Q2 2023 USA Compression Partners LP Earnings Call
Good morning, welcome to the U S. A compression partners second quarter 2023 earnings conference call. During today's call all parties will be in a listen only mode.
The conclusion of management's prepared remarks, the call will be opened for Q&A additional Q&A instructions.
Well up here in the call. This conference is being recorded today August 1st 2023.
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 operational and financial results for the quarter ended June 32020.
You can find a copy of our earnings release as well as a recording of this call in the Investor Relations section of our website at USA compression Dot com.
During this call our management will reference certain non-GAAP measures you will find definitions and reconciliations of these non-GAAP measures to the most comparable U S. GAAP measures in our earnings release as a reminder, our conference call will include forward looking statements. These statements are based on management's current beliefs and include projections and expectations.
Guarding our future performance and other forward looking matters actual results may differ materially from these statements.
Please review the risk factors included in this morning's earnings release and in our other public filings. Please note that information provided on this call speaks only to management's views as of today August one 2023 and may no longer be accurate at the time of a replay.
I will 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 I am joined on the call today by Eric Schiller Park.
L O and Mike Pearl our CFO .
This morning, we released exceptional second quarter 2023 results.
Were attributable to our ability to opportunistically procure and deploy new compression units convert idle units to active status.
<unk> attractive pricing for new and legacy units and an extremely tight compression market.
Our directed efforts in each of these areas have allowed us to create meaningful stakeholder value through the delivery of our best in class compression service offerings under our disciplined capital management and organic growth compression as a service business model.
We continue to exercise capital discipline to return based capital allocation the direct capital expenditures to optimize returns, resulting in continued improvements to our balance sheet.
<unk> closer to a state of financial Optionality that affords us greater flexibility to deploy free cash flow to further reduce debt.
Changes to our distribution policy or pursue other strategic long term investments and initiatives are.
Our second quarter 2023 results again featured consecutive quarterly record revenues adjusted EBITDA and distributable cash flow.
Demand driven pricing for our services in an extremely tight compression market.
She needs to underpin our up into the right operational and financial performance.
During the second quarter, we continue to place units under contract for extended Cheddars.
Attractive pricing compared to prior market cycles, while increasing the size of our active fleet through new unit additions and continued conversions of legacy units from idle to active status.
Our revenue generating horsepower exit rate for the second quarter came in at approximately 335 million horsepower a record for USA compression.
Our second quarter growth in active horsepower was achieved alongside further quarter over quarter improvements in utilization, which averaged over 93% during the second quarter.
Our improved utilization was accompanied by record setting quarterly average per horsepower revenue, which came in at $18 65.
Which represents our sixth consecutive quarterly average rate improvement.
Our increased active fleet size and improved utilization and pricing enabled record setting distributable cash flow coverage of one three times.
We're extremely pleased with our second quarter results and believe that our continued operational and financial improvements speak to the value of the services that we provide.
The reliability and predictability of our cash flow stream and the benefits of our returns based and disciplined organic growth model.
Each of which represents a significant catalyst for continued improvements to our balance sheet and provides ongoing financial flexibility that a nurse to the benefit of all of our stakeholders.
Over the past several quarters, we have discussed our bullishness on long term commodity prices and on the broader energy industry and our views have not changed we view meaningful transactions to alternative energy sources and electrification.
As multi decade undertakings that will require extra ordinary levels of capital investment and we will.
Experienced many starts and stops as economic social and political factors continued to affect the pace of transition and change.
As these unpredictable dynamics play out over the coming years, the oil and gas production cycle will continue which we believe provides USA compression with sustained demand for its natural gas compression services.
Carbons will remain critical to the current and future health wealth and well being of society and USA compressions vital compression services will be required to move hydrocarbons to the marketplace.
Production centric nature of the services that we provide and the mission critical role that natural gas compression services play within the broader energy value chain provides USA compression with durable baseline demand for our services.
We have emphasized many times with demand for our services is linked directly to domestic hydrocarbon production, which the EIA currently forecast at record levels for 2023, and 2024 with incremental production growth continuing for years to come.
We also anticipate significant incremental demand for natural gas compression.
Production ratios of associated gas to oil continued to increase in domestic shale oil plays.
The lingering U S LNG export delays abate and additional takeaway capacity is added to increase the flow of Permian gas volumes into Mexico and advance of re exporting these volumes from highly anticipated and planned investments in Mexican LNG facilities.
Although our term base take or pay revenue model provides us with secure long term recurring fees that are unaffected by lower natural gas prices improved demand and pricing for U S. Natural gas provides an advantageous backdrop for USA compression to capitalize on future organic growth opportunities.
We are seeing producers increasingly opt for outsourced compression services in favor of directing their capital spending closer to the wellhead.
We believe that trend will continue as we seek to improve their overall capital investment metrics and continue to focus on their core competencies of improving drilling and well completion efficiency.
We expect domestic oil drilling activity to continue into the foreseeable future as forecasted crude oil prices remain above industry cited breakeven wty prices for new drilling and remained elevated as worldwide inventories continue to decline significantly and crude oil demand continue.
To grow as worldwide economies continue their post pandemic recoveries and expansions.
To summarize we are extremely pleased with our current market position and our compression as a service delivery model that features a growing active fleet.
Remains highly utilized under attractively priced long term take or pay contracts.
Our in place business model provides us with a durable and predictable cash flow stream that runs consistent with the sustained domestic hydrocarbon production cycle that relies on natural gas compression to deliver hydrocarbons to market centers and ultimately to end users.
Furthermore, we expect commodity prices to remain supportive of incremental drilling with demand for oil and natural gas continuing to increase over time as the transition toward alternative energy sources progresses.
What we believe will be a slower than expected pace and additional use cases for domestic natural gas a ball.
These market dynamics applied incremental pressure to what already is a constrained market for compression services that we provide.
In possession USA compression to grow its active fleet strategically and through returns based capital investments that augment USA compressions take or pay recurring revenue stream and improve its overall financial position.
Before turning the call over to Eric <unk> to discuss second quarter operating results I would like to stress that the most important thing we do as a company is to ensure that our employees contractors and customers return home safely each day through.
Through the first two quarters of 2023, we maintained a total recordable incident rate of zero, which is well below the industry average of 0.9 and is attributable to our employees continual focus on safety.
We are extremely proud of this accomplishment and <unk>.
Thank every USA compression employee for their continued commitment to our safety policies and procedures with that I will turn the call over to Eric Schiller, our COO to discuss our second quarter operating results.
Thanks, Eric and good morning, all.
Eric noted the strong results. We reported this morning, once again reflect our exceptional customer service, our high quality compression assets and our demonstrated ability to enhance the performance and profitability of the business at the same time, we will continue balancing our opportunity set with firm commitments to pursue.
Capital discipline reduce leverage and improve distribution coverage.
We continue to message our positive industry outlook for 2023, and beyond and focus on expanding the size of our active fleet to meet the demands of what continues to be a hungary compression market during the second quarter and throughout 2023, we've been successful in growing our active fleet to all time highs.
Revenue generating horsepower with approximately 335 million of currently deployed horsepower generating revenue at quarter end.
Wise, our utilization statistics continue to improve with our second quarter exit rate utilization clocking in at 93, 7%, a four percentage point improvement over the prior quarter.
As our active fleet size utilization continue to improve we also continued to capture extended contract tenders across the entire portfolio, which is the direct result of an extremely tight market for natural gas compression and the quality of service that we deliver to our customers.
We expect our active fleet companywide utilization to continue increasing as market tightness persists, we believe that existing pronounce tightness in the compression market will continue for years to come as forecasted commodity prices support continued domestic drilling.
New unit orders slow as new unit construction costs escalate significantly lead times for new unit deliveries surpassed 70 weeks and available component manufacturing capacity is consumed by numerous companies seeking gas driven backup power solutions for data centers.
Our capital investment strategy has evolved over the last few years in anticipation of and in response to compression market dynamics.
Irrespective of the prevailing market backdrop are.
Our approach to capital investment has remained disciplined in our capital investment decisions will continue to be returns based while available capital dollars being directed to their highest and best use which at times may cause us to moderate our capital investments in favor of funding other initiatives such as debt reduction.
For example in 2022, our capital investment strategy focused on converting already owned equipment from idle to active status as a result, we curtailed our 2022 capital spending focusing on making the nominal capital investments necessary to redeploy a higher than usual.
That fleet and a recovering economic environment.
For 2023 in response to increasing market tightness in the high utilization of our large horsepower fleet, we increased our capital spending on new unit orders, which we currently expect to result in the addition of 140000 of large horsepower capacity throughout 2023, and 25000 of large horsepower capacity.
In 2024.
For the 2023, New unit program, we have taken delivery of 45000 horsepower as of the end of the second quarter or.
Our initial cost for all new unit orders was set at the time of ordering and therefore is not affected by continued inflationary pressures.
In addition to these new unit orders, we have continued to direct capital spending to bring existing idle units.
Its status and.
In retrospect, our new unit orders were extremely timely from cost and demand perspective, since we placed the orders manufacturing costs have continued to escalate as input cost inflation and limited manufacturing capacity has increased new unit prices by approximately 20% compared to the new unit pricing that we were able to lock in.
For our existing 2023, and 2024 new unit orders.
Also we are pleased to report that all new units are spoken for and are currently under or subject to pending contracts with longer tenors.
Given current market conditions, including delivery times that exceed 70 weeks. We currently expect that our 2020 for capital investment strategy will shift back to converting already owned equipment from idle to active status utilizing our inventory of idle units and component parts inventory returning to an idle to active conversion.
<unk> strategy will allow us to moderate year over year capital expenditures and improve our overall returns by directing our capital to its highest and best use to close we expect our full year 2023 results to reflect the benefits of our directed efforts to increase our active fleet size and utilization and the practice returns based.
Capital investing as we look out into the foreseeable future. We currently expect to continue harvesting cash flow from our active fleet and expect to moderate capital spending as we focus on unlocking the incremental return potential of our in demand yet idle horsepower that we can deploy efficiently and effectively at a comparatively.
<unk> lower capital burden, we remain extremely bullish on compression market fundamentals and view, our continued operational and financial performance as firm validation of our investment strategy and compression as a service revenue model.
With that I'll turn the call over to Mike <unk>, our CFO to discuss our second quarter financial results.
Thanks, Eric and good morning, as Eric Long mentioned, our second quarter results featured consecutive quarter record revenue adjusted EBITDA and distributable cash flow.
Our second quarter distribution coverage of one three times represents an all time high for USA compression.
And is directly attributable to pronounced and continued demand for our services, which play a pivotal long term role in delivering hydrocarbons to market centers.
Our operations and commercial teams continue to manage our fleet efficiently. So that we remain positioned to grow our active fleets compression capacity, while capitalizing on attractive contract pricing that we continue securing under long term take or pay style contracts are.
Our quarterly utilization exit rate continued to improve and was complemented by further increases to our quarterly average revenue per revenue generating horsepower, which came in at another all time high of $18 65.
Our second quarter 2023 results revealed a 5% increase in sequential quarter revenues and a 21% increase in revenues compared to the year ago period. This revenue growth was driven by improved utilization and pricing with margins largely remaining intact, despite pronounced and persistent.
Cost inflation.
We continue to experienced comparatively higher prices for parts supplies and labor and all regions.
The bulk of our customer contracts allow for CPI rate adjustments at contract anniversary dates and these rate adjustments can help to mitigate the adverse economic impact of input cost inflation. However, there is a lag effect associated with realizing the economic benefit of CPI rate adjustments as the immediacy.
<unk> of input cost inflation tends to front run the data, which CPU rate adjustments can be applied. Furthermore, inflation related to some of our significant input costs, such as labor remained sticky and elevated compared to the CPU, which is affected by a broader market basket of consumer goods and services.
That have continued down a disinflationary path since mid 2022 notwithstanding.
Standing we do expect that inflationary pressures will abate over time and that CPI rate adjustments will provide increased margin support, thereby allowing our adjusted gross margin percentages to revert towards historic levels.
Our total fleet horsepower at the end of the quarter remained essentially flat to the previous quarter at approximately $3 7 million horsepower.
However, our revenue generating horsepower increased by two 6% on a sequential quarter basis second quarter 2023 expansion capital expenditures were $71 6 million and our maintenance capital expenditures were $6 4 million expansion capital spending during the quarter primarily consisted of reconfigure.
<unk> and make ready of idle units the delivery of 27500 of incremental large horsepower and the procurement of compression station components.
Second quarter 2023, net income was $23 6 million operating income was $51 4 million net cash provided by operating activities was $87 9 million in cash interest expense net was $40 2 million.
Cash interest expense increased by approximately $2 2 million on a sequential quarter basis, primarily due to higher interest rates applicable to outstanding borrowings on our floating rate credit facility.
However, this increase was offset by $1 2 million of cash payments received under our $700 million.
Notional principal fixed rate interest rate swaps that we executed in early April and that Watson 30 day sober for a two year period at three 875%.
Compared to current 30 day, so for that exceeds 5% approximately nine months ago, we identified a near term bank covenant leverage ratio target of four five times, which we are pleased to report that we have achieved as of the end of the second quarter as we continue to exercise capital discipline and reap the benefits of our stable and existing.
<unk> a business, we anticipate further leverage reductions over time, and we'll work toward achieving a terminal leverage target of four times.
We believe that further leverage reductions provide us tremendous financial flexibility to responsibly consider strategic alternatives adjust distribution levels.
They make opportunistic capital investments, we will remain committed to achieving our terminal leverage target and believe that improving market conditions operational and contract pricing improvements and continued capital discipline will allow us to achieve our leverage objectives.
We expect to file our Form 10-Q with the SEC as early as this afternoon and with that I will turn the call back to Eric long for concluding remarks.
The second quarter of 2023 provided us with further confirmation regarding our optimism regarding the long term demand for our services and our ability to further cement our status as the Premier third party compression service provider in the industry for the balance of 2023, we will.
Continued focusing on maintaining capital discipline as we satisfy market demand for our services, increasing our durable and predictable cash flow stream by Opportunistically contracting our services under longer term contracts.
Feature attractive and demand driven market rates and deploy new large horsepower units and transitioning legacy units from idle to active status.
Look forward to sharing the results of our ongoing operations and investment strategy in the periods to come and firmly believe that USA compression is positioned to improve its financial positioning as we continue to realize the benefits of our commercial and operational efforts on.
On August 4th we will make our 42nd consecutive quarterly distribution payment.
The $52.05 per unit distribution is flat to the previous quarters distribution.
Improvements to our active fleet size utilization contract tenors and contract pricing will increase our financial Optionality for further capital investment leverage reductions and distribution policy changes to.
To conclude we are extremely pleased with our second quarter results highlighted again by record quarterly revenues adjusted EBITDA distributable cash flow and distribution coverage and which also featured continued improvements to utilization and leverage.
Finally, I would like to recognize USA compressions, 20, <unk> anniversary, which we celebrated in July on behalf of our board of directors and senior management I am statically. Thank each member of the USA compression family for their respective contributions to making USA compression the industry's premier.
<unk> of natural gas compression services.
Your commitment to delivering first class service to our customers while safely pursuing operational excellence has enabled USA compression to deliver exceptional value to all stakeholders for more than 25 years, reflecting.
Reflecting on the last 25 years I can't help but be amazed that USA compression has distributed more than $1 $5 billion over the past decade to its equity holders while growing its business exponentially.
We've enjoyed many successes throughout our journey and look forward to the opportunities that lie ahead.
Closing, we would like to thank our employees customers suppliers investors and founders for contributing to USA compressions pronounced success and we look forward to discussing our third quarter 2023 results with you in a few months' time and with that we will open the call to questions.
Okay.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if any point you'd like to withdraw from the queue. Please press star one again.
I'll now take a moment to compile a roster.
Our first question comes from the line of Gabe Moreen from Mizuho. Please go ahead.
Good morning, everyone.
I just wanted to ask about I guess, the shift and pivot back to trying to.
Bring idle units back into service versus ordering new units can you just talk about the dynamics I guess out there.
With your customer relationships, the market's still really tight I assume some of your customers are still clamoring for rental horsepower.
Is there a risk that I guess, maybe you cede market share if youre not out their ordering despite these really really long lead times and inflated cost for new compression.
Yes, Great question. This is Eric I mean, what we're seeing is that there is more demand than there is.
Goods and services and mechanics to go around for all of us in the industry. So.
I think the way we look at it is we control we can Ken can control the incremental cost of <unk>.
Redeploying some of our idle equipment is significantly less than building brand new.
So to the extent, we've got decent equipment that has a useful life remaining we'd rather spend a little bit of make ready capital rather than.
Spending summit.
Incremental additional capital with <unk>.
So we see that.
We pointed out cost.
Phoenix assets were up 20% year over year or so.
We're less concerned about market share than we are about optimizing our own financial health our own balance sheet are on leverage and coverage profiles, but again, there's more than enough business for all of us to go around.
Thanks, Eric and maybe as a follow up can I ask about sort of the piece of equipment as I guess you termed it turned it instead is still high at all out there can you help us kind of frame up how much of the utilized stuff out there can be refurbished and redeployed sort of whats. Your timing is on that and then maybe sort of free.
I think you had $250 million as some capex this you're framing up sort of what 'twenty four capex can look like.
Hey, this is sheller Gabe so.
The vast majority of the idle equipment that remains is in really good condition. We've done a hard review of all of the assets were started to refurbish the components and has begun to assemble.
And it's to start going out here for the back half of the year and especially more so in the first half first three quarters of next year.
Sure.
I think the capital burn on that is going to be substantially less than it is going to be this year, but nonetheless, we'll be able to supply units for all of the customers who have already expressed an interest as they are doing their forecast for 2024.
Thanks, Eric.
Just hypothetically if youre approaching 94% utilization right now do you think you could get another percent or two next year as you redeploy all that stuff.
I think the stuff Thats whats left and what it looks like is in good condition.
We're very confident we can get utilization higher.
Okay. Thanks, very much everyone.
Our next question comes from the line of Selman <unk> from Stifel. Please go ahead.
Thank you so much.
So first question just on gross margins.
Improved very nicely sequentially.
Great. Thank you.
All time size has been around 65% so.
Is this sustainable can it go higher.
Is your thought on gross margins on a go forward basis.
So the net seller gross margins, we've been always hard focused on good times bad times always been able to make margin to the right number I think there is not going to be degradation. There is always upside as we're managing the cost.
Given the components that go into it I think that the numbers are still good.
<unk>.
Worried about making those numbers going forward.
Okay.
And then.
Are you guys, having discussions on 2025, yet given how tight the marketplaces.
We've had some preliminary discussions with folks.
Think about the norm in our industry.
The contracting points tend to historically been kind of six months to nine months in advance.
I think has caught some of our customers somewhat by surprise when they get here.
2024, as an industry has basically spoken for and now it's time to start thinking about 2025.
It tends to be longer than the normal planning cycles.
<unk>.
When you think about our independent and large.
Large independent and even the major oil guys tend to look at things about a year in advance that said, we are working with some of the Corp, Dev and strategic planning folks who have a little bit longer time perspective, yes.
Inform and educate hey gang, if you want to.
Getting into the queue. So to speak for equipment is time to start thinking about 2025.
I think people are starting to noodle on that and recognize that with the supply chain bottlenecks. Jim Bumblebee was on Squawk box. This morning from Caterpillar talking about how they are hitting on eight cylinders out of eight on all other business fronts.
<unk> got some continued supply chain issues in particular related to the large engine engine manufacturing, which obviously is compression in prime power in standby power.
I think people are starting to acknowledge and recognize that it's a longer time.
Longer term and longer time cycle, when things have historically been in the past.
Got it and then I can just squeeze one more in here.
Thought I heard you mentioned something about.
<unk>.
Gas driven power for backup to data centers, which kind of sounded like a new market to me.
Is there any color you could provide on that.
Thank you.
The concept was made that that's a competitive source.
Okay. Okay <unk> engines that caterpillar is.
Allocating equipment twos standby data centers and that was again one of the thing example, we spoke to this morning big demand for standby units going into data centers for backup electrical purposes.
As we bring more and more renewables online wind and solar which tend to be intermittent.
Our ability to provide power to the grid.
It makes some of these must Ryan.
<unk> mission critical applications require additional backup power to assure that the data centers don't go down during a brown out of a blackout.
And so that's what's really leading to sort of this 70 week.
Lead time out there.
Among other things so you've got a combination of demand for compression and data centers in prime power and standby power and marine and all of these large industrial engine applications.
Coupled with the point, where you've got some continued supply chain bottlenecks wiring harnesses the come from the Ukraine arent coming from the Ukrainian anymore.
Still have some continued issues with.
Parts and pieces not clearing courts in a timely manner. So there's a whole bunch of drivers that impact caterpillar impact fabricators impact parts and component pieces throughout the supply chain. So, yes, 70 70 months and.
Hopefully there is some improvement but.
We're pretty close contact with caterpillar and it appears that the 70 70 weeks rather.
Not really coming back in on itself, it's continuing to extend.
You for the additional insight.
Thank you.
Thank you ladies and gentlemen.
This does conclude today's call. Thank you for your participation you may now disconnect.
Okay.
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Sure.
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