CSI Compressco LP (CCLP) Misses Q1 EPS by 10c, Revenues Miss

CSI Compressco LP (NASDAQ: CCLP) reported Q1 EPS of ($0.28), $0.10 worse than the analyst estimate of ($0.18). Revenue for the quarter came in at $90.28 million versus the consensus estimate of $93.12 million.

First Quarter 2020

Brady Murphy, President of CSI Compressco commented, "In the first quarter of 2020, our business continued to perform well despite the unprecedented deterioration in market conditions that started in the month of March. The impact of the COVID-19 pandemic and crude oil oversupply on the global energy markets has been dramatic. Our customers have reacted quickly to the downturn by significantly reducing capital budgets and scaling back drilling and completion activities. This downturn is unique in that we are seeing pressure on both the demand side from the slowdown in the global economies and the supply side from several years of excess production. Unlike previous downturns, production shut-ins due to oversupply and lack of storage are occurring and will be having a meaningful impact to our business. The speed of this downturn is much faster, and the lack of visibility makes it hard to predict when things will eventually recover. With excess compression horsepower in the industry, we expect to see lower service equipment utilization, additional client requests to put service units on stand-by, and pricing pressures as customers try to reduce their costs. We started seeing all three of these issues towards the end of March and they have accelerated into April and May. By the end of May 2020, we expect up to 20% of our domestic horsepower to be impacted by customers shutting-in production, either by going to stand-by rates or through equipment returns. Prior to the current downturn, approximately 2% of our domestic fleet horsepower was on standby. Given the magnitude of the shut-ins that our customers are communicating to us, we expect the amount of horsepower to be put on standby by the end of May to be above 10% of our domestic fleet. We expect utilization to quickly approach the low point of the 2014-2016 downturn of 75.2%.

"As the world adjusts to the COVID-19 pandemic, the Partnership has implemented guidelines to keep our employees and clients safe while meeting our clients' requirements. We have developed operating practices that allow us to effectively monitor remotely a large percentage of our business and found alternate supply sources for key components to ensure that our clients' equipment is properly running and maintained.

"While we cannot control the demand or supply for oil and gas or the length and severity of the COVID-19 pandemic, we have acted swiftly and with a sense of urgency to reduce our cost structure. The Partnership has already implemented or is in the process of implementing the following cost cutting actions: (1) reduction in capital expenditures from $75.8 million in 2019 to a forecast of between $28 million and $35 million in 2020; (2) U.S. employee pay reductions; (3) headcount reductions at corporate and field levels; (4) 20% reduction in Board of Directors cash retainers; (5) reduction of all discretionary expenditures; (6) suspension of the employer 401(k) matching program; and (7) negotiated reductions in expenditures with many of our suppliers.

"In addition, we have made the decision to close our fabrication operations in Midland, Texas, which should be completed by the end of the second quarter or early third quarter of this year. We will look towards selling our 38-acre Midland facility and real estate. When the market returns and along with it demand for new service fleet additions, we expect to use an outsourcing relationship for the fabrication of our future requirements.

"During the quarter we added 22,160 additional horsepower to our service fleet to fulfill prior customer commitments, focused around centralized gas lift, with the vast majority of the new additions being deployed into existing clusters of equipment in the Permian Basin and in South Texas. We continue to have some additional commitments for new service equipment to be delivered in the second quarter of 2020, but beyond that, our commitments are minimal and at this time we do not anticipate any second half growth capital expenditures.

"Distributable cash flow in the first quarter of 2020 was $8.7 million, down 44% from the fourth quarter of 2019, resulting in a distribution coverage ratio of 18.3x compared to 32.5x in the fourth quarter of 2019.

"In summary, the compression and related services business remained steady in the early parts of the first quarter of 2020, while the equipment sales and aftermarket services business declined. We realize going forward we are in a very different market environment. The fundamentals of our business to support increasing volumes of gas production and centralized gas lift will be intact for many years to come, but in the immediate and foreseeable future we are focused on navigating the Partnership through this downturn successfully and responsibly."

For earnings history and earnings-related data on CSI Compressco LP (CCLP) click here.

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