U.S. Markets closed

Edited Transcript of CCLP earnings conference call or presentation 6-Nov-19 3:30pm GMT

Q3 2019 CSI Compressco LP Earnings Call

OKLAHOMA CITY Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of CSI Compressco LP earnings conference call or presentation Wednesday, November 6, 2019 at 3:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brady M. Murphy

TETRA Technologies, Inc. - President, CEO & Director

* Elijio V. Serrano

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

* Jacek Mucha;VP of Finance & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Charles W Barber

JP Morgan Chase & Co, Research Division - Analyst

* Darren McCammon;Cash Flow Kingdom;Analyst

* Eric Seeve

GoldenTree Asset Management, LP - Research Analyst & Portfolio Manager

* Praveen Narra

Raymond James & Associates, Inc., Research Division - Analyst

* Sharon Lui

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

* Steven Ruggiero

R.W. Pressprich & Co. - Head of Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning and welcome to CSI Compressco LP's Third Quarter 2019 Earnings Conference Call. The speakers for today's call are Brady Murphy, President 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; and Jacek Mucha, Vice President of Finance and Treasurer for TETRA Technologies, Inc. and 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 now like to turn the conference over to Mr. Mucha for any -- for opening remarks. Please go ahead.

--------------------------------------------------------------------------------

Jacek Mucha;VP of Finance & Treasurer, [2]

--------------------------------------------------------------------------------

Thank you, Elisa. Good morning, and thank you for joining CSI Compressco's Third Quarter 2019 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 analysis made by CSI Compressco, 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 reconciliation 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 November 7, 2019.

With that, I will now turn it over to Brady.

--------------------------------------------------------------------------------

Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Jacek. Good morning, everyone, and thank you for joining our third quarter conference call.

I will start with an overview of our performance and results, and then turn the call over to Elijio Serrano, who will provide more details on our financial results and updated projections. CSI Compressco had another outstanding quarter and delivered another set of record achievements.

For the second quarter in a row, we achieved record highs in compression services margins, which reached 53.2%, and utilization for our compression services fleet, which ended the quarter at 90.1%. Compression services revenue of $65 million increased 1% sequentially, while gross profits increased to $34.6 million from $34 million in the second quarter as gross margins expanded 50 basis points sequentially.

Our compression services gross margins have continued to improve as we deploy -- continue to deploy new fleet equipment to our core customers in our core geographies that generate at least a 20% return on capital. We continue to realize the financial benefit of the leverage we get from deploying new equipment into clusters for core and well-capitalized customers, where we can more effectively utilize our employees. Since the beginning of the year, we have increased our horsepower by approximately 71,000, while keeping our technician headcount flat, effectively improving our horsepower to technician ratio. Our management team are fully utilizing all the tools and data from our ERP system to focus on areas to drive efficiencies and reduce cost.

In a period of rapidly declining rig count activity in the U.S. and uncertainty in the oil and gas industry, our business continues to deliver improved results, underpinned by our long-term outlook of increasing U.S. gas production.

Third quarter 2019 adjusted EBITDA of $34 million increased 4% over the second quarter of 2019, and is up 28% from the same period last year despite a sequential revenue dropped to $114 million from $136 million in second quarter of this year. This compares to $115 million in the third quarter of 2018. The sequential revenue decrease was the result on timing of shipments for equipment sales and was consistent with our expectations. Despite this revenue decline, adjusted EBITDA improved sequentially and from last year.

Aftermarket services revenue increased by $2.3 million sequentially to $20.4 million. We expect aftermarket services to end the year strong, given the customer demand we're seeing for parts and services and a strong aftermarket services backlog. We expect our revenue and profitability in the fourth quarter to increase sequentially for aftermarket services. And as a reminder, aftermarket service business requires minimal capital investment and generates very good returns.

Third quarter 2019 bookings for new equipment totaled $29 million, net of cancellations of approximately $4 million. Bookings were up from $19 million in the second quarter of 2019. Our backlog as of September 30 is $63 million, up $3 million from the end of the second quarter and after a third quarter shipments of $27 million. We expect to have 1 to 2 more large orders in the fourth quarter of 2019 or the first part of 2020 that we expect to fulfill our backlog for 2020 deliveries.

A pipeline of identified new unit sales opportunities remains in excess of $250 million as we continue to replenish our leads on global opportunities. While some customers have recently delayed orders, partially due to lead times on key components coming down and not needing to order equipment 9 to 12 months prior to delivery, we continue to see a healthy outlook for this business.

Centralized gas lift continues to be an important application in high demand for our compression services fleet. And we continue to deploy new higher horsepower fleet additions for our core customers in the early stages of oil production, particularly in the Permian Basin where we have our strongest market share position.

Additionally, our increased focus on liquids artificial lift methods for aging unconventional wells, such as our GAPL, or gas assisted plunger lift, combined with BAIS, or our back side auto injection services, has resulted in a fourfold increase in the number of GasJack sets we have out working on this application since the beginning of the year. This new application was developed specifically for later life unconventional wells that are typically producing below 100 barrels of oil per day, where large horsepower compression system failed to achieve the desired lift efficiency and in horizontal wells that will not support rod lift.

In addition to reducing CapEx, it can be installed with wireline, avoiding the major expense associated with the well workover. Recent case studies have highlighted our success in increasing oil and liquids production by multiples as much as 5x to 10x, resulting in multiple orders by customers in the Permian and SCOOP/STACK Basin.

Further, the increased utilization of GasJack fleet in these liquids applications requires only minimal capital deployed and enhances our return on capital. I'm pleased to say that October was our largest month ever for new GAPL orders, as our customers are looking to minimize capital investment while maintaining or increasing production.

Our utilization for 1,000 and higher horsepower equipment focused on gathering systems and centralized gas lift was 97.4% at quarter end, up 30 basis points from the end of the second quarter of 2019. Overall utilization for the entire fleet was at 90.1%, up from 89.1% at the end of the second quarter and up from 86.3% at the end of the third quarter of 2018. This was a second consecutive quarter in which we accomplished record highs in utilization for our overall fleet since the fourth quarter of 2014. Out of our total horsepower and operations, 52.9% of the fleet is 1,000 or more horsepower in size.

We're currently in discussions with our customers on their 2020 requirements for their large horsepower units to address centralized gas lift -- and gas lift -- centralized gathering and gas lift. Though I already mentioned, demand for that equipment is experiencing some modest slowdown. Given our disciplined approach on where and whom to deploy new equipment, we will not commit to any new orders unless we have a full customer commitment at prices that generate returns of capital of 20% or higher.

Between our growth plans and TETRA's support, we expect to deploy approximately 101,000 horsepower of new equipment into our fleet in 2019. Elijio will further elaborate on projected total year capital expenditures as well as some early thoughts on capital expenditures for 2020.

In summary, we had a very strong quarter with revenue increasing sequentially across compression services and aftermarket businesses, with overall adjusted EBITDA increasing $1.2 million sequentially or 4%. The gas compression business continues to be one of the strongest segments in the energy sector, underpinned by long-term outlook for increased gas production. While overall drilling and completion spend will likely decline in the coming quarters, overall oil and gas production is projected to further increase in 2020, which drives demand for our equipment and services.

We will continue to work on improving our utilization and gross margins in our compression services business, while working with core customers to satisfy their requirements. Our aftermarket business is expected to have a strong finish to 2019, and continue to stay strong as we head into the New Year. Finally, we expect additional large orders to come in over the next several months to build out our necessary backlog for 2020 deliveries.

I'll now turn the call over to Elijio.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Brady. Brady touched on the key areas related to our operating results. I'll spend a couple of minutes focusing on cash flow, the balance sheet, capital expenditures, touch on updated guidance and our capital allocation strategy. Cash flow from operating activities were $27.4 million, up from $8.7 million in the second quarter. Capital expenditures were $15 million for growth capital, net of cash received from the sale of used equipment.

In the third quarter, we added approximately 14,300 operating horsepower to our fleet. All of the additions are for equipment over 1,000 horsepower per unit in size. Also in the quarter, we invested $5.7 million for maintenance capital expenditures.

Distributable cash flow of $15.8 million improved 76% from the third quarter of 2018 and was up sequentially. Our distributable cash flow coverage ratio of 33x, which reflects our decision in December of last year to reduce the distribution to cash redeem the Series A preferred units, with final redemption completed on August 8, 2019. Distributions paid in the quarter were $477,000.

At the end of September, total net debt outstanding was $642 million, of which $350 million are the secured notes that mature in the year 2025 and $296 million of the unsecured notes that mature in August of 2022. Our ABL revolver balance is approximately $11 million as of September 30, and cash on hand was $15 million. And as a reminder, we don't have any maintenance covenants to comply with.

Our leverage ratio at the end of September was 5.2x. However, when annualizing our third quarter adjusted EBITDA, our net leverage ratio would be 4.9x, well on our way towards the goal of 4.5x that we committed to achieve at our investor conference in May last year in New York City, and that we reiterated when we announced a reduction in the distribution in December of last year.

Compared to a high of 7x at the end of Q2 2018, our net leverage ratio has improved to 5.2x. We expect 2019 total expenditures to remain at $65 million to $70 million, inclusive of $19 million to $21 million of maintenance capital expenditures. Our growth capital expenditures are estimated to be $46 million to $49 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 up to $15, 1-5, million or 20,700 horsepower of compression equipment that will be deployed to our fleet to meet customer demands. This 20,700 horsepower is being 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. Some of this equipment is already in the field working for key customers.

Year-to-date through September, we invested $53 million of capital expenditures, inclusive of maintenance capital expenditures and excluding approximately $14.6 million funded under the TETRA leases, I just mentioned. Between TETRA's commitment to support us and our own capital plans, we believe we will satisfy our current customers' demands and at the same time, grow within the cash flows.

Total horsepower expected to be added this year from all these initiatives is approximately 101,000 horsepower, an increase of almost 9% to our fleet, all targeting 20% returns on capital with very high fall-through margins. All the additions in new equipment have been over 1,000 horsepower in size, and as Brady mentioned earlier, the fleet is now composed of 52.9% of units of the 1,000 horsepower or more each.

During the quarter, CSI Compressco increased average active operating horsepower by more than 14,300.

With respect to total year guidance, 2019 adjusted total year guidance remains between $125 million and $130 million, consistent with our prior guidance. This compares to $99 million of adjusted EBITDA that we achieved last year and represents a year-over-year growth of between 26% to 31%. We expect 2019 revenues to be between $475 million and $490 million, which is also unchanged from the guidance we gave 3 months ago. This is an increase of between $36 million to $51 million from last year.

We are very encouraged with our compression business and are getting a challenging North America land market with a decline in rig count. So far, the decline in the broader oil and gas North America market has not had any impact on our business. And in fact, the business fundamentals have continued to improve the last several quarters, amid all the uncertainty.

Using the midpoint of our full year adjusted EBITDA guidance of $127.5 million and after accounting for approximately $48 million of cash interest expense, $20 million of maintenance capital expenditures and $3 million of cash taxes, we expect to generate approximately $57 million of distributable cash flow.

This year, $30 million of that $57 million was directed towards cash redeeming the Series A preferred units and the rest to growth CapEx with approximately $2 million towards distributions. And as a reminder, the last Series A preferred unit redemption occurred August 8 this year.

With respect to capital allocation, we previously communicated our plans to direct approximately 50% of future distributable cash flow towards growth capital on the assumption that the market continues to support the high margins we are achieving that generate 20% return on capital. As we respond to some mixed signals from customers towards the timing of securing additional fleet equipment in 2020, we are now expecting growth capital to be less than 50% of next year's distributable cash flow.

When we reduced the distribution on December 20, 2018, we outlined 2 objectives. The first was to cash redeem the Series A preferred units to protect the equity holders' value by avoiding the dilutive conversion of the Series A preferred units into common units. We have completed that objective. We also communicated an objective of reducing the leverage ratio to 4.5x or lower. This is the same goal and commitment we communicated at the investor conference we hosted in New York City in May 2018. Our goals and objectives with respect to capital allocation have remained consistent over the past year. We intend to remain focused on the creation of unitholder value.

While our overall drilling and completion spend will likely decline in the coming quarters creating some market uncertainty, we believe that it is even more important that we focus on the balance sheet by continuing to improve our leverage ratio. As a result, any material amount of available distributable cash flow after meeting key customers' requirements, which we believe to be less than 50% of next year's distributable cash flow, will be focused on delevering and improving our balance sheet. The retirement of debt transfer values to our equity holders from our debt holders.

We expect to achieve our target leverage ratio of 4.5x by the end of 2020 or potentially sooner through a combination of continued improvements in adjusted EBITDA and open market purchases of the unsecured bonds. The timing of their retirement will be dependent on generating the targeted distributable cash flow and monitoring the market to see what our unsecured bonds are trading at.

The available cash in the immediate quarters will go towards fulfilling customer orders, generating 20% returns on capital. The vast majority of our new capital is going to our top customers that are super majors or large independents with solid balance sheets and well-defined drilling programs.

Beginning early next year, we expect to focus on debt reduction with more than 50% of next year's distributable cash flow targeted toward debt reduction. Currently, the unsecured bonds are trading around $0.90 on the dollar with a yield to maturity of slightly above 10%, which compares to a coupon of 7.25%.

We expect that an improved leverage ratio and lower levels of total outstanding debt will create a path for us to successfully refinance the unsecured bonds that mature in August 2022. Once those unsecured bonds are refinanced, the next maturity is not until the year 2025. With the unsecured bonds' maturity being pushed out beyond 2025 and no maintenance covenants to comply with, this creates a significant opportunity for CSI Compressco to begin to direct distributable cash flow towards equity holders.

But first, we will focus on improving our leverage ratio through a combination of improved earnings and debt reduction and as this then creates significantly more flexibility for the company to redirect capital toward distributions, unit buybacks or continuing to make investments back into the business to drive up earnings. As market conditions evolve, we will work with our Board of Directors to reassess our capital allocation priorities.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question today comes from Praveen Narra of Raymond James.

--------------------------------------------------------------------------------

Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [2]

--------------------------------------------------------------------------------

I guess, if we could start on the larger horsepower items. So can you talk about the length of the terms you're putting out there? Obviously you're getting good rates of return, but maybe the length of contracts? And if you could maybe give us an update on what portion of the large horsepower is on month-to-month at this point?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The big units, Praveen, the 3,600 and above are going at 2 or more years, 3516 which is a 1,300 horsepower units are going at a year each. And we consciously did that because we believe that the demand for that equipment will provide us an opportunity to increase prices as the contracts roll over. So rather than commit to 3, 4 years in those and then get locked in into that type of margin over an extended time period, I think we called the market right because the units that we deployed a year ago that are rolling over are getting better price increases than if we had tried to lock in a 3- or 4-year contract.

--------------------------------------------------------------------------------

Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [4]

--------------------------------------------------------------------------------

Right. And any update on kind of what the month-to-month on the large horsepower is or...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Right. So we're seeing high single-digit price increases on all large horsepower units that are rolling over from their 1-year contracts. So equipment deployed a year ago at, what we believe to be very good pricing, we're still getting high single-digit price increases as they roll over in this market.

--------------------------------------------------------------------------------

Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [6]

--------------------------------------------------------------------------------

Okay. On the smaller horsepower, that's certainly gotten a lot better over the last year. You've talked about some of the different use cases for them. Can you talk about how that changes to next year? I guess, are you seeing a wider set of operators take on that approach? Or are you seeing the same operators that have kind of adopted it in 2019 expanding for 2020? Or how should we think about the ability to roll some of that smaller horsepower equipment out in 2020?

--------------------------------------------------------------------------------

Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

Yes, Praveen, this is Brady. We're very pleased with the acceptance and adoption of some of the new techniques that we have used with our GAPL application as well as our BAIS system for injecting on the backside. And the results that we're getting, we believe, will continue to support expansion of that application. And as you think about the smaller independents having difficulty getting access to capital to drill their way into new production, we think we have a perfect application that can get them some improved production results with a very little capital investment. And the returns that we're seeing for the applications when we deploy them are fantastic for our customers. So we're very optimistic about this solution continuing to gain traction as we head into 2020. I mean we've only introduced this solution really within the past year.

--------------------------------------------------------------------------------

Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [8]

--------------------------------------------------------------------------------

I guess, yes, maybe I'll ask one more and I'll hop off. Just on that point, can you give us an idea of what percentage of the fleet is being used for those kind of newer applications of just the small horsepower utilized fleet?

--------------------------------------------------------------------------------

Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [9]

--------------------------------------------------------------------------------

So, Praveen, as you know, the GasJack fleet represents about 9% of our total fleet, and right now, the applications that Brady mentioned are the early phases. So I would suggest that it's a small section of that 9%, but it's probably the fastest-growing application that we have out there.

--------------------------------------------------------------------------------

Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

Yes. It's by far the fastest-growing application of new sets that we're deploying, Praveen.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Darren McCammon;Cash Flow Kingdom;Analyst, [12]

--------------------------------------------------------------------------------

Before we get to the questions, I just wanted to congratulate you a 76% increase in distributed cash flow over the last year. That's very impressive. My figures show you are now trading at approximately 50% DCF yield or so. Is that correct?

--------------------------------------------------------------------------------

Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [13]

--------------------------------------------------------------------------------

I trust your math.

--------------------------------------------------------------------------------

Darren McCammon;Cash Flow Kingdom;Analyst, [14]

--------------------------------------------------------------------------------

Okay. Fair enough. So I saw that you turn free cash flow positive. Congratulations on that. When you measure your -- you've been also very transparent on this call about your capital allocation. So that's great. One question I have is, when you mentioned your 4.5 debt-to-EBITDA ratio target, do you use trailing EBITDA or current quarter run rate?

--------------------------------------------------------------------------------

Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [15]

--------------------------------------------------------------------------------

So the $4.5 million is at the end of next year that will be trailing 12 months EBITDA.

--------------------------------------------------------------------------------

Darren McCammon;Cash Flow Kingdom;Analyst, [16]

--------------------------------------------------------------------------------

And is that also what the banks tend to use?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. That's what all creditors use as a standard computation.

--------------------------------------------------------------------------------

Darren McCammon;Cash Flow Kingdom;Analyst, [18]

--------------------------------------------------------------------------------

Okay. So that's more understandable. On Chesapeake gave a -- I don't know if you know this, but Chesapeake gave a going concern warning yesterday. I was wondering what your exposure to them was or maybe the Williams who does some work for them?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I'll mention a little bit about the creditworthiness of customers. We'll avoid talking about any specific customer. 2/3 of our compression services revenue is coming from clients that we call super majors or large independents. And the vast majority of the CapEx that we've allocated, both last year and this year, are going to our top 3 to 5 customers that are well capitalized with very well-defined drilling programs.

I don't have concerns about bankruptcy or the creditworthiness of our customers, especially taking into account that the compression fleet is moving gas to be able to create a cash stream for our customers. And in the very limited cases to where we have seen some Chapter 11 filings on the compression services side, we've pretty much been declared a critical vendor that allows our services to remain in place, and we get funded from cash.

So I'm not concerned about any exposure on creditworthiness on the compression services fleet.

--------------------------------------------------------------------------------

Darren McCammon;Cash Flow Kingdom;Analyst, [20]

--------------------------------------------------------------------------------

That's helpful. Last question from me. I commend you on only buying units for committed customers at 20% of ROI. I'm wondering about your competitors. Are you seeing any signs of increased competitive pressure?

--------------------------------------------------------------------------------

Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [21]

--------------------------------------------------------------------------------

So good question, Darren. I think we've mentioned in the past that this industry is a bit unique and that once you align with the customer, customers don't tend to mix and match equipment so that if you go to a cluster of equipment in either basins out there, they don't have our equipment next to a competitor, next to a competitor. They try to cluster the same service provider around a field to be able to hold one service provider accountable. Therefore, we don't get into price wars in terms of customers trying to displace one service provider from the other. Therefore, we're not seeing pricing pressure. And in fact, I mentioned earlier to one of the earlier questions, that we're still getting high single-digit price increases.

We're not seeing the market flooded with excess equipment out there. And in fact, the lead times are still 30 weeks or more out there for key equipment. So we're not seeing any indications of pricing pressure for the equipment out there.

--------------------------------------------------------------------------------

Darren McCammon;Cash Flow Kingdom;Analyst, [22]

--------------------------------------------------------------------------------

Okay. And congratulations again on a good quarter.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

The next question comes from Steven Ruggiero of R.W. Pressprich.

--------------------------------------------------------------------------------

Steven Ruggiero, R.W. Pressprich & Co. - Head of Research [24]

--------------------------------------------------------------------------------

Good numbers, guys. I'm glad you pointed out that you're deemed a critical vendor should any of your customers experience a bankruptcy process. That's so important. But let me -- with regards to that, I just want to ask a couple of questions on your receivables. What was your receivable balance at quarter end, if you have that number? I know it was about $70.4 million after second quarter. And just as a follow-up to that, how well are you reserved for potential future bad debt expense in light of the bad debt expense you incurred this past quarter?

--------------------------------------------------------------------------------

Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [25]

--------------------------------------------------------------------------------

Good questions. So our receivables at the end of September were right at $68 million. And we have very little exposure on the bad debt side. Now in the earnings announcement that we made, you'll see that in the reconciliation tables in the back, we took a $1.7 million write-off for a Chapter 11 filing. That was a unit that we sold last year to an engineering company that was a subcontractor for a midstream company.

That engineering company got into a dispute with a midstream company and was not able to satisfy their obligations to us. That is a rare sale that we make to someone other than a midstream well capitalized company. So I consider that a one-off.

So other than that one, and also recognizing the first statement that you made and emphasizing the comment that we made is that being a critical supplier in moving gas and keeping the cash stream going has not really exposed us to bad debt expense historically.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Your next question comes from of Eric Seeve of GoldenTree.

--------------------------------------------------------------------------------

Eric Seeve, GoldenTree Asset Management, LP - Research Analyst & Portfolio Manager [27]

--------------------------------------------------------------------------------

A few questions. First, with respect to the bad debt expense, just trying to understand which line item on the P&L did that flow through? So what line items should we be adding it back to think about recurring earnings?

--------------------------------------------------------------------------------

Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [28]

--------------------------------------------------------------------------------

Good question, Eric. So that's reflected in the G&A line out of the P&L and the sale occurred under equipment sales where originally, it was booked as equipment sales on revenue, and then we book it as an expense on G&A.

--------------------------------------------------------------------------------

Eric Seeve, GoldenTree Asset Management, LP - Research Analyst & Portfolio Manager [29]

--------------------------------------------------------------------------------

Okay. Different topic. Can you talk a little bit about -- you laid out in the press release your capacity utilization for the large horsepower units. Can you tell us what they were for the small units and the medium units?

--------------------------------------------------------------------------------

Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [30]

--------------------------------------------------------------------------------

Give me a second, and let me pull that out. And on the large unit, while I pull up that information, essentially we're fully utilized and anything less than 100 is equipment either being moved between job sites or being down for recurring maintenance. So the small horsepower fleet, the GasJack is right around 72%, 7-2. The midsized equipment is 87%. And as you recall, Eric, the midsized equipment at the prior peak was 89%. So we're almost back up to historical utilizations on the midsized equipment. And then the large horsepower is...

--------------------------------------------------------------------------------

Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [31]

--------------------------------------------------------------------------------

97%

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Is 97% at the end of September.

--------------------------------------------------------------------------------

Eric Seeve, GoldenTree Asset Management, LP - Research Analyst & Portfolio Manager [33]

--------------------------------------------------------------------------------

Right. That was great. I guess, lastly from my end, when I -- if I run the math and look at the average contract pricing on the compression services side from Q2 to Q3, it looks like it declined slightly, which seemed inconsistent with what's going on in the marketplace in terms of you guys continuing to get price increases. Is that a function of the mix shift? Or what am I missing?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, Eric, and I think we've done a little of this math in the past. The small units, the GasJack fleet is averaging right around $40 per horsepower per month per unit. The big units, the 1,300 size horsepower units, are averaging about $15, $16 revenue per month per unit. So as the big fleet keeps increasing relative to the smaller fleet, it's going to represent a mix and average down total revenue per horsepower per month. So don't read into it to reflect pricing. Read into it to, instead, reflect the mix change in the fleet.

--------------------------------------------------------------------------------

Eric Seeve, GoldenTree Asset Management, LP - Research Analyst & Portfolio Manager [35]

--------------------------------------------------------------------------------

Okay. Do you guys still disclose what proportion of the fleet is small versus large versus medium?

--------------------------------------------------------------------------------

Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [36]

--------------------------------------------------------------------------------

Yes. So not only will we have it in the 10-Q that we expect to file either later today, if not, tomorrow morning, we'll also have it in our investor presentation that we'll update. But when the 10-Q goes in, you will be able to see those 3 groupings.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

(Operator Instructions)

The next question comes from Jeremy Tonet of JPMorgan.

--------------------------------------------------------------------------------

Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [38]

--------------------------------------------------------------------------------

This is Charlie on for Jeremy. Just wanted to touch on the cost side of the compression services. Just thinking about efficiencies, kind of where costs have come out this quarter and last quarter. It seemed a bit lower, especially relative to kind of the beginning of this year. Just thinking about next quarter and kind of a go-forward run rate, feels like there's some more efficiencies that can kind of be stripped out or kind of what you think kind of a good run rate is?

--------------------------------------------------------------------------------

Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [39]

--------------------------------------------------------------------------------

Yes. So as we mentioned on the call, we've, I think, deployed about 71,000 horsepower this year and kept our technician headcount flat. And we've done that a couple of different ways. One, by deploying assets where we have existing asset base with our core clients, which allows us to be much more efficient. But we also have -- our team executing, using our ERP systems, scheduling, manpower planning, that is all really led to improved labor costs as a percentage of our revenue. And that's a big part of contributing to our improved margins. We also have some other efficiency gains that the team is benefiting from. And as we continue to deploy the remaining of our '19 CapEx to these key clients in their core locations, we do expect -- we have the opportunity to continue to increase those margins.

--------------------------------------------------------------------------------

Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [40]

--------------------------------------------------------------------------------

That's helpful. Then one more from me. Some of your peers have been kind of talking more about how some of maintenance -- routine maintenance has been getting pushed out a bit. I'm just curious what you've seen on that end? And how much you can really push in, sort of defer maintenance on these units?

--------------------------------------------------------------------------------

Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [41]

--------------------------------------------------------------------------------

That's not really practical, Charlie, because if you see further maintenance, you're going to have more downtime on the units. And then, obviously, you'll impact customer service quality. So we're on a very rigid scheduled process of monitoring the hours, the run time. And the fleet of mechanics and technicians are constantly making the rounds to each unit and replacing components as necessary. So it's not our practice to defer maintenance capital.

Now on the aftermarket services side, going into the last downturn, operators that own their own equipment, they try to conserve cash, did push out a lot of maintenance capital, and that's why you saw a spike in aftermarket services as we came out of the downturn, as we helped our customers try to catch-up that maintenance. And also, as you saw, our aftermarket services tried to rebuild a lot of equipment from customers. So we've seen our customers do it to conserve cash. We do not do it because it will impact service quality.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

The next question comes from Sharon Lui of Wells Fargo.

--------------------------------------------------------------------------------

Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [43]

--------------------------------------------------------------------------------

Your Q3 utilization continued to increase sequentially. I guess, just based on your conversations with customers, do you think, I guess, the second half of this year represents like a fairly good level going forward, looking out to 2020? Or could it actually represent a peak level?

--------------------------------------------------------------------------------

Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [44]

--------------------------------------------------------------------------------

Yes. I think for the high horsepower, as we mentioned, we're running at 97% utilization. We're pretty well maxed out, and we feel pretty confident that we can sustain that high-level horsepower or utilization for high horsepower. As we mentioned on the lower horsepower and some of the new applications that we're developing for the GasJack, we're seeing significant interest in and increased demand. So we feel pretty good about being able to move the needle on the lower end of the horsepower utilization as well. So we feel pretty good about maintaining or increasing our utilization going forward.

--------------------------------------------------------------------------------

Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [45]

--------------------------------------------------------------------------------

Okay. Helpful. And then, I guess, based on your core regions, maybe if you could touch on producer sentiment in each of the regions, and whether any of their compression needs have materially changed from like the second quarter?

--------------------------------------------------------------------------------

Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [46]

--------------------------------------------------------------------------------

Yes. So our largest market share position by far is the Permian Basin and our core customers we work with are, as Elijio said, the major -- super majors or major independents. And we continue to see them increasing their activity levels and their needs for compression as we go into 2020, and we're very closely linked to them in terms of their planning process.

The other 2 core regions for us, where we have over 70% of our horsepower deployed between the Permian, South Texas and the Mid-Con, again, it really depends on the customers that you're linked to. In South Texas and the Eagle Ford, we're linked to a super major, and we know their demands. And again, pretty consistent with what we've seen from prior years from them. I think the SCOOP/STACK, Midland -- or sorry, the SCOOP/STACK Basin is probably, from terms of activity, the lowest of the 3 but that's not been an area where we've been deploying a lot of our high horsepower in the recent year. It's really probably more of an opportunity for some of our lower GasJack applications for some of the independents. If that helps.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

The next question is a follow-up from Eric Seeve of GoldenTree.

--------------------------------------------------------------------------------

Eric Seeve, GoldenTree Asset Management, LP - Research Analyst & Portfolio Manager [48]

--------------------------------------------------------------------------------

Just on the SG&A front, it looks like in the last 2 quarters, it was running right around $11 million a quarter. This quarter, it was $11.3 million, but it sounds like if we net out the bad debt expense, it would be more like $9.6 million. Just trying to understand, did that sort of step change lower in SG&A? Is that based on sustainable cost savings that you guys have implemented? How should we think about SG&A moving forward?

--------------------------------------------------------------------------------

Elijio V. Serrano, CSI Compressco LP - CFO & Director of CSI Compressco GP Inc [49]

--------------------------------------------------------------------------------

Yes, I think just that if you're building your model that you model right above $10 million a quarter. And that's a combination of us trying to streamline and use the ERP system and other technologies to keep our cost structure low.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

This concludes our question-and-answer session. I would like to turn the conference back over to Brady Murphy for any closing remarks.

--------------------------------------------------------------------------------

Brady M. Murphy, TETRA Technologies, Inc. - President, CEO & Director [51]

--------------------------------------------------------------------------------

Okay. Well, thank you again for joining us for the call. We appreciate your interest in CSI Compressco, and this concludes our call.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.