Q3 2021 USA Compression Partners LP Earnings Call

November 2, 2021

Good morning, welcome to USA compression partners L. P third quarter 2021 earnings conference call.

During today's call all parties will be in a listen only mode and following the call. The conference will be opened for questions. This conference is being recorded today November 2nd 2021.

I would now like to turn the call over to Chris border, 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 September 32021.

Can find our earnings release as well as recording of this call in the Investor Relations section of our website at USA compression Dot com.

Gordon will be available through November 12, 2021.

During this call our management will discuss certain non-GAAP measures you will find definitions and reconciliations of these non-GAAP measures. 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 result.

<unk> may differ materially. Please review the statements of risk included in this mornings release and in our SEC filings. Please note that information provided on this call speaks only to management's views as of today November 2nd 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 is Matt Liuzzi, our CFO.

This morning, we released our financial our financial and operational results for the third quarter of 2021, reflecting another quarter of continued stability in our infrastructure driven business model with results that were again consistent with the prior quarter and in line with what we expected.

The format gets into the specifics of the quarter I want to highlight some key facts and observations that help form the decision making process of your management team.

Thank you you may actually find them enlightening simply put considering the lack of regulatory clarity and uncertainty emanating from both the executive branch and Congress regarding major policy decisions, which made profoundly impact the energy industry tax structures and our domestic economy.

Say compression will continue to do what we have done in periods of uncertainty, we hunkered down we power through we maintain a consistent course of action, providing exemplary levels of natural gas compression services to our long term and strategic infrastructure oriented customers. We intend to do the same for the balance of 2012.

One in throughout 2022.

Right now there is a lot of discussion around the topics of ESG and energy transition.

Both are important and are front and center here at USA compression.

For our investors, we believe that it is important to differentiate between the policy noise with all of the feel good wish to be true prognostications of the future.

As the realities of economics and technology.

World leaders with varying degrees of commitment appear to be committed to achieving net zero by the back half of this century with the emerging energy crises in China, and Europe as well as the positions taken by China, India, and Russia regarding their continued use of coal well into the middle of the century. This commitment appears to be waivers.

Somewhat.

What is coming to light is that one the energy transition will be one of the most capital intensive and most complex undertakings in human history.

<unk>.

Multiple tens if not hundreds of trillions of dollars will be spent pursuing these undertakings and three policy decisions, which currently appear focused on constraining capital required for transitory hydrocarbon sources, meaning natural gas are disconnected from the realities of today's.

Growing energy needs and the ultimate achievement of net zero.

The bottom line demand for energy of all types is up supplies of conventional energy sources are down and we know of no technology that exists at scale to backstop, the intermittent nature of solar and wind supplies.

Natural gas prices are searching around the world part of an emerging global energy crises spilling into the coal market, causing power prices to spike.

While the Henry hub natural gas prices in the upper $5 per M. M Btu range.

Average spot prices for LNG in September were $25 45.

A 40% increase on the prior month and more than four times the price from the year before.

Prices have continued to rise in October of 2021 and traded the $34 per M. M Btu.

The utilization of U S. LNG facilities continues to be high in countries around the globe are building inventories in.

In anticipation of tight supply this coming winter.

Dutch natural gas for December December delivery touched $187 per <unk>.

December LNG, It Japan Korea, currently $32 and a penny per M of Btu.

Of these high natural gas prices include government intervention regarding electric power in Europe to reduce cost to consumers shuttering of manufacturing suppliers in China and subsequent mandates to secure coal supplies quote at all cost.

So what is happening in the U K renewables, mostly wind displace coal in power generation over the past decade, increasing reliance on natural gas for base load electric power.

Utility scale battery storage is essentially nonexistent.

Nuclear power is about 20% of generation capacity.

70% of the UK is gas storage capacity was shuttered in 2017 with regulators expecting newly constructed renewables and natural gas imports to meet demand.

With the combined reduction in gas storage and domestic gas production from the north sea declining more than 65%.

The year 2000.

The UK became reliant on LNG imports, both Japan and Europe are also bidding unlimited LNG supplies, resulting in UK power prices jumping four to 10 times historical norms.

With the U K being colder than normal and experiencing lower than average wind speeds renewables have been unable to meet electric electricity demand.

Bottom line demand for electricity is up at a time when the wind doesn't blow the sun doesn't shine available domestic gas supplies and storage are down coal has been cut and no meaningful utility level battery storage exist.

So shifting gears to the oil side and the domestic drilling and supply side, Here's some comments from sources ranging from the economist to noted industry analyst to energy focused private equity firms and others.

The demonization of oil and gas is unprecedented in the history of the industry. This is leading to capital starvation. The exit of major oils with only 40% of cash flow being redeployed into supply replacement.

OPEC plus has done an effective job of managing pricing.

Further signals suggest that OPEC plus will be out of excess capacity by mid 2022. This is unprecedented.

Global upstream capital expenditures expenditures averaged $320 billion to $350 billion in 2020 in 2021.

This is one half the levels of 2011 to 2014 and 25% short of what is needed to hold oil production steady at 100 million barrels a day of which two thirds is for transportation and one third for industrial use.

Over the past 18 months the world has been under supplied by 2 million barrels a day oil in storage is down over 950 million barrels since the peak in May of 2020, and now runs 200 million barrels below normal.

PUC, our drilled and uncompleted drawdown.

Three years to build an inventory of 3300 do you seize it may have been wiped out in the last 12 months.

U S. E&P sector is now completing 270 more wells, we are drilling on a monthly basis, which is unsustainable.

In 2020 to address additional drilling capital will be needed.

To sustain production levels.

By the end of 2030, the global electric vehicle fleet is expected to be lower than consensus penetration of 30% to 40%.

Worldwide, we will need an additional 7 million barrels per day to balance the market demand and where is it going to come from.

And finally, we have the regulatory uncertainty relating to the domestic oil and gas industry overall implications regarding potential methane regulation and taxation.

<unk> from the myriad and ever changing proposals emanating from various factions of the current Washington administration as well as the specter of Sidoti tax.

So what does all this mean for USA compression as we head into 2022.

It appears to us that as the world economies continue to open and regained strength.

<unk> for energy in all forms and especially natural gas will continue to increase.

It's also apparent that the supplies of oil and natural gas have declined due to underinvestment.

And then in the interim time frame renewable sources of energy are insufficient to meet the overall needs for energy.

We believe that over the next several years domestically, we will see increasing albeit measure drilling and completion activity for both oil and natural gas and less demand for our compression services will continue to increase in 2022 and beyond.

We've mentioned before that USA compression is developing the use of an exclusive proprietary technology developed by energy transfer dual drive as a potential cost effective offering to allow our customers to switch from natural gas quickly and reliably to electricity as a fuel source dual.

It will drive is effectively a hybrid compressor similar to a Toyota Prius, which has the potential to be an important breakthrough for our customers seeking to reduce their carbon dioxide and methane emissions.

Dual drive will provide the reliability and redundancy of natural gas for what we believe will be a multi decade transition period to expand the electric grid.

We expect growing instability of the electric grid over the intermediate term exacerbated by the specter of policy mandated reliance on renewables without access to cost effective utility scale storage.

During 2022, we intend to continue the development of dual drive units across several horsepower ranges.

One final note before I turn the call over to Matt to walk through our results for the third quarter with this quarter's payment. We've now achieved 35 quarters of distributions.

Turning over $1 2 billion to unit holders since our IPO back in 2013.

The stability of the business and strong cash flow generation has allowed us to power through the downturns and be positioned to take advantage of the upticks as we're starting to see out in the marketplace. We envision continued stability as we focus on working with our infrastructure oriented customers in 2022, Matt.

Thanks, Eric and good morning, everybody.

Today, USA compression reported third quarter results, including quarterly revenue of $159 million adjusted EBITDA of $100 million and DCF to limited partners of $52 million.

All of which were consistent with last quarter.

Total revenues of $159 million approximately $156 million reflected our core contract operations revenues, while parts and service revenue contributed roughly $3 million.

Last quarter, Eric mentioned that we had been seeing firming demand signals from our customers with increased quote in contracting activity, which had allowed us to push through some rate increases.

<unk> continued to increase in the third quarter to $16 62 per horsepower per month up from $16 55 in the previous quarter. This reflects the impact of contractual price escalators and the tight supply demand, especially for the largest horsepower classes.

Our adjusted gross margin as a percentage of revenue was 69% in the third quarter consistent with USA compressions historical levels we.

We achieved adjusted EBITDA for the third quarter, approximately $100 million flat.

Flat to the second quarter.

Adjusted EBITDA margin of 62, 8% was again consistent with our historical averages.

CF to limited partners of $52 million also consistent with last quarter.

Our total fleet horsepower at the end of the quarter approximately $3 7 million horsepower was flat with the second quarter.

While average utilization throughout the third quarter was essentially flat with the second quarter at 82, 3%. You'll note that the period end utilization has ticked up to 83%, reflecting our positive trend of horsepower deployment as the quarter came to a close.

We continue to exercise caution on capital spending throughout.

Third quarter with total expansion capital of $14 million consisting.

Primarily reconfigurations of idle units and maintenance capital of $5 million consistent with our expectations. We do not have any units on order for delivery in the remainder of 2022, we continue to evaluate the market demand for 2022, while we expect some moderate amount of new unit orders, we expect the.

Any of our capital will be focused on the redeployment of existing idle units with nominal capital required to deploy that horsepower.

Net income for the quarter was $4 million and operating income was $37 million net.

Net cash provided by operating activities was $45 million in the quarter and lastly, cash interest expense net was $30 million.

Based on the third quarter's results the board decided to keep the distribution consistent at 52 five cents per unit, which resulted in a distributable cash flow coverage ratio of 1.02 times consistent with year to date levels. Our bank Covenant leverage ratio was 496 times flat.

The previous quarter consistent with prior quarters, our board of directors determined the quarterly distribution on a quarterly basis and the board can opt to maintain reduce or suspend the distribution as it deems most appropriate.

As for our previously communicated guidance for 2021, which was included in this morning's earnings release, we have narrowed the ranges while keeping the adjusted EBITDA midpoint, where it was and slightly increasing the distributable cash flow midpoint we.

We expect to file our Form 10-Q with the SEC as early as this afternoon.

To summarize this quarter was the third quarter in a row of very stable earnings and we see improving fundamentals developing over the next few quarters. We've continued to manage what is in our control achieving attractive operating margins and we've managed our capital spending appropriately we like our position as a leader in large horsepower multi.

Unit centralized compressor stations and expect that our services will be in demand as things pick up as we move into 2022.

With that we'll open the call to questions.

Thank you.

To ask a question please signal by pressing star one on your telephone keypad.

Using a speaker phone please make sure that the mute function is turned off to allow your signal to reach our equipment.

Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.

Our first question comes from Brian Reynolds with UBS.

Hi, Good morning, everyone, maybe just start off on 'twenty, one EBITDA guidance.

It seems like the recovery at this time around and compression.

A bit slower than in previous cycles, and I was curious if you could provide some color on what is different. This time, just given that Nat gas production remained resilient just curious if you could also congrats on the initial color around like how much of it is around customer optimization and rationalization of compression units.

How we should view.

22 compression demand going forward.

This is Eric I think consistent with our commentary.

We're seeing a lot of discipline from the E&ps the major oils have slashed their capex budgets.

Historically, when you saw oil prices in the mid eighties and natural gas prices in the mid fives.

They are hitting the gas and matched in the accelerator, we do see.

Some of the private larger private players accelerating some of their developmental activity.

And I think the other thing you've got some hedges.

Our rolling off from 2021 into 2022.

You recall, the pioneer guys. The other day announced over $900 million hedge loss for the quarter. So on the one hand high commodity prices would suggest that there's this massive free cash flow.

A lot of that cash flow is going to the counterparties of the E&ps have entered into these hedges. So what we're hearing from our clients customers are one there will be continued discipline in the industry.

Moderated by the Investor focus on.

Improving balance sheets from the E&P guys. So I think they are listening to the financial Investor community second the roll off of hedges, which then will kind of start to push on some additional activity the drilling and development of the <unk>, which are going to be nonexistent. So if you.

To maintain production is going to require a kind of an increase in drilling and development capital.

We're hearing from our producers that activity in 2022 will maintain production either flat to slightly up.

As we all know when.

Production is stable pressures come down you need an exponential increase in compression horsepower. So I think all of this is weaving together historically compressions of 4% to six quarter lagging indicator, where now five or six quarters into that and demand signals coming into 2022 are significantly stronger than what we heard for 2021.

Great I appreciate all the color.

As a quick follow up just given the recent tax proposals around the MLP tax structure. Just curious if you had any comments around how you stack ultimately piece its current status today.

We know the future. Thanks.

Yes, Brian it's Matt.

I think that MLP.

I forget what its called but the basically.

Basically treating them as corporations that debt provision tends to get put in every single budget. If you look back many many years.

And so I think.

There is a lot of there seems to be a lot of support firm a broader definition of what mlps can be in terms of including some of the renewables.

<unk>.

Kind of a transition type companies in the MLP structure, and so I think if that happens that's obviously a positive for kind of the overall tax structure of being able to remain an MLP.

But in terms of what we what we do what we want to do what we will do.

We can't really say anything about that.

Great Fair enough I appreciate the color and have a great day.

Yes, Thanks, Brian.

Our next question comes from Vinay <unk> with J P. Morgan.

Hi, good morning, guys.

When we talk about the <unk>.

Cigna's Minsheng bank.

And I think the large horsepower market.

I mean, if you think about the pricing kind of consolidated historical heights, especially what we saw last quarter.

Can you give any.

Bigger thoughts on what operating Nowadays USA, Inc.

And market conditions.

Do you see any upside to the pricing maybe I got it.

Yes, it's Matt why don't I start I think in terms of.

Yes on the larger horsepower side, we mentioned that things are tight and when we're talking about that we're really focused.

<unk> focused 2500 horsepower and above kind of the really really big stuff.

Part of what we're going to be evaluating for next year.

We've got idle equipment.

As we show in every every Q that we filed a lot of that stuff did come home last year, while one of our primary focuses is going to be able to put that out next year and so we'll be able to use a lot of equipment that we've already bought and paid for that's sitting at the at the business right now we will use that to two.

<unk>.

Fund customer demands et cetera, and so I think thats. The plan in terms of horsepower utilization and there is obviously that has upside because that is equipment that is that we own right now and getting that stuff out to your point about operational leverage.

That 70% gross margin equipment.

If and when we can get it out so that will obviously be a big.

A big part next year.

I think to Eric's commentary earlier.

Still some uncertainty that's floating around the industry and floating around with customers and so I think I think everyone is hopeful that we get some resolution.

Some of those items here as we get towards the end of the year.

But I think even regards the.

The industry is figuring out solutions to problems and one of the one of the problems that I think everyone sees as there is a huge demand for gas and how are you going to get that gas out of the ground into customers and so I think even even with some uncertainty youre going to see customers reacting in.

Taking economical actions and we think that's going to translate into more demand question going into next year.

But can you just give us a glimpse of how the.

Thank you.

Production outlook is in the different basins, I mean, who is who is driving kind of the activity I mean, you've been talking about a lot of activity increase in the next deal, but the major us Andy and because so much has been paying you dug in there Glen commentaries.

Wanted to understand do you expect that activity to pick up coming from is it.

More than that but I mean, do you expect to see some upside that or do you actually expect some may just to increase the activity.

Yes, I think we're going to see continued activity by some of the large privates.

The commentary we're hearing from from several of the majors is that we can expect tick up.

Drilling and completion activity.

We see pickup in the Delaware, we see continued pickup in the Eagle Ford shale.

We see continued pickup in activity over in the Haynesville shale I would say kind of moderating.

Flat to slight tick up in.

In the mid continent areas of the Scoop stack merge.

A little bit of tick up in the Rockies.

And then Appalachia, we're seeing.

A fairly.

Significant tick up in what we think will be 2022 activity.

I'd say, we're not we're not offshore.

Any material way, we're not up in the Bakken can't really address those so I think generically.

<unk>, we're seeing tick up across all basins with probably greatest amount of activity would be Permian, Delaware Eagle Ford Haynesville and Appalachia.

Got it got it.

Thank you guys. That's helpful. Thank you.

As a reminder, if you'd like to ask a question. Please dial star one on your telephone keypad.

Our next question comes from Selman <unk> with Stifel.

Thank you good morning.

You guys alluded to in your comments contractual price escalators.

Wondering if you could just maybe discuss how much of it we think in terms of your EBITDA is covered by that.

Selman, it's Matt.

I don't have it.

Right at hand, but may be just to give you some color on how those work basically all of our contracts have.

In them contractually the ability to raise the rates basically on an annual basis.

According to a <unk>.

CPI index amount and so what we've done obviously CPI is pick.

Pick your months I mean, we have contracts that are that are coming up for sort of an annual renewal. If you will our annual CPI.

Renewal every month, so every month we're out.

Ending out notices and raising those rates so that's a.

Depending on which month it happens to be you know over the last 910 months its been.

Anywhere from one.

5% or more depending on the month so.

We just those add in we just kind of layer those in but again on the fleet you've got 70% of the fleet that's under long contracts.

I think what's important is those rate escalators.

Allow us that's what's helped us maintain the margins right and so as you are.

Yes, you are seeing.

If diesel oil lube oil costs like that are going up we're able to basically maintain those margins through using the CPI escalators, which is kind of the whole point so.

It is not.

Wouldn't say I would be guessing, but it's not a significant part of the of the EBITDA, but it obviously helps in those margins.

I appreciate that and then.

Just going through the quarter. It looks like you had really very good control over SG&A. This quarter and I was wondering was there anything in particular.

Uh huh.

Did it does now.

No nothing I mean it will.

Yes.

I mean, there's really nothing in particular this quarter versus others. We've we've obviously just continue to watch like I said, everything and kind of control.

We've not added even as things have started to kind of tick up a little bit we maintain those costs as best we can yes. Selman. This is Eric and I think one thing we pride ourselves at USA is that we built scalable systems over time and I would think that if you look at our.

Our corporate G&A you look at the number of people that we have the number of folks that we employ.

Significantly leaner than some of our other peers private and public alike. So our approach to business has been let's don't.

Slash and burn in a downturn.

Set aside the various programs.

401K matter.

Let's not take.

Take salary cuts for things that are these one time things that then when the business recovers then all of a sudden you layer on additional expenses again, so we built the company to be sustainable through through peaks and valleys.

We run a very mean and lean organization with scalable systems and I think it's proven itself.

When you look at our financial results as you pointed out.

We didn't see a lot of bloating and we didn't see a lot of cutting all the downturn so.

Again, it's much more stable in <unk>.

Probably.

Much more efficiently run organization than some folks.

Got it and I appreciate that and then just sort of last one for me and I know next year youre going to be.

Using primarily idle equipment.

But if we just sort of think about.

All the bottlenecks were hearing on the industrial side. If you had to go out and get stuff is there anything out there that's particularly tight for you that.

You just can't see whether it would be.

Large engines or was there anything out there that's just in.

Big short supply that would cause you guys a huge bottleneck if you needed to maybe move more aggressively in terms of scaling up.

Yes, good question.

We've spent time with.

Our major manufacturer caterpillar than the folks at Ariel who manufacture the compressor side and some component manufacturers with coolers and electronic control devices et cetera.

Is this.

Kind of a worldwide global supply chain bottlenecks.

To pick up we have worked proactively to address some of these things. So we're making sure that we doubled down on available inventory spare components. So you'd think turbo chargers are oil filters or spark plugs or <unk>.

Compressor valves whatever the major components are that we need to run and support our day to day operations, we've been very aggressive in making sure that we have access to components.

What we're hearing from our major manufacturers is that because of supply constraints and bottlenecks and limitations that they are indeed, having.

Some limitations on their ability to ramp up.

Manufacturing of of engines across all horsepower ranges. So we're seeing lengthening of lead times with.

Appear to us to be fairly small order placements. So if.

If you were to the question was hey, it looks like the cycles, a little bit different this time things have been somewhat muted.

If you go back kind of post 2008 into 2010, you go back after the crude oil collapse of 2014 and saw kind of 16 and 17, there was a dramatic ramp up on activity and manufacturers have the capacity to ramp up this time because of the supply chain bottlenecks.

They don't have the ability to ramp up significantly.

This is a horsepower in.

Meads for USA or some of our peers as well. So we think this will give us a competitive advantage coming into 2022, because we've got a.

We are purposefully not dumped equipment on the marketplace taken a dive on pricing knowing what we saw coming which was demand is going to be up suppliers are going to be down youre going to have to suck.

Suppliers harder to be able to move the same volumes of gas the exponential increase in compression horsepower. So we've got equipment some of our peers don't have equipment.

The supply bottlenecks, we think that bodes very well for our ability to penetrate the market.

To maintain and improve upon pricing and be positioned extremely well for 2022 and on into 2023 as well.

Alright, Thank you very much.

Thank you.

Our next question comes from Ned <unk> with Wells Fargo.

Yes.

Good morning, Thanks for taking the question.

Could you provide more details on the amount of capital you think you would need for reconfiguration of idle equipment in 2022, and then also building on the previous question.

What are the lead times on new orders. These days. Thank you.

Yes Ned.

The second question is probably the easier one I think we're probably in the four to six month range and so youre talking about.

If you were to put in an order now youre talking about kind of early spring April may that kind of timeframe. So.

That in terms of kind of the big horsepower stuff again like Eric said, we're looking at redeploying a lot of that idle horsepower.

Right now I don't have a capital number for you of what we will do is we kind of plan out we always give the annual guidance in February. So we will have more color for you in more kind of granular details for you at that point.

Yes.

Thanks, Thats all I had.

Thanks Ned.

That concludes today's answer question and answer session. At this time I will turn the call back over to Mr. Eric long for closing remarks.

Thank you very much the third quarter reflected another quarter of stable cash flow generation by our core compression services businesses.

We're pleased to see both utilization and pricing tick up as we move throughout the quarter and believe that bodes well for the remainder of 2021 and on into 2022.

Natural gas prices have moved to recent record highs and the outlook for production is positive.

Both of which we expect to drive the demand for compression and for our business. The fundamentals of our business remain the same driven by the demand for natural gas, which we see increasing in the U S and throughout the world. We believe that the underlying stability of our large horsepower infrastructure focused contract compression services business model has served.

Our unit holders well over the last 18 months and for the nearly 25 years with visits we have a great asset base from which to be involved in the longer term transition to cleaner energy in which natural gas will clearly play an important part thanks for joining us and please be safe and we look forward to speaking with everyone on our next call.

Thank you. This concludes today's call you may now disconnect.

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[music].

Good morning, welcome to the USA compression partners L. P third quarter 2021 earnings conference call. During today's call all parties will be in a listen only mode and following the call. The conference will be opened for questions. This conference is being recorded today November 2nd 2020.

One.

I would now like to turn the call over to Chris border, 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 September 32021.

Can find our earnings release as well as recording of this call in the Investor Relations section of our website at USA compression Dot com the recording will be available through November 12, 2021.

It's may differ materially. Please review the statements of risk included in this mornings release and in our SEC filings. Please note that information provided on this call speaks only to management's views as of today November <unk> 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 is Matt Liuzzi, our CFO.

Morning, We released our financial our financial and operational results for the third quarter of 2021.

Collecting another quarter of continued stability in our infrastructure driven business model with results that were again consistent with the prior quarter and in line with what we expected.

The format gets into the specifics of the quarter I want to highlight some key facts and observations that help form the decision making process of your management team.

I think that you may actually find them enlightening simply put considering the lack of regulatory clarity and uncertainty emanating from both the executive branch and Congress regarding major policy decisions, which made profoundly impact the energy industry tax structures and our domestic economy.

Jose compression will continue to do what we have done in periods of uncertainty, we hunkered down we power through we maintain a consistent course of action, providing exemplary levels of natural gas compression services to our long term and strategic infrastructure oriented customers. We intend to do the same for the balance of 2010.

One in throughout 2022.

Right now there is a lot of discussion around the topics of ESG and energy transition.

Both are important and are front and center here at USA compression.

For our investors, we believe that it is important to differentiate between the policy noise with all of the feel good wish to be true prognostications of the future.

First is the realities of economics and technology.

Somewhat.

What is coming to light is that one the energy transition will be one of the most capital intensive and most complex undertakings in human history.

<unk>.

Growing energy needs and the ultimate achievement of net zero.

The bottom line demand for energy of all types is up supplies of conventional energy sources are down and we know of no technology that existed scale to backstop, the intermittent nature of solar and wind suppliers.

Natural gas prices are searching around the world part of an emerging global energy crises spilling into the coal market, causing power prices to spike.

While the Henry hub <unk> natural gas prices in the upper $5 per <unk> range average spot prices for LNG in September were $25 45.

A 40% increase on the prior month and more than four times the price from the year before.

Prices have continued to rise in October of 2021 and traded a $34 per <unk>.

The utilization of U S. LNG facilities continues to be high in countries around the globe are building inventories in.

In anticipation of tight supply this coming winter Dutch.

Such natural gas for December.

Timber delivery touched $187 per <unk> with December LNG, Japan, Korea, currently $32 and a penny for Btu.

The effects of these high natural gas prices include government intervention regarding electric power in Europe to reduce cost to consumers shuttering of manufacturing suppliers in China and subsequent mandates to secure coal supplies quote at all cost.

So what is happening in the UK renewables, mostly wind displace coal in power generation over the past decade, increasing reliance on natural gas for base load electric power.

Utility scale battery storage is essentially nonexistent.

Nuclear power is about 20% of generation capacity.

70% of the UK is gas storage capacity was shuttered in 2017 with regulators expecting newly constructed renewables and natural gas imports to meet demand.

With the combined reduction in gas storage and domestic gas production from the north sea declining more than 65% since the.

The year 2000 <unk>.

The UK became reliant on LNG imports, both Japan and Europe are also bidding unlimited LNG suppliers, resulting in UK power prices jumping four to 10 times historical norms.

With the UK being colder than normal and experiencing lower than average wind speed renewables have been unable to meet electric electricity demand.

OPEC plus is done an effective job of managing pricing.

Further signals suggest that OPEC plus will be out of excess capacity by mid 2022. This is unprecedented.

Global upstream capital expenditures expenditures averaged 320 to 350 billion in 2020 in 2021.

This is one half the levels of 2011 to 2014 and 25% short of what is needed to hold oil production steady at a 100 million barrels a day of which two thirds is for transportation and one third for industrial use.

PUC, our drilled and uncompleted drawdown.

Took three years to build an inventory of 3300 do you seize EMEA has been wiped out in the last 12 months. The U S. E&P sector is now completing 270 more wells that we're drilling on a monthly basis, which is unsustainable.

In 2020 to address additional drilling capital will be needed to sustain production levels.

By the end of 2030, the global electric vehicle fleet is expected to be lower than consensus penetration of 30% to 40%.

Worldwide, we will need an additional 7 million barrels per day to balance the market demand and where is it going to come from.

And finally, we have the regulatory uncertainty relating to the domestic oil and gas industry overall implications regarding potential methane regulation and taxation considerations from the myriad and ever changing proposals emanating from various factions of the current Washington administration as well as the specter.

Of Sidoti tax.

So what does all this mean for USA compression as we head into 2022.

It appears to us that as the world economies continue to open and regained strength.

<unk> for energy in all forms and especially natural gas will continue to increase it is also apparent that the supplies of oil and natural gas have declined due to underinvestment and that in the interim time frame renewable sources of energy are insufficient to meet the overall needs for energy, we believe that over the next several years.

<unk>, we will see increasing albeit major drilling and completion activity for both oil and natural gas and that demand for our compression services will continue to increase in 2022 and beyond.

<unk> drive is effectively a hybrid compressor similar to a Toyota Prius, which has the potential to be an important breakthrough for our customers seeking to reduce our carbon dioxide and methane emissions.

Dual drive we will provide the reliability and redundancy of natural gas during what we believe will be a multi decade transition period to expand the electric grid, we expect growing instability of the electric grid over the intermediate term exacerbated by the specter of policy mandated reliance on renewed.

<unk> without access to cost effective utility scale storage.

During 2022, we intend to continue the development of dual drive units across several horsepower ranges.

One final note before I turn the call over to Matt to walk through our results for the third quarter with this quarter's payment. We've now achieved 35 quarters of distributions returning over $1 $2 billion to unit holders since our IPO back in 2013.

Matt.

Thanks, Eric and good morning, everybody.

Today, USA compression reported third quarter results, including quarterly revenue of $159 million adjusted EBITDA of $100 million.

And DCF to limited partners of $52 million, all of which were consistent with last quarter.

Of total revenues of $159 million approximately $156 million reflected our core contract operations revenues, while parts and service revenue contributed roughly $3 million.

Last quarter, Eric mentioned that we had been seeing firming demand signals from our customers with increased quote in contracting activity, which had allowed us to push through some rate increases.

Pricing continued to increase in the third quarter to $16 62 per horsepower per month up from $16 55 in the previous quarter. This reflects the impact of contractual price escalators and the tight supply demand, especially for the largest horsepower classes.

Our adjusted gross margin as a percentage of revenue was 69% in the third quarter consistent with USA compressions historical levels.

We achieved adjusted EBITDA for the third quarter, approximately $100 million flat.

<unk> flat to the second quarter adjusted EBITDA margin of 62, 8% was again consistent with our historical averages.

CF to limited partners of $52 million also consistent with last quarter.

Our total fleet horsepower at the end of the quarter approximately $3 7 million horsepower was flat with the second quarter.

While average utilization throughout the third quarter was essentially flat with the second quarter at 82, 3% Youll note that the period end utilization has ticked up to 83%, reflecting our positive trend of horsepower deployment as the quarter came to a close.

We continue to exercise caution on capital spending throughout <unk>.

Third quarter with total expansion capital of $14 million.

Consisting primarily of reconfiguration of idle units and maintenance capital of $5 million consistent with our expectations. We do not have any units on order for delivery in the remainder of 2022.

We continue to evaluate the market demand for 2022, while we expect some moderate amount of new unit orders. We expect the majority of our capital will be focused on the redeployment of existing idle units with nominal capital required to deploy that horsepower.

Net income for the quarter was $4 million and operating income was $37 million.

Net cash provided by operating activities was $45 million in the quarter and lastly, cash interest expense net was $30 million.

Based on the third quarter's results the board decided to keep the distribution consistent at $52.05 per unit, which resulted in a distributable cash flow coverage ratio of 1.02 times consistent with year to date levels. Our bank Covenant leverage ratio was 496 times flat.

From the previous quarter consistent with prior quarters, our board of directors determines the quarterly distribution on a quarterly basis and the board can opt to maintain reduce or suspend the distribution as it deems most appropriate.

We expect to file our Form 10-Q with the SEC as early as this afternoon.

Unit centralized compressor stations and expect that our services will be in demand as things pick up as we move into 2022.

With that we'll open the call to questions.

Thank you.

To ask a question please signal by pressing star one on your telephone keypad.

You are using a speaker phone. Please make sure. The mute function is turned off to allow your signal to reach our equipment.

Again press Star one to ask a question we'll.

Pause for just a moment to allow everyone an opportunity to signal for questions.

Our first question comes from Brian Reynolds with UBS.

Hi, Good morning, everyone, maybe just start off on 'twenty, one EBITDA guidance.

Seems like recovery at this time around and compression is a little bit slower than in previous cycles and I was curious if you could provide some color on what is different. This time, just given that Nat gas production remained resilient just curious if you could also provide some initial color around like how much of it is around customer optimization rationalization of compression units and you know how we should do.

22 compression demand going forward.

Hey, this is Eric I think consistent with our commentary.

We're seeing a lot of discipline from the E&ps.

<unk> oils have slashed their capex budgets, whereas historically when you saw oil prices in the mid eighties and natural gas prices in the mid fives.

They are hitting the gas and matching the accelerator, we do see.

Some of the private larger private players accelerating some of their developmental activity.

And I think the other thing you've got some hedges that are.

Our rolling off from 2021 into 2022.

If you recall the pioneer guys. The other day announced over $900 million hedge loss for the quarter. So on the one hand high commodity prices would suggest that there is this massive free cash flow a lot of that cash flow is going to the counterparties of the e&ps have entered into these hedges. So what we're hearing from our clients.

Customers are one there will be continued discipline in the industry.

Moderated by the Investor focus on.

Improving balance sheets from the E&P guys. So I think they are listening to the financial Investor community.

Second the roll off of hedges, which then will kind of start to push on some additional activity the drilling and development of the <unk>, which are going to be nonexistent. So.

If you want to maintain production is going to require a bit increase in drilling of developmental capital and we're hearing from our producers that activity in 2022 will maintain production either flat to slightly up.

We all know when.

Great I appreciate all the color.

As a quick follow up just given the recent tax proposals around the MLP tax structure. Just curious if you had any comments around how you stack ultimately visits it's correct flattish maybe down the future. Thanks.

Yes, Brian it's Matt.

I think that MLP.

I forget what its called but the basically treating them as corporations that debt provision tends to get put in every single budget. If you look back many many years.

And so I think.

Yes, there is a lot of there seems to be a lot of support firm a broader definition of what mlps can be in terms of including some of the renewables.

Kind of a transition type companies in the MLP structure, and so I think if that happens that's obviously a positive for kind of the overall tax structure of being able to remain an MLP.

But in terms of what we what we do what we want to do what we will do.

We can't really say anything about that.

Great Fair enough I appreciate the color and have a great day.

Thanks, Brian.

Our next question comes from Vinay <unk> with J P. Morgan.

Hi, good morning, guys.

I just wanted to talk about the demand signals.

And then you add on the large horsepower market.

I mean, if you think about the pricing kind of consolidated.

Nickel heights, especially working solid last quarter last cycle can you give any updated thoughts on what operating Nowadays USA Inc.

Market conditions.

Do you see any upside to the pricing maybe I got it.

Yes, <unk>, it's Matt why don't I start I think in terms of.

Yes on the larger horsepower side, we mentioned that things are tight and when we're talking about that we're really.

Focused.

500 horsepower and above kind of the really really big stuff.

Part of what we're going to be evaluating for next year is.

We've got idle equipment.

As we show in every every Q that we filed a lot of that stuff didn't come home last year, while one of our primary focuses is going to be able to put that out next year and so we'll be able to use a lot of equipment that we've already bought and paid for that's sitting at the at the business right now and we'll use that to two.

<unk>.

Okay.

That 70% gross margin equipment.

If and when we can get it out so that will obviously be a big.

A big part next year.

I think to Eric's commentary earlier.

Still some uncertainty that's floating around the industry and floating around with customers and so I think I think everyone is hopeful that we get some resolution.

On some of those items here as we get towards the end of the year.

But I think even regards.

The industry is figuring out solutions to problems and one of the one of the problems that I think everyone sees that there is a huge demand for gas and how are you going to get that gas out of the ground and the customers and so I think even even with some uncertainty youre going to see customers reacting in.

Taking economical actions and we think that's going to translate into more demand question going into next year.

But can you just give us a glimpse of how the <unk>.

Alright.

Thank you.

Production outlook in the different basins, I mean, who is who is driving kind of the activity I mean, you've been talking about a lot of activity increase in the next deal.

The major us Andy and because so much has been picking a date and then Colin commentaries.

So just wanted to understand the.

Do you expect that activity picked up coming from is it a U.

More than that but I mean, do you expect to see some upside data.

Do you actually expect some may just to increase the activity.

Yes, I think we're going to see continued activity by some of the large privates.

The commentary we're hearing from from several of the majors is that we can expect tick up.

Drilling and completion activity.

We see pick up in the Delaware, We see continued pickup in the Eagle Ford shale.

We see continued pickup in activity over in the Haynesville shale I would say kind of moderating.

Lapped a slight tick up.

In the mid continent areas in the Scoop stack merge.

A little bit of tick up in the Rockies.

And then Appalachia, we're seeing.

Apparel.

Significant tick up in what we think will be 2022 activities. So it's I'd say, we're not we're not offshore.

Any material way, we're not up in the Bakken can't really address those so I think.

Generically, we're seeing tick up across all basins with probably greatest amount of activity would be Permian, Delaware Eagle Ford Haynesville and Appalachia.

Got it got it.

Thank you guys. That's helpful. Thanks, Vanessa Thank you.

As a reminder, if you'd like to ask a question. Please dial star one on your telephone keypad.

Our next question comes from Selman <unk> with Stifel.

Thank you good morning.

You guys alluded to in your comments contractual price escalators I was wondering if you could just maybe discuss how much of thinking towards your EBITDA is covered by that.

Selman, it's Matt.

I don't have it.

Right at hand, but may be just to give you similar on how those work basically all of our contracts have.

In them contractually the ability to raise the rates basically on an annual basis.

According to <unk>.

CPI index amount and so what we've done obviously CPI is pick.

Pick your month I mean, we have contracts that are that are coming up for sort of an annual renewal if you will or an annual CPI.

Renewal every month, so every month we're out <unk>.

Sending out notices and raising those rates so.

That's a.

Depending on which month that happens to be you know over the last 910 months its been.

Anywhere from one.

5% or more depending on the months so.

We just those add in we just kind of layer those in but again on the fleet you've got 70% of the fleet that's under long contracts.

I think what's important is those rate escalators.

Allow us that's what's helped us maintain the margins right and so as Youre, yes, youre seeing if diesel oil lube oil costs like that are going up we're able to basically maintain those margins through using those CPI escalators, which is kind of the whole point so.

It's not.

I wouldn't say I would be guessing, but it's not a significant part of the of the EBITDA, but it obviously helps in those margins.

Understood and I appreciate that and then.

Just going through the quarter. It looked like you had really very good control over SG&A. This quarter and I was wondering was there anything in particular.

Did it does number now.

Nothing I mean.

It will.

I mean, there's really nothing in particular this quarter versus others. We've we've obviously just continue to.

Watch like I said, everything and kind of control.

Our corporate G&A you look at the number of people that we have the number of folks that we employ.

Significantly leaner than some of our other peers private and public alike. So our approach to business has been whitestone.

Slash and burn in a downturn.

Set aside various programs <unk> 401, K match or.

Let's not take.

We run a very mean and lean organization with scalable systems and I think it has proven itself.

When you look at our financial results as you pointed out.

We didn't see a lot of floating and we didn't see a lot of cutting all the downturn.

Again, it's much more stable in <unk>.

Probably.

Much more efficiently run organization than some folks.

Got it and I appreciate that and then just sort of last one for me and I know next year youre going to be.

Using primarily idle equipment.

But if we just sort of think about all.

All the bottlenecks were hearing on the industrial side. If you had to go out and get stuff is there anything out there that's particularly tight for you that.

You just can't see whether it would be.

Large engines or is there anything out there that's just in.

In short supply that would cause you guys a huge bottleneck if you needed to maybe move more aggressively in terms of scaling up.

Yes, good question.

We've spent a time with.

Our major manufacturer caterpillar than the folks at Ariel who manufacture the compressor side and some component manufacturers with coolers and electronic control devices et cetera.

Is this.

Kind of a worldwide global supply chain bottlenecks.

Continue to pick up.

We have worked proactively to address some of these things. So we're making sure that we doubled down on available inventory spare components, so you'd think turbo chargers or oil filters or spark plugs are.

Compressor valves or whatever the major components are that we need to run and support our day to day operations, we've been very aggressive in making sure that we have access to components.

What we're hearing from our major manufacturers is that because of supply constraints and bottlenecks and limitations that they are indeed, having.

Some limitations on their ability to ramp up.

Manufacturing of.

Engines across all horsepower ranges. So we're seeing lengthening of lead times with.

Appear to us to be fairly small order placements. So if.

If you were to the <unk>.

Question was hey, it looks like the cycles, a little bit different this time things have been somewhat muted.

If you go back kind of post 2008 into 2010, you go back after the crude oil collapsed in 2014 and saw kind of 16 and 17, there was a dramatic ramp up activity and manufacturers have the capacity to ramp up.

At this time because of the supply chain bottlenecks, they don't have the ability to ramp up significantly.

This is a horsepower in.

Meads for USA or some of our peers as well. So we think this will give us a competitive advantage coming into 2022, because we've got them.

We have purposely not dumped equipment on the marketplace taken a dive on pricing knowing what we saw coming which was demand is going to be up suppliers are going to be down youre going to have to suck.

Supply is harder to be able to move the same volumes of gas the exponential increase in compression horsepower. So we've got equipment some of our peers don't have equipment.

With the supply bottlenecks, we think that bodes very well for our ability to penetrate the market.

To maintain and improve upon pricing and be positioned extremely well for 2022 and on into 2023 as well.

Alright, Thank you very much.

Thank you.

Our next question comes from Ned <unk> with Wells Fargo.

Good morning, Thanks for taking the question.

Could you provide more details on the amount of capital you think you would need for a reconfiguration of idle equipment in 2022, and then also building on the on the previous question.

What are the lead times on new orders. These days. Thank you.

Yes Ned.

The second question is probably the easier one I think we're probably in the four to six month range and so youre talking about.

If you were to put in an order now youre talking about kind of early spring April may that kind of timeframe. So.

That's in terms of kind of the big horsepower stuff again like Eric said, we're looking at redeploying a lot of that idle horsepower.

Right now I don't have a capital number for you of what we will do is as we kind of plan out we always give them.

The annual guidance in February so we will have more color for you in more kind of granular details for you at that point.

Thanks, that's all I had.

Okay. Thanks Ned.

That concludes today's answer question and answer session. At this time I will turn the call back over to Mr. Eric long for closing remarks.

Thank you very much for the third quarter reflected another quarter of stable cash flow generation by our core compression services businesses.

We were pleased to see both utilization and pricing tick up as we move throughout the quarter and believe that bodes well for the remainder of 2021 and on into 2022.

Natural gas prices have moved to recent record highs and the outlook for production is positive.

Our unit holders well over the last 18 months and for the nearly 25 years with visits we are a great asset base from which to be involved in the longer term transition to cleaner energy in which natural gas will clearly play an important part.

For joining us and please be safe and we look forward to speaking with everyone on our next call.

Thank you. This concludes today's call you may now disconnect.

Q3 2021 USA Compression Partners LP Earnings Call

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