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spk05: Good morning and welcome to the CSI Compresco LP's third quarter 2022 earnings conference call. The speakers for today's call are John Jackson, Chief Executive Officer of CSI Compresco LP, and John Byers, Chief Financial Officer of CSI Compresco LP. Rob Price, Chief Operating Officer, is also in attendance. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Mr. Byers. Please go ahead.
spk06: Thank you.
spk01: Good morning, and thank you for joining CSI Compressco's third quarter 2022 results conference call. I'd like to remind you that this conference call may contain statements that are or may be deemed to be forward-looking. These statements are based on certain assumptions and analyses made by CSI Compressco and are based on a number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the partnership. Your caution 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. Please refer to this morning's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In addition to our press release announcement that went out earlier this morning and is posted on our website, our Form 10-Q will be filed later today. Please note that the information provided on this call speaks only to management's views as of today, November 3rd, and may no longer be accurate at the time of replay. With that, I will now turn it over to John Jackson.
spk02: Good morning, and thank you for joining our call today. We're pleased to see this quarter's financial results to begin to reflect some of the improvement that's been occurring in compression space the last few quarters. Our contract services and aftermarket service businesses all continue to show strong activity. The revenue positives up to this point have been largely offset by inflation and the effect of foreign currency amidst the strengthening dollar worldwide. This quarter, we have seen the core business outpace the inflation costs for the first time in a few quarters. This is not to say we have recouped the entire effect of cost increases in this cycle, but we are making progress and pushing some of our activity improvement now through to EBITDA. As it relates to our fleet or contract services business, utilization continued to improve quarter over quarter for the sixth straight quarter. Price increases on the existing deployed fleet have begun to close the gap of the effects of inflation. This is translated into increasing fleet revenue quarter over quarter for seven consecutive quarters. Our cost picture, however, remains challenging as people remain in short supply. Parts costs continue to rise and fluids costs, such as lube oil, remain at elevated levels, even with the recent crude oil declines from their summer highs. As a result, we expect cost pressures to continue into the fourth quarter and early 2023. We believe we can mitigate the effect of the cost increases through pricing and cost management efforts. In addition to the further price increases on our fleet, we have several idle units that are contracted for redeployment over the fourth quarter of 22 and into 23. The aftermarket services and parts business, or AMS business, has performed well this year with increasing revenues and improving margins. We have a strong pipeline of AMS activity, both in current contracted work, outstanding bids, and current customer requested proposals. This pipeline provides us visibility through the first quarter of 2023. And based on what we've seen this year, we would expect the activity levels in the AMS business to stay elevated through 2023. The primary constraint on growing the AMS business is finding incremental qualified people to execute quality work. Our overall industry is short of people, and this affects our contract services business as well as our AMS business. Our incremental capital spending for the remainder of this year in the first half of 2023 is will be spent deploying the idle fleet units, converting additional units from national gas-driven engines to electric motor drive units, and deploying new build units as they are completed. As we mentioned in our press release, if our customers do not return a significant amount of horsepower to us over the next couple of quarters, we will be nearing full utilization of the U.S. reciprocating fleet. We will continue to grow our large horsepower fleet in 23, as we currently have some new build units on order that are contracted for deployment in the second half of 2023. While electric motor drive units remain interesting to customers and we continue to see bidding opportunities, the pace of deployment remains a question mark as customers work through the dynamics of installing significant amounts of electric motor drive units. This includes acquiring long lead items, attempting to determine the overall capacity of the local grid that's available, with many different groups planning on accessing the current available excess capacity, and then ultimately determining the reliability of that electrical supply. We plan to continue to be a provider of both natural gas engines and electric motor drive units as our customers evolve in their distribution of their compression across various basins. As we think about growth capital for 2023, we plan to provide specific guidance in our year-end call, and we expect it to be reduced from our 2022 levels of growth capital. While our customers have continued to express interest in additional large horsepower for the future, we are building modestly into 2023 as we are positioning CSI Compressco to generate free cash flow and increase liquidity during the year. In summary, we continue to see a strong demand environment for our products and services heading into the fourth quarter of 22 and the beginning of 23. Inflation continues to be the major unknown variable. We will remain flexible as we navigate the rapidly changing environment and position ourselves for success. So as we conclude this year, we're excited about the future. The natural gas space continues to be critical for reliable energy supply to power not only the U.S., but much of the world. We're excited to be a part of that effort and look forward to an exciting 2023.
spk01: I'll now turn the call over to John Byers. Thank you, John. For the third quarter of 2022, CSI Compresco reported a utilization increase from 78.9% in Q3 of 2021 to 85.1%. Our reported revenue increased 94.9 million compared to 77.7 million in the third quarter of 2021. Our contract services revenue was up to 67.5 million from 59.4 million in the third quarter of 2021, a 14% increase. Year-on-year, our AMS revenue was up 66% to 23.2 million compared to 14 million in the third quarter of 2021. Third quarter adjusted EBITDA was $29.8 million compared to $25.7 million in the third quarter of 2021, a 16% increase. Distributable cash flow was $13.1 million compared to $10.6 million in the third quarter of 2021. We'll pay our third quarter distribution of one cent on November 14th with a distribution coverage ratio of 9.3 times. Moving on to the balance sheet, our total liquidity. Cash on hand plus outstanding ABL capacity was $51.3 million on September 30, 2022. As of November 1, our total liquidity was $42.7 million, which compares to $32.7 million at year end. Our net leverage ratio in the third quarter of 2022 is 5.7 times down from our peak of 6.8 times in Q3 of 2021. We continue to expect a downward trend in our net leverage ratio through the rest of 2022. On October 17, we extended our Spartan ABL from a maturity of January 24 to October of 25, leaving CSI with no significant credit maturities until 2025. Our capital spending guidance for 22 remains $55 to $65 million. As John said, this is mainly driven by high-return projects, including reconfiguring large horsepower units to meet customer demand. electrification of older large and medium horsepower units and some large horsepower new builds. Executing on our plan to reduce our overall leverage while growing the business, our net leverage ratio has stepped down from 6.8 times a year ago to about 6.3 times at year end 2021, and now we sit at 5.7 times. If you annualize our third quarter 22 EBITDA, we have a net leverage ratio of 5.2 times. Most of our debt is fixed rate. This has helped us in a rising interest rate environment, resulting in a minimal impact on our overall interest expense. Our focus in 22 has been reducing leverage while balancing liquidity and growth. Looking forward to 23, as John mentioned, we plan to reduce overall growth capital spend relative to this year and emphasize debt reduction and liquidity. Longer term, we remain focused on simplifying our capital and organizational structure in positioning CSI to thrive in all phases of the energy cycle. We'll now open the call to questions.
spk05: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
spk06: And our first question will come from Brian Derubio with Baird.
spk05: Please go ahead.
spk03: Good morning, gentlemen. How are you? Good, Brian. So, first question for me, you know, as I look at the results, you know, it was nice to see that you were able to deploy more horsepower without any degradation in the margins, given those extra costs. Can you just help us better understand what the current pricing environment is and how that's helped you to offset that?
spk02: Sure. I think we've seen over the last year, we've seen a continually increasing cost environment, inflation being transitory, not transitory, all these different thoughts from our customer base. So the ability to drive price increases is Second half of last year was there, but at a minor level, let's say 3% to 5%, perhaps. And then you really moved into Q1, Q2 this year. You saw everything take off with the Russian invading Ukraine, parts and supplies getting very tight, parts going up 25%, KUDO going from 80% to 120%. Everything really took off on us in latter Q1 and into Q2, and that was an immediate cost hit. And that's really been able to That's allowed us to really push price increases to our customer because we absorb the cost increases in the front half of the year. So our price increases that we're getting now, really trying to recoup that cost increase, are in the double digits, generally. Every customer is different. Some are more towards the market now as they were just recently put out. Some have been on for two or three-year terms, and they're coming off at much lower rates. So the overall effect is that the price increases we're getting now are reflecting the cost environment from the first half of the year. Obviously, prices continue to go up. Parts continue to rise. Like I said on my comments, lube oil, which we use a significant amount of lube oil on our units, running them each month. If you were to go back a year ago, lube oil on average was running in the third quarter, let's say $7.50 a gallon, and it's running... Going into the fourth quarter, it's running between 11.5 and 12.5. And so when you use a whole lot of lube oil every month, that's costing us a million dollars a month in additional lube oil costs from a year ago. So these are the kind of cost pressures that hit us earlier this year that are now, I'd say, flatter. They're not down. They're still rising, but not rising at the rate we saw in the first half of the year. It's a very long-winded answer, but the point is, We're six months on a lag to catch up with the significant cost increases we saw, and we're just starting to see that now. We have more price increases to go because all of our fleet isn't there yet. But generally, double-digit price increases at the moment.
spk03: And that's very helpful. I'm not sure if you want to answer this, but how much of your current horsepower and service costs Do you think it's sort of within a reasonable range of current market prices versus those that still have to reset?
spk02: I'd say in the last six months, let's – see, I'm already thinking about Q3 – I mean, Q4 and Q1 are kind of what we're already working on, those price increases. I would say we still have, you know, maybe – 40%, 50% of our fleet's kind of there at maybe what you might consider market today. We have a lot of it still under turn. It has to come off. And you've got to look at our fleet in layers, too. You look at the large horsepower. The large horsepower got tight first. And so we were able to raise prices earlier on the large. Let's say the 1,500 horsepower and up or 1,200 horsepower and up back in Q1. The smaller end of the fleet... had a lot of excess capacity. That excess capacity has gone everywhere just about now from the 100 horsepower and up, 150 horsepower and up. And so we're able to raise price on the smaller horsepower now. So I'd say from a dollar magnitude, we're probably 50% of the way there. From a fleet magnitude, we probably have a lot more units to touch on pricing just because the smaller end of the fleet has gotten tighter in the last four to five months. So there's a lot of work still to do next year And really, it's really managing the environment we're in. I think the thing that you've seen, I think, on commentary on other people's calls, and we didn't really talk about it on our commentary, but in addition to just flat-out price increase, we're trying to push term. We want to have visibility. And with that term, we're trying to price protect with price inflators, annual price inflators that are tied in. And I think we tried to do that last year and got a lot of pushback, but as we've moved into this year – it's mandatory for us to do it on our sales force. So anything at 1,000 horsepower and up, because those are getting multi-year deals, they have price inflators on them so that we don't have to go back and necessarily renegotiate every single unit every single time even if it's on term. So we're trying to do it in a multitude of ways, price inflators, term, rate, and then layer by layer through the fleet. So I'm not answering your question specifically because I don't have that, but I'd say it's around 50%.
spk03: That extra color is extremely useful. Just help us understand what's the market look like in terms of the ability to get new compression? I know that was an issue a couple of quarters ago, that the lead times are really long. Has that changed at all? Is new compression still 12 to 18 months out?
spk02: Yes. The engines that you would order from Caterpillar today, if you... You might have a distributor that has a few engines around, but if you're going to go and get in the back of the line today and say, I want to build 50 3608s or 3606s or whatever the case may be in the large, you're going to be 52 to 58 weeks. That's today, and depending on the size of the order, it's going to move it out further. So that's to get the engine. So I was recently at a fabricator a couple months ago, and there's a lot of units completed that have come out of fabrication, don't have an engine yet. I mean, they're waiting on the engine, because the timing of the delivery of the engine, while they give you a slot, say we think in 50 weeks you'll have it, it may be 55, 58 when it gets done, because you go back to Caterpillar, and they say, I've got some engines done, but I'm missing two or three components still to get the engine completed to ship it to you. So it's just like a car manufacturer that's sitting here today saying, I've got cars done on the lot except for three things. So it's all the way back up, and... So there's not real clear delivery schedule. Within maybe 8 to 10 weeks or so, but that's not really what your producer wants. Producers now are jumping out into 24, and they're trying to get bids for 24 deliveries because they know the variability on delivery is quite wide.
spk03: Great. That's really helpful for you guys. And as a final question for me, John Byers, as we think about 2023, And, you know, you're focused on repaying debt. Are you going to attack the ABLs or just given where some of the second liens are trading in the open market today, you know, is it sort of more attractive to pick off those opportunistically? Just look to get to the thought process around that.
spk01: Yeah, you know, I would say, you know, just from a pure finance standpoint, it'd be great to be able to attack the first and second liens. There are some limitations we have in our bond indentures. that may prevent us from doing that. So we're working through some of that right now. Paying down our ABLs is very easy. You know, generally, we've been here the last 18 months. Historically, we've drawn on our CSI ABL to make our annual interest payments and then paid that down over the following months. You know, I expect that we will be, you know, hopefully drawing on that less as we build liquidity. And then the Spartan ABL, which is, you know, we've got a ballpark $52 million drawn on that now. You know, our goal is to continue to pay that down as well. And really from an interest rate standpoint now, you know, now that the underlying indices, BISB is increased, there's really not a significant interest rate difference between BISB buying in first and second lien versus ABL other than the fact that the first and second lien are trading in the mid-80s.
spk03: Got it. That's helpful all around. Thanks so much. Appreciate the call. Yep. You bet.
spk01: You bet.
spk05: Again, if you have a question, please press star then 1. Our next question will come from Selman Akil with Stifel. Please go ahead.
spk04: Thank you. Good morning.
spk05: Good morning.
spk04: Taking a look at your CapEx and your 23 commentary around it, you intend for it to be lower. Have you guys completed your capital expenditures related to technology? Another way of just asking is, is there going to be some of that next year?
spk01: It's going to be fairly minimal. It's going to be fairly minimal. We've pretty much finished our ERP implementation. I think we have about a million to a million and a half dollars left to actually pay, although some of that's already been incurred. So I would say we are winding down the technology. Got it.
spk04: And then it seems like just listening – Most of your torque in terms of repricing may be coming from those units that are out there on sort of two- to three-year contracts. And so I'm just curious as to how much of your fleet is on sort of with two to three years left, and then, you know, am I thinking about that correctly, that those are the ones with the greatest price increases?
spk01: All right. Sorry, are you – I guess, are you asking about contracts coming up on term, or are you asking, I mean, basically are you saying that of the units that we have that are two or three years out, are they candidates for pricing? Yeah, go ahead.
spk04: So of the units that you have, right, some of them are coming up and they're coming off two or three-year contracts. Those are going to reprice, and I presume they're going to reprice significantly higher. And so I'm just trying to understand how much your fleet might be subject or exposed to that?
spk02: Well, I'd say right now we have about 60% of our fleet has some term remaining on it. Okay, so we've got about 40% of our fleet that's on month to month. And when you look at the smaller end of the fleet, let's call the smaller end 800 horsepower and down just to keep it simple. Those are generally going to be one year deals or less. And they're always going to be able to be repriced within a fairly short duration. So the larger end of the fleet We have currently about 15% of our fleet has more than one year left on its term as of today. So those units that do come off, that are coming off, yes, we are getting significant price increases. And just to give you an example, I'll take you to the cost side and not the revenue side because that's different for each producer. But an 1,875-horsepower unit two years ago When we walked in the door, we were being deployed here. Those cost maybe a million eight, excuse me, a million four to build them. I was thinking about a larger one. A million four to build them, and today they're two one. So they're up 50%. So when you just think about the cost of building a new one today and what that's pricing at to get, let's just call it the same economics, you're going to have to move your price a lot on the existing fleet to get it into market, or you have the ability to move that in the market, and they're in very high demand. So that'll give you a sense of some of these units can move quite a bit. So you might move it. So just simply, you might have a unit that was running at $30,000. Maybe you can get $40,000, $42,000, $43,000 for it now as an example of something that might move that's been out for a couple of years. But you've got to go back one year ago and think about what was being deployed one year ago. We weren't getting necessarily two- and three-year turns for some of these units. We were getting on the – On the mid-sized units, 1,000, 1,500, you're getting one-year terms a year ago, maybe 15 months ago. So those are going to come off term, too, and the markets move quite a bit on those also. So I think the 1,000 horsepower and up, you still have a lot of torque across that entire fleet spectrum that's going to come up to reprice again this year because last year we weren't able to get inflators on the fleet contractually. And this year... we're also able to take, let's say the 1,000 to 1,500 horsepower last year, we were getting one-year terms, we're getting two to three-year terms now, and we're able to get inflators in those. So I think we'll see that continue to move in 2023 up.
spk04: Got it. I appreciate that. And then last one for me, but in your comments, you referenced trying to simplify your structure as being one of your goals on a go-forward basis. And I'm Curious as to what you were exactly referring to. Is that the capital structure of the company?
spk01: It's definitely the capital structure of the company. You know, we've been talking about that since Spartan acquired CSI in 2020. Organizationally, you know, we're also considering, you know, does it make sense to convert from the MLP structure?
spk06: Thank you very much.
spk05: This concludes our question and answer session. I would like to turn the conference back over to John Jackson for any closing remarks.
spk02: I appreciate you all joining this quarter. We look forward to talking to you on our year-end call and how we finish the year and how 23 is opening up. But we're excited about the future, and thanks for joining us.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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