CSI Compressco LP (CCLP) CEO John Jackson on Q4 2020 Results - Earnings Call Transcript

Feb. 24, 2021 2:17 PM ETCSI Compressco LP (CCLP)
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CSI Compressco LP (NASDAQ:CCLP) Q4 2020 Earnings Conference Call February 24, 2021 10:30 AM ET

Company Participants

John Jackson - Chief Executive Officer

Jon Byers - Chief Financial Officer

Robert Price - Chief Operating Officer

Michael Moscoso - Vice President, Finance

Conference Call Participants

Brian DiRubbio - Baird

Jay Spencer - Stifel

Selman Akyol - Stifel

Operator

Good morning and welcome to CSI Compressco LP's Fourth Quarter and Total Year 2020 Earnings Conference Call. The speakers for today's call are John Jackson, Chief Executive Officer of CSI Compressco LP; and Jon Byers, Chief Financial Officer of CSI Compressco LP. Also in attendance today are Robert Price, Chief Operating Officer; Roy McNiven, Senior Vice President of Operations; and Michael Moscoso, Vice President of Finance.

All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I'd now like to turn the conference over to Mr. Byers for opening remarks. Please go ahead.

Jon Byers

Thank you, Jason. Good morning and thank you for joining the CSI -- joining CSI Compressco's fourth quarter 2020 results conference call. I would like to remind you that this call may contain statements that are or may be deemed to be forward-looking. These statements are based on certain assumptions and analyses 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're cautioned that such statements are not guarantees of future performance and that actual results may vary -- may differ materially from those projected in the forward-looking statements.

In addition in the course of the call, we may refer to EBITDA, gross margins, adjusted EBITDA, free cash flow, distributable cash flow, distribution coverage ratio, leverage ratio, utilization, 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 is posted on our website, our Form 10-K will be filed in the coming days. Please note that information provided on this call speaks only to management's views as of today February 24th and may no longer be accurate at the time of replay.

With that, I will now turn it over to John Jackson.

John Jackson

Thanks Jon. Good morning everyone and thanks for joining us today. I'll give some summary comments and I'm going to turn it over to Jon Byers after that to provide some commentary on cash flow balance sheet liquidity.

But first Spartan is pleased to have completed the acquisition of the general partner and a significant common unit position in CSI Compressco at the end of January. We strongly believe the long-term prospects of compression considering US and global natural gas demand. And with the exit of the fabrication business in 2020, CSI Compressco is a less volatile business with significant growth opportunities.

CSI has a solid asset base and a great group of employees. Our employees have done a great job this past year navigating the pandemic and the overall oil and gas environment. I want to thank everyone for their efforts this year to help guide the company through such challenging times.

As mentioned in the press release, we view Spartan's business to be complementary to CSI Compressco's business. The Spartan business model primarily involves treating natural gas through amine treating and gas cooling. The business model is similar to compression whereby Spartan provides contract services for a monthly fee.

In addition the Spartan management that's joining CSI Compressco now has significant prior compression experience. We've worked in the industry successfully in the past and look forward to doing so again as we join the team. We're seeking opportunities or seeing opportunities and seeking them also we're seeing opportunities to joint bid projects with CSI Compressco and Spartan. And right now, these projects are specifically international, but we will look for these same type of opportunities in the US, as we have more time to work together.

If we turn to operational results and trends, CSI Compressco had modest declines in revenues, adjusted EBITDA and distributable cash flow in the fourth quarter of 2020 as compared to the third quarter of 2020, as our utilization declined from 80.3% to 76.4% quarter-on-quarter. While this trend may continue into early 2021, we are seeing signs of activity that give us optimism about the compression space in general and more specifically for CSI Compressco. With WTI oil prices rising to around $60 and natural gas in the $2.75 to $3 range, bidding activity is picking up both in the US and internationally.

In addition, horsepower that's been on standby decreased from 81,500 horsepower at year-end to 68,400 today. We also believe that we can expand our customer base in our core areas and we will be looking to broaden our relationships in our existing areas of operations. The strength of CSI Compressco's asset base is clearly evident in the partnership's resiliency related to adjusted EBITDA and free cash flow generation during a very challenging 2020 with the pandemic and the unprecedented decline in oil prices.

Over the last nine months CSI Compressco has made some key strategic decisions to position ourselves for long-term success. One, we exited new equipment sales business and sold the manufacturing facility to generate additional liquidity. The new unit sales business was no longer a strategic fit given the overall environment. Second, we exchanged $215 million of unsecured notes for the 2022 maturity for $50 million secured notes with a 2025 maturity and $156 million second lien notes with a 2026 maturity. We also eliminated $9 million of debt with this exchange leaving us with $81 million of unsecured notes maturing in August of 2022.

Finally, we have changed the general partnership ownership as I mentioned earlier. And while TETRA has long been a strong supportive general partner, Spartan is a company that has a similar business model, customer base and provide services around the natural gas infrastructure. We're hopeful these commonalities will provide incremental opportunities for both companies as we move forward. We will operate CSI Compressco with a focus on customer service, capital discipline and cost management. We will not manage this business betting on a recovery, but we'll be prepared to take advantage of one, if and when it happens.

Based on what we're seeing right now, we are optimistic about increasing activity over the course of 2021. And with that in mind, we entered 2021 with four large horsepower units that are on order already and are under contract. We expect to focus any incremental capital on redeploying idle fleet units. Overall, I want to again commend our management team and employees on safely and efficiently delivering a solid 2020 in an incredibly difficult environment. We're excited and optimistic about the future and the trends in the macro energy space and we look forward to a bright future.

With that I'm going to turn it back over to Jon now.

Jon Byers

Thanks, Jon. Today CSI Compressco reported fourth quarter revenue of $71.1 million, compared to $72.3 million in the third quarter of 2020. Fourth quarter adjusted EBITDA was $26.2 million, compared to $27.8 million in the prior quarter and distributable cash flow was $7.7 million, down from $10.5 million in the third quarter. We paid our fourth quarter distribution of $0.01 earlier this month, which represented a distribution coverage ratio of almost 16 times.

Moving on to the balance sheet. Cash on hand at the end of December was $16.6 million, up from $2.4 million at the beginning of the year. At the end of December, there were no amounts outstanding on our revolver compared to $3.5 million that was outstanding at the end of 2019. The year-end borrowing base available under our credit agreement was $14.2 million. That put total liquidity at just over $30 million at the end of the year.

As John mentioned, we have $81 million of unsecured notes that are due in August of 2022, and approximately $555 million of first and second lien bonds that are due in 2025 and 2026. Our net leverage ratio at the end of December was 5.8 times adjusted EBITDA. This compares with over seven times during the prior downturn a few years ago. As a management team, our immediate focus will be on delivering to our customers generating liquidity and improving our capital structure.

Finally, I want to take a moment to thank TETRA for their support during the transition period, as we work to separate shared services. As one of our largest unitholders, TETRA has a direct financial interest in seeing CSI Compressco succeed and we appreciate that support.

We will now open the call to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Brian Dirubbio from Baird. Please go ahead.

Brian DiRubbio

Good morning. Maybe to start off just on the business itself. Utilization rates dropped to the mid-70s. Do you see that declining in the near-term and then rebounding in the second half? I'm just trying to get a sense of what you're seeing as potential cadence over the next several quarters.

John Jackson

Yes. That's a tough question to answer with pinpoint accuracy. But I'd say, as we moved into the early part of the first quarter, we continue to see utilization slide a little bit. But what we're seeing right now, let's say, March forward is a more constructive environment, where we're seeing more going out than coming back at this time.

Obviously, there's a lot of dynamics with demand and COVID and things that are up and down. But I think we're seeing our customer base being a lot more active than three months ago, as far as at least looking ahead planning, budgeting and hopefully committing. So I would say, Q1 will probably drift a bit lower would be my guess. But our expectation is that from there hopefully, we'll be bottoming out and moving north or more positively from that point.

Brian DiRubbio

That's fair. And then just as w think about pricing, there were obviously some concessions that were made during the depths of the pandemic last year. Are we fully seeing those price concessions roll through, or do we have another quarter or two, where we could see average revenue per horsepower maybe decline a little bit more.

Robert Price

Yes. This is Rob Price. It's a good question. We continue – I would say pricing continues to be flat as people try to deploy idle fleet in the industry. But as the industry picks up and utilizations climb higher, we would expect to see a more robust pricing environment.

John Jackson

But I don't think there will be more price concessions from where we are on the things that are out. Is that...

Robert Price

Right.

John Jackson

We'll be coming back from there. And to Rob's point, there's a lot of equipment at this point. So it's more about getting the equipment out and working, not at a terrible rate but at kind of what the market is today. And then as that begins to shrink on availability, I think we'll see opportunities to return to normal.

We also on our side, I think we're -- I don't want to say unique, but we're different than most of the compression companies in the US today and that we have an international presence. So we're seeing probably a little bit more activity right now internationally than we are in the US to put -- immediately put units to work. So in the next couple of months, we'll see what happens on these projects we're currently bidding. But if that's the case, we may see utilization tick up, but it may be more of a transfer from one country to another to make that happen.

Brian DiRubbio

Okay. Just maybe switching gears, what are you thinking for CapEx this year?

John Jackson

So overall CapEx, we're looking at around $30 million to $40 million. Some of that is related to the units that Jon alluded to earlier on the growth side, maintenance capital we expect to be around $20 million to $24 million.

Brian DiRubbio

Perfect. And then just how are you thinking about capital allocation between now and the maturity of the '22 notes? And I guess specifically from the credit investors side, the dividend is a small number, but obviously is cash that could be better used elsewhere. So maybe thoughts on the dividend and thoughts possibly how you intend on addressing the '22s?

John Jackson

We don't have any changes or thoughts on changes at this point on the dividend. So right now, we're highly focused on the 2022 maturity. We have a number of initiatives around that, whether it's free cash flow generation, to your point on CapEx discipline. I think balancing that and making that a priority is certainly at the forefront of our mind. Otherwise, we might be looking at doing something different on the CapEx side.

But I can't really get further into the comments on what we plan to do around the 2022s right now because the markets are pretty dynamic there and we'll just have to see what's available. We wouldn't have come into this, if we didn't think we had some options to take care of the 2022s. And we think we do. But we've got a lot of work to do in the next I'd say six to eight months to get to that point where they go current in August. And while we think that's a moment they go current, it's not a crisis moment. We've got we think the full year to deal with this and maybe even early next year.

So we're going to let that play out. But I think the dividend itself would free up a little bit of cash, but doesn't make that significant a difference on what we need to do.

Brian DiRubbio

Okay. That's fair. And then just a final one for me. Just look to get your thoughts on, how do you feel about the fleet today? As you know there was a major refresh done a couple of years ago. How do you feel about the age of the fleet, the composition and thoughts on just inflation impacting the business one way or the other? Thank you.

John Jackson

Well, I think on the fleet itself, we've got a good core of assets to work with. I think the world is moving towards larger and larger horsepower. We've seen that migration over the last 20 years. You moved from 800 horsepower units to 1400 horsepower units was the main driver. Now you're moving 1400 horsepower units to 1800 to 2200 horsepower units. And that's just the natural progression that's occurring from an emission standpoint, a footprint standpoint, the volume of gas being gathered sent to locations and the way people are using outsourced compression.

So I think while we have a good core to stay where we need to be in the forefront, we're going to need to invest over time in the larger horsepower that being the 1800 to 2200, 2400, 2600 horsepower-type units and we plan to do that.

But we have some timing issues that we need to take care of one of which is the 2022 maturity. And we need to get that off of our radar and taking care of -- we have a nice runway to work with no significant maturities coming up in front of us. So I'd say overall the fleet has a nice cash flow generation characteristics and we want to invest in the newest and latest and largest to continue forward.

Again, I think one of our opportunities is to move some horsepower from the U.S. overseas and generate nice cash returns probably better cash returns than you can get in the U.S. on that horsepower while then reinvesting those cash flow streams in larger horsepower over time, so that you would see our average size horsepower per unit go up and we will continue to shrink on the smaller end either through asset sales or through just normal pruning of the fleet. Is that helpful?

Brian DiRubbio

Extremely. Thank you.

Operator

The next question is from Jay Spencer from Stifel. Please go ahead.

Jay Spencer

Yes, good morning.

John Jackson

Good morning.

Jay Spencer

I just wanted to kind of get a higher level view here. I mean in the press release you say that Spartan business is complementary to CSI Compressco. Can you elaborate on that? What is it that makes Spartan the right company to own the general partner? Is it the international opportunities? Is it something else? If you could just kind of elaborate on what the complementary nature of the business is please?

John Jackson

Well the assets Spartan has the income stream is the way they're set up or just like the compression business most of the contracts we have would be MLP-qualifying type assets and contracts. So you have that run-off of that you have qualifying income that could come potentially someday part of CCLP.

I don't know if we'll do that or not, but that works. But then when you look at what we do and where we do it we -- we interact with the same people as the compression people interact with. So whether it's the purchasing people the field operations people. So the business model of fee-based income and where we place our assets compression is oftentimes upstream or downstream of our plants.

So it's right there. So it's complementary both in the style of the way we get paid fee-based no commodity risk and usually some term to it, one year, two year, three year terms on these contracts along with where it sits in the value chain. I think if you -- on top of that I'll let Rob expand, but we've got -- we are internationally too. We have -- we operate in three other countries outside the U.S. as a partner. So just taking through our Egypt project real quick the fact that we have.¦

Robert Price

Yes. I mean a lot of the opportunities that we saw internationally required compression, as well as treating or processing. So the opportunity to deploy the assets at the same site and operate efficiently and have a single contracting point with a customer was what the customer preferred. So we've identified multiple opportunities that required both asset bases and we think we can effectively deploy equipment internationally in those jobs where it would be more difficult to deploy it in the United States or lower rate.

So we're very optimistic about the opportunity to provide a single sourcing point for some customers and at the same time drive utilization at CCLP and generate some cash flow to invest in the larger horsepower units that are more in demand in the United States. So that's…

John Jackson

We have two jobs right now that we're -- now that we've become part of CSI that we're bidding where there would have been two bids before one for compression and one for amine treating. And now we're turning in a single bid to provide it all. So that right there is complementary and that maybe neither one of us would have won the bid or maybe only one of us would have won [indiscernible] and the other one would have missed out. Now we're going in as Rob said a single provider.

And in Egypt for example we have a project in Egypt where we actually have compression and amine treating. So we actually -- that's the only place we have compression, but it was necessary for us to do the whole turnkey site to actually acquire and rent the compression. We did it on long-term basis that worked, but as a normal course in the US, we didn't have compression. We had many opportunities to buy compression, but we didn't have a big enough scale and fleet to work with and do that.

Jay Spencer

Okay. Well, that definitely helps. And so the compression that you may move overseas like is that the smaller horsepower units, or how -- or is there a specific region, or is it stuff that's associated with federal land, or what is -- what would make it -- or is it just idle assets? What are the assets that you would consider moving to the international operations if that opportunity arose, or do you know yet?

Robert Price

Well, the opportunities are there and the opportunities that we're identifying our idle fleet in the US that's hard to deploy for one reason or another whether it's emissions or size or whatever. So the opportunity to deploy those internationally opens up a avenue for us to drive utilization up. And the availability of the idle compression fleet allows us to respond quickly with units out of inventory instead of having to source on a 20 to 30 week lead time new units.

John Jackson

And these were larger. Larger one.

Robert Price

Yes, the one -- and typically, let's say, the one -- the job that we -- that John was referencing earlier was 6,000 horsepower. So in the jobs that we're currently bidding and looking at are 5,000 to 10,000 horsepower. So you have the ability to move multiple units and deploy horsepower in large chunks of assets that weren't easily deployed in the United States without a significant conversion cost make ready capital we can deploy them as is internationally.

Jay Spencer

Okay. Great. Thank you very much. That's it for me.

Robert Price

Thank you.

Operator

The next question is from Selman Akyol from Stifel.

Selman Akyol

Thank you. Good morning.

John Jackson

Good morning.

Selman Akyol

So, I guess, just to follow-up on previous questions there. You guys also referenced higher cash flows that you then would reinvest in buying higher horsepower in your opening comments. So can you maybe talk about sort of the difference in margins that you would see between deploying overseas versus the US?

John Jackson

What do you think Rob?

Robert Price

Differences in margin?

John Jackson

Yes.

Selman Akyol

That we might see, or how we should be thinking about the increased cash flow coming from…

Robert Price

Yes. I mean, it just -- it really depends on the opportunity and how much -- if you -- on a straight compression job there would probably be somewhere in the neighborhood of 10% to 20% margin uplift on a straight compression on a job that incorporated other facilities and a large amount of compression, it could be substantially higher, because you have a large concentration of assets and revenue in one space with the same operational capabilities, or the same number of operational people in that area. So, obviously, if you can increase the concentration and drive GP that way, or our gross contribution margin that way is a lot higher. So that would be more -- if you -- on a straight compression job if you said it was a 10% to 15% type uplift on a job that required compression and an amine plant it would be on the 15% to 25% pipe uplift. That's kind of how I'd look at it.

Selman Akyol

Got you. And then as you just think about this overseas opportunity, do you have like a goalpost of how much of the fleet you'd like to have deployed overseas versus in the U.S.? Is it -- should we think of it as 10%, 5% larger?

John Jackson

I don't really think we think about it that way because the fleet would be -- if we move things overseas as Rob said, I think there will be more assets that we either would have a longer time to deploy them because we have a significant number idle. So, therefore, it's not really crimping anything we're doing here, but it would generate immediate cash flow that we could then grow the U.S. fleet on the larger and more quickly. And, therefore, your percentage might not really change that much. If we -- even if we move 40,000 horsepower, 2,000 horsepower overseas it might just turn around to where we end up with 20,000 or 30,000 more horsepower here.

So we don't really have a set goal or goalpost or window we're looking at it. Really we're trying to optimize cash flows and returns at this point. We don't want to become a 90% international company, but we do want to -- we have a lot of horsepower here. We're at 76% utilization. I think we could do a lot of things that would make a decent return for this company a lot more free cash flow generation without significantly exposing us any more than we already are internationally. And our experience in the compression in the past has been from Hanover and Ariel days and we worked all over the world.

So I think from the standpoint of understanding risks and exposures and how to manage that and get paid, I think we've been able to do that pretty effectively in the past. So we don't think we're taking on incremental risk beyond the reward we're getting for the uplift.

Jon Byers

The returns are definitely risk-adjusted for the companies we're operating in.

Selman Akyol

Fair enough. And then is you guys -- I mean, should we see this like in the next three months, or should we really expect to see this in the back half of 2021? Is there any thought in terms of…?

John Jackson

You're talking about international work?

Selman Akyol

Yeah.

John Jackson

I think, it'd be in the back half of 2021 we'd see it. We might get awarded something, but by the time you get the units and ship them and install them and get them up and running. And really we're just trying to give you a flavor for we are in a snapshot in time here on February 23rd or whatever, 24th. But we're trying to give you a snapshot at this moment of this measure, what are we seeing? And so I think we have more reason for optimism right now because of what's happened in the last couple of months both U.S. and internationally.

Our bid book is up. Now bid book is not the same as here's a bill for services being provided, but activity was pretty light in the third quarter. And then it started -- people started putting budgets together in the fourth quarter and thinking about 2021. And then, of course, we have the big weather freeze here in Texas for 10 days or eight days it kind of slows things down. But the momentum feels like it's building up to where people are beginning to make decisions and spend some capital. So whether that happens in late Q1, mid-Q2, our expectations are we're going to see a pickup.

Internationally, I think we saw that a little bit earlier. We saw people start to look at projects because it takes a little bit longer for them to get up and get signed off on to the processes that go on internationally to get these projects awarded because they're a little bit bigger in scale. And they're longer term. I mean, the good thing about these international projects, they typically are three, four, five not one year. So when you put it away, you put it away. So we want to do a good job on that and make sure we get a good contract. So I'm saying all that to say, if we saw a win or two, you probably wouldn't see the financial results in the second half, and we'll keep you updated if we are successful in winning some of that. But we're trying to give you a little bit of flavor on activity compared to maybe the last couple of quarters that we're – that's why we're more optimistic right now.

Selman Akyol

Very much appreciate that color. And as other people said, you guys have talked a little bit about the Spartan combined with CSI Compressco. Can you maybe just talk about the high level some of the puts and takes on that as you think about it?

John Jackson

Well, I think we said, what we said in the earnings release, which was that it's a complementary business. I've mentioned on the call that, a lot of our income is qualifying. It's something that we get asked about and it's something that is certainly possible, but we have no immediate plans. There's nothing being worked on right now for that to happen. I think right now we're three weeks into being on the ground here three and half weeks.

So we're trying to get Ks filed and earnings calls done and really get our hands around the operational side of the business and make sure, we know exactly where we are and execute for a while, and then we'll evaluate what makes the best common sense strategic sense for CSI from the 2022 maturity, from putting idle equipment to work, from committing any capital, or from looking at any other M&A-type activity which could include Spartan.

So I can't really give you any more color than that other than that's the one item we semi-control, because we own Spartan and we own the GP of CSI, so we can at least entertain the transaction, if that was ever to make sense. But we're not at that point right now, and nothing is imminent on that.

Selman Akyol

Very good. And just maybe a little more granular here, the SG&A declined $1 million sequentially a little over $1 million. Is that a good run rate, or should we expect the shared services going away that we'll see pressure on that line going up as we go into 2021?

Michael Moscoso

This is Mike Moscoso. Yeah. So the decline this year, we had the exit of the fabrication business. So that's a permanent decline in SG&A. So it is a good run rate. It will change a little bit now with us coming off of the TETRA shared services, and then adding the Spartan executive team. So, it will change slightly, but it's closer to a run rate than what we had historically.

Selman Akyol

Awesome. And then just the last one for me. Any impact from the recent weather on your assets down there? To the –

Robert Price

There was a minor impact. We had two facilities that had water leaks out no major damage done inside the shop to the best of our knowledge. And then, there's a – there hasn't been any impact to our large-sized fleet maybe an engine or two that had some damage to it. But in general, I would say, very minor at most.

Selman Akyol

Okay. Thank you very much.

Robert Price

You bet.

Operator

This concludes…

Jon Byers

At this point, -- yeah go ahead. Go ahead.

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to John Jackson for any closing remarks.

John Jackson

We appreciate everyone joining today and listening in, and thank you for the questions. We look forward to getting back together here in a short couple of months, as we get into Q1 and report what's going on there. And we look forward to the future. Thanks much.

Operator

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

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