Drive Over 8.75% Yield-to-Maturity with CSI Compressco, Bonds Mature August 2022

  • Q2 revenues increased 33% year-over-year, and 17% over Q1 2018.
  • Adjusted EBITDA increased 21% over Q1 and 19% year-over-year.
  • Compressions Services increased gross margin by 460 basis points.
  • At the conclusion of Q2, new equipment sales had generated a backlog of $102 million, revenue to be recognized later this year and the first half of 2019.

This week’s bond issuer is a company entrenched in production and transportation of natural gas. CSI Compressco’s (CCLP) first and second quarters have been outstanding, both recording consecutive increases in revenues. The oil and gas industry’s activity level has been steadily increasing over the past 18 months and CCLP has started to see the effects of this on all three of its business segments – Compression Services, Aftermarket Services, and Equipment Sales. Its second quarter results gives investors reason to look twice at this natural gas services company.

 

  • Q2 revenues increased 33% year-over-year, and 17% over Q1 2018.

  • Adjusted EBITDA increased 21% over Q1 and 19% year-over-year.

  • Compressions Services increased gross margin by 460 basis points.

  • At the conclusion of Q2, new equipment sales had generated a backlog of $102 million, revenue to be recognized later this year and the first half of 2019.


Many oil and gas production companies are finally starting to move to full production after a long and difficult recovery. CCLP is ready and able to provide the support for those companies – from new equipment sales, to aftermarket service of existing infrastructure, to compression services for natural gas transport. The company’s 2022 bonds, couponed at 7.250% and currently trading at a slight discount, have a current, competitive yield-to-maturity of about 8.9%. In light of CCLP’s outstanding first half of 2018, these 46-month bonds make an ideal addition to Durig Capital’s
FX2 Managed Income Portfolio, the most recent performance of which is shown below.

 CSI Compressco Continues Growth With Second Quarter Results

CSI Compressco (CCLP) had a fantastic first quarter and has continued this momentum in its latest posted quarterly results. For the three months ending June 30, 2018 (Q2), CCLP posted numerous gains, both consecutive quarterly gains as well as year-over-year gains.

 

  • Adjusted EBITDA for Q2 was $23.3 million, representing a 21% increase over Q1 2018 ($19.2 million), and a 19% increase over Q2 2017 ($19.5 million).

  • Second quarter revenue registered $99.9 million, an increase of 17% over first quarter 2018 ($85.4 million), and a 33% increase over Q2 2017 ($75.3 million).

  • CCLP’s Aftermarket Services segment saw Q2 revenue gains of 43.3% over the same period in 2017, primarily due to customers performing much needed deferred maintenance on existing equipment as well as deploying previously idle equipment.

  • The Compression Services segment greatly increased its gross margins, registering a 460 basis point increase over first quarter levels. Gross margins grew from 41.6% in Q1 to 46.2% in Q2.

  • At the end of the second quarter, the company had backlog of new equipment sales of $102 million.


Owen Serjeant, President of CSI Compressco commented on the company’s outstanding performance in the second quarter as well as expectations for the remainder of 2018. “The compression market continues to be in the midst of a robust recovery, as each of our offerings continue to see an increase in inquiries and demand. Our existing customer base continues to demand more horsepower for incremental gas production anticipated to come online in 2019”.

 

Due to CCLP’s solid performance in both its first and second quarters this year, the company increased guidance with the release of its second quarter results. Fiscal year 2018 adjusted EBITDA is now projected to be between $97 million and $102 million, up from $95 million to $100 million. Total revenue guidance was also increased to a range of $405 million to $420 million, up from $385 million to $400 million.

 

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 MexicoCanada 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

 

Opportunities for Growth

 

With the recovery in oil and gas production, CCLP is now taking advantage of several growth opportunities – the shortage of takeaway capacity out of the Permian Basin, renewing customer contracts, and the increase in drilling activity across the areas where it operates (aftermarket).

 

For months now, there has been talk of takeaway bottlenecks out of the Permian both for oil and natural gas. CCLP is affected by both commodities as it compresses natural gas for transport, but also provides equipment to oil producers for gas lifting at the well. The company saw a marked increase in its margins for its Compression Services segment in Q2, with margins still climbing as the quarter concluded (up to 47.5%). Demand for CCLP’s compression services continues to increase and the company has recently announced an increase in its capital expenditures (capex) to address this increased demand.  CCLP is carefully allocating the additional capex spend to areas where it already has existing infrastructure and loyal customers who want to continue partnering with CCLP for their compression needs.

 

CCLP’s compression services are most often secured by an annualized contract. As these contracts have come up for renewal this year, CCLP has been able to negotiate increased rates, around 15%, for each renewed contract, primarily due to the increased demand for these services. These increases are finally being seen in the revenue bottom line in Q2 and the company anticipates these increases to continue through the second half of 2018.

 

Finally, the company’s Aftermarket Services segment has seen fantastic growth in Q2 due to the increased drilling activity in both oil and natural gas. Many exploration and production companies, who put off maintenance and parts replacement on their equipment, are finally performing much needed maintenance and replacing old or outdated parts on their equipment.  This segment saw over 43% growth in Q2 over the same period in 2017. And for CCLP, its an even sweeter deal as this business does not need any capital to grow. The aftermarket business is correlated to CCLP’s equipment sales business and its customers who purchase new equipment from CCLP often return over time to purchase aftermarket parts and services.

 

(Source: CCLP June 2018 Investor Presentation)

 

Interest Coverage and Liquidity

 

Interest coverage is of paramount importance because it indicates the company’s ability to service its existing debt. For its most recent quarter (Q2), CCLP had operating income (without the effect on non-cash depreciation and amortization) of $21.6 million, and interest expense of $13.8 million. This calculates to an interest coverage ratio of 1.6x. In terms of liquidity, as of June 30, 2018, CCLP had cash and cash equivalents of $51.4 million.

 

Risks

 

The risk for bondholders is whether CCLP can balance the demand for its services along with effectively addressing this demand. Clearly demand for its services is increasing. The company looks to be successfully addressing the increased demand across all of its business segments. It is smartly increasing rates for its compression services as contracts come up for renewal. Its new equipment sales have also increased this year as the industry has continued to recover from historically low prices a few years ago. And its aftermarket services are also experiencing increased sales as producers perform deferred maintenance on their equipment. In light of these factors, the about 8.9% 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 is having a banner year. Both Q1 and Q2 have brought consecutive as well as year-over-year increases in revenues as activity in the oil and gas industry continues to build momentum. All three of the company’s business segments are seeing healthy increases and CCLP has recently raised it guidance on both revenues and adjusted EBITDA for 2018. Earlier this year, the company secured funds from a new bond issue which it plans to use to strategically increase its compression capacity in some of its key operating areas. The company’s solid 2018 performance along with its predicted strong second half makes CCLP’s 2022 bonds an excellent addition to Durig Capital’s FX2 Managed Income Portfolio, the most recent performance of which is shown above.

 

Issuer: CSI Compressco

Symbol: NASDAQ: CCLP

Coupon: 7.250%

Ratings: Caa2 / CCC+

Maturity: 08/15/2022

Pays: Semi-Annually

Price:  94.75

Yield to Maturity: ~8.89%

 

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Disclosure: Durig Capital and certain clients may hold positions in CCLP’s August 2022 bonds.

 

We track thousands of bond issues and their underlying fundamentals for months, sometimes years, before finding any that achieve or surpass the targeted criteria we have found to be successful.  Our main priority is to provide the best opportunities for our clients.  Our bond reviews are first distributed to our clients, then published on our website and our free email newsletter, and lastly on the Internet and distributed to thousands of prospective clients and competitive firms. Bond selections may not be published if they have very limited availability or liquidity, or viewed as not being in the best interests of our clients. When high yielding bonds with improving fundamentals are acquired at lower costs, Durig Capital believes that investors will appreciate earning higher incomes with our superior high income, low cost, fiduciary services.

 

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