Q4 2021 USA Compression Partners LP Earnings Call

February 15, 2022

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Okay.

Good morning, welcome to USA compression partners Lp's fourth quarter 2021 earnings conference call during.

During today's call all parties will be in a listen only mode and following the call at the conference will be opened for questions. If you'd like to ask a question today you may enter the queue by pressing star one.

This conference is being recorded today February 15th 2022, I would now like to turn the call over to Chris Porter, Vice President General Counsel and Secretary.

Good morning, everyone and thank you for joining US. This morning, we released our financial results for the quarter ended December 31, 2021, you can find our earnings release as well as a recording of this call in the Investor Relations section of our website at USA compression dotcom.

The recording will be available through February 25, 2022.

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

Actual results may differ materially. Please review the statements of risks 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 February 15th 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 today.

While I plan to cover our positive financial and operational results for the fourth quarter of 2021.

Also want to give you our unitholders a sense of where we see the puck going so to speak for the balance of 2022 and into the future.

We are living in unusual times in which both real and false information are quickly disseminated by news and social media outlets that often appear to have biased agendas. We are seeing firsthand in Europe that some feel good beliefs have led to governmental and regulatory policies.

Appeared to be in conflict with the pragmatic and economic realities of the real world in which we live.

First I wanted to say, thank you to the dedicated men and women of USA compression, who during the past two years of the Covid pandemic have continued to do what it is what they do best meeting the needs of our upstream and midstream customers 24 hours a day seven days a week 365 days, a year, which have helped to keep oil and.

Gas producing in our country and whose efforts have helped to keep the lights on in America and to keep Grandma's house warm when much of our country was locked down.

To give you a sense of the magnitude of what it takes to keep USA compression up and running our service teams drove almost $1 3 million miles and worked over 122000 hours of January 2022 alone.

And our folks embrace a culture of safety with our service technicians now having work almost 4 million hours without a lost time injury.

Safety is a way of life USA compression and I am proud of how our team continues to embrace it.

So, let's turn to the fourth quarter of 2021, and wrap up the year in which USA compression remained true to our core business strategy of providing exemplary levels of natural gas compression services to our long term and strategic infrastructure oriented customers are.

Our fourth quarter results came in consistent with the previous quarter and reflects the inherent stability in our business and the significant amount of base load natural gas demand that underpins our active fleet of horsepower.

Full year, we achieved results that were at the higher end of our guidance range. We once again maintained our distribution at 52 five cents per unit and we have now returned over $1 3 billion to our unit holders since our IPO in 2013.

During Q4, we also entered into a new five year ABL agreement with our Bank group, which would've gone current in early 2022 that resulted in additional flexibility at lower interest margin spread while maintaining our total capacity of $1 6 billion.

As of the end of 2021, we had about $516 million drawn.

So now more commentary 2021 and leading into 2022.

We saw two very different customer profiles in 2021 are large public players continue to show financial and operational restraint while.

Our smaller private independent developers, who tended to take a more aggressive approach to their capital spending programs.

While we were hopeful that 2021 would bring some additional clarity to policymaking as it regards the energy industry. What we got instead was continued mixed messaging by our government, which kept our larger public customers generally hunkered down with reduced levels of growth capex throughout the year.

With the continuing uncertainty out of Washington D. C. It appeared that restrained capital spending became the mantra even in the face of very attractive commodity prices.

Last quarter, I spoke demonization of oil and gas and the capital starvation in the <unk>.

The industry has seen over recent years due to many factors not the least of which has been shareholder pressure and the specter of more stringent governmental regulation.

I mentioned, how that Underinvestment combined with strong demand has resulted in declining inventories and puc's the drilled and uncompleted wells all of which are further exacerbating the supply demand imbalance during.

During the fourth quarter. These trends only continued we've seen preliminary estimates show inventory draws in the fourth quarter several times larger than both in 2020, and when compared to historical averages and according to EIA. The number of <unk> wells was down 13% in the fourth quarter and we ended 2021.

Down 40% from the end of 2020.

The regulatory uncertainty relating to the domestic oil and gas industry overall, including implications regarding potential methane regulation and taxation has not abated, however, with midterm elections on the horizon. The likelihood of action seems to have waned that pause combined with a precarious supply.

<unk> balance and the expectation for continued attractive commodity prices in the near term, we believe ought to help our customers take investment actions, which they might otherwise have been wary of last year.

Let me make a few comments about where commodity prices currently stand crude oil prices in the fourth quarter were up over 80% from a year ago period and for the full year 2021 prices were up almost 75% over 2020, but it isn't just a comparison to a weak year in 2020 you'd have to go all the way.

2014 to see crude oil prices at levels above what they are today.

The biggest difference between now and 2014, though is that the 2014 run up in prices was in many ways flea driven.

Today, we are looking at a combination of real world factors, which taken together are causing a supply demand imbalance.

The globe and resulting in very attractive oil prices. The same holds true on the natural gas side of things as well prices in the fourth quarter were up almost 100% over the year ago period, and the same for the full year 2021 versus 2020.

You would have to go back to the 2008 to 2009 time period to find prices like what we saw during the fourth quarter for.

For natural gas the commodity strength is also being driven by real world situations, including cold weather lack of natural gas supply in parts of Europe and also the general Underinvestment in bringing on new sources of supply.

Recall that energy was the best performing sector in the S&P 500 last year driven in large part by the overall strength in commodity prices.

Well interesting to consider where we've been I think the more appealing aspect of what this situation potentially means for where we're headed there.

The current price situation reflects the realities of shrinking supplies and increasing demand for both crude oil and natural gas be inherent tension to balance the massive cost to move to renewable forms of energy over the timeframes and the harsh reality that energy supplies are a critical and powerful tool that can be <unk>.

Used to hold governments hostage.

One of the concerns that we have an industry have faced as a substantial underinvestment needed to add supply over the last few years, driven primarily by the Covid panic regulatory uncertainty shareholder pressures and other factors the oil and gas industry is a longer lead time industry and requires a sufficient amount of capital investment.

Projects can take time to be developed and commercialized and we continue to witness this reality and the struggles that certain OPEC plus members have had in trying to meet their production quotas.

Producers just can't turn on the spigot whenever they want.

So we are now seeing very resilient demand running headlong into a tight supply situation that is ill equipped to react quickly.

This will change dramatically in the short term and continued geopolitical instability in Russia, the Ukraine and Europe only exacerbates the issue.

In fact, the EIA just revised upwards their demand forecast for 2022 to $100 6 million barrels a day, an increase of $3 5 million barrels a day over 2021, which was up $5 2 million barrels a day over 2020.

This is at a time when U S crude oil inventories are 13% below last year and 9% below the five year average.

Further the global oil market is estimated to be under supplied by one 5% to 2 million barrels per day for 2022 added geopolitical stability, both Russia, and China, and we have the potential for a global energy squeezed the likes of which we have not seen since the embargo days of the mid 19 seventies.

So how does this affect USA compression. The good news is that domestic natural gas is abundant and we have the ability to export large volumes of LNG around the world the importance of natural gas for heating and electricity generation is front and center in the conflict between Russia, and Europe , right now, which revolves around natural gas at the.

The end of 2021, the U S became the largest exporter of natural gas, surpassing Qatar and Australia. We believe the free market will continue to function to move natural gas, where it is valued most highly whether that is domestically or internationally and as that gas comes out of places like the Marcellus shale and the Permian basin.

Producers and transporters will require compression to move it along.

Another prominent theme during 2021 that continues into 2022 was the continued discussion around ESG and the energy transition.

Both are important and we expect both the factor into the dialogue across the energy spectrum for the years to come. However, I think 2021 also demonstrated that this transition will take a lot longer than many expect.

We will likely cost far far more than many estimate.

I wanted to share a few factoids I recently saw a financial post to help point out the chasm between government policy and our energy reality.

First the EIA recently projected that the U S internal combustion car fleet won't peak until 2038 and today lesson about 3% of the U S car fleet is electric.

We will need to convert 145 billion vehicles 29000 aircraft and 54000 shifts to renewable fuel sources.

Raw materials are forecast to enter structural deficit copper as an example is 32% deficit.

Interestingly the average person in the world consumes only five barrels of oil per year in the U S were higher living standards translate to higher hydrocarbon demand that number is 21 barrels of oil per year.

<unk> is forecasting of the world's population will add 2 billion people by 2050 with the middle class growing in China, and India. So run the math how is it fathomable that the global demand for things such as plastics fertilizer mine metals for electronics and specialty chemicals, all hydrocarbon intensive will fall.

The bottom line remains the same demand for energy of all types worldwide is up suppliers of conventional energy sources are down and we.

No no technology that economically exist at scale to backstop, the intermittent nature of solar and wind supplies, but bottom line is that we believe the need for USA compression services will continue far into the future.

USA compression begins 2022, we're looking out in the marketplace in dire need of energy in all forms both crude oil as well as natural gas both fuels are essential to providing cost efficient energy to the entire world.

Natural gas remains a clean burning abundant fuel that is easily transported throughout our country as well as the world.

And as the broader world continues to grow and develop crude oil is critical to improving the quality of life for people all over the planet.

In the near term we are witnessing a focus on renewable sources of energy that are quite frankly insufficient to meet the overall needs of the population and of course. It is affordable to society, we expect major drilling and completion activity for both oil and natural gas in the years to come and with it demand for our compression serve.

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Our work on the dual drive concept will continue in 2022 and beyond and we expect expect an uptick in customer inquiries as further electric infrastructure begins to be built out.

The dual dry product represents a potential and cost effective offering to allow our customers to switch quickly and reliably and reliably from natural gas to electricity as a fuel source.

Each will allow them to reduce their carbon dioxide and methane emissions meaningfully we.

We believe dual drive is an attractive transition offering for our customers with the ability to provide the reliability and redundancy of natural gas during what we believe will be a multi decade transition period to expand the electric grid.

One final note before I turn over the call to Matt to walk through our results for the fourth quarter.

With this quarter's payment we've now achieved 36 quarters of distributions returning over $1 $3 billion to unit holders since our IPO back in 2013.

Stability of the business and strong cash flow generation has allowed us to power through the most recent downturn yet be positioned to take advantage of the tailwind that we believe are coming in 2022.

The last several years have really demonstrated the power of the large horsepower compression business model and as we begin a more optimistic 2022, we expect to continue the path we've been on a map.

Thanks, Eric and good morning, everyone today, USA compression reported fourth quarter results, including quarterly revenue of $160 million adjusted EBITDA of $99 million and DCF to limited partners of $52 million, all of which were consistent with last quarter.

Of total revenues of $160 million approximately $157 million of it reflected our core contract operations revenues, while parts and service revenue contributed roughly $3 million.

<unk> for the fleet as a whole remained flat in the fourth quarter at $16 62 per horsepower per month remember this is an average across the entire fleet. So while we continue to manage contractual price escalators the churn of assets from active to idle will also have an effect on this metric our.

Our adjusted gross margin as a percentage of revenue was 68% in the fourth quarter consistent with historical levels, we achieved adjusted EBITDA for the fourth quarter of approximately $99 million.

<unk> flat to the third quarter.

Adjusted EBITDA margin of 62% was again consistent with our historical averages and previous quarter's DCF to limited partners of $52 million was also consistent with the prior quarter.

Our total fleet horsepower at the end of the quarter of approximately $3 7 million horsepower was flat with the third quarter average utilization for the fourth quarter was up about a half a percentage point from the third quarter at 82, 9%, indicating gradual redeployment of equipment.

During the quarter, we kept in line with our capital spending guidance with total expansion capital of $14 million.

Consisting primarily of reconfiguration of idle units and maintenance capital of $5 million during the fourth quarter. We put in orders for 10, new large horsepower units for delivery. In 2022. These are earmarked for a couple of large compressor stations for existing customers subsea.

Subsequent to year end, we also placed orders for 20 additional large horsepower units.

These units will go to specific customer installation and the remainder of our expansion capital will be focused on redeployment of existing idle units.

Net income for the quarter was $3 million and operating income was $36 million net.

Net cash provided by operating activities was 80 $81 million in the quarter and lastly, cash interest expense net was $30 million.

Based on the fourth quarter's results the board decided to keep the distribution consistent at 52 five cents per unit, which resulted in a distributable cash flow ratio of 1.02 times consistent with the previous quarter.

Our bank coverage leverage ratio was 5.09 times.

System 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.

As with past practice, we are introducing full year 2022 guidance, we expect adjusted EBITDA of between $406 million and $426 million and.

And distributable cash flow of between 213 and $233 million.

Lastly, we expect to file our Form 10-K with the SEC as early as this afternoon and with that we'll open the call to questions.

Thank you, Sir and once again, everyone if you'd like to ask a question. Please signal at this time by pressing star one on your telephone keypad. Please make sure that your mute function is turned off to allow your signal to reach our equipment.

We'll take our first question from Vinay <unk> with J P. Morgan.

Hi, good money on this.

Thanks for all the commentary on the call.

Maybe I'll just my.

First question.

How.

Okay.

Got it.

Thank you Juan.

I just wanted to take.

Lachlan you got it.

Some 30 odd profiling.

I mean, we're back.

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And in terms of price and utilization.

Definitely look at that over time.

Okay.

Yes.

This is Eric I think it is.

A timely and good question.

I would say the activity level both.

Incoming quotations are inbound.

Needs of customers, where we quote units and then leading to contract activity is consistent what we had anticipated coming into 2020 to that level is significantly ahead of what we were seeing in 2021.

Thank the combination is in our prepared remarks, we commented that the public large public companies.

It had been somewhat conservative with their capex programs in 2020 and on into 2021 pressures from shareholders pressures from the government pressures from financing institutions too.

Reduce capex to focus on improving balance sheet to focus on returning capital to their shareholders or unit holders they've done that so now that we're in an environment with pushing $100 oil pushing $5 natural gas.

Some of the major players looking at their budgets for 2022.

Significantly.

Spanish their magnitude of Capex spending, 20%, 25%, 30% kind of number so that's leading to some additional activity for USA kind of along the lines of what we expected during our budget process.

The good news is what we expected is holding up and holding true so far for the first quarter of 2022.

Got it thanks.

Maybe just following up on capital allocation.

So I think you guys have strong distribution.

Each quarter.

Lovely.

Now that we can solve.

No group of velocity behind us.

The stock is currently.

Provide liquidity.

The market is not giving full credit.

Thirdly the solution.

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Okay. Thanks.

Stability.

Great.

We do expect the high activity on growth Capex creeping up.

Over the next couple of years.

Using Bob it looks like <unk> <unk>.

And since the market is not giving you wanted to understand your thoughts on.

Got it.

Your thoughts on maintaining distribution.

Hey, Nick.

Exhilarating debt payments.

Okay.

The name of the market is never giving us full credit.

Since the time of the IPO.

I would note that the type of projects, where we are deploying growth capex into.

Our highly accretive.

Honestly the more of those projects that we do the better our coverage ratio becomes lower over time, our leverage becomes these are highly attractive projects with <unk>.

Very attractive economics, the capital we're spending on make ready work to deploy idle equipment, obviously spending a little bit of money to deploy a piece of equipment. You've already spent several millions of dollars on is extremely economically attractive.

So.

We don't need to issue equity.

Don't plan to issue equity, we're in an environment, where we can utilize the attractive financing terms under our ABL and we're now at the size that we can kind of manage our growth capex manage our revenue streams managed leverage and coverage.

The.

Stock market so to speak.

Finally, acknowledging and recognizes the stability of our business that we shouldnt have a double digit yield.

So be it if they don't.

So be it as well I would point to the fact that our public debt holders. We've got two tranches of public debt that traded a premium we get inbound calls.

Asking us hey, guys when you are going to.

Come up with some additional debt needs. We love you guys. So I have always considered the.

The debt investors to be extremely financially sophisticated.

And they look at it and say.

We're willing to have your debt traded a premium to.

Where it was originally issued I think thats, a hype vote of confidence have suggested that they get it and maybe it's the public equity owners, who don't get it.

Got it thanks, that's all from me.

Thanks for that.

Alright next question will come from the line of T J Schultz with Royal Bank of Canada.

Great. Thanks.

Eric What's your biggest.

Growth area right now our base and I think as we think about things like.

Increasing LNG exports you mentioned the pull on places like the Marcellus and the Permian, but.

I guess my question is really just as we think about things like responsibly sourced gas that may impact, where export or if you want to pull in.

LNG cargoes are you expecting any major shift from a basin perspective for where you operate is there any major shift that may lead to some costs.

Maybe move some horsepower around.

Great question T J and right now we're seeing.

Clearly the Permian, Delaware Basin is kind of leading activity, that's where the largest increases in the rig count in the most dramatic reduction in the drilled and uncompleted well activity has been in the last six months or so that said, we're seeing a fair amount of activity come from our Haynesville shale <unk>.

<unk> also the mid continent area has recently seen a fairly material tick up in demand and that's a lot of that tends to be a little bit smaller horsepower.

Appalachia, a lot of the gathering systems operated well.

What I'll call intermediate pressures the pressures that are higher than what we see in Texas and the mid continent.

Two stage compression rather than three stages, and we've seen some operators up there installing an extra stage of compression as a booster unit.

Other than drilling additional wells are completing additional wells they use compression as a way to pull down the section pressures closer to the wellhead, which gives a corresponding increase in throughput so rather than drill wells are complete cemig some uncompleted wells they install.

Fresh and to maintain.

Enhanced production and maintain a stable throughput.

We're not up in <unk> and <unk>.

North Dakota area. So we really can't address that offshore we don't have much of a presence we're not in California et cetera. So we're seeing some some tick up in the Wyoming, Colorado area were seeing some tick up in the Eagle Ford shales. So I would say on balance T. J the mix looks a lot like it has historically.

It has historically and we are seeing some some glimmers of some folks looking at renewable source gas both up in the Haynesville and more particularly up in Appalachia as a potentially growing source of new supplies as well.

Okay perfect.

Sure.

Just second for me.

Maybe on the balance sheet.

Look back over the last several years your cash flow.

Really been fairly steady through.

Different cycles now so just coming out of this latest cycle.

The question is do you have a different perspective on what debt leverage you are comfortable running the business.

Longer term.

Hey, T J, it's Matt No I don't think our perspective has changed I think what happened was we lost two year two perfectly good years of 2020 , one where we had expected some cash.

Cash flow growth and debt repayment and so now I feel like.

Eric mentioned budgets, our increase this year of bid activity levels are up and so I think the our perspective would be keep doing what we've been doing back just like back in $2014 $15 16, we powered through.

The weak part of the cycle and here, we go again and as that cash flow increases I think youre going to see us continue to chip away at the debt balance. So I don't think the perspective has changed I think the truth is.

It should be lower than where we are right now for the at least from a public optic standpoint.

I think we've proven that the business can absolutely handle it but I think that the markets.

Robley would appreciate it.

A little bit lower leverage and obviously.

EBITDA and cash flows grow thats, what will be kind of targeting.

Perfect. Thank you.

Thanks T J.

Alright, it looks like we have no further questions at this time, so I'd like to turn it back over to Mr. Eric long for any additional I'm sorry, we did have one more question in queue up if you'd like to take that from.

Some <unk> with Stifel.

Absolutely.

Guys I appreciate you squeezing me in.

Can you, maybe just talk a little bit about sort of what price assumptions you have embedded in your guidance in terms of.

Pricing youre going to be able to pull through.

And then also talk a little bit maybe about the inflationary pressures youre seeing out there.

Sure Selman.

In terms of.

Pricing that we use in our kind of forecasting where we typically are very conservative and we will look at kind of where pricing stay where pricing is sitting right now.

So I think that that would be consistent with how we approach the guidance amounts. So certainly nothing nothing too crazy no no big assumptions on kind of hockey stick price increases.

I would tell you we are.

On the large horsepower stuff in particular, we are seeing strong pricing the really large stuff the utilization is way up.

And so I think as that happens is that as we get through the year I mean again, we're early but as we get through the year, we'll be able to.

I think it is.

Utilization moves will be able to kind of at that point, a valuation does pricing need to move but certainly in the guidance, we've taken a pretty conservative bent.

On the inflationary stuff it's.

Interesting, we looked just as a tidbit last year over the course of 2021 at our labor cost in particular, because there's been a lot of.

Headline noise, there about costs and whatnot.

And our average labor on a dollar per hour basis went up over the course of the year went up anywhere from 2% to 4% and so that's kind of in line with what we had seen historically in line with what we expect this continuing year and again, we're not are the vast majority of our employees are.

Guys out in the field they are skilled.

Skilled folks who were not talking minimum wage stuff and so.

We expect that we will see some increase I think again in.

Field wages et cetera in line with with kind of what we've seen in the past, but not expecting huge huge moves.

And then the other things parts.

Lube oil those kinds of things you know parts and both of them, we've actually done a pretty good job we've locked in some some pricing before the end of the year and so we avoided some kind of early 2022 price increases that went out and so.

We've tried to manage that as best we can and then of course the other way we worked through that is through the CPI price escalators.

<unk>.

Making sure that we're passing on the increased cost to customers. So it's a combination of sort of managing it actively in terms of locking in some some prices, but also having the flexibility in our contracts to go through and push through those price increases.

Understood. Let me ask you just one more then.

As we think about sort of the supply chain out there and you guys referenced that you've ordered some large horsepower.

Can you maybe just talk about any tightness youre seeing out there and people are customers came in and said we want additional compression.

It's not order by April or May then.

You have done for the year, because you just can't get it or are you seeing any constraints from that standpoint.

Yes. So this is Eric and that's absolutely a true observation on the larger horsepower right. Now if you were to pick up the phone call a fabricator recalls caterpillar caterpillar, there's somewhere between 46 to 52 weeks of lead time to source large component inventory.

Got it.

So that's almost a year youre talking 10 to 12 months out.

So part of why we're excited about 2022, as we have a fairly sizable tranche of idle, but high quality horsepower that can be quickly and economically redeployed.

So yes.

Made commitments as we mentioned.

10 units.

Last of last year and another 20 units. This year. So we've got roughly 30 big horsepower machines coming our way.

We've got a large tranche of stuff. That's in the 1500 1800 horsepower range 600 to 1000 horsepower range and even some of the smaller gas lift wellhead equipment.

Readily available quickly available this idle and we think will give us a very large competitive advantage versus somebody who says I got nothing and it's going to take me a year to buy some new equipment. You got the same kind of bottlenecks with electric motor driven equipment. So we've got a lot of people running around go and electrify everything.

<unk> everything well electric motors come from Korea, and they are sitting on boats offshore of la and unable to get into the end of the states to be appropriated repatriated in the supply chain you got bottlenecks and problems. So those of US who have some available equipment I think were situated pretty well too.

122, being able to meet and deliver upon our customers' needs.

Great appreciate the additional insight thank you.

Thank you.

Now it looks like we have no further questions. So I'd like to turn it back over to Mr. Long for any additional remarks.

Thank you very much the fourth quarter of 2021 reflected another quarter of stable cash flow generation by our core compression services business for 2022, we see quote and contract activity continuing to accelerate as.

As we remain optimistic we have begun to cycle idle equipment through our make ready facilities to be redeployed to active status soon at nominal capex cost Nash.

Natural gas prices remain at near term record highs and the outlook for production is positive both of which we expect to drive the demand for compression and for our business. One thing has not changed the fundamental driver of our business is the demand for and the production of natural gas, we see natural gas usage, 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 past few years and for the nearly 25 years, we have been in business, 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, we look forward to speaking with everyone on our next call.

And that does conclude today's conference we thank everyone again for their participation.

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Good morning, and welcome to USA compression partners Lp's fourth quarter 2021 earnings conference call.

During today's call all parties will be in a listen only mode and following the call at the conference will be opened for questions.

You'd like to ask a question today, you may enter the queue by pressing star one.

This conference is being recorded today February 15, 2022, I would now like to turn the call over to Chris Porter, Vice President General Counsel and Secretary.

The recording will be available through February 25, 2022.

Our conference call will include forward looking statements. These statements include projections expectations of our performance and represent our current beliefs actual results may differ materially.

These 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 February 15th 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 today.

While I plan to cover our positive financial and operational results for the fourth quarter of 2021.

I also want to give you our unitholders a sense of where we see the puck going so to speak for the balance of 2022 and into the future.

Appeared to be in conflict with the pragmatic and economic realities of a real world in which we live.

First I want to say, thank you to the dedicated men and women of USA compression, who during the past two years of the Covid pandemic have continued to do what it is what they do best meeting the needs of our upstream and midstream customers 24 hours a day seven days a week 365 days, a year, which have helped to keep oil and.

Gas producing in our country and whose efforts have helped to keep the lights on in America and to keep Grandma's house warm when much of our country was locked out.

To give you a sense of the magnitude of what it takes to keep USA compression up and running our service teams drove almost one 3 million miles and worked over 122000 hours of January 2022 alone.

And our folks embrace a culture of safety with our service technicians now having worked almost 4 million hours without a lost time injury.

Safety is a way of life USA compression and I am proud of how our team continues to embrace it.

Our fourth quarter results came in consistent with the previous quarter and reflects the inherent stability in our business and a significant amount of base load natural gas demand that underpins our active fleet of horsepower.

As of the end of 2021, we had about $516 million drawn.

So now a little commentary 2021, and leading into 2022 we.

We saw two very different customer profiles in 2021 are large public players continue to show financial and operational restraint.

Our smaller private independent developers, who tended to take a more aggressive approach to their capital spending programs. While we were hopeful that 2021 would bring some additional clarity to policymaking as it regards to the energy industry. What we got instead was continued mixed messaging by our government, which kept our larger public customers.

Generally hunkered down with reduced levels of growth capex throughout the year.

With the continuing uncertainty out of Washington D. C. It appeared that restrained capital spending became the mantra even in the face of very attractive commodity prices.

Last quarter, I spoke demonization of oil and gas and the capital starvation. The energy industry has seen over recent years due to many factors not the least of which has been shareholder pressure and the specter of more stringent governmental regulation.

Mentioned, how that Underinvestment combined with strong demand has resulted in declining inventories and puc's the drilled and uncompleted wells all of which are further exacerbating the supply demand imbalance.

During the fourth quarter. These trends only continued we've seen preliminary estimate to show inventory draws in the fourth quarter several times larger than both in 2020, and when compared to historical averages and according to EIA. The number or do you see wells was down 13% in the fourth quarter and we ended 2021.

<unk> down 40% from the end of 2020.

The regulatory uncertainty relating to the domestic oil and gas industry overall, including implications regarding potential methane regulation and taxation has not abated.

However, with midterm elections on the horizon, the likelihood of action seems to have waned that pause combined with a precarious supply demand balance and the expectation for continued attractive commodity prices in the near term, we believe ought to help our customers take investment actions, which they might otherwise have been wary of last year.

Back to 2014 to see crude oil prices at levels above what they are today.

Just differs between now and 2014, though is that the 2014 run up in prices was in many ways really driven.

Today, we are looking at a combination of real world factors, which taken together are causing a supply demand imbalance.

<unk>, the globe and resulting in very attractive oil prices. The same holds true on the natural gas side of things as well prices in the fourth quarter were up almost 100% over the year ago period, and the same for the full year 2021 versus 2020.

You would have to go back to the 2008 to 2009 time period to find prices like what we saw during the fourth quarter for natural gas. The commodity strength is also being driven by real world situations, including cold weather lack of natural gas supply in parts of Europe and also the general Underinvestment in bringing on new sources.

Of supply.

Recall that energy was the best performing sector in the S&P 500 last year driven in large part by the overall strength in commodity prices.

Well interesting to consider where we've been I think the more appealing aspect of what this situation potentially means for where we're headed there.

So our current price situation reflects the realities of shrinking supply and increasing demand for both crude oil and natural gas be inherent tension to balance the massive cost to move to renewable forms of energy over the timeframes and the harsh reality that energy supplies are a critical and powerful tool that can be <unk>.

Used to hold governments hostage.

Projects.

Time to be developed and commercialized and we continue to witness this reality and the struggles that certain OPEC plus members have had in trying to meet their production quotas.

<unk> just can't turn on the spigot whenever they want.

So we are now seeing very resilient demand running headlong into a tight supply situation that is ill equipped to react quickly. This won't change dramatically in the short term and continued geopolitical instability in Russia, the Ukraine in Europe , only exacerbates the issue.

<unk> and 9% below the five year average further the global oil market is estimated to be under supplied by one 5% to 2 million barrels per day for 2022.

Ed in geopolitical stability, both Russia, and China, and we have the potential for a global energy squeezed the likes of which we have not seen since the embargo days of the mid 19 seventies.

How does this affect USA compression. The good news is that domestic natural gas is abundant and we have the ability to export large volumes of LNG around the world.

The importance of natural gas for heating and electricity generation is front and center in the conflict between Russia, and Europe , right now, which revolves around natural gas at the end of 2021. The U S became the largest exporter of natural gas, surpassing Qatar and Australia. We believe the free market will continue to <unk>.

To move natural gas, where it is valued most highly whether that is domestically or internationally and as that gas comes out of places like the Marcellus shale and the Permian basin producers and transporters will required compression to move it along.

Other prominent theme during 2021 that continues into 2022 was the continued discussion around ESG and the energy transition.

Wanted to share a few factoids I recently saw the financial post to help point out the chasm between government policy and our energy reality.

First the EIA recently projected that the U S internal combustion car fleet won't peak until 2038 and today less than about 3% of the U S car fleet is electric.

We will need to convert 145 billion vehicles 29000 aircraft and 54000 shifts to renewable fuel sources.

Raw materials are forecast to enter structural deficit copper as an example is 32% deficit.

Interestingly the average person in the world consumes only five barrels of oil per year in the U S where higher living standards translate to higher hydrocarbon demand that number is 21 barrels of oil per year.

<unk> is forecasting of the world's population will add 2 billion people by 2050 with the middle class growing in China, and India. So run the math how's it fathomable that the global demand for things such as plastics fertilizer mine metals for electronics and specialty chemicals, all hydrocarbon intensive will fall.

Its unit holders you understand our core business and you all likely have your own views on the role of natural gas into the future. We believe the realities of economics and technology will continue to shape the dialogue and the transition the bottom line remains the same demand for energy of all types worldwide is up suppliers of conventional energy source.

<unk> are down.

No no technology that economically exist at scale to backstop, the intermittent nature of solar and wind supplies. The bottom line is that we believe the need for USA compression services will continue far into the future.

Natural gas remains a clean burning abundant fuel that is easily transported throughout our country as well as the world.

And as the broader world continues to grow and develop crude oil is critical to improving the quality of life for people all over the planet.

In the near term we are witnessing a focus on renewable sources of energy that are quite frankly insufficient to meet the overall needs of the population and of course it is affordable to society.

We expect major drilling and completion activity for both oil and natural gas in the years to come and with it demand for our compression services.

Our work on the dual drive concept will continue in 2022 and beyond and we expect expect an uptick in customer inquiries as further electric infrastructure begins to be built out.

The dual dry product represents a potential and cost effective offering to allow our customers to switch quickly and reliably and reliably from natural gas to electricity as a fuel source.

Which will allow them to reduce their carbon dioxide and methane emissions meaningfully we believe dual drive is an attractive transition offering for our customers with the ability to provide the reliability and redundancy of natural gas during what we believe will be a multi decade transition period to expand the electric grid.

One final note before I turn over the call to Matt to walk through our results for the fourth quarter with this quarter's payment. We've now achieved 36 quarters of distributions returning over $1 $3 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 most recent downturn yet be positioned to take advantage of the tailwind that we believe are coming in 2022.

Of total revenues of $160 million approximately $157 million of it reflected our core contract operations revenues, while parts and service revenue contributed roughly $3 million.

Pricing for the fleet as a whole remained flat in the fourth quarter at $16 62 per horsepower per month.

Remember this is an average across the entire fleet. So while we continue to manage contractual price escalators the churn of assets from active to idle will also have an effect on this metric.

Our adjusted gross margin as a percentage of revenue was 68% in the fourth quarter consistent with historical levels. We achieved adjusted EBITDA for the fourth quarter of approximately $99 million flat to the third quarter.

Adjusted EBITDA margin of 62% was again consistent with our historical averages and previous quarter's DCF to limited partners of $52 million was also consistent with the prior quarter.

During the quarter, we kept in line with our capital spending guidance with total expansion capital of $14 million.

Subsequent to year end, we also placed orders for 20 additional large horsepower units.

These units will go to specific customer installations, and the remainder of our expansion capital will be focused on redeployment of existing idle units.

Net income for the quarter was $3 million and operating income was $36 million net.

Net cash provided by operating activities was 80 $81 million in the quarter and lastly, cash interest expense net was $30 million.

Based on the fourth quarter's results the board decided to keep the distribution consistent at $52.05 per unit, which resulted in a distributable cash flow ratio of 1.02 times consistent with the previous quarter.

Our bank coverage leverage ratio was 5.09 times.

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.

As with past practice, we are introducing full year 2022 guidance, we expect adjusted EBITDA of between $406 million and $426 million and.

And distributable cash flow of between 213 and $233 million.

Last we expect to file our Form 10-K with the SEC as early as this afternoon and with that we'll open the call to questions.

We'll take our first question from Vinay <unk> with J P. Morgan.

Hi, good money on this.

Thanks for all the commentary on the call maybe.

My first question.

How do we can level funding.

Thank you Juan.

Just wanted to say is that.

Lachlan you are expecting some parties that are performing well.

I mean, we're back.

<unk>.

And in terms of pricing utilizing scan.

Definitely neglect that overtime work.

Yes.

But I think with you guys like me.

Yes.

This is Eric I think it is.

A timely and good question.

I would say the activity level both.

Incoming quotations are inbound.

Needs of customers, where we quote units and then leading to contract activity is consistent what we had anticipated coming into 2022.

That level is significantly ahead of what we were seeing in 2021.

Thank the combination is in our prepared remarks, we commented that the public large public companies.

It had been somewhat conservative with their capex programs in 2020 and on into 2021 pressures from shareholders pressures from the government pressures from financing institutions too.

Some of the major players looking at their budgets for 2022.

Significantly.

Spaniard their magnitude of Capex spending, 20%, 25%, 30% kind of number so that's leading to some additional activity for USA kind of along the lines of what we expected during our budget process.

The good news is what we expected is holding up and holding true so far for the first quarter of 2022.

Got it thanks.

Maybe just following up on capital allocation.

So I think you guys have mentioned distribution each.

Scott.

The montney.

Now Doug Vicari Nathan.

<unk> behind us.

The stock is currently yielding about 12.

Right.

The market is not giving full credit.

The solution.

Who has been given to me.

And also when they buy stability.

Given.

We do expect a high activity.

Capex creeping up.

Over the next couple of years.

Using bulk it looks like <unk> five Soc.

And since the market is not giving one do I understand your thoughts on yacht.

Okay, you guys thoughts on maintaining distribution.

And are you seeing that.

Exiting that statement.

Yes.

The name of the market is never giving us full credit.

At the time of the IPO.

I would note that the type of projects, where we are deploying growth capex into.

Our highly accretive.

Honestly the more of those projects that we do the better our coverage ratio becomes lower over time, our leverage becomes these are highly attractive projects with.

So.

We don't need to issue equity.

We don't plan to issue equity, we're in an environment, where we can utilize the attractive financing terms under our ABL.

We're now at the size that we can kind of manage our growth capex manage our revenue streams.

Manage leverage and coverage.

The.

Stock market so to speak.

Finally, acknowledging and recognizes the stability of our business that we shouldnt have a double digit yield.

<unk>.

If they don't.

So be it as well.

I'd point to the fact that our public debt holders. We've got two tranches of public debt that traded a premium we get inbound calls.

Asking us hey, guys when you're going to come.

Come up with some additional debt needs. We love you guys. So I've always considered the.

The debt investors to be extremely financially sophisticated.

And they look at it and say.

We're willing to have your debt traded a premium to.

Where it was originally issued I think thats a high vote of confidence some suggested that they get it and maybe it's the public equity owners, who don't get it.

Got it thanks, that's all from me.

Thanks for that.

Alright next question will come from the line of T J Schultz with Royal Bank of Canada.

Great. Thanks.

Eric What's your biggest.

Growth area right now our base and I think as we think about things like.

Increasing LNG exports you mentioned the pull on places like the Marcellus and the Permian, but.

I guess my question is really just as we think about things like responsibly sourced gas that may impact, where export or if you want to pull in.

LNG cargoes are you expecting any major shift from a basin perspective for where you operate is there any major shift that may lead to some costs.

Maybe move some horsepower around.

Great question T J and right now we're seeing.

<unk> also the mid continent area has recently seen a fairly material tick up in demand and that's a lot of that tends to be a little bit smaller horsepower.

Appalachia, a lot of the gathering systems operated well.

What I'll call intermediate pressures the pressures that are higher than what we see in Texas and the mid continent.

Two stage compression rather than three stages, and we've seen some operators up there installing an extra stage of compression as a booster unit.

Other than drilling additional wells are completing additional wells they use compression as a way to pull down the section pressure is closer to the wellhead, which gives a corresponding increase in throughput.

So rather than drill wells are complete cemig, some uncompleted wells they install compression to maintain.

Enhanced production and maintain a stable throughput.

We're not up in North Dakota areas. So we really can't address that offshore we don't have much of a presence we're not in California et cetera. So we're seeing some some tick up in the Wyoming, Colorado area were seeing some tick up in the Eagle Ford shales. So I would say on balance T. J the mix looks a lot.

Like it has historically.

Okay perfect.

Just second for me just a follow up maybe on the balance sheet.

If we look back over the last several years your cash flow.

It really been fairly steady through.

Different cycles now so just coming out of this latest cycle.

I guess the question is do you have a different perspective on what debt leverage you are comfortable running the business longer term.

Hey, T J, it's Matt.

No I don't think our perspective has changed I think what happened was we lost two year two perfectly good years of 2020 , one where we had expected some.

Free cash flow growth and debt repayment and so now I feel like.

The weak part of the cycle and here, we go again and as that cash flow increases I think youre going to see us continue to kind of chip away at the debt balance. So I don't think the perspective has changed I think the truth is it should be lower than where we are right now for the.

Just from a public optic standpoint, I think we've proven that the business can absolutely handle it but I think the market's probably would appreciate.

A little bit lower leverage and obviously.

EBITDA and cash flows grow that's what will be kind of targeting.

Perfect. Thank you.

Thanks T J.

Alright, it looks like we have no further questions at this time, so I'd like to turn it back over to Mr. Eric long for any additional I am sorry.

We did have one more question in queue up if you'd like to take that from.

Some <unk> with Stifel.

Absolutely.

Guys I appreciate you squeezing me in.

Can you, maybe just talk a little bit about sort of what price assumptions you have embedded in your guidance in terms of.

Pricing youre going to be able to pull through.

And then also talk a little bit maybe about the inflationary pressures youre seeing out there.

Sure Selman.

In terms of.

Pricing that we use in our kind of forecasting where we typically are very conservative and we will look at kind of where pricing stay where pricing is sitting right now.

So I think that that would be consistent with how we approach the guidance amounts. So certainly nothing nothing too crazy no no big assumptions on kind of hockey stick price increases.

I would tell you we are.

On the large horsepower stuff in particular, we are seeing strong pricing the really large stuff the utilization is way up.

And so I think as that happens is that as we get through the year I mean again, we're early but as we get through the year, we'll be able to I think.

As utilization moves will be able to kind of at that point evaluate does pricing need to move but certainly in the guidance, we've taken a pretty conservative bent.

On the inflationary stuff. It's interesting we looked just as a tidbit last year over the course of 2021 at our labor cost in particular, because there's been a lot of headline noise, there about costs and whatnot.

Guys out in the field they are skilled.

Skilled folks who were not talking minimum wage stuff and so.

We expect that we will see some increase I think again in.

Field wages et cetera in line with with kind of what we've seen in the past, but not expecting huge huge moves.

And then the other things parts.

The way we work through that is through the CPI price escalators.

And making sure that we're passing on the increased cost to customers. So it's a combination of sort of managing it actively in terms of locking in some some prices, but also having the flexibility in our contracts to go through and pushed through those price increases.

Understood. Let me ask you just one more then.

As we think about sort of the supply chain out there and you guys referenced that you've ordered some large horsepower.

Can you maybe just talk about any tightness youre seeing out there and.

People are customers came in and said we want additional compression.

It's not order by April or May then.

You have done for the year, because you just can't get it or are you seeing any constraints from that standpoint.

Yes. So this is Eric and that's absolutely a true observation on the larger horsepower right now you're going to pick up the phone call a fabricator, who calls caterpillar caterpillar, there's somewhere between 46 to 52 weeks of lead time to source the large component inventory.

Ari.

So that's almost a year youre talking 10% to 12 months out.

So part of why we're excited about 2022, as we have a fairly sizable tranche of idle, but high quality horsepower that can be quickly and economically redeployed.

Yes.

Make commitments as we've mentioned in the 10 units.

Last of last year and another 20 units. This year. So we've got roughly 30 big horsepower machines coming our way.

We've got a large tranche of stuff that's in the <unk> hundred <unk> hundred horsepower range 600 to 1000 horsepower range and even some of the smaller gas lift wellhead equipment readily available quickly available those idle and we think will give us a very large competitive.

Vantage versus somebody who says I got nothing and it's going to take me a year to buy some new equipment. You got the same kind of bottlenecks with electric motor driven equipment. So we've got a lot of people run around gone electrify everything electrify everything well.

<unk> Motors come from Korea, and they are sitting on boats offshore of L. A and unable to get into the end of the states to be appropriated repatriated in the supply chain you got bottlenecks and problems. So those of US who have some available equipment I think were situated pretty well.

122, being able to meet and deliver upon our customers' needs.

Great I appreciate the additional insight thank you.

Thank you.

Now it looks like we have no further questions. So I'd like to turn it back over to Mr. Long for any additional remarks.

As we remain optimistic we have begun to cycle idle equipment through our make ready facilities to be redeployed to active status soon at nominal capex cost Nash.

Energy in which natural gas will clearly play an important part thanks for joining us and please be safe, we look forward to speaking with everyone on our next call.

And that does conclude today's conference we thank everyone again for their participation.

Q4 2021 USA Compression Partners LP Earnings Call

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