Q4 2020 Archrock Inc Earnings Call
Okay.
Good morning, welcome to Archrock flood QUADRA and full year 'twenty 'twenty conference call.
For today's call is Megan repine.
Vice President of Investor Relations at Archrock.
I will now turn the call over to Mr. Huang you may begin.
Thank you Michelle Hello, everyone and thanks for joining us on today's call with me today, our grandchildren, President and Chief Executive Officer of Archrock, and Doug Aron Chief Financial Officer for Archrock Yesterday, Archrock released its financial and operating results for the fourth quarter of 2020.
As well as annual guidance for 'twenty and 'twenty one.
If you've not received a copy you can find the information on the company's website at Www Dot Archrock dotcom.
During the call we will make forward looking statements within the meaning of section 21 E of the Securities and Exchange Act of $19 30 for based on our current beliefs and expectations as well as the assumptions made by and information currently available to Archrock management team.
Although management believes the expectations reflected in such forward looking statements are reasonable it can give no assurance that such expectations will prove to be correct.
Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those and the forward looking statements made during this call.
In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA gross margin gross margin percentage and cash available for dividend.
For reconciliations of these non-GAAP financial measures to our GAAP financial results. Please see yesterday's press release, and our form 8-K furnished to the S E D.
I'll now turn the call over to Brad to discuss our trucks for quarter and full year results and to provide an update for our business.
Thank you Megan and good morning, everyone.
I'm happy to be with you today to close out the discussion on our financial results for 2020.
A year that brought unforeseeable and even on syncopal challenges to our industry and the global economy.
While I'm excited to turn the page for 2021.
I'm also proud of and grateful to and wanted to take a moment to thank our dedicated employees, who have adapted quickly to help us navigate the rapidly changing environment and delivered excellent fourth quarter and full year results.
And our first quarter, 'twenty and 'twenty conference call I detailed our objectives and action plan for the downturn, including significant cost savings and capital reduction initiatives.
We reacted quickly to protect the value of our natural gas compression franchise and.
Maximize our near term performance and position the business to emerge even stronger from this downturn.
As our 'twenty and 'twenty results show, we delivered on these objectives.
We maintained strong capital and cost discipline.
As the market deteriorated in the spring, we sharply reduced new equipment capital and optimized our maintenance and other capital investments.
We reduced our total capital by $245 million, and 2000 $20 million to $140 million.
In addition, we reduced our run rate SG&A by 12% and even as we continue to invest incremental SG&A into our technology operating project.
We enhanced our financial flexibility.
We paid down debt of $155 million during 2020, resulting in an exit leverage ratio of 416 times, which is essentially flat from 2019.
We have no near term debt maturities and with our successful senior notes offering during the fourth quarter, we extended $300 million of bond maturities by for years to 'twenty and 'twenty eight.
And we did this at a record low financing costs for the company.
A strong signal of the market's confidence and Archrock.
We continue to transform our compression fleet and drive field efficiencies.
We executed several highly strategic asset sales completed a business unit restructuring.
And aligned our business for the current environment.
Together these drove a 400 basis point increase and our contract operations gross margin percentage year over year and further solidified our strong competitive position.
Lastly, we continued our commitment to returning capital to shareholders, we paid $89 million and dividends with internally generated cash flow and maintained a robust dividend coverage ratio of two nine times for the full year 2020.
Due to our actions, we delivered adjusted EBITDA of $415 million, and 2020, which was flat compared to 2019, despite a 9% decline and revenue.
It's also in line with low and of our pre Covid guidance range and with our cost and capital reductions, we actually increased our full year free cash flow and cash available for dividend.
Just wondering 19 as well as compared to our initial forecast for 2020.
We're entering 2021 with optimism about the outlook for natural gas compression and Archrock.
While the degree of uncertainty surrounds the pace of the COVID-19 vaccine rollout and the resumption of pre COVID-19 levels of overall economic activity. The energy markets are nevertheless, showing early signs of a cyclical recovery.
Oil prices and returned to pre pandemic levels supported by Opec's actions and December production declines and the prospect of improved global demand.
And the natural gas side with favorable supply and demand dynamics Henry hub prices are trending around $3 per million Btu.
This provides the expectation of additional cash flow as producers look to increase drilling and completion activity in 2021 at least enough to achieve maintenance levels of production.
Most U S natural gas forecast show a steady increase in production and 2021, though the annual 2021 average is still expected to be 1% below 2020.
Year over year production growth is anticipated to resume and 2022.
Structural natural natural gas demand drivers continue to point to consistent long term demand for our compression services.
We're seeing strong power generation demand.
Record LNG exports and robust annual growth and natural gas exports to Mexico, So far and 2021.
Given this macroeconomic backdrop, we expect our operating performance and financial results to bottom and the first half of 'twenty and 'twenty, one with a pickup starting in the back half of the year.
Turning to our contract operations our actions in 2020 have further solidified our leading position and the compression market and we enter 2021 from a position of strength.
For the full year 2020 contract operations revenues were $739 million, a decline of 4% compared to 2000 22019.
Gross margin percentage increased approximately 400 basis points year over year due to our cost reduction activities throughout the year.
Gross margin of $478 million and 2020 was actually up slightly from $474 million in 2019.
With our focus on large horsepower units deployed and midstream applications and and the best U S basins.
As well as our continued efforts to keep units out on location and our 2020 exit utilization continuing to hold up well at 82%.
This reflects a significant decline and the pace of horsepower returns over the past several months with stop activity now beginning to approach normalized levels.
Booking activity remains low, but we have a positive backlog and demand for units to be deployed and 2021.
We expect to satisfy much of this demand from existing units and our idle fleet.
Given the stability provided by our large base of contracted horsepower the overall impact of pricing reductions to our financials as modest.
As you would expect with our utilization hovering in the low eighties, we certainly seen pressure on spot pricing, but given our higher quality fleet spot pricing and remains well above prior cycle lows.
During the year, we continue to manage and prune our compression fleet selling 150000 horsepower Inc.
Accelerating EBITDA recognition from less strategic horsepower and bringing in additional cash, which we used to repay debt.
And this month, we sold another 300 compressors totaling 40000 horsepower, which will result, and a gain on sale during the first quarter of 2021 of approximately $6 million.
I also wanted to highlight that in the midst of a global pandemic and severe energy downturn, we continued to deliver exceptionally high service quality to our customers.
Our customers have also been challenged by the downturn and we continue to work closely with them to achieve maximum production uptime and cash flows.
Prioritizing these relationships and proving the value we deliver to our customers during the downturn will pay long term dividends.
And our efforts to continue to improve our customer service havent stopped in 2021.
Even as we manage cost tightly and this downturn, we continue to focus on innovation and invest both SG&A and capital dollars into our multiyear technology project.
Over the last several months, we've begun to leverage the expanded telematics capabilities on our compression units to drive and enhanced and more efficient response to downtime events.
And I am excited that we will complete the planned installation of telematics on the remaining operating units and our fleet throughout the course of 2021.
This is just one of several ongoing initiatives, which are critical to the future enhancing the value proposition for our customers, reducing our emissions and carbon footprint and delivering attractive returns to our shareholders.
Moving to our aftermarket services segment.
And I appreciate the team's heavy lifting to maximize performance given the difficult hand dealt by COVID-19.
The work to maintain as much profitability as possible hasnt been easy, but its importance as reflected in our results.
Our fourth quarter revenue increased slightly on a sequential basis.
This is particularly encouraging given the fourth quarter tends to be seasonally slow.
Based on conversations with customers are cautious optimism is carried over so far into 2021, which is reflected in our guidance for modest revenue growth this year compared to 2020.
On our third quarter 2020 earnings call, we previewed our expectation for significant free cash flow generation again in 2021 supported by another significant reduction and capital expenditures.
Our 2021 budget reaffirms, our free cash flow expectation, both pre and post dividend and fine tune into our capex forecast to reflect our latest customer engagements and view of the market.
Our existing idle capacity provides us with meaningful capital allocation flexibility as we satisfy increased customer commitments later this year.
As such we plan to limit growth capital to between 30, and $50 million down from $79 million, and 2020 and $300 million and 2019.
This 2021 growth Capex includes repackaging, capex and investments and a small number of newbuild units.
These are high return large horsepower opportunities with premium customers, including several electric motor drive units.
There's no doubt the energy sector has been one of the hardest hit by the pandemic.
But every market offers an opportunity to outperform against that market context, and Archrock did just that and 2020.
And 2021, we will continue to do what Archrock does best.
For excellent customer service operating safely and efficiently and.
And manage our financial position with discipline.
These strategic principles provide a foundation for meaningful free cash flow generation.
<unk> of our capital allocation priorities strong shareholder returns and a sustainable future.
Before turning the call over to Doug I would be remiss, if I did not highlight that our efforts to ensure our future have gone beyond our profitability initiatives to include a growing commitment to our ESG performance and disclosure.
We published our second ESG report during the fourth quarter and with it adopted the FASB reporting standards for the midstream industry.
We've also formalized for governance structure Archrock will use to manage our ESG efforts, which include both board oversight of ESG matters, and and internal employee led sustainability committee that will assess opportunities within our operations and markets and consider and propose initiatives to improve performance.
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I'm confident our infrastructure assets are well positioned to participate and the global energy transition NAV.
Natural gas is reliable affordable and cleaner burning.
It has and will continue to bridge the gap between declining reliance on coal and nuclear power and increasing support for renewable energy sources.
We believe our focus on natural gas and our legacy of resilience and of delivering continuous improvement will ensure that we continue to play a critical role and helping to power America.
With that I'd like to turn the call over to Doug for a review of our fourth quarter and full year performance and to provide additional color on our 2021 guidance.
Thank you Brad and good morning, let's look and a summary of our fourth quarter and full year results and then cover our financial outlook.
Net income for the fourth quarter of 2020 was $5 million and included a noncash $7 million and long lived asset impairment and $1 million and restructuring costs.
We reported adjusted EBITDA of $89 million for the fourth quarter 2020 adjusted.
Adjusted EBITDA was down for the third quarter as expected due to lower operating horsepower and $20 million and non recurring third quarter items, which makes for challenging sequential comparisons.
Our fourth quarter adjusted EBITDA performance kept us flat on a year over year basis for the full year 2020, and put us firmly above the midpoint of our annual guidance range achieving.
Achieving this and the face of a significant industry downturn demonstrates the stability of our business model and strong operating performance.
Turning to our business segments contract operations revenue came in at $169 million and the fourth quarter compared to $175 million and the third quarter due primarily to lower operating horsepower we.
We delivered a strong gross margin percentage of 65% as our operating team continued to pull out all the stops to reduce overtime parts lube oil and make ready expenses.
For the full year, we delivered a meaningful increase and our gross margin percentage compared to 2020, despite revenue headwinds.
And our aftermarket services segment, we reported fourth quarter 2020 revenue of $31 million compared to $30 million and the third quarter.
The small increase occurred despite the more typical fourth quarter seasonal decline.
Fourth quarter Ams gross margin of 13% was slightly below expectations we.
We had a few cost items come in above our forecast for the quarter, including higher benefits and workers' compensation costs for the year, we delivered a gross margin of 15%, which was consistent with the midpoint of our guidance.
SG&A totaled $27 million for the fourth quarter down, 12% compared to the $31 million quarterly run rate earlier this year.
And one time $7 million benefit from tax audits and settlements included and the third quarter 2020 results affected quarter over quarter comparability.
For the fourth quarter growth capital expenditures totaled $1 million for equipment modifications and re packages, we had no new equipment capex for the quarter.
Our full year growth capex of $79 million was down from $300 million and 2019 and in line with our guidance.
Maintenance and other Capex for the fourth quarter of 2020 was $9 million. This brings the full year total to $61 million down $24 million or 28% year over year. This was also within our guidance.
Late last year with net we successfully completed and opportunistic debt offering which further increased our financial flexibility. We took advantage of favorable debt market conditions to issue $300 million and senior notes at five and one 8%.
Proceeds were used to pay down a portion of borrowings on our revolving credit facility.
And I'm very pleased with the continued support from our lenders and the debt markets, a testament to the health and steadiness of our business.
We exited the year with total debt of $1 $7 billion down.
Down over $42 million compared to the third quarter and as Brad mentioned down by $155 million compared to the end of 2019.
This significant reduction helped mitigate the leverage ratio impact of lower adjusted EBITDA.
Our leverage ratio was just under four two times compared to 4.0 times last quarter and was slightly improved versus the fourth quarter of 2019, we.
We also had available liquidity of $444 million as of December 31.
Today, we announced two amendments to our credit facility.
And we reduced our facility size to $750 million from $1 billion to $5 billion.
And although we don't expect to need of the amendment.
Also provides for higher leverage ratio covenants, the total leverage ratio covenant and stepping up from $5. Two five times to 575 times through the fourth quarter of 2022 will be five five times and the first quarter of 2023 through the third quarter of 2020.
And then returned to five and a quarter times and the fourth quarter of 2023 and thereafter.
We do not anticipate our covenant leverage exceeding the high fours, even at the low end of our guidance range, but the proactive amendment gives us additional cushion and the event of another unexpected market disruption like the one we witnessed in 2020 with COVID-19.
We also put in to place and aftermarket equity offering program totaling $50 million we've.
We've had a few constructive conversations with our customers about possibly purchasing their compression assets for archrock to operate.
And if successful we believe partially funding these potential transactions using equity would be prudent and the current market.
We recently declared a fourth quarter dividend of $14 five per share or <unk> 58 on an annualized basis or.
Our latest dividend represents a compelling yield of 6% based on yesterday's closing price, especially given the protection provided by our industry leading dividend coverage cash.
Cash available for dividend for the fourth quarter of 2020 totaled $56 million, leading to healthy fourth quarter dividend coverage of two five times.
Finally on guidance all of the customary detail can be found in the materials published last night and for the purposes of this call I will keep my comments high level.
And as we've discussed for some time now we expect our 2021 adjusted EBITDA to be lower on a full year basis compared to 2020, due primarily to our expectation of lower average operating horsepower and this year.
As a later cycle and production oriented participant in the energy value chain. We believe 2021 will be a transition year and we expect our earnings to stabilize and the first part of the year and begin to recover and the later part of the year and into 2022.
We currently forecast 2021, adjusted EBITDA range to be.
Adjusted EBITDA to be and the range of 335 million to $375 million and.
And comparing 2021 guidance to 2020 performance I'll remind you that our 2020 adjusted EBITDA included $22 million and gain on asset sales and tax benefits.
We will maintain capital discipline to continue to maximize our cash flow and ability to repay debt and prudently fund our dividend and 2021.
On a full year basis, we expect total capital expenditures of $80 million to $106 million. This represents a decline of $47 million on the heels of the impressive $245 million reduction and we delivered in 2020.
Booking activity remains low which will drive capital reinvestment, even lower next year compared to 2020, we.
We expect growth capex to be between 30% and $50 million.
And as we put idle equipment back out to work to meet customer demand, we expect additional make ready investment, which is reflected and our expectation for a modest increase in maintenance capital for 2021.
Other capex should tick down meaningfully as planned as we reach the tail end of our technology investment period, and as we tightly manage spending on our truck fleet.
To sum it up our expected operating performance combined with our reduced Capex profile will drive strong free cash flow generation pre and post dividend as well as meaningful debt reduction.
With that we'd now like to open up the line for questions Michelle.
Ladies and gentlemen, we will open it up for question and answer session. If you wish to ask a question. Please press star one on your telephone if you wish to cancel your request and lay press the pound key.
Please standby, while we compile the Q&A losses.
Okay.
Our first question.
From the line of Daniel Burke.
Sir Your line is now open.
Yeah, Hey, good morning, guys.
Good morning.
Let's see.
I had a question on contract ops margin.
And 2021, a little bit of a step down year over year non <unk>.
Apprised, but.
Would you expect the contract ops margin to sort of mirror I think that the general progression. You described for this year will it be lower and the first half of the year and then begin to recover should we think of that as more of a steady state margin.
Well first of all looking back Daniel's Brad looking back at 2020, I'll just remind you that we had a couple of factors that brought.
That gave us a boost and that gross margin per cent that we don't expect to repeat in 'twenty and 'twenty, one and one of them is we had a pretty substantial amount of horsepower and move on to standby and.
And the year and that has an immediate and long term and and immediate.
Gross margin benefit that we got in 2021 that we're not going to have in 'twenty and we got in 2020 that were not going to have and 2021.
On the good news on that point, however, as all of that horsepower is gone and the work Thats really strong indication that the market is recovering and.
And looking better for 2021 as our standby horsepower has returned to more normalized levels.
And that should allow more new horsepower to go back out.
And then we also had some onetime tax benefit and that gross margin. So when we think about the gross margin year over year. We think it is close to flattish, but we are encountering a few incremental headwinds and gross margin and that includes higher lube oil prices, which is just a consequence of higher oil prices.
As well as additional new activity and an upmarket as we put more things to work it pressures our gross margin overall as we make units ready and get them started again. So that's what's really I think the geography on the gross margin look year over year.
Okay I appreciate the color Brad.
Let's see.
Really really two questions that are related because they both sort of speak to.
Sort of the fleet refreshment and could you could you talk about maybe the scale of some of the customer fleet acquisition opportunities.
And that you might encounter as the year goes on and.
And then maybe give a broader perspective on.
Asset sales I mean is the experience of 2020.
Likely to repeat in 2021, and I know, there's limited visibility and a way, but maybe theres a base case you could share since it does have a bearing on that the guidance range for the year.
Sure Let me, let me try to take both of those the index and it.
And Doug to top me up on anything.
And look on the customer acquisition front, we have found that customers have moved to focusing on their own balance sheets and capital discipline and free cash flow and a way that could be very constructive for our business. We're excited about that and so the opportunities that we're talking out talking about our.
Multiple sizes.
Going to quantify it or give specifics.
But just opportunities that we wanted to be prepared to be able to move and act if we can capture them.
I've had this discussion and the past with everyone and those transactions can be hard to capture.
But right now we see some momentum and we wanted to position archrock to be able to take advantage of it and that they materialize and I'm pretty excited and hopefully hopefully we'll get to get to to announce one at some point.
On the fleet improvement initiative.
This is an important long term strategic move for Archrock as we think about the compression we've added and the focus we have on large horsepower on midstream gathering and just and the best plays that the U S. Lower 48 has to offer.
We're going to continue doing that when the market permits that's not our capital allocation to day capital allocation today is very much focused on free cash flow and reducing debt.
Returning capital to shareholders and being very disciplined on our investment and this part of the investment cycle.
But the other side of that fleet improvement includes looking at pockets of less strategic horsepower based upon the horsepower itself its market location or other factors and the benefits to that program are really significant number one it really does help us to standardize our fleet and drive.
Improvement and our financial performance.
And as we get a much better logistics and supply chain efficiency behind a more standardized fleet.
Second it accelerates EBITDA it brings it into a more current period.
It doesn't just.
Generate gains it's that gain as a proxy for that acceleration of earnings and EBITDA, which were excited to see and it brings and additional cash to repay debt at a time when thats. One of our focuses so we can't quantify 2021 is going to look like 2020, because these are transactions and we have to work hard to get them.
But youre going to you should expect to see us focus on it for those reasons, just as hard and 2021 as we did in 2020.
And Daniel this is Doug what I would say is and brad's prepared remarks. He talks about one that we closed already here and 2021 and further illustrate just.
Really how meaningful that is to us.
The average age of the equipment, we sold and that transaction that he mentioned the 40000 horsepower and 300 compressors was 25 years old.
And so.
And the fact that we were able to sell that for what it is.
Mounted to about right at $6 million gain on sale of assets reflects that there is still usefulness.
Probably some smaller companies out there that can operate that horsepower frankly more efficiently than we can and.
And.
Allows us to focus our existing team on the more standardized larger fleet that we've described so really a win win those are a little difficult to forecast we.
We are hopeful there are a couple more similarly sized transactions out there this year and those are hard to bank on I know.
<unk> asked sort of that as it relates potentially to our guidance for the year and we've given perhaps a little bit of a wider range on EBITDA and we typically would.
That higher are highest and of the guidance range might include another similarly sized transaction.
This year, whereas the midpoint of our guidance for this year really assumes that our horsepower stays flat to last year.
And so.
I know you guys are trying to sort of.
And do the impossible, which is to peg, where you think we're going to be but.
Hopefully that helps frame that.
And the spectrum.
Yes, that's all that's all I hope for comments guys I'll leave it there. Thank you.
Thanks Daniel.
Your next question comes from the line of Tom Kim Ann Your line is now open.
Good morning.
Good morning.
Have any segments and the customer base started or signaled preparations to expand their budgeted activity and order to capitalize on the sustained stronger than anticipated commodity prices and.
And if so would you just expound on who and terms of customer type not specific names and.
With regards to the basins you've detected such a response.
And yet I would love to give you a very bullish response to that question, but in all honesty and what we're experiencing right now and the market is as continued restraint and.
And the unleashing of.
For their capital budget increases.
As people are focusing on free cash flow and listening to see how well this market recovers. So what we find with our customers is very optimistic discussions about future plans if.
Yeah.
And if the market continues to show the signs that it's giving us currently.
And at the right levels and the customer there are projects spending that they want to get on with.
But I would still say that the timing looks to us like it's more in the back half of this year than the first half of this year. So while the discussions are optimistic the timing yet has.
And is still showing some restraint and our and our customers' activities.
Got it.
And with what we've heard from for many others.
Turning to the technology modernization project would.
Would you update us on where youre at with some of the implementation of some of that programs other initiatives such as the ERP system migration and and remote monitoring and then just dramatically whats. The next secular phase of technology evolution as it is.
Step up and automation.
Is it some aspect of Digitization and just looking beyond telematics.
Which seems like it's going to come next for the future.
Of compression.
Sure.
And just.
And make a note is I think and want to make sure I answer both parts of your question.
So number one and the good news front on the telematics side, our rollout is going well and we're going to complete the installation of the remaining parts of our fleet that don't have full telemetry within 2021, and that's our target and that's going well, where we have installed at the really good news for us it's exciting to see us change our.
And of operating.
To take advantage and leverage that increased visibility as to what's going on on the units on an instantaneous basis as well as to use that information to drive.
Better coordination of response with our customers for their benefit for the and for the benefit of uptime and certainly for cost management. So as we roll that out we expect to continue to get the benefits of that on the ERP the team's working hard.
We're going to spend 2021, preparing our systems for that and as you can probably imagine you got to pick at least a quarter and if not a year and.
For the flip of a switch on the ERP system, and so we're targeting having that switch and move at the end of this year and we have adequate time and really a good time to prepare for that to continue to prepare for that.
So that's going well and then the only other point I'm going to make on the rollout currently is that behind both of those and and between both of those the ERP and the field systems is going to come much better logistics management through our investment in.
Our supply chain capabilities with much more information flow and.
And more timely and instantaneous information around inventory amounts and locations and needs. So those are some of the exciting things that we're going to get from the project as we move forward.
The net.
Next immediate phase of once it's fully implemented.
And we've practiced.
Operationalize, Inc, and have fully operationalize the benefits of that communication system and information flow is to look at data and have data tell us more on a preventative and predictive basis.
Where we need to focus our time and attention. So that we can get ahead of not waiting for it to happen, but seeing it before it happens and taking preventative and predictive actions or actions based on that.
Predictive and preventative approach I think that's really the next phase.
Automation will be like a yet out there stage I think that's a ways off there are some inherent safety issues around how much automation is going to go into.
Managing compression equipment, but that's the that's the optimistic view I have right now about how well we're going to be able to operationalize the benefits of this investment.
Great overview. Thanks.
Thanks for taking my questions.
Yes. Thank you.
Okay.
Sure.
And.
Your next question comes from the line.
Yes.
Your line is now.
Michelle we were having a hard time hearing you on R&M.
Your next question comes from Zelman.
Okay.
Thank you and is now open.
Got it thank you good morning.
Good morning.
Like you I had a difficult time hearing so let me ask you just two quick questions. So when you talk about potentially picking up some.
Assets from the from your customers and I understand you know up to the $50 million, but how do you think about the earnings on that investment.
Or how should we be thinking about it.
On the you talked at the high end of the Capex range.
You guys talked about putting and ATM in place in order to purchase some compression assets.
Customers and so if we see that I'm just wondering how we should be thinking about that.
Yeah. So.
Okay.
Look I think the answer there is as we still don't have one to announce and.
And until we do the specifics will be a little tougher to enumerate, but generally speaking the way we think about new when we think about building a new unit as an example.
And then targeting something in that.
Mid teens return.
Certainly at least and 13% depending on the length of the contract you could get and.
And so similarly.
Our view is that obviously the cost of equity is higher than the cost of debt.
And at the same time, we've had a pretty firm commitment that that most of you will remember we had intended to have our leverage under four times by the end of 2020.
Covid, certainly and the way of that and so our point is that if we can go out and.
Allocated equity at a mid teens return.
A term contract with a high quality customer and owning their equipment. We think there's value in doing that while also being able to continue to delever and.
And so.
And I think that will be the way that we will look at these contracts and.
And hopefully we'll have something to report with a customer that is interested also because keeping in mind that because of our scale and our expertise and compression generally we're able to operate that equipment and a lower operating cost and they can and so what might look like a mid teens returned to us will.
Like something lower to them, because we are offsetting a higher operating cost.
Got you and then.
Let me just ask one other question. There is there any reason why they would particularly come to you or is there chance they would go to several.
Different compression players and get bids for everybody.
It's a competitive market and.
Some of our competitors work on projects like this to but what we find is that.
Customers with which we have a material amount of business so significant strategic relationship.
Which tends to be the bulk of our top 10 customers.
Want to work with us because thats their service provider of choice already and in fairness, a few of our competitors probably get the same benefit from their customer deck.
Very good and then just last one for me is you get your telematics fully rolled out should we see that sheltered cost savings as well.
Yes, youre already seeing it and the truth is it will show up and cost savings and efficiencies.
Efficiencies.
We're experiencing some of that and started to is with the implementation of.
The expanded telematics, even in the back half of 2020.
The question is going to be how well, we can capture that and continued profit growth, which we've demonstrated for several years and our ROE now and.
How much of a weak share with our customers and pricing.
To gain more.
Growth with our customers and the market, but it's absolutely going to come through and continued improvement and our cost.
Base.
And it has impacted profitability constructively already we expect more of that.
Very good thank you Kelly.
Yes. Thanks.
There are no more questions now I'd like to turn the call back over to MS. Childers for final remarks.
Thank you operator, thank you everyone for participating in our Q for review today as our results demonstrate we continue to take the right steps to differentiate archrock and deliver value to our customers and our shareholders. Our future is bright and I look forward to updating you on our progress again next quarter.
Thank you.
Ladies and gentlemen that does conclude today's conference call. Thank you for participating you may now disconnect.
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