Q2 2020 USA Compression Partners LP Earnings Call

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Good morning, welcome to U.S.J. compression partners LP second quarter 2020, <unk> earnings conference call. During today's call all parties will be in listen only mode and following the call. The conference will be open for questions. This conference is being recorded today August 4th 2020.

I'd now like to turn the call over to Chris Porter, Vice President General Counsel in Secretary.

Good morning, everyone and thank you for joining US. This morning, we released our financial results for the quarter ended June 30 2020.

You can find our earnings release as well as recording of this call in the Investor Relations section of our web site at USA compression Dot com recording will be available through August 14, 2020.

During this call or management will discuss certain non-GAAP measures you will find definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures in the earnings release as a reminder, our conference call will include forward looking statements. These statements include projections and expectations of our performance and represent.

Our current beliefs actual results may differ materially.

Please review the statements of risk included in this mornings release in in our SEC filings.

Please note that information provided this call speaks only to manage views as of today August 4th and May no longer be accurate at the time of a replay.

I'll now turn the call over to Eric long, President and CEO of USA compression.

Thank you Chris Good morning, everyone and thanks for joining our call also with me as Matt will usually our CFO.

This morning, we released our financial and operational results for the second quarter of 2020.

Keeping a solid quarter of operational and financial results, especially when you consider the market environment in which we found ourselves.

Similar to last quarter today I'm pleased that briefly highlight the quarterly results and then spend more time discussing our business model.

Well, we've seen happening out in the marketplace and what we're doing to manage the business. This uncertainty.

The second quarter, not surprisingly saw decreased revenues as a result of customers returning equipment and a slowdown in unit redeployments out in the field.

Total revenues were $160 million approximately 6% below Q1.

Due in large part to cost cutting measures taken in late Q1 in early Q2 adjusted EBITDA for the second quarter was approximately 105 million representing less than a 1% decrease from Q1.

Reflecting this focus on cost.

<unk> adjusted gross margin and adjusted EBITDA margin were very strong, it's 70.4% and 62.5% respectively.

Average utilization throughout the quarter was 88.0% debt from the Q1 levels of 92.5%, reflecting continued returns of units throughout the quarter.

We ended the quarter with approximately 3.1 billion active horsepower was off about 6% from the end of Q1, while the total fleet remained consistent at about $3.7 million horsepower.

Average pricing across the fleet decreased slightly during the second quarter, which reflected the return of a fair amount of small horsepower, which typically earns a higher dollar per horsepower rate.

Well as the impact of selected temporary service rate decreases.

Average monthly revenues of $16 in 79 cents per horsepower was down slightly from $16 at 89 cents in the first quarter.

Last quarter, we discussed revising the capital spending plan and we saw some impact of that decision in the second quarter, where growth Capex consistent consisted of $22.8 million and maintenance Capex was $4.4 million.

The growth Capex included delivery of 16700, new horsepower of which about 75% consisted of a large horsepower units.

This growth Capex had largely already been locked in by the time, we had the events of early March.

We do plan to seeing meaningful reduction in growth Capex for the balance of the year, which is unchanged from previous quarters commentary.

Maintenance capital was also down versus Q1, as we limited spending given the slowdown in activity.

At this point in time, we expect expansion capital spending to total between 80 and $90 million consistent with our guidance for the last call, which is compared to our initial guidance of $110 million to $120 million.

Based on the second quarter's results the board decided to keep the distribution consistent at 52, and a half sets per unit, which resulted in a distributable cash flow coverage ratio of 1.1 times X, which was up slightly from Q1, primarily due to a reduction in maintenance capital spending in Q.

Good.

Our bank Covenant leverage ratio was 6.4 X for the quarter.

Just as a reminder, the quarterly distributions and decision that our board of directors plant makes on a quarterly basis.

As has always been the case since our IPO the board can opt to maintain reduce or suspended distribution as a deems most appropriate on a quarterly basis.

Continued to be proud of and dedicated men and women of USA compression, who work hard throughout the second quarter two delivered to our customers. The services. They rely on to successfully operate their businesses. Obviously day to day life has changed a lot during this past quarter and how the future plays out as anything but certain.

But in the face of all this uncertainty our dedicated field technicians and everyone else who supports them figured out how to make a war and continue to do so every day in a safe operating manner.

Let's talk a little bit about natural gas in crude oil.

Last quarter I spent some time on a different market dynamics between crude and natural gas and why we felt that USA compression was well positioned to be somewhat insulated from the dramatic price volatility and uncertainty around crude oil as our businesses driven by the demand for natural gas.

At the time of our last call crude was trading around $20 a barrel. Since then it has seen a bit of a rally to the $40 barrel range and as shown relative stability.

Even with that rebound many DMP companies are being cautious on capital budget.

That makes for a challenging environment for companies that depend on new crude drilling oil activity and you're seeing the fallout and bankruptcy filings. We are fortunate that our business is driven by the demand for natural gas.

While we continue to take a long term view the overall need for and production of natural gas even the near term outlook has shown signs of relative stability during the industry weakness in strength in the medium to longer term. We continue to believe that natural gas will play a more and more important role as a clean fuel of choice.

Yes.

Not in the energy markets. It has been quite arrived since we announced first quarter earnings in early May as the pandemic has continued to play out around the world demand has been impacted both on the oil and natural gas side. However, as economies began to open back up in May in sense oil demand has.

Started to rebound.

June so global consumption of petroleum and liquid fuels up 10 million barrels per day versus may.

Right now that he is forecasting 2020 consumption to be about 93 million barrels a day, which is only about an 8% decrease from 2019 levels. The demand destruction, which was previously forecast to be much more severe seems to have moderated and we've seen crude prices hold relative relatively steady.

Above $40 per barrel.

As previously mentioned, even with the strengthening of crude oil prices. Many of the S&P companies have held the line on reduced capital budgets, showing a level of discipline that we havent necessarily seen in past downturns.

The total rig count is down approximately 70% since the beginning of the year.

Well just in the last week or so you've seen a rigor to get added in the Permian. Many expect the reduced council last for considerable while longer.

That should help support crude oil prices as economies recover and the demand continues to tick upwards. While it is too early to know what capital budgets will look like for 2021, I think it's a fair assumption that overall production growth will be less than we've seen in the past years and over the coming quarters, we will see even more evidence of.

Shale well declines in the early years of wells light.

As I've discussed before shale type curves, while Steve but first after a few years tend to flatten out significantly when it gets unwell moves into more of a steady state existence. So if the capex counts whole producers will simply not be drilling enough new wells to offset the decline in their existing flush production wells and then overtime.

You have a large amount of wells in that flat steady state part of the curve where decline has also meaningfully slowed.

While impacting production growth for the NPS. This is a favorable situation for USA compression.

Significant component of USA is larger horsepower fleet is deployed in infrastructure applications exhibiting the flat steady state shallow decline profile. So even without any drilling activity compression is continually needed to continue to move the stable volumes of natural gas.

But as you all are aware USA compression doesn't move crude oil we deal 100% with natural gas overall prospects for crude oil impact many of our customers, particularly in regions with significant associated gas because of the reduction in crude oil production you are seeing a related decline <unk>.

It is gas production, although generally not quite as severe as previously expected.

Earlier, I mentioned, how natural gas demand destruction wasn't nearly as bad as that for crude oil in fact, while the demand.

Was projected to be lower we have.

What we've seen so far is even more positive than most of predicted we've always believed that the resiliency of natural gas demand was one of the primary factors underpinning USA compressions business model natural gas simply as a preferred fuel for his two largest end uses residential and commercial power generation and industrial.

Manufacturing.

While there is expected to be some short term demand disruption. The EA is currently projecting natural gas consumption to decline by about 3% in 2020, the underlying demand for natural gas remains strong.

Well generally things have stabilized from the midstream sector the capital budgets of the S&P companies remain dramatically reduced from where they were beginning in the year.

So what does that dynamic being for USA compression.

Hi, often discussed the relationship between compression horsepower and declining reservoir pressure simply describe as pressures decline to move the same volume of gas requires an exponential increase in compression horsepower.

As an analogy think about a fully inflated by tire when you take off the Val cap air loses out of the tire very quickly at first but then slows quickly.

Wells are not that different this concept underlies the reason why compression is not transactional like untypical oilfield service company drill the well completed then move on instead compression stays around for a long long time, but that will use of oil and gas slows down and ultimately needs more effort.

Horsepower to get it out for both associated gas in dry gas applications, even though gas volumes may be declining the compression required me actually increased as pressure also.

Declines.

You've also heard a lot about gas oil ratios, which in many cases and the increase as producers have moved the encore areas as increasing gas oil ratios have led to more associated gas production per barrel of oil produced you will need additional compression to move those volumes.

These concepts underpin the compression services model that USA compression is based on when markets are great. We grow their customers over our 22 years and business we've been through multiple cycles during periods of reduced activity and even production declines we have not historically experienced material declines.

And the need for our large horsepower compression services are required horsepower.

The dynamics I mentioned above along with relatively resilient demand have historically made large horsepower compression a less volatile business.

As we mentioned on last quarter's call. The natural gas markets are expected to experience a fairly unique dynamic in the near term future as of the relatively resilient demand outlook intersects production declines, notably from associated gas regions.

You're already seeing consumption tick back upwards, while supply begins to to decrease for example, Mexican exports in July are at record levels, averaging about 6.1 Bcf per day up some 13% from year ago levels of about 5.4 Bcf a day.

LNG exports, however, mental had been a little soft and for July averaged about 3.2 Bcf per day down about 24% from year ago levels of about 4.1 Bcf per day.

In the near term that oversupplied has led to higher than expected underground storage levels, but as we get through the summer and into the natural gas withdrawal season, we may very well may see a more strain supply demand balance because of the decrease in new well drilling of the dynamics of the shale type curves really adding some pressure to this.

Supply side of equation.

Yes, well gas futures prices for calendar 2021 are averaging around $2.50 per mcf.

As it regards the markets, obviously, the sooner than expected rebound in crude oil prices and relevance relative stability in both crude oil and natural gas bodes well for the broader energy industry and the resilient demand on the natural gas side bodes well for critical service providers like USA compression.

As natural gas continues to play very important role in those countries energy future, we're optimistic about the future outlook for the compression business.

So let's talk about our large horsepower focus over the 22 years of USA compressions existence. Our business model has not changed we have always focused on larger horsepower compression used in large regional infrastructure oriented facilities. The rationale behind this strategy has been proven out during.

Previous downturns and simply comes down to the fact that these facilities move very large amounts of natural gas and or demand oriented.

We have purposely pursue the large horsepower and because these facilities are not easily shutdown and the cost of demobilization, which are borne by our customers to said home our assets tend to be extremely expensive.

This creates a barrier to exit which lends stability to the business that other service providers, both in compression as well as activities closer to the wellhead do not possess.

We have always pointed to the stability of this business model and as we work through the remainder of 2020, we expect to exceed experienced that relative stability.

So little bit on our customers.

Based on customer activity and indications, we're currently expecting utilization to bottom out in the third quarter.

At June 30, our utilization stood at 86.2%, which was similar to where fleet utilization declined back in the 2014 to 2016 timeframe.

Remember the crude got as low as $27 per barrel back then.

While the went lower back in March of this year it rebounded much more quickly and a stabilized.

And so while the recent quarter or so is somewhat different from the 2014 cycle.

Our customers to behave in a similar fashion.

We have seen the rate of return of underutilized assets decreased meaningfully we have seen recent quote activity pick up substantially and have had equipment start begin to once again outnumber equipment stops we continued to see the large horsepower equipment classes remain utilized proving this.

Credigy of pursuing larger infrastructure based applications.

Overall, our customers are working to figure out what the future holds for their particular operations as well as the overall industry and that creates differ motivations for different customers and different basins.

The vast majority of our asset server, either dry gas activities and natural gas handling activities such as those connected to gas processing plants are large volume centralized gas lift applications beyond the flush production stage in in the stable shallow decline steady state mode.

With the geographical diversity of our asset base, we have exposure to different producing regions and as such.

Have a balanced throughout the fleet events in one particular area like associated gas declines in the Permian and Delaware basins, while they affect us are partially mitigated by activity in other regions like Appalachian.

I've mentioned before or contract mix and have historically, we had anywhere between 40 and 50% of our assets out on a month to month basis.

As a result agreed contracting activities over the last year. So we have reduced our month to month exposure to approximately 26%, which puts us in a good position as we work through the rest of the year, we have new starts of equipment scheduled for the back half of the year. So that will add some additional term contracts to help mitigate.

Some of the month to month units that have come home.

While the industry as a whole is by no means out a little woods and under recovery. We believe you're are beginning to see signs of a bottom in indications of recovery. While we saw a fair amount of unit returns during the second quarter. The rate of were unit returns has slowed appreciably and as a result of our cost cutting and capital spending decisions we.

Really the company is positioned to weather any additional market softness in emerging the positioned to benefit from what we believe will be an eventual recovery.

As many appreciate our focus over the years as purposely bed away from activities that introduced commodity price risk and oriented toward larger installations, serving demand driven natural gas infrastructure applications.

We have deployed significant amounts of capital.

Excuse me the significant amounts of horsepower in large multi unit centralized compressor stations over the recent years. These installations are critical to serving the resilient demand that I discussed earlier.

The production in many cases has moved into the steady state based with shallow decline rates.

Thereby reducing relatively more stable volumes and pressures as these wells age and the reservoir pressures naturally continued to decline more horsepower may be required to accomplish.

Customers operational needs I'll now turn the call over to map to walk through some of the financial highlights of the quarter Matt.

Thanks, Eric and good morning, everyone today, USA compression reported a solid second quarter results, including quarterly revenue of $169 million adjusted EBITDA of 105 million in DCF to limited partners of $59 million in July we announced a.

Cash distribution to our unit holders of 52, and a half cents per LP common unit consistent with the previous quarter, which resulted in coverage of 1.15 times.

Our total fleet horsepower as of the end of Q2 was largely consistent with where we ended the first quarter at approximately 3.7 million horsepower.

Our revenue generating horsepower at period end decreased approximately 6% to a little over 3.1 million horsepower as we saw the effects of the return of units that began following the events of March.

Our average horsepower utilization for the second quarter was 88%.

Pricing as measured by average revenue per revenue generating horsepower per month was $16 in 79 cents for Q2, which was a slight decrease from the previous quarters levels.

Of the total revenue for the second quarter up 169 million approximately 166 million reflected our core contract operations revenues, while parts and service revenue was $3 million.

Adjusted gross margin as a percentage of revenue was 70.4% in Q2 helped by the early cost cutting actions. We took net income for the quarter was 2.7 million in operating income was $34.9 million.

Net cash provided by operating activities was 97.4 million in the quarter.

Maintenance capital totaled 4.4 million in the quarter as we cut back on activities with the decreased utilization.

Cash interest expense net was $29.9 million.

And last with our quarterly EBITDA.

Encouraged borrowings our bank leverage was 4.64 times.

As it regards full year guidance for 2020, we've made a few minor revisions, which don't affect either adjusted EBITDA or distributable cash flow.

So we still currently expect 2020, adjusted EBITDA of between 395 million and $415 million in DCF of between 195 million in $215 million.

Last we expect to file our form 10-Q with the FCC as early as this afternoon.

And with that we will open the call to questions.

Okay.

Operator are there any questions currently.

I apologize at this time, we'll open the floor for questions. If you would like to ask a question. Please press the star key followed by the one key our first question comes from Charlie.

Hey, good morning.

First question just on on the margin side.

You cited cost cutting action just wondering if you get maybe a bit more color. There on this cost controls and kind of what we can expect shelf in future quarters.

Sure Charlie it's Matt and thanks to the question, Yes, you know back at the time of the first quarter earnings we talked a little bit about it as well going back when we started seeing what was what was coming kind of in that mid March area.

Timeframe, we went through really the entire business we did.

Fair amount of kind of Rightsizing, the labor force I think we probably cut about 10%.

Labour costs out of the out of the business as well as kind of going through the other parts of the business to kind of pull out some SGN a so I think what you saw in the second quarter was the impact we did most of that really before the end of March and so what we did we got ahead of it and so I think you're seeing.

And probably margins just a hair, obviously, a hair higher than they were historically, because we have taken out a whole bunch of that cost really at the as of the beginning of the second quarter. So as the quarter went on we got the benefit of that I think going forward, we continue to believe that.

With the asset base that we have in terms of of operating.

The assets that the margin should be very similar to where they were historically at USA compression. So again I think we were a tad higher this quarter than than you've seen in the recent past because of the.

The timing of those costs and I think as we kind of go through the rest of the year, we'll get back to probably what what would be a more normalized level of margin.

And Matt is unfair to say that when we looked at some of the cost cutting elements that we did.

When we look at some of our peers, who came into those with bloated gene a structure in there and are scrambling to kind of rationalized.

There are PNM calls.

Some of the some of the peers have taken some one time.

Short term adjustments you know there the alleviated there for a one k. match, which we have not done.

Reduced benefits they've reduced a lot of things that once a quarter or to his past, they're going to kind of reserve.

Revert back to the rural ways and.

They are not going to be able to wring some of those cost permanently out the organization. So the cost that we really have wrung out of things are actually sustainable or they're not onetime hits and we opted to to focus on things that that makes sense for the long term rather than.

And do some short term pain and suffering on our employees and then you'll wait a couple of quarters and bring it back end. So I'd say, it's much more sustainable and than maybe what some of those folks in the best or even some of our peers have been doing.

Okay, So some permanent reduction but.

Looking at margins down the road should probably.

Revert to what we've seen historically.

Yes, yes, I think thats.

Okay.

Secondly, just on customer activity, where about a month now into the third quarter. Appreciate the color that you gave in the opening remarks use kind of curious if you go through some of the your key basins and what you're seeing.

In this latest Mont activity trends versus what you saw onto Q.

Yes, so when you look at the at the most recent months, we're seeing a fairly substantial ticked up in quote activity.

New set activity and a slowdown in unit level returns.

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Like we saw in past cycles.

We had a fairly major hit from the smaller horsepower gas lift equipment, which was predominantly.

Up in the meantime region, we had some significant curtailments, we have some significant shut ins. So we work with our customers to to put in place. Some some short term.

Standby rates.

Where we actually in certain cases, just allow them the units to stay on location contemplating that there was going to be a rebound coming in the future.

Thank goodness for the industry.

Our customers on the NPV side, and then you'll for us at USA compression commodity prices have come back very very quickly. So in the standbys and the curtailments in the rate abatements, we're working through very very quickly. So some of the pricing concessions will continue for another month or two and.

Certain cases.

The view that are remaining but very dramatic increase in.

Startups again of the smaller horsepower gas lift that having curtail one phenomenon that hit this time that we haven't seen in the past was we with some of our larger customers.

Folks tend to use third party compression provider for services like USA compression and then they actually own some equipment the might be base load oriented. So we tend to be the variabilized guys were there when they are moving into new areas are ramping up and growing or as activities.

Pete than they've kind of played out the area.

When you've got an installation 10 machines and perhaps they owned three or four than USA compression with on the other six or seven.

As things.

Starting to slow down and Theyre productions starts to decline a little bit overtime. They buy said, one or two units home.

What happened in this first quarter when activity was going in blowing.

Some of our customers had committed to purchase.

Large horsepower compression assets and when the bottom dropped out in March these folks continue to take delivery of assets into the March April on into the May type timeframe.

So we had some instances where some of our larger horsepower units were installed and.

Now for a period of time, when we're out on a month to month contracts and we saw a fairly.

Meaningful slug of that equipment come home some of that was in the Permian basin that some of that tended to be up in the mid continent. So those activities have been worked through.

The backlog of customer purchases is slow they've taken delivery. So now folks are the point in time, where they are starting to rationalize their assets are large horsepower that is installed the staying install and what we're heading is is additional activity starts to ticked up.

For example, in the Eagle Ford in the Haynesville and onto the Appalachian We've got assets that are in the fleet being redeployed in those areas and that we've got folks inside the Permian and Delaware basins. As an example, and on into the mid continent different customers have different demand needs and we're seeing it ticked up there so I would say that.

It's it's this thing dropped off the cliff it hit very quickly our customers reacted quickly and I think all of US. We're envisioning that we were potentially looking at an 18 to 24 months sub 20 dollar environment on the crude oil side.

And sub two dollar natural gas environment and that has been mitigated. So I think activity is quickly ticking up.

And we will be the beneficiaries of that so I think as we pointed out in our commentary the third quarter.

US appears to be the bottom of the cycle and indicted things aren't taking up as evidenced by new contracting activity in this in the cessation of returns for equipment.

Small and large horsepower like.

Great that was a great response really appreciate all the color and side I mean, a monopolizing the call here, but just really quickly. The last question just eight the 8-K that you put out yesterday I just wanted to confirm that gives you pull axis the revolver.

Charlie It's Matt we wouldn't have full access it would ultimately be governed by the leverage ratio, but it gives us cushion throughout kind of the remainder of this year.

Case anything sort of unexpected happens and then kind of ratchets down over the course of next year. So we would never get up to the full borrowing capacity at that facility, but it does give us a little bit extra cushion to to manage the business through.

Great. Thank you.

Our next thanks Charles.

From Shneur Gershuni, yes.

Hi, good morning, everyone glad to everyone well up Eric I was wondering if you can go back to your prepared remarks.

On the call just with respect to how the company. This works.

Just kind of wanted to clarify one of the common you had made you talked about how as as wells deep pressurized the need for come through pricing continues to increase.

Try to clarify I guess, one point is were you, saying that like that's just kind of the natural flow.

And that's something that would have happened whether we have this issue with coke I didn't know pack.

Regardless, where are you, saying that because there's not a lot of new drilling activity that pressure slows in trunk lines in so it actually increases the need for.

For more compression as well too as a result in this slow down and drilling activity.

Yes generative this is Eric and in our focus is not on the slowdown or changing conditions in trunk lines. It's actually looking at the wells looking at the major pad size looking at the regional applications. So.

His mad pointed out in the prepared remarks, when you have the steep shale declines.

From went when new drilling activity ceases, you'll see on 18 to 24 to 30 month period of significant decline and then wells that have been up and operational for three years four years five years.

Maybe they're not making 5000 barrels of oil and 20 million cubic feet a day anymore, maybe the making 500 barrels a day and they're making about a million or million and a half cubic feet of gas and you've seen the decline rates on those types of wells.

Change from 70, 80, 90% to 15, 20% so what we see going on is as new activity.

His new drilling activity ceases demand for new compression will slow so thats, where historically a lot of the growth in our industry is come our in periods, where you've seen dramatic increases in rig counts. We go back post group country Katrina and Rita in the old five or six or seven range and you go back.

After the financial Meltdown in 2008, and you saw growth in activities in 2010, 11, and 12 on into 2013 and part.

The way through 2014, a lot of growth a lot of demand and then in times like we're having now the new activity slows down.

People need cash flow people try to maintain production as much as they can but for that short period of for Tailwinds and now what you're seeing is the flush production drops quickly and then that other component and relative steady state continues so.

Theres two phenomenon that go on you see.

Decline in volume, but you also see decline in pressure, so that's where the compression horsepower.

Comes in where as the pressures decline you got to suck harder to get that gas out of the spare tire of the bicycle so to speak so when volumes decline in pressures decline you might actually see flat to slightly increasing levels of compression horsepower.

Pressures decline volumes up anymore.

Volumes up pressures down can't really you know you may need some more and then when pressures are down in volumes are down you may stay flat you may slightly increase so thats really what shneur. We're trying to speak to is the fundamentals of when new activity slows down is that you've got a stock.

Harder to maintain the existing level of of production throughput as the pressures start to decline.

Yes, if that makes perfect sense, but I'm, saying that was kind of my understanding prior to all this year. So I think you what's the point really just more to really educated listeners as to this is how our business works.

And that nothing has really changed in terms of our understandings of everything but in theory, you just have a lost opportunity with this slowdown in rigs probably 30 to 40 months out when you would have captured that compression as kind of a growth in that kind of the right way to think about it.

I think thats, a great way to think about it and we've been in business for 22 plus years.

People focus on the growth mode, and the environment and then when the declines come for some reason people.

Look to compression is behaving similar to the oilfield service guys, who are tied to the drilling cycle and that's when we start to get the noise about guys you need to to go into preservation mode, you need to country distribution you can't afford to do these things because your business was volatile and I think we'll we're trying to draw attention to Shinier decision.

You pointed out is.

A lot of our production at our compression assets are installed in this very stable production profile. So yeah. We just slow the growth we powered through the downturn, we maintain our distributions and then when market conditions improve and a year or two years or whatever it takes like they've done in many many cycles since we formed a business sense.

Back in 1998, you go back Museum some growth again, so we grow when it makes sense to grow.

We don't grow and we go down into the hunker down mode and power through a downturn and our view is always been if we maintain the proper right size corporate DNA, we maintain the right type of assets the right kind of contract mix.

The right kind of customers that when these inevitable downturns occur we're extremely well positioned we can our through and we can reward our long term shareholders.

With the maintaining a decent level of distribution.

So nothing's really changed.

Okay fair enough.

Just two more questions if I'm wrong.

I guess.

You sort of talked about me in the prior back and forth.

The turn back of some assets.

Just to clarify that was more of a function of somebody over ordered or if you would over ordered based on some expectations and there were obviously using their own assets, but theres not a trend where this is not a trend where operators are looking to reduce their variable costs. Despite.

Taking compression in house kind of on a go forward basis, which would seem counterintuitive because nothing in bulk capital outlays.

Am I thinking about it correctly.

Yes, you are I think you coming to a downturn like this and.

If you go back to that I mentioned, five and six post Katrina Rita capital was massively available for anybody in the energy business upstream midstream downstream you pick the bank for flooding capital.

In the collapse in 2008 hit.

Banks kind of pulled there or is it a little bit than loosen their per streams again back in the.

2010 to 2014 range and when the 14 15 16 collapse occurred a bank started to get a little more skittish, Hey, guys focus on your core competency. We've got enough exposure to pick an aim of X y Z DMP or or X y Z midstream.

So the bank started kind of tightening the capital spigots, a little bit and now you fast forward to today, where you've seen a lot of.

Flush out in the industry, you're seeing some bankruptcies occur capitals really constraint on throttled back.

It's our belief that this trend that has occurred over the last three waves that I've mentioned will continue into the future and then when we come out of this downturn in the he in PE guys start to put the bit back on the ground, they're going to focus on their core competency, which is drilling and producing they're not going to be building pipe.

Lives are not going to be purchasing compression, they're going to focus on that core competency. So I think it's the trend toward outsourcing we will continue.

There's just a few of us very few of US who have the capabilities of of backing the play.

The major oil companies in the large independents, both from a capital perspective as well as from an operational.

Expertise as well as the ability to focus and maintain a level of safety standards and proficiency, though to required by the by the biggest so the trend is going to continue and I think that bodes well for the for companies like USA compression, who have the size of scale in the operational excellence to be able.

To do the sophisticated type of operations, that's got to be required more and more by the majors going forward.

Great and one final question, if I may just with respect to seeking out a a waiver.

On your covenant.

Was it more bell they operate the business as is or was it more to get flexibility around paying the distribution at these elevated levels versus potentially recreating decreasing and not meeting at CECO waivers just wondering if you can.

Give us the board thoughts in discussion is it's how you way different options between a waiver versus the distribution.

Reset.

Yeah sure, it's Matt I think on the distribution obviously, that's a decision the board makes quarterly as we kind of noted I.

I think they looked at the.

Quarter second quarter results in part based on that made that decision to kind of keep it where it was the you know in terms of the.

The bank Covenant, what you may recall as we came into this year, we had when we did the deal initially with CDN back at two and half years ago, We had it the covenant levels were higher as we sort of integrated the business as we came into the first quarter of 2020 at ratcheted down and it was five times.

And it was basically set at five times for the remainder of the facility. So.

When we looked at our initial budget. Obviously you know everything worked just fine and then you had kind of March and April hit so when that happened.

And given just you know this just obviously a lot more I think uncertainty lingering out there now than than there in the past we thought the prudent thing to do is to to go had talked to the banks explained the situation.

And basically get a little bit a cushion so that we could kind of operate the business and again you know not you know.

You're not we were not talking pay we think we were going to have enormous breaches, but I think just the increased uncertainty that's kind of out there in the market right now we didn't want to be in it in a situation where down the road something happened in kind of caught us off guard. So we went ahead in soda.

Did it ahead of time, if you will.

Perfect.

Really appreciate the color guys. Thank you for taking the time with me today and at the same thing.

You bet there thanks.

Our next question comes from TJ Schultz with RBC capital markets.

Hey, good morning.

And that's that's going to answer and I just one quick one on the.

The $10 million GP contribution agreement are there any time milestones that Robert control of that option for you all.

By that or is that always energy transfer decisions on their ownership alternate yeah TJ, it's Matt Yeah. It works it really two ways. They the the ability of energy transfer had a time one year. After closing so April of 2019 any time starting at that point.

I think they can elect unilaterally to put that the GP interest back to the partnership for that $10 million. So that's on their side. So they're kind of right now free to go.

The other side is when their ownership, which is roughly 46 and a half million units right now when that gets LP units when that gets down to 12, and a half million units, which is about a 75% decrease.

At that point it automatically triggers the repurchase by the partnership from energy transfer for that same amount.

Okay got it thanks guys.

Yes, Thank you Jay.

Tell me if that further questions in queue and I would like to turn it back over to Eric long.

Thanks, operator.

We expect 2020 to be a tale of two halves. The first half of the year saw solid results, but during the second quarter, we saw the impact of commodity price volatility and back on the global pandemic. There continues to be a good amount of uncertainty on the extended duration of the current weakness and therefore, the timing and magnitude of the recovery but.

Good news is that we have continued to manage USA compression with the same business model that has held up over 22 years.

Business built on natural gas demand is long term importance to this country and the world we continued to be optimistic about.

We believe the underlying stability of our large horsepower infrastructure focus contract compression services business model and the science behind the need for compression and the interplay between pressures in volumes will be a key point a positive differentiation as we work through the rest of the year.

We took action early into the downturn on both cost and capital spending that have served us well and the second quarter and we will continue to focus on things within our control like in past downturns, we expect to weather the storm and come out on the other side with the business model built for stability.

Thanks for joining us today Im pleased to be say, we look forward to speaking with everyone on our next call. Thanks to your continued support of USA compression.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

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Good morning, welcome to USA compression partners LP second quarter 2020, <unk> earnings conference call. During today's call all parties, hoping to listen only mode and following the call to conference will be open for questions. This conference is being recorded today August four 2000.

I would now like to turn the call over to Chris Porter, Vice President General Counsel and Secretary.

Good morning, everyone and thank you for joining US. This morning, we released our financial results for the quarter ended June 32020.

You can find our earnings release as well as recording of this call in the Investor Relations section of our website at USA compression dotcom the recording will be available through August 14 2020.

During this call our management will discuss certain non-GAAP measures you will find definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures in the earnings release as a reminder, our conference call will include forward looking statements. These statements include projections and expectations of our performance and represent.

Our current beliefs actual results may differ materially.

Please review the statements of risk included in this mornings release and in our SEC filings.

Please note that information provided this cost big owing to manage views as of today August sport and may no longer be accurate at the time of a replay.

Ill now turn the call over to Eric long, President and CEO of USA compression.

Thank you Chris Good morning, everyone and thanks for joining our call also with me as mentally UGI our CFO.

This morning, we released our financial and operational results for the second quarter of 2020, achieving a solid quarter of operational and financial results, especially when you consider the market environment in which we found ourselves.

I'm going to last quarter today I plan to briefly highlight the quarterly results and then spend more time discussing our business model.

Well, we have seen happening out in the marketplace and what we're doing to manage the business in this uncertainty.

The second quarter, not surprisingly saw decreased revenues as a result of customers returning to equipment and a slowdown in unit redeployments out in the field.

Total revenues were $160 million approximately 6% below Q1, however, due in large part to cost cutting measures taken in late Q1 in early Q2 adjusted EBITDA for the second quarter was approximately 105 million representing less than a 1% decrease from Q1.

Reflecting this focus on cost.

Adjusted gross margin and adjusted EBITDA margin were very strong, it's 70.4% and 62.5% respectively.

Average utilization throughout the quarter was 88.0% debt from the Q1 levels of 92.5%, reflecting continued returns of units throughout the quarter.

We ended the quarter with approximately 3.1 billion active horsepower was off about 6% from the end of Q1, while the total fleet remained consistent at about 3.7 billion horsepower.

Average pricing across the fleet decreased slightly during the second quarter, which reflected the return of a fair amount of small horsepower, which typically earns a higher dollar per horsepower rate as well as the impact of selected temporary service rate decreases.

Average monthly revenues of $16.79 per horsepower was down slightly from $16, an 89 cents in the first quarter.

Last quarter, we discussed revising the capital spending plan and we saw some impact of that decision in the second quarter, where growth Capex consistent consisted of $22.8 million.

And maintenance Capex was $4.4 million.

The growth Capex included delivery of 16700, new horsepower of which about 75% consisted of large horsepower units.

This growth Capex had largely already been locked in by the time, we had the events of early March.

We do plan to seeing meaningful reduction in growth Capex for the balance of the year, which is unchanged from previous quarters commentary.

Maintenance capital was also down versus Q1, as we limited spending given the slowdown in activity.

At this point in time, we expect expansion capital spending to total between $80 million to $90 million.

Assist with our guidance from the last call, which is compared to our initial guidance of $110 million to $120 million.

Based on the second quarter's results the board decided to keep the distribution consistent and 52 and a half cents per unit, which resulted in distributable cash flow coverage ratio of 1.1 times X, which was up slightly from Q1, primarily due to a reduction in maintenance capital spending in Q2.

Our bank Covenant leverage ratio was six point fourx for the quarter just as a reminder, the quarterly distribution as a decision that our board of directors play makes on a quarterly basis.

As has always been the case since our IPO the board can opt to maintain reduce or suspend the distribution as it deems most appropriate on a quarterly basis.

Continued to be proud of and dedicated men and women of USA compression, who work hard throughout the second quarter two delivered to our customers. The services they rely on to successfully operate their businesses.

Easily day to day life has changed a lot during this past quarter and how the future plays out as anything but certain but in the face of all this uncertainty our dedicated field technicians and everyone else who supports them figured out how to make it work and continue to do so every day in a safe operating manner.

Let's talk a little bit about natural gas in crude oil.

Last quarter I spent some time on the different market dynamics between crude and natural gas and why we felt that USA compression was well positioned to be somewhat insulated from the dramatic price volatility and uncertainty around crude oil.

As our business is driven by the demand for natural gas.

The time of our last call crude was trading around $20 a barrel.

Since then it has seen a bit of a rally to the $40 barrel range and has shown relative stability.

Even with that rebound many DMP companies are being cautious on capital budget.

That makes for a challenging environment for companies that depend on new crude drilling oil activity and you're seeing the fall at the bankruptcy filings. We are fortunate that our business is driven by the demand for natural gas.

While we continue to take a long term view the overall may four and production of natural gas even the near term outlook has shown signs of relative stability during the industry weakness in strength in the medium to longer term. We continue to believe that natural gas will play a more and more important role as a clean fuel of choice.

Yes.

None of the energy markets that has been quite arrived since we announced first quarter earnings in early may as the pandemic has continued to play out around the world demand has been impacted both on the oil and natural gas side.

However, as economies began to open back up in May and since oil demand has started to revamp.

Do so global consumption of petroleum and liquid fuels up 10 million barrels per day versus may.

Right now that he is forecasting 2020 consumption to be about 93 million barrels a day, which is only about an 8% decrease from 2019 levels. The demand destruction, which was previously forecast to be much more severe seems to have moderated and we've seen crude prices hold relative relatively steady.

$40 per barrel.

As previously mentioned, even with the strengthening of crude oil prices. Many of the S&P companies have held the line reduced capital budgets showing a level of discipline that we havent necessarily seen in past downturns.

The total rig count is down approximately 70% since the beginning of the year.

Well, just the last week or so you've seen a rigor to get added in the Permian. Many expect the reduced council last for considerable while longer.

That should help support crude oil prices as economies recover and the demand continues to tick upward.

While it is too early to know what capital budgets will look like for 2021, I think it's a fair assumption that overall production growth will be less than we've seen in the past years and over the coming quarters, we will see even more evidence of steep shale well declines in the early years of wells what.

As I've discussed before shale type curves, while Steve but first after a few years tend to flatten out significantly when it gives us well moves into more of a steady state existence. So if the capex cuts whole producers will simply not be drilling enough new wells to offset the decline of their existing flush production wells and then overtime.

You have a large amount of wells in that flat steady state part of the curve where decline has also meaningfully slowed.

While impacting production growth for the NPS. This is a favorable situation for USA compression.

Nipigon component of USA is larger horsepower fleet is deployed in infrastructure applications exhibiting the flat steady state shallow decline profile.

So even without any drilling activity compression is continually needed to continue to move these stable volumes of natural gas.

But as you all are aware USA compression doesn't move crude oil we deal 100% with natural gas overall prospects for crude oil impact many of our customers, particularly in regions with significant associated gas.

Because of the reduction in crude oil production you are seeing a related decline in associated gas production, although generally not quite as severe as previously expected.

Earlier, I mentioned, how natural gas demand destruction wasn't nearly as bad as that for crude oil.

Backlog the demand.

It was projected to be lower we have what we've seen so far is even more positive than most of predicted we've always believed that the resiliency of natural gas demand was one of the primary factors underpinning USA compressions business model natural gas simply as a preferred fuel for his two largest end users.

Residential and commercial power generation and industrial manufacturing.

Well there is expected to be some short term demand disruption. The EA is currently projecting natural gas consumption to decline by about 3% in 2020, the underlying demand for natural gas remains strong.

Well generally things have stabilized for the midstream sector the capital budgets of the ERP companies remain dramatically reduced from where they were beginning in the year.

So what does that dynamic being for USA compression.

Hi, often discussed the relationship between compression horsepower and declining reservoir pressure simply describe as pressures decline to move the same volume of gas requires an exponential increase in compression horsepower as an analogy think about a fully inflated by tire when you take off of that.

Cap air pushes out of the tire very quickly at first but then slows quickly.

Those are not that different this concept underlies the reason why compression is not transactional like untypical oilfield service company drill the well completed then move on instead compression stays around for a long long time, but that loose of oil and gas slows down and ultimately needs more effort.

Yes power to get it out from both associated gas and dry gas applications, even though gas volumes, maybe declining the compression required me actually increase there is pressure also.

Declines.

You've also heard a lot about gas oil ratios, which in many cases and increased as producers have moved beyond core areas as increasing gas oil ratios have led to more associated gas production per barrel of oil produced you will need additional compression to move those volumes.

These concepts underpin the compression services model. The USA compression is based on what markets are great. We grow their customers over our 22 years of business, we've been through multiple cycles during periods of reduced activity and even production declines we have not historically experienced material declines.

And the need for our large horsepower compression services are required horsepower.

The dynamics I mentioned above along with relatively resilient demand has historically made large horsepower compression less volatile business.

As we mentioned on last quarter's call. The natural gas markets are expected to experienced a fairly unique dynamic in the near term future as of the relatively resilient demand outlook intersects production declines, notably from associated gas regions, you're already seeing consumption tick back upwards, while supply begins to to do.

Decrease for example, Mexican exports in July are at record levels, averaging about 6.1 Bcf per day up some 13% from year ago levels of about 5.4 Bcf a day.

LNG exports, however, bill had been a little soft and for July averaged about 3.2 Bcf per day down about 24% from year ago levels of about 4.1 Bcf per day.

In the near term that oversupplied has led to higher than expected underground storage levels. This we get through the summer and into the natural gas withdrawal season, we may very well may see a more strain supply demand balance because of the decrease in new well drilling of the dynamics of the shale type curves really adding some pressure to the.

The supply side equation.

Oral gas futures prices for calendar 2021 are averaging around $2.50 per mcf.

As it regards the markets, obviously, the sooner than expected rebounded crude oil prices and relevance relative stability in both crude oil and natural gas bodes well for the broader energy industry and the resilient demand on the natural gas side bodes well for critical service providers like USA compression as.

Natural gas continues to play very important role in those countries energy future. We are optimistic about the future outlook for the compression business.

So let's talk about our large horsepower focus.

Over the 22 years of USA compressions existence, our business model has not changed we've always focused on larger horsepower compression used in large regional infrastructure oriented facilities. The rationale behind this strategy has been proven after in previous downturns and simply comes down to the fan.

Back to these facilities moved very large amounts of natural gas and or demand oriented.

We have purposely pursue the large horsepower.

And because these facilities are not easily shutdown and the cost of demobilization, which are borne by our customers to sent home our assets tend to be extremely expensive.

This creates a barrier to exit which lends stability to the business that other service providers, both in compression as well as activities closer to the wellhead do not possess.

We have always pointed to the stability of this business model and as we work through the remainder of 2020, we expect to exceed experienced that relative stability.

So little bit on our customers.

Based on customer activity and indications, we're currently expecting utilization to bottom out in the third quarter.

At June 30, our utilization stood at 86.2%, which was similar to where fleet utilization declined back into 2014 to 2016 timeframe.

Remember the crude got as low as $27 per barrel back then.

While a went lower back in March this year it rebounded much more quickly and a stabilized.

And so while the recent quarter or so is somewhat different from the 2014 cycle.

Our customers to behave in a similar fashion.

We have seen the rate of return of underutilized assets decreased meaningfully we have seen recent quote activity pick up substantially and have had equipment starts begin to once again, how number equipment stops we continue to see the large horsepower equipment classes remain utilized proving this.

Credigy pursuing larger infrastructure based applications.

Overall, our customers are working to figure out what the future holds for their particular operations as well as the overall industry and that creates different motivations for different customers in different basins.

The vast majority of our assets are either dry gas activities and natural gas handling activities such as those connected to gas processing plants are large volume centralized gas lift applications beyond the flush production stage in the stable shallow decline steady state mode.

With the geographical diversity of our asset base, we have exposure to different producing regions and as such.

Have a balanced throughout the fleet events in one particular area like associated gas declines in the Permian and Delaware basins, while they affect us are partially mitigated by activity in other regions like Appalachian.

I've mentioned before or contract mix and have historically, we had anywhere between 40 and 50% of our assets out on a month to month basis.

As a result of recontracting activities over the last year. So we have reduced our month to month exposure to approximately 26%, which puts us in a good position as we work through the rest of the year, we have new starts of equipment scheduled for the back half a year. So that will add some additional term contracts to help mitigate.

Some of the month to month units that have come home.

While the industry as a whole is by no means out a little woodson onto recovery. We believe you're are beginning to see signs of a bottom indications of recovery. While we saw a fair amount of unit returns during the second quarter. The rate of were unit returns has slowed appreciably and as a result of our cost cutting and capital spending decisions we.

Early in the company is positioned to weather any additional market softness in emerging the positioned to benefit from what we believe will be an eventual recovery.

As many appreciate our focus over the years as purposely bed away from activities that introduced commodity price risk.

Oriented toward larger installations, serving demand driven natural gas infrastructure applications.

We have deployed significant amounts of capital.

Excuse me the significant amounts of horsepower in large multi unit centralized compressor stations over the recent years. These installations are critical to serving the resilient demand that I discussed earlier.

Production in many cases has moved into the steady state base was shallow decline rates.

Thereby reducing relatively more stable volumes and pressures as these wells age and the reservoir pressures naturally continued to decline more horsepower may be required to accomplish.

Customers operational needs.

I'll turn the call over to map to walk through some of the financial highlights for the quarter Matt.

Thanks, Eric and good morning, everyone today, USA compression reported a solid second quarter results, including quarterly revenue of $169 million adjusted EBITDA of 105 million in DCF to limited partners of $59 million in July we announced.

Cash distribution to our unit holders of 52.5 cents per LP common unit consistent with the previous quarter, which resulted in coverage of 1.15 times.

Our total fleet horsepower as of the end of Q2 was largely consistent with where we ended the first quarter at approximately 3.7 million horsepower.

Our revenue generating horsepower at period end decreased approximately 6% to a little over 3.1 million horsepower as we saw the effects of the return of units that began following the events at March.

Our average horsepower utilization for the second quarter was 88%.

Pricing as measured by average revenue per revenue generating horsepower per month was $16 in 79 cents for Q2, which was a slight decrease from the previous quarters levels.

Of the total revenue for the second quarter up 169 million approximately 166 million reflected our core contract operations revenues, while parts and service revenue was $3 million.

Adjusted gross margin as a percentage of revenue was 70.4% in Q2 helped by the early cost cutting actions. We took net income for the quarter was 2.7 million in operating income was $34.9 million.

Net cash provided by operating activities was 97.4 million in the quarter.

Maintenance capital totaled 4.4 million in the quarter as we cut back on activities with the decreased utilization.

Cash interest expense net was $29.9 million.

And last with our quarterly EBITDA.

In current borrowings our bank leverage was 4.64 times.

As it regards full year guidance for 2020, we've made a few minor revisions, which don't affect either adjusted EBITDA or distributable cash flow.

So we still currently expect 2020, adjusted EBITDA of between 395 million in $415 million and DCF of between 195 million in $215 million.

Last we expect to file our form 10-Q with the FCC as early as this afternoon.

And with that we will open the call to questions.

Okay.

Operator are there any questions currently.

I apologize at this time, we'll open the floor for questions. If you would like to ask a question. Please press the star Kit followed by the one key our first question comes from Charlie.

Hey, good morning.

First question just on on the margin side.

Decided cost cutting action just wondering if you get maybe a bit more color. There on this cost controls and kind of what we can expect to shelf in future quarters.

Sure Charlie it's Matt. Thanks for the question, Yes, you know back at the term of the first quarter earnings we talked a little bit about it as well going back when we started seeing what was what was coming kind of in that mid March area.

Timeframe, we went through really the entire business. We did a fair amount of kind of Rightsizing. The labor Force I think we probably cut about 10%.

Of labor costs out of the out of the business as well as kind of going through the other parts of the business to to kind of pull out some SG nay. So I think what you saw in the second quarter was the impact we did most of that really before the end of March and so what we did we got ahead of it and so I think you're.

Seeing probably margins just a hair, obviously, a hair higher than they were historically, because we have taken out a whole bunch of that cost really at the as of the beginning of the second quarter. So as the quarter went on we got the benefit of that I think going forward, we continue to believe that.

With the asset base that we have in terms of operating.

The assets that the margin should be very similar to where they were historically at USA compression. So again I think we were a tad higher this quarter than than you've seen in the recent past because of the.

Timing of those costs and I think as we kind of go through the rest of the year, we'll get back to probably what what would be a more normalized level up margin.

And Madison Fair to say that when we looked at some of the cost cutting elements that we did.

When we look at some of our peers, who came into those with bloated gene a structure in are scrambling to kind of rationalized.

They're PNM calls.

So the some of the peers have taken some one time.

Short term adjustments.

The alleviated there for a one k. match, which we have not done they've reduced benefits. They produced a lot of things that once a quarter or to his past, they're going to kind of reserve route revert back to the rural ways and.

They're not going to be able to wring some of those cost permanently of the organization. So the cost so we reg and wrung out of things are actually sustainable or they're not onetime hits and we opted to to focus on things that that make sense for the long term rather than.

And do some short term pain and suffering on our employees and then wait a couple of quarters of bring it back in so I'd say, it's much more sustainable that than maybe what some of those folks and the faster even some of our peters of into it.

Okay, so some permanent reductions but.

Looking at margins down the road should probably.

What we've seen historically.

Yes, I think thats.

Okay.

Secondly, just on customer activity, where about a month now and say that third quarter. Appreciate the color that you gave in the opening remarks use kind of curious if you go through some of the your key basins and what you're seeing.

In this latest month activity trends versus what you saw in Twoq.

Yes, so when you look at the at the most recent months, we're seeing a fairly substantial ticked up in quoting activity.

New set activity and a slowdown in unit level returns.

Like we saw in past cycles.

We had a fairly major hit from the smaller horsepower gas lift equipment, which was predominantly.

Next up in the mid continent region, we had some significant curtailments, we have some significant shut ins. So we work with our customers to put in place some some short term.

Standby rates.

Or we actually in certain cases, just allow them the units to stay on location contemplating that there was going to be a rebound coming in the future. Thank goodness for the industry.

Our customers on the NP side, and then for us at USA compression commodity prices have come back very very quickly so any of the standbys in the curtailments in the rate abatements.

We're working through very very quickly. So some of the pricing concessions will continue for another month or two in certain cases.

The few that are remaining but very dramatic increase in.

Startups again of the smaller horsepower gas lift that haven't curtail one phenomenon that hit this time that we haven't seen in the past was we with some of our larger customers.

Folks tend to use third party compression provider for services like USA compression and then they actually own some equipment that might be base load oriented. So we tend to be the variabilized guys were there when theyre moving into new area, and theyre ramping up and growing or as activities.

The they've kind of played out the area.

When you've got an installation head machines, and perhaps sailed three or four than USA compression with on the other six or seven.

As things.

Starting to slow down and Theyre productions starts to decline a little bit overtime. They buy said, one or two units home.

What happened in this first quarter when activity was going in blowing.

Some of our customers had committed to purchase.

A large horsepower compression assets and when the bottom dropped out in March we spoke to continue to take delivery of assets into the March April on into the May type timeframe. So we had some instances where some of our larger horsepower units were installed and.

Now for a period of time and we're out on a month to month contracts and we saw a fairly.

Meaningful slug of that equipment come home some of that was in the Permian basin that some of that tended to be up in the mid continent. So those activities have been worked through.

The backlog of customer purchases is slow they've taken delivery now folks are the point in time, where they are starting to rationalize their assets are large horsepower that is installed the staying install and what we're heading is is additional activity starts to pick up.

For example, in the Eagle Ford in the Haynesville and onto the Appalachian We've got assets that are in the fleet being redeployed in those areas and that we've got folks inside the Permian in Delaware basins as an example, and on into the mid con it different customers have different demand needs and we're seeing it ticked up there so I would say that.

If this thing dropped off the cliff it hit very quickly our customers reacted quickly and I think all of US. We're envisioning that we were potentially looking at an 18 to 24 months sub 20 dollar environment on crude oil side.

Sub two dollar natural gas environment.

That has been mitigated so I think activity is quickly ticking up.

And we will be the beneficiaries of that so I think as we pointed out in our commentary the third quarter.

To us appears to be the bottom of the cycle and indicted things aren't taking up as evidenced by new contracting activity in this in the cessation of returns for equipment.

Small and large horsepower like.

Great that was a great response really appreciate the color and side I mean, a monopolizing the call here, but just really quickly. The last question just eight the 8-K that you put out yesterday I just wanted to confirm if that gives you pull axis the revolver.

Charlie It's Matt we wouldn't have full access it would ultimately be governed by the leverage ratio, but it gives us cushion throughout kind of the remainder of this year in case anything sort of unexpected happens and then kind of ratchets down over the course of next year. So we would never get.

Up to the full borrowing capacity at that facility, but it does give us a little bit extra cushion to to manage the business or.

Great. Thank you.

Hi, Thanks.

Comes from Shneur Gershuni, yes.

Hi, good morning, everyone GLAC, everyone well up Eric I was wondering if you can go back to your prepared remarks on the call just with respect to how the company. This works.

Just kind of wanted to clarify one of the comments that you had made you talked about how as as wells depressurize than the per come through pricing continues to increase.

Trying to clarify I guess, one point is were you, saying that like that's just part of the natural flow.

Thats something that would have happened whether we have this issue with coke I Didnt know pack.

Regardless of where are you, saying that because there's not a lot of new drilling activity that pressure slows in trunk lines in so it actually increases the need or.

For more compression as well too as a result of this slowdown in drilling activity.

Yes generative this is Eric and our focus is not on the slowdown or changing conditions in trunk lines. It's actually looking at the wells looking at the major pad sites looking at the regional applications. So.

His mad pointed out in the prepared remarks, when you have the steep shale declines.

From went when new drilling activity ceases, you'll see 18 to 24 to 30 month period of significant decline and then wells that have been up and operational for three years four years five years.

Maybe they're not making 5000 barrels of oil and 20 million cubic feet a day anymore, maybe the making 500 barrels a day and they're making about 1 billion EUR 1 billion and a half cubic feet of gas.

And you've seen the decline rates on those types of wells.

Change from 70, 80, 90% to 15, 20% so what we see going on is as new activity.

His new drilling activity ceases demand for new compression will slow so thats, where historically a lot of the growth in our industry is come our in periods, where you've seen dramatic increases in rig counts. We go back postscript country Katrina and Rita OPI, those six or seven range and you go back.

After the financial Meltdown in 2008, and you saw growth and activities in 2010, 11, and 12 on into 2013 in part part way through 2014, a lot of growth a lot of demand and then in times like ramping now the new activity slows down.

People need cash flow people try to maintain production as much as they can.

For that short period of curtailments and now what you're seeing is the flush production drops quickly and then that other component and relative steady state continues so.

Theres two phenomenon that go on you seat.

Decline in volume, but you also see decline in pressure, so thats, where the compression horsepower.

Comes in where as the pressures decline you got to suck harder to get that gas out of the spare tire of the bicycle so to speak so when volumes decline and pressures decline you might actually see flat to slightly increasing levels of compression horsepower.

Pressures decline volumes up anymore.

Volumes up pressures down in can't really you know you may need some more and then when pressures are down in volumes are down.

You May stay flat you may slightly increase so thats really what we're trying to speak to is the fundamentals of win new activity slows down is that you've got a stock harder to maintain the existing level of of production throughput as the pressures start to decline.

Yes, if that makes perfect sense, but I'm, saying that was kind of my understanding prior to all of this year. So I think you what's the point really just more to really educate the listeners as to this is how our business works.

And that nothing has really changed in terms of our understandings of everything but in theory, you just have a lost opportunity with this slowdown in rigs probably 30 to 40 months out when you would have captured that compression as kind of growth and that kind of the right way to think about it.

I think thats, a great way to think about we've done in business for 22 plus years.

People focus on the growth mode in the environment and then when the declines come for some reason people look to compression is behaving similar to the oilfield service guys, who are tied to the drilling cycle and that's when we start to get the noise about gosh, you need to to go into preservation mode, you need to control just.

True fusion you can't afford to do these things because your business was volatile and I think what we're trying to draw attention to Shinier just as you pointed out is.

A lot of our production at our compression assets are installed in this very stable production profile. So yeah. We just slow the growth we powered through the downturn, we maintain our distributions and then when market conditions improve and a year or two years or whatever it takes like they've done in many many cycles since we formed the business sense.

Back in 1998, you go back new resume some growth again, so we grow when it makes sense to grow.

We don't grow and we go down into the hunker down mode and power through a downturn and our view is always been if we maintain the proper rightsize corporate DNA, we maintain the right type of assets right kind of contract mix.

The right kind of customers when these inevitable downturns occur we're extremely well positioned we can power through and we can reward our long term shareholders.

With maintaining.

A decent level of distribution.

So nothing's really changed.

Okay fair enough.

Just two more questions were primarily.

I guess, the eastern have talked about me in the prior.

Back and forth about the term back up some assets.

Just to clarify that was more of a function of some of the over ordered or a few had over ordered based on some expectations and there were obviously equal there on assets, but theres not a trend where this is not a trend where operators are looking to reduce their variable call bye.

Taking compression in house kind of on a go forward basis, which would seem counterintuitive because nothing in bulk capital outlays.

Am I thinking about it correctly.

Yes, you are I think you come into a downturn like this and.

If you go back to that I mentioned, five or six post Katrina Rita capital was massively available for anybody in the energy business upstream midstream downstream you pick the bank for flooding capital.

On the collapse in 2008 hit.

Banks kind of pulled their margin a little bit loosen their purse strings again back in the.

2010 to 2014 range and when the 14 15 16 collapse occurred.

Bank started to get a little more skittish, hey, guys focus on your core competency, we've got enough exposure to pick an aim of X y Z GMP or or X y Z midstream.

So the bank started kind of tightening the capital spigots, a little bit and now you fast forward to today, where you've seen a lot of flush out in the industry, you're seeing some bankruptcies occur capital is really constraint on throttled back.

It's our belief that this trend that has occurred over the last three waves that I've mentioned will continue into the future and then when we come out of those downturn in the BNP guys start to put the bit back on the ground, they're going to focus on their core competency, which is drilling and producing they're not going to be building pipe.

Lives are not going to be purchasing compression, they're going to focus on that core competency. So I think it's the trend toward outsourcing we will continue.

There's just a few of us very few of US who have the capabilities of of backing the play.

The major oil companies in the large independents, both from a capital perspective as well as from an operational.

Expertise as well as the ability to focus and maintain the level of safety standards and proficiency those are required by the by the big guys. So the trend is going to continue and I think that bodes well for the for companies like USA compression, who have the size scale and the operational excellence to be able.

To do the sophisticated type of operations, that's got to be required more more by the majors going forward.

Great and worked final question, if I may just with respect to seeking out a waiver.

On your covenant.

Was it more about being operate the business as is.

Was it more to get flexibility around paying the distribution at these elevated levels versus potentially decreasing decreasing and not meeting.

Eco waivers just wondering if you can.

Given the board thoughts in discussion is it's how you wait different options between a waiver versus a distribution.

Reset.

Yes, sure it's Matt I think on the distribution obviously, that's a decision the board makes quarterly as we kind of noted.

I think they looked at the.

Quarter second quarter results and in part based on that made that decision to can keep it where it was the.

In terms of the.

The bank Covenant what.

You may recall as we came into this year, we had when we did the deal initially with CDN back at two and half years ago. We had at the covenant levels were higher as we sort of integrated the business as we came into the first quarter of 2020 at ratcheted down and it was five times and it was basically said at five.

Runs for the remainder of the facility so.

When we looked at our initial budget obviously.

Everything worked just fine and then you had kind of March and April hit so when that happened.

And given just this just obviously a lot more I think uncertainty lingering out there now than than there in the past we thought the prudent thing to do is to to go had talked to the banks explain the situation.

In basically get a little bit a cushion so that we could kind of operate the business and again you know not.

You are not we were not talking Hey, we think we were going to have enormous breaches, but I think just the increased uncertainty that's kind of out there in the market right now we didnt want to be in it in a situation where down the road something happened in kind of caught us off guard. So we went ahead in soda.

Did it ahead of time, if you will.

Perfect.

Really appreciate the color guys. Thank you for taking the time till today and at the same day.

You bet next action here.

Our next question comes from TJ Schultz with RBC capital markets.

Hey, good morning.

And that's that's on the Internet just one quick line on the.

The $10 million GP contribution agreement are there any time milestones that Robert controller that option for you all.

By that or is that always and energy transfer decisions volumes their ownership alternate yes, TJ, it's Matt yes. It works it really two ways. They the the ability of energy transfer had a time one year. After closing so April of 2019 any time starting at that point.

I think they can elect unilaterally to put that.

The GP interest back to the partnership for that $10 million. So that's on their side, so they're kind of right now free to go.

The other side is when their ownership, which is roughly 46 and a half million units right now when that gets LP units when that gets down to 12, and a half million units, which is about a 75% decrease.

At that point it automatically triggers the repurchase by the partnership from energy transfer for that same amount.

Okay got it thanks guys.

Yes. Thanks BJ at this time it does further questions in queue and I would like to turn it back over to Eric long.

Thanks, operator.

We expect 2020 to be a tale of two has the first half of the year saw solid results, but during the second quarter, we saw the impact of commodity price volatility and that's on the global pandemic. There continues to be a good amount of uncertainty on the extended duration of the current weakness and therefore, the timing and magnitude of the recovery but.

Good news is that we have continued to manage USA compression with the same business model that has held up over 22 years.

Business built on natural gas demand has long term importance to this country and the world we continued to be optimistic about.

We believe the underlying stability of our large horsepower infrastructure focus contract compression services business model and the science behind the need for compression in the interplay between pressures in volumes will be a key point of positive differentiation as we work through the rest of the year.

We took action early into the downturn on both cost and capital spending that has served us well and the second quarter and we will continue to focus on things within our control like in past downturns, we expect to weather the storm and come out on the other side with the business model built for stability.

Thanks for joining us today Im pleased to be safe, we look forward to speaking with everyone on our next call. Thanks to your continued support of USA compression.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.