CSI Compressco LP

good morning and welcome to csi compresco lp's fourth quarter and year-end 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 ravi pruski vice president of operations is also in attendance all participants will be in listen only mode So if you need assistance, please send a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one near a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I'll now turn the conference over to Mr. Byers for any opening remarks. Please go ahead.

Thank you, Anthony. Good morning, and thank you for joining CSI Compressco's fourth quarter and year-end 2022 results conference call. I'd like to remind you that this call may contain statements that are 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 financial measures. Please refer to this morning's press release or our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not 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 early next week. Please note that information provided on this call speaks only to management's views as of today, March 10th, and may no longer be accurate at the time of replay. With that, I'll now turn it over to John Jackson.

Thanks, John. Good morning, and thank you for joining our call today. We're excited to speak today about our fourth quarter 2022 results and the optimistic outlook we have for 2023. So let's start off with the results for the fourth quarter of 2022. This quarter continues the trend from last quarter of improving activity, translating into increased revenue and EBITDA. We've experienced improving activity for several quarters, but the effect of inflation earlier in the cycle led to increasing revenue, but marginal incremental EBITDA fall through. As the cost environment is stabilized, we've seen the financial results improve over the second half of 2022. Our contract services, aftermarket services, and parts sales all continue to show strong activity and EBITDA improvement. As it relates to our fleet or contract service business, utilization continued to improve quarter over quarter for the seventh straight quarter. Price increases on the existing fleet deployed have begun to close the gap of the effects of inflation. This is translated in the increasing fleet revenue quarter over quarter for eight consecutive quarters. Three trends are improving our forward visibility. First, our ability to term up equipment on expiring contracts. Secondly, redeploying existing idle equipment And third, deployment of our large horsepower new build units on multi-year contracts with marquee customers. Our sales team has worked hard to improve contract duration, but have placed equal importance on improving contract terms with our customers, specifically building inflation protection using cost inflators for contracts with terms longer than 12 months. We are pursuing price improvements as we continue to move our fleet to market pricing. Pricing in the mid to large horsepower segment of the market has been changing rapidly over the course of the last year. This has been the result of the last remaining idle units in the mid and large horsepower ranges that are owned by contract compression companies that have been contracted. Almost all additional horsepower in these categories now has to come from new builds as very few units are being returned by customers. The transition to market rates takes time as many units are under term contracts. As these contract terms expire, we will look to term out the unit and move pricing to market. This will continue to occur throughout 2023 like it did in 2022. While we've seen the effect of inflation to stabilize our cost environment over the second half of 2022, we will continue to see labor and part cost increases. At this time, we expect those to be much more modest and than those in early 2022 and in line with normal annual increases. Opportunity improvements exist related to our make ready costs for our fleet. As we deploy the bulk of our remaining idle reciprocating fleet in the first half of 2023, we would expect our make ready costs to reduce given that most of our reciprocating fleet units will be out on contract. The aftermarket services and parts business or AMS business performed well in 2022 with increasing revenues and improving margins. We have a strong pipeline of AMS activity, both in current contractual work, outstanding bids, and current customer requested proposals. While the first quarter is typically a bit slower with parts sales and AMS awards coming out of the holidays, we have seen a strong pipeline of activity and expect 2023 to be another strong year. We expect over the course of 2023 to transfer some of our people and shop space that have been making CSI-owned fleet units ready for deployment over into the AMS business, potentially creating more opportunity for growth year over year. Our capital spending for 2023 will be focused on deploying additional idle fleet units, converting some units from natural gas-driven to electric motor drive units, and funding large horsepower new build units that are currently on order. Our overall goal will be to generate a modest amount of free cash flow after our growth capex to reduce absolute debt balances and improve liquidity. Most of our customer discussion surrounding capital has begun to shift to 2024 as lead times remain long and customers are planning well in advance to avoid compression needs being a constraint to their ability to produce natural gas and crude oil. Our guidance as a firm reflects opportunities for additional financial improvement. This comes from a combination of deploying the remaining fleet, building new units, improving pricing, and reducing our make-ready costs without a significant inflation response on the remainder of our cost structure. One item to keep in mind when looking at our guidance for 2023 is that in December 22, we had an international contract expire through its natural course. As of December 31, 2022, the contract has not renewed. Currently, management is having ongoing conversations with the customer over renewal or extension and and our guidance reflects no renewal of this contract. If that contract is renewed in whole or in part, we would update our guidance at that time if the contract terms warranted a revision to our guidance. Overall, we're bullish about the macro environment and the longevity of this cycle. We've seen a consistent focus on returns this cycle across the spectrum. Despite recent lower gas prices, we believe in the long-term need for natural gas. This is evident both in the increasing production and consumption of natural gas in the U.S. throughout the course of 22 and into 23. As our industry remains focused on returns, this discipline, we believe, will result in a longer, more stable multi-year cycle. We're excited about the overall improving results and the forward activity levels that are contracted. Given the overall macro backdrop, we expect to have a continually improving year in 2023. In summary... We continue to see a strong demand environment for our products and services heading into 2023, and we will remain flexible as we navigate the rapidly changing environment, position ourselves for success for what we believe to be a longer and stronger cycle in the years ahead. We're looking forward to an exciting 23 for our industry and specifically for CSI Compresco. I'll now turn the call over to John Byers.