CSI Compressco LP

Good morning and thank you for joining CSI Compressco's First Quarter 2021 results conference call. I would like to remind you that this 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're cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements. In addition, in the course of the call, we may refer to EBITDA, gross margins, adjusted EBITDA, free cash flow, distributable cash flow, distribution coverage ratio, leverage ratio, utilization, or other non-GAAP financial measures.

Please refer to this morning's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures.These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In addition to our press release announcement that went out earlier this morning and is posted on our website, our Form 10-K will be filed in the coming days.

Please note that information provided on this call speaks only to management's views as of today April 30th and may no longer be accurate at the time of replay. With that, I will now turn it over to John Jackson.

Thanks Jon, Good morning everyone and thanks for joining CSI Compressco's First Quarter 2021 earnings call. I'll give some summary comments and I'm going to turn it over to Jon Byers after that to provide some commentary on cash flow balance sheet liquidity.

At a macro level, the quarter was relatively flat from a number of operating metrics, but the overall trend appears to be improving the speed and volatility around that improvement remains to be seen we're hopeful and optimistic that the second half of 2021, about the second half of 2021. We expect to see the activity begin to show up in the operating results.

The industry is always a late cycle place, slower to increase activity, and also slower to reduce activity. The nature of the revenue stream being term-based fee contracts that are related to production causes the industry to lag activity by our customers, both in an up cycle and in a down cycle.

Historically though, when you, when activity begins to pick up, it does so for a number of consecutive quarters, and we hope to see that same kind of trend from the past, begin to play out later this year, turning the operational results and trends. CSI can press go had a sequential increase in compression related services revenues, and a modest decline in aftermarket service revenues adjusted EBITDA triple cash-flow were both lower than fourth quarter of 2020 due, primarily to significant lower equipment sales in the current quarter compared to the fourth quarter of 2020.

Excluding equipment sales adjusted EBITDA was slightly higher in the first quarter of 2021 compared to the fourth quarter 2020. Fleet utilization remained relatively flat at 76.2 compared to 76.4 at year end and the horsepower on standby decreased from 81,500 at year end of 59,100 at the end of the first quarter.

At least for now, January was the low point in this cycle for a lot of these metrics, both compression services and the AMS business had month on month improvements each month during the first quarter, it's too early to say, if this continues or we will, or if we will have a more up and down growth cycle. March was our first positive net sets of compression of horsepower since December of 2019.

So we had more starts and stops on a horsepower basis. So that's 15 months that was primarily related to the larger horsepower beginning to go out in the thousand horsepower and up categories.

We continue to see other signs of activity that give us optimism about the compression space in general, and more specifically for CSI compress code. The bidding activity that we referenced to discussing a year in earnings call continued to pick up throughout the quarter.

The conversion of these bids to orders has been slower and lower than normal as customers try to determine the pace of activity they were going to pursue this year. Beginning of April, we have seen some of these bids convert to firm orders and expect to see these orders be on revenue beginning of Q3 and on into 2022, the international activity we mentioned on a year-end call remains active, but still at a big state bid stage at this point, as the customers we're working with are still finalizing their capital plans for this year.

We would expect any of these international contracts to have an impact on earnings beginning in late 2021 and early 2022, if awarded additionally, as we looked at what we hope to accomplish the main of the year, we know we have $81 million of unsecured notes maturing in August, 2022. We have a number of alternatives identified to deal with this August, 2022 maturity.

And we've begun the analysis of those options. And we'll make decisions that are in the best interest of the long-term capital structure of CSI can Prescott.

We plan to make progress on dealing with this maturity. In the course of this year, the management teams are Spartan is joined up with the existing CSI compress team has just completed the first 90 days together and I think both groups of people have come together and are working well as a team to improve the performance of CSI compress scale.

Some work remain to separate us from Tetra shared services, but those actions are underway and we're making progress overall. I want to, again, commend our management team and employees on safely and officially navigating the down turn and position the company to perform, to perform well in any upturn, we remain excited and optimistic about the industry.

I look forward to an improving 2021 with that. I'll turn the call over to Jon Byers.

Thanks Jon. Today, CSI compress go report it.

First quarter revenue of $65.7 million compared to $71.1 million in the fourth quarter of 2020. First quarter adjusted EBITDA was $21.1 million compared to $26.2 million in the fourth quarter of 2020, as Jon mentioned, excluding used unit sales adjusted EBITDA was $20.7 million compared to $20.6 million.

In Q4 2020, a slight improvement. Distributable cashflow was $4.3 million down from $7.7 million in the fourth quarter of 2020.

We will pay our first quarter distribution of $0.01 on May 14th, which represents a distribution coverage of 8.9 times. Moving on to the balance sheet cash on hand at the end of March, 2021 was $20.9 million up from $16.6 million at the beginning of the year at the end of March, 2021.

There were no amounts outstanding on a revolver. The March 31st borrowing base availability under our credit agreement was $13.8 million and total liquidity at the end of the end of the quarter was approximately $35 million.

As John mentioned, we have $81 million of unsecured notes that are due August of 22 and approximately $557 million of first and second lien bonds that are not due until 2025 and 2026. Our net leverage ratio at the end of March, 2021 was 6.1 times adjusted EBITDA.

This compares to over seven times during the prior downturn in 2018. I also want to highlight that when Sparton purchased the GDP of CSI compress, go on January 29, 2021, the trip, the first of two change and control triggers that would provide the first and second lien bond holders effectively a put right on the bonds at one oh one.

The second trigger, was a rating downgrade within 90 days of the, of the purchase of the GP. The 90 day window closed yesterday, April 29th as a management team, our focus will continue to be on delivering to our customers, generating liquidity and improving our capital structure.

We will now open the call to questions.

Good morning guys. Jon Byers, a couple of questions for you.

first of all, as it pertains to secondly notes, visit the company's plans to still pick the portion of that interest payment?

We, we did pick any on the April 1st payment and, year-over-year ou know, as we, as we try to preserve liquidity, our thought today is that we will, we'll continue to pick until the 20 twos, have been addressed.

Okay, got it. So can you just explain the logic?

I know, I know we've discussed this before, picking the bonds, but still paying a distribution.

Yeah. it's a good question.

You know, being in the MLP structure, we do have, we do have holders, fund holders that, you know, have a requirement that they have to, you know, they have to sell if, if a, company stops paying the dividends. so that's part of it.

And then the second part is the, you know, the dividends fairly minimal. so you know, that doesn't have a huge impact on the liquidity of the company, John, would you okay?

Yeah. Add something.

It's something we'll evaluate over time, but right now we're not coming in trying to make drastic changes to the capital structure other than dealing with the $81 million, we want to get off the pic as fast as possible. And we could have, we could have chosen to not pick this last quarter, but we, as John said, we still have the $81 million, we've got to figure out how to deal with that.

And right now that that's worth picking. So the dividend is, is not something we're looking to change at this time.

We're looking to, to the bigger capital structure for the longterm.

Okay. No, no understood.

and just the $30 million to 4$0 million of cap backs, I guess, two questions on that, is that a net or gross number and sort of what pushes you to the low end versus the higher end?

That's a gross number. So that, that doesn't exclude any, any, or doesn't, take into account any equipment sales.

What would you, I don't understand your second, second question. Well, it's a spread due to what's the duty to do the high end versus low end.

Yeah, what's the, what's the, it, you know, on the, on the growth side, it's driven by the opportunities that we have, you know, there's growth capital related to make ready growth capital related to, deploying existing equipment, that needs to be reconfigured. And so, you know, depending upon that opportunity set, that would dictate where we are on the lower high end of that.

and then on, you know, on the maintenance side of the equation, it's driven by, you know, getting equipment back out. and, you know, as we dig into the maintenance capital spending, making sure that, you know, we w we're we're spending, dollars in a, you know, in a, in a thoughtful manner.

Got it. And then final question beyond assets sales, I guess, two things on that, you know, what you're thinking about asset sales especially relates to your smaller idled equipment.

And do you have any sense of what you think you could sell this year or generating in terms of proceeds this year?

Yeah, you know, I would say it's, it's definitely a tool in our toolbox that we're considering, you know, it's not a great market to sell, to sell compression assets, to smell good, you know, to sell a smaller horsepower, part of our business. so, you know, whatever we do is gonna get us closer to having a more sustainable capital structure.

Sure. Very good.

Thanks for the time.

Good morning, so in your prepared comments, you talked about the August 22 maturity, and you said, you know, you'll address it in the course of this year. So do you think you'll have this resolved by year end or do you think we'll still be looking at this in 2022?

Well, We'd like to have it resolved by this year and we don't control everything relative to the capital markets, but I think, I think we'll have the bulk of it resolved by March of next year. For example, if we don't have a resolved by this year in, and when we say resolved, you know what, there may be a piece of it.

We decided to try and pay off with cash flow. And that may be that we still have a stub outstanding even next year, early next year, that we're just going to use cash flow to pay it down.

So I would say the overhang of the $81 million, we hope to resolve this year, but we certainly will resolve it by March 31 next year, as far as the 81 does the 81 become 20 or 15 or 10. And we say, well, we'll just going to pay it off cash that can certainly occur.

So I'm not going to make a promise that the whole $81 million is going to go away. But the, the issue that sits in front of us about a near term maturity will be taken off the table within the next 12 months.

Very good. Appreciate the clarity there and then on your GNA line, it was up sequentially.

And I know some of that probably was sort of non-cash comp. but is there any other thoughts there and maybe thinking, or any guidance on a, on a run rate as you get separated from Tetra tech?

Yeah. We're working on that now, as you can imagine, trying to separate shared services, there's some, there's some costs associated with that in our, you know, in our budget internally.

we expected these costs to increase through the second quarter with the hope that, you know, there are the plan that after that, as we get separate, we'll be able to, to manage that more closely.

Understood. And then and is you guys in I'm hearing sort of optimism and, you know, as you talked to producers, et cetera, but is it any equal mix between privates and publics or is it you're seeing more interest from private players?

I'd say for us, our customer basis tends to be more of a public company environment. We're seeing when I, when I referenced the awards that we actually got converted from bids to actual contracts, they were public companies.

So I think, I think the first quarter, I don't know, that's why I was kind of cautious of my comments. I still am.

But the first quarter, January, you're always kind of slow to get going in February. You hit the freeze and people are really trying to figure out where the market's going.

So they have a lot of budget plans, but they were cautious blasting out of the gates this year. But what we're seeing now is the conversion of some of those bids to awards.

So that's where John's referenced on CapEx from 30 to 40 right now, I'd say we're trending towards the higher end of that. Only because these awards that have already been given and some that we're anticipating in the next 60 days will drive this towards the higher end of that.

Just go, we're going to put more horsepower out so that that's, that's encouraging. I think as people start to see this happen, and this is what happens to compression space in general, right?

It, it, when it starts up, it starts moving, it can move fairly rapidly and then people become concerned more about locking in price versus saying, I want to wait because if I wait and market gets a little bit tighter rates go up. So I think we're starting to see customers start to try and balance that.

Now, do I want to turn out what I've got? Do I want to put more on order so that I've got it locked in at a rate that I'm comfortable with today?

So that's why I think we're, I can't give you good timing on it, but I think this is where we're more optimistic when we look at our quote activity that we've scrubbed pretty hard to say, is it viable, real quote activity right now? And we compare it to last year.

It's the highest it's been in 15 months, but it represents more of a 2019 timeframe. Now I think people are slower to pull the trigger.

So I don't, I can't reference that we're in a 2019 timeframe. I'm not saying that, but I'm saying the, the thought process around now is primarily with public companies, trying to figure out what their plans are and get executed and maintain their cost structure, or keep it low and not, not let the run up on them.

Understood that does it for me. Thank you.

Thanks for taking the questions, you made some good progress, with horsepower and standby in the quarter. Did you see further progress at the end of April?

And do you expect more progress for this quarter?

Yes, we do. We've I would say we've, we've captured some new business, converting the opportunities as John was discussing.

I think we've also, we've made a tremendous amount of headway getting units that were on standby back on full, right. And then we've also made some progress recapturing, right.

Of, of units that are in service.

Thanks. Thanks for that.

The other question I have is regarding receivables. I see you did have a buildup of about closing in on $4 million in the first quarter, was that, did that have to do with your, improving utilization as well as, that you alluded to as well as the horsepower and standby declining?

Yeah. So regarding councilor seeable, some of that is just timing.

We have some customers that pay significant amounts, right at the end of the month. And last quarter, they, you know, they may have paid on December 31st versus on March, you know, the, the first quarter they paid on April 1st.

So some of that's attributable to timing.

And then some of it is, is some increase in activity which drove our receivables higher. I think one other thing too, is we had significant change the operators, which may delay some of the payments as the [ph] Lisa's changed hands and contracts had to get converted.

So we've made some progress on that as well.

That's Great. Understood -- Understood.

Thank you for your questions and your answers. Thank you.

Just one follow up here on the pricing environment, I'm sort of picturing through the Python. So last year at this time market was crashing.

Concessions were being made. To what extent should we, how should we think about sort of those concessions potentially rolling loss and new pricing deck sort of being put on?

I'm just trying to get a, a sense of how quick, you know, just from last year today, or to what extent has pricing changed?

On the contracts we have out, we've begun to make progress on that. We had some customers, we were able to reinstate almost the entire rate beginning of this year, somewhere in discussions with right now, sort of depends on the horsepower range, size location activity, and so forth.

But I'd say it's going to take probably through Q3, maybe Q4 to get it all back. Assuming assuming the environment changes where you can get it all back, but we are pushing on price across the board, especially on the concessionary that we've made to try and reinstate that given that oil prices are up, you know, the, the loophole, everything we use is going up.

So we're, we're pushing on that. So I'd say it's a, it's across the spectrum, but it's a big focus for us.

And I would say it's going to take most of the rest of the year, but we're probably what sort of the way halfway, I'd say, I'd say halfway up the there already. So we've made some good progress.

Now it's a matter of getting that second bite or that second, second concession we gave back.

Got it. No, that's helpful.

And just final one for me, a lot of companies are talking about inflation, hitting them in various ways. Are you seeing any inflationary pressures in the business?

I think labor is getting a labor, labor lube oil field fuel gasoline to for, for the trucks. So yes, there is there inflation or increased costs are our impacts, the labor market's getting tight, especially in the active basis and the activation with, especially with the technical people.

Right.

Got it. And is that something that, you know, the, the, your customer is sort of recognize?

I'm just trying to get a sense with bill, your ability to offset some of that?

I think they recognize it, and I think that's, that's the dance we're doing right now on trying to get our price concessions back and price increases in place, because I think they're starting to see that and feel that then that's kind of goes to the comment I was making earlier about. We're trying to kind of lock in where they are now because they lock in a two year rate instead of staying on month a month, knowing that we're probably going to come back and say, we've got to have a higher rate, higher rates.

So I think there's that negotiation going on because of people recognizing the inflationary pressure?

I hear you. Great.

Appreciate the comments. Thanks.

Okay.

Thanks for joining the call today. We look forward to getting back together with you next quarter, and we hope to see a continually improving environment.

Thanks for your time today.