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Edited Transcript of CCLP earnings conference call or presentation 7-Aug-19 2:30pm GMT

Q2 2019 CSI Compressco LP Earnings Call

OKLAHOMA CITY Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of CSI Compressco LP earnings conference call or presentation Wednesday, August 7, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brady M. Murphy

CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc

* Elijio V. Serrano

CSI Compressco LP - CFO & Director of CSI Compressco GP Inc

* Roy Evan McNiven

CSI Compressco LP - VP of Operations - CSI Compressco GP Inc

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Conference Call Participants

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* Darren McCammon;Cash Flow Kingdom

* James Marshall Adkins

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research

* Kyle May

Capital One Securities, Inc., Research Division - Associate

* Selman Akyol

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good morning and welcome to CSI Compressco LP's Second Quarter 2019 Earnings Conference Call. The speakers for today's call are Brad Murphy, Interim President for CSI Compressco LP; Roy McNiven, Vice President of Operations for CSI Compressco LP; and Elijio Serrano, Chief Financial Officer for CSI Compressco LP and also for TETRA Technologies, Inc., which is the general partner of CSI Compressco LP. Also in attendance today is Michael Moscoso, Vice President of Finance for CSI Compressco LP. (Operator Instructions) Please note, this event is being recorded.

I would like to now turn the conference over to Mr. Brady. Please go ahead.

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Brady M. Murphy, CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc [2]

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Thank you, Jake. Good morning, everyone, and thank you for joining CSI Compressco's Second Quarter 2019 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 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 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 statement.

In addition, in the course of the call, we may refer to EBITDA, adjusted EBITDA, free cash flow, distributable cash flow, distribution coverage ratio, backlog 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 is planned to be filed with the SEC on or before August 8, 2019.

So I'll start the call briefly commenting on Owen Serjeant's recent departure from his post as President of CSI Compressco, followed by an overview of our performance and then turn the call over to Roy McNiven to provide some color on our improvements in our compression services margins followed by Elijio Serrano who will provide some more detail on our financial results and updated projections.

As most of you have seen, we announced that effective July 22, 2019, Owen Serjeant resigned from his position as President of CSI Compressco to address personal matters. We thank Owen for his contribution to CSI Compressco and wish him well. CSI Compressco is a much stronger company today than it was when Owen joined in the fourth quarter of 2017, thanks in part to his contributions. CSI Compressco continues to be backed by our very strong management team and we continue to be pleased with the performance and outlook for the partnership. We will announce a new President at the appropriate time.

Now turning to operations. CSI Compressco had an outstanding second quarter and delivered several record-level performances since combining CSI with Compressco in August of 2014. We achieved record highs in compression services margins of 52.7% and utilization of 89.1% for our compression services fleet.

Compression services revenue of $64.5 million increased 2.4% sequentially. Gross profits increased to $34 million in the second quarter from $30.4 million in the first quarter as margins expanded to 52.7% from 48.2% in the first quarter of the year.

Sequential incremental margins were 248%, which represents incremental gross profits relative to incremental revenue comparing the second quarter this year to the first quarter of 2019. A little later, Roy will walk us through some of the initiatives that are driving these improvements.

Second quarter 2019 adjusted EBITDA of $32.8 million increased 22% over the first quarter of 2019 as revenue and gross margin in all 3 segments increased sequentially with the gross margin increases led by compression services and equipment sales.

As we indicated on our last call, we expected a meaningful ramp-up in both new unit sales and aftermarket services in the second quarter due to the timing of several large projects and that has been realized.

In addition to the strong growth in the new unit sales from the first quarter, our aftermarket services business also experienced a strong rebound sequentially with revenue improvement by $4.6 million to $18.2 million and gross margin improving by $385,000.

Second quarter 2019 bookings for new equipment totaled $18 million, up from $11 million in the first quarter of 2019. Our backlog as of June 30 is $60 million. Although our new equipment pipeline of identified opportunities remains strong in excess of $250 million, bookings so far this year have been lower than last year as customers are delaying some new unit purchasing decisions. However, we expect that orders for new equipment will pick up in the second half of this year as customers plan for their 2020 delivery requirements. And we're currently in late stages negotiating some large international orders that we expect to materialize this quarter.

More like the equipment sales order book, our aftermarket order book strengthened as we progressed in the quarter and the outlook for the second half of the year is very encouraging. We believe our revenue and profitability in the third quarter should increase sequentially. This business requires minimal capital investment and generates very good returns.

We continue to deploy new equipment for our core customers, which is required to support their higher gas production levels as well as the increasing trend to use higher horsepower compression for centralized gas lift in the early stages of oil production. Our utilization for the 1,000-and-higher horsepower equipment focused on gathering systems and centralized gas lift was 97.1% at quarter end, up 150 basis points from the end of the first quarter in 2019 -- of 2019.

Overall utilization for the entire fleet is at 89.1%, up from the 87.2% at the end of the first quarter and up from 85% at the end of the second quarter 2018. The vast majority of the increase continues to be in the areas with the most activity, including the Permian Basin, the Eagle Ford and the SCOOP/STACK areas in Oklahoma. We have approximately 70% of our operating horsepower deployed to these 3 areas.

We're currently in discussions with our customers on their 2020 requirements for their large horsepower units to address centralized gas gathering and gas lift. As we've previously stated, we do not commit to order new equipment unless it has full customer commitment and we do not build fleet equipment on speculation. Our disciplined approach on where and whom to deploy new equipment allows us to attain returns on capital of 20% or above and preserve shareholder value.

We continue to see price increases as contracts on our existing horsepower equipment roll over. The more we scale up our compression services business in these key markets with key customers, the more we are able to improve our profitability by adding minimal costs with each additional unit deployed.

Between our growth plans and TETRA support, we expect to deploy approximately 107,000 horsepower of new equipment into our fleet in 2019. This is approximately 6,000 horsepower more than our prior guidance. Elijio will further elaborate on our projected total year capital expenditure expectations.

In summary, we had a very strong quarter with revenues increasing sequentially across all 3 business lines and adjusted EBITDA increasing $6 million sequentially. The gas compression business continues to be one of the strongest segments in the energy sector and the long-term outlook for increased gas production continues to be strong. We're excited about the future of this business and its continued growth profile.

Now Roy McNiven, our Vice President of Operations, overseeing our field operations on the fleet side and aftermarket services, will provide some incremental color on what is driving our improvements in margins. Roy?

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Roy Evan McNiven, CSI Compressco LP - VP of Operations - CSI Compressco GP Inc [3]

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Thank you, Brady. As Vice President of Operations, I have responsibility for our domestic compression services and our aftermarket teams, including the highly skilled group of mechanics and technicians that service our equipment and deliver our aftermarket services. As Brady mentioned, we are experiencing continued sequential improvements in compression services gross margins that in the second quarter reached a high of 52.7%. In addition to our great team responsible for delivering fantastic results, these improvements are being attained from several initiatives that I'll elaborate upon.

In mid-2017, we deployed an ERP system that significantly improved the tools available to us to more effectively manage the business. This system provides us real-time P&Ls for each of our units, enables us to transition from scheduled maintenance towards predictive maintenance and provides better visibility on the utilization of our mechanics and technicians in addition to allowing us to manage back-office functions more cost effectively. This system is one of the most advanced that I've seen in my history in the energy services sector, providing the most visibility at a granular level to make real-time decisions.

We are utilizing these tools to allow us to determine which customers and geographic areas are attaining the best margins and returns. Our new capital is being deployed to those areas. As a result, we are adding horsepower to our fleet at a much higher rate than we are adding incremental mechanics and technicians, effectively improving our horsepower per technician ratios.

We can also identify individual units that are not achieving the desired margins and quickly pinpoint the source of the issue, be it the performance of the unit, the application or the effectiveness of how it's being maintained. We can then have clearly defined actions to address it. This, in addition to transitioning from regularly scheduled maintenance programs towards a more predictive-based maintenance model, results in cost efficiencies and improves our equipment run times. We are also using these tools to drive down overtime and to better manage the costs of parts and components as we optimize restocking levels.

In addition to benefiting from deploying equipment into optimal customers and geographic areas on top of doing predictive maintenance, we are also seeing the impact of new equipment being deployed at prices much higher than the prior market peak in 2015. This targeted and intentional growth has supported our efforts to create clusters, which creates cost synergies through our ability to more effectively schedule our mechanics and technicians.

And finally, given the continued demand for compression services and high utilization of the fleet, we continue to do -- to achieve price increases as customer contracts roll over. During the second quarter, we also successfully implemented a price increase to the U.S. GasJack fleet.

I'll now turn the call over to Elijio.

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [4]

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Thank you, Roy. Brady and Roy touched on the key areas related to our operating results. I'll spend a couple of minutes on nonrecurring charges, cash flow, the balance sheet, capital expenditures, guidance and our capital allocation strategy.

Nonrecurring charges in the quarter were $3.6 million, of which $997,000 were cash expenses and $2.6 million were noncash charges. The noncash charges included $2.5 billion write-off of 441 small horsepower GasJack units or 20,286 horsepower, which we deemed unlikely to return to service. As a reminder, all our horsepower utilization statistics reflect this write-off. We still have approximately 650 idle domestic GasJack units or about 30,000 horsepower that can be deployed as market conditions warrant.

We also incurred a $1.2 million noncash expense related to deferred market valuation for the Series A preferred unit and the cash redemption premium.

Cash flow from operating activities were $8.7 million. Capital expenditures in the quarter were $11.5 million for growth capital, net of cash received for the sale of used equipment to deploy approximately 13,400 horsepower in the second quarter. In the quarter, we also invested $4.9 million for maintenance capital expenditures.

Distributable cash flow of $15.7 million improved 150% from the first quarter of this year and 200% from the second quarter of last year.

Our coverage ratio was 33x compared to 13x in the first quarter. This coverage reflects our decision in December of last year to reduce the distribution to cash redeem the Series A preferred units. The final cash redemption of Series A preferred units will be on August 8, which is tomorrow, after which all Series A preferred units will be fully redeemed. Distributions paid in the quarter were $477,000.

At the end of June, total gross debt outstanding was $646 million, of which $350 million are the secured notes that mature in the year 2025 and $296 million is for the unsecured notes that mature in August of 2022. No amounts were drawn on our ABL revolver. Cash on hand was about $4 million. And as a reminder, we do not have any maintenance covenants to comply with.

Our gross leverage ratio at the end of June was 5.55x. When annualizing our second quarter adjusted EBITDA, our gross leverage ratio would be 4.98x. We are well on our way towards the 4.5x target we communicated at our Investor Conference in May last year in New York City and also when we announced the reduction in our distribution in December of last year.

With respect to capital expenditures, we expect 2019 capital expenditures to be between $65 million and $70 million, inclusive of $18 million to $20 million for maintenance capital expenditures. Our growth capital expenditures are estimated to be between $47 million and $50 million that we expect to self-fund with cash on hand or cash flow from operations.

And as previously mentioned, TETRA Technologies as our general partner has agreed to purchase $15 million, 1-5, or 20,700 horsepower of compression equipment that will be deployed to our fleet to meet customer demands. This 20,700 will be leased from TETRA with CSI Compressco having the right to buy the equipment anytime over the next 5 years at CSI Compressco's sole discretion. Through the end of the second quarter, more than 2/3 of that investment in equipment by TETRA has been made. Between TETRA's commitment to support us and our own capital growth plans, we believe we will satisfy our current customers' demands and at the same time, grow within our cash flows.

Total horsepower expected to be added this year from all these initiatives is approximately 107,000 horsepower, an increase of approximately 9.4% to our fleet, all targeting 20% returns on capital with high fall-through margins and taking advantage of the margins and the initiatives that Roy mentioned earlier.

We expect total year guidance -- with respect to total year guidance, we are revising 2019 adjusted EBITDA to be between $125 million and $130 million. This compares to $99 million of adjusted EBITDA in 2018 and represents a year-over-year growth of between 26% and 31%. This compares to our prior guidance of between $125 million and $140 million.

On revenue, we expect 2019 to be between $475 million and $490 million. This is an increase of between $35 million and $50 million from 2018 and compares to our prior guidance of between $490 million and $520 million. The tightening up of the adjusted EBITDA guidance and adjustment to the revenue guidance reflects a slowdown in orders for new equipment sales in the first half of this year.

We are very encouraged with the price increases we continue to see on our fleet as contracts roll over, new equipment going out at record-high prices and the continued improvements in compression services margins that Roy elaborated upon earlier in the call.

In the second quarter, the improvements in compression services margins, gross profit was greater than the sequential revenue increase. Given fall-through gross margins of 248% or said differently, for every incremental dollar of compression revenue generated in the second quarter over the first quarter, we delivered $2.48 of gross profit from, among other things, cost reductions and [efficiencies].

At the midpoint of our full year adjusted EBITDA guidance of $127.5 million and after accounting for cash interest expense, maintenance capital expenditures and cash taxes, we expect to generate approximately $60 million of free cash flow. This year, $30 million of that was directed towards cash redeeming the Series A preferred units and the rest to growth capital and a small amount toward distributions.

We've previously communicated our plans to direct 50% of our future cash flows toward growth capital on the assumption that the market supports the higher margins that we are achieving, which reflect 20% returns on capital. The other 50% will be targeted to returning cash to our stakeholders, being debt holders and equity holders.

We are committed to improving our leverage ratio to 4.5x or better. We expect to be at the target -- at the 4.5x target by the end of 2020 through a combination of continued improvements in adjusted EBITDA and some open market purchases of the unsecured bonds. The timing of debt retirement will be dependent on generating the targeted free cash flow and monitoring the markets to see what our unsecured bonds are trading at. Currently, the unsecured bonds are trading at around $0.90 for the dollar with a yield to maturity above 10%, which compares to the coupon of 7.25%.

We'll be capital disciplined with our 50-50 approach toward reinvesting back into the business and improving stakeholder value. Our focus is on returns, margin improvements and having a very disciplined approach to capital allocation. We'll be prudent in answering our customers' demands and focused only on those opportunities which provide the highest returns and best pricing. We will grow and delever.

Jake, with that, we'll now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Kyle May with Capital One Securities.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [2]

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So I want to start with the contract operations segment. You mentioned overall service fleet utilization increased about 89% in the second quarter. How much farther can you continue to increase this? Or are you getting close to hitting a ceiling?

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [3]

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So the amount of the equipment that we're deploying is primarily on the large horsepower. And Brady mentioned that we're up in the high 90s already. Anything that's not deployed is in transition between a customer job site or down for maintenance. I'm not sure that there's much more to go on the large horsepower equipment. On the midsized equipment, we're running in the high 80s and there's an opportunity to get into the low 90s. And then I also mentioned that we've got almost 30,000 of small horsepower equipment. So any increases that we see are going to be on the small and the midsized. I would suggest that the large horsepower equipment is pretty much maxed out.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [4]

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Got it. Okay. That is really helpful. And the next one for me, Elijio, you had talked about -- I believe you referenced the leverage ratio reaching 4.5x by the end of 2020. How do you think about balancing, I guess, the difference between paying down debt and increasing the dividend?

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [5]

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Good question, Kyle, and that's a discussion that we've had among the management team and the Board. And what we want to do is as soon as we get into the free cash flow available beyond the immediate growth capital commitments that we've made, we're going to take a look at what the unit price is trading at. We're going to take a look at what the bonds are trading at. If the bonds trade near par, then we probably will look at something toward equity. If the equity remains very depressed and the bonds are trading near par, then I think there's an opportunity to do something more on the equity side. So it's really going to be a function as to what those 2 securities are trading at when we're ready to make the decision.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [6]

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Okay. Got it. And one more if I may. When we're thinking about the -- sorry, when we're thinking about equipment sales in the back half of the year, I realize you gave us a little bit of color on that should decline a little bit but still be above 1Q level. Can you help us dial that in a little bit more?

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [7]

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Right. So anything that we've got scheduled to occur this year is pretty much already in the manufacturing cycle. We've either got the equipment on order or it's already been fabricated. We went from a high of $50 million in Q4, we dropped to $25 million of equipment sales in Q1. Then we jumped back up to $50 million in Q2. I would expect that we're going to stay between those 2 ranges, Q3 and Q4.

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Operator [8]

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The next question comes from Marshall Adkins with Raymond James.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [9]

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Could you give us a little more insight into the -- you had a big jump in equipment orders this quarter, and you kind of point to a modest slowdown in the next couple of quarters. What's driving that? And is there any read-through to trends in pricing for your compression fleet or leading-edge pricing for the compression fleet as well?

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [10]

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So Marshall, let me start and then I'll turn it over to Brady. The timing on the equipment sales is simply when we receive the orders, knowing that it's taken us anywhere from 4 to 6 months to buy the engines, the compressors, the coolers, get them delivered, then assemble them and deliver them. Most of those are going into gas processing plants either in Permian and Delaware Basin or being shipped internationally. Last year, we received some significant orders, if you would go back and look at the press releases in the middle of last year and that's what we delivered in Q4 or early Q1 or early last year orders and that's what we delivered in Q2 for summer orders that we received last year. So it's really all about the timing of when these orders are coming in.

You can see from the margins that we're reporting that we're achieving low double-digit margins on those orders, and we also mentioned that we've got almost $250 million list of opportunities that we're in discussions with customers. We have seen some of those slow down in terms of being converted to purchase orders but they're not dropping off. I believe our customers are being a bit more cautious about going ahead and placing orders. We wanted to look at volumes of gas and pricing indicators out there. So the volume of opportunities is not slowing down. The customers' decision to pull the trigger and issue a PO is what's slowing down.

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Brady M. Murphy, CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc [11]

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Yes. The only other comments I would say, I think we showed $11 million bookings in the first quarter, $18 million in the second quarter. We do expect that to continue to increase in the back half of the year from those run rates. But as Elijio said, the pipeline hasn't changed. There's still a lot of opportunities out there but the decision making from -- you compare last year to this year, I think has what has slowed down, pushing them further out to the right than executing orders through the quarters. So...

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [12]

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And Marshall, the other gist of your question is how does that read over to pricing on our fleet? And I would suggest that it's 2 completely different buyers. Our buyers of the equipment for the gas processing plants are primarily midstream operators. The people that are taking our equipment for the gas -- centralized gas lifts and gathering systems are the operators who continue to drill and have volumes of gas. As you know, that is way in excess of what your expectations are. So I would suggest that there's not a direct connection between what we're seeing on orders for building and selling equipment versus the rates for the equipment that we're deploying into the field.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [13]

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So you're not seeing the same hesitation on the compression side at least as it flows through to leading-edge pricing. Is that a fair statement?

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [14]

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Yes.

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Brady M. Murphy, CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc [15]

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Yes, that's fair. And again, Elijio said, the customers that we have in the key basins where we operate, I think, is the strength of our compression services activity that we're seeing.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [16]

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Right. Elijio, I know it's early but things seem to be moving in the right direction. You're starting to get visibility going into 2020. Any thoughts on your growth CapEx next year?

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [17]

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So we have had discussions with our core customers. They've given us some preliminary indications in terms of their planning for next year. And we're going to commit to the 50-50 strategy that we laid out. Growth capital for next year will be approximately half of the cash flow that we generate. That's what we're working toward. I think the opportunities are above and beyond that, that we'll evaluate but right now that's our strategy.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [18]

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Okay. Last one for me. Utilization bumped up across the board. How much of that should we associate with the write-down of the equipment? It doesn't seem like a whole lot but I just want to make sure.

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [19]

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It's only about 1.5 -- 150 basis points.

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Operator [20]

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The next question comes from Selman Akyol with Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [21]

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In light of your strong margins this quarter and thinking about your guidance on a go-forward basis, can you talk about what kind of gross margins you've got assumed in your future guidance for the rest of the year?

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [22]

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So we don't want to be that granular in terms of guidance. I think that it is baked into our projections. We would challenge Roy to keep those margins improving sequentially given that the vast majority of the equipment coming in are to our core customers that are well capitalized with strong drilling programs in place. And also the key to making good profit in this business is to deploy equipment into clusters. Roy touched on this issue that we've got customers out there that have 2 or 3 units in the middle of the fields and they're asking for 3 or 4 -- to go up to 3 or 4 units. And when we deploy those units into those clusters, we don't have to add incremental technicians and mechanics. That is one of the big items that is driving our margins and that's where our future capital is going. So I would suggest that there's upside but it'll be dependent on the amount of capital we deploy plus the price increases we keep achieving.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [23]

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Great. And then I guess that was going to lead to my next question. Can you just talk in terms of maybe the size of the fleet, how much you've run your prices through? And how much opportunity still may be there to be realized through price increases?

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [24]

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So we've been achieving price increases as contracts roll over in the high single digits, low double digits, and that is on the existing fleet. Now I'll say that all new equipment going out is going out at rates higher than what our average fleet is out there. So anything that we're deploying that's new, I would suggest is getting premium pricing and anything that's been on contracts and has been deployed over time is rolling over with single-digit to low double-digit price increases.

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Operator [25]

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The next question comes from Darren McCammon with Cash Flow Kingdom.

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Darren McCammon;Cash Flow Kingdom, [26]

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Thanks for the answer on the previous capital allocation question. I just had one little more nuance there. Given the high cash flow ROI that you guys are enjoying, I understand the emphasis of buybacks over distribution, that's pretty clear. I also understand that you're getting higher ROIs from placing units. But it sounds like you're going to emphasize placing units at least for the next quarter over buybacks. Could you talk a little bit about the decision between those 2 and why that?

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Brady M. Murphy, CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc [27]

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Yes, this is Brady, Darren. We have a good relationship with our key clients, and we're in discussions with them for their 2020 requirements for capital. So we may be a little bit front-end loaded on that 50-50 distribution between meeting their requirements for 2020 and deploying capital in the first half of the year. But we're committed to that 50-50 split that Elijio has talked about for the second half of the year for the shareholder returns -- stakeholder returns.

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Darren McCammon;Cash Flow Kingdom, [28]

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Okay. So it's customer demand, that's correct?

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Brady M. Murphy, CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc [29]

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Yes. It's related to the timing of our customers' 2020 deployments for compression.

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Darren McCammon;Cash Flow Kingdom, [30]

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Okay. Does that mean that once that's done, you should, I mean, catch up to the 50-50 or does it mean you go to 50-50 after that?

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Brady M. Murphy, CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc [31]

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No, no, we catch up to 50-50 after that.

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [32]

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Yes. Our commitment, Darren, is that over a relevant time period we're going to be at 50-50. Every quarter is not going to be at 50-50. It might be skewed one way or the other depending on timing of capital expenditures, but over the relevant time period, we're going to be at 50-50.

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Darren McCammon;Cash Flow Kingdom, [33]

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Okay. Good. That's very helpful. So I think -- help me understand this. This is an operations question more. There's a lot of DUCs out there especially in the Permian. When a DUC comes online, is that when they place your compressors or is it afterwards? In other words, have -- when the 4,000-plus DUCs in the Permian come online, is that extra business for you or have you already placed those units?

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Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [34]

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So the DUCs are drilled but uncompleted, which means that they're not yet producing any gas. As soon as they start getting into a production mode, the equipment is being deployed to either enhance production by doing gas lift or once they're in a production mode to gather the gas and push it into a pipeline. But if a well is drilled but not completed, it is not yet tied to any compression equipment. Once it's completed, that's when we're tying it to compression equipment. So all those DUC opportunities are future opportunities to deploy compression units.

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Brady M. Murphy, CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc [35]

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Yes. The only thing I would add, I'm not sure we can speak for every operator as it relates to their DUC planning and compression planning. I think some of them are probably a little bit ahead of the game. Some of them may not be if they had planned on building up a DUC inventory before completing themselves. So although I'd like to know all the answers for every operator on DUCs, I don't think we can speak to that granularity.

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Darren McCammon;Cash Flow Kingdom, [36]

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Okay. Yes, that's what I was getting at, is would they have already preordered these units? Or I guess they would have to, right? They would've already preordered the units if they're going to bring the thing online.

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Brady M. Murphy, CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc [37]

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Again, it's hard for us to speak to an operator's plans as it relates to their DUC inventory and planning. I wouldn't want to speak for them.

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Darren McCammon;Cash Flow Kingdom, [38]

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Okay. Fair enough. The last thing, we're seeing a number of E&P firms that are cutting back on CapEx for next year. Is -- how is that affecting you?

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Brady M. Murphy, CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc [39]

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I think it's still pretty early for us to know what the operators' capital plans are going to be for 2020. I think that normally shapes up in the fourth quarter. I think it's pretty early for that to determine what that's going to be at this point, at least for our customer base, which -- so far we've seen very little cut back at all from our customers. Again, the bigger operators have continued to drill and complete through this current fluctuation in the commodity prices.

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Operator [40]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks.

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Brady M. Murphy, CSI Compressco LP - Chairman & Interim President of CSI Compressco GP Inc [41]

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Okay. This is Brady. We thank you for your interest in CSI Compressco and taking the time to join us this morning. That concludes our call.

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Operator [42]

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We appreciate your interest in CSI Compressco and thank you for taking the time to join us this morning. This concludes our call.