CSI Compressco LP (CCLP) on Q4 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to CSI Compressco LP's Fourth Quarter 2021 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; and Michael Moscoso, Vice President of Finance. All participants will be in a listen-only mode. 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.
Jon Byers: Thank you, Vaishnavi. Good morning and thank you for joining CSI Compressco's fourth quarter 2021 results conference call. I'd 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 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 are 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 and other non-GAAP financial measures. Please refer to this morning's press release, which are on 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 as posted on our website our Form 10-K will be filed early next week. Please note that information provided on this call speaks only of management's views as of today March 10th and may no longer be accurate at the time of replay. With that, I'll now turn the call over to John Jackson.
John Jackson: Thanks Jon, and good morning, everyone. Thank you for joining our call today. The fourth quarter 2021 was pivotal in positioning CSI Compressco to thrive as we enter 2022. We did this by purchasing Spartan's operating entities, issuing equity to reduce leverage and redeem our 2022 bond maturity, while deploying approximately 22,000 new horsepower and increasing the utilization of our existing fleet. The overall environment as we enter 2022 is positive from a customer activity, pricing and utilization perspective. We have currently committed to build approximately 17,000 new horsepower during 2022 and have contracts to convert a number of idle units to electric motor drive throughout the year. At this point, any additional capital spending on the fleet during 2022 will be dedicated primarily to reactivating idle fleet units or converting existing units to electric motor drive. In addition to these operating and balance sheet improvements, CSI converted to a new ERP system effective January 1, 2022. This move was necessitated by the expiration of our transition services agreement with TETRA as we have been on the TETRA ERP platform throughout 2021. System conversions require a lot of effort by many people and I want to thank all the CSI employees for their hard work and dedication to accomplish this transition. In the contract, compression services space we pushed through price increases during the fourth quarter and continue that process in early 2022. We continue to evaluate the cost environment as well as our month-to-month contracts on a continual basis in an attempt to maintain and improve gross margin. In addition, we see a growing demand for electric motor drive units across the fleet. We have some contracted orders for units ranging anywhere from 200-horsepower up to 1250 horsepower units. We also have interest and opportunity to quote larger horsepower electric motor drive units. The gas engine-driven market still has very strong demand for existing and new units. Given our capital structure, we will grow modestly with some new build units this year and they will all be in the large horsepower category. We could build significantly more based on market demand, but want to stay capital-disciplined with our capital allocation and chase the highest returns. The gas treating business purchased from Spartan remained stable through 2021 is expected to grow during 2022. We are adding some additional equipment to our treating fleet as the capital returns make sense. Just like compression any additional capital spent in gas treating will be contracted before committing the capital. We believe the acquisition of Spartan continues to deliver some combination synergies for revenue. We have deployed an amine plant in Mexico in the first half of 2022 to an existing CSI customer. Additionally, we have contracted some compression in Chile to an existing Spartan customer. These are just a couple of examples of where synergies on the revenue side of the business is making the whole better than the individual parts. We hope to see more of this during the year now that we are operating into one umbrella of ownership. I've been extremely pleased with how well the two organizations have come together as one operating union. There are certainly challenges as we enter the year. We have the typical slow start in January in AMS and parts sales, but it usually happens that begin to improve as we moved into February and on into March. The supply chain and cost structure remain areas where we have to remain nimble. The temporary shortage of a particular part or the timing of delivery changes week-to-week requiring good communication between our supply chain group, our operations group and our vendors. Our industry labor force remains very tight as business activity continues to ramp up. These are typical issues for our industry and accelerating activity environment but they are more exacerbated than past cycles given the labor market being tighter than past cycles and the supply chain challenges that continue to grow and shift each month. In spite of these challenges facing CSI and the industry overall, I believe we are positioned to have a successful year and exit 2022 as a stronger and better company than we are today. I'm personally energized about what we can accomplish in 2022 and look forward to the year with optimism. I'm going to turn the call over to Jon Byers.
Jon Byers: Thanks John. As John mentioned, it's been a big fourth quarter for CSI Compressco. With the transactions announced in November, we raised approximately $57 million in an equity offering $10 million in incremental, second lien debt and acquired Spartan's operating entities in a drop-down transaction. These three transactions enabled us to redeem our $81 million of unsecured bonds that were due in August of this year. This pushed our next large bond maturity to 2025. Before I get into the numbers, I'd like to take a moment to explain the accounting methodology used to present our fourth quarter 2021 and total year 2021 results. Going back to last year on January 29, 2021, Spartan Energy Partners LP acquired the general partner CSI Compressco as well as about 23% of the outstanding LP units. Then on November 10th, the transaction I just discussed we announced that and that CSI acquired substantially all of the operations of Spartan Energy Partners LP. Because CSI Compressco and the acquired Spartan operations we're under the common control as of the end of January 2021, financial results are presented as of Spartan and CSI were combined starting in February of 2021. In other words, Spartan's financial performance is included in CSI Compressco's financial results for 11 months of 2021. Today, CSI Compressco reported fourth quarter revenue of $80.2 million compared to $77.7 million in the third quarter of 2021. Fourth quarter adjusted EBITDA was $26.4 million compared to $25.7 million in the third quarter of 2021. Distributable cash flow was $9.3 million compared to $10.7 million in the third quarter of 2021. We paid our fourth quarter distribution of $0.01 on February 14 with a distribution coverage ratio of 6.6 times. Moving on to the balance sheet. Cash on hand at the end of 2021 was $6.6 million, down from $23.5 million at the end of the third quarter. This reduction mainly reflects the interest payment on our bonds made October 1st. At year-end 2021, our borrowing base availability under our credit facilities was $26.1 million and our total liquidity at year-end was approximately $32.7 million. This compares to total liquidity of $30.8 million at the end of last year -- at the end of 2020 rather. Our year-end net leverage was 6.2 times. This is down from the 6.8 times that we reported in our third quarter earnings call prior to the Spartan acquisition but up from the 5.5 times pro forma for the Spartan acquisition. Looking at fourth quarter 2021 annualized EBITDA, we’re below six times and we aim to continue to reduce our leverage over 2022 while balancing liquidity and growth opportunities. Looking back to 2021, we accomplished a lot. We eliminated a near-term bond maturity, strengthened our balance sheet and made significant capital investments in our large horsepower fleet. We accomplished this while separating from our prior parent, building out our own corporate infrastructure and installing a new ERP system. The teams worked hard to accomplish these goals. 2022 will be a pivotal year for CSI Compressco, as we continue to manage growth in an upcycle and improve our balance sheet. We'll now open the call to questions.
Operator: We will now begin the question-and-answer session. Our first question comes from Brian DiRubbio with Baird. Please go ahead.
Brian DiRubbio: Good morning, gentlemen. How are you?
John Jackson: Good.
Jon Byers: Good morning, Brian.
Brian DiRubbio: A couple of questions on a few different topics. Maybe starting off, Jon Byers. The exiting of the TSA in January and switching to your own ERP system, is that going to be neutral or positive to EBITDA for 2022?
Jon Byers: So, if you look at 2021, we spent about $7 million on the TSA. We were ramping down TSA support over the course of the year. So we started at about $900,000 a month and worked our way down to about $300,000 a month in TSA charges. At the same time, we built up our own organization. We did lose some of the benefits of scale of being a larger company having the corporate infrastructure. So, I would say, generally, we're going to be closer to neutral. But I would expect, if you look at our SG&A from 2022 -- or from 2021 compared to 2020, I would expect that we would move much closer to 2020 numbers.
Brian DiRubbio: Got it. Okay. That helps. Perfect. And then, just -- John Jackson, just help us understand given the surge in the oil and gas prices, what are lead times now looking like for new equipment? And what is that demand and/or price premium that you're getting for these electric-driven motors versus the traditional gas driven?
John Jackson: Okay. So the lead time for new engines at some, let's call it, Caterpillar on the gas side is probably in the 30s, 35, give or take five weeks, may be in the 40s by now. It just -- very volatile. It moves around every day. So I'd say it's probably nine months right now, give or take, to get a gas engine. On electric side, the key components you've got to get relative to an engine and the VFD that goes with it is probably -- I'll just give you an anecdote here. We are not totally sure, because when we go out today to try and get the components to build an electric motor drive or convert an existing unit, we're being told the delivery could be anywhere from 25 to 40 weeks, because the supplier can't tell us yet exactly how much they're going to be hung up. So we're working with our customers, saying, we can deliver it in X or -- between X and Y based on our vendors. So it's pretty wide. I'd say, if you're going to try and commit to building something new today, it's going to be very end of the year before it's going to get done at the earliest, just because of the way the supply chain is working. So that's what's going on, on that side of it. And I think what was the other piece you asked about price increase?
Brian DiRubbio: Just with the -- are you getting a premium, because you're upgrading obviously some of your --
John Jackson: Yes, yes, yes. Yes, I would say, what we're doing right now is, we're getting -- yes, we're getting a premium. We're getting high-end pricing for electric motor drive, but also important to us is, we're getting term -- longer term with electric. If we're going to go spend new capital, things that I think we're growing into an electric motor drive fleet in the US, that's ramping up fairly rapidly right now. But at the same time, we want to be able to get our economics out on the initial term and not have to worry about redeployment. So I think, we're getting term, we're getting rate. The other thing that happens with the electric motor drive is your cost structure comes down, because you don't have the same as far as maintenance capital and overhaul. You don't have the same maintenance work that you've got to do later in the cycle, where you've got to do overhaul an engine kind of thing. So your cost structure over the full cycle comes down a bit for you too. So that all helps, the economics work for us. And so, we're very excited about it. The other thing we're doing on the electric motor drive from our side is that, we have some older engines in our gas engine fleet, older vintage emissions-wise. We're taking those off and putting an electric drive on. And by doing that, we're able to be very efficient with our capital, while then basically upgrading our fleet to be the newest and latest standard. So it's a combination of getting good rates, good term, but also utilizing existing equipment, in a way that basically re-vintages our fleet.
Brian DiRubbio: Got it.
John Jackson: Does that make sense?
Brian DiRubbio: No. It does. And that's really helpful. And just on the headwinds labor in particular. Has that gotten any better? I know it's been very tight for a couple of quarters now. Are you seeing any relief on that front?
John Jackson: I think, it's -- I wouldn't say, I've seen a relief on it. I don't see it accelerating, at this point.
Brian DiRubbio: Right.
John Jackson: I think it's been the same for the last three or four months. Rob, you...
Robert Price: No. That's exactly right. I think, I would say, it's flat.
John Jackson: Yeah.
Robert Price: …Hard as it's been and we've focused our efforts on, focused on increased recruiting efforts to try and fill some of the boys, we see from tax schools and the like.
John Jackson: Yeah. We have constant openings. I think we've been able to maintain a fairly stable labor force, but there are pockets and areas that I think all of us in the industry face high turnover on. There's, some places that are just hard to accrue to. You have more demand for people than people live there. So they've got to move into the area and work there on a rotating basis or for a while and they may do that for a while and they want to exit then you're going to bring new people in. So it's a constant -- a treadmill you're chasing, but it's not accelerating on us.
Brian DiRubbio: Okay. That's fair. And then, just finally, Jon Byers, just on capital allocation, two questions there, just confirming that you are no longer picking the Second Lien notes. And as we go through the year with the generation of free cash flow, what is the priority? Is it to plow it back into the business? Is it to maybe reduce some of that, especially given that some of it's trading below par? Just like to get the thought process on that.
Jon Byers: Yeah. So, on the pick, we for the first time have elected not to pick. So we'll be cash paying our April one interest payment. We're excited and proud about that. On the cash flow side, this is a year where we're trying to get to a point where we can actually refinance our entire capital structure. That's probably not something that will happen this year, but something that, we think is achievable in 2023 if we're able to perform. And so the balance that we're going to be striking this year is between growing our fleet, growing EBITDA, managing liquidity, being able to make our -- being able to meet all our obligations and everything, but getting the company to a point where we can actually refinance the capital structure. Buying debt, not off the table, but we would look at it in the context of our other options in terms of what's the return on the invested dollars, so.
John Jackson: Yeah I would add to that. I think, right now we have a group sit down and look at all of our capital allocation decisions on spending growth capital. And really parse through just what you're talking about. Our debt trades close to par right, now if not at par if you really try to execute it. So, we know what that yield is and that return would be. And then, we know what our incremental capital dollars spent would be. So, we're definitely looking at. So right now the market's strong. And we can get long-term good rates, high returns, good terms and conditions we think are very underpin the floor for those returns. If the market shifts something happens during the year and we shift to where those capital dollars can't be spent as efficiently, then we'll pivot to reducing debt and buying that off the market. But it's kind of a daily, weekly, monthly decision. We discussed it with our Board. We discussed it with the entire management frequently.
Brian DiRubbio: Understood. Appreciate all the color. Thank you so much.
Jon Byers: Thanks, Brian.
Brian DiRubbio: Yeah.
Operator: The next question comes from Selman Akyol with Stifel. Please go ahead.
Selman Akyol: Thank you. Good morning guys.
John Jackson: Good morning.
Selman Akyol: A couple of questions, so, you guys talked about price increases. Can you put any bookends around that, or can you just maybe shed a little more light there?
John Jackson: Well, I don't -- it's going to vary by contract term and -- not the contract term, but contract rate versus the current market. We have -- I can give you this. I think as we exited the year about half of our fleet is contracted term. So, some term left on it whether it's 1 two more months or 24 months or 36 more months. So, there's about half your fleet you can't touch as of year-end. It's always changing obviously every month as you roll off term. So, we've gone out -- and so but you have about half of your fleet that can have price increases. We look at these on a customer basis, on a rate basis and go in and trying to capture those price increases to get them to market where we can. And we're doing that on a -- I'd say every month we're evaluating that. We're looking at each situation that we do. So, we're -- I think we offer our customers usually, we offer our customers a couple of options. One is if you want to sell a month-to-month, here's a price increase of X dollars it's going to be higher, a little bit higher than if you term out. If you want to turn out for a year with a price escalator attached to it, then we'll come in here and give you a slightly lower rate and we'll get term and now that that's done and we don't have to move the unit around spend time and money taking it offline and put it back online. So, that's kind of philosophically how we go about it. I would say if you think about the industry and how costs move versus price increases on a more macro level, we started seeing cost increases last late last spring into summer. And our customers there's still a lot of excess supply on the market, let's say idle equipment, reenergizing the fleet was just getting ready to occur. So, what happens in the compression space is you have cost increases as you first, you have price increases follow that. We started getting price increases during the late spring and the summer last year, more modest than we're getting now just because the cost environment has changed. But I would say now as we enter 2022, we hope and expect that our price increases will keep up with our cost increases at a minimum as we move through the year. So go ahead Rob.
Robert Price: The other bit of color I'd add to that is I would say six months ago, we were getting modest price increase sort of a very targeted range of equipment that was in tight supply in the market. Now, what we're seeing six months later is price increases are getting expanded and applied to all sizes of the fleet to keep up with the increased operating cost. So, that's helped -- and customers have been more open to that and acknowledging the cost environment increasing accepting those price increases. So, it's not only expanded in terms of dollar volume or percentage increase of price, but it's also applied to a larger number of units than it was six months ago.
Selman Akyol: Very helpful. Thanks. Can you guys maybe and I'm sure it's kind of hard to parse out. But I mean can you just say what an average tenor on the fleet is? Do you have any thoughts around that? It sounds like--
John Jackson: What you mean is average tenor as far as duration left on contracts on a blended basis?
Selman Akyol: Yes. Yes.
John Jackson: I would say other than the very large horsepower of the electrics most contracts are one to two years generally at the front end. Now, on the larger horsepower we're getting -- we're trying to get three to five depending on the situation. So, I'd say on average given 50% I'm saying it's probably blended around a year. Maybe some category, if you go to the lower end of the horsepower fleet, most contracts are one year. So, if you go to the 400-horsepower and down you're getting one-year contracts so that average duration is sitting out there right now, it's probably six months. But as you go to the higher end of the fleet, the average duration is probably a year to 15 months just to give you some sense.
Selman Akyol: Okay, I appreciate that. You talked a little bit about the -- I mean -- treating business. And I'm just kind of curious as you guys continue to blend in those operations. Is there a substantial difference of margin that we should be aware of, or everything for gas treating does it approximate the same?
Jon Byers: The treating business is a higher margin business. We provided financials in the 8-K for Spartan. So, that can give you a sense of it. But yes historically the treating business has been about a 70% margin business.
John Jackson: We don't see that change -- everything we're seeing in the treating business is very similar to the compression business as far as -- on the cooling side, it's very tight supply. In fact our cooler fleet at this point is in essence all accounted for. It's either contracted or committed or being built or whatever somewhere in that -- it's pretty -- that's why we're adding a little bit to that fleet. We don't want to build it out a lot more from where it is. But -- and then on the amine side, we have some idle units, but the bulk of those idle units right now are quoted into various potential contracts both internationally and in the US. So, it's an environment where things are better and stronger and then we don't have the maintenance cost that goes on to keep the equipment up. So therefore, our margins that we drive to on a monthly basis are a fair bit higher than compression.
Jon Byers: Yeah. I think that's an important point to hit on is just the nature of the Spartan treating fleet the maintenance capital is significantly lower than what you would see in compression.
Selman Akyol: Helpful. Thank you. And then -- and I'm sure it's small overall, but can you talk maybe a little bit about the electric fleet and how you see it growing and where it is now in relationship in terms of horsepower?
John Jackson: Sure. I think as we entered -- when we acquired CSI's GP a year ago or so, I think about 1.5% of the fleet was electric. It was almost exclusively on the smaller end of the fleet 200-horsepower and down generally. And so today, we converted one unit just last year that was a gas engine to electric motor drive. But next year, we expect to -- we have contracts right now to convert about another 1% of our fleet, over 1% of our fleet to electric probably between 12,000 and 15,000 horsepower right now. We have a lot of other inquiries going on relative to electric motor drive either conversion or new builds or whatever in various sizes. So we're talking 200, 800, 1,200. That's what we're working on right now. We've got opportunities to quote 2,000 2,500 horsepower electric conversion. So I think based on some conversations we had with customers that we'll see a bigger conversion in 2023 than we are in 2022. I think part of the issue in 2022 is you start thinking about what you have to have happened as you move to larger horsepower. The customer has to get a step-down transformer. They've got to put the infrastructure in place, so they can electrify the units we're bringing to them. You talk about supply chain issues today. I told you a little bit about our delays in getting equipment, so we can convert or build electric. I think the transformer market is just as delayed or more. So I think 2023 will be a much bigger conversion. Not conversion, I would say addition to the electric side of the fleet. And I think you'll see us move from -- we'll go from 1.5% a year ago to like the end of this next year, we'll probably be closer to 3% of our fleet will be electric. And then in 2023 I think you'll see that percentage accelerate. But I don't -- I want to reiterate that gas engines are still in high demand. Like we had more large horsepower today gas engine driven we can deploy it all. So it's a combination of both. There's a lot of areas where the electric grid -- is it real stable or large enough to handle a lot of electricity? They need to run off gas there and some people want the gas and electric side by side. So if you lose one, if you lose the electric power, you can still run your production vice versa. So it's going to accelerate in 2023, but I think 2022 we're probably close to what we can get done given the fact we're in March and it's going to take us 25 or 30 weeks to get equipment in to convert more from where we are. So most of our electric drive we'll do this year will convert in the second half of the year, just because we're waiting on components. That's maybe more than you wanted but that's...
Selman Akyol: No, no, no, I appreciate it. I mean, it's part of the business that's growing and you don't get a lot of look into. So I appreciate the detailed answer. And just kind of along those lines my understanding with other conversations is the customer is responsible for paying for the fuel cost there.
John Jackson: That's correct. Correct.
Selman Akyol: Same. Okay, so that's sort of standard throughout. I got it.
John Jackson: Yeah, yeah.
Jon Byers: Yeah.
Selman Akyol: So just flipping back to the G&A for a moment and I don't have 2020 right in front of me. But it seemed like a market stepped up from the third quarter. Anything going on in there that would be onetime that we should be thinking about there?
John Jackson: Yeah. So as I mentioned with Brian, we were moving off of the TETRA shared services and building our own capability corporate back office. I guess that's IT, tax, accounting, HR all the different functions. So if you look at 2021, we spent about $43 million in SG&A. About $7 million of that was PSA, about $5 million with Spartan and there's $2 million in transaction costs. So if you back all of that out and you probably shouldn't back all of it out, because some of the TSA obviously we used, but there was definitely some overlap between the two. And that's why I said I think you can expect us to get back to that $34 million, $36 million range compared to 2020.
Selman Akyol: Okay. That's it for me. Thank you, guys.
Jon Byers: Thanks.
John Jackson: Thanks, Selman.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. John Jackson, Chief Executive Officer for any closing remarks.
John Jackson: All right. Thank you. I think -- I appreciate everyone joining the call today. We're -- as I said at the beginning, we're excited about 2022. It's -- there's a lot of moving pieces. It's a very dynamic environment for everyone right now, and I'm very grateful for all the work that everyone here at CSI. And we look forward to talking to you in a quarter and telling you how we're doing. But we're excited about the year. Thanks for joining.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
