Q1 2021 Archrock Inc Earnings Call
Good morning, welcome to the Archrock first quarter 2021 conference call.
Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock.
I'll now turn the call over to MS for Pony you may begin.
Thank you Celine Hello, everyone and thanks for joining us on today's call with me today are Brad Childers, President and Chief Executive Officer of Archrock, and Doug Aron Chief Financial Officer, Archrock yesterday, Archrock released its financial and operating results for the first quarter of 2020 one.
Not received a copy you can find the information on the company's website at <unk>.
And be Ww Dot Archrock dotcom.
During this 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 current beliefs and expectations as well as assumptions made by and information currently available for our trucks management.
Although management believes that 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 the 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 and will reference certain non-GAAP financial metrics, 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 SEC I'll now turn the call.
For it to Brad to discuss our trucks first quarter results and to provide an update on for business.
Thank you Megan and good morning, everyone I'm happy to be with you today to discuss our financial results for the first quarter of 2021.
Our solid performance reflects the continued actions, we're taking to maximize our profitability and cash flows and a volatile and evolving market.
We're controlling what we can including our operational execution, our cost structure and capital allocation.
I'm proud of the results I'm pleased to share that during the quarter overall economic trends improved and we saw continued signs of stabilization and our compression business.
First quarter highlights include.
Revenue declined less than 2% from the fourth quarter, a significant improvement from the larger sequential declines we experienced throughout 2020.
We delivered a strong contract operations gross margin percentage of 63%. This was consistent with guidance and up 100 basis points compared to the first quarter of 2020.
We maintained capital discipline spending $12 billion in total capex for the first quarter versus $72 million and the first quarter of 2020.
In addition, our first quarter 2021, net capital expenditures were negative when taking into account asset sell proceeds of $27 million generated during the quarter as we continued to transform and standardize our suite.
We continue to enhance our financial flexibility.
Bust free cash flow generator generation handily funded our quarterly dividend and keeps us on track to deliver at least $100 million and debt reduction.
Duction during 2021.
The downturn has been a true test and the durability of our business and as evidenced by the stabilization of performance of our operations. During the first quarter. We are no doubt realizing the beneficial returns we had targeted and our multiyear efforts to high grade our suites operations geographic footprint and.
Customer base.
Based on our strong first quarter performance today, we are reaffirming our guidance for the full year 2021.
And consistent with the expectations laid out on the fourth quarter call. We believe that the second half of 2021, well our offer archrock and opportunity to resume revenue growth as we focus primarily on deploying existing idle compression units.
The first quarter was a positive one for commodity prices with oil prices and the range of $60 per barrel.
We believe commodity prices and providing the necessary cash flow visibility for our customers and are beginning to translate into responsible increases and U S onshore activity levels, even as producers prioritize capital discipline and.
Moderate growth and free cash flow generation.
Upstream capital spending is expected to increase gradually and the U S rig count currently stands at about 475 rigs up more than 80% from the trough last summer.
Most just for cash flow natural gas production and steadily increasing throughout the remainder of 2021 with year over year production growth anticipated to resume in 2022 and beyond.
In fact, the Eia's 2021 annual energy outlook predicts the U S. Natural gas production will return to pre pandemic levels in 2023, and then continue to grow during the entire forecast period 2015.
Even at a time when much of the focus and energy is on renewables, we believe that U S. Natural gas will continue to play a critical role and helping to power America well into the future.
And so we'll archrock.
Turning to our contract operations performance during the first quarter, we recorded the smallest sequential decline and our operating horsepower and contract operations revenue since the COVID-19, driven downturn began.
Compared to the fourth quarter or first quarter exit fleet utilization was flat at 82% and operating horsepower declined by just 59000 horsepower 29000 for over half of about half of which was attributable to operating horsepower that we sold as we continue to prune.
Compression fleet.
Pricing on our active fleet remained steady compared to the fourth quarter. The result of our contracting strategy and standby units returning to full monthly service rates.
Booking activity picked up towards the end of the quarter and though it remains below pre pandemic levels were hopeful to carry this momentum as the year progresses.
And we plan to satisfy much of this demand from existing units and our idle fleets.
Our gross margin percentage expanded on an annual basis, driven by our proactive and aggressive efforts to align our cost structure with the market environment.
I also want to highlight the incredible response by our team following the week long extreme freezing temperatures across Oklahoma, Texas and other states that severely impacted many of our customers.
Our field team had the majority of our units back in operation in short order once it was safe to do so.
Once again, we showed our customers with excellent customer service is all about.
And I'm proud to say the team exemplified great safety performance with zero weather related safety and vehicle incidents recorded during this challenging period.
And aftermarket services performance during the quarter was softer than our internal expectations.
Revenues were down 4% from the fourth quarter of 2020.
The first quarter is a seasonally low quarter for the Ams business and due to the pandemic in many cases customers are choosing to leverage internal resources, rather than outsource their service needs.
Further we experienced a meaningful setbacks activity with the severe winter weather we.
We did see some more encouraging trends during March.
Margin percentage was 12% below guidance due to the revenue pressure and higher than expected costs, including some that were more onetime in nature.
In summary, we're off to a solid start in 2021 and I'm excited about what lies ahead for archrock as we move closer to the up cycle and as for longer term secular and steady growth and demand for natural gas becomes is cleared and others as it is to us today.
We will continue to maximize our near term performance during this uncertain period.
As we do so we will remain focused on providing exceptional and safe service to our customers protecting our balance sheet liquidity and leverage position and.
And maximizing our free cash flow.
At the same time, we will also continue to prioritize and advance our long term strategies.
<unk>, our fleet investing in technology, and increasing our focus on sustainability.
I am confident that Archrock has the right people assets and financial strength and place to drive differentiated and enduring value for our customers and our shareholders within the compression industry and the broader energy landscape.
With that I'd like to turn the call over to Doug for a review of our first quarter performance and to provide the latest on our 2020 one outlook.
Thanks, Brad and good morning, let's look at a summary of our first quarter results and our latest financial outlook for the year net.
Net income for the first quarter of 2021 was $4 million and included a few onetime items. The majority of which were non cash were recorded a noncash 7 million long lived asset impairment.
$5 million write off of and unamortized deferred financing costs and nearly $1 million and restructuring costs. These items were partially offset by a non income that are non income based tax benefit of $2 5 million.
We reported adjusted EBITDA of $98 million for the first quarter of 'twenty one.
Adjusted EBITDA was up from the fourth quarter as the impact of lower operating horsepower was offset by $11 million and net gains related to the sale of compression and other assets.
I want to emphasize that the ongoing sale of non core assets based on unit size age or geographic location is an important strategic choice for Archrock and does more than just generate gains these transactions and improve our operational efficiency and profitability bring forward future EBA.
And bring in cash for debt repayment at a time when thats our focus.
Turning to our business segments contract operations revenue came in at $166 million and the fourth quarter down only $3 million compared to the fourth quarter due primarily to lower operating horsepower.
We delivered strong gross margin percentage of 63% up 100 basis points compared to the first quarter of last year and consistent with guidance as our operating team maintained disciplined cost management.
And our aftermarket services segment, we reported first quarter 2021 revenue of $29 million compared to $31 million and the fourth quarter.
The decrease reflected the continued deferral of maintenance by our customers as well as lower parts and service activity as a result of the severe winter weather.
First quarter Ams gross margin of 12% was below expectations we.
Had a few cost items come in above our forecast for the quarter, including higher workers' compensation and warranty expense.
SG&A totaled $25 million for the first quarter, even excluding the $1 $6 million tax benefit during the quarter SG&A was down 13% compared to the $31 million and the prior year period.
For the fourth for the first quarter growth capital expenditures totaled just under a $1 million similar to last quarter and were largely for equipment modifications and repackages.
Maintenance and other Capex for the first quarter of 2021 was $11 million.
We exited the quarter with total debt of $1 6 billion.
Through debt reduction, we maintained a leverage ratio of four one times compared to four two times last quarter and flat compared to the first quarter of 2020.
Debt reduction continues to be a primary focus for archrock and we are committed to at least $100 million of repayment this year and to bringing our leverage ratio over time as our interest and.
Bringing down our leverage ratio over time as our EBITDA recovers.
We had available liquidity of $414 million as of March 31, giving us plenty of financial flexibility on top of the free cash flow we are already generating.
Yesterday, we declared a first quarter dividend of $14 <unk> per share or <unk> 58 on an annualized basis.
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 available for dividend for the first quarter of 2021 totaled $62 million, leading to healthy first quarter coverage of two eight times.
Earlier this year, we provided our full year 2021 outlook, including the expectation that our earnings will stabilize and the first part of the year and then begin to recover and the later part of the year and into 2022.
As Brad mentioned, our first quarter results keep us on pace to achieve our guidance of adjusted EBITDA of between $335 million to $375 million.
We expect we will be able to tighten our guidance range as the year progresses.
For the full year 2021, total capex is unchanged and expected to be and the range of $80 million to $106 million.
This represents a decline of $47 million on the heels of the impressive $245 million reduction we delivered in 2020.
We continue to expect growth capex to total between 30% and $50 million down from the $79 million and 2020, and the 300.002 million 19.
2021 growth growth Capex includes repackaging, capex and investments and a small number of newbuild units.
To sum it up we are maximizing our cash flow and still expect to drive approximately $100 million and <unk>.
Free cash flow this year after dividends.
With that operator, we'd like to go ahead and open the floor to questions.
Yes.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Again that Istar and then the number one on your telephone keypad.
And we'll pause for just for a moment to compile the Q&A roster.
Yes.
We have our first question coming from the line of Kyle May with capital One Securities. Your line is open.
Hi, good morning, everyone.
Good morning, Brad.
Brad in your opening remarks, you highlighted some of the economic trends and and how that's overlaying with compression and stabilization. Just wondering if you can give us any additional color on kind of your perspective on where we are with the economic recovery as it pertains to archrock and the compression business.
And are really just trying to get a better idea if we could see the compression business and perhaps ams as well see improvement sooner than previously anticipated.
Yes, Thanks Kyle.
What we see going into the market right now right now is steady improvement both in the data and also in the perspective of our customers, which has been very encouraging that the guidance that we gave and the basis for it is candidly being reaffirmed but I would suggest it's not being changed as we see.
And these indicators pickup we note that our customers, though encouraging and.
And bringing to us discussions of projects that theyre going to invest in our still exercising a decent amount of restraint on new investment activity as they continue to focus on their own capital discipline balance sheets and free cash flow. So we as I.
Set and my opening remarks, and I think this is consistent with what we said last quarter as well, we believe that the back half of the year remains the opportunity for us to see growth in revenue in both Ams and contract operations.
Understood.
Helpful and.
It appears that horsepower pricing actually stepped up a little bit and the first quarter.
Just curious if you can share any any color on the change that occurred and the first quarter and thoughts about pricing for the balance of the year.
Sure what I would suggest is that pricing is essentially flat.
Which we're really happy to see that level of maintenance of pricing stability in the market that we have today.
And that stability overall has been great. The increment youre seeing is somewhat influenced by just quarter over quarter noise, but also including that we've brought some more standby units online increasing the revenue on a per horsepower basis per month pretty nicely. The other thing I would suggest that we're re.
Really pleased to see is that we really think that some of the long term investments and strategic moves we've made are paying off and the stability of our business.
<unk>, we've had over the years to high grade our fleet focus on large horsepower and more stable applications to upgrade the location of our units and the basins and which we operate and are focused on.
To work with our strategic customers.
And as well as to invest and technology are really starting to show up and pay off and the stability of this business and we really think the downturn contest the business much better than an up cycle and we were pleased with how well we're coming through that right now based on those that focus and the strength the strategic work that we've done in the past.
Got it that's helpful. Thanks for taking the questions. This morning.
You bet. Thanks Carl.
Yeah.
For our next question coming from the line of TJ Schultz with RBC capital markets. Your line is open.
Great. Thanks, Good morning, so and as you look at debt compression market and improving.
What's your usable idle capacity and how much of that is larger horsepower a variety.
Would you expect to retire over the next one to two years and I'm just trying to get some indication of reacting to better demand.
Without a lot of new Capex, and where you do spend what would the growth capex would be for getting some of that idle capacity ready versus spending on new units into the fleet.
Yes, TJ great question we.
Good news, we look at the overall fleet and from the kind of capacity a way to think about it is highest utilization that we've experienced in the past has been right around that 90% level 89 to 91.
The remaining amount of the fleet has been.
Units that are coming off application.
And being made ready and going back to work. So we typically think about capping out utilization on our fleet as large and as diverse as ours at that 90% range and worried about 82% now and that gives you a proxy for 80% 8% of the units that would be basically good to go back to work.
That's one perspective.
And second perspective is that for the.
13, 100 horsepower and below range, we have lots of idle capacity.
Lots of idle units that are well equipped to go back to work within that 8% range.
And we're working to put those back to work now we do expect the bulk of our start activity in 2021 to be from that idle fleet and not require a significant investment and new and.
And new horsepower units at.
At the 500 horsepower and larger range. However, the market remains pretty tight and and very stable and demand in that category is going to require us to start reinvestment.
And we do think that thats likely starting in the back half of the year and moving through 2022.
Okay cool.
And then on selling horsepower and realizing some gains and I understand there are operational benefits and it sounds like that will.
Continue to be a tool to bring some EBITDA forward.
For you all and I'm, just trying to think about how that progresses or quantifying that maybe if we think about the rest of this year.
Much of your.
EBITDA guide range reflects some of those expected gains from from some of these high grading efforts.
Yes T J, it's Doug so.
Look I think these these transactions are.
And particularly if they come and any size are pretty tough to execute.
There are some counterparties that were out there talking to but from a forecast perspective, and I think I'd point, you back and maybe that word for word to the queue for transcript but.
The midpoint of our guidance range for this year sort of reflects flat horsepower year over year right. So we really arent baking and.
Any additional asset sales certainly gains on asset sales into this guidance range unless you start pointing towards the upper end.
And.
<unk>.
There is a number of things we can point to that.
And get us to that from a tailwind possible tailwind perspective would be more large horsepower starts more IMS activity.
A possible purchase leaseback transaction that we talked about or those non strategic asset sales those with what I believe to get us more to the high end of the range and then the <unk>.
Some of the headwinds that we're working to try to offset our.
Higher oil prices have meant higher lube oil prices and as more assets idle assets go back to work.
Those could could.
It means more lube oil that we've got to put in a little higher make ready cost.
And then as Brad talked about on some of that less than 1000 horsepower stuff that environment, while the large horsepower stuff is really tight and we're seeing net pricing would be very good on some other smaller horsepower.
It could be a little tighter or meaning pricing is a little tougher and more competitive. So I know that's a long winded way of answering the how is it coming on asset sales.
The answer is really there is a lot of things obviously that go into our guidance, but nothing further.
Again, the midpoint of that range and hopefully that gives you a little bit of direction.
That's great thanks, everyone and I'll just leave it there.
Thank you.
We have our last question coming from the line of Selman <unk> with Stifel. Your line is open.
Thank you good morning.
I just wanted to continue.
And along sort of the the last answer you gave there and you you referenced higher lube oil prices and May credit costs. I guess can you specifically, maybe talk about what you're seeing and the labor markets as well.
In terms of just inflationary pressures.
Sure.
We are definitely seeing the labor market is surprisingly tight at this part of the cycle, where we think we are flattening out and stabilizing we typically would expect to see the labor market tightening and inflationary pressures ahead of us, but the dynamic and the field right now is that we are restarting.
And I think some of the labor pressures.
And of a steeper part of the up cycle earlier in this cycle than we've had in the past. So we will see some inflationary pressures on labor.
But we think they are in hand, we have a tremendous labor force and great management team to help us both recruit develop and.
And and dispatch and retain and have our workforce work with our customers. So we're optimistic that we can navigate this well, but we are seeing earlier inflation inflationary pressures than we would have expected other ones.
Got you and then and your opening comments you talked about and you were pleased with seeing how gross margin.
And was sequentially flat so.
And you're saying the inflationary pressures are under control, but should we kind of still expect or are you seeing anything that might be a detriment to the gross margin.
Well look quarter over quarter, the gross margin may fluctuate a bit.
We're definitely facing the headwinds we just described and look to give you the easy summary on those headwinds at <unk>.
Incrementally and labor, we're just going to see it and lube oil and fuel usage and we're also going to see some spend as we.
Invest and making units ready to go back to work and all of those will provide pressure.
Our goal is however to use the improved sort of the operations that we've invested and over the years to help offset some of those inflationary pressures and still deliver a gross margin target within the range of our guidance.
But quarter over quarter, you may see minor fluctuations and what actually gets delivered.
For the year, we're very comfortable with our guidance.
And then just the last one for me can you just remind us I mean as you go back into the upsell Upcycle, what you expect your leverage or what your leverage goal is.
Yeah sure look I think.
Really the only thing for us that's uncertain is the timing and not at all try to be elusive about this but again right now what we're focused on is using free cash flow after dividend to pay down debt and.
And getting EBITDA back to sort of a pre COVID-19 level I think we would obviously be inside of our four times target I think what we've talked about as a management team and I think have broad support from the board long term.
And by long.
That depends on who you're talking to arrive for hedge funds and that's a week for long term holders.
That's a couple of years, but.
But for US three and a half is really that medium long term goal and we'd love to get there by the end of 2022, but that's very dependent on what's what's the recovery look like.
And so we will continue to be and debt repayment mode. Obviously, that's only half the equation and getting EBITDA back to the levels that we experienced prior to the downturn.
The timing is a bit uncertain, but our philosophy has not changed.
Got it. Thank you guys very much for the time.
Thank you.
Yes.
There are no more questions at this time and now I'd like to turn the call back over to Mr. Childers for final remarks.
Thank you operator, we appreciate everyone's interest and Archrock want to close by extending my thanks to our dedicated employees as we navigate the evolving market environment and focus on the elements of our business that we can control I'm proud of and first quarter performance and look forward to updating you on our progress next quarter. Thank.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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