CSI Compressco LP (NASDAQ:CCLP) Q3 2023 Earnings Call Transcript

CSI Compressco LP (NASDAQ:CCLP) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Good morning, and welcome to CSI Compressco LP's Third Quarter 2020 Earnings Conference Call. Speakers for today's call are John Jackson, Chief Executive Officer of CSI Compressco LP; and Jonathan Byers, Chief Financial Officer of CSI Compressco LP; Rob Price, Chief Operating Officer, also is in attendance. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I'll now turn the conference over to Mr. Byers for opening remarks. Please go ahead, sir.

Jonathan Byers: Thank you, Keith. Good morning and thank you for joining CSI Compressco's third quarter 2023 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 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 later today. Please note that information provided on this call speaks only to management's views as of today, November 2, 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, John. Good morning and thank you for joining our call. Today, I will cover a few macro comments and discuss the third quarter results, fourth quarter and 2024 activity outlook and how CSI Compressco is positioning itself to flourish in 2024 and beyond. So last quarter, I spoke about the overall compression market and how several factors have changed this market to create a more stable, durable and less cyclical environment for the contract compression industry. These factors primarily revolve around the tight market for compression at 400-horsepower or larger, capital discipline space, improving pricing and terms, CPI protection, lengthening contract duration, long lead times for new build units, producer desire to outsource more horsepower than in the past and the growing need for natural gas worldwide.

Nothing has happened to change our view of the market. We are even more confident in that viewpoint from last quarter to now as we head towards year-end 2023. These factors or changes from the past continue to provide visibility into what we think is a prolonged up cycle for compression and natural gas. Overall, with this macro backdrop, we believe the future is bright for our company and the industry. Last quarter, we discussed that CSI Compressco had goals of growing EBITDA in a disciplined manner, continue to improve our operational execution to be cost and revenue efficient, while reducing our net leverage significantly. I want to walk through some of the trends towards achieving each of these goals today. As we look at the third quarter of 2023, the financial results reflect the strong macro backdrop for compression.

This quarter continues to build on the multi-quarter trend of increasing contract services revenue, EBITDA growth and improving net leverage metrics. The transition of our fleet to market rates is still underway, but far from complete as the market continues to price units at higher rates quarter-on-quarter. In addition, we still have a significant portion of our contracts that do not yet include CPI protection as those multiyear contracts have not rolled over for renewal. This will be an ongoing effort through next year to update all multiyear contracts to CPI-based contracts. Also, CSI Compressco's third quarter EBITDA, which reflects sequential quarter-over-quarter growth, does not have any EBITDA associated with Egypt operation was sold at the end of the second quarter 2023.

Year-to-date, 2023 has had sustained growth in EBITDA over the same year-to-date period in 2022 as well as Q3 '23 versus Q3 '22. This EBITDA growth is net of the negative EBITDA impact of the sale of Egypt and the nonrenewal of a significant contract in Latin America at the end of 2022. This EBITDA increase, net of these changes, underscores the strength of our performance. In addition, our AMS business continues to perform at a high level. The third quarter AMS gross profit was the highest AMS quarterly gross profit in the industry of the Company. This is not the result of a large one-off job, but the disciplined approach the team is taking to pricing, project and change order management, execution and selectively bidding the type of work we have the skill to execute at a high level.

Congrats to the AMS group this quarter for the record performance for a job well done, not only this quarter, but throughout the year. Now let's turn our attention to operational performance. The last two to three years have been very active as we work to put the idle portion of our fleet back to work along with deploying new building units in our fleet. After the initial burst of activity in '21 and in early '22, CSI Compressco began a more intentional effort of focusing on what we term operational rigor. These efforts were started in 2022, but have been expanded and accelerated during 2023. The compression-rigor related projects we have been working on within CSI Compressco come in many forms. This includes purchasing our fleet of units we no longer desire, increasing pricing on units to market rates as they come off terms, restaging units, improving our supply chain processes.

Working capital management, such as reduced DSOs and reduced inventory balances. Unit maintenance visibility through technology and implementing machine learning for predictive avoidance of major failures, these are just a sampling of the internal projects we are pursuing to deliver predictable, repeatable and improving results. The theme of rigor is embedding itself in our organization, and each group is taking on the challenge to execute more efficiently. A number of these initiatives are in the early stages, but we believe the benefits of these efforts will be reflected in 2024 and beyond via improved operational cost metrics. The last primary goal I mentioned relates to leverage. Our net leverage continues to improve as we are now under 5x levered.

This has come about from growing our EBITDA, but also by reducing our net debt. We have indicated throughout the year that we plan to generate some modest amount of free cash flow to reduce debt, and we are seeing that reflected in the current results. This has been a continual focus over the last two-plus years. We are pleased to see the actual results reflect the hard work that has been done to reduce our net leverage. Jon Byers will have more to say about this in his comments. Moving from performance to the future, we can provide some updates. As we look to the fourth quarter of 2023, we can expect the AMS business gross profit to drop back a bit due to the normal seasonality of that business is during the holidays, there's usually a slowdown in activity from our customers in the AMS segment.

A storage facility for natural gas, showing the vast reserves of this abundant energy source.

Offsetting the potential fourth quarter change in AMS is the deployment of some additional new build units into our Contract Services segment that will be installed for our customers and on revenue during the fourth quarter. Our fleet is nearing effectively full utilization. Our fleet utilization ended the quarter at 87.6%. CSI Compressco's reciprocating horsepower, representing approximately 83% of our fleet, has a utilization at the end of the third quarter of approximately 94%. And our large horsepower fleet, that being defined as all horsepower over 1,000 horsepower, is 96% utilized. Our GasJack and rotary fleet utilization remains in the mid-50s as far as percent utilized, and we expect these non-reciprocating type units of our fleet to remain in that approximate utilization for the foreseeable future.

As a result, there remains a very small amount of true uncontracted idle reciprocating horsepower to put back to work. We have additional horsepower contracted that is not yet deployed because of customer timing or make ready work on the unit before being deployed. As equipment churns from one customer to another, there's a period of time that unit, while being under contract, may not be generating revenue. The unit is not generating revenue. We do not count it as utilized, so we will always have some percentage of our fleet not utilized, but under contract. As we look to the remainder of 2023, we reiterate our full year guidance for EBITDA of $125 million to $135 million. Our year-end net leverage guidance of $5.2 million to $4.8 million, we are currently inside both of those ranges on a 12 -- trailing 12-month basis for EBITDA and quarter end net leverage.

We expect to give guidance for 2024 on our year-end earnings call. Our current outstanding capital commitments for new build units will be completed and the units deployed and on revenue by late 2024. Every unit that we currently have on order is contracted on a multiyear term with the customer. We are currently seeing a request from multiple customers for additional equipment in 2024. To fulfill those requests, there may be a few remaining idle units that we can reconfigure that will satisfy a small portion of that demand. Anything else will require transitioning units from one customer to another, requiring a longer term and higher rate than that unit is contracted for today. In addition, we have requests for proposals for 2025-horsepower coming in from multiple customers.

Many of these requests will require new build capital and the total of these requests already far exceeds our ability to fund. We are currently in the process of capital allocation for 2025 new-build units. Based on current activity levels, we might well contract all our new-build capital allocated for 2025 and by early Q1 of 2024. Throughout this process, we will continue to focus on returns and capital discipline as we look to continue to reduce our net leverage metrics while growing EBITDA. Overall, we continue to be bullish about the macro environment, the longevity of the cycle and how CSI Compressco is positioned to perform over the coming quarters. We continue to focus on returns and deleveraging versus absolute growth. This is evidenced by our multiquarter improvement in leverage metrics while growing EBITDA.

We believe this cycle will continue longer and stronger, and we believe in the long-term fundamentals of natural gas and especially our ability to perform at a high level as we go forward. Finally, we will continue to look for ways to instill rigor in everything we do as we continue our pursuit of operational excellence. While we have made a lot of strides in our operational performance, we believe there's still a lot of opportunity from here. I want to thank all our employees for embracing the mantra of operational rigor and constantly looking for ways to improve what and how we do each and every job. It has been a pleasure to see the employees so engaged in these efforts. I'll now turn the call over to Jon Byers.

Jonathan Byers: Thank you, John. For the third quarter of 2023, CSI Compressco reported adjusted EBITDA of $33.8 million compared to $29.8 million in the third quarter of 2022, a 14% increase. Our contract services revenue grew 6% year-over-year from $67.5 million in the third quarter of 2022 to $71.5 million in the third quarter of 2023. This was driven by continued improvement in utilization and pricing, particularly among our large horsepower equipment. Year-over-year, our utilization increased to 87.6% from 85.1% in the third quarter of 2022. Our AMS revenue grew 2% year-over-year and was 12% higher than the prior quarter. Moving on to profitability. Our Contract Services gross margins were 51%, up about 150 basis points for Q2, and our AMS business, as John said, continues to perform well, with gross margins of just over [Technical Difficulty].

Distributable cash flow was $14 million compared to $11.1 million in the third quarter of 2022, and we'll pay our third quarter distribution of $0.01 on November 14, with a distribution coverage ratio of 9.9x. Our capital spending guidance for 2023 has increased to $49 million to $54 million. When compared to our prior guidance, the increase of approximately $6 million is offset by the redeployment of cash proceeds from the sale of our Egypt assets in the second quarter. As John mentioned, one of our primary goals is to significantly reduce leverage. As of September 30, 2023, we delivered a net leverage ratio of 4.8x. This is down from a peak leverage of 6.8x in Q3 of 2021, and is the lowest net leverage ratio CSI Compressco has reported since Q1 of 2016 over seven years ago.

We're currently at the low end of our net leverage guidance of 4.8x to 5.2x and anticipate exiting the year around 4.8x. A related focus to reducing leverage is building our liquidity. Cash on hand plus undrawn ABL capacity is how we look at that. At quarter end, our total liquidity was $68.2 million. That's an increase of almost 50% from the beginning of the year. Financial perspective as our operations and AMS teams have focused on, as John said, predictable, repeatable and improving results. The finance team has been focused on refinancing our balance sheet. Our first lien bonds mature in April of 2025, 18 months from the end of Q3. And we have been engaged in conversations throughout the summer and fall with banks, lenders and our rating agencies.

Currently, we're optimistic about our refinancing alternatives based on these conversations. John discussed our positive outlook on the compression business. The market is short equipment and there's strong demand for existing and new-build units. The industry is operating in a disciplined manner regarding pricing, new-build capital and contract duration, which is being measured in years, not months. CSI Q3 was evidence of the success of our strategy to balance growth and deleveraging. Equally as important, Q3 showed the results of our employees' multiyear effort to improve performance and grow our business. With that, we will now open the call to questions.

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