CSI Compressco LP (CCLP) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to CSI Compressco LP's Second Quarter 2021 Earnings Conference Call. The speakers for today's call are John Jackson, Chief Executive Officer of CSI Compressco LP; and John Byers, Chief Financial Officer of CSI Compressco LP. Also in attendance today are Robert Price, Chief Operating Officer; and Michael Moscoso, Vice President of Finance. . After today's presentation, there will be an opportunity to ask questions. . Please note, this event is being recorded. I will now turn the conference over to Mr. Byers for opening remarks. Please go ahead.
Jonathan Byers: Thank you, Jordan. Good morning, and thank you for joining CSI Compressco's Second Quarter 2021 Results Conference call. I'd like to remind you that this conference call may contain statements that are or may deem 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 differ materially from those projected in the forward-looking statements.
John Jackson: Thanks, Jon. Good morning, and thank you for joining CSI Compressco's Second Quarter 2021 Earnings Call. I'm going to give some summary comments, and I'll turn it back over to Jon Byers to provide some commentary on cash flows, balance sheet, and liquidity. At a macro level, the quarter was an improvement sequentially from a number of financial operating metrics, and the overall trend continues to improve into the third quarter. The pace of this activity has really picked up in the second quarter. We are hopeful and optimistic about the second half of 2021, as we expect to see this activity begin to show up in the operating results in the second half of '21. The compression industry is always a late-cycle play. It's slower to increase activity, and it's slower to reduce activity based on the term-based fee contracts that exist in the compression industry. When activity picks up, the conversion of bids to firm contracts to fleet deployment takes several months to begin to be reflected in the financial results. Historically, when activity does pick up, it does so for a number of consecutive quarters. We expect to see that same kind of trend begin to play out in the second half of this year and hopefully on into '22. The current trends we are seeing today would suggest that is what will occur. So, turning to operational results and trends, CSI Compressco had a sequential increase in compression and in aftermarket services revenues. In addition, adjusted EBITDA, distributable cash flow were both higher than the first quarter of '21. Fleet utilization improved slightly to 76.9%, compared to 76.2% in the first quarter of '21. Additionally, horsepower on standby decreased from 81,500 at year-end to 37,700 at the end of the second quarter '21. Both compression services and the EMS business had month-on-month improvements each month during the second quarter. We continue to see other signs of activity that give us optimism about the compression space in general, and more specifically, for CSI Compressco.
Jonathan Byers: Thanks, John. Today, CSI Compressco reported second quarter revenue of $69.8 million, compared to $65.7 million in the first quarter of 2021. Second quarter adjusted EBITDA was $23.1 million, compared with $21.1 million in the first quarter of 2021. Distributable cash flow was up to $6.5 million from $4.3 million in the first quarter of 2021. We'll pay our second quarter distribution of $0.01 on August 13, which represents a distribution coverage ratio of 13.3x. Moving on to the balance sheet, cash on hand at the end of June '21 was $8.3 million, down from $20.9 million at the end of the first quarter. At the end of June 2021, there were no amounts outstanding on our revolver. The June 30 borrowing base availability under our credit agreement was $17.1 million. Total liquidity at the end of the quarter was approximately $25 million. We have $81 million of unsecured notes that are due August of 2022 and approximately $560 million of first- and second-lien bonds that are not due until 2025 and 2026, respectively. Our net leverage ratio at the end of June 2021 was 6.5x adjusted EBITDA. This compares with over 7x in the prior downturn. As we look at the balance sheet of CSI Compressco and what needs to be done in the near term, we need to address the $81 million of unsecured notes. We have a number of alternatives identified to deal with this upcoming maturity. We hope to have the solutions in place to complete the takeout of these bonds prior to year-end 2022. Our desire in this transaction is to put CSI Compressco closer to our long-term capital structure goals of less overall debt, lower cash interest costs, lower leverage metrics, and additional liquidity. We will not have the expected long-term capital structure in place at the completion of the takeout of the $81 million, but view upcoming maturity is an opportunity to move closer to that goal than where we are today. As a management team, our focus will continue to be on delivering to our customers, generating liquidity, and improving our capital structure. We will now open the call to questions.
Operator: . First question comes from Selman Akyol from Stifel.
Selman Akyol: So, I guess, first of all, let's just -- on the international side, you talked about things are still early on, but you could see some impact in late '21 and into '22. How much capital would that be involved with? And I guess, as you start looking at this upturn coming, how much capital do you think you need in order to participate, right? So, working capital would increase ahead of actually putting fleets in the field?
Jonathan Byers: Yes. On the international side, we're -- our intent is to use existing units so that the impact on new capital would be minimal. It would be about $2 million. And then the related to the larger question on much capital we need to participate, so before we just jump off on that, let me just correct one thing that we said in the opening comments about we intend to address the debt maturity by year-end '22. We meant year-end '21. We're getting our '22s, and we're already thinking so much about '22, but we intend to address the debt maturity by the end of this year. So I just want to make sure that's clear. But relative to how much capital we need to grow, it's hard to say. Like we just said, in the last quarter, we booked a fair bit of new 3,600-horsepower Caterpillar engines that we're going to put in our fleet. And I think there's going to be follow-on opportunities for those contracts in and of themselves, as those stations expand and grow. So I think the opportunity is going to be -- is going to exceed the capital that we have available to us, so it's a matter of us balancing liquidity and leverage, and really dealing with this refinancing and seeing where we are on the other side of that. So I think we'll have a chance to grow quite a bit. It's just a matter of how much we can handle financially. So I'm not giving you an answer because we really need to do the refinancing and put that behind us, and that will give us a lot more clarity on liquidity. I will say in the near term, we are not turning away work. We're capturing work on redeploying idle equipment. We're capturing new builds, but you really can't get anything else built this year because Caterpillar engines are starting to move out on delivery. So you couldn't really take a new unit now probably until Q1 of '22. Perhaps there's an engine or two out there that somebody has. But, so with all that said, we have Spartan that can provide incremental capital as the GP sponsor. And we will do that in the near term to facilitate the early part of this cycle and participate in the early part of this growth. And then we'll see where we are in 3 months, 4 months, 5 months, but hopefully, by the end of the year, and have this refinancing done and have a lot clearer picture of the capital availability to us as we move through '22. We're pretty -- as John said, we have some solutions identified, we're pretty optimistic about how we can get there, so we think we'll be able to participate in a fairly robust manner. But until we get to that solution, we can't really give you specifics.
Selman Akyol: Understood, and I appreciate that. And since we're on that subject, again, I'm sure a lot of moving pieces, things are being evaluated. In terms of thinking of how you're going to deal with this financing, is there any way you guys could maybe just offer up either examples or assurances in terms of dilution to the equity guys and how this is going to happen? I presume it's going to involve Spartan, but is there any just thought you could offer?
Jonathan Byers: We've said in the past, at some point, we'd like to put Spartan in this entity. That remains on the table. Whether that's part of this transaction or not remains to be seen because we don't have -- we have a lot of things we're talking about and working with our Board on and bankers. And so, we have bankers identified to help us. We've got a lot of solutions we've talked to people about. We've met with some of our key equity and debt holders to talk about where they are and what they're seeing and what they'd be interested in. So, I think we have a lot of enthusiasm around the name, so that's what I'll leave it at. With the enthusiasm around the name, there's a lot of options. I think with those options in front of us, we're trying to find the optimal solution. So it's -- I don't really want to give examples, because we may not end up using some of those examples of what we may do, based on what happens. So I'm being intentionally vague because I don't want to get out over my skis here, but all I'll say is that I think we're pretty optimistic that we'll be able to tackle this this year, and hopefully, in a very productive manner, as John said, which is, hopefully, we're reducing our overall leverage. Hopefully, we're reducing our overall interest cost. We're getting closer to the goal, not further away from it. So that's really probably about all we can say at this point.
Selman Akyol: Okay. And I appreciate all that. Let me just sort of go to a couple of different places. Can you talk about any sort of -- and I guess you alluded to it a little bit in terms of inflation pressures and when you think you might be able to get some pricing to be able to push through sort of as you look out over the cycle?
Jonathan Byers: We've been -- Rob, why don't you talk about pricing, kind of what we've been --
Robert Price: Yes, we've been able to go back and capture some price increases as equipment gets tighter from -- in the market in general, and recoup some of the discounts we gave during the downturn. So we've been able to recoup, on the revenue side, some of the some of the revenue that was given during the downturn and seeing some pricing power as we deploy new equipment going forward. On the cost side, we've seen some inflation on parts and consumables, and then obviously, on the gasoline side, where our trucks and fleet -- our guys are using to get to the sites and things like that, there's been an increase in fuel.
John Jackson: Yes. I'd say our pricing is not back to where it was at a peak point in the pandemic across the entire fleet. There are segments that it's gotten tight, and we're able to get back to that as far as incremental units. But I think we're seeing -- to give you some perspective, if you look back at the units that we had under contract that aren't counted in our utilization -- because we don't count utilization until it's actually being billed, so it's not on revenue. It doesn't go into our utilization number until it's revenue generating. But as I've said, we get a bid, we get a contract, we sign the contract. Maybe there's some revamp work that's going to be done on it. Maybe there's a little bit of overhaul work, some make-ready, whatever to get out in the field, so it may be a month or two, or maybe the customer is not quite ready for it yet. So maybe 2 or 3 months before it goes out, but we know it's going out. If you look at where we were at the end of April, when we had this call, and where we are today, without giving specific numbers, the amount of unset horsepower has more than doubled. So, in the first quarter, as you can see, our utilization kind of moved sideways because we had still a fair bit of churn in the fleet -- units coming back and units going out and kind of kept it sideways. Now that -- looking forward at this moment, we have less units that we know of coming back, and we have a lot more units than we know of going out, so we should start gaining on utilization, gaining on net availability in the fleet. And with that will come to pricing power where you can go out and say, on an incremental unit, on an incremental contract, the rates will start to move up. But right now, it's about reactivating most of the fleet and getting most of what the pricing power used to be 1.5 years, 2 years ago. It's a lot of yack, yack, yack, but anyway, that's kind of what -- that's -- it's a slow machine. And it just -- you got to get the thing going, and you got to get your utilization tight to figure out where the market is. And we're very encouraged about what's happened in the last 3 or 4 months. A lot has happened.
Selman Akyol: So maybe by the end of the first quarter next year, second quarter, we should expect to see pricing to be able to be pushed through?
John Jackson: If things continue like they are, absolutely.
Selman Akyol: Okay. That's helpful.
John Jackson: I mean, we're just not going to have -- in certain pockets of our fleet, we're just not going to have much. So, if you have 1 out of 100 versus 25 out of 100, we're no different than our competitors. The same segment of our fleet that's tight for us is going to be tight for somebody else, and the same segment of our fleet that's not as tight is not going to be for somebody else. So the pricing power is really a classic demand-supply issue. So -- and I think we're all trying to be pretty disciplined on spending money to just go out and build a lot of new things. I mean, we're really only building where we have an opportunity to deploy it for multiyear contract and where we have more equipment behind it that is going to come on top of it so that we get a lot of density and scale and locations, so we can be incredibly efficient. And that's what we're trying to deploy -- incremental growth, horsepower, new build versus revamping our fleet.
Selman Akyol: All right. Understood. And so let me just wrap up, and this will be last one for me. So with gas sort of at 390 and pretty good constructive forward strip, can you talk about what basins you're seeing strengthen, other than, I guess, presumably the Permian, because everyone is seeing that?
Unidentified Company Representative: Well, primarily, it's in the Permian, but we continue to see -- I would say, from the time that we've been here in the past 6 months, we've seen some opportunities that were relatively new in South Texas and in the VJ.
Unidentified Company Representative: Yes. I'd say what's good for us is we've had a couple of larger anchor customers for this firm for a long time that's been great. But a lot of our activity is branching out from those customers in the Permian and South Texas. So we're diversifying our portfolio of customers here a bit in this upturn right now, both in new build and in existing equipment. So that's the -- we still have strong activity, our regular activity in the Niobrara area and that kind of stuff. But we're -- the real growth, the real soaking up of our idle equipment is happening in those two basins right now.
Operator: Our next question comes from Brian DiRubbio with Baird.
Brian DiRubbio: Let me just start off with a question. Can you help me understand what the fleet breakdown is today in terms of low, medium, high horsepower units?
Unidentified Company Representative: We can do that. Yes. We'll --
Brian DiRubbio: Do you want to get back to me on that?
Unidentified Company Representative: I've got it here. But what else you got while we look that up?
Brian DiRubbio: Okay. That's fine. When you first came on board, one of the opportunities that you were talking about was joint bids on international projects with Spartan. Are you seeing any traction with those efforts?
Unidentified Company Representative: Yes, we are, definitely. We're -- we've got multiple bids outstanding for what we'll call an integrated project between a facility, ex-compression and the compression together, so we're aggressively pursuing those opportunities. They -- because there are larger opportunities versus renting compressor unit, they take substantially longer. The gestation cycle of the projects is substantially longer because you have to invest a lot more effort in developing your cost for the project, prior to going and bidding and negotiating and those kind of things. And we also have seen an uptick or a couple of opportunities on -- domestically as well, so it's not just international. There are a couple domestically as well, so we've seen a lot of activity in that area.
John Jackson: So, on the fleet side, just in round percentage numbers, if you look at our fleet -- everybody breaks their fleet segments differently, right? The large, small, medium, whatever. So we're going to call it 1,000 and up, that's about 50% of our fleet. Just under 50% of our fleet's 1,000 and up. And from 100 to 1,000 is about 40%, and then below 100 is about 10%. So it's sort of 10, 40, 50 as far as that. Now we have -- this company started historically, long ago, as largely a GasJack business, GasJack and VJack, so those are all 100 -- under 100-horsepower units. And so, when you look at our fleet, we have almost 5,000 units in our fleet, and 2,500 of them, in round numbers, are GasJack and VJack, so they're all under 100. That gives us about a, what, a 240, 242 horsepower on average per our fleet. But if we take the GasJacks and the VJacks out, because that was the historical legacy business that was the beginning of the genesis of this company. Then the CSI acquisition was made, there's some other units built. If you take that out, the rest of the fleet averages almost 500 horsepower a unit. So those are kind of two different markets and two different segments. So, our whole blended fleet is about 240 a unit, but the bulk of our fleet, where we're spending most of our time and energy and effort as far as dollars, new dollars spent -- we're certainly redeploying GasJacks all the time, but as far as growth, is on the larger end, which averages about 500 horsepower. So, it's a lot of data, a lot of numbers, but hopefully, that answers your question.
Brian DiRubbio: No, that's actually perfect. That's really helpful. And I guess the next logical question, and you mentioned before it's going to take years, but what would be the right mix? Or should we think about maybe the mix going forward as, hey, just forget about the small, older GasJacks and thinking about the mix sort of pro forma for that, but it's still going to move higher?
John Jackson: I think what you'll just see is us continue to migrate incremental dollars on new capital into the large horsepower fleet and into the international market. You're going to see us -- we have a lot of horsepower in the midcontinent region, so that would include East Texas, Oklahoma. It's a very active basin for us. It generates a lot of EBITDA. And so, you've got GasJacks, and you've got midsized horsepower, and you've got large horsepower in that region. And so, I don't think we're going to just abandon the region and say, we're only going to place large horsepower, and if that's 5, that's 5 versus 500. So I think, at least for now, our strategy is going to be to maintain what we've got and keep that running, and optimize our efficiency on that, and then harvest the incremental cash on that and deploy it in the large horsepower.
Brian DiRubbio: Got it. Switching gears, you mentioned that Spartan is going to kick in some capital to facilitate some of the growth CapEx. Are you willing to disclose that, how much that could be for this year?
John Jackson: What I'm saying is, we're the backstop. So depending on CCOPs, the timing of that cash flow, if -- we're committing to projects because they're great projects and we want to do them. And so, if there's a near-term liquidity or issue that CCLP would face to get through the cycle to get that done, Spartan's -- we had our Board meeting yesterday. I mean, Spartan's committed to stepping up and buying some of those units or loaning the money or whatever that may be. So I don't -- I can't -- even if you wanted me to give you a number, and I could give you a number, I can't give you a number because I don't know what that need would be, if any. So we have a lot of undrawn capacity inside Spartan that we can use, and we will, as needed.
Brian DiRubbio: Understood. That's helpful in that clarification. Just two more for me. As you think about -- as I talk to a lot of my companies, and in my coverage across some disparate industries, labor shortage has been sort of a really big deal. And not so much the labor shortage. I guess one guy, one firm was saying that when Domino's is paying $20 an hour to deliver pizza, it gets really hard to compete. What are you seeing in terms of both the availability and pricing for labor? And are you hoping that things get better once the extra benefits went out in September?
Unidentified Company Representative: Once the extra --
Unidentified Company Representative: Once the unemployment --
Brian DiRubbio: Yes, extra unemployment benefits, that's --
Unidentified Company Representative: I think in active basins, in the basins that are extremely active, labor has gotten tight. And we're competing with everybody else in those basins, and we've been strategic about how we've tried to address wages in those specific areas.
Unidentified Company Representative: We don't -- do we see it improving after the benefits expire? I doubt it. Because of the specific skills and characteristics that you're looking for, if those basins remain active, the labor is going to continue to be in tight supply for the segment that we're looking to fill.
Unidentified Company Representative: Yes. We're just in some areas that geographically are challenging, and it's the same challenge for -- if you're in eastern New Mexico or far west Texas and Delaware, there's not a lot of people there, so people rotate in and out. You want to get people to move out there and stay out there. Everybody has the same challenge. And it was the same before the pandemic as it is now, and with growth coming, it just creates the same problems. We've got ideas and things we put in place to try and solve those, but it's more basin-by-basin than it is across our entire company. And I think we've got a -- I think our HR team and our operations team is all over it and is using every tool they can to -- I think we've done -- actually, we've looked at our turnover so far, and it was really low last year, obviously, with not much going on as far as anybody growing or doing anything. I think our turnover is at or near normal levels for a cycle at this point. We've been closely monitoring that and trying to keep up. So it hasn't gotten really bad yet, but as we grow, that's where the challenge is, is trying to continue to add a few people back. Because some people left the industry. That's the other thing. There's a lot of jobs you can do. It's not going to Domino's. It's like, you can be an electrician and work a lot of places. You can be a mechanic can work a lot of places that don't have to be just in the compression space. So it's -- there's demand for these people that have these trade skills. They're in high demand everywhere. So it's going to be a challenge for us, but I think we've got some plans on it.
Brian DiRubbio: Okay. Final question for me, and this is one that I frequently get on the 2L notes -- no, I'm not going to ask about the dividend, but on the 2L notes --
Unidentified Company Representative: I was ready.
Brian DiRubbio: You declared it, so I'm not going to go there again. But assuming that you're successful on addressing the '22 senior notes before the end of this year, are you going to continue to pick part of the 2L note coupon, or does that go to cash pay at that point in time?
Unidentified Company Representative: Our desire is not to pick it. We're balancing growth capital, liquidity, overall leverage, but our desire would be to move to a cash pay and reduce the overall interest.
Unidentified Company Representative: Yes. We definitely want to do that. We can't promise anything until we get the second-lien financing redone, but that's our goal. That's our Board's goals, it's our senior management's goal, get rid of that.
Operator: This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Jackson for any closing remarks.
John Jackson: All right. We appreciate everyone joining in on the call, and we look forward to catching up at the end of the third quarter, and we're looking forward to a good second half. Appreciate it. Thanks.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
