CCLP - CSI Compressco LP (CCLP) CEO John Jackson on Q2 2022 Results - Earnings Call Transcript
CSI Compressco LP (CCLP)
Q2 2022 Earnings Conference Call
August 09, 2022 10:30 AM ET
Company Participants
Jon Byers - Chief Financial Officer
John Jackson - President & Chief Executive Officer
Conference Call Participants
Brian DiRubbio - Baird
Selman Akyol - Stifel
Presentation
Operator
Good day, and welcome to the CSI Compressco Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded.
I would now like to turn the conference over to Jon Byers, Chief Financial Officer. Please go ahead, sir.
Jon Byers
Thank you. Good morning, and thank you for joining CSI Compressco's Second 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 analysis 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. You're cautioned 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 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 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 9, and may no longer be accurate at the time of replay.
With that, I'll now turn it over to John Jackson.
John Jackson
Thanks, John and good morning. I appreciate everyone joining the call today. As we discuss the second quarter results and the outlook for the remainder of the year, there are two overarching themes that I want to talk about at the beginning. The first is demand. The demand for our equipment is currently very high. It began last year with large horsepower, continued with demand for electric drive units, both conversions of existing unit and new build electrics and has continued to pick up in the medium and smaller horsepower units. This has led to more pricing strength, as we attempt to maintain and ultimately improve our overall margins.
As a result, our shops across the organization are full of make-ready activity related to our existing fleet, as well as AMS work on customer-owned units. We have the visibility to see that this level of activity will be sustained through the rest of the year and into the early part of 2023, as we deploy a large portion of our remaining idle fleet, over this time frame.
The second theme is cost, the inflation and the supply chain impact. During the second quarter, we saw significant increases quarter-over-quarter. As we noted in the earnings release, these were primarily associated with fluids, parts and labor. We are familiar -- we're all familiar with the gasoline prices we saw the dramatic increase in prices this year, especially in the second quarter. And since the end of the second quarter, we've seen gasoline prices recede from their highs, like the rest of you probably noticed. The impact on gasoline cost is immediate and we're seeing lower gasoline costs in our financials, as we begin in the third quarter.
The other and more significant part of fluids is lube oil. Lube oil prices change more slowly. And so, while we expect reductions in the coming months, the effect may be more gradual than that of gasoline. In the parts area, we've had price increases from suppliers during Q1 and Q2 and with the more significant of those increases occurring in Q2. We've had some early Q3 price increases from suppliers, but hope to see some stability from here related to those costs on parts.
Labor costs, also, increased in the second quarter as a result of increased hiring, raises and increased overtime. Our people are fully utilized deploying our idle fleet and expect that will continue through the rest of the year. Overall, we're working very diligently to mitigate the impact of cost increases, where we can, but it remains difficult to predict the effect in the short term, as costs are changing rapidly.
As we look ahead, we have a high degree of excitement and optimism. We still have a significant number of contracted idle units, that to be -- are better to be reactivated over the remainder of '22 and into early '23. We expect to see utilization continue to improve through the rest of this year, as these units move from makeready to revenue-generating assets.
In addition, the current active fleet is seeing far fewer returns in the past few quarters. When customers do give notice of intent to return the unit, the unit is often re-contracted before it is returned.
In many instances, we're seeing that same unit deployed with a new customer at a higher price. This is a continuation of what we began to see late last year in the higher horsepower end of our fleet as availability begin to tighten. Our current pricing for most of our fleet is at an all-time high. As we're able to raise prices across the contracted fleet, to current market prices, we expect to recover the increase in costs we are currently experiencing.
The second half of 2022 will be largely focused on deploying both idle fleet units and electric motor drive converted units, while also completing installing and commissioning the final new builds we have committed for 2022.
In addition, based on lead time and customer demand, we'll be making additional capital commitments for 2023 over the course of the next quarter. As we think about capital allocation over the coming quarters, we'll continue to focus on spending our money to deploy our existing fleet first that being compressors or coolers, amine plants international opportunities for any product line, including the electric motor drive conversions of existing units.
As we reached, near full utilization levels, the shift in capital will move towards fleet additions. We have several new build opportunities and compression in both gas and electric that we're currently evaluating and high-grading. One of the effects of the inflection – of the inflationary environment is the cost of new large horsepower units has increased significantly over the last six to nine months.
In addition, lead times for delivery of major components continue to extend. Any new build units, we commit to now will generally not come online until the second half of 2023. As always, we look to the most effective return on our capital as we commit to new projects. This return analysis is not just pricing, but includes improving the terms and conditions surrounding contracts, related to spending this new capital.
In summary, we continue to see a strong demand environment for our products and services, throughout this year and well into 2023. The cost side of the equation will be the variable we are watching closely and working to mitigate, continuing – on the continuing inflationary pressures. All our product lines and geographic areas are experiencing growth in this environment. We believe in the long-term demand for natural gas worldwide. This drives an ever-increasing need for compression and we look forward to growing the company and delivering exceptional service and improving shareholder returns.
With that, I'll turn the call over to Jon Byers.
Jon Byers
Thanks John. For the second quarter 2022, CSI reported revenue of $84.5 million compared to $76.5 million in the prior year. Our contract services revenue was up from – to $64 million from $58 million in the second quarter of 2021, a 10% increase. Year-on-year, our AMS revenue was up 9% to $16.2 million from $14.9 million in the second quarter of 2021.
Second quarter adjusted EBITDA was $26.4 million, compared to $26.5 million in the second quarter of 2021 essentially flat. As John discussed, higher revenue was offset by cost inflation in our main cost series, labor, fluids and parts. Distributable cash flow was $10.3 million, compared to $10.3 million in the second quarter of 2021, and we'll pay our second quarter distribution of $0.01 per unit on August 12, with a distribution coverage of 7.3 times.
Moving on to the balance sheet. Our total liquidity cash on hand plus outstanding ABL or credit facility capacity was $26.3 million at the end of the quarter. In July of 2022, we had significant collections from an international customer, which improved our liquidity position substantially.
As of August 5, our total liquidity was $35 million, which compares to $32.7 million at the end of the year 2021. Our net leverage ratio in the second quarter of 2022 is 6.1 times. This is down from our peak of 6.8 times in Q3 of 2021. Our net leverage ratio is up slightly from Q1 of 2022, as we continue to balance deleveraging, and investment in our fleet to drive EBITDA growth. We continue to expect a downward trend in our net leverage ratio through the rest of 2022.
Finally, at the end of the second quarter of 2022, we extended one of our credit agreements that was set to mature in June of 2023, it was extended to 2025 – June of 2025. We've revised our capital spending guidance upward slightly this year. Our new guidance is $55 million to $65 million, up from $50 million to $60 million provided in the prior quarter. This is mainly driven by high-return projects, including reconfiguring large horsepower units to meet customer demand, as well as electrification of older large and medium horsepower units.
As we said on prior calls, we aim to continue to reduce our leverage ratio over the remainder of 2022, while balancing liquidity and growth opportunities. Longer term our goal is to reduce our overall debt level, simplify our capital structure and position CSI to thrive in all phases of the energy cycle.
We'll now open the call to questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Brian DiRubbio with Baird. Please go ahead.
Brian DiRubbio
Good morning, gentlemen.
John Jackson
Hi, Brian
Brian DiRubbio
Starting up just the comments you said about utilization rates. I think, you ended the quarter at just under 83%. What is full utilization look like for CSI? Is it 90%? Is it 95%?
John Jackson
I'd say, we're probably looking at low 90s. We have really three large -- three main components of our fleet. We have a [indiscernible] fleet and we have some screw compressors and we have the GasJack fleet, which is the smaller horsepower the well under our 100-horsepower fleet.
And in the reciprocating compression fleet, I think, we're going to end up in the mid-90s. We have a chance for high for full utilization to end up in the mid to upper 90s, but the screw fleet and the GasJack fleet rarely is going to reach those kind of levels it's going to be more in the 60%, 70% range. There's much smaller components. So overall that blends probably more detail than you want, but overall that blends you to a low 90s.
Brian DiRubbio
No that's actually very helpful. Appreciate it. And then Jon Byers what -- how should we think about sort of how much of the fleet is contracted up? And when could we start seeing that reset in rates as the existing fleet sort of rolls into newer contracts that are going to be at much higher prices?
Jon Byers
So we're pushing price increases now in every opportunity we have. Referring back to John's comments as we have the total returns of units are dropping. But as we do have units come back we're typically able to place those units out back at higher rates. And then as contracts come up for renewal typically we see one year term on some of the larger horsepower those come up for renewal. We're pushing rate increases where we can. John, do you want to address a little bit.
John Jackson
You think about our fleet and how it's contracted about 85% of our fleet give or take at any one-time is -- has a term of one year or less. But we have about 15% that's longer than one year. So to capture what we would consider to be current market prices today and they -- recognizing they've moved up a lot in the last six months it's going to take 9 months to 12 months to get most of that pushed through without changes from here.
So if you were to go back a year ago we're probably getting 2%, 3%, 4% price increases back in July of last year. Maybe on the percent of the fleet we were chasing because things were just starting to tighten. Then you started moving to the upper single digits on changes. And now you're moving into potentially 10% to 15% price changes. And so someone who isn't at a price change for a year, 1.5 years may see a 15% to 20% price change when their unit comes up.
So that takes time to push through because of the way these contracts come off term. But I would say over the course of the next 12 months, we should have almost everything at what I would consider current market pricing, which current market pricing being July 1, 2022. I can't tell you what the current market price is going to be a year from now, because it still may go up from here. But that's generally the time frame it takes to flow through the price increases. And so you have a dialogue with your customer. Do you want to stay month-to-month? Is this something you think you're going to come -- you not need or resize your compression over the next six to nine months? That may be one rate. And then you may say, well, no I'll turn it up for a year or two that may be a different rate.
But as I mentioned in my comments some of the things we're trying to also address in this window of just besides just straight pricing has turned to conditions. So that may include if you want a longer term, but we want an inflation index in the contract such that it has an automatic adjustment to inflation. So we don't have to go in and negotiate each time. What the standby rate may be. And so instead of being 60% stand by maybe 75% standby. These are all the things we're trying to work on that underpin the floor of our performance not just straight pricing. But long-winded answer, again, to your question but the reality is it takes nine to 12 months to push the whole fleet across.
Brian DiRubbio
No. Much appreciate the detail there. Just, I guess, final question for me is as we think about CapEx spending and given all the inflationary pressures that we've been seeing over the last 12 months or so, you moved your CapEx number up this year. But are you buying more stuff, but obviously stuff and quotes, or is it just whatever stuff you were buying just cost that 10% more? And how should we be thinking about CapEx for 2023 conceptually considering some of the comments you made earlier regarding the extended lead times for new equipment?
Jon Byers
So to answer the first part of your question, we -- the increase in CapEx is really driven by the reconfiguration of our fleet. So we are not seeing price creep on what we had -- what the guidance that we had provided previously. It's more electrification and reconfiguring units to more broadly used application.
On your -- does that answer your question?
Brian DiRubbio
Yeah, it does, on that point, yeah.
Jon Byers
Okay. And then the second part we're not providing any capital guidance for 2023. We've talked about it in all our calls how we're focused on deleveraging. So we're high-grading opportunities now, but we haven't made a final decision or won't provide guidance at this point on our 2023 capital budget.
Brian DiRubbio
Fair enough. I recognize it’s early. Appreciate all the comments. Thank you.
Jon Byers
Thanks Brian.
Operator
[Operator Instructions] Today's next question comes from Selman Akyol with Stifel. Please go ahead.
Selman Akyol
Thank you. Good morning. Just a couple of quick ones for me. You talked about new builds and cost of large horsepower units increasing significantly. Can you quantify what you're just seeing out there for new builds and acquiring horsepower?
John Jackson
Sure. I would say to put it in more percentage terms, if you're looking at what I call the larger horsepower ,the 3,600 caterpillar engine fleet sizes so the 3,606 and 3,608, which is 1,875 horsepower and 2,500 horsepower. Those units from let's call December 31 to today are probably 25% higher to bill in round numbers. So that's a significant increase. So let's say a 3,606 maybe cost $1.5 million six months ago, nine months ago it costs 2.21 depending on how you got to set up today. Same thing on the other. So, you're up significantly. So, to build the same number of units, you're going to spend 25% more capital.
The other side of that is, with that comes more pricing power I think with your existing fleet, because to replace you with new build is going to be a lot more expensive. Our op costs are up. We're lagging on covering our op costs, but we think there's a lot of price movement, we can still capture over the course of next year with our existing fleet that are on older rates.
Selman Akyol
Got it. That's helpful. And then, also on electric drives. Can you just -- are you getting premium pricing for those? And then I'm sure, it's very, very small, but can you just maybe give some horsepower in terms of how much is now electric? And are there any goals, or do you see demand supporting so much horsepower in electric?
John Jackson
Yes. I'd say, we had probably coming into the last year or so, we probably had 1.5% of our fleet was electric and across the spectrum from small to medium size. We didn't really have any larger horsepower, higher voltage horsepower electrics. We've been moving into that arena converting some of our older higher emission engines to that.
So I would say, based on what we're deploying this year, it's probably 15,000 to 17,000 horsepower that we're converting to electric so another 1% to 1.5% of our fleet will go from gas to electric by the end of 2022. So, that will pretty closer to the 3% range, if that's what you're looking for.
Selman Akyol
That is. And then does electric bring a premium pricing?
John Jackson
Yes, it does. It does bring a premium pricing. So there's that and you get a combination. You get a higher price. We get -- at least at this point, we're getting longer term and you have lower op costs and you have minimal overhaul, because you don't have a gas-fired combustible engine running. So, you get cost reduction, you get maintenance reduction and you get term and you get rate. So, all that works pretty well.
- Selman Akyol
Okay. Thank you very much.
John Jackson
You bet.
Operator
Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to John Jackson for closing remarks.
A - John Jackson
Appreciate everyone joining today. We look forward to talking to you again next quarter. Thank you for your time.
Operator
And ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
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CSI Compressco LP (CCLP) CEO John Jackson on Q2 2022 Results - Earnings Call Transcript