Q2 2021 Archrock Inc Earnings Call
Yeah.
Good morning, welcome to the Archrock second quarter 2021 conference call.
Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock I will now turn the call over to Ms. <unk>.
You may begin.
Thank you Katrina Hello, everyone and thanks for joining us on today's call with me today, our grandchildren, as President and Chief Executive Officer of Archrock, and Doug Aron Chief Financial Officer of Archrock.
Yesterday, Archrock released its financial and operating results for the second quarter of 2021.
And if you've not received a copy you can find the information on the company's website at Www 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 $19.34, based on our current beliefs and expectations as well.
Assumptions made by and information currently available to Archrock management team, although management believes that 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.
And that may cause actual results to differ materially from those and the forward looking statements. 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.
True to our GAAP financial statements. Please see yesterday's press release, and our form 8-K furnished to the SEC I'll now turn the call over to Brad to discuss Archrock second quarter results and to provide an update of our business.
Thank you Megan and good morning, everyone. Let me start by saying that I'm pleased.
And with our trucks performance and the second quarter of 2021.
We executed on a number of strategic priorities and to driving value and this transition year.
With our fleet of large horsepower assets solid operational performance and continued financial discipline, we delivered meaningful free cash flow during the.
The first half of 2021.
Highlights from the second quarter include that we saw further stabilization in our operations and revenue.
Compared to the first quarter, our utilization was flat at 82% and our contract operations operations revenue was down just 1%.
We captured our highest level of horsepower bookings since the second quarter of 2019, reinforcing our confidence in this recovery.
We delivered a solid contract operations gross margin percentage of 63% largely unchanged compared to the first quarter of 2021.
We maintained capital discipline spending $39 million and total capex and the first half of 2021 compared to $113 million at the same point last year.
We continued our commitment to return capital to shareholders, we paid $22 million and dividends.
And with internally generated cash flow and maintained a robust dividend coverage ratio of 1.9 times.
Finally, we progressed, our multiyear fleet high grading strategy and total we've divested 279000 horsepower year to date <unk>.
Including.
108000 horsepower during July.
These transactions improve our operating efficiency and profitability.
Forward future EBITDA and allow us to accelerate debt repayment.
I'm proud to share that the proceeds from these asset sales and strong year to date operational execution have accelerated.
And our targeted debt reduction from an expected $100 million.
And to $150 million or more during 2021 and from $250 million to $300 billion or more since the end of 2019.
As of late cycle participant we expected 2021.
<unk> be a transition year as the current cycle turns from contraction to expansion.
The pace of this recovery is proving to be more measured than we initially anticipated. However.
Our utilization and pricing are at or near cyclical lows.
At the same time, we're beginning to invest.
1 to meet the expected customer growth plans and are starting to face inflationary pressure from the tightening market and some shortages.
This concurrence of lower revenue and accelerating investment is typical of the transition and our business from the end of the down cycle to the beginning of an up cycle.
As with past cycles, our focus is now moving to the growth. We expect to see ahead as we convert our growing backlog of compression demand to revenue.
And get setup to raise pricing to align with our cost structure.
We expect this period to be transitory as it has been in past cycles, and we expect to leverage the market.
Opportunities presented by the steady multi decade growth cycle for natural gas that we believe is now underway.
We expect increasing booking activity to continue through the balance of the year, which for Archrock should translate into a robust outlook for 2022 and beyond.
Turning now.
Per dive and.
A review of the market backdrop commodity prices strengthened further during the second quarter.
Oil prices remain above $70 per barrel supporting existing 2021 activity plans across the oil patch.
The North American rig count currently stands at approximately 470.
Now to a day up more than 100% from the trough.
Our conversations with customers around 2022 plants are increasing and frequency and optimism and we believe future activity is biased higher setting the compression industry up for a stronger 2022.
And the Eia's latest forecast.
Natural gas production remains in the 93 to 94 Bcf a day range for the second half of the year with a 2021 average of 93 Bcf a day essentially flat from 2020 levels.
From there it's expected to reach 96 Bcf a day by the fourth quarter of 2020.
Above pre pandemic levels, and 7% higher and the low point experienced in the second quarter of 2020.
Beyond the cyclical recovery currently and holding the positive long term fundamentals for natural gas and therefore, our compression business remain in place.
Natural gas remains.
<unk> is a cornerstone fuel through worldwide energy transition and the multi decade forecast published by major energy agencies.
And as we oil and gas industry increases its commitment to reducing its own greenhouse gas emissions. This could further strength and natural gases value proposition and provide upside.
Upside to long term demand.
For Archrock, we believe the opportunities presented by energy transition outweigh the risks.
Our strategy includes a growing commitment to our ESG performance and disclosure.
We plan to publish our third sustainability reports and the next few weeks with.
2020 data and additional disclosure enhancements.
As you know, we already provide electric powered compression to certain customers.
This represents a small portion of our fleet today, but a key growth opportunity ahead.
Moving on to our segments contract operations revenue.
Client by just $2 million or 1% and the second quarter, a significant improvement from the larger sequential declines we experienced throughout the pandemic.
Compared to the first quarter or second quarter exit fleet utilization was flat at 82%.
Excluding the $12.
And that could force power, we chose to sell as part of our fleet high grading strategy.
Operating horsepower declined by just 22000 and compared to the first quarter.
During the second quarter, we divested 63000 total horsepower and in July sold another 108000 horsepower to compression providers with small horsepower.
And <unk>.
This required a tremendous effort from numerous people across our organization and was a win win for all parties involved.
Including the benefit of these transactions are large horsepower equipment as a percentage of our operating fleet has increased from 74% at the end.
Power's, 2019% to 80% today.
Pricing on our active fleet remained steady compared to the first quarter. The results of our contracting strategy and standby units returning to full monthly service rates.
Revenue per horsepower was flat on a sequential basis.
Booking activity.
<unk> during the quarter was robust and reached levels not seen since the second quarter of 2019, which should enable us to resume horsepower growth.
Our gross margin percentage was roughly flat from the first quarter of 2021 and was down on a year over year basis.
During the second quarter, we started to see higher cost.
And to an increase and make ready expenses as we prepare to meet higher customer demand and.
And we're also facing rising parts lube oil and labor expenses.
The team has and will continue to optimize gross margin and work to offset inflationary pressures with tight cost control efficiency gains.
<unk> D and future price increases.
I also want to thank our employees for their continued hard work and commitment to safety.
We achieved great safety performance with zero safety incidents recorded so far in 2021.
And aftermarket services revenues were up 2 million.
And sequentially off a seasonally low first quarter. However results were softer than our expectations as the resumption of major maintenance by our customers has largely lagged our experience in prior cycles.
And this is especially true for our field service activity.
I'd like to touch on our capital allocation.
Org, particularly as we move closer to the up cycle as always we will remain focused on balancing appropriate levels of investment leverage and return of capital to shareholders.
Over the past several years, we've worked hard to build a platform that will profitably support the consistent.
And framed relatively modest growth and demand for natural gas compression and forecasted ahead.
We've modernized our fleet invested in technology and standardized practices in the field and across the organization.
With this solid foundation, we're focused primarily on redeploying existing out of compression units.
And we will responsibly increased investment and our fleet is necessary. So that we have equipment available and and configurations desired by our customers.
In summary, we're confident our recovery is developing.
We have a lot of reasons to be excited about 2022.
And we have the right people assets.
And strategy in place to optimize our results during this transition period and as this recovery takes hold.
With that I'd like to turn the call over to Doug for a review of our second quarter performance and provide the latest on our 2021 outlook.
Thanks, Brad and good morning.
Let's look and a summary.
Second quarter results and our latest financial outlook for the year.
Net income for the second quarter of 2021 was $9 million and included a few onetime items the majority of which were non cash.
We recorded a noncash 3 million long lived asset impairment and nearly.
And <unk> and restructuring costs.
We reported adjusted EBITDA of $87 million from the second quarter 2021.
Compared to the first quarter horsepower declines and smaller net gains related to the sale of compression and other assets resulted in a decline and adjusted EBITDA.
Turning to our business segments contract operations revenue came in at $164 million and the second quarter down only $2 million compared to the first quarter due to lower due to lower operating horsepower.
We managed to defend our gross margin percentage of 63%.
Relatively flat compared to the first quarter, but down 300 basis points year over year or.
Our year over year margin decline was due to fewer units on standby and additional make ready expense.
And our aftermarket services segment, we reported second quarter 2021 revenue of $32 million.
Compared to $29 million and the first quarter as activity recovered from a seasonally slow first quarter.
Revenue was down on an annual basis, primarily due to the July 2020 disposition of our turbocharger business.
Topline pressure weighed on the segment's gross margin which came in below.
Rail guidance at 13%.
SG&A totaled $26 million for the second quarter down, 9% compared to $29 million and the prior year as we improved our bad debt expense and tightly managed corporate overhead.
For the second quarter growth capital.
Annual interest totaled $8 million, we invested and equipment modifications and re packages and took delivery of a small amount of new horsepower.
Maintenance and other Capex for the second quarter of 2021 was $19 million and reflects higher levels of make ready and overhaul spending as well as technology.
And investments.
We exited the quarter with total debt of $1.6 billion.
Our leverage ratio as of June 30, ticked up slightly to 4 to 5 times from 4.1 times and both last quarter and the second quarter of 2020 is debt reduction only partially.
And extremely offset the impact of lower adjusted EBITDA. However.
However, we redeployed process proceeds from July asset sales towards debt reduction and pro forma for these actions our leverage ratio as of June 30 was 4.5 times.
Debt reduction continues to be a.
I'm Mary focus for Archrock and as Brad mentioned, we're committed to at least $150 million of repayment this year and to bringing down our leverage ratio over time as our EBITDA recovers.
We had available liquidity of $420 million as of June 30, and giving us plenty of financial flexibility.
<unk> on top of the free cash flow, we are already generating.
We recently declared a second quarter dividend of $14.5 per share or <unk> 58 on an annualized basis our.
Our dividend represents a compelling yield of 7% based on yesterday's closing price, especially <unk>.
Protection provided by our industry, leading dividend coverage.
Cash available for dividend for the second quarter of 2021 totaled $42 million, leading to a healthy dividend coverage of 1.9 times, even after making our semiannual interest payments during the quarter.
Moving on to our updated outlook, we are tightening our full year 2021, adjusted EBITDA guidance range to $340 million and $355 million.
Full revenue and gross margin detail at the segment level can be found and the earnings press release, we issued last night.
For contract.
Given the operations, we still expect full year 2021 operating horsepower to be flat year over year with the horsepower growth assumed in the high end of our guidance now expected to materialize in 2022.
Relatedly as we absorb the cost of start activity and inflationary pressures discussed today.
<unk> dissipate, our gross margin percent will step down during the second half of the year.
We are also revising our annual Ams revenue and gross margin guidance gross margin guidance to account for weaker year to date performance and to reflect our latest view of a recovery.
Finally, our updated guidance incorporates the.
$18 million net effect of year to date asset sales.
The $10 million and lost EBITDA as well as the $28 million and net gains from asset sales.
For the full year 2021, total capex is unchanged and expected to be and the range of $80 million to $106 million.
We anticipate presents a decline of $47 million on the heels of the impressive $245 million reduction we delivered last year.
With that I will now call turn the call back over to you Katrina and we will take questions from those on the line.
Thank you Sir.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number 1 key on your Touchtone phone is your question has been answered or you rich to remove yourself from the queue. Please press the pound key.
We have our first question.
And from Kyle May from capital 1 and your line is open.
Hi, good morning, everyone.
Good morning.
And maybe Doug just a quick question to follow up on the guidance.
Looking at the contract operations segment it looks like.
Revenue is set to decline and the back half of the year and this really primarily driven by the lost EBITDA that you mentioned or is there something else going on and the segment.
Yes. So it is it is 2 things Kyle.
It is very much that EBITDA that goes away offset obviously.
By the gain that we saw but we also are experiencing the inflation that you're hearing about.
Gosh, all throughout the country and likely globally.
Higher parts expense for us is forecasted and the second half of the year Lube oil expense in addition to the higher.
Commodity price Youre seeing some some shortages frankly and availability of lube oil and lubricants.
And the U S, which is driving it to really what was the equivalent of sort of a $100 oil price previously so we're dealing with that and after labor and parts Thats, our third highest cost and then again.
And on Labor, which is in fact, our largest cost we're starting to see some pressures in certain basins.
And particularly the Permian, which you would expect.
I think seeing net inflation happened faster than we're going to be able to pass some of that through.
And so thats really whats leading to.
The lower forecasted gross margin for second half.
Got it okay, that's helpful and.
And maybe for Brad.
Based on what Youre seeing with with recent bookings and kind of the outlook for activity can you help us frame up how how to think about the growth for Archrock next.
2.
Thanks Kyle.
It's too early to really know what and how firmly 2022 is going to.
<unk> and develop but I will share that I'm optimistic the activity that we're seeing and bookings.
Already for starts.
And next year, new activation on locations in 2022.
And place it at a nice rate but.
And the translate and translating that into what the net growth is going to look like with normal and the stop and start activity and that growth on top of it.
It's just too early.
But it's a good outlook that's developing.
We're excited about that.
Understood.
Great well I appreciate the color this morning, I'll jump back in the queue.
Thanks Scott.
And again, if you have a question at this time. Please press the Star then the number 1 key on your Touchtone telephone.
And our next question is from Selman <unk> from Stifel. Your line is open.
Thank you good morning.
Couple of quick ones so.
Talk about electric compression is a growth opportunity can you maybe talk about.
Pricing strategies on.
And what difference Youre seeing for electric compression if any.
Sure on the good news front.
And our customers and as we and the entire industry I'll turn our attention to being the best Corp.
Corporate citizen and we can be including on our ESG efforts.
And and managing emissions the continual migration to more electric motor drive compression, where we have electric electric electrification and that field.
Is inevitable and.
And what I can share with you is that number 1 that the amount of opportunities that we're seeing for that with our customer base.
Base are.
The double or triple what they would've looked like this time last year, which is really great to see.
And then number 2 from a margin contribution perspective more than pricing.
And we really make the equivalent amount of margin contribution and profitability.
And returns on investment in the electric motor drive compression that we put out and the field as we do with our reciprocating and natural gas burning engines.
<unk>.
Overall, it's an equivalent contribution so it's exciting to see and develop.
It's something we have experience and and we're looking forward to meeting our customers' growing.
<unk> with electric electric motor drive compression for.
And for the future.
Appreciate that thank you.
You mentioned, you're optimistic and book things for starts and new locations things for next year.
Sure.
I don't know sort of a percentage of if we could just think about in terms of bookings turning into.
<unk> eventual.
Revenues or is there and yes is there any way I guess, we can just kind of.
Think about that.
So and this is Doug I would say.
And part of the trouble with that is going to be a little bit dependent on.
What our capital.
Our ability or.
Boeing needs higher I guess to spend on new equipment will be for 2022.
That's a discussion we just had with our board preliminarily for the first time looking at 2022 and so is.
As much as I'd love to start getting into the 2022 guidance. We're just not there we're still kind of a quarter away.
I mean, I think again, what you can see as particularly and that larger horsepower class, but 36% <unk> and $36 <unk> preliminary discussions are very much that.
We're 90 plus percent utilization as an industry.
And there is not much if any available.
Idle equipment and those horsepower classes and.
And so the fact that we're having several customers already calling and enquiring about availability for that next year.
And as is all goes into sort of the formula of of what we'll bake our 2022 planned but give US 90 more days to come back to you on what.
<unk> and it looked like if you don't mind.
No not a problem and I understand and I appreciate the commentary let.
Let me just see if I can answer this and.
More of a general question is there anything you can talk about in terms of like basins I mean, okay. We all know Permian.
From that standpoint, but is there any other basins that.
We.
What that's doing for particular strength coming.
So youre right and I think the.
Mitchell perspective, and the industry is that the Permian will be the dominant play, especially with a buoyant oil price.
It's prolific it's profitable and it's still attracts more capital and other plays.
<unk>.
But after the Permian and there are some producers that don't have such a large Permian position.
<unk> invested in their fields and other locations, we still expect to see some some good activity and the northern Rockies.
We are seeing some good incremental activity and a couple of dry gas plays.
Including in the northeast.
And we're also hearing and seeing some opportunities develop and haynesville.
Nothing at the same scale as the Permian, but all of which are important to our customer base and.
And still provide good markets for our compression services.
Alright.
And you very much and it does it for me.
Thank you.
Yeah.
Once again, if you have a question at this time. Please press the Star then the number 1 key on your Touchtone phone.
We have another question from Eric Katz from New Fleet asset management. Your line is open.
And.
Good morning, just on the compression you sold in July was that smaller horsepower stuff and then any comments on demand trends across the small medium large I'd be curious on.
Sure.
The answer is yes.
First ourselves we've conducted a primarily.
Around our smaller.
Horsepower fleets.
Average size was definitely and the small horsepower range and all of the asset sales that we've conducted and year to date and as for demand across the horsepower ranges I'd say that the tightest demand remains in the largest horsepower categories.
The 70 and 70.
And 5 horsepower and above.
And our Utilizations and the.
And is very tightened and 90 plus percent range.
And the generally above a 1000 horsepower is also relatively tight utilization is pretty good close to the mid 80% range and then in the smaller horsepower range, it's really down and we.
We see utilization and the lower 80% range and demand is a little bit softer, but there is still demand and the market across all ranges of horsepower.
Thank you.
Youre welcome.
And there are no further questions now I'd like.
To turn the call back over to Mr. Childers for final remarks.
Well. Thank you everyone for participating in our second quarter earnings call I am proud of our results and I'm thankful to our employees for their continued contributions to our ongoing success, we're executing well and I'm confident we'll profitably and safely.
We deploy assets as we put our growing backlog to work and the future.
Everyone.
Thank you presenters ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
Okay.
[music].