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Edited Transcript of CCLP earnings conference call or presentation 7-Nov-18 3:30pm GMT

Q3 2018 CSI Compressco LP Earnings Call

OKLAHOMA CITY Dec 5, 2018 (Thomson StreetEvents) -- Edited Transcript of CSI Compressco LP earnings conference call or presentation Wednesday, November 7, 2018 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Elijio V. Serrano

CSI Compressco LP - CFO of CSI Compressco GP Inc

* Owen A. Serjeant

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

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Conference Call Participants

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* Charles W Barber

JP Morgan Chase & Co, Research Division - Analyst

* James Marshall Adkins

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

* Michael Christopher Gyure

Janney Montgomery Scott LLC, Research Division - Former MD of Forensic Accounting & MLPs

* Selman Akyol

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

* Sharon Lui

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to CSI Compressco LP's Third Quarter 2018 Earnings Conference Call. The speakers for today's call are Owen Serjeant, President; and Elijio Serrano, Chief Financial Officer. (Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Serjeant. Please go ahead.

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [2]

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Thank you, Jamie. Good morning, and thank you for joining CSI Compressco's Third Quarter 2018 Results Conference Call.

I would 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, 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 measure. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our completed financial results for the period.

In addition to our press release announcement that went out early this morning and as posted on our website, our Form 10-Q is planned to be filed with the SEC on or before November 8, 2018.

I will start with an overview of our performance, then turn the call over to Elijio Serrano, our Chief Financial Officer, who will provide more details on our financial results and projections.

I'm once again pleased to report significant sequential improvements in revenue, adjusted EBITDA, distributable cash flow, utilization and backlog. The progress the CCLP team has made to get better prices for our equipment and services, deploy equipment previously idle and invest capital in high-return opportunities is paying dividends, as can be seen by our quarterly results.

The market remains very strong for the compression industry across all of our business lines, and we see no signs of a slowing down in the near future. We have continued to focus on improving efficiencies in our field operations, at our fabrication facility, at our after-market distribution centers and in the back-office to not only capture top line growth, but also to continue to improve margins.

We have seen no slowdown in any of our businesses in the compression market in the third quarter nor are we forecasting any slowdown as we move into 2019. While some of the industry is struggling with permanent takeaway constraint concerns, our business is part of the solution and we continue to see strong demand for our Compression Services and unit sales to address the issues impacting demand for some wellsite services companies.

The rest of the North American market also continues to be strong. Our customers are demanding more compression equipment and services from us, and we're directing capital at those customers that are giving us the best returns.

I'll spend a few minutes on each of the individual lines of business and provide some perspective on how they are performing. Our Compression Services business segment continues to be robust and growing. Our 2018 projected total capital expenditures are expected to be between $110 million and $120 million, inclusive of $18 million to $20 million for maintenance capital expenditures. There is no change to our capital expenditure forecast from last guidance, given the lead time on some of the key items to build Compression Services and equipment. Lead times for engines and compressors continue to stretch out. We are waking on our 2019 capital investment plan, and we'll share that with you on our next earnings call.

Since the end of the downturn, we have placed orders for approximately 170,000 additional horsepower to be added to our fleet, with approximately 100,000 horsepower scheduled to be delivered in 2018. About 85% of the additions are large gathering system units over 1,000 horsepower per unit. All orders are customer specific and have planned commitments attached to them. We are not building any speculative equipment. We're only targeting new investment opportunities with return of 20% or higher focused on high-horsepower equipment in geographic areas where we have existing strengths on customers who continue to want to partner with CCLP as a supplier with flexibility and the experience to offer compressor systems solutions.

As we are adding more horsepower into existing clusters of equipments with our marquee clients, our incremental margins are materially higher than the overall margins we are reporting for the existing fleet. We gain efficiencies with the mechanics and technicians, given the incremental horsepower is going against the existing network. We remain very disciplined with our investments and have identified projects for customers and in regions where we already operate to leverage our footprint and infrastructure and get the highest return. The strategy is working, and we are pleased to see the returns as we introduce more horsepower into the market.

Pricing is also increasing for our Compression Services business, as contracts continue to roll over or new contracts are put in place. Some of the price increases implemented earlier this year were for 1 year or shorter terms. We expect to have opportunities to revise pricing and push up again beginning in the first quarter of 2019. We'll begin those discussions in the fourth quarter this year with our customers. The high demand for this equipment is driving price increases across most basins. We are pleased with the progress of price actions and see the real benefits as we put new high horsepower equipment into the field.

Second, our new unit sales activity remains extremely strong. We received $71 million of orders for new equipment in the third quarter, pushing our fabrication backlog for third-party sales over $140 million. Year-to-date through September, we have received nearly $170 million in new orders, many of which are filling up our 2019 order book already. This is a record for CSI Compressco, and we still have 3 months to go.

I personally would not be surprised that total year 2018 new equipment orders are around $200 million based on outstanding quota proposals. Most of these orders are scheduled to be delivered into the Permian Basin, Delaware Basin and South Texas to midstream operators that are investing to address takeaway constraints and to build regional gas processing facilities. While the Permian and Delaware takeaway constraints continue to worry some wellsite services companies, we're part of the solutions for the problem. As we sell new equipments, we also benefit in the future from some parts and services through our aftermarket network to support customers through the life of the equipment who purchase those compressors from us. The demand for new equipment sales is stronger than we expected, and we believe this trend will continue as companies are building out infrastructure and takeaway capacity in key basins. The industry continues to be short on large horsepower equipment, and we are addressing this demand as fast as we can.

Thirdly, our Aftermarket Services had a very good quarter, growing a very strong 32% sequentially to $19.9 million in revenue. We also increased our gross margins for that business as we capitalized on some of the efficiency initiatives we instituted in prior quarters. Our customers continue to catch up on previously deferred maintenance and are engaging those to maintenance and support their equipment as they reactivate old equipment and add to their existing fleet.

As I mentioned earlier, this business also benefits from new unit sales, as customers who purchase new units from us often look for us to provide Aftermarket Services and spare parts. While not an immediate benefit in many cases, we look forward to servicing our new customers into the future.

The gas compression industry is going strong, with each quarter seemingly stronger than the prior one. The U.S. land rig count has stabilized above 1,000 rigs, with last week's count of about 1,046 according to the Baker Hughes rig count. Our customers continue to have more demand for compression to deal with higher volumes of associated gas from the shale play drilling programs, and our business is directly benefiting from this.

Our utilization for 1,000 higher horsepower equipment focused on gathering systems is now at 96.6%, a significant uptick from 94.1% at the end of last quarter and essentially our full utilization. We deployed an incremental 31,247 of active horsepower during the quarter, increasing the amount of deployed horsepower to 963,714.

Overall utilization for the entire fleet is 86.3%, up from 85% at the end of the second quarter and up from 81.4% at the end of the third quarter 2017. The vast majority of the increase is in the areas with the most activity and demand including the Permian, Eagle Ford and the SCOOP/STACK areas in Oklahoma and in South Texas where approximately 70% of our operating horsepower is deployed.

With that, I'll turn it over to Elijio to provide some financial details of the quarter. And then we'll open up for questions.

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

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Thank you, Owen. Third quarter revenue increased sequentially by 15%, primarily due to continued stronger activity from Aftermarket Services and new unit sales. Compared to 1 year ago, revenue is up 61%, with equipment sales improving 250% to $36.5 million. Aftermarket Services revenue increased 109% from last year to up $19.9 million. And Compression Services revenue increased 14% to $58.9 million. All 3 of our business lines also increased sequentially.

Compression Services margins in the third quarter were 47.2%, an increase over the second quarter of this year of 100 basis points due to better pricing and continued improvements in our efficiencies. We gained the benefit of the recently installed ERP system and are seeing the initial benefit of new equivalent being deployed with 20% returns.

Aftermarket Services revenue of $19.9 million generated gross margins of 18.6%. We continue to see strong demand and growth in this area, as documented by our 32% sequential revenue growth and the improved margins. This increase is driven by customers who continue to deploy more equipment, catch up on deferred maintenance and rebuild our inventory of parts in anticipation of higher activity levels.

Equipment sales were $36.5 million with gross margins of 18.4%. This reflects the delivery of equipment from the backlog that we started building in the third quarter of last year. While we continue to make strides to improve manufacturing efficiencies and increased margins in this business line, the third quarter margins reflected costs associated with some new unit designs. For the future units, we'll benefit from those early investments. We expect future margins to be above 10%. We also expect to see continued increases in equipment sales in the fourth quarter of 2018 and into 2019 as a result of the $140 million backlog after receiving over $71 million of new orders in the third quarter.

Also in the third quarter, we recorded a $600,000 noncash expense to adjust the carrying value of the Series A Convertible Preferred Units. Adjusted EBITDA in the second -- in the third quarter was $26.5 million, up $3.2 million improvement from the previous quarter. Our coverage ratio was 1.07x, up from 0.65 in the second quarter. Distributable cash flow increased 71% from the second quarter.

In the press release that we issued this morning, we also provided guidance for the fourth quarter. We expect our fourth quarter adjusted EBITDA to be between $29 million and $31 million, up from the $26.5 million in the third quarter. The cumulative impact of price increases, stronger market demanding more horsepower, new investments coming online delivering 20% type returns, plus the continued strength of the Aftermarket Services are expected to deliver on the guidance.

In addition, the backlog of equipment that is currently in the build stage that would be delivered in the fourth quarter and throughout 2019 with improved gross margins will also contribute toward this. We expect fourth quarter revenue to be between $125 million and $135 million and sequential increase of $10 million to $20 million of the third quarter. We expect further increase to come from additional equipment sales, which we estimate will be between $45 million and $50 million in the fourth quarter.

Going back to the Investor Day we hosted in New York City earlier this year, we indicated that we expect our net leverage ratio to improve materially as the year progresses. We expect to deliver stronger earnings in the second half of this year with each quarter continuing to get progressively better, and we're delivering on that commitment.

Based on the fourth quarter annualized adjusted EBITDA, our year-end leverage ratio would be between 5.1x at the high end of the adjusted EBITDA guidance to 5.5x at the low end of the Q4 adjusted EBITDA guidance. This is a material improvement based on our Q4 run rate earnings from the levels that we're at today. Additionally, on the second quarter call, we mentioned that our distribution coverage ratio was expected to materially improve in the second half of the year and provided guidance in the range of 1.2 to 1.5x coverage ratio.

As outlined in our press release, we believe fourth quarter distribution coverage will be between 1.5 and 1.6x, with distributable cash flow in the fourth quarter expected to increase 49% on the low end of the guidance up to 62% on the high end of the guidance. This is an increase from $8.6 million in the third quarter to somewhere between $12.8 million and $14 million in the fourth quarter.

And finally, our total year CapEx guidance for the year remains unchanged, as we expect to extend between $110 million and $120 million for capital investments inclusive of $18 million to $20 million for maintenance capital.

In closing, we will continue to be very focused on returns in margins as we go, and we will maintain a very capital disciplined approach that we communicated during the investor conference earlier this year in New York. We are focused on getting higher prices for all our services and products, continue to drive efficiencies throughout the organization and improve our leverage metric.

With that, we'll open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Marshall Adkins from Raymond James.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [2]

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Elijio, you gave us some pretty explicit guidance on the fourth quarter, and we appreciate that. That's helpful. A 30% to 40% sequential increase in EBITDA is, without a doubt, the biggest increase of any one in our coverage universe I can think of. Help me understand where that's coming from. Help bridge the difference. Is it improving margins? Is it mix? Is it aftermarket? Help me to understand where the -- what's driving that improvement.

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

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Okay. And just to make sure that the numbers you've picked up, Marshall, are accurate. So in the third quarter, we generated adjusted EBITDA of $26.5 million and we're guiding $29 million to $31 million of EBITDA in the fourth quarter. So that increase is coming from 3 sources.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [4]

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I'm sorry. I mentioned the 30%, 40%. I was talking about the -- I meant to say the distributable cash flow, I apologize.

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

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Okay, perfect. So this will address both items. Number one, we built up a nice backlog of new equipment orders that we are delivering. And you heard me say earlier that our new equipment sales were $36.5 million in the third quarter, and I'm guiding $45 million to $50 million for the fourth quarter. And in a 10% EBITDA range, that'll contribute a nice amount of incremental profit. And one of the things that I want to emphasize is equipment sales bring profit without any capital investments. So the returns are incredibly good knowing that we don't have capital tied up, and we also get upfront and progressive payments for our customers. So this business actually generates working capital through the process. So that would be one contributor. Number two, we also continue to build the backlog of equipment of Aftermarket Services to rebuild customers' equipment and deliver parts to those customers. We expect that, that'll continue to increase. And then the last one and the most important one, because this one has the most state power, is we started delivering a lot of equipment that we've been building and that equipment is going out, as we've mentioned several times at 20% type margins, and then in addition to that, with the existing fleet, we're seeing the cumulative impact of prices coming across. And that will have the full four quarters of the entire fleet at the new prices that have been implemented through the entire year. You add up the sum of all those and you're seeing a significant fall through to EBITDA and distributable cash flow as we move through the process.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Energy Research [6]

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That's helpful. Okay. So the follow-on to that is, you're looking at obviously next year that everything seems to be in place for ongoing improvements. Given what you're seeing in pricing and obviously the increase on new builds and whatnot, how should we think about next year? With what you know right now, should we think about sequential improvements into Q1? And then through the remainder of the year -- you did refer to that I think for '18 in your commentary, but I'm really more concerned about '19.

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

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Well, I'll start and then I'll turn it over to Owen, because the market is at a point right now that our ability to capture price increases is quite attractive. As we went through the downturn, all the contracts that we had in play rolled over and they're getting 1-year evergreen renewals. So when we started renewing some of those contracts in late Q4 of last year, Q1 and Q2 of this year's, they're rolling over again in 2019. And we get a second bite at the apple for price increases in this process, and we intend to take advantage of that opportunity and continue to push pricing again. Then the other thing is we've mentioned that the 100,000 horsepower that we've ordered is getting delivered this year plus the total of 170,000 horsepower that we expect to be delivered next year will then come online and add to the revenue and the profitability. So the combination of equipment is now arriving and getting deployed. We're pushing up pricing, and we're going to see a rollover of contracts that we push prices up this year. Then we'll get a second adjustment on that one. Owen?

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [8]

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I think Elijio has covered the points, but what I would add to that is on the sort of the third leg of a stool on new unit sales. Our backlog, we reported $140 million. We still expect to see ongoing activity in 2019 from an incoming order standpoint. All that's associated with that pipeline activity and process plant activity to relieve some of the constraints around the Permian. But with those still higher gas flows coming out of these wells, there's still some anticipation that, that activity will continue into next year. As well (inaudible) are looking to deploy equipment from other parts of the country into -- this will be equipment that's already in utilization back into the Permian to help with some areas. And that will normally be cycled through an aftermarket center added for overhaul of some type of reconfiguration on the compressor side. So the signals from the markets and what we're seeing still anticipate that the Compression Services, new units and aftermarket will still have strength as we go into 2019.

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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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Last one from me. Based on all of this, it seems like clearly you're going to be generating a lot more cash than you're currently distributing. Just remind us all what your priority is there? Is it paying down debt, applying that excess cash to more growth? Or is it distributions or something else?

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

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Right. So we laid out priorities, May 31 in New York City when we met with our shareholder base in the sell-side community. And priority number one was invest in high-return projects. We've got existing customers wanting to add more equipment to their current clusters of equipment. So that's where all our capital is going. We anticipate that the -- as long as that demand is there and the prices are there, that'll be priority number one. Priority number two is we committed to strong balance sheet and we committed to improving our leverage ratio. That will be priority number three. And then, the last option would be looking at any distribution changes as a recommendation to our board, recognizing that, that decision is ultimately a board decision, but management makes recommendations. So while we can achieve 20% type margins, that is the priority.

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Operator [11]

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Our next question comes from Jeremy Tonet from JPMorgan.

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Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [12]

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This is Charlie on for Jeremy. I think you had mentioned it briefly, but wondering if you could give a little more color on where, currently, times kind of sit and expectations into 2019? And then kind of more importantly, any pricing pressures for manufacturers? What you're kind of seeing there. And I guess, your ability to flow this through to the customers, I understand that you're going to start pricing discussions with customers, you said, in next quarter. So just kind of general commentary there.

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [13]

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Sure. I'll take that in 2 parts, the first one on lead times. You can't throw a blanket over that -- over the whole of what we supply in terms of lead times stretching out. You do see on the higher horsepower, you still see lead times that are generally longer than what the industry has experienced over the last few years. You get into the sort of midrange above 1,000-horsepower, 1,500-horsepower units. And there's still reasonable, if you like, not seeing too excessive movements over the last 12 months ago. But what we also have on the new units side is that a lot of the horsepower supplying has got electric motor drivers on it, and that's a completely different set of dynamics from a lead times standpoint compared to have an engine. So the other part about all that is I think what we're trying to do a lot more effectively is preplanning, is looking out to see what that forecast is going to be over the next 12 months, 18 months. And then working with some of those key suppliers that may have constraints so that we can get ahead of the curve in terms of placing some long lead time items on order quickly so that we can take them off the critical path. So I think we're managing what those lead time challenges are. But definitely, from a high horsepower -- and you'll see more challenges in the midrange. And again, on the unit side with a lot of electric motors, it's a bit of a different dynamic. In terms of price inflations, obviously, no news about towers and things like that. And again, just a -- what happens in like the Permian, we know there's been some inflationary issues around resources. And yet that happens, but again, I think effective supply chain management can alleviate some of that, working to make sure we manage our resources effectively and attempt to bring people in from outside the industry, train them, develop them, put them to work as quickly as we can. So there's certainly operational things we can do to combat that. But again, where we do see inflation, where all can't be alleviated, we will put that back through into contract negotiations with customers. So I don't see that as being detrimental to margins, but it's all about managing the issues as we go forward.

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Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [14]

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Great. And then also large horsepower utilization, I think in the last 2 quarters, it was kind of talked about how it just keeps creeping higher and higher. I mean, it feels like it's got to be pretty much tapped out at this point. And granted, a lot of your investment is in large horsepower, so just any color there and you're squeezing any more out there?

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [15]

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I think if you look at the above 1,000 horsepower and 96%, it's hard to get any more out of that. I think the team has done exceptionally well in taking it from 94% over the last 12 up to 96%. I wouldn't expect to see really any dramatic change from that. But in essence, the horsepower we're redeploying, that's 170,000 horsepower that's in process of being deployed and on all that is all in the high horsepower range, and that's where we're focusing a lot of attention, because that's where the demand is currently.

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Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [16]

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Awesome. And last one from me. You obviously spoke a lot about your Permian activity and benefits that's paying. Any commentary, I guess, outside of that basin and thinking -- looking forward to 2019 and beyond?

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [17]

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Yes. So the 2 major areas where we have the major parts of our activity is Southeast Texas and up in the SCOOP/STACK. We still have activity out West. And so Fayetteville, Haynesville, so both the SCOOP/STACK and Southeast Texas first of all. Southeast Texas is still very buoyant. We are deploying some horsepower out there. But again, it's slightly different dynamic than the Permian. On a new unit sales standpoint, there's really nothing much going on out there. And then you go to the SCOOP/STACK where we're taking advantage with some of our smaller horsepower units, because again, difference -- so the gas lift type of applications compared to the Permian low flows, et cetera. And so, those 3 areas still have activity. Aftermarket is across the 3 of them. New unit sales are predominantly driven by Permian. Obviously, the Compression Services application of new horsepower is dominated by the Permian, but we still have new horsepower going out into Southeast Texas and SCOOP/STACK as well.

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Operator [18]

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Our next question comes from Mike Gyure with Janney.

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Michael Christopher Gyure, Janney Montgomery Scott LLC, Research Division - Former MD of Forensic Accounting & MLPs [19]

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You guys touched a little bit on, I guess, the backlog and sort of the makeup of new customers, existing customers. Can you talk about, I guess, your ability to deliver some of that backlog? How do you feel about mechanics and technicians and the availability of your staff to deliver on that backlog?

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Elijio V. Serrano, CSI Compressco LP - CFO of CSI Compressco GP Inc [20]

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Michael, let me start, and then I'll let Owen make a little feedback. One of the benefits that we have is that we've got a very strong customer base, and we've got a significant amount of their market share in the fields that they're operating. Most of our customers have 1, 2 or 3 of our existing pieces of equipment in their field. And when they're calling us, they're asking us to add another or 2 more units to an existing cluster of equipment. So today, we have our mechanics and technicians already driving to that site to provide maintenance to those pieces of equipment on a routine basis. So they're now making the drive, and instead of providing maintenance for 3 units, they're going to be providing maintenance for 4 or 5 units all at the same site without a new drive to a different physical location. That's why we're getting much higher margins. That's why we're getting the 20% type returns. That's why we do not have to add mechanics and technicians on a 1:1 ratio with the amount of horsepower coming online. And that's why we're being able to continue to drive better margins through the process. So simply by continuing to expand our business with existing customers in existing fields with existing clusters of equipment, it's allowing us to be able to keep up with that volume without a lot of headcount additions. Owen?

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [21]

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So Elijio talked about Compression Services. I'll just talk a little bit about aftermarket, a bit about new unit sales. So new unit sales, obviously with our model being basically integrated, we can -- we perform that activity around our Midland facility where we've been able to ramp up folks that are able to support the backlog that we have there. And in addition to that, we have a couple of really outstanding third party that we -- who we have developed over the last couple of years that can support us. So feel very comfortable in those managing that large backlog we have on the new unit sales. On the aftermarket side again, because the beauty about the way we model is that the -- a guy working on an aftermarket engine compared to whole working on Compression Services diagnostic. And we have the same suite of skills that can flow from aftermarket activity to our Compression Services activity, if need be, which helps us from a resource modeling standpoint. So to conclude in terms of the sort of the 3 areas, we feel comfortable that we have the capacity to manage that backlog as it continues to grow in -- on a unit side, activity and aftermarket and as we deploy equipments into the field at the Compression Services.

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Michael Christopher Gyure, Janney Montgomery Scott LLC, Research Division - Former MD of Forensic Accounting & MLPs [22]

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Great. That's helpful, guys. Maybe if you could touch a little bit on the smaller equipment, gas lift type products, I guess, we're seeing as far as the demand there?

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [23]

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Yes. So on the sort of gas lift units, the smaller research there is quite highly utilized on the smaller gas lift versus sort of 40-, 45-horsepower. We've seen utilization through the course of the year increase. And while there might be some softness in terms of some basins, which are predominantly gas related, we've been able to start deploying and seeing some good activity in oilfield, oil applications where we marry up a small compressor with a plunger pump to improve liquid recovery. And so quite excited about that actually going forward, we've been working with some plunger pump companies who see that opportunity and customers who are taking advantage of that in plays that don't quite have the volumes that you get in the Permian or maybe Southeast Texas, but on all the oily basins around the country where there's quite a unique application from a small compressor with a plunger pump.

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Operator [24]

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Our next question comes from Sharon Lui from Wells Fargo.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [25]

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So growth CapEx looks like it's going to be roughly in the $100 million range this year. Just based on your conversations with customers, what's your outlook for 2019 and your plans for financing expenditures?

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Elijio V. Serrano, CSI Compressco LP - CFO of CSI Compressco GP Inc [26]

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Good question, Sharon. Today, we're focused on meeting the existing demands that we have. We did a successful bond offering early this year that we've allocated those funds toward growth capital for commitments that we have. We're evaluating the cash generation capabilities of the business to make some commitments to fund some of the incremental demand. Anything beyond that, we're not yet committing to. And we will evaluate that over the next coming months as we build our 2019 plan. And we expect to announce a CapEx plan for 2019 on our next earnings call.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [27]

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Okay. That's helpful. And Owen, I was just wondering if you've noticed, I guess, a change in the competitive landscape with the consolidation of 2 of your large compression peers last quarter?

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [28]

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Yes. Obviously, we're very attentive to what's happening in the overall marketplace. But what I would suggest is that we have our top 10 customers and there's some overlap with other companies, but CSI has a strong history, strong legacy of performance. And with those customers, we still maintain a high level of market share. And we're doing what we need to do to make sure that their demands are met because of all the reasons that Elijio referred to, the close proximity of units to each other, making sure our distribution centers are aligned with those needs. So yes, it's still competitive out there. It will always be the case. But as long as we're attentive to our customers -- our top customers, I feel comfortable that we can continue to grow this business.

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Elijio V. Serrano, CSI Compressco LP - CFO of CSI Compressco GP Inc [29]

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I would suggest that we are not -- given our existing customers and their demands, we're not out there having to compete for new customers and then get into a price competitive environment to do so.

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Operator [30]

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(Operator Instructions) Our next question comes from Selman Akyol from Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [31]

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I appreciate your comments on pricing and that you still think there's room to grow. I was hoping you could put some bookends around that. Is it sort of like 0 to 5% is what you think you can get, or is it above 5% as you go forward?

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [32]

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I think you got off sort of passed off into 2 areas of the -- so the new equipment that's being deployed and contracts that are up for renewal. So new equipment being deployed, just to say, we're now higher than what we were going back into the highs of the market. So we've seen some of that 20%-plus in terms of from the low points over the 12 months ago to what's new equipment that's being deployed on the new contracts. I think we were very successful this year on contracts that were being renegotiated and we talked before about on the higher horsepower units, we saw that 15%-plus range at one of the calls we had this year. Taken those as we renegotiate them going forward might be it's not of a stress to get to those numbers, but certainly, no reason not to suspect high single digits, double digits on renegotiated contracts as we go into 2019.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [33]

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And then I'm just trying to think about the cycle and I appreciate how you guys say you're part of the solution to the constrained environment. And so as you start looking beyond 2019, I would think your compressor would be -- you have some longer-term contracts. But I'm trying to think about equipment sales and aftermarkets. Does that -- do you see that sort of softening beyond 2019? Or do you have any just sort of where we are in the cycle and sort of your outlook for that as well?

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [34]

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I'd say, again, crystal balls often get murky the further out we go, we know that. But talking to the suite of customers, generally around a midstream, who are buying this equipment, they still see anticipation of future developments going into beyond 2019 and 2020. Now if you think about -- if we look at the CAGR growth of gas production coming out of the Permian as an example, now whilst the Northeast might continue to dominate in terms of overall flows, its rate of growth is a lot less than what you see out of the Permian. These wells tend to get more gaseous overtime as well. So we anticipate a lot more production of gas going forward. The liquid market, the NGL market is still quite strong and strengthening with the ability to end markets maturing and adding another ethylene tracking capacity and the like. So yes, we do anticipate that to continue to develop beyond 2019. The extent to which that is, the longest -- the length of that is difficult to predict. But what customers tell us that we're working with is that continue to hold the course and make sure that we have the wherewithal project management capacity and the like to support them going forward.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [35]

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Got it. And then in terms of your backlog, if you didn't have any more orders come in, how long it would it just take you to work through that? Is that all going to be delivered in 2019? Or does it extend beyond that as well?

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [36]

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With the current backlog we have, it would all deplete by the end of 2019.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [37]

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Okay. And then, the last one from me. Can we get the cash and debt balances end of the quarter?

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Elijio V. Serrano, CSI Compressco LP - CFO of CSI Compressco GP Inc [38]

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So the cash balance was $26 million, if I'm not mistaken, $26.2 million at the end of September. And the debt balance is only the bonds that we've got out there, $296 million on the unsecured bonds, $350 million on the secured bonds and nothing drawn on our ABL revolver.

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Operator [39]

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And ladies and gentlemen, at this time, we've reached the end of the allotted time for today's question-and-answer session. At this time, I'd like to turn the conference call back over to management for any closing remarks.

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Owen A. Serjeant, CSI Compressco LP - President & Director of CSI Compressco GP Inc [40]

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Thank you. We appreciate your interest in CSI Compressco, and we thank you for taking the time for joining us this morning. This concludes our call.

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Operator [41]

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Ladies and gentlemen, this does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.