CSI Compressco LP

Good morning and welcome to CSI Compresco LP's first quarter 2023 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 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 on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Byers for opening remarks. Please go ahead, sir.

Thank you, Vaishnavi. Good morning and thank you for joining CSI Compressco's first quarter 2023 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. 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 margin, 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 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 on earlier this morning, as posted on our website, our Form 10-Q will be filed later today. Please note that the information provided in this call speaks only to management's views as of today and may no longer be accurate at the time of replay. With that, I'll now turn the call over to John.

Thanks. Good morning and thank you for joining our call today. Let's start off with the results for the first quarter of 2023. This quarter continues the multi-quarter trend of increasing contract services revenue, higher fleet utilization, EBITDA growth excluding the effect of asset sales, and improving net leverage metrics. Q1 was a slight improvement in EBITDA from Q4, despite the first quarter typically being our slowest quarter each year. This usually results from lower AMS activity in Q1 as people return from the holidays, winter weather, which usually leads to increased costs and a bit of catch-up work, catch up in the work and spending from the holidays. Our fleet utilization continued to climb higher as we reached 87.4%. The nuances around our utilization are that our reciprocating horsepower, representing over 80% of our fleet, has a utilization of 93.3%, and our large horsepower fleet, as defined as being all horsepower over 1,000 horsepower, is just under 95% utilized. We do not include horsepower that is contracted but not deployed in our utilization numbers. We have additional horsepower contracted that is not yet deployed because of customer timing, make ready work, and so on that is occurring on the unit. That equipment, when deployed, would increase our total fleet utilization to approximately 90%. This is meant to give some additional color to our utilization as we near full utilization on our reciprocating fleet. As far as our overall natural gas compression market goes, we're continuing to see two- to five-year terms on new and existing large horsepower units, and the larger the horsepower, the longer the term. Generally, that's 700 horsepower and up in that category that we're seeing those multi-year contracts. The market rate for large horsepower has continued to increase, and as a result, we continue to pursue opportunities to move our fleet to current market pricing while pursuing term extensions as contracts come up for renewal. We value longer terms in our contracts along with price protection from inflation. They're providing more predictable and stable cash flows for longer periods of time. I want to offer some general thoughts on this cycle as compared to the past. In past cycles, as delivery times for engines have moved to nine to 12 months or longer, we have usually seen the contract service companies unable to contract significant units that far in advance and therefore acquire engines and fabrication slots without a home yet for those units. In this cycle that is not the case. There's very little speculative building occurring in the contract service space. We believe that's a significant change from prior cycles and as a result there will not be a large number of orphaned units being built without a home should there be a slowdown in the future. In addition, producers are less eager to own as large a portion of their compression needs as in past cycles and are willing to contract further into the future related to contract compression than has generally been the case. For example, CSI Compressco has signed orders for a number of new built compression units, some of which will be delivered as far out as the third quarter of 2024. The supply side of the market for medium to large parts is almost fully utilized right now despite the lower gas price environment. In part, due to continued and increased demand for compression and associated gas plates, gas plates having oil as the driver for activity. Finally, the cost of a new build unit, at least in the large horsepower category, has increased approximately 40 to 50% in the last two plus years and continues to rise based on price pressures from OEMs and fabricators. While the contract compression sector has exhibited capital discipline during most of this expansion, the cost increase of new units is an additional forced governor of how much horsepower is being built. The recent significant increase in the cost to fabricate new equipment means that you can only build two-thirds of the horsepower that you could build two years ago. The flip side to that is the installed base of compression equipment is worth a lot more today than it was two years ago. The compression assets that exist in the contract compression space today, especially the large horsepower, should be worth... 30% to 50% more than that same asset was two to three years ago in the market, and the market rates for contract compression support that premise. As we look to the remainder of 2023, we still like our full year guidance on EBITDA of 125 to 135 and our year-end net leverage guidance of 5.2 to 4.8. The trends we've seen over the last few quarters of a tight supply and increasing demand we expect to continue based on customer conversations. We will have additional positive pricing adjustments throughout the remainder of the year and continue to deploy our new build units as they are delivered from fabrication. In addition, we expect our AMS business to ramp up from Q1 activity levels as is typical. We have a robust pipeline of both awarded work and bids we are pursuing. The work is short-term in duration and as far as award timing to completion, so we usually have a two- to three-month backlog of work and a hard backlog. The quote backlog gives us confidence that consistent work with reasonable margins, will be there throughout the year. Overall, we remain bullish about the macro environment and longevity of the cycle. We continue to focus on returns and deleveraging versus absolute growth. We will maintain a focused approach to capital allocation by adapting to the market and pursuing the best options for long-term value creation. This will continue to lead to improving returns and increased options for value creation for all the stakeholders in CSI Compresco. We believe this cycle will continue longer and stronger as we believe in the long-term fundamentals of natural gas. I'll now turn the call over to John Byers. Thanks, John.