CSI Compressco LP (CCLP) on Q1 2022 Results - Earnings Call Transcript
Operator: Good morning, and welcome to CSI Compressco LP's First Quarter 2022 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 the attendance today is Michael Moscoso, Vice President of Finance. Please note, this event is being recorded. I will now turn the conference over to Mr. Byers for opening remarks. Please go ahead.
Jon Byers : Thank you. Good morning, and thank you for joining CSI Compressco's first quarter 2022 results conference call. I'd 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 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're cautioned that such statements are not guarantees of future performance, 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, 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-Q will be filed Monday. Please note that information provided on this call speaks only to management's views as of today, May 13, and may no longer be accurate at the time of replay. With that, I'll now turn it over to John Jackson.
John Jackson: Good morning, and thank you for joining our call today. As we discuss the first quarter results and also the outlook for the remainder of the year, I want to expand a bit on my comments in today's press release. First, our first quarter reflects an increase in revenue and utilization. This is a result of a number of positive factors that are beginning to flow through our results. Our utilization has continued to improve quarter-on-quarter, both sequentially and year-over-year. The utilization increase has come from deploying new build units as well as reactivating idle units. In addition to the utilization increase, revenue has also been augmented by increased pricing. We had a price increase in Q4, along with a Q1 price increase. As you may know, many of our units are under term contracts. Some of these contracts are multiyear term contracts. So at any one time, our price increase can only affect a portion of our fleet. We have been systematically enacting price increases each quarter as units come off term. The effects of price increases in 2021 lagged the effect of rapidly rising costs in '21, but we are maintaining or improving our margins in 2022 with price increases, allowing us to begin to return our margins to the pre-pandemic levels. This impact on revenue has translated into growing EBITDA, both sequentially and year-over-year for Q1 of '22. While we've had continued cost pressures in '22, we are focused on managing the cost environment as effectively as possible, while trying to drive these margin improvements. As we look ahead, we've contracted a number of idle units for redeployment over the remainder of 2022 and into early '23. We expect to see utilization continue to improve through the rest of the year, based on the current demand and activity levels. We have already put in place a price increase in Q2. And additionally, we are seeing positive effects of the churn in our fleet now for the first time in a couple of years. And what I mean by that is that as the unit is returned from a customer, we are generally able to redeploy that unit at a higher price than the expiring contract. While this is small dollars on an individual basis, it is a net positive to the EBITDA stream and the effect builds as the fleet units are moved to new customers. In contrast, over the course of the prior couple of years, this churn of the fleet has been in the opposite direction, higher-priced contracts were being replaced with slightly lower monthly rates or the units were going idle. So supply has tightened, pricing has now returned to levels where we can recapture some of that revenue loss from prior years. As for an update on electric motor drive activity, we have continued to execute contracts to convert some older, higher emission units to electric. These units that have signed contracts will generally deploy in the third and fourth quarters of 2022. A year ago, we were having conversations with two to three customers about their interest in electric motor drive compression. That has now expanded to somewhere between 12 and 15 customers who are exploring where, how and when they want to add or expand electric units to their rental options. We are well positioned to participate in this transition and expect to convert more of our existing fleet to electric in '23 as customers determine the pace and size of adding electric units to the compression options. There remain a number of hurdles to transition to electric on a large scale as there are a number of supply chain problems, grid capacity and stability issues to resolve, but the electric drive market will continue to grow over the next few years, and we plan to be a big participant in that market. Gas cooler and amine business continues to perform well. Specifically, the cooler portion of the business is essentially 100% utilized, and we have significant incremental demand beyond our capacity at the moment. We expect the supply and demand imbalance to continue through the rest of the year as long lead items for coolers are 20-plus weeks out. We generally have one to two year contracts on coolers, so we have strong visibility into 2023 on this piece of the business. The international market has also seen an uptick in inquiries over the last couple of quarters. We expect that we will convert some of these inquiries to orders and deploy existing equipment incrementally into the international markets over the course of '22 and '23. The international markets take longer to contract, but have more stickiness to the equipment once placed with the customer. We'll continue to pursue these opportunities as they develop. As we think about capital allocation over the next few quarters, we will continue to focus on spending money to deploy our existing fleet first. That being compressors, coolers, amine plants or international opportunities for any of those product lines. This can be making unit ready or converting it to electric motor drive style unit. We will have opportunities to build additional coolers and compression and redeploy amine plants throughout the course of the next couple of years. As always, we will look to the most effective return on our capital. In summary, we expect an improving environment throughout the rest of this year with a variety of options to deploy equipment and improve profitability. I want to thank all of our employees for the hard work on our transition to a fully functioning stand-alone company, and look forward to executing on these growth opportunities over the course of '22. I'll now turn the call over to Jon Byers.
Jon Byers : Thanks, John. Before getting into the numbers, I'd like to highlight a few items related to our business. As John mentioned, utilization in deployed fleet have improved significantly over the last 12 months. On March 31, 2021, utilization bottomed at 76.2%, with total HP in service of 900,000. Today, our utilization has grown to 81.4% with 973,000 horsepower in service. In the third quarter of 2021, as we realized the full impact of the 2020 downturn, our net leverage ratio was 6.8 times. After the refinancing that we did in November -- in December of 2021, our leverage ratio was reduced to 6.2 times. Today, we have a net leverage ratio of 5.9 times, and we expect to continue the downward trend over the rest of the year. Last thing I'd like to note is that on April 1, we elected to cash pay all interests on our second lien 2026 notes rather than pay in kind. This was the first time that we were able to do this since the bonds were issued in June of 2020. CSI has made tremendous strides over the last year, and our team should be proud of what is accomplished. On the first quarter 2022, CSI Compressco reported revenue of $80 million compared to $69.8 million in the first quarter of 2021. First quarter revenue for our contract services business was up from $56 million to $63 million year-on-year, about a 12% increase. First quarter adjusted EBITDA was $26.9 million compared with $23.3 million in the first quarter of 2021, and distributable cash flow was $10.3 million in Q1 compared to $6.6 million in the first quarter of 2021. We pay our first quarter distribution today of $0.01, and we have a distribution coverage ratio of 7.3 times. Moving on to the balance sheet. Cash on hand as of March 31 was $17.3 million, up from $6.6 million at the end of 2021. At the end of the first quarter of 2022, our borrowing base available under our credit facilities was $26.2 million, and our total liquidity at quarter end was $43.5 million, which compares to total liquidity of $32.7 million at year-end 2021. As we mentioned in our year-end call, we aim to continue to reduce our leverage ratio for the remainder of 2022, while balancing liquidity and growth opportunities. Longer term, our goal is to reduce our overall debt level, simplify our capital structure and position CSI to thrive in all phases of the energy cycle. We'll now open the call to questions.
Operator: Thank you. We will now begin the question-and-answer session. Our first question. Go ahead.
John Jackson: Brian, you on?
Unidentified Analyst: Yes. I’m on. I didn’t hear her call my name. How are you guys doing this morning?
John Jackson: Good. How are you?
Unidentified Analyst: Good. So just a couple of questions. Just a point I can no longer ask about cash paying that second lien, but that's a good thing overall. As we just think about the core compression business, can you help us get a sense of what the demand is and what your ability to raise prices are as it pertains to the low versus mid versus high horsepower units? Just want to get a sense of supply-demand dynamics and the pricing.
John Jackson: Sure. Yes. Our utilization in our -- let's say, 1,000 horsepower and up range is well in the upper 80s now. So we're -- let's call it, 87% in round numbers. So on that end of the fleet, to the extent that they come up on month-to-month, we have more pricing power there than if you go to 400 horsepower and down. Now that's migrated slowly over time. Over the last 12 months or so, the first thing to get tight was the large horsepower, the 1,250, 1,380 horsepower and up to the 1,875 to 2,500. That got tight six months ago or started getting tight, and now it's staying tight. Then you move down to the middle horsepower, and that started getting tight over the last three or four months. And now what we're seeing is more of our 200, 300 horsepower is just beginning to get where it's hard to find units for people. So the pricing layers have been -- we've been able to attack more aggressively the larger horsepower because that came off aggressively price point-wise during the pandemic and the downturn. We've been able to move that back. And I'd say now as you look at those large units going out, we're putting those units out at or above pricing that was pre-pandemic. And in the middle horsepower range, we're probably where we were in the pandemic. And then the low horsepower range, we're still just a little bit behind, but I think starting to pick up steam there. That's a lot of very vague analogy, but I'd say at this point, that reflects also the utilization in those categories. But all of them are getting better, and all of them are getting stronger, and we're driving price increases probably on the 400-horsepower and up generally speaking.
Unidentified Analyst: No, that's helpful. I appreciate it. And where do you put yourself -- let's use the baseball analogy. What inning are we in, in terms of your move into increase the amount of high horsepower capacity relative to the total horsepower in the fleet today?
John Jackson: Are you talking about --- when you say relative adding a large horsepower to our fleet or putting it out? I’m not what's the --?
Unidentified Analyst: You've spoken about in the past that you would like to increase the amount of high horsepower units in the fleet relative to everything else. And so what inning are we on in terms of that? We still sort of early days on that process? Or just likely get it done?
John Jackson: Yes we are. Yes, we are. I think we've spent -- we've committed to spending some money last year and this year, which is all new builds have been 1,875-horsepower or larger, 1,875 or 2,500 horsepower units. And we probably put 15 or 20 of those in the order book from July of last year up through year-end early this year. Now what we're doing is trying to drive those through the system and get those out. As the electric motor drive world has picked up, we have a finite amount of CapEx dollars to spend, our efficient dollar to spend now is to take older, higher emission units and convert those to electric. So that's what we're doing over the balance of this year is incremental dollars that we're going to spend are going to be on electric conversion, assuming the math still works to make that the most efficient use of our capital dollars. So I would say we're probably going to slow down on our growth on the large horsepower, but we're going to optimize on a large -- we're going to optimize that large horsepower fleet to a higher returning higher dollar, lower cost structure environment by converting some units to electric now over the next few months. But yes, as far as baseball analogy, this is going to be the drive over the next few years. So I'd say we're in the very early innings.
Unidentified Analyst: Okay. That's good just to get a sense of where we are. Just obviously, a hot topic today with every company is just inflation. Would love to get your thoughts on how that's impacting your business? How that's allowing you to drive some pricing? Just sort of related to that, what's the labor situation also looking like with the company lately?
John Jackson: I got to say pricing, we had cost inflation pressures we had. A fair bit of that happened in Q3 and Q4 last year. As you saw crude oil move up, so your fluids cost, your gasoline cost, all that ran up on you, on us and everyone last year. And as we move into 2022, that's probably been a bit more stable only because we've been at $100 crude oil, give or take, for the last three or four months. And so that's been -- when we look at our cost trends, they've been fairly flat in that area. Not where you want them, but that's just a function of the price market -- the price of the crude in the market. On the labor side, that's continued to be just challenging from a standpoint of finding people. Certainly, it cost more over time, you're having to pay more overtime because you can't find as many people. Our turnover rates are probably back to where they would be in a normal strong cycle, which is the same across the industry. You have people moving quite a bit. And we're making a lot of effort as are a lot of other companies in this space to go out and recruit from other sources, whether that's the military, whether that's technical colleges, whether -- what that may be technical institutes to put people through to try and create a larger workforce in the space because we've had a lot of people aged out, retire, move on. And so replacing that workforce is probably our biggest challenge at the moment. So it is probably over the last six months, that's probably been our biggest cost pressure is that, that in parts. Those have both gone up. But I think right now, we've fairly stabilized that, but it sits on this every day as we probably have 20 positions open at any point in time in the field from a field tech perspective. So we're always looking for more people there.
Unidentified Analyst: Great. Then, just a final question for me. As you speak to your customers, has there been any shift in tone relative to their prospects for needing new equipment? Obviously, things are getting tighter. But obviously, with all the turmoil in the world today, especially what's going on over in Ukraine, just love to get a sense, is there any sense of optimism that there will be a lot more activity going forward? Or is everybody still viewing the current situation with a bit of caution? Thank you.
John Jackson: Sure. I think there's certainly caution just from the standpoint of cost structure, and equipment availability. But we have probably more opportunities than we can prosecute. So what we're trying to decide is how do we allocate our capital dollars? It's not like we have $200 million to go spend. So from our standpoint, it really is an optimization situation. I think we have a lot of optimism from the customer side of things as far as growth and their need to deploy. They're looking at 2023 right now pretty strongly. Here we are sitting in mid-May. And if you were to go to the back of the line to get a compressor built today new, it's going to be 40 weeks, give or take, 5 weeks, maybe 45 now, maybe 38, somewhere in that range. So you're already talking about 2023, if you want to give something today. Same thing really on the electric motor. If you want to build a new one or convert you're still having to go out and supply chain perspective to get that done. I think what people are trying to really do is a couple of things. They're trying to optimize what they have. So do they have equipment they own themselves? Can they put that to work while they try and lay out their plans for next year? And secondly, how and when and where do they want to play on the electric side of things? And how fast do they want to do that? And how certain are they that they can prosecute that and do that effectively and not disrupt their production? What I mean by that is, is the grid stable? Is the grid large enough to handle an enormous amount of electric units going online across the spectrum in the Permian, the Delaware or wherever that may be? So you may go to the Delaware Basin, the grid's a little bit more unstable out there. So if the grid moves around on you a lot, you may shut your units down, you shut your production down. It becomes a lot less efficient. So do you have a gas unit and an electric unit? So I think there's a lot of people trying to navigate where they want to be in three to five years from now and how they allocate that capital, both internally for their own units and rental units to say, how do I position myself for the next five years? Or where do I want to be? But from an overall demand standpoint, I think it's very strong. I think if you look at some of the forward-looking basin by basin gas production projections, and this is somewhat of an output of Ukraine and people, I think, trying to have energy independence from Russia and so forth, is I think gas production in the U.S. is projected to go up and most of the prolific gas basins over the next three to five years, a fair bit. That's going to lead to a lot of compression. I think people are figuring out they can make money doing that, they can make pretty good money doing that, and it's just a matter of staging in. So it's a long-winded answer to your question. But I'd say, generally, it's optimistic from the standpoint of the industry, but it's also cautious with the world order and what's going on and how that disrupts things and how effectively you can play in. So I'll stop there.
Unidentified Analyst: No, that was great. I really appreciate all that color. Thank you so much.
Operator: The next question comes from Selman Akyol with Stifel.
Selman Akyol: Thank you. Good morning. A couple of quick ones for me. So can you talk a little bit about just sort of the pricing you're seeing when you bring an older unit in and you converted over to electric, and you put it back out? Are you getting 5%, 10%, 15% uplift in pricing? Any way to discuss that?
John Jackson: Yes. I can give you some perspective on that. Obviously, it's pretty dynamic as the market gets tighter on the large horsepower units. So there's sort of three segments of the fleet in what I'd call the 1,380 horsepower range, which is probably about 45% to 50% of our fleet. And so if you look at that, you'd say there's the engines that were built in the 2000 to 2010 time frame that are higher emission units, a little bit higher emission units. And then there was the ones that have been built and so they're sort of they call them the Bs and the Js. It's a style of engine that was built. So the Bs and the Js are the first things to go out, that's what people want, and that we're pretty close to fully utilized on those. So the older units are slower to go out and command a lower price. So if you put those out maybe three, four, five months ago, you put those out, you're going to get a probably 30% price decrement to what a J or B would go out for, 30%, 35% price decrement. To move those to electric, you not only take a higher emission unit out -- engine out, you replace it with electric, you can move that to the equivalent of a J rate or possibly even higher. It depends on the situation and you get longer term and your op costs go down because your operating cost for lube oil changes, spark plugs that's going to save a lot of that drops away. Your mechanics don't have pretty much time there. So you save money on that end. So you go from a 30%, 35% decrement to maybe a 5% premium. So that gives you some sense, but also your op cost change and your overhaul cost and your maintenance costs go down. So the other thing is some of those units sit idle and are still sitting idle. So you can say you're getting a 30%, 35% price increase, but you're also putting it to work, versus not putting it to work. So there's both of those factors play into it on however you want to look at the economics. So that's roundhouse numbers.
Selman Akyol: Got it. How much does it cost to refurbish a unit to go from gas to electric?
John Jackson: It depends on a lot of various factors related to the cylinders and the stages and so forth, but on just a simple taking the engine off and putting electric motor drive on and putting a VFD on that goes with it that can control it, you're probably talking about $500,000 or $600,000 versus building a brand-new electric might cost you $1.2 million in that size range. They're all going to be different. But say in the 1,300 horsepower range, give or take, it's going to cost you $1.2 million to build new and $500,000 to convert.
Selman Akyol: Got it. And then clearly, the Permian is probably the largest demand center out there, totally get that. Maybe you could just talk about and rank what other basins you're seeing in terms of increased demand?
John Jackson: Okay. Yes. I think just about across the spectrum, every basin is increased demand. We are in the Mid-Continent, that's Oklahoma, East Texas, that's ramped up, but that's smaller horsepower. So that's going to be the 400, 500, 600, 700, 800 horsepower range generally. But that demand has picked up. So we generally have most of our equipment out there. It's just been harder as I was saying earlier to get much pricing power earlier on that. We're starting to see a little bit of that now. South Texas, is pretty strong, and then we have DJ in the Bakken. So I think all those are doing well and all those are -- utilizations moving up. Farmington is a smaller horsepower area, and I think that's relatively flat. And we're in Vernon in California and some places like that, but they're very kind of minor and don't have a lot of movement. But I'd say all those other basins that we play in, which is the DJ, Bakken, South Texas, Permian and East Texas, Oklahoma, they're all seeing improvement. But certainly, it surged in the Permian first and biggest.
Selman Akyol: Okay, that does it for me. Thank you so much.
John Jackson: Thanks, thanks Selman.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to John Jackson for any closing remarks.
John Jackson: All right. We appreciate everyone calling in and dialing in and checking in with us, and we'll look forward to improving results over the rest of the year and look forward to talking to you next quarter. Thanks much.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
