This week, Durig Capital takes a look at a company that provides compression services and equipment for the oil and gas industry. CSI Compressco (CCLP) has had multiple successive quarters where the company has increased revenues and its latest quarter did not disappoint. Included with this increase were several other notable achievements.
- Q4 adjusted EBITDA increased 14% over Q3 and 44% over Q4 2017.
- Revenues for the full year 2018 were up by nearly 50% over 2017 levels.
- Q4 new equipment sales were the highest in the company’s history.
With the continued demand for LNG and the current and planned LNG terminals in the U.S. and Canada, CSI Compressco looks to be perfectly positioned to take advantage of this demand. In light of the company’s solid performance in 2018, the company’s short-term bonds maturing 2022 are an ideal candidate for additional weighting in Durig Capital’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, shown below.
A Strong Finish to 2018 – Fourth Quarter and Full Year Results
CSI Compressco finished off the year on a high note, posting impressive increases across several categories for its fourth quarter and full year results. Most notably, the company has record sales of new equipment, posting the greatest quarterly sales since the company was acquired by Tetra Technologies in 2014. New equipment sales in Q4 totaled $55.6 million, a 52% increase over Q3 2018. Additional highlights from both fourth quarter and the full year 2018 included the following:
- Fourth quarter revenues were up 20% over third quarter 2018, $138 million compared to $115 million, and increased 66% over Q4 2017.
- Fourth quarter adjusted EBITDA also increased sequentially, up 14% over Q3, and up 44% over Q4 2017.
- Cash from operations came in at $23.6 million for Q4 2018, up from $10.8 million in Q3, as well as increased over Q4 2017 at $14.5 million.
Owen Serjeant, President of CSI Compressco commented on the company’s most recent results. “We further expect that as oil and gas operators and midstream companies continue to build out their networks and infrastructures to move increased volumes of produced associated gas, the demand for our products and services will continue to be strong.”
Further adding to CCLP’s solid fourth quarter is the solid fourth quarter performance of its parent company, Tetra Technologies Inc. Tetra Technologies and its subsidiaries generated net cash provided by operating activities for the full year of 2018 totaling $46.6 million. What is truly impressive is the fact that 96%, or $45.0 million, of that cash was earned in the fourth quarter.
About the Issuer
CSI Compressco is a provider of compression services and equipment for natural gas and oil production, gathering, transportation, processing and storage. CSI Compressco’s compression and related services business includes a fleet of more than 5,700 compressor packages providing approximately 1.1 million in aggregate horsepower, utilizing a full spectrum of low, medium and high horsepower engines. CSI Compressco also provides well monitoring and automated sand separation services in conjunction with compression services in Mexico. CSI Compressco’s equipment sales business includes the fabrication and sale of standard compressor packages, custom-designed compressor packages, and oilfield fluid pump systems designed and fabricated primarily at its facility in Midland, Texas. CSI Compressco’s aftermarket business provides compressor package re-configuration and maintenance services, as well as the sale of compressor package parts and components manufactured by third-party suppliers. CSI Compressco’s customers comprise a broad base of natural gas and oil exploration and production, midstream, transmission, and storage companies operating throughout many of the onshore producing regions of the United States, as well as in a number of foreign countries, including Mexico, Canada and Argentina. CSI Compressco is managed by CSI Compressco GP Inc., which is an indirect, wholly owned subsidiary of TETRA Technologies, Inc. (NYSE: TTI).
Source: CCLP June 2018 Investor Presentation
Setting up for 2019 and Beyond
CCLP posted a fantastic year for 2018. Revenues nearly doubled, up by 48% over 2017 levels. Fourth quarter new equipment sales were the highest in company history. The company increased revenues for seven consecutive quarters and continues to project sequential improvements into 2019. The company currently has $105 million in backlog on the books and demand continues to stay strong as the company has seen an additional $12 million in sales in the first two months of 2019. New equipment sales also increase the possibility of increased revenues in the future to CCLP by selling parts and services through its aftermarket networks to support its customers. In fact, the company’s aftermarket services revenues also showed healthy increases in the fourth quarter of 2018, increasing 10% sequentially over third quarter 2018. The following graphic shows the recent growth in the company’s aftermarket services.
(Source: CCLP Investor Presentation December 2018)
Growth in LNG Projects
In a world that is seeking clean affordable energy sources, global demand for LNG (liquefied natural gas) is projected to double by 2035. Currently, there is approximately $366 billion worth of global investments in pending LNG export projects. More than half of these export projects are slated for the U.S, according to Bloomberg New Energy Finance. Of the 27 pending global LNG export projects, 15 are for U.S. facilities awaiting final investment decisions or approval from the Federal Energy Regulatory Commission (FERC). One of these projects has recently received final approval from FERC.
Recently, Venture Global LNG Inc. said it will start construction immediately on its $5 billion Calcasieu Pass liquefied natural gas export terminal in Louisiana after receiving approval from the top U.S. energy regulator. Venture Global has 20-year contracts with companies for 80 percent of the terminals export capacity, including Royal Dutch Shell and BP. The facility is slated to produce about 10 million tons a year, but could produce as much as 12 million tons a year according to FERC.
In addition, a $7.5 billion LNG project in Eastern Canada is seeking to get the final green light later this year. Pieridale Energy is focused on a final investment decision in late 2019 after having lined up buyers of the fuel, mainly in Europe.
Interest Coverage and Liquidity
Interest coverage is an important metric for bondholders because it is an indication of the company’s ability to cover interest payments for its existing debt. For its most recent quarter (Q4 2018), CCLP had operating income (without the effect on non-cash depreciation and amortization) of $14.9 million, and interest expense of $13.5 million. This calculates to an interest coverage ratio of 1.1x. Although this coverage is lower than ideal, CCLP’s cash flow for Q4 did increase significantly, as did its sales and revenues. In terms of liquidity, as of December 31, 2018, CCLP had cash and cash equivalents of $15.9 million.
The risk for bondholders is tied to CCLP’s ability to continue to increase its new equipment sales as well as its aftermarket parts and services. The increase in LNG activity, specifically in the increase in demand for new pipelines and pipeline services is definitely a plus for the company. The company’s backlog is currently at $105 million and its capacity to produce and deliver new equipment in 2019 is nearly filled. In light of these factors, the nearly 12% yield-to maturity on CCLP’s 2022 bonds does appear to outweigh the risks identified.
CCLP’s revenues are indirectly affected by the price of oil and natural gas. Commodities prices are volatile and these markets have experienced significant price increases / decreases over the past few years. If the price of oil and / or natural gas were to decrease significantly, this would likely affect the activity of oil and gas producers, which would then affect demand for CCLP’s products and services. This could have an adverse affect on the company’s revenues and profitability.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
CSI Compressco continues to build on its seven quarters of sequential improvements. It posted record new equipment sales in Q4 and increased 2018 revenues by nearly 50% over the previous year. Its aftermarket services also continue to grow, with the most recent quarterly results increasing by 10% over the previous quarter. Company management has stated that they anticipate continued strong demand for both new equipment and services in 2019. With the continued demand and growth in LNG facilities, the company looks to be well positioned to excel both in new equipment sales as well as service and parts for this equipment after the sale. In light of these developments, the company’s short-term bonds maturing in 2022 and couponed at 7.250% and with a yield-to-maturity of nearly 12%, are ideal for additional weighting in Durig Capital’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, shown above.
Issuer: CSI Compressco
Ratings: Caa2 / CCC+
Price: ~ 87.50
Yield to Maturity: ~ 11.84%
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Disclosure: Durig Capital and certain clients may hold positions in CSI’s August 2022 bonds.
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