Q3 2019 Earnings Call
Ladies and gentlemen, the Congress will you get it just one minute. Thank you for your patience.
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Good morning, welcome to the Archrock third quarter 2019 conference call. Your hosts this morning put this morning's call is Paul Burkart, Treasurer, and Vice President Investor Relations at Archrock I will now turn the call over to Mr. <unk>.
You may begin Mr. Burton.
Ladies and gentlemen, we're having a technical difficulty please hold.
Ladies and gentlemen, thanks for your patience please hold.
Ladies and gentlemen, I apologize for the delay the conference we'll now begin.
Mr. Burkart. Please go ahead.
Thank you Gerry Hello, everyone and thanks for joining us on todays call with me today are Brad Childress, President and Chief Executive Officer at Archrock, and Doug Aron Chief Financial Officer of Archrock [noise].
Yesterday, Archrock released its financial and operating results for the third quarter of 2019, if you've not received a copy you can find information on the company's website at www Dot Archrock Dot com.
During this call will make forward looking statements within the meaning of section 21, each other securities and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by and information currently available to Archrocks management team.
Although management believes that the expectations reflected in such forward looking statements are reasonable I can give no assurance that such expectations will prove to be correct.
Please refer to our latest filings with the FCC for a list of factors that may cause actual results to differ materially from those in the forward looking statements made during this call.
Additionally, our discussion today, we'll reference certain non-GAAP financial measures, including adjusted EBITDA gross margin gross margin percentage and cash available for dividend for reconciliations of these non-GAAP financial measures to our GAAP financial result, we see yesterday's press release, and our form 8-K furnished to the.
The FCC.
I'll now turn the call over to Brad to discuss Archrock third quarter results and to provide an update of our business.
Thank you Paul and good morning, everyone.
Our truck delivered strong performance in the third quarter.
Part of our employees and their dedication to working safely everyday delivering great service for customers and generating value for investors.
Let me share some of course highlights.
And I guess first we closed the acquisition all the compression and successfully integrated at least horsepower and operating team into the Archrock platform.
Our adjusted EBITDA of $112 million for the quarter represents a quarterly record for our truck and an increase of 25% over the prior year third quarter.
Results for the third quarter of 2019 included a $7 million gain related to the sell a compression assets to an affiliate of harvest midstream concurrent with the closing of elite.
We increased our operating horsepower by over 300000, bringing archrocks total operating horsepower at quarter end to approximately 3.9 billion.
We achieved gross margins, 62% for contract operations and 19% for aftermarket services.
At the high end of our guidance ranges.
We recently announced our third quarter dividend, a 14.5 cents per share.
Our latest dividend reflects an increase of 10% over the third quarter last year, well at same time, delivering peer leading dividend coverage ratio of 3.1 times.
And finally, we reduced our leverage ratio from 4.4 times last quarter to 4.3 times. This quarter as we continue toward our target of sub four times leverage by the end of 2020.
Many of you will recall, the we moved to providing annual guidance from our prior practice of providing quarterly guidance starting at the beginning of 2019.
And I'm pleased to share their performance for the quarter keeps us on track to achieve our annual adjusted EBITDA guidance of between 400 and $410 million.
On the elite acquisition, we're excited to successfully completed this attractive and complimentary consolidation opportunity.
Which was net income and cash flow accretive.
Expanded our business with two large customers and added attracted a basin density.
All of these benefits were acquired a transaction that was completed on a leveraged neutral basis.
We continue to expect the lead assets to generate annual adjusted EBITDA of approximately $55 million in 2020.
And with a deal now complete and the asset and assets and teams incorporated into our truck.
We're confident in our ability to achieve at least the $5 million an annualized cost synergies, we communicated at the time of our transaction announcement.
During the quarter. We also completed the divestiture of 80000 horsepower compression equipment harvest midstream in connection with the elite acquisition.
As well as 47000 horsepower to other customers.
Equipment sold in each of these transaction typically meets one or more of our criteria for divestment, which include the equipment is located in a non core play.
And is an age type work configuration that does not compete well for redeployment in our current core broke growth focused areas.
The lead acquisition at least divestments are consistent with our strategy maintaining a highly efficient fleet of standardized large horsepower units operating income growth basins.
And our strategy of continuously high grading our assets in operations and improving the performance and profitability of our business a point I'll return to shortly.
Now turning to the market.
The U.S. energy industry delivered record natural gas production growth in 2018, and 29 team, which has directly benefited our business.
Since the end of 2017, we're growing our operating horsepower by about 660000 or 20%.
And improved our adjusted EBITDA of 72 million in the last quarter at 2017 to 100 installed billion for this third quarter 2019 and improvement of 56%.
Long term, we believe the demand for natural gas will continue to grow.
We expect that low and steady natural gas prices and the readily available and abundant volume of associated and dry natural gas will continue to support increases in demand for U.S. natural gas including for LNG.
Exports to Mexico petrochemical plants.
Power generation.
In the near term however, we expect the growth rates for natural gas demand to moderate from the extreme growth. We saw in 2018 in 2019 to rates in the lower single digit range in 2020 and 2021.
This reflects an expected return to a more normalized market, but still a healthy backdrop to support continued demand for our compression equipment and services.
Now it's for what we're seeing currently bidding and quoting activity levels continue to be solid in the Permian The DJ basin and in the northeast, though we have seen a moderation of customer activity in some areas in particular in dry gas plays and in the scoop and stack areas of the mid continent.
Planning time frames for customers have come in a little but are still little level that provides good visibility into 2020.
In fact over half of our expected 2020, Newbuilds capital is already under firm commitments to customers and we had an active negotiations on the remaining units.
Spot pricing on units placed into service remains constructive, but the rate of double digit annual price increases that we experienced over the last few years has moderated which is consistent with the deceleration in production growth that is expected.
Our team continues to focus on achieving market rates for all of our units as evidenced by our margin performance. So far this year.
Activity levels for the aftermarket services business has slowed over the past few quarters and we expect the fourth quarter to continue that trend.
Several customers have elected to delay spending on compression maintenance activities, a practice that cannot endure indefinitely, but has impacted our business and our revenues in 2019.
We remain focused on maintaining a high margin ANS business and despite revenues being lower than expected our gross margins remain relatively strong.
Well the activity levels have dropped in the near term the base of own compression in the field has increased over the past several years and will help sustain the gain this business over the long term.
I'd like to move to a discussion of our capital strategy.
At the time of our corporate simplification transaction in April of 2018, we established a three year capital allocation plan.
As we sit here today looking ahead to the final period as planned in 2020, I'm proud of where we stand as we're well on track to achieve the capital allocation objectives, we laid out in 2018.
These objectives were.
First to meet the needs of our customer base by investing in high return large horsepower compression equipment.
The gross the growth we delivered in our operating horsepower and financial performance demonstrate how well we've been able to meet this objective.
Second leverage reduction.
We are on track to reduce our leverage to below four times in 2020.
Our current leverage ratio stands at 4.3 times a reduction of about one turn from year end 2017.
As we now expect our 2020 growth capex to be less than $125 million combined with our continuing profitability improvement. We believe we are well positioned to achieve our 2020 leverage reduction target.
Third capital return.
We're delivering on our promise to provide an ongoing and growing returned to our shareholders through the payment of the quarterly dividend.
We increased the dividend by 10% in each of the second quarters of 2018 2019.
And we're committed to growing the dividend by another 10% to 15% by the end of 2020.
And significantly the successful execution of our strategy has put us in a position to generate positive free cash flow in 2020.
Over the long term, we're committed to positioning and managing this business to generate positive free cash flow.
Finally.
As we began working with our customers to understand their plans and needs for next year.
Let me share with you what will be focused on for 2020 and beyond.
First and foremost we'll continue to work diligently to meet the needs where customers safely every day.
As we do so we're committed to delivering the highest levels of service quality.
To accomplish this our employees have worked and we'll work tirelessly to hydrate every part of our business.
This is Matt investing in a competitive compression fleet, which has continued to grow in the categories of large horsepower equipment that is most in demand in the high growth place today.
Since 2010, our large horsepower equipment as a percentage of our operating fleet has increased from approximately 55% to 74% today.
We remain justice committed to investing in the technology systems and operating platform improvements that will continue to drive superior service for our customers as well as continuing profitability and returns for our investors.
Together with the improvements we've made to our fleet the improvements we've made to our operating platform where substantial contributor to the profit improvement we've driven into this business elevating our contract operations gross margins from 51% in 2010% to 62% in the most recent quarter.
Looking into 2020.
These efforts to high grade our fleet invest in technology and hybrid our operations and our profitability will continue.
And support our commitment to deliver on our capital allocation objectives, including delivering free cash flow in 2020.
Now I'd like to turn the call over to Doug for more detailed review of our third quarter performance great. Thanks, Brad and thanks to all of you for joining us this morning.
Archrock reported another period of solid operational and financial results revenue for the third quarter totaled $245 million, an increase of 5% compared to the prior year period.
Our adjusted EBITDA of $112 million. This quarter is 22, and a half million dollars or 25% higher than the third quarter of 2018 in was driven primarily by higher operating horsepower and improved pricing.
As Brian noted the third quarter results included $7 million in gains related to the sale of compression assets to harvest midstream and others.
Net income for the third quarter of 29 team was $20 million double the $10 million reported in the third quarter of 2018.
Turning to our business segments in contract operations revenue improved for the 10th consecutive quarter to $198 million up 17% from a third quarter of 2018.
This increase is compared to the prior year resulted from higher operating horsepower and rate increases implemented across our fleet at the start of the year.
We delivered gross margin and contract operations of $122 million up from $100 million in the prior year quarter as again, we benefited from price increases our larger operating fleet and focused cost management.
Third quarter gross margin percentage of 62% is equivalent to the last quarter and up over 200 basis points from the prior year quarter.
In our aftermarket services segment, we reported third quarter revenue of $47 million compared to $63 million in the prior year third quarter, driven by several customers deferring maintenance activities.
We continue to prioritize high margin business within our ANS operations and as a result have maintain gross margins of 19%, which was at the high end of our full year expectation of between 17 and 19%.
As DNA totaled $30 million for the third quarter compared to $26 million from the prior year and 20 million $29 million last quarter. The increase in SGN over the prior year was partially driven by our investment and significant technology initiatives.
For the third quarter growth capital expenditures totaled $49 million, bringing year to date growth capex to $241 million as we continue to expect full year growth capex to be between 285 and $300 million.
Maintenance Capex for the third quarter of 19 was $14 million, bringing year to date total to $46 million and keeps us on pace for full year guidance of between 60 and $65 million.
We generated $34 million from asset sales in the third quarter, including $30 million associated with our previously announced sale of noncore compression equipment to harvest midstream.
For the first three quarters of 29 team, we have completed $56 million an asset sales as we continue to manage improved our fleet, where it makes strategic sense for the full year, we expect approximately $70 million, an asset sales, including the aforementioned sale to harvest.
We exited the third quarter with total debt of $1.83 billion up from $1.63 billion at the end of the second quarter as we funded with debt a portion of the elite acquisition.
For the third quarter leverage reduced to 4.3 times from 4.7 times in the third quarter of 2018 and from 4.4 times last quarter.
This was achieved despite our strategic acquisition of a week, which was leveraged neutral and continued investment in high return compression assets to support our 29 teen growth program.
We remain steadfast in our focus to reduce leverage and we remain on target to achieve our leverage goals of below four times in 2020.
We exited the third quarter with available liquidity of $246 million.
We recently cleared our third quarter dividend of 14.5 cents per share or 58 cents on annualized basis unchanged from the prior quarter and reflecting a 10% increase over the prior year.
Our latest dividend represents a yield of 5.9% based on yesterdays closing price and a total estimated dividend payment for $22 million.
Our third quarter dividend will be paid on November 14 to all shareholders of record on November seven.
Cash available for dividend for the third quarter of 2019 totaled $68 million, leading to third quarter dividend coverage of 3.1 times.
We are proud of our ability to deliver value to shareholders through an attractive dividend yield combined with peer leading dividend coverage.
Our strong third quarter results keep us on pace to deliver on our guidance, we provided on our second quarter earnings call, including adjusted EBITDA between 400 and $410 million.
We don't plan to give full year 2020 guidance until we report our fourth quarter fourth quarter 2019 results. However, as previously mentioned, we do expect capital expenditures to be less than $125 million next year and as a result, we should be well positioned to deliver free cash flow.
In 2020.
With that we'd now like to open up the line for questions. Jerry can you begin that process. Thank you well now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate that your line is in the question Q you May press star too if you would like to.
Remove yourself from the question Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star fees.
One moment, please probably pull for questions.
The first question is TJ Schultz RBC capital markets. Please go ahead Sir.
Great. Thanks, Good morning, guys.
Hey, I guess, just first thinking about supply and demand.
For compression and ultimately your ability to kind of maintain pricing into 2020.
As you guys discuss producers are dialing back some activity.
How does that evolve and at the same time, you and others are pointing to lower.
Horsepower additions next year.
Just kind of your thoughts there over the next 12 months or so.
Sure look we're still seeing good activity in the market I'd say the market remains constructive as demand for crushed for compression equipment and for our services.
Clearly however were off the frenetic pace that occurred in 18 and 19.
And so coming off of high pace I wouldnt consider to be.
Declined.
Just a reduced level of growth and it still remains constructive and quoting activity with customers remains good and that translates into pricing I would point out that I think pricing remains firm in the marketplace.
And that's what we're seeing currently as we are bidding and quoting and starting horsepower.
And this finally im going to point out right at high level of utilization both in our business.
That 80% industry overall and in the past utilization rates in the high Eightys has been a period of very constructive pricing for the market.
And I think thats going to be the case that looks like it's going to continue to be the case in the current market.
Okay, and then as we think about things like utilization and supply and demand is give a view on how much of kind of the industry fleet.
Could be retired next year or over the next 12 months, just based on age and things like that or is that not really material to the equation.
It's it's not immaterial to the equation. So I'll give you a way to think about it's the way we think about it and that is that the equipment is 25 to 30 year equipment, sometimes longer and that should mean that equipment that was added into the space.
25 to 35 years ago.
Is that a as a good chance of being retired that would equate to.
Decline rate or an amount of horsepower moving out of the space of.
2% to 3% overall.
Unfortunately, it's not that simple because not all the equipment was added ratably. The business has grown over time and so the horsepower additions currently are larger than the horsepower additions 25, and 35 years ago.
What gives you a way to think about it for the industry overall.
Okay. That's helpful.
Just last one from me I'm kind of consolidation.
In the space that theme that.
Continues I guess Kodiak and Pegasus most obvious recent deals do you see those.
Private deals specifically changing kind of that can additive landscape for you all.
Do you anticipate further consolidation in this space and how do you see archrock kind of bidding and to that theme moving forward. Thanks.
Sure. So a couple of things on our our business we're really pleased.
Consolidation activity, we ended the quarter.
The acquisition that we made of elite.
It was really a good acquisition and good combination for our business high quality assets.
As a part of the addition of about 300000 horsepower in the quarter.
All located with newer equipment and a great play for us with a couple of marquee customers. So we thought that that consolidation was was great to see in the space as for what others do on less interested in talking about their business, but any consolidation in the space is good and we're happy to see it.
And then finally just to close the loop on your question.
This space has always had some private players.
In entering into it and the management teams there are a part of some of the private players that have entered into the business recently were part of private players that entered into the business 20 years ago.
And so that part of this business remains more consistent.
Than it is novel.
So that's that's just not need to what the competitive landscape looks like.
It makes sense. Thank you.
Next question is some Jeremy Tonet JP Morgan. Please go ahead Sir.
Hey, good morning, just quickly back to pricing and looking more specifically at at this quarter quarter over quarter or was it was that increase more.
Reflective of a lead or or legacy assets or maybe maybe some mix.
It's just a mix, it's very hard to distinguish that too we did not have.
A leap for a long and it's not such a large addition to our already 3.5 million horsepower fleet that it can show up clearly is driving it.
We think however, it's just been a healthy environment from an overall revenue per horsepower and pricing we've captured that in our base business and we had that too.
Okay.
No, it's smaller but aftermarket services it sounds like more kind of deferrals and into year end.
Kind of that that trend continuing and 2020 and then more specifically do you think the guidance range.
Is there possibility that maybe falling a bit below the lower end.
Well clearly the business has continued to decline throughout 2019.
But we think the reasons for that or a few that have to change. There is a combination of budget exhaustion going on with with some more customers dry gas plays in particular, our specialty financially tight given the current dry gas price, that's where a lot of legacy is equipment that attracts aftermarket services activity.
And finally capital discipline. It look it's definitely set into the marketplace. It's been very good for our contract operations business in that our customers of look to us to help them with our compression needs, but it has incentivized I think more deferrals in the ANS space.
All of those factors will change overtime and as they do we expect that business and the revenue in that business to rebuild.
Calling the timeframe for that pretty challenging however, but we're looking for that to occur not in the fourth quarter more into the middle of 2020 that business typically picks up more in Q2 in Q3.
In Jeremy I think maybe I'd just add to the back half of your question on on the guidance side.
Historically Ns has always been a little bit more difficult for us to forecast a little more variability than contract compression. So.
Certainly not to the point, where we want to update guidance for Q4, we're going to stick with our annual guidance model.
But as as Brad mentioned.
Two things one.
We don't believe that this maintenance deferral can happen forever and despite budget could exhaustion at some point people will need that work to be done and we're just not quite sure when that is.
But overall very comfortable reiterating our EBITDA guidance of between 400 410 for next year.
Okay. Great. That's helpful last one for me I'm, just thinking about the current environment obviously.
With activity normalizing as you know the next couple of years, even some talks of certain pipes take away pipes being even pushed out a couple of years from now what's when you think about the dividend growth rate, what what's a sustainable growth rate longer term for it for your business are highly leased think about that.
So when we set the current capital allocation policy and including the dividend growth rate guidance through 2020, I'll remind you that was in 2018 and it was a part of our corporate simplification.
As we look at this business and by the way, we've really pleased that we achieve not just that growth rate.
But increasing coverage on top of that.
Yes.
And in three times for the current quarter, so it's pretty robust.
Demonstration at but healthy growth in our business and disciplined capital management and achieving the targets that we set.
Actually we achieved that goal will look ahead.
Candidly starting in 2020 to think about what our capital allocation should and could look like I'll point out that once we achieve these objectives and are generating free cash flow.
The whole pick the whole opportunity set of capital allocation options will then be available to us and whether that.
Yes.
Return for our investment is then by increasing the dividend at whatever rate, whether its repurchasing shares given market conditions investing in the business or repaying debt will have all those options available and we'll look into the 2020 period to come up with how we recommend to the board and the board approved.
Next level of what capital allocation should look like.
Great. Thanks.
Yes.
Okay.
Question from John Watson Simmons and company. Please go ahead Sir.
Thank you good morning.
Morning.
Hey, Brad in past years, you've discussed how archrock could order more horsepower than you did end up ordering.
Should we think about that being the case for your 2020 budget said differently is there more demand for your units next year than your initial capex budget suggest in your exercising capital discipline.
Yes, Thanks, John and I Trust that ourselves seem to put you up to this question.
Yes.
But the truth is yes lucky for every year.
Including 18 19 as could look out to 20 candidly, we think that there is incremental incremental demand.
Potentially with new customers for equipment that we are not positioning our our business to to satisfy at this time, we're fully meeting the needs and we're investing at a level that meets the needs of our core customers weren't tight communication with them to ensure we can supply their needs.
But yes, we believe there is an increment investment available that we are not we're not chasing but look we believe that at some point capital discipline means something and generating good returns for investors and getting this business to show the strength of this stable production leverage business.
Model is worth making sure we can do so to answer your question short is yes, yes, okay I I agree completely I think thats prudent.
Given the elite acquisition and the Capex spent year to date I had expected operating horsepower deployed to increase more significantly by the end of the quarter Im sure asset sales were an offsetting factor, but can you walk me through any of the other puts and takes influencing operating horsepower that I might be missing.
Sure look the horsepower for the quarter was essentially flat, but it was in fact down about 7000 horsepower on I Wouldnt read a lot into it in some quarters, we grow in some quarters. It doesn't doesn't grow as much so were down 7000 from an organic horsepower.
In the fleet perspective before taking into account.
The elite acquisition and the divestitures that we described so overall still a very good quarter from utilization.
In bookings and starts with our customers, but starts were slightly down it stops are slightly up and that level of movement on a 3.9 million horsepower fleet.
Produced pretty much in just a flat quarter and that's what that's what I think you're saying.
Okay, and then lastly, you mentioned some softness in dry gas basins.
More generally and I guess for the oil basins are you expecting a deceleration and gas lift demand given what we've seen with completions activity over the past few months.
Yes, I think so I mean, we haven't been able to translate that directly into a change in demand for gas lift demand still remains for that portion of the market as well, but I think that with overall production levels not drawing on the oil side, just like on the gas side at the right.
Is that we had in 18 and 19 that that will.
Slow the growth also for demand for gas lift.
Right. Okay. Thanks for the color I'll turn it back.
We have account.
From Mr., Daniel Burke Johnson Rice. Please go ahead.
Hey, guys good morning.
Good morning.
Let's see.
I think last two query on.
It looks like the on the Capex for this year it looks like that that the pace of spending Brad for for other capex.
Where are you guys are spending some on your tech initiatives is it's a little behind schedule, but I don't know if that's the right way to put it.
What do we see in there what's what's the update on those initiatives in.
You guys had a lot going on internally certainly over the last few months.
We did.
Good on that on the technology improvements that we're looking at that.
Spending is actually moving up in the fourth quarter and it was up a little bit in the third quarter moving up in the fourth quarter through 2020 is going to me I think the heavy spend area. Some of that movement quarter to quarter is just the inability to forecast exactly when the dollars are going to lead.
So I wouldn't draw any conclusions out of the spend rate on that.
The project itself, though is one that we're pretty excited about so getting our platform migrated to the cloud into full cloud environment.
With with our ERP, putting in that's barcoding mechanisms with supply chain to get some efficiencies there as well as improving the communications infrastructure, we have in the field.
Is the project that we're investing in again that investment phase goes through 2020 and into 2021, and we're excited about what thats going to break the business overall the projects progressing but we're still on the on the front end real heavy lifting part of that.
Got it.
And then and then this shift gears Navy.
Talk a little bit about a gross margin on that when the contract upside.
Just wondering as as the business slows from as you put it the frenetic pace you've seen over the last couple of years, what's what's your ability to manage your input costs.
At present prevent that that creep from from chewing into some margin a little bit looking forward.
Okay.
Well it.
Okay I shared with you first that the business and the operations team have done a great job managing our overall opex and spend rate to date to deliver the gross margin performance that we're achieving.
It's no small feat to safely operate in the field to deliver excellent customer service and meet the cost targets that we've laid out to support our profitability.
Targets, so they've done a great job to date I think that what you're going to see is some equilibrium.
On both revenue and cost as the market does not growth growth. The same accelerated rate was previously and we see that opportunity set.
Contract a little bit we see lead times for equipment coming in a little bit I believe that the pricing environment. We're in a more stable and I believe the cost environment or remain more stable and I think thats going to support us being able to maintain the level of profitability we've achieved.
With a long term ambition as evidenced by the technology project that we're never going to be satisfied we're still going to look for more.
Okay, Alright, great all right. Thank you I'll leave it there.
Thanks.
We have a question from Kyle May capital One Securities. Please go ahead.
Good morning.
Good morning, apologies, if I've missed this earlier, but as we're thinking about the fourth quarter in the context of your full year guidance for 2019 can you walk us through the different variables that could swing results to one and or the other of your guidance range.
Yes, I think as you first you've got the the two main operating segments, both contract operations, which we've seen has very predictable and performing at levels that.
We are at or maybe even exceeded our expectations. Obviously the the addition of the Aleve horsepower I think from a modeling perspective, what we've talked about with folks is that.
We we had initially said when we bought that business would be about.
$55 million of annual EBITDA that included $5 million of annual synergies that it would take us up to 12 months to achieve those synergies. So for modeling purposes. When I think we updated folks. After we made that acquisition. It was sort of 512 out of that 50 million.
And so all of that sort of variable coming into the quarter, we touched a little on amas, having been below our expectations certainly on the revenue so.
So far year to date.
Candidly, we probably model that for Q4, given the beginning of the year, we would have expected that to be a little on the lower end. So those are those are two key items that you might think about as as.
What could reflect the difference between the lower end higher end of our range and then we've seen pointed out in a few morning notes this morning that.
Perhaps folks aren't as willing to give us credit for the gain on asset sales that we achieved in the third quarter and.
I think it's easy to think about those as onetime events, because it's not necessarily quote unquote, our core business.
But I'd tell you as you think about Archrock strategy of.
Pruning the fleet historically.
Getting rid of either less standardize packages were particularly once used harvest as an example, because that's the one that we have made public.
Those were 23 year 24 year old averaged aged equipment with a single customer and very much a mature basin that being the San Juan basin. It made very good sense for the operator, there the owner to on those assets, we got a reasonable price and we did book again, we traded.
Existing EBITDA for that gain and so.
That would be I guess, the last piece I would point to in terms of if you're trying to think about whether we come in at that.
Middle of the range high end of the range low end to the range or even above that higher into the range would be in my mind, whether or not you include that gain on sale of assets that we include in our adjusted EBITDA, perhaps some of you guys don't.
To me those would be the areas that that could mean the difference for the quarter.
Got it okay and one other question that we get oftentimes then.
Well, just say more distressed environments like we're in now.
People, often ask about the strength of your contracts and.
I guess really what it boils down to is when you when you're thinking about your long term contracts that are.
Three plus years.
What's the.
Potential that these get either cancelled or restructured or I guess big picture, how do we think about that.
Sure.
Good news side of our business on the contract side as well as on the longer term stable performance is that first on the contracts.
This business has a history of our customers honoring our contracts and our contracts, having integrity and holding up through the cycle.
We have not had a history of canceled contracts.
At all of any notes in the space I'm, not aware that being a part of anybody else's history, but it's certainly not a part of what we experienced at Archrock. So interior contracts in the space is really good.
The second thing I'd point out and probably more fundamentally and maybe why that's the case is that this business is levered to natural gas and oil production.
That generates great stability of our operations and great stability for the customers as well because we're levered to their production into their cash flow into the revenue.
That means that through the last period of time I'll point out in contrast to what others in the industry experience. Our utilization went from about it peak of 87, 88% to a trough 79%.
Not exactly a crisis in what was considered to be one of the deepest sharpest drops in the space and energy for the right for a long time and this business held up well industry held up well.
We expect this is not.
In a change in the future if anything we're going to continue to bring that bottom up through the improvements we've made to our fleet into our operations, we expect to maintain strong utilization through through industry conditions and multiple industry environments.
Okay, great well, that's all from me. Thank you.
Thanks Scott.
We have a question from Tom current F. B R. Please go ahead Sir.
Good morning, guys.
Good morning.
Brad returning to the technology modernization program when it comes to that programs major initiatives my understanding that the first one expected to be completed is the Oracle ERP system migration to the cloud.
Could you. Please just confirm or correct that and then give us an idea when you would expect to have that initiate a finished.
Sure. So it's not really the case, Fortunately weve already migrated components to the cloud and so this has been an ongoing project.
The details of like every step in the project is for migration like this.
As to detailed to get into on a conference call such as this but Fortunately we've already had success moving some of our modules and work modules in the company to the cloud.
Migration of Oracle to the cloud is going to be in 2020.
Beyond that right now we're not going to.
Two public with the exact timing of when that's going to occur and how it's going to occur we believe the teams well position to mitigate manage the risks around.
RP project to the scope and scale I'll point out that were Fortunately with one vendor today, and we're staying with that vendor and using that vendors cloud based product. So it's not a change of vendor or a system. It's moving from then on premises.
And provided by that vendors to their cloud based solution.
Good to hear.
Doug sticking with the technology program any visibility at this point on how next years.
20 million roughly investment is likely to be split between X gene and Capex.
Yes, I would say, yes, we do have an internal view of that and Tom again, I think we're going to we're going to stick with our are kind of plan of of laying out our 2020 guidance in more detail when we provide that on our fourth quarter earnings call not trying to.
To be kg at all but but again, having gone from quarterly guidance to gain annual guidance this year and feeling very good about delivering on that.
I do think that again points to sort of the stability and predictability of this business.
And we want to make sure our pencil sharpeners, where we deliver that information.
Fair enough last one for me and understandable to answer is somewhat the same but.
Did you did touch on the fact that ongoing asset sales are in some ways and actual recurring reality for you coming out of the merger and integration could you update sort of what that quarterly run rate range should be for asset sales.
Yeah.
I would look at our historical numbers.
And I don't think that the elite the elite units that we acquired the business that we acquired is very young fleet and so we wouldn't expect that to have had an impact other than specifically the transaction with an affiliate of elite.
That had a sell the horsepower that we did there so.
Again that is a little bit of an unpredictable part of our business, but we will give guidance on what we expect that to be.
When we report our fourth quarter results.
Right. So stay tuned for all the above with the upcoming annual guidance I appreciate taking my question Scott.
Yes, maybe not quite to hook, we'd hope for to keep you interested in the next call, but we'll do our best.
Hi, guys.
Thank you.
Thanks.
There are no more questions now I'd like to turn the call back over to Mr. Childers for final remarks. Please go ahead Sir.
Thank you everyone for joining our call this morning.
Look I'm proud of our entire team continue to dedicate themselves to delivering reliable safe and quality service on behalf of our customers.
And I believe this dedication as evident in our performance for the quarter and our outlook for the future. Thank you everyone for participating on our call. This morning and for your interest in Archrock.
Ladies and gentlemen this.
Concludes todays conference call you may now disconnect your telephone calls.
Thank you and have a good day.