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spk02: 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.
spk07: 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.
spk03: 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.
spk07: For the first quarter of 2023, CSI Compresco reported adjusted EBITDA $30.7 million compared to $26.9 million in the first quarter of 2022, a 14% increase. Our contract services revenue grew 11% year-over-year from $62.8 million in the first quarter of 2022 to 69%. driven by continued improvement in utilization and pricing, particularly among our large horsepower. Year over year, our utilization increased to 87.4% from 81.4% in the first quarter of 2022. Our AMS revenue grew 35% year over year and was 16% below the prior quarter, with fairly typical seasonality for this line of business, as John explained. Distributable cash flow was $12.5 million compared to $10.3 million in the first quarter of 2022, We'll pay our first quarter distribution of one cent on May 15th with the distribution times. Our total liquidity cash on hand plus outstanding ABL capacity was $51.9 million on March 31st, 2023. As of May 2nd, our total liquidity was $32.2 million, which compares to $46.4 million at year-end 22. And note that we made our $23.6 million semiannual bond interest payment on April 1st. As John noted, our EBITDA and capital spending guidance for 2023 remain unchanged. We anticipate exiting the year with a net leverage ratio of 4.8 to 5.2 times. We're executing on our plan to reduce our overall leverage while growing the business. Our net leverage continues to step down from our Q3 2021 peak of 6.8 times to 5.3 times as of the end of Q1 2023. If you annualize our Q1 2023 EBITDA, we have a net leverage ratio of 5.2 times. Most of our debt's fixed rate. This has helped us in a rising interest rate environment, resulting in minimal impact on our overall interest expense. In 2023, we plan to reduce overall growth capital spend relative to prior years and emphasize debt reduction, liquidity, and to generate free cash flow.
spk04: We'll now open the call to questions.
spk01: Thank you. We will now begin the question and answer session.
spk02: To ask a question, you may press star, then 1 on your touchtone phone. If you're 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.
spk04: Our first question comes from Salman Akyal with Stifo.
spk02: Please go ahead.
spk06: Thank you. Good morning. Good morning. Let me just start out with sort of contract tenor, if you will, and if you had to look at your overall fleet, can you say how long you've got it deployed for?
spk03: Well, what I can tell you, let me give it to you this way. It's just how much is kind of segmented out a little bit. If we were to look at December 21... we had about 50% of our contracts a month to month and 50% under some level of term, be it three months or two years. And at that time, we had about 9% of our fleet was over one year term remaining and about 1% was over two years. Today, we have about a little over 70% of our fleet is on term and a little less than 30% is month to month. And of that, 32%, it has had one year longer, and 9% is two years or longer. So it's just we have a lot longer and more visibility on a larger portion of our fleet. So if we were to go back, I think we probably had, on a revenue basis, we probably had 15%, 20% of our fleet under some kind of term two years ago, two and a half years ago, and today we have about 60%, 65%. under probably six months or longer term. So there's just different slices on how you want to look at it, but we always have units coming up for renewal. And then what we're seeing is from two years ago when we had a two-year contract or one-year contract, we're trying to get longer term. And every time we turn up multi-year, we're adding the CPI inflator. So that's the One of the big differences, too, two years ago we had 0% of our fleet that had an inflator on it. Today we probably have 15% of our revenue base has an inflator on it today that didn't.
spk06: Got it. That's very helpful. And then if I think about it, it looks like you have about 150,000 horsepower that's idle, if I'm thinking about that correctly. And I'm just wondering – How much of that would be large horsepower, and then maybe you could talk about time to make ready for that as well?
spk03: Of the 150, I'd say 100 of it is gas jacks and rotary screws. Those are more niche-y and nuanced and There probably won't be a lot of movement in that just based on demand and or cost to make ready of the unit depending on what we need to do there. So that can change. Obviously, if people come in and say, we want to sign multi-year deals and it'll pay for the make ready cost to put that unit back to work, we would consider it. But those utilizations sit in the 50% to 60% range and have been fairly within that 10% band pretty consistently for the last three years. So that leaves you 50,000 or so horsepower of, you know, that's the 95% to 100% I was quoting earlier of our reciprocating fleet. We're approaching 95% utilization. So that leaves you 50,000 horsepower. And of that, probably a third of that is larger horsepower. However, it would require some dollars to spend to make that ready, and we need to find – the right application where we want to spend that money. So what I mean is maybe it's a single-stage unit, maybe it's a two-stage unit that would need to be re-cylindered, it would need to have a different engine put on it, whatever. So those are options and opportunities that we look at for electric conversion and or if we get the right long-term contract on, we would look to spend that money. So I would say it's probably 50% of new to reconfigure those the way we want them. And we'll evaluate those as those opportunities come along. I'll tell you this. We have almost all that quoted in different jobs. We're waiting to see if those jobs manifest themselves. And if they do, we'll spend that money. And those jobs are an environment where we would get paid out one and a half times what we invest in in the term of the contract.
spk06: Got it. Very helpful. Since you mentioned electric, what kind of demand are you seeing out there for electric?
spk03: For us? It's the, I'd say, one, two here and there. When I talk about that, I'm talking about 800 horsepower and up type units. So we've had the opportunity to quote on 10, 15 type units, new build. And I think what we're seeing a little bit of right now is customers are still conflicted on, as I mentioned in my commentary, customers want to own less compression today than they used to, just generally as a source of capital growth. That's one where they can free up capital. So I think people are debating on the producer side, do I want to own my electric or not, or do I want to outsource it? And it's given the nature of electric for us, given that the reapplicability of it is less clear long-term or less diverse long-term, we want to make sure we get a nice return on the initial contract. Therefore, new build for us, is something we're interested in, but it requires a very high stringent capital discipline allocation and contract terms for us to execute on. As a result, I think we're seeing that across the industry, and the customers are trying to decide, does it make sense for me to own it if it's going to be there 10 years? So that's one phase going on. The second phase going on on the electric side is I think producers are running into a longer timeframe to get this done, more complex timeframe to get this done, and an uncertain availability of grid for a big, huge commitment. You can put one on, two on, five on, but to go say, I'm going to electrify 500,000 horsepower is a big ask. And so I think people are just not pausing. I think they're reevaluating the speed with which they can do this. So a lot of the producers are dipping their toe in the water or dipping less toes in the water, if I might say it that way. They're just like, let me try one, let's get that up and running, let me try two, let me try five, let me try ten. So it's creating some complexity, too, as producers try to decide to renew their terms on their existing gas-fired engines. Like, okay, great, I can get a much better rate on a three- or four-year deal. I may electrify in the next two years. I don't want to be stuck with that long of a term. So do I pay up for shorter term when I know so far I've missed every deadline I've set for myself to electrify? Those are the complexities. That's probably a lot more than you wanted, but it's not a very good answer for you, but that's just where we are.
spk06: Got it. Got it. That's helpful. Can you just talk a little bit about what you're seeing on the inflation front?
spk03: It's moderated quite a bit. We haven't seen a huge increase. I think this year we expect, based on conversations we've heard with our OEMs, providers, we'll probably have that 4% to 8% price increase on frames and parts from Cat and Ariel. I'm guessing that's where we'll be, somewhere in that range. But we'll see. And that's usually about mid-year. So I'd expect in the next 60 days or so we'll see that. I think there's some talk about the end-of-the-year price increases also. But beyond that, you know, Fluids have stabilized over the last couple of quarters. Labor is, you have labor pressure more from a supply side issue than you do rate, you know, cost. I mean, cost of labor is going up, but it's going up, I'd say, as normal in the market, you know, 3%, 4%, 5% cost of living increases or merit increases, but it's going up from overtime and just the dearth of people. So you're having to, people are having to be pushed more I mean that in a positive way. People are doing more with what you have to get things done. Or you're outsourcing and using outside services to fill the gaps. So I'd say generally inflation's probably in check with the larger, broader U.S. market of that 4%, 5%, 6% that you're seeing quoted.
spk06: Got it. Last one for me. What are you just seeing from the private companies out there? Are you seeing them lever up and trying to bring on additional funds? units in CREAT capacity, or are you seeing them be pretty well capital disciplined as well?
spk03: I think they're being very capital disciplined as well, and whether that's because they're levered as far as they can go, or whether that's a choice consciously, but I think across the compression sector, you're seeing pretty disciplined environment right now, and I think that's one thing from past cycles. I mentioned a number of things from past cycles in my commentary, but one thing I didn't mention is in some of the past really big up cycles, you've seen a new entrant. There's no new entrants. There's nobody going to... You've got to spend a half a billion dollars to get scale in this space to start making some of the work unless you're just going to try and run a 50, 100,000 horsepower business as a mom and pop operation. So you're just not seeing... capital being allocated from private equity firms or from large investors to come in and say, hey, let's create a new large horsepower competitor out there. I don't expect to see it either. So the discipline's been there both on the smaller guys, the private side, I'd say, as well as the new capital side.
spk04: Got it. Thank you so much.
spk00: You bet.
spk01: The next question comes from Brian DiGiovio with Baird.
spk02: Please go ahead.
spk05: Good morning, gentlemen. How are you today? Good. How are you, Brian? Good. So, John Byers, just can you help us understand what needs to happen for you to move from the low end to that EBITDA guided range to the high end? What sort of dynamics should we be focusing on?
spk07: I mean, I think the – Given what John said about utilization, we've got a little bit of room to grow there on the large reciprocating horsepower. You know, what's responsible for the range really is how much are we going to be able to push on price increases on the revenue side, and then on the cost side, it's how much more do inflationary pressures moderate. You know, we've seen, I would say, probably the most significant moderation on the fluid side, but as John said, We're still tight, and we continue to see a little bit of pressure on the parts side.
spk03: I think some of our price increase issues, we're trying to work with our customers to give them what they want. So in some cases, as I mentioned on the electric side, people are trying to figure out if they want to electrify, and they don't want to sign a three-year contract. They want to sign a one-year contract or a month-to-month contract for a while. And as long as we can have some visibility on what they need to get to where their plans work for them, We're willing to do that, but that price delta from a three-year contract to month-to-month is pretty wide. So for us to predict where our pricing is going to be over the course of the rest of the year has a fairly wide outcome because of the customer selection. Let's say if I want to stay month-to-month, we have a lot of contracts coming up for renewal over the last eight months of this year, and if people select a lot of month-to-month contracts, That's going to drive a lot more revenue in EBITDA. It's going to drive a little more volatility in the timing of when that comes off and when we move it to someone else. But if they select longer term, it'll mitigate the price increase a little bit, but it'll give us visibility and stability for multi-years out there. So that's a piece of it, too. When John talks about pricing, there's a lot of nuance in that that's driven by us trying to work with our customer to deliver what they want.
spk05: Got it. That helps a lot. And just as we think about the capacity additions, I know you're going to be fairly well-disciplined this year on growth capbacks, but as we look at the absolute number of horsepower in your fleet today, how do you see that growing by the end of the year?
spk07: I would say we probably see about 10 to 15,000 in growth. We've got some a couple units on order in December that may show up in December, may show up in January. That's why I'm hesitating a little bit. But I think on a gross ad basis, it's probably in that 10,000 to 12,000 horsepower. And then on the denominator side, we have been pruning our fleet a little bit on the smaller horsepower side. So if you look over the last From when we got here at the end of 2020 to today, our fleet's only grown about 10,000 horsepower, but we've added about 40,000 to 45,000 large horsepower and pruned about 30,000 to 35,000 small horses.
spk05: Great. That's actually really helpful there. The prior question was where you made a comment, John, about new large entrants. But given sort of the capital-constrained world we are today, our interest rates, our cost to acquire new equipment, do you see opportunities where smaller players just may not be surviving anymore or may need a way out?
spk03: You know, it's hard to answer that question given no visibility to their cap structure. But I would say... just in general, I think they're all being, just like us, more conservative in trying to re-lever themselves in a different environment. I say re-lever by the standpoint of restructure the cap structure so that you're less levered. If you were paying 3% before on a variable rate borrowing base and you're paying 8% today, you need to have less leverage to have the same cash flow that you used to have. And I think People are taking that to heart, and frankly, I think it's great for the long term for everyone to say, let's build a much more sustainable cap structure that can survive any environment and get back down in that three range. So I think a lot of people are trying to drive towards that. Some of that's self-selection, saying I want to do that, and some of that's lender selection, saying you will do that. I think that's just the nature of the beast of the world we're living in right now, and I think it's good and healthy. But I think it continues to – all the factors are leading to less people building, less horsepower, and therefore the market remaining tight. Nobody's chasing growth just like I want to have units ready to take a customer away from somebody. That hasn't happened in a year and a half, two years. The only reason we get a new customer – if we had the capital or have the capital available, you know, some units free up, is because their current provider can't supply it to them. Not because, oh, you're cheaper, I'm going to come to you. It's like, who has it? And that's small, medium, large, everywhere.
spk05: Got it. Nope, that makes sense. And this may be a final question. You know, I've controlled the company for just a little over two years at this point. You know, Any thoughts on sort of looking forward, things that you can see that you can still improve upon? Just love to get your thoughts there.
spk03: I think we've made a lot of progress, but we have a lot of things we can improve on. We've had an enormous change in people and personnel, and just from normal activity, when you look across the industry, I think we're probably all experiencing 25% to 35% turnover. But as we look through that, I think we spent a lot of time early on getting our hands around the business. The world was changing rapidly. We're putting a lot of equipment out, doing a lot of make ready. We're seeing that make ready should start abating. So we're turning a lot of our attention, not that we didn't have attention on before, but we're turning more people attention towards cost containment. Let's operate efficiently. Let's operate our equipment really efficiently. Let's do everything we can to drive the cost structure down and make it more efficient. And I think there's room to go there. And I think hopefully we'll see that over the course of the next year or so as not only revenue hopefully continues to go up with inflation, but also on the cost side that we're able to contain that and capture those positive margins. I think there's a lot of work to do on that. I think we still have a capital structure environment that we're not on board with totally. And at the opportunity to fix that, we will. but we've moved from two years ago when you walked in, if you took out the effective asset sales, we were a little over seven times levered, low sevens, and we're low fives now. So we've taken two turns of leverage off. I'm not saying that's where we want to be, but that's a big move in two years in our mind, and we still have the goal to get inside four over the next year and a half to two years, and that's what we continue to drive towards, and I think we can do that. So that's Those are two big areas, I think, for us to continue to delever and continue to improve on our cost and operating structure. Excellent.
spk04: I appreciate all the color. Thank you. You bet. You bet.
spk01: This concludes the question and answer session.
spk02: I would like to turn the conference back over to John Jackson for any closing remarks.
spk03: Thanks for joining the call today. We look forward to talking to you next quarter and continuing to build value for all the shareholders.
spk04: Appreciate it.
spk01: The conference has now concluded. Thank you for attending today's presentation.
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