY) among others.
In the past few years, crude oil and natural gas have declined which has had serious implications to companies operating in the sector. Service providers like CCLP have suffered as upstream companies minimize their capital expenditure. The company has suffered reduced revenues which made the company slash its dividend from a high of 0.5025 in 2015 to the current 0.3775. The stock price has also suffered a 50% decline in the last three years. As of this writing, the stock price is trading at $10.26 per share and a market capitalization of $341 million.
3-year chart of crude oil and natural gas
As shown below, the company's dividend yield has fallen from a high of 44.2% in 2014 to the current low of 14.7%.
Source. Dividend yield. Ycharts
In this article, I present a bullish case for CCLP which is based on the management strategies and the industry as a whole.
While I called 2016 the "year of tough decisions," I'd characterize 2017 as "the slow road back." … John England (Deloitte)
As mentioned above, natural gas price have fallen together with the other commodity prices. However, there is optimism that the price will go up this year. According to the Energy Information Administration the daily consumption of natural gas is expected to rise 0.4% in 2017 and 2% in 2018. This increase is associated with both residential and commercial consumption. This is because National Oceanic and Atmospheric Administration (NOAA) anticipates that winter's heating days will be higher in 2017 than in 2016 by 6.7%. In Europe, the current cold season is predicted to be longer than 2016's. In 2018, the increase in consumption will be led by the demand in the electric power and industrial sectors.
In addition, EIA estimates that dry natural gas production will increase by 2% in 2017 and 2018. The organization anticipates that natural gas pipeline exports will increase because of the rise in demand by Mexico. In the EIA forecasts, the United States is expected to become a net exporter of natural gas in 2018.
In 2016, the natural gas price increased because of increased demand in the electricity generation sector and because of the low levels of production. In 2017, it is anticipated that the price of natural gas will increase from $2.51/MMBTu in 2016 to $3.55/MMBTu in 2017. In 2018, the price will average $3.73/MMBtu.
A significant contributor to CCLP's revenues is the oil companies. As mentioned before, upstream companies have suffered from the slump in oil prices. This has led to companies shelving their projects and affecting the service providers. This seems to be improving with crude oil prices now trading at above $50 per barrel. According to the EIA, crude oil price is expected to average $53 in 2017 and $58 in 2018. A median estimate by 20 analysts surveyed by Bloomberg estimated that crude oil could average $57 this year. Other analysts like Van Cleef have forecasted that oil price could average $70.
The rise in oil prices is expected because of the oil producer's agreement to slash their production. So far, countries like Saudi Arabia, Oman, and Russia have announced their supply cut. Also, the inadequate investments in the sector is expected to reduce the supply.
All this matters because oil and gas companies reduced their investment and deferred projects which service companies like CCLP benefit from. In the third quarter's conference call, the CEO of the company said the following.
With oil prices showing extended stability of above $40 level for the past six months, hopefully turning towards $50 and as were gas price is maintaining above $2.50 at the beginning of the summer, we've seen increased 2017 planning activities from our numerous customers throughout these regions as well as in Niobrara DJ Basin, the Eagle Ford and the Bakken.
With natural gas and crude oil expected to trade at $3.55/MMBTu and $57/b respectively, one can hope that more planning activities have been in place.
In the third quarter, the company's total revenue of $70.7 million was a 8% decline from Q2. This was fueled by the 8% decline in the compression services revenue and the decline in the aftermarket sales division.
With revenues declining, the company's management have put in place cost-cutting measures which needs to be lauded. For instance, the company has managed to reduce the Sales, General and Administrative (SG&A) expenses to $9.2 million. This was 16% reduction from a year before. This was attributed to a reduction in headcount and wage reduction.
In the year, the company issued $80 million in preferred equity while amending its credit facility which increased the leverage covenant to 5.95 EBITDA. The funds were used to lower the balance of the outstanding senior notes and the firm's revolver.
While the company competes with larger competitors like Baker Hughes (NYSE: BHI) and Schlumberger (NYSE: SLB), the company has established a credible reputation among its niche clients because of its unique products and services which are targeted to compression. Therefore, as the sector improves, I anticipate that the company will increase its revenues, and net profit margin which have improved from a low of-152.2% in 2015 to the current -22.59%.
Companies servicing the oil and gas sector have suffered as the prices of the commodities have fallen in the last few years. Going by the estimates, this is about to change as the prices rise. As a small and well-run company with a special niche of clients, CCLP will benefit. The company already offers a generous dividend to its investors. The dividend has fallen from 2015 when the company started to struggle because of the oil and natural gas prices. I therefore believe the company has the ability to increase its dividend in the next few quarters.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.