Q3 2022 USA Compression Partners LP Earnings Call
Good morning, welcome to USA compression partners LP third quarter 2022, earning conference call Today's conference call all parties will be in listen only mode and following the call. The conference will be opened for questions. This conference is being recorded today November 22.
I will now like to turn the call over to Chris Basta, 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 32022, you can find our earnings release as well as a recording of this calls in the Investor Relations section of our website at USA compression Dot com.
The recording will be available through November 11, 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.
Reminder, 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 risk included in this mornings release and in our filings.
Please note that information provided on this call before the match views as of today November <unk> and May no longer be accurate at the time of a replay.
Now I'll 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 I would like to begin today's call by introducing our new CFO , Mike <unk> Mike.
Mike joined US in early August and brings a wealth of finance experience for USA compression.
Approximately 17 years as a finance executive at Anadarko Petroleum and Western Midstream partners. Most recently, serving as Western CFO , we are happy to welcome Mike aboard and we sincerely. Thank Matt when you would see for <unk>.
Valuable contributions to USA compression during his tenure as our CFO .
Last quarter, we highlighted industry dynamics that we believe are driving increased demand for natural gas in a supply constrained environment.
He is on the energy macro environments have not changed and we continue to believe that we are in the early innings of a commodity price super cycle.
E J executive director Fatigue, Earl stated last point, the tightening market for LNG worldwide major purchasers cutting overall supply.
Looking world in the Middle of the first currently global Energy crisis, we believe that the oil and gas industries disciplined capital investment approach that focuses on free cash flow generation and return space investing further underpins the existing titles and energy markets.
And will contribute significantly to continued market tightness into the foreseeable future.
We also expect the commodity price backdrop to remain supportive of production growth, which in turn will drive increased demand for our natural gas compression services are.
Our customers remain active across our operating regions. The primary basins in our largest operating areas have all registered year over year production increases.
Raging from modest single digits to close to mid teen growth percentages.
And leading to continued levels of expanding natural gas production or.
Our increasing activity levels in these regions have kept pace with our customers' production activities.
These regions have benefited from proximity to export markets and ample transportation and takeaway availability.
However, in the Permian and Delaware basins natural gas takeaway capacity continues as a future challenge for the industry and we believe that this challenge will persist for the next several years based on anticipated Permian and Delaware growth. We believe increased tightness in natural gas takeaway capacity likely will occur in late 'twenty.
'twenty three and into early 2024, necessitating additional demand for compression services in.
In the northeast natural gas production growth has been more modest as operators in the region continue to work through an adequate pipeline capacity due to regulatory roadblocks.
<unk> has been used by several of USA compressions northeast customers as a means to arrest production declines and as a cost effective alternative to drilling additional wells.
We believe it is important to recognize that USA compressions operational and financial performance is more dependent on the production cycle than on the drilling cycle that correlates more closely with near to medium term commodity prices.
In short the compression services that we currently provide within most of the significant U S onshore basins.
Serve as a vital component necessary to deliver natural gas from the wellhead to processing facilities and ultimately to market centers.
Our current contracts and contracting strategy, we view our ability to continue to generate a meaningful and reliable stream of cash flow as durable irrespective of the drilling cycle. We believe the current drilling supportive commodity price levels.
Expected production increases there from provide USA compression readily achievable opportunities to drive operational efficiencies.
So organically and ultimately secure financial Optionality achieve.
Achieving a financial Optionality will allow USA compression to deploy free cash flow to support incremental capital investment.
Debt reduction distribution increases or a combination thereof.
We believe that the observed current trajectory of production growth in the basins that we serve will contribute significantly to our ability to grow through redeployment of existing compression as well as organically with new compression deployed at attractive rates. Our current focus remains converting already owned equipment for.
Idle to active status and therefore, the cash flow generating status during.
During the third quarter, we continued to increase our service position with our major customers through improved fleet utilization.
Our third quarter utilization exit rate was 99% up from 88, 4% on a sequential quarter basis and up from 83% for the year ago comparable period.
During the third quarter, we redeployed over 60.
Currently owned and idle horsepower met.
In addition to increasing utilization, we also realized increased average revenue per revenue generating horsepower per month.
The sequential quarter and year over year comparable period basis.
Were also witnessing meaningful increases in average contract tenor from the redeployment of our units as well as from contract renewals are currently deployed units.
Negotiations with our customers centered on 30 month average renewal tenors with new equipment deployments, attracting contract tenors in excess of 60 months.
We manage our contract portfolio returns and margins. So that we are positioned to satisfy market demand for desirable service and equipment, while protecting our cash flow during volatile and inflationary periods through CPI based rate resets, we have seen market increases in the prices of <unk>.
Fuel fluids, and labor and although our contract base CPI adjustments allow us to mitigate this cost inflation, we did see a modest decline in margins, resulting from input cost inflation that tends to perceive the date that we are able to execute contract rate adjustments.
Notwithstanding we expect inflationary pressures to abate eventually in our adjusted gross margins to remain at or near their historic levels normalizing around 68%.
In addition to our increased utilization for the current fleet, we expect to improve our market share in key production basins in which we operate through our commitment to purchase an additional 50 large horsepower compression units.
Recently made in September of this year.
These planned purchases were driven by pronounced demand from our major customers for compression and station services and will bring our committed new unit order for 2023 to <unk> 66 units for a total of 165000 of additional horsepower.
By locking in unit delivery slots that now approach our full year's lead time, we expect to secure multiyear contracts with our customers for the deployment of this additional compression by year end 2023.
As we have previously discussed and announced publicly we have been working on a dual drive compressor units assigned that takes advantage of the gradual transition to electrification as the country's electric grid expands and ultimately gets built out.
During last quarter's call I mentioned that we have signed multi year contracts to deploy our dual private units out in the field.
These units have been installed at Cowen petroleum sites.
And commenced operations. The first week of August we continue to be excited about the service offering as it allows our customers to further mitigate greenhouse gas emissions and a pragmatic reliable and economic manner.
This ESG friendly initiative is centered around retrofitting existing compression units for dual drive capability. The dual drive concept combines a natural gas driven engine and an electric driven motor to quickly and reliably switch from natural gas to electricity to compressed Nat.
Total gas, depending on operating constraints and conditions.
This technology resulted in decreased emissions, while maintaining the flexibility and redundancy to switch to gas and weather conditions or grid demands make natural gas powered compression preferable economically our dual drive initiatives makes a lot of financial sense for USA compressions customers that will benefit from <unk>.
Our operating expenses increased reliability, 99% run times substantially lower greenhouse gas emissions and the mitigation of interconnect delays.
As these units get up and running and demonstrates our expected operational performance reliability and flexibility. We anticipate that we will continue to field and increasing number of indications of interest from customers that are seeking to deploy this cost efficient and more environmentally friendly solution to compressed natural gas.
Yes.
We believe that the migration to electrification will be a multi decade effort and as customers realize that the dual drive offering provides the reliability and redundancy of natural gas backup driver with the advantage of electricity is a prime power source, we believe that demand for this service offering will continue.
To increase over time.
October 13th and based on our third quarter results. Our board maintained this quarter's distribution consistent at 52 five cents per unit, which will be paid this Friday November 4th.
This distribution represents a 39th quarter of consecutive distribution payments and corresponds street distributable cash flow coverage ratio of one seven.
Seven times in.
In addition to maintaining a healthy coverage ratio, we reduced our bank covenant leverage ratio from four nine times to 484 times on a sequential quarter basis, consistent with our commitment to reduce leverage over time, while providing meaningful returns to all of our stakeholders.
Lengthening contract tenders for new equipment deployments and contract renewals of existing active assets absent unexpected events, such as further supply chain disruptions or major geopolitical events. We remain encouraged that both leverage and coverage metrics will continue to improve.
Finally, before Mike discusses our third quarter results I would like to make a few comments regarding safety.
As a company the most important thing we can do is ensure that our employees return home safely each day.
We are extremely proud of our relentless focus on safety that has resulted in zero year to date recordable incidents for our last $1 2 million hours worked this is a significant accomplishment and I. Thank each and every USA compression employee for their commitment and strict adherence to our safety <unk>.
<unk> and procedures with that I will turn the call over to Mike to discuss our third quarter 2022 results.
Thanks, Eric and good morning, before walking through our third quarter results I would like to thank Eric and our board for this opportunity at USA compression what intrigued me most about this opportunity was the unique positioning of USA compression within the production cycle, which provides stable and predictable cash flows from currently deployed compression.
Assets that are situated in most of the significant U S. Onshore plays as U S. Onshore production continues to ramp up USA compression remains positioned to continue harvesting cash flow from its existing highly utilized compression fleet, while maintaining clear visibility in terms of making incremental and strict.
These are capital investments that will support return to base their organic growth into the foreseeable future with that I will discuss USA compressions third quarter financial results.
Today, we reported our third quarter results, which again featured sequential quarter increases in revenue and adjusted EBITDA, driven primarily by improved utilization and pricing with our third quarter utilization exit rate, increasing by nearly 3% on a sequential quarter basis, while maintaining our current trajectory.
<unk> are improving average revenue per revenue generating horsepower per month, which increased approximately 2% to $17 53.
Pricing improvements were driven by CPI price escalators for currently contracted services and improving supply and demand dynamics that allowed for improved pricing for newly contracted compression services. We did see a modest decline in our adjusted gross margin percentage that ticked down nine tenths of a percent attributable.
Largely to price increases and vehicle fuel compressor fleet lubrication fluids and labor, while our contracts allow for CPI adjusted rates. There is a lag effect associated with these rate resets where input cost inflation predates effective rate resets. Nevertheless, we expect these inflationary pressures to abate.
Over time, and we still have maintained our margins at or near our historic averages finally, our distributable cash flow declined by just under 1% on a sequential quarter basis as a result of higher interest costs associated with borrowings under our floating rate credit facility.
Notably most of USA compressions debt is fixed rate debt and although higher interest rates persist. Our nearest debt maturity is not until December 31 2025.
Our total fleet horsepower at the end of the quarter remained flat to the previous quarter at approximately three 7 million horsepower expansion capital spending for the third quarter was $46 7 million and our maintenance capital expenditures were $8 1 million for third quarter of 2022 expansion capital spending.
Is that a reconfiguration and make ready of idle units the delivery of four large horsepower units and associated components at a compressor station in the Delaware Basin and Downpayments on our 2023, New unit orders are.
Our maintenance capital spending was approximately $2 million higher on a sequential quarter basis attributable to a higher level of maintenance activities for the third quarter. Net income was $9 6 million operating income was $45 1 million net cash provided by operating activities was $49 2 million in cash interest expense.
Net was $33 3 million again interest expense increased by approximately $2 million on a sequential quarter basis as a result of higher interest rates applicable to outstanding borrowings on our floating rate credit facility notwithstanding the board kept our quarterly distributions flat at 52 five cents per unit based on a.
Relatively flat coverage ratio that came in at 1.07 times.
Our bank Covenant leverage ratio was 484 times, representing yet another sequential quarter decline, we continue to believe that with improved outlook for the industry. The previously discussed metrics should improve overtime improved market conditions, coupled with our anticipated operational improvement and continued capital discipline provided IV.
Set of circumstances for USA compression to continue delivering predictable reliable and durable returns for all stakeholders.
We have narrowed our full year 2022 guidance, we expect adjusted EBITDA between 420, and $430 million and distributable cash flow between 215 and $225 million, we expect to file our Form 10-Q with the SEC as early as this afternoon and with that I'll turn the call back to Eric for concur.
<unk> remarks.
Thanks, Mike.
As we close out 2022 and look forward to 2023, we are very encouraged by what we see in our markets that contribute to the continued resilience and strengthening for natural gas compression services and in particular for the large horsepower offerings that are fleet features.
Industry dynamics are proving conducive to improvements in price discovery and contract tenor these factors.
Along with our demonstrated ability to build long term relationships with our customers through the provision of high quality service position USA compression to continue delivering meaningful investment returns to its stakeholders.
We would like to reemphasize, our track record of 39 consecutive quarterly distributions and our expectations of continuing to deliver best in class compression services to our customers.
Our ability to deliver high quality service to our customers, while maintaining capital discipline should continue driving financial performance that we expect will afford us the flexibility to dedicate future cash flows to further capital investment debt reduction distribution increases or a combination.
Of the foregoing items.
To conclude we are extremely pleased with our third quarter results that featured quarter over quarter improvements in utilization and operational performance.
Annual results and leverage metrics.
We look forward to discussing our full year 2022 results and our 2023 outlook with you in several months time and with that we will open the call to questions.
Ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad to be doing a question. Please press star two.
<unk> possible I guess, a quick moment to allow everyone an opportunity to signal for questions.
We will take our first question from Selman <unk> from Stifel. Your line is open. Please go ahead.
Thank you good morning.
<unk>.
In terms of your fleet utilization now being or exiting at a 90% run rate should we expect.
Pricing to improve.
Improving I mean sort of accelerate from here in terms of what you're able to push through.
Yes, Selman this is Eric.
When you think about 10% of our fleets being idle still several hundred thousand horsepower.
When we look at the mix of the equipment.
We continue to deploy our largest.
<unk> power.
I would say in greater percentages in the smaller horsepower, but everything is in demand right now clearly with inflationary pressures both on Opex as well as capex costs and new unit acquisitions.
Continue to reprice, our existing book.
Compression.
Compressor, that's 10 years old or 20 years old provides the same service that a brand new one so the beauty of our business. Since we don't have technological obsolescence as older assets can perform the same services, a new asset which allows us in a market like this to continue to reprice. So.
We do have some month to month assets that we have been terming up and when we do turn them up we reprice.
Unlike <unk>.
Company does Scott three large LNG tankers are five large Ellen LNG tankers.
Over 4000 individual units each of which has a separate contract. So it's kind of a methodical re pricing over time and we look at it by horsepower class. So.
So long winded way to say.
And anticipate continued upward movement in our pricing capacity in the upcoming year.
Which will vary by horsepower tight and it will vary as things roll off of contract over time.
Understood. Thank you.
And then.
In terms of your dual drives any anticipate getting more calls and in putting more units deployed out there is there any supply chain limitations for getting more of those in the field.
So there are various components that go into these things electric motors that you have to source, which have.
In excess of a year lead time, we got some gear mechanisms that have in excess of years lead time.
But we haven't just waited around a year ago to start making commitments for the supply chain. So we do have.
Continued.
Dual drive components that will be coming over the course of 2023.
We do have some units that we recently completed that we are quoting for deployment in the field.
Over the course of 2023 will probably have completed somewhere in the range between 20 to 50 of the dual drive machines that will be able to be deployed out in the field.
Great and then.
Last one for me.
You noted the improvement in your leverage ratio for the business and I am just sort of curious kind of giving a rising interest rate environment now what is the appropriate.
Leverage for.
The business in your eyes as you go forward and you kind of go through the cycle, where would you like to end up at.
In terms of leverage.
Yes. Thanks for the question. This is Mike I think in terms of thinking about the leverage I mean first and foremost.
Strong balance sheet enthusiast, I think a strong balance sheet and very manageable leverage contributes to the overall story equity included having said that I think as we as we look forward and it will be a combination if you look at it consider a debt to EBITDA metric.
We want to grow the denominator, obviously to do what we can to reduce the numerator I think.
Stage, one is let's let's.
Get close to four five in terms of a leverage metric and then what's assessed the opportunity set that that's ahead of us in terms of what do we have.
In terms of opportunities to secure new units et cetera, and make a decision from there I think the capital discipline that you see in the E&P industry is very much bleeding over to the services sector and so we're not going to spend money growth grow for growth's sake, I mean that we're committed to capital discipline and so I think once we once we visit the four.
Five type neighborhood, we'll think about additional opportunities to get closer to four.
And so one other comment on when you think about our capital structure, we've got a pretty large tranche of fixed rate debt. Two tranches of notes that are out there where our preferred is fixed.
So we've got floating rate debt under our ABL and we're just north of $600 million taken down under that facility today. So.
You can take a look at whatever every one percentage point of increase in interest would do to your under that floating rate debt.
Pretty manageable in the world that we're living in today.
Great. Thank you very much.
We will take our next question from Gabe Moreen from Mizuho. Your line is open. Please go ahead.
Hey, good morning, guys.
Maybe if I could start off by asking about the new units that you ordered here for deployment can you just talk about directionally kind of where you see capex going in 'twenty three versus this year is there a tradeoff I guess between redeploying idle capex, sorry idle units versus this these new.
Units, you're ordering so should we take that into account when we consider kind of overall capex and then also.
I think Mike you mentioned prepaying some of the sand in 'twenty two as deposits is that is that going to be significant so sorry multipart question there.
Yes, so Dave this is Eric I guess the first part of the question is these are the largest units that we typically deploy in our fleet.
The what we call the cap 36 O eight products.
We have one of the largest if not the largest $36 eight fleet in the world today. So that's kind of our leading product that we offer with if you look at our idle fleet today, we have zero of the <unk>.
So when we look at our capital program clearly the cost to redeploy existing assets and spend a little make ready capital generally is significantly less than buying a brand new asset.
That said.
These large assets are highly highly highly accretive.
These are things that are we're being opportunistic on we've got extremely strong demand signals from long term existing customers and theres not a lot of capacity to build these assets on a new basis. So we're able to lock in multi year.
Contracts.
Significantly long multiyear contracts was extremely strong creditworthy customers. So what we look at is where can we get the biggest bang for our Buck.
The reason we've committed to add 50, new ones for next year, then we got some carryover from this year as the fees are unbelievably accretive.
When you look at after we deploy the capital the cash flow that is created and what this does from.
Continuing to help us delever, our balance sheet and improve our coverage. So these are the kind of things you want to deploy.
That said, we do continue to deploy stuff out of our idle fleet this year and on into next year, we will continue that activity.
But I think the trajectory of that once 2023 years past, maybe a little long into 2024 were basically going to be close to running out of idle assets can be redeployed.
Great and thanks, Eric and then maybe if you can talk about I guess.
It sounds like customer demand is real high just.
The balance between satisfying that customer demand how much do you feel youre pushing it versus I guess manufacturing and fabrication slots to get these units built.
Kind of where things stand within those tradeoffs basically are you actually meeting I guess as much customer demand as you think is out there at this point.
I would say that between all of us in the industry. There remains more demand than there is.
Existing assets and fleet that can be.
<unk> redeployed as well as capacity from various manufacturers, so theres more demand than there is available product.
Supply chain continues to have some some bottlenecks and implications and it's weird thing.
Everything from all that.
<unk> flywheels to an engine to various sub components to wiring harnesses.
Got some labor bottlenecks.
I was just kind of we're still seeing supply chain bottlenecks and limitations out there. So I think we're in a little bit of a perfect storm.
<unk>.
We could actually commit to spend additional capital, but we're balancing leverage we're balancing coverage and clearly we don't want to get over our skis and we want to continue to delever the balance sheet as Mike indicated to continue to improve our coverage metrics. So.
Actually are using this as an opportunity to high grade our customer list rather than chasing growth for the sake of growth we're going to grow.
It makes the most SaaS from a profitable perspective.
Focus only on highly accretive opportunities.
And again kind of redeploying some of that idle fleet.
Thanks, Eric maybe just for the last one from me shifting gears, a little bit side or the cost side of things clearly theres some stuff, which is how do you control like vehicle fuel costs, but as far as things like labor for example.
Any deceleration youre seeing at this point.
Stuff or just no change as far as what you've kind of seen in the last couple of quarters.
I would say the trajectory is starting to flatten a little bit.
We're not see service technicians.
Commit to make moves in the field.
<unk>.
Buck an hour or higher here <unk> 50, an hour higher there.
We're seeing moderation, obviously transportation fuel costs.
We're doing some creative things on our large volume bloom boil purchasing programs to take advantage of some some.
Basis differential from supply perspective, so we're actively managing our supply chain and frankly, that's one of the reasons. We made the commitment that we did with the 50 unit order with so that we could get US ahead of the food chain.
Take advantage of some of our relationships and some what we see as impending bottlenecks in 2023 was supply. So I think we've done a very good job of locking in as many of Opex and capex cost variables as we can coming into 2023, so we feel pretty good about it.
Functionary pressures kind of.
Managing and controlling that on R&D, while we continue to capitalize on the <unk>.
Lack of capacity and lack of supply of compression assets that exist out there.
Great. Thanks, Eric I appreciate it.
Thank you.
We will take our next question from Jeremy Tonet from Jpmorgan. Your line is open. Please go ahead.
Hi, good morning.
Hey, Jeremy.
Just wanted to kind of start off on a higher macro level question and thank you for all the commentary that you've provided so far but just wondering.
If you might be able to frame for us I guess, where USA fees.
Our market share has been in large large compression historically, how that's trended and where you see that going forward.
Yes.
Resting question because people talk about market shares company, a gaining as company be losing.
I think in my response to gauge question on Theres more demand than there is supply. So I think when you look at USAF customer mix and one of our publicly traded competitors customer mix and some private guys customer mix. We all have different customers that are kind of our core.
No.
We continue to meet the needs and demands of our core customers and our competitors continue to meet and supply the needs and demands of their customers. So I wouldn't say that one company is gaining market share at the expense of the other.
If you go back year.
As we've been talking about the compression pie natural gas pipe.
As pressures decline it takes an exponential increase in compression horsepower to move the same amount of volume and the volumes been getting bigger we got in the business in 1995, we produced.
Somewhere in the low 50 Bcf a day range and today, we're over 100 Bcf a day. So the pie is getting bigger more compression as needed and there's pressures in fields continue to come down.
Need even more compression on top of it. So the pie is getting bigger and there's just a few folks who continue to feed the pipe. So there is enough market share for all of us to go around Germany.
Got it I'll leave it there thank you very much.
Thank you.
Once again, please press star one to ask follow up question with possible just a quick moment to allowing it was one of the opportunity to signal for questions.
Yes, no further question on the line.
Thank you everyone for joining today's call you may now disconnect.
Okay.
[music].
Yes.
Okay.
[music].
Sure.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Okay.
Thank you.
Okay.
Yes.
[music].
Okay.