Q1 2020 Earnings Call
Good morning, welcome to the Archrock first quarter 2020 conference call.
Your host for today's call is Megan refined vice president of Investor Relations at Archrock.
I will now turn the call over to Mrs. Reporting you may begin.
Thank you Christine Hello, everyone and thanks for joining us on todays call with me today, a broad shoulders.
Keith Executive Officer, Archrock, and Doug Aron, Chief Financial Officer per truck.
Yesterday, our truck released its financial and operating results for the first quarter 2020. If you have not received a copy you could be information on the company's website at www dot our dropped off.
During Oh, we will make forward looking statements, but then the meaning of section 21, each of the Securities Exchange Act 1934 based on our current beliefs and expectations as well as assumptions made by information currently available to our trucks management team.
Although management believes the expectations reflected in such forward looking statements are reasonable.
It can have never sure inputs such expectations will prove to be correct.
Please refer to our latest filings with the ITC for OLED factors that may cause actual results to differ materially from those in the forward looking statements made during that call.
In addition, our discussion today.
Well reference certain non-GAAP financial measures, including adjusted EBITDA gross margin gross margin percentage and cash available.
Reconciliations of these non-GAAP financial measures to our GAAP financial results. Please see yesterday's press release work 8-K furnished to the FTC.
I'll now turn the call Levered abroad to discuss Archrocks first quarter results provide an update on orbit.
Thank you Megan and good morning.
I appreciate everyone joining the call today.
What has changed for last quarterly earnings call.
Wants to the ever seen cobot, 19, pandemic, and the resulting drop in commodity demand and prices.
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Swiftly and decisively over the last several weeks to adjust our strategy spending an action plan for 2020.
Before addressing the current market.
And the company's plan I don't want to Miss the opportunity to discuss our solid first quarter performance.
Highlights several significant operational shrinks, we will leverage in this market.
We had an outstanding execution in the quarter.
Driven by our high quality asset and customer base.
And our excellent customer service dedicated employees.
Among the accomplishments look were we grew adjusted EBITDA quite 24% as compared to the prior year period.
We continue to transform and standardized we would additional noncore asset sales totaling 35000 horsepower.
We maximize performance in our contract operations segment, delivering a 19% year over year increase in gross margin.
We maintain excellent financial flexibility.
Including substantial liquidity and reduced our leverage 4.0 times.
4.05 times.
And as always we prioritized the safety and well being of our employees customers and communities.
We took appropriate steps early in the coming like team pandemic to minimize risk exposure and community spread of the virus.
I'm pleased to report we have maintained full capabilities at our operations continued and continue without interruption.
Our fourth quarter conference call I emphasized that in my time with Archrock. Our fleet has never been younger and our competitive position has never been better.
This is evident in the company's first quarter performance.
On the road ahead it is much different than we expected coming into the year I'm confident we're prepared for success in the face of its challenges.
We entered 2020 expecting a slowdown in the annual natural gas production growth rate.
With declines materializing in the second half the year.
Since then the kind of 19 pandemic, that's driven severe demand destruction in a very short period of time, particularly for oil.
Given the resulting price declines in widespread capital reductions by producers of midstream or we see we're not planning for more significant declines in associated natural gas production.
Balance of this year and into 2021.
The next few months, it's also likely that some producers will temporarily shut in an economic wells storage constraints further comparable prices.
On the natural gas demand side. The near term outlook is also softened driven primarily by has sharp decrease in cobot 19 related industrial demand.
Even though demand will be on record highs earlier in the year summer season should still benefited from solid levels exports to Mexico, and LNG demand both of which are expected to be up year over year.
And longer term, we remain optimistic that has a low cost and cleaner burning fuel natural gas work spreads healthy growth in demand and in turn U.S. natural gas production will resume.
We believe be supportive fundamentals will hold even indeed, a prolonged oil price challenge.
The exact magnitude of the downturn as well in the shape of recovery So no today.
Just as we've done in the past, we'll manage through this environment by differentiating performance that are more stable compression businesses can deliver.
Drawn on our leaderships [laughter] leadership teams deep experience and keep our employees engaged.
As we do so we'll remain focused.
On the following.
Providing exceptional service for customers.
Retaining our technical expertise.
Driving free cash flow generation, and preserving long term value for our shareholders and maintaining our opportunity set.
This will recovery.
What are these guiding principles, we've taken following actions to date, which translates into an annualized cash savings between 75 and $85 million.
We further reduced our plan 2020 capital expenditures to between 140 and $170 million.
At the midpoint, that's a reduction of 60% compared to 2019 capital expenditures of $385 million.
Oh, yes, our growth capital is now anticipated to be between 70 and $90 million.
At the midpoint. This represents reduction of 220 million compared to 2019 growth capital expenditures.
About $49 billion in growth Capex was spent during the first quarter and 90% of the units to be acquired in 2020 are already contracted with customers.
We completed a business unit reorganization as we saw an opportunity to streamline our organizational structure and better align our teams for maximum customer service and profitability.
This included the rationalization of headcount at the executive and senior leadership levels.
Now, we're taking further steps to align our corporate cost structure with the current environment.
This includes deep cuts to discretionary spending as well as compensation adjustments.
The executive management team and the board of directors have voluntarily agreed to reduction in base salaries and retainer fees.
With retainer fees for the members of the board to be reduced by 25%.
My be salary.
25%.
The executive management teams base salaries being reduced.
10%.
We're also implementing temporary decreases employee base salaries of between five and 10%.
With no expected change for employees blow targeted compensation threshold.
<unk> hourly employees, we're optimizing labor efficiency.
Including a significant reduction in overtime hours.
We recently declared a dividend to 14.5 cents per share 58 cents annualized unchanged from last quarter ended up 10% increase compared to the first quarter of 29 team.
Turning to our operations in contract operations first quarter results reflect our leading position in the U.S. compression industry.
With our focus on large horsepower units deployed in midstream applications, our first quarter exit utilization was flat sequentially and 89%.
And we drove an increase in contract operations gross margin to 62% horsepower.
300 basis points versus the first quarter of 29 team.
As we moved through the year absence, the material rebound in commodity prices, we would expect to see top line pressures from both horsepower and pricing declines.
However, we're working closely with our customers to develop solutions to mitigate equipment returns and long term price reductions.
In addition, a significant portion of our operating costs are variable.
This enables rapid adjustments to changing market conditions, while still meeting the needs of our customers.
This puts us in a good position hold and maintain margin at attractive levels.
Moving onto our aftermarket services business customers are still delaying maintenance activity on their equipments and in some cases, they're using internal resources to perform work they have historically outsource.
That said first quarter revenue margin comparisons were favorable compared to the fourth quarter 2019.
As I emphasized in the past compression me it cannot be deferred indefinitely, and we expect an uptick in this business when the environment improves.
Meanwhile, we remain focused on optimizing gross margins through this challenging period.
Our capital allocation framework remains focused on balancing appropriate levels of investment leverage and return of capital to shareholders through commodity cycles.
We invested significantly in our fleet over the past three years to meet the needs of our customers.
Participating in a significant infrastructure build out required to support the 20% plus broken natural gas demand in production.
And capture the in the attractive investment opportunities generated by the market.
[noise], our updated 2020 capital and adjusted EBITDA guidance continues to support free cash flow generation.
And we're adjusting our capital allocation.
Like what we expect to be a meaningful reduction investment in investment required to meet our customers compression needs and to adjust to market with infrastructure that should be mostly sufficient to support natural gas production for the next few years.
As a result, we've shifted our capital allocation priorities given today's environment is as follows.
First.
We believe having a reliable at attractive dividend, it's important to our investors and the value our company.
We will continue to prioritize shareholder returns even during this downturn and as we always do we'll work with our board each quarter to assess our four views a future cash flows and the dividend.
Our second priority is debt reduction.
We will execute all of the whole measures to reduce our debt and protect our strong financial position.
Finally, as we de emphasize growth through the downturn, we expect attack capital investment to be a distant third priority.
I can assure you were a prepared operationally and financially to resume prudent growth from high return investments was customer demand returns.
Before turning the call order, Doug I want to sure one so grateful to be entering this downturn from archrocks unique position of strength.
We provide must run services.
Russia is a critical part of the midstream value chain, bringing natural gas.
Production to end markets.
We typically interns a multiyear contracts for compression services. These our fee based with no direct commodity or volume metric exposure.
We've worked diligently over the past several years to create a modern diverse and scalable fleet.
We've aligned ourselves with great customers will preserve the strong relationships during this challenging period.
We also have solid liquidity position with no need for external financing at a business that we expect too and we'll manage to generate free cash flow.
These factors combined with our production related business model will help mitigate the impacts of this downturn.
Finally.
We stumbled experienced management team.
We know what it will take to navigate this downturn successfully and as we've demonstrated in the past we will emerge from this challenging time even stronger.
With that I'd like to turn the call over to Doug for review, our first quarter performance and our updated 2020 guidance.
Thanks, Brad and good morning, let's look at a summary of first quarter results and then cover our updated guidance.
First quarter revenues totaled $250 million, reflecting an increase of 6% compared to the prior year period.
Adjusted EBITDA of $113 million was up 24% over the first quarter of 29 team and was driven by horsepower in pricing increases in our contract operations segment as well as cost management across all segments.
The first quarter results included $4 million in gains related to the sale of assets.
We recorded a net loss for the first quarter of 2020 of $61 million, which included several onetime charges. The majority of which were noncash impairments adjusting for these items, we reported significant year over year gross and net income.
In the first quarter, we reduced the goodwill balance related to our acquisition to our acquisition of elite compression to zero.
We recorded a goodwill impairment of $100 million in light of the significant deterioration in macroeconomic conditions caused by the cobot 19 pandemic.
We booked a tax benefit on the entire nonrecurring goodwill impairment charge of $23 million verdict during their first quarter of 2020.
Also in the first quarter, we conducted an extensive review of our fleet and identified compression units that were either not likely to go back to work or did not warrant additional investment to be but to be put back in the field.
From this review, we decided to retire 23000 operating horsepower and recorded a 6 million dollar long lived asset impairment.
Finally, we took a 2 million dollar restructuring charge primarily related to severance benefits.
Turning to our business segments in contract operations revenue and gross margin dollars were relatively flat compared to the prior quarter and were up meaningfully on an annual basis.
We had record revenue of $207 million up 13% from the first quarter of 29 team.
This increase as compared to the prior year resulted from higher operating horsepower and pricing.
We delivered gross margin in contract operations of $128 million up from $108 million in the prior year as we focused on aggressive cost management.
First quarter gross margin percentage of 62% was up 300 basis points from the prior year quarter.
In our aftermarket services segment, we reported first quarter 2020 revenue of $43 million up 3% compared to the fourth quarter of 29 team, but below the $54 million in the prior year first quarter.
Gross margins continue to hold up well considering revenue pressures.
First quarter M.S. gross margin of 18% was up from 15% in the fourth quarter of 29 team and flat year over year.
Asked DNA was unchanged compared to the prior quarter at $31 million and was up from 29 million from the prior year period, a year over year increase primarily related to our ongoing technology investments.
For the first quarter cap growth capital expenditures totaled $49 million and will represent the highest quarter of investment for the year.
Maintenance and other Capex for the first quarter of 2020 was $23 million equal to the fourth quarter of 2019.
We expect lower levels of investment for the balance of the year.
On April 1st we successfully repaid all $350 million of our senior notes due 2022 with our revolving credit facility.
We maintained significant financial flexibility with liquidity totaling $410 million after taking into account the 2022 senior notes redemption.
Our borrowing base as well collateralized and we continue to receive great support from our lenders.
On our bond Indentures, we got ahead of the multi year wave of energy debt refinancings, which will now likely come at a much higher cost of capital.
With the billion dollars and maturities we pushed out next next pushed out last year. Our next maturity is now not until 2027.
Our total debt of $1.8 billion was effectively unchanged compared to the fourth quarter.
Our leverage ratio of 4.05 times was down from 4.4 times from the first quarter of 29 team.
As Brad mentioned the leverage continues to be our primary focus for Archrock and we expect to allocate 2020 free cash flow to absolute debt reduction this year.
However, with anticipated declines in EBITDA, our leverage ratio as it is anticipated to expand modestly on a go forward basis.
While our three and a half to four times leverage target remains a goal for the company given our updated outlook, we no longer anticipate being able to achieve this by the end of 2020.
We recently declared a first quarter dividend of 14 in a fortune and a half cents per share or 58 cents and you're on an annualized basis unchanged from the prior quarter and reflecting an increase of 10% over the prior year.
Our dividend payout is supported by our internal cash generation strong balance sheet and robust dividend coverage.
Cash available for the dividends for the first quarter of 2020 totaled $62 million, leading to strong first quarter dividend coverage of 2.8 times.
Our existing dividends still represents a compelling yield of 13% based on yesterdays closing price.
We remain committed to returning cash to shareholders and to reducing our debt from available free cash flow.
I'll end with our updated 2020 guidance, which includes our best estimate based on what we know today.
Of the cold at 19 pandemic and the commodity price decline impacts.
We now expect 2020, adjusted EBITDA in the range of $380 million to $420 million.
Although down from our prior guidance of $415 million to $450 million the updated range highlights the resiliency of our business.
Based on our view of the market today, we are optimistic we can deliver adjusted EBITDA above the midpoint of this range and perhaps closer to the higher end yet are cognizant of the possibility of rapidly changing market conditions that could impair our current view.
In contract operations, we anticipate the largest impacts will occur beginning in the second half of the year as production has declined from budget cuts material materialize.
Matt as Brad commented earlier, we are working to mitigate impacts with aggressive cost management.
In A.M.S., we've lowered our expectations for the year as our customers have further delayed releasing their budgets for maintenance work.
Turning to capital on a four year basis, we now expect total capital expenditures of $140 million to $170 million.
Oh, yes, we expect growth capex to total between $70 million to $90 million down 11% from the prior guidance midpoint.
Deliveries of new equipment will largely wrap up by mid year, and we will have additional spending flexibility moving into 2021.
We also anticipate maintenance capital savings as we redeployed fewer units to the field.
Finally, as it relates to our multiyear technology project. This remains critical to our future success.
That said, we're prioritizing 2020 work streams and plan to rationalize and defer some of those costs until 2021.
Importantly, given our current operating outlook and reduced Capex profile, we remain well positioned to generate free cash flow as we have done in prior downturns.
And with that operator, we'd now like to open up the line for questions.
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Dave.
Thank you. Our first question comes from the line of TJ Schultz with RBC. Please proceed with your question.
Great. Good morning, I think first you mentioned working with customers.
Medicaid similar returns and and permanent price reductions.
If you can just give a little color on on what you've seen so far.
I'm returns and and what are some options you have with custom at what with customers to mitigate some of those returns. Thanks.
Sure. Thanks today.
Well, but number one you guys have heard of status in the past.
Fresh and compared to other parts of.
The upstream in particular is at a lag time luck and so what we typically see happening upstream.
We get to see for a couple of quarters before it impacts.
And.
That gives us a little bit of time to work with our customers.
On their production side.
That said, it's still pretty early in the going at this.
The downturn for us and so discussions with customers for us we're only a couple all at quarter really into it.
Our stones and very early stages and very preliminary and it's also at the case that I have the opportunity to show, we create customer base the largest customers in the upstream space the midstream pays space.
Are those that we service and that that puts us in I think an enviable position so work with them to make sure that we have a partnership we help meet their needs.
But with the large horsepower installations that we put in with our customers. These are very expensive to relocate they don't want to see the change in said the business can be very sticky and so we work with them long term to try to keep the horsepower available for them when they don't need it immediately without removing from site and so moving to staff.
By becomes an option for some of those larger installations.
And that's the way that Covenant center of the discussion is working with our customers right now.
And again, it's early going in this in this cycle so.
So that's about as far as late as well as we've seen in the dialogue with our customers yet.
Okay on the.
Revised EBITDA guidance I guess.
Greetings, there if you can kind of frame.
How you've thought about utilization trend in through the year into that guidance and then on some of the cost savings.
If you could just breakout that 75 to 85 million if that includes capex and and what's coming out of Opex and <unk> 's DNA and how much of that is captured in and EBITDA guidance. Thanks.
Sure look I'll take the market part of the question and double talk a little bit about our cost savings initiatives, but when we look at the market.
Number one it's early going none of us know and we don't want to get over our skis in asserting we know more than we do and the shape duration of the downturn or the timing and shape of the recovery.
But we all are looking at very similar estimates were staying close by customers and what we see in the marketplace has oil production declines in 20 and 21 in the.
10% at 13% range.
From a barrel million barrels per day perspective, tenant, 13% and gas production more in that kind of 5% decline plus or minus over that 2020 and 2021 timeframe.
And it's against those those benchmarks and that that forecast that we're basing our.
Demand for compression.
Which is.
Basically proportional if you want to think about it that way.
So that's that's a framework for what we see from a demand perspective in the market and the good news. The this is that when you think about a 10% decline and well a 5% plus or minus the class a natural gas on and then transposing that over on the compression business.
These are not the types of declines that other businesses will be participating in and the energy space. So we feel really good about the fact that when we think about those production levels that our business is levered to production.
That puts us in the strong place to continue to generate good earnings and strong free cash flow.
Let me ask the type of cost sure. So there's we kinda look at this two ways.
Hey, Jay and I don't I don't want to turn this into a total modeling call, but theres a we've got what we expect for 2020, and then thinking about that on an annualized basis and so I'll cover the annualized piece.
Maybe you can follow up with Meg and for 2020 specific but generally think about that as sort of a 12 of the annualized number.
So we're showing.
About $21 million to $33 million of savings in our contract compression Opex business.
10 million SDMA savings.
$18 million to $23 million of say savings from our growth Capex about 19 million of savings in a maintenance and then about $5 million of savings in other to get to that sort of 75 to 85 million dollar bridge.
Perfect got it thank you very much.
Thank you.
Our next question comes from the line of Daniel Burke with Johnson Rice. Please proceed with your question.
Yeah. Thanks morning, guys.
Let's see let's see Oh, sorry to stick with a question that that's got some grounding in the model, but but was just curious Doug you alluded to contract obscene the largest impact in the second half the year I assume I assume that's that's a gross margin focused comments and but I was curious.
In terms of horsepower and releases do you would anticipate that Q2 would be the heaviest quarter or is it going to or is it hard to see is it possible heavier releases could be forthcoming out into Q3.
And Dan host, Brad I'll take that one it's hard to see.
Right now our customers are still working through their production forecast an impact, especially beyond what we expect could be some very short term shut ins on in the second quarter on and the duration of the shut ins which are very.
Market driven and immediate.
The expectations lots the customers is that they're going to be temporary they just don't have an estimate on the timeframe. So.
Number one the fact that it's early going number two the fact that we expect some short term shut ins and the duration is unclear.
And then in a downturn visibility is always slightly impaired those factors make it more challenging to see where the stop activity will be the heaviest in the year. So don't seem to be evasive, but that's that's the visibility we have have into it right now.
Okay got it.
I was wondering if you could talk a little bit about maybe the benefits of having a.
A decent amount of horsepower and what would I think would still be primary term just given the heavy heavy gross spend over the last couple of years and.
You know I guess all contracts and all.
Maybe all options on the table with all customers, but but can you talk a little bit about the benefit you might have from from primary term contracts this year in and whether that extends into 21.
Sure.
Any onetime and right now we have about 40% our horse power that is under contract with a term that exceeds 12 months and some of it out to your some of it out three years and so those contracts that the other part of that goes with it is it's a business that has integrity is the contract structure with.
Our customers as we find that that is against the ability to that portion of the revenue through the contract term.
Beyond that.
Daniel as you've heard me say in the past just remember this business is also very sticky particular at the large horsepower range and so not only does that contract structure keep the horsepower out on location and working with our customers and it's on an termed the contract basis be on that when they go month to month.
Especially with the size of horsepower, we predominantly operate we find the business is very sticky.
Customers want to keep the horsepower out there as long as it is operationally suitable rightsizing.
And economics for them and so that builds in that incremental stickiness. In addition to the longer term contract nature of our business.
Got it and then maybe just a quick final one I'm not sure that the standby count will be sufficient or meaningful enough to be material, but but.
In terms of margin impact a standby is it is accretive to the gross margins. We typically think about when we look at the margin projection for this year.
It's not it's neither dilutive or accretive a couple of thoughts on that we don't expect that the amount of horsepower those standby will be material to the overall not horsepower. We operate on it's not insignificant, but it will not be material second.
We have pricing structure, where we work with our customers look they need us most when they're suffering and they can't generate revenues when they need us to step up.
And so we put in place a reduced rate and we also are able to take out a lot of variable cost and so the combination of the amount not being materials, the fleet and our ability to take a variable cost out really properly together with the rate.
Modification during the standby period like customers means that I don't expect it to be dilutive or accretive to gross margin and in fact, that's the principle with which we used structure. We're not trying to take advantage of customers who can't produce we also do not want to take a financial hit because of their upstream needs.
Got it makes sense appreciate Brad thanks for the time.
You bet. Thank you.
As a reminder, if he would like to ask a question press star one on your telephone keypad. One moment. Please while we pull for any additional question.
Thank you. Our next question comes from a line of Thomas carrying with B. Riley FBR. Please proceed with your question.
Good morning.
Good morning.
Branded Doug regarding the technology modernization program have there been any changes in the estimated 2020 budget of 16 million and or complete your timing of early 2021 and then.
You bet programs initiatives would you expect to be most beneficial in this current down cycle and then looking out longer term in the next upcycle.
Let me talk about the benefits the project first and an odd stock the topic topping up on.
The numbers, but I'll give you my take on the question. So first and foremost it's a great project for us.
It is going to enable better efficiency in the way, we manage labor in the field.
Managed labor attachment and connection to our units supply chain behind that as well as migrate our ERP in the cloud. So those are the major steps the project that we're still very excited about.
That said this is a period, where we're rationalizing all of our cost expended expenses, and especially discretionary investments and so we have pushed some activities into 2021.
And that equates to a couple of million Bucks of investment moving from 2020 into 2021 to support the project.
And where we expect to get the biggest staying for a buck. However, we have not slow down that investment and that is in expanding our communications until then the tree capabilities throughout our operational structure in the field.
That investment is proceeding apace that we do expect complete.
Within that 2021 time frame still and that's I think the part of the investment that's going to give us the biggest being for a buck we do expect to start to.
To see benefits from this investment and the 2021 time frame.
And because its cost focus it's just one of those projects that we think is even in a downturn is going to give us great returns.
In a short term basis, so we're still happy with how it's proceeding even if we're deferring a component of it into the 2021 timeframe.
Yes, I think Brad covered really most of it including the deferral of some of the costs. Tom I think the only thing I heard and the question was I'm not sure we had ever sort of envisioned a completion of the project in the first quarter of 2021.
And there will continue to be.
I would say both money spent through most of 2021 and then honestly, we would expect the benefits to as Brad mentioned, some to accrue and 21 and then the majority of those now probably looking more towards 2022 and beyond.
Okay and.
Oh any estimates on how the remaining spending would break down between 2020 and 2021.
Yes, we've got a about 4 million a capex.
And as and 6 million of Sta was the 2019 numbers. So comparatively for 2020 about 7.6 million of Capex and same about 6 million of SGN, a and then for 2021, we go to 7.3.
And of Capex and 4.3 million of SGN.
Great very very helpful comprehensive update from both of you on that.
Turning to you did the revised growth Capex budget of 70 to 90 million.
It sounds as if.
With that lower budget, you're expecting to take delivery now of new units totaling between 70000 100000 horsepower.
Is that where do you correct or clarify that are confirm or clarify that and then please tell us.
How those deliveries should be deployed over the year in terms of quarterly timing, where they're headed and the nature of the demand for them.
Yeah, absolutely. So we look at your I think you hit a spot on probably closer to about 80000 horsepower I think is sort of the number we have in our mind.
We've taken if we should say in past tense.
As you saw we spent almost $50 million in the first quarter.
It really that was driven by customer orders a need for.
<unk> for units that.
I have already gone out and started in almost all cases, you know as we mentioned in her prepared remarks, 90% of our units already under firm contract. So.
The remainder of the year I would say is likely to be ratable, although frankly.
There's a little bit of a moving target there as our sales team is working a bit with with our customers.
Obviously this is a more fluid market than normal, but again 50 of that 80 already out.
And earning revenue for us.
Tom was there a second part of that question.
Just wanted to try to understand where they're headed geographically.
That's right yeah predominantly that was to the Permian and again those were orders that were placed a year in advance.
So that's that's where the majority or even the vast majority went of of what we had expected for this year.
Again, some of that could change.
Given the new market dynamic, but for now that's that's I.
I think meghan unless we have new information that that's still where where most of that horsepower wet.
Got it thanks for taking my questions.
Thank you.
Okay.
Yeah.
Our next question comes from a line of Kyle May with capital. One. Please proceed with your question.
Good morning.
Good morning to follow up on.
Brad good chat with you.
I wanted to follow up on the discussion around capital allocation and thoughts about the distribution and apologies. If this has already covered.
But since the distribution was held flat in the first quarter and you've already had.
Kind of a long term goal through this year to to increase the distribution, 10% to 15% on annual basis I'm. Just wondering your latest thoughts around the distribution policy for the balance of this year and potentially going forward into next year.
Yeah.
Kyle Fair Fair question and.
And one that obviously, we wish we had an easy in very visible answer to you I think you know as I mentioned in my remarks, let's start with the leverage target.
I can assure you having achieved 4.05 at the end of the first quarter and knowing we were well on our way to our longer term goal is met with more than a little bit of frustration by Brad and I and frankly, the rest of of the management team the board and the guys that are out there doing the work every day.
To say that this is a black Swan event, probably doesn't do that justice and so.
Timing on that has been different and I think frankly.
[music].
While.
We're thinking about raising our dividend at that 10% to 15% is just not likely a prudent action in this market and not something that we would be likely to do obviously maintaining extraordinary coverage is something that we will do easily we will continue to generate significant free cash flow.
Pre and post dividend in 2020, certainly and while we're not in a position yet to give guidance for 2021 I would call. It a near certainty that we will be significantly free cash flow positive in 2021 as well.
Which should be supportive of continuing.
With with a competitive dividend program and with paying down significant portions of our debt.
Obviously the board as all public companies say, we'll evaluate that quarterly no different for us our board and management team will evaluate it quarterly but.
Specifically to the 10% to 15% increase just doesn't feel prudent in this market.
So I hope that's helpful and giving you some clarity on where we see the next several quarters.
Absolutely that that makes a lot of sets.
And then the last one for me I was wondering if you could talk a little bit more around your assumptions for the revised guidance and the contract ops business.
Maybe a little bit more detail around utilization trends through the year pricing I realize you also covered a lot on the variable costs I mean, any any additional color would be great.
So look I mean, I think you can use history as a little bit of a guide for you.
And look at the last downturn, where our utilization peak to trough was 89 down to about 79%, which I think bottomed in the fourth quarter of 16 or maybe early 17, Kyle since then our.
Our fleet has gotten the younger.
We've we've continued to sell assets that we see as non core and so.
Again, it's.
The there's not maybe the level of clarity, we'd love to be able to see and predict what that is but if you look at our guidance range.
For EBITDA, you know as I mentioned, we're still hopeful the performing better than.
The midpoint for the year.
That would indicate utilization certainly hanging in there.
For for 2020 and beyond.
Okay got it.
And I guess.
One of the things that we've talked about in the past is the the rate of change for the utilization in the last downturn, while it was maybe erratic from one quarter to the next.
It it was pretty steady around 1% declining each quarter over that time period is do you have any idea about maybe to the rate of change. This time, if it maybe more quick or do you think it could be similar to what we saw in the last cycle.
Yes, I called spreads look I I don't think we have enough visibility to compare this downturn yet to the prior downturns I think your assumptions right by the way in the prior downturns we lost.
[music].
9% was the decline.
And it did happen ratably.
Over a period quarters, if the decline as much sharper. It also could be the recover as much sharper, but we're really not in a position with visibility to speak that so I don't I don't want to kind of a sort of perception that we just that the data doesn't support or the forecast don't yet support.
But what I would.
Emphasize is that when we look back and ask utilizations, including the prior downturns, we had two quarters below 80%.
And the vast bulk of this business for the last seven years is operated in the mid eighties or higher 80% range and utilization over the past seven years and since then and through that period of time, we've taken steps to drastically improve the competitive position. This fleet that includes age as Doug mentioned the size of course.
Power the location in the field and the customers that we provided too.
So while I never want actually a downturn to test how what we've done it I believe that this business. This fleet is positioned to endure this.
Better than we did the prior downturn, although the scope. This the shape of the downturn is to be determined.
I feel really good about the position that this fleet has in the marketplace to endurance and perform as well as possible in this downturn and that includes the side our forecast maintaining really good margin.
In the guidance range that we gave you as well as good utilization to support it.
Got it that's very helpful. Alright, that's helped me thanks for the additional information.
Sure. Thanks.
Thanks, Joe.
We have reached the end of the question answer session. Mr. Children's I would now let's turn the floor back over to you for closing comments.
Great. Thanks, operator, Thank you everyone. We appreciate your interest in Archrock and Archrock performance.
Our operating momentum continues our financial position remains sound.
Confident we have the right team.
In place to preserve value through this downturn manage exceptionally well and emerge as a stronger company on the other side.
Thank you I look forward to talking to you next quarter's call.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.