CSI Compressco LP

Good morning and welcome to CSI CompressCo LP's second quarter 2023 earnings conference call. The speakers for today's call are John Jackson, Chief Executive Officer of CSI CompressCo LP, and John Byers, Chief Financial Officer of CSI CompressCo LP. Rob Price, Chief Operating Officer, is also in attendance. All participants will be in 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 will now turn the conference over to Mr. Byers for opening remarks. Please go ahead.

Thank you, Alan. Good morning and thank you for joining CSI Compressco's second 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. 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 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-Q will be filed later today. Please note that information provided on this call speaks only to management's views as of today, August 7th, and may no longer be accurate at the time of replay. With that, I'll turn it over to John Jackson.

Thanks, John. Good morning, everyone, and thank you for joining our call today. I want to start out today with some overall macro comments. We've mentioned some of these in the past, but I think they're worth repeating to reflect why we are so bullish about the future for CSI Compresco. First off, the market is tight, especially for horsepower over 600 horsepower. Utilization remains high, looks to remain that way for the foreseeable future. Customers are committing capital out through 2024 and beyond to ensure the compression they need will be available. In addition, the compression industry has been and continues to be capital disciplined. Generally, the players are interested in reducing their leverage. This may be through EBITDA growth, absolute debt pay down, or both. Also, there has not been a significant new entrant into the market deploying a significant amount of new capital in the compression space. Also, the producers want to own less compression as a percentage of their overall compression needs. This is a result of many factors, including their own capital allocation decisions around returning cash to shareholders, underspending cash flow, and finding qualified labor to maintain the equipment. Deliveries of new equipment are stretching out well beyond a year as engine deliveries continue to extend, making it necessary for customers to plan further ahead. The speculative new build that has occurred in prior cycles is not happening this cycle as the compression companies are able to contract new build units before committing capital. Also, the terms of contracts have improved. This is reflected in the duration of contracts, inflation protection on those contracts, and better underlying terms. This has greatly de-risked the near-term redeployment risk for CSI Compresco and the compression industry as a whole. The cost to build a new large horsepower unit is up 40% to 50% over the last two to three years. This has required continual adjustment to contract compression pricing for new build units as well as existing units to reflect market rates. All the changes that I have described argue for a prolonged upcycle for compression. There's no excess new supply coming into the market. It is all contracted, and generally for multiple years. The needs for compression continue to grow. The natural gas production and associated gas areas continue to increase, and with the pending construction of LNG facilities potentially doubling the export capacity over the next few years, dry gas basins should also perform well over time. Overall, with this macro backdrop, we believe the future is bright for our company and industry. Since the beginning of this improving cycle, CSI Compresco has had goals of growing EBITDA in a disciplined manner, improving our operational execution to be cost efficient while reducing our net leverage significantly. Our approach to achieving these goals relative to discretionary cash flow has been to allocate our capital spending to be in line with our cash flow goals. thereby leaving gross debt materially flat. We have begun to shift our spending trend relative to expected cash flows down slightly over the second half of 23 into 24 as far as those relative cash flows that what we're going to do with it for some absolute modest debt pay down. On the fleet side of our capital, we've been building large horsepower units and making our existing fleet ready and available for broader applications where it makes financial sense. Additionally, on the revenue portion of our business, we are continually repricing and terming out our fleet to reflect current market conditions as contracts conclude their primary term and are up for renewal. In addition, we have a lot of focus on improving our operational rigor on the costs as it relates to the contract compression business. On the AMS portion of the business, we have been pursuing high return projects, focusing on projects where we have expertise, increasing the pricing for labor to reflect appropriate returns, and improving attention on project management. As we look at the results for the second quarter of 2023, we believe our financial results reflect the impact of these efforts. This quarter continues the multi-quarter trend of increasing contract services revenue, EBITDA growth, and improving net leverage metrics. This quarter our utilization was essentially flat, as we sold our Egyptian operation during the quarter, which reduced our operating horsepower via the sale. As we continue to reprice our fleet to market as contracts come off term, we look to optimize the renewal of fleets where possible to achieve the highest return. This may mean a slightly lower rate in a lower cost basin or higher rates in tight labor market areas. The idea is to end up with the best return for those assets. We pursue longer-term, multi-year renewals on our large horsepower but price our contracts to reflect the duration of a contract. This means if a key customer desires a shorter-term contract, we will work with the customer by offering the term the customer desires but charge a higher rate to reflect the option value the customer is requesting. We are also using the opportunity to improve unit density where possible by recontracting units closer to core asset installations. This is a long process with over 4,000 units in our fleet, but we've made a lot of progress over the last two years and continue looking for ways to improve our operational performance. Our fleet utilization in the quarter at 87%, a slight contraction from last quarter, primarily reflecting the sale of our Egyptian operations and some units that are in transition between locations and customers. CSI's reciprocating horsepower, which represents over 80% of our fleet, has utilization at the end of the second quarter of 93%, and our large horsepower fleet, that being defined as all horsepower over 1,000, is 95% utilized, up about a half a percent from Q1 of 23. We do not include horsepower that is contracted but not revenue generating as utilized in our calculations. We have additional horsepower contracted that is not yet deployed because of customer timing or make ready work on the unit before being deployed. Finally, as it relates to cost, we have seen the rate of inflation come down quite a bit from last year. We see this in all phases of our cost structure, that being primarily fluids, parts, and people. This is not to say we are not experiencing any inflation, but it is slow to a more modest pace. As we look to the remainder of 2023, we reiterate our full year guidance for EBITDA of 125 to 135, and our year-end net leverage guidance of 5.2 to 4.8 times. We are currently inside both of those ranges on a 12-month, trading 12-month basis for EBITDA and a quarter-end net leverage. Overall, we remain bullish about the macro environment, the longevity of this cycle, and how CSI is positioned to perform over the coming quarters. We continue to focus on returns and deleveraging versus absolute growth. We will continue our focused approach to capital allocation by adapting the market and pursuing the best options for long-term value creation. We have made some significant progress on operational execution and will have a lot of this area we will be focused on in the coming months. We believe this cycle will continue longer and stronger as we believe in the long-term fundamentals of natural gas and especially our ability to perform at a high level as we go forward. I'll now turn the call over to John Byers.