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GSJK > SEC Filings for GSJK > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for COMPRESSCO PARTNERS, L.P.



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report. In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K filed with the SEC on March 14, 2014. This discussion includes forward-looking statements that involve certain risks and uncertainties.

Business Overview

As a result of our August 4, 2014, acquisition of Compressor Systems, Inc. (CSI), our operations have been significantly expanded. Our revenues, gross profit, general and administrative expenses, interest expense, and pretax earnings are expected to be significantly affected. For further discussion of the CSI acquisition, see below.

Over time, oil and natural gas wells exhibit declining pressure and production. Production enhancement technologies are designed to increase daily production and total recoverable reserves. Our conventional compression-based production enhancement services are utilized to increase production by deliquifying wells, lowering wellhead pressure, and increasing gas velocity. Our conventional applications include production enhancement for dry gas wells and liquid-loaded gas wells, and including backside auto injection systems ("BAIS") for liquid-loaded gas wells. Our unconventional compression-based services applications are utilized primarily in horizontal resource plays and include vapor recovery, gas lift, and casing gas system applications. We have capitalized on the increasing demand for these unconventional compression-based services over the past year as a result of increased oil and liquids production primarily associated with horizontal resource plays. During late 2013, we purchased three-stage compressor packages with higher discharge pressure for use in gas lift services applications. Gas lift involves the use of compression equipment to inject natural gas downhole in order to increase oil and liquids production, primarily in horizontal wells. As a result of the acquisition of all of the outstanding capital stock of CSI (the CSI Acquisition), we have significantly expanded our operations and now design and fabricate natural gas reciprocating and rotary screw compressor units up to 8,000 horsepower for use in our service fleet and for sale to our broadened customer base.

Increased demand for unconventional compression services applications, particularly vapor recovery, contributed to increased U.S. and Canadian service revenues during the six months ended June 30, 2014 compared to the prior year period. This growth in U.S. service revenues was more than offset, however, by decreased activity levels in Mexico over the six month period. In addition to the increased demand for unconventional compression services, U.S. and Canadian natural gas prices were higher compared to the prior year period, which has had a positive impact on demand and pricing for conventional compression services in these markets. As a result of this increased U.S. and Canadian services activity, the average utilization rate for our compressor fleet increased to 86.5% during the current year period compared to 84.3% during the prior year period. The growth of our U.S. unconventional compression services applications has helped reduce our overall dependence on natural gas prices, however, the level of our conventional production enhancement services operations remains generally dependent upon the demand for and prices of natural gas in the locations in which we operate. Demand for our unconventional compression services remains strong and we expect continued growth in demand for those applications. In addition, foreign compression service revenues increased compared to the prior year period, particularly in Mexico.

Increased activity levels by our primary customer in Mexico, Petrσleos Mexicanos (PEMEX), resulted in increased compression services revenues during the three months ended June 30, 2014, compared to the prior year period. During late March 2013, we began to experience a decline in the level of activity and revenues in Mexico. The renewal and extension of certain contracts with PEMEX during the second quarter of 2014, along with continuing modest increases in PEMEX activity levels in Mexico, cause us to believe that demand for compression services will continue to increase going forward. However, any long-term increase in the levels of revenues for compression services provided in Mexico is dependent upon the activity levels by PEMEX in the regions in which we operate as well as the granting of additional future renewals or extensions of certain of our other contracts, or the awarding of new contracts, with PEMEX. The Mexican government is in the process of enacting legislation pursuant to recent energy industry reform designed to allow the government to grant non-Mexican companies the opportunity to enter into contracts and licenses to explore and drill for oil and natural gas in Mexico. Although this reform could result in additional customers for us in Mexico, and a reduction in our dependency on PEMEX, the timing of any impact from this reform is uncertain. Regardless of the impact of this reform, we anticipate that we will continue to be dependent on PEMEX as a significant customer.

Overall, our total revenues and cost of revenues increased during the three month period ended June 30, 2014, compared to the corresponding prior year period. These increases reflect:
• increased activity in Mexico;
• improved overall utilization of the existing fleet, particularly in the U.S.;

• increased compression services activity in Argentina and Canada;
• growth of our unconventional compression services applications in the U.S;

•    growth of the fleet within our other international operations; and
•         decreased operating expenses as a percentage of service revenues driven
          by cost reductions in Mexico as well as overall labor and equipment
          cost reductions.

Our operations in Latin America remain significant, and require a significant investment in working capital, equipment, and the levels of personnel and related administrative services provided under the Omnibus Agreement and our other agreements with TETRA and its subsidiaries. In addition, our operations in Latin America are subject to potential volatility relating to our Mexico and Argentina operations as addressed in more detail under "Liquidity and Capital Resources - Cash Flows."

On August 4, 2014, we completed the CSI Acquisition. CSI has three primary business lines: service operations, unit sales, and aftermarket services. Through these business lines, CSI provides a full range of products and services that cover a wide range of compression needs throughout the gas production and transportation cycle to a broad customer base. CSI owns the largest fleet of natural gas compression equipment in the U.S. With the acquisition of CSI, we have effected a significant change in the composition of our operations and our capital structure. The acquisition of CSI increases our total horsepower (HP) offering from approximately 187,000 to over 1,045,000, and will allow us utilize an expanded range of compressor packages (from 20 HP to 2,370 HP units) to provide compression services to customers. The CSI Acquisition dramatically expands our participation in the higher horsepower market, complementing our existing strong presence in the low horsepower services market. It is anticipated that this expansion of our service offerings will allow us to participate in the compression market at a broader level. Strategically, the acquisition is expected to afford us the opportunity to

capture significant synergies associated with our product and service offerings, our fabrication and manufacturing operations, the further penetration into new and existing markets, administrative efficiencies, and other strategic benefits.

The CSI Acquisition purchase price was funded from (i) the issuance of 7.25% Senior Notes due 2022 in the aggregate principal amount of $350.0 million by us and our subsidiary, Compressco Finance, Inc., (the 7.25% Senior Notes) resulting in net proceeds of $337.8 million (after deducting a $5.2 million discount and certain transaction related fees), (ii) the issuance by us of 15,280,000 common units (the New Units) in an underwritten public offering resulting in net proceeds of $346.0 million, and (iii) a portion of the $210.0 million borrowed under our new $400 million bank revolving credit facility (the New Credit Agreement). A subsidiary of our General Partner purchased 1,391,113 of the New Units for approximately $32.7 million. On August 11, 2014, the underwriters exercised their option to purchase 2,292,000 additional common units for $23.50 resulting in additional net proceeds of $51.7 ($53.9 million less $2.2 underwriting discount and fees). We intend to use a significant portion, if not all, of the proceeds generated from the exercise of this option to reduce indebtedness outstanding under the New Credit Agreement. Our General Partner contributed approximately $8.4 million in order to maintain its approximately 2% general partner interest in us following the Offering of the New Units and the additional common units issued upon the exercise of the underwriters' option.

How We Evaluate Our Operations

Operating Expenses. We use operating expenses as a performance measure for our business. We track our operating expenses using month-to-month, year-to-date, and year-to-year comparisons, and as compared to budget. This analysis is useful in identifying adverse cost trends and allows us to investigate the cause of these trends and implement remedial measures, if possible. The most significant portions of our operating expenses are for our field labor, repair and maintenance of our equipment, and the fuel and other supplies consumed while providing our services. Other materials consumed while performing our services, ad valorem taxes, other labor costs, truck maintenance, rent on storage facilities, and insurance expenses comprise the significant remainder of our operating expenses. Our operating expenses generally fluctuate with the level of activities performed.

Our labor costs consist primarily of wages and benefits for our field personnel, as well as expenses related to their training and safety. Additional information regarding our operating expenses for the three month period ended June 30, 2014, is provided within the results of operations sections below.

EBITDA. We view EBITDA as one of our primary management tools, and we track it on a monthly basis, both in dollars and as a percentage of revenues (compared to the prior month, prior year period, and to budget). We define EBITDA as earnings before interest, taxes, depreciation, and amortization. EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements, including investors, to:

•         assess our ability to generate available cash sufficient to make
          distributions to our unitholders and General Partner;

•         evaluate the financial performance of our assets without regard to
          financing methods, capital structure, or historical cost basis;

•         measure operating performance and return on capital as compared to our
          competitors; and

• determine our ability to incur and service debt and fund capital expenditures.

EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities, or any other measure of financial performance presented in accordance with generally accepted accounting principles (GAAP). Our EBITDA may not be comparable to EBITDA or similarly titled measures of other entities, as other entities may not calculate EBITDA in the same manner as we do. Management compensates for the limitations of EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management's decision-making processes. EBITDA should not be viewed as indicative of the actual amount we have available for distributions or that we plan to distribute for a given period, nor should it be equated with "available cash" as defined in our partnership agreement.

The following table reconciles net income to EBITDA for the periods indicated:

                                   Three Months Ended            Six Months Ended
                                         June 30,                     June 30,
                                     2014            2013        2014         2013
                                                  (In Thousands)
Net income                    $     4,879          $ 2,478    $    9,498    $  7,017
Provision for income taxes            534              612         1,168       1,334
Depreciation and amortization       3,751            3,533         7,433       7,006
Interest expense, net                 145              109           304         167
EBITDA                        $     9,309          $ 6,732    $   18,403    $ 15,524

The following table reconciles cash flow from operating activities to EBITDA:

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