This week, Durig Capital takes a look at a company that provides compression services and equipment for the oil and gas industry. With the demand increasing for takeaway capacity from oil and gas fields around the country, CSI Compressco’s services become even more valuable and essential. The company had a fantastic second quarter, with record setting utilization, increased revenues and adjusted EBITDA.
- Second quarter overall utilization came in at a record setting 89.1%.
- Revenues increased by 36% over second quarter 2018.
- Adjusted EBITDA increased 22% over first quarter and 41% year-over-year.
- Outstanding interest coverage of 2.2x.
CSI Compressco (NASDAQ:CCLP) is projecting solid increases in both revenues and adjusted EBITDA in its updated 2019 guidance. With the global demand for liquid natural gas (LNG) increasing each year, CCLP is providing essential compression services for the industry here in the U.S. Its 2022 bonds boast a very competitive yield-to-maturity of over 10%. Given the company’s solid second quarter performance, these short-term maturity bonds are an ideal candidate for additional weighting in Durig Capital’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, the aggregated performance of which is shown below.
Record Setting Second Quarter
In its latest quarterly results, CSI Compressco delivered record level performances since its acquisition of Compressor Systems Inc. in August of 2014. Margins for its Compression Services segment in Q2 were a record setting 52.7%, with utilization of its Compressions Services fleet also at a record 89.1%. The second quarter also saw increases in revenues and adjusted EBITDA, as well a solid increase in cash from operations year-to-date.
- Revenues for the second quarter totaled $135.9 million, up from $99.9 million a year ago, an increase of 36%.
- Second quarter adjusted EBITDA was $32.8 million, as compared to $23.3 million in the second quarter 2018, an increase of $41%. In addition. Adjusted EBITDA also increased 22% over the first quarter.
- For the six months ended June 30, 2019, net cash provided by operating activities was $40.3 million, a significant improvement from the $(4.3) million loss in the first six months of 2018.
Brady Murphy, interim President of CSI Compressco, commented on the company’s solid second quarter. “The second quarter was our strongest sequential improvement in quarterly earnings since the downturn. We achieved several record highs, driven by continued and consistent improvements in compression services, aftermarket services and new unit sales. Adjusted EBITDA increased sequentially by 22% and was the highest Adjusted EBITDA since the fourth quarter of 2014.”
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 5,300 compressor packages providing approximately 1.15 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 reconfiguration 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
Adjusted 2019 Guidance
Along with releasing its second quarter results, CCLP also updated its 2019 guidance. Revised adjusted EBITDA is now projected to be between $125 million and $130 million (updated from $125 million to $140 million). 2018 adjusted EBITDA was $99 million, so the updated guidance represents growth between 26% and 31%. In terms of revenue, 2019 revenues are expected to range between $475 million and $490 million (updated from between $490 million and $520 million). This represents annual revenue growth between $35 million and $50 million from 2018 levels. This adjustment is due to a slowdown in orders for new equipment in the first half of the year. However, CCLP is realizing price increases with its customers as its fleet contracts rollover, anywhere from high single digit increases to low double digit increases due to the demand for its services.
LNG Use and Demand Continues to Grow
As the world continues to seek clean and affordable energy sources, the demand for LNG (liquefied natural gas) continues to grow. LNG is still the fastest growing gas supply source, which is expected to grow at a compound annual growth rate of 4% until 2035. This global growth in demand is expected to be led by Asia and Europe.
To meet this growing demand, new LNG plants have been coming online this year, with more on the way. The U.S. has been a key contributor to the growing global LNG capacity, which saw 35 million metric tons per year of capacity added in 2018. Within the U.S. itself, LNG exports have continued to increase thanks to new liquefaction trains at facilities like Sempra Energy’s Cameron LNG and Cheniere Energy’s Corpus Christi LNG. The Elba Island LNG facility near Savannah, Georgia and the Freeport LNG terminal on the Texas coast are also on the cusp of commercial start-up this year.
In addition to these already operational LNG facilities, there are more facilities being constructed or in the process of securing final financing. The Calcasieu Pass LNG facility has closed on its final financing along with the related TransCameron Pipeline. Full site construction began on this facility this past February and the site is scheduled to commence operating in 2022.
Interest Coverage and Liquidity
For bondholders, interest coverage translates to the ability of the issuer to service its existing level of debt and can give clues to the financial health of the company or issuer. In its latest quarterly results, CSI Compressco has excellent interest coverage. The company had operating income (earnings before interest and taxes) of $28.4 million. This is without the effect of non-cash depreciation and amortization charge. Interest expense for the quarter was $13.0 million, which gives an excellent interest coverage of 2.2x. In terms of liquidity, as of June 30, 2019, CCLP had cash of $4.3 million. Also, as of August 7, 2019, CCLP had an additional $31.6 million available under its bank credit facility.
For bondholders, the risk is tied to CCLP’s ability to increase revenue and profitability along with addressing its outstanding debt. The company had a fantastic second quarter, with its overall utilization rate at a five year high of 89.1%, and the utilization rate for its high horsepower equipment in Q2 was a whopping 97.1%. Revenues and adjusted EBITDA were also up in the second quarter. Even with the slowdown in equipment orders in the first half of the year, the company is realizing increases as its fleet contract rollover due to the increasing demand for its services. There are no debt maturities coming before these 2022 bonds, and with the increasing demand for LNG globally, it appears that the 10.25% yield-to-maturity on these shorter maturity bonds does outweigh the risks identified.
CCLP’s revenues are indirectly affected by the prices of natural gas and oil. Commodities prices can be volatile and oil and gas prices have seen significant increases and decreases over the past few years. A sharp decrease in the price of oil / gas would affect the operations of oil and gas producers, which would likely affect the demand for CCLP’s products and services. This could significantly affect the company’s revenues and profitability.
Generally, there is reduced risk for investors who invest in Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio due to its diversification across many bonds and industries, as compared to the purchase of individual bonds. Historically, the FX2 Portfolio has outperformed portfolios where investors have chosen bonds individually. Durig Capital currently holds this bond in its FX2 Portfolio.
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 put up a solid second quarter and is on track to produce an outstanding 2019. With its recently updated 2019 guidance, the company is poised to post healthy increases in both revenues and adjusted EBITDA over 2018 levels. Global demand for LNG continues to increase and the U.S. is answering with increased export capacity. CCLP’s 2022 bonds, couponed at 7.250%, are trading at a notable discount, giving these shorter maturity bonds a yield-to-maturity of over 10%. Durig Capital already holds a position in these bonds. Given CCLP’s solid quarter and its projected 2019 growth, these bonds look to be an ideal candidate for additional weighting in Durig Capital’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, shown above.
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Issuer: CSI Compressco LP
Ratings: Caa2 / CCC+
Price: ~ 92.50
Yield to Maturity: ~ 10.25%
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Durig Capital provides investors with a specialized, transparent fiduciary service at a very low cost. Our FX2 (Discretionary Management) Portfolio over time has greatly outperformed our FX1 (Non-discretionary) Portfolio, giving significantly higher (at times double) the returns of FX1. Our professional service enables access to a broad spectrum of bond, high yields, and lower price points that are often found in less efficient markets, but not evidenced in many bond services. Most of our client accounts are custodied in their own name at TD Ameritrade Institutional, a large discount service provider that is SPIC insured, or at Interactive Brokers. We have now started offering our highly successful FX2 service to clients of other Registered Investment Advisors through segregated accounts at TD Ameritrade. Please ask us to learn how this might work for you and your current advisor.
Disclosure: Durig Capital and certain clients may hold positions in CCLP’s August 2022 bonds.
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