CSI Compressco LP (NASDAQ:CCLP)
Q4 2016 Earnings Conference Call
February 28, 2017 10:30 AM ET
Timothy Knox - President
Derek Coffie - CFO
Praveen Narra - Raymond James
Andrew Burd - JPMorgan
Selman Akyol - Stifel
Michael Gyure - Janney Montgomery Scott
Welcome to the CSI Compressco LP Fourth Quarter and Full Year 2016 Results Conference Call. The speakers for today’s call are Tim Knox, President and the Director of CSI Compressco GP; and Derek Coffie, Chief Financial Officer of CSI Compressco.
I will now turn the call over to Mr. Knox.
Good morning and thank you for joining us for the CSI Compressco’s fourth quarter and full year 2016 results conference call.
I would like to remind you that this conference call may contain statements that are or may be deemed to be forward-looking. These statements are based on certain assumptions and analysis made by CSI 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 Partnership. You are cautioned that such statements are not guarantees of future performance and the 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, adjusted EBITDA, free cash flow, 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 measures to the nearest GAAP measure. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context for the 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 Form 10-K is planned to be filed with the SEC on or before March 15, 2017.
Again, thank you for joining us this morning. We do appreciate your interest in CSI Compressco. I’ll start by discussing full year 2016 results, followed by a discussion of overall business performance and our view of signs of recovery in the market and then I’ll provide some comments on the fourth quarter performance, before turning the call over to Derek Coffie, our Chief Financial Officer, who will cover more financial details.
With challenges faced in 2016, there are many accomplishments that we need to be certain to acknowledge. Pressure from the continued downturn in the overall oil and gas industry for majority of the year led to a 40% reduction in net cash provided by operating activities and $61 million for total year of 2016. However, with a tight focus on capital expenditure and cost control, our free cash flow for 2016 was $51 million.
Full year 2016 gross capital expenditures were $18.4 million compared to gross capital expenditures of $105 million in 2015, or $10.7 million and $95.3 million net of sales proceeds respectively. Maintenance capital expenditures in 2016 were essentially flat with 2015, just under $11.5 million each year.
Headcount for the partnership ended the year at 617, a 24% reduction from the 811 at year end 2015. And in both cases this excludes some personnel available to us in Latin America for operations there under our working relationship with TETRA Technologies who owns the General Partner.
Sales, general and administrative expenses for 2016 were $36.2 million, a 17% decline from the $43.4 million of 2015. Safety performance improved from prior year, with the number of OSHA recordable incidents reduced by 40% and the number of serious incidents reduced by 78% as reflected in the OSHA days away and restricted time measure.
Vehicle safety also continues to improve, as measured by our internally defined chargeable vehicle incident rate, declining 7% from prior year and with zero significant vehicle incidents in the final eight months of 2016. Leading indicators as measured by our internal behavior based observation, hazard recognition, management site visit and training programs also continued to improve.
Throughout 2016, we continued with and largely completed the task of integrating the former Compressco and Compressor Systems businesses. Our consolidation of sales operations and accounting functions with a very robust development and implementation of JD Edwards EnterpriseOne plus sales force and other tax specific applications, with some components already up and running.
Late in the year, we completed the consolidation of Houston area offices and relocated our corporate headquarters from our Midland, Texas manufacturing facility to the Tetra Technologies buildings in the Woodlands, providing better access to legal, treasury, IT and other services that we obtain, through Omnibus Services arrangement with Tetra.
Earlier in 2016, and as previously reported we raised $80 million from our Series A preferred unit offering. We repurchased $54 million of our 7.25% senior note at a 6% discount and reduced total debt as calculated for leverage covenant purposes by 10% to $528 million compared to prior year ending $589 million.
Total revenues in 2016 were $311 million, off 32% from the $458 million of 2015. Note however, that within compression services, the most profitable line of business, revenues for 2016, at $225 million were down only 22% from the 2015 level of $228 million, indicating the relative stability of the Compression Services business.
We will cover more of the Compression Services business, specifics in a few moments, but it's important to note here that our deployed fleet at the end of 2016 was down only about 10% compared to the end of 2014 in terms of horsepower deployed and generating revenue.
At the end of 2016, we had roughly 852,000 horsepower generating revenue compared to approximately 955,000 horsepower generating revenue at the end of 2014. Keeping natural gas flowing provides a relative consistency -- relatively consistent utilization of assets compared to many other oil flow service company assets in swings from boom to bust cycles.
Full year adjusted EBITDA was $95.9 million compared to the $127.9 million of 2015, a 25% decline. Distributable cash flow for full year 2016 was $51 million and total cash distributed for the year, 2016 was $51.2 million for a full year distribution coverage ratio of 0.99 times.
Overall given market conditions, our 2016 results with the exception of the fourth quarter manufacturing cost that we'll discuss later, were generally in line with internal expectations and we'll focus efforts in 2017 on continued improvement as the outlook for oil and gas services to rebound continues.
Specific to the fourth quarter of 2016 there are a few things that I want to bring your attention to, including improvement to Compression Services fleet utilization and new equipment sales orders. After starting 2016 with natural gas trading generally below $2 per million Btu and with oil trading generally below $40 per barrel, pricing improvements in late 2016 were very encouraging.
Except for a short dip in November, we saw natural gas trading $3 to $3.50 and oil showing stability in the low $50, natural gas had pulled back a bit the past few weeks which we anticipate to be temporary, although we will monitor this closely as time goes on.
The leading indicator of drilling activity begin 2016 with 698 active U.S. rigs before reaching a low near 400 in the second quarter and since recovering to 658 at year-end and now advancing to 754 in the most recent February 2017 report. This compares to 502 at the same time in February 2016. Note that this is a 50% year-over-year and an incredible 86% improvement from the 2016 low. These are all signs of a cyclical recovery in oil and gas industry which in the coming year should translate into recovery opportunities in our business.
For the first time, since the first quarter of 2015 we experienced quarter-over-quarter improvement in utilized horsepower in our compression services fleet. Exiting the fourth quarter 2016, 851,733 horsepower were generating revenue, out of a total fleet comprised of 1,114,312 horsepower, which calculates to 76.4% horsepower utilization, an improvement of 1.2% compared to prior quarter.
Total fleet horsepower at the end of the December 2016 was down 14,017 horsepower compared to end of prior quarter, with 11,257 horsepower sold, and 2,760 horsepower disposed of in the fourth quarter. Note that our horsepower utilization calculation is very straightforward, revenue generating horsepower divided by total fleet horsepower at a given point in time, with no exclusions for horsepowers undergoing maintenance, contracted for future use or any other caveat.
The utilization of our large equipment class, 801 horsepower and above increased by 7,650 horsepower compared to prior quarter. The utilization of this class above 87% exiting December amid continued signs of the supply of larger compression services equipment is tightening. While pricing remains pressured, we are optimistic of rationale behavior in the industry which later in 2017 may allow us to begin to recoup some of the pricing concessions provided in the prior two years in this equipment.
Improvement in utilization of the 801 horsepower and above horsepower class was partially offset by 4282 utilized horsepower decline in our other two horsepower classes. The portion of our used equipment sales late in the fourth quarter were operating equipment, which provided compression services revenue throughout the quarter but contributed to the end of quarter total horsepower and utilized horsepower decline.
For our 101 to 800 horsepower equipment class utilization ended the quarter at 71%, up 1% from prior quarter. For our 100 and below horsepower class utilization ended the quarter at 63% flat with prior quarter. The market appears to remain oversupplied with equipment and some more specific categories of these smaller equipment classes, so we expect some continued pressure on pricing, as we stride to maintain utilization and grow market share. However, we have seen some tightening of supply in the equipment that provides well head gas with compression, more specifically the three stage equipment of roughly 150 [ph] to 250 horsepower.
We know that utilized horsepower increases in the fourth quarter compared to the third quarter in East Texas with improvements in market share and in Western Oklahoma related to new SCOOP and STACK development as well as improvements in market share and increases associated with the build out in the Delaware Basin.
We are optimistic that commodity price improvements and continued drilling activity will increase demand for all segments of the services and products that we provide. It is encouraging to see the industry investments focused in the areas where we are almost strongly represented and where our assets are already deployed. Upticks in customer inquiry for Compression Services in the Niobrara and Bakken matched well with our capabilities associated facilities and personnel in these areas.
Turning to equipment sales, in the fourth quarter of 2016, we received purchase orders for new equipment sales totaling $20.3 million, and amount of booking is greater than the prior five quarters combined and the largest single quarter since 2014. We carried forward an additional $1.3 million in equipment sales backlog exiting 2016 with $21.6 million in total equipment sales backlog, essentially flat prior quarter.
In the same fashion our long lead times particularly in our packaging and sales business on the front end of the downturn, long lead times also delay the recovery of this portion of our business on the front end of the recovery. We are pleased to see activity increase in the Permian Basin and the other areas core to our operation and we view this improved level of bookings, but still only about 50% of what we experienced in the years leading up to the late 2014 decline as a positive indicator of increased spending by our customers following two quarters of significant increase in inquiries for such equipment.
We look for the backlog to build in the coming quarters providing the revenues in the last half of 2017 and continued improvement in to 2018. These industry investments in infrastructure to both expand existing systems and develop new systems in underserved areas can impact our new equipment sales business now and then bode well for increased demands for field compression and compression services in the future, to fill the expanded gathering and processing system capacities.
Even though it is the lower revenue component of our business we remain optimistic for aftermarket services, including part sales and that as experienced in previous industry recovery cycles, those customers who own compression equipment will begin to repair, maintain and overhaul their equipment as well as restock inventories where such work may have been disbursed [ph] when cash was tightest. They will also reconfigure some of their equipment so that they can be reutilized to match current and upcoming requirements. We will continue to seek out and pursue opportunities to serve our customers in this manner.
While we are not at this time going to provide 2017 revenue or EBITDA guidance, I will address our capital expenditure expectations. We anticipate full year 2017 capital expenditures to be $15 million to $30 million, including approximately $10 million to $13 million in estimated maintenance capital and $2.4 million invested in our ERP system, with the remainder of capital expenditures directed to growth opportunities that offer an appropriate rate of return.
With that I will turn the call over to Derek Coffie.
Thank you, Tim and good morning everyone. I'll provide some additional comments and details on the business segments for the quarter, starting with Compression Services. Fourth quarter revenue for Compression Services, which accounts for 62% of our total revenue was $51.4 million, down $3 million from prior quarter as previously issued price concessions continued to roll into fourth quarter results and down 23% from the fourth quarter of 2015 as a result of price concessions throughout the year and revenue generated horsepower being off 73,000 horsepower or 8% from where it was a year ago.
Compressor Services margins were impacted by a 0.7 negative cost adjustments to fill inventories. This represents inventory use that should have hit in previous quarters. Aftermarket service and parts revenue declined from $8.3 million in the third quarter to $6.9 million in the fourth quarter due to in-process project slippage to future quarters.
Revenue of $24.6 million from equipment sales was $15.2 million higher than the third quarter. New unit sales drove $12.1 million of this increase and included sales related to International projects. The sale of used units contributed $3.1 million of quarter-over-quarter increase. Equipment margins were negatively impacted by the $2.6 million of unusual cost overruns on two highly customized International projects. We ended the fourth quarter with a new equipment backlog of $21.6 million going into 2017.
Total revenue of $82.9 million for the fourth quarter of 2016 is an increase of $12.2 million compared to the third quarter of 2016. This increase came from our equipment sales business. Sales, general and administrative expenses for the quarter ending December 31, 2016 were $8.5 million, a 0.7 decrease from the prior quarter and accounting for legal fees associated with our convertible preferred equity issuance in the third quarter of 2016 showed stability at this level, and the effectiveness of management controls.
SG&A expenses for the fourth quarter were down 24% from the fourth quarter 2015. Also upon implementing the ERP system we expect to achieve more than $4 million in annualized savings for operational efficiencies. Adjusted EBITDA for the fourth quarter at $21.7 million was a decrease of $2.3 million from the prior quarter and was negatively impacted by the previous amended $0.7 million inventory adjustments and $2.6 million of unusual cost overrun associated with the manufacturing of new equipment.
Net cash provided by operating activities in the fourth quarter of 2016 were $15.9 million compared to $10 million in the third quarter of 2016, leading to free cash flow of $12.9 million in the fourth quarter compared to $6.2 million in the third. These free cash flow attributed to prior [ph] to our quarterly distributions. For full year 2016 we generated $61.4 million in cash flow from operating activities. For 2017 we plan to spend between $15 million and $30 million for capacity expenditures of which approximately $10 million to $13 million is estimated for maintenance capacity and $2.4 million in continued investments in our ERP system implementation.
Distributed cash flow for the fourth quarter was $8.8 million down $3.9 million from prior quarters. Distributed cash flow was positively impacted by $1.6 million in general, administrative reimbursements made to TETRA, our General Partner under our Omnibus agreement which TETRA agreed will be paying common units instead of cash.
Additionally our maintenance capital expenditure of $4.8 million were $2 million higher than prior quarter due to deferral expenses from prior quarters as the full year maintenance capital expense of $11.4 million is flat with prior year and in line with our guidance. With Board approval to hold distributions flat at $37.75 for the quarter for a total distribution of $12.9 million our distribution coverage ratio for the fourth quarter of 2016 was $0.68 compared to $0.99 in the third quarter. If you add back the $2.6 million of unusual cost overruns for the previously mentioned two highly customized International projects and the $0.7 million negative cost adjustment to fill inventories related to prior quarters the coverage ratio will be higher on a normalized basis.
Our full year 2016 coverage ratio was $0.99. Our funded [ph] debt for covenant purposes were $528 million compared to $521 million at third quarter, a moderate increase of 1.3%. Our leverage ratio increased from 4.81 at the end of September to 5.40 times at the end of December compared to our bank covenant of 5.95. Our aggressively managing collections of outstanding receivables, our DSO at the end of December was 37 days down 4 from the end of September. And with that I will turn the call back over to Tim.
Thank you, Derek. And at this time we would like to open the call for questions.
Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And this morning's first question comes from Praveen Narra with Raymond James.
Hey, good morning guys. The orders were clearly impressive. Can you give us a sense as to what drove that, was it directed any particular area, particular customer and then can you give us a sense how those customer enquiries have kind of tracked thus far into 2017?
Look so Praveen, let me get you to clarify, in what line of business are you talking?
In the manufacturing and sales part of business, just the 20.3 million of orders in the quarter?
Right. So the first thing I want to point out is, and I mentioned it in the script is, biggest quarter since -- actually since the Compressco and TETRA acquisition of Compressor Systems and adds up to a little bit more than the past five quarters combined, this showing how depressed, if you will that market has become. So we are very excited about that. Still $20 million is roughly 50% of the old Compressor Systems run rate and that can be seen in the early quarters following Compressco’s acquisition of CSI, by the amount of business that was billed at that time.
So no, I won't talk of specific customers, I will tell you that a lot of the equipment is going out in the Permian and Delaware. So people we have worked with over the past several years. In some cases adding equipment to existing facilities in other cases building additional infrastructure.
So it's work that’s right there close to home if you will and we’re very eager to see the Permian and Delaware continue to build in that way.
Okay, perfect. So in terms of thinking about how that pace continues, is this something that can be sustained going forward into 2017?
So enquiry level remains very active. Again $20 million run rate compared to more boom times is only about halfway there. But I am not going to say one quarter completely makes a trend either, so we are chasing it aggressively and we’re pretty optimistic.
Okay, perfect. And then you mentioned that the pricing remains pressured on these small horsepower, it makes sense. But have we seen the pace of pricing at least slow and start to…?
Absolutely, absolutely. So we have seen the -- and I've mentioned this before, but the amount of times that our customers call looking for price decreases across the board has pretty well dried up. It’s the news that’s sort of a very competitive.
Okay, that's always a great trend. And then just one more regarding the ERP savings, Derek you mentioned the $4 million of savings we're expecting to have. Have you realized how much of that have we realize thus far, how much is incremental for 2017?
We haven’t realized much yet now. We will realize starting in the second half of 2017, and expect it to start to roll in as we implement the project.
Okay perfect. Thank you very much guys.
Thank you. And the next question comes from Andrew Burd with JPMorgan.
Hi, good morning. Follow-up on the equipment sales backlog question, how should we think about the progression of earnings throughout the year as you work that backlog into sales, is this more of a second half benefit or is it kind of ratable over the course of the year?
So of our current backlog, the vast majority of it is all within 2017. I think there was one little project that stretches out. You know the lead time on that new equipment is certainly beyond the 12 or 15 week level. So impacts maybe more for us late second or early third quarter.
We still have capacity to fill for the fourth quarter.
Okay great. And another follow-up to Praveen’s question on was this driven by a number of customers kind of across your customer base, or was it kind of one or two pretty big lumpy customers any type of composition would be helpful?
You know we just don’t put out information in that fashion. What I would -- it's more than one for sure. But there are big projects going on and there are also 500 horsepower and 1,000 horsepower projects going on. I really don’t think we want to start the habit of getting into those details.
Okay, yeah, that’s fine. And switching gears to the costs that were paid with LP units to TETRA during the quarter, can you just explain what that was -- sorry if I missed it in prepared remarks and should we expect similar things going forward?
Actually that TETRA just the made the decision to further invest in CCLP, that’s the option that TETRA will evaluate quarter-to-quarter going forward.
Okay and does that relate to the G&A reimbursement or allocation and that's up for them [ph] every quarter-to-quarter?
That’s correct, it's general and administrative expenses that support from us -- that they support us on.
Okay, great. And then final question on the gross CapEx backlog currently fairly small outside the ERP, any type of activity that would lift that number higher, specifically any specific ranges of horsepower classes that maybe tighter than others, that if you get a little pickup throughout the year that may revise that growth CapEx number higher. Or is it pretty visible from this point.
Andy, I'm going to say two things. One increased activity certainly helps, but the other thing is quite frankly the pricing. We got to make sure that the rate of return on that new investment matches the hurdles we need. The pricing we mentioned I think it's been fairly consistent in the industry, might be two, three, four, five quarters away before pricing really starts to improve very much. So we got to look at those -- the cost to build the equipment keeps going up. So we need the income from the equipment to go up as well.
Now we do have ability to go and reconfigure some of our idle fleet at a fraction of the cost to building new. So with idle equipment that we have and then that's already built for purpose and then reconfiguration we can do of some idle equipment, we think that we can serve our customers on the front end of the year at least without getting into that additional investment.
Great, thanks for taking my questions.
Thank you, and the next question comes from Selman Akyol from Stifel.
Thank you, good morning.
Couple of quick ones from me, first of all just in terms of the backlog. Can you guys talk about what margins are in that backlog?
But I'll tell you that you can go back and look at historical results. I encourage you to look beyond just the fourth quarter. We've already mentioned that we had a significant cost overrun. So look historically at add on and then also recognize that the business is pretty competitive right. There is less orders being placed now than there were in 2013 or 2014 but more than were being place in 2015. So there is a certain need to bid those competitively. But I don't want to get into how we are reporting projects.
Okay, and then can I just get what your cash balances were at 12/31?
I'll have to [ph] look at that. I apologize.
Okay. I got another one while you're looking for that. I guess as a…
So why don't we wait for the 8-K to come out?
Okay, and then lastly can you just in terms of sequential from 3Q to 4Q compression came in. I was wondering is there anything else there beside just the mix?
I don't understand the question.
So compression and other services you guys came in at $22.8 million this quarter, $26.1 million in Q3. So down roughly 13%. I'm just wondering what was driving that decline.
So a lot of that is mix. Yeah, it's product mix it's also -- and hopefully we're running out of quarters that we have to keep looking at this. It's also price concessions that might have been provided in July, August, September that hadn't hit for the fourth quarter and the third quarter that have been rolled in for the full quarter [ph] the fourth. But some of those pressures from we'll call it mid-year 2016 and even early 2016 are just showing up in the fourth quarter.
I got you. All right, well, thank you very much.
Thank you. [Operator Instructions] And the next question comes from Michael Gyure with Janney.
Yeah, can you guys maybe touch on your coverage ratio for the distribution kind of what you're thinking goal for 2017 will be?
We've never provided distribution guidance. So I don't think we're going to -- I don't think we want to do that today.
Okay, and then on the leverage side of things, I think you said the year-end debt was $528 million, is that correct?
Okay. That's all I have, thank you.
Thank you. And as there are no more questions at the present time, I would like to turn the call over to management for any closing comments.
Well thank you very much. I do appreciate the interest in CSI Compressco and for everyone taking the time to participate in this fourth quarter call. As we enter 2017 we look forward to what appears to be an improving market cycle. I want to mention that on Thursday of this week, March 2nd, Derek and I will participate in the Capital Link Fourth Annual Master Limited Partnership Investing Forum at the Metropolitan Club in Manhattan. And we hope to see you there. Thank you very much and this concludes the call.
Thank you. This does conclude today's conference. Thank you for participating, and you may now disconnect your lines.
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