Q4 2023 USA Compression Partners LP Earnings Call
Operator: www.thevenusproject.com Good morning. Welcome to USA Compression Partners' fourth quarter 2023 earnings conference. During today's call, all parties will be in a listen-only mode.
Yes.
Speaker Change: Good morning, welcome to the USA compression partners fourth quarter 2023 earnings Conference call.
Speaker Change: During today's call all parties will be in a listen only mode.
Speaker Change: At the conclusion of managements prepared remarks coal will be opened for Q&A.
Operator: At the conclusion of Management's Prepared Mark, the call will be open for Q&A. If you would like to ask a question during Q&A, simply press the star followed by the number one on your telephone keyboard. If you would like to withdraw your question, press star 1 again. This conference is being recorded today, February 13th, 2024. 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.
Speaker Change: If you would like to ask a question during Q&A Q&A simply press star followed by the number one on your telephone keypad.
Speaker Change: If you would like to withdraw your question Press Star one again.
Speaker Change: This conference is being recorded today February 13th 2024.
We'd now like to turn the call over to Chris Porter, Vice President General Counsel and Secretary.
Chris Porter: Good morning, everyone and thank you for joining US. This morning, we released our operational and financial results for the quarter and year ended December 31, 2023, you can find a copy of our earnings release as well as reporting of this call in the Investor Relations section of our website.
Chris Porter: This morning, we released our operational and financial results for the quarter and year ending December 31, 2023. 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 usacompression.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
Speaker Change: I say compression dot com.
Speaker Change: 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.
Chris Porter: 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 regarding our future performance and other forward-looking matters. However, actual results may differ materially from these.
Speaker Change: Regarding our future performance and other forward looking matters.
Speaker Change: Actual results may differ materially from these statements.
Chris Porter: Please review the risk factors included in this morning's earnings release and in other public filings. Please note that information provided on this call speaks only to management's views as of today, February 13, 2024, and may no longer be accurate at the time of a review. I will now turn the call over to Eric Long, President and CEO of USA Compression. Thank you, Chris. Good morning, everyone.
Speaker Change: Please review the risk factors included in this morning's earnings release and other public filings. Please note that information provided on this call speaks only to management's views as of today February 13, 2024 and are 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.
Eric Long: Thank you Chris Good morning, everyone and thanks for joining our call I'm joined on the call today by Eric <unk> our CFO.
Eric Long: And thanks for joining our call. I'm joined on the call today by Eric Scheller, our COO. This morning, we released our fourth quarter and year-end 2023 results. We are extremely pleased that we were able to deliver another quarter and full year of outstanding results. We continue to increase distribution coverage and decrease leverage. Our results reflect our continued and incremental movement towards our previously mentioned leverage ratio goal of 4.0 times, providing us increased financial flexibility and positioning us well for when our senior notes mature, which is not until Q2 of 2026 and Q3 of 2027. Of note, for both the full-year and quarterly results, we achieved many record results, including revenues, adjusted gross margin, adjusted EBITDA, distributable cash flow, distributable cash flow coverage, average revenue-generating horsepower, and average revenue-generating horsepower. We also reduced our leverage ratio to 4.1 times and saw common unit prices over $26 during the fourth quarter, nearing all-time highs. Finally, we were added to the VETIFY Elarion MLP Infrastructure Index, the AMZI, resulting in approximately 8.8 million common units added to index funds. I feel comfortable saying we had a great year.
Eric Long: This morning, we released our fourth quarter and year end 2023 results. We are extremely pleased that we were able to deliver another quarter and full year of outstanding results.
Eric Long: We continue to increase distribution coverage and decrease leverage our results reflect our continued and incremental movement towards our previously mentioned leverage ratio goal of 4.0 times, providing us increased financial flexibility and positioning us well for when our senior notes mature.
Eric Long: Which does not until Q2 of $20 26 in Q3 2027.
Eric Long: For both the full year and quarterly results, we achieved many record results, including revenues adjusted gross margin adjusted EBITDA distributable cash flow distributable cash flow coverage average revenue generating horsepower and average revenue per revenue generating.
Eric Long: Horsepower.
Eric Long: We also reduced our leverage ratio to four one times and saw common unit prices over $26 during the fourth quarter nearing all time highs.
Eric Long: Finally, we were added to the verify hilarious MLP infrastructure index, the MSCI, resulting in approximately $8 8 million common units added to index funds.
Eric Long: I feel comfortable saying, we had a great year.
Eric Long: As we look forward, we are continuing to position U S. AC is a resilient player in the natural gas compression service industry as we've always done.
Eric Long: As we look forward, we are continuing to position USAC as a resilient player in the natural gas compression service industry, as we have always done. 2024 will be a year that we focus on improving internal operational efficiency, the continuation of converting idle units to active status, continuing price improvements, and maximizing returns on growth capital through opportunistic purchasing of equipment that enables USAC to capture margins in line with our fourth-quarter results. As we mentioned in last quarter's call, our customers and others in the industry have not yet begun to accept the pricing required for USAC to purchase new compression units. That statement continues to be true. We are also mindful of the near-term geopolitical and economic uncertainty ahead. The most recent reports from the Federal Reserve indicate that interest rates will be terminally higher than what we have experienced over the last decade.
Eric Long: 2024 will be a year that we focus on improving internal operational efficiency, but continuation of converting idle units to active status continuing price improvements and maximizing returns on growth capital through opportunistic purchasing of equipment.
Eric Long: USA seat to capture margins in line with our fourth quarter results.
Eric Long: As we mentioned on last quarter's call our customers and others in the industry have not yet begun to accept the pricing required for USA to purchase new compression units that.
Eric Long: Statement continues to be true.
We're also mindful of the near term geopolitical and economic uncertainty ahead. The most recent reports from the federal reserve indicate that rates will be timely higher than what we've experienced over the last decade.
Eric Long: The Worldwide Economy, including China in the Slope. We are continuing to see escalating geopolitical tension in the Middle East and in the ongoing Russia-Ukraine conflict. And finally, there is the never-ending U.S. federal government budget fight and 2024 election cycle. We believe these factors suggest the prudent course of action is to remain financially and operationally flexible. With that in mind, we believe one strength we have proven over time is our management's ability to weather the storm. If you review USAC's history, you will notice a common theme that has been core to our stable historical growth.
Eric Long: The worldwide economy, including China slowed.
Eric Long: We are continuing to see escalating geopolitical tension in the middle East and then the ongoing Russia, Ukraine conflict.
Eric Long: And finally, there is a never ending U S. Federal government budget fight in 2020 for election cycle.
Eric Long: We believe these factors suggest the prudent course of action is to remain financially and operationally flexible.
Eric Long: With that in mind, we believe one strength, we have proven over time is our management's ability to weather the storm.
Eric Long: If you review USA sees history, you will notice a common theme that has been core to our stable historical growth.
Eric Long: USAC grows when the industry and geopolitical environment are supportive of that growth. In times of uncertainty, however, you will notice that USAC has reigned in growth, battened down the hatches, and focused internally on efficiency and productivity. It's easy to show high utilization and growth when you are the new fresh face in the compression space that has yet to experience significant, lasting downturns. USAC's management has a proven track record during those times, such as 2008 to 2010, 2015 to 2017, and most recently during the COVID downturn. Throughout those cycles, USAC continued to maintain utilization, revenue, and adjusted EBITDA at levels strong enough to maintain our distribution while sustaining manageable levels of leverage.
Eric Long: So you see growth on the industry and geopolitical environment are supportive of that growth in times of uncertainty. However, you will notice that U S. AC is random growth battened down the hatches and focused internally on efficiency and productivity, it's easy to show high utilization and growth. When you are the new fresh faces.
Eric Long: The compression space.
As you have two experienced significant lasting downturn.
Eric Long: USA <unk> management has a proven track record during those times such as 2008 to 2010 2015 to 2017 and most recently during the Covid downturn.
Eric Long: Throughout those cycles USA C continued to maintain utilization revenue and adjusted EBITDA at levels strong enough to maintain our distribution, while sustaining manageable levels of leverage.
Eric Long: While we do not expect the near term to be as dramatic as those prior cycles, we do see general uncertainty ahead and believe our current 2024 plans match the USAC story that you have all become accustomed to, one of cash flow and financial stability through prudent capital spending at the right times. The uncertainty is not without some clarity specific to our industry. We still maintain a very bullish view of the long-term prospects of the natural gas compression industry.
Eric Long: While we do not expect the near term to be as dramatic as those prior cycles. We do see general uncertainty ahead and believe our current 2024 plans match. The U S. AC story that you have all become accustomed to.
Eric Long: Cash flow and financial stability through prudent capital spending at the right times.
Eric Long: The uncertainty is not without some clarity specific to our industry, we still maintain a very bullish view of the long term prospects of the natural gas compression industry.
Eric Long: As we have said before our business is not directly tied to commodity prices, but rather production and demand the future looks bright on both fronts.
Eric Long: As we have said before, our business is not directly tied to commodity prices but rather production and demand. The future looks bright on both fronts. The EIA expects U.S. production of natural gas to likely continue growing to meet rising global demand through the end of their forecast period, which is 2050. U.S. natural gas exports are expected to continue growing in 2024, 2025, and beyond, especially as new LNG facilities already approved and scheduled to come on stream in the U.S. increase current capacity from about 15 BCF a day to more than 40 BCF a day.
I expect U S production of natural gas to likely continue growing to meet rising global demand through the end of their forecast period, which was 2050.
Eric Long: U S. Natural gas exports are expected to continue growing in 2020 for 2025 and beyond.
Eric Long: Especially as new LNG facilities already approved and scheduled to come on stream in the U S increased current capacity from about 15 Bcf a day to more than 40 Bcf a day.
Eric Long: To be clear, that is incremental capacity not impacted by the recent announcement from the Biden administration to pause further approval of LNG export terminals. We believe these long-term dynamics will dovetail well with our current 2024 plans to focus on maximizing unit holder value through internal process optimization and efficiency, and less through capital expenditures, which we currently believe will be significantly reduced in comparison to 2023. We believe this will allow us to continue improving our balance sheet, and provide us with the financial flexibility to opportunistically improve our capital structure over time, including potentially refinancing or embeddedness at attractive rates, allowing us to further pursue capital cost improvement, leverage reductions, and distribution policy changes. One point I would like to mention in regards to our capital structure is that in January, we had $40 million of the preferred units convert into common units. When combined with the common units issued pursuant to previous warrant exercises by the preferred unit holders, this resulted in an additional 4.9 million common units outstanding in the aggregate, at least 80% of which have been absorbed into the open market to date.
Eric Long: To be clear that is incremental capacity not impacted by the recent announcement from the Baidu administration to pause further approval of LNG export terminals.
Eric Long: We believe these long term dynamics will dovetail well with our current 2024 plans to focus on maximizing unit holder value through internal process optimization and efficiency and less through capital expenditures, which we currently believe will be significantly reduced in comparison to 2023.
Eric Long: We believe this will allow us to continue improving our balance sheet.
Eric Long: Provide us the financial flexibility to Opportunistically improve our capital structure over time, including potentially refinancing indebtedness at attractive rates, allowing us to further pursue capital cost improvement leverage reductions and distribution policy changes.
One point I would like to mentioned in regards to our capital structure in January we have $40 million of the preferred units convert into common units when combined with the common units issued pursuant to previous warrant exercises by the preferred unit holders. This resulted in an additional $4 9 million common units outstanding.
Eric Long: In the aggregate at least 80% of which had been absorbed into the open market today.
Eric Long: The good news is that this increases our public liquidity with a de minimis impact on our distributable cash flow coverage, which we have highlighted in a recently published investor presentation you can find on our website. As always, we will continue to look for ways to maximize the capital structure, and the value that can be derived from it from 2024 will be no different. Switching gears, I would like to recognize our hardworking field employees. During the recent winter storm that swept across the country in mid-January, our employees were called upon to battle ice and sleet, keeping our compression units at the ready as our customers' natural gas compression needs changed in response to the storm. As always here at USA Compression, we are all about serving our customers and our communities, helping to keep the lights and heat on when it matters the most. Our field employees' actions during this recent storm are just another proud example of our dedication to a high level of service. I am very proud of this company and our employees' commitment to serving the baseload power generation that we all need during these times. One more point before I turn the call over to Mr. Scheller.
Eric Long: The good news is that this increases our public liquidity with a de minimis impact on our distributable cash flow coverage, which we have highlighted in a recently published investor presentation, you can find on our website.
Eric Long: As always we will continue to look for ways to maximize the capital structure and the value that can be derived there from 2024 will be no different.
Eric Long: Switching gears I would like to recognize our hard working field employees. During the recent winter storm swept across the country in mid January our employees were called upon to Battle ISO sleep, keeping our compression units as already as our customers natural gas compression needs changed in response to the storm.
Eric Long: As always here USA compression, we are all about serving our customers and our communities, helping to keep the lights and heat on when it mattered the most.
Eric Long: Our field employees actions. During this recent storm is just another proud example of our dedication to a high level of service I am very proud of this company and our employees commitment to serving the Baseload power generation, but we all need during those times.
Speaker Change: One more point before I turn the call over to Mr. Sheller I'm pleased that our 2023 safety performance continued to outperform the industry average.
Eric Long: I'm pleased that our 2023 safety performance continued to outperform the industry average. As always, the safety of our employees, our contractors, and our customers' employees remains the number one priority of our organization. We are extremely proud of our employees' continued focus on being safe in all we do, each and every day. With that, I will turn the call over to Eric Scheller, our COO, to discuss our fourth quarter highlights. Thanks, Eric, and good morning, all.
Speaker Change: The safety of our employees, our contractors and our customers employees remains our number one priority of our organization. We are extremely proud of our employees' continued focus on being safe and all we do each and every day with that I will turn the call over to Eric <unk> Our CFO.
Eric Long: To discuss our fourth quarter highlights.
Eric Long: Thanks, Eric and good morning, all and as Eric noted we are extremely pleased with our full year and fourth quarter results and I am extremely proud of our employees. In addition to the record results. Eric mentioned, we continued to increase utilization during the fourth quarter to a near all time high all while continuing to capture contracts with <unk>.
Eric Scheller: As Eric noted, we are extremely pleased with our full year and fourth quarter results, and I am extremely proud of our employees. In addition to the record results Eric mentioned, we continued to increase utilization during the fourth quarter to a near all-time high, all while continuing to capture contracts with extended tenor and enhanced pricing that we think generates strong, stable baseload cash flows while providing opportunistic upside as market conditions evolve. During the fourth quarter, our revenue growth trend continued and was driven primarily by continued utilization and pricing improvements. Our revenue increased 4% in sequential quarters and 18% compared to the year-ago period.
Eric Long: Tenor.
Eric Long: <unk> pricing that we think generate strong stable base load cash flows, while providing opportunistic applied as market conditions wall during.
Eric Long: During the fourth quarter, our revenue growth trend continued in this driven primarily by continued utilization and pricing improvement our revenue increased 4% in sequential quarters, and 18% compared to the year ago period.
Eric Scheller: The fourth quarter also saw an increase in our margins, bringing them back in line with historical averages since our initial public offering. This increase is the result of our steady determination to offset inflationary costs through both productivity improvement and contractual pass-through adjustments. We believe the utilization of both the continued productivity improvements and the continued use of CPIU rate adjustments will continue to support our margins in line with current levels should inflation increase again in the near term. Fourth quarter 2023 net income was $12.8 million. Operating income was $68.5 million.
Eric Long: The fourth quarter also saw an increase in our margins, bringing them back in line with historical averages since our initial public offering. This increase is the result of our steady determination to offset inflationary costs through both productivity improvement and contractual pass through adjustment. We believe the utilization of both the continued productivity.
Eric Long: Activity improvement and the continued use the CPU rate adjustments, we will continue to support our margins in line with current levels should inflation increase again in the near term.
Eric Long: Fourth quarter 2023, net income was $12 $8 million operating income was $68 $5 million net cash provided by operating activities was $91 6 million and cash interest expense net was $43 million cash interest expense increase.
Eric Scheller: Net cash provided by operating activities was $91.6 million, and cash interest expense was net was $43 million. Cash interest expense increased by approximately $1.6 million on a sequential quarter basis, primarily due to higher average outstanding borrowings on our floating rate credit facility.
Eric Long: <unk> by approximately $1 $6 million on a sequential quarter basis, primarily due to higher average outstanding borrowings on our floating rate credit facility. However, higher cash interest expense was mitigated by $2 $5 million of cash payments received under our $700 million notional principal fix.
Eric Scheller: However, higher cash interest expense was mitigated by $2.5 million of cash payments received under our $700 million notional principal fixed rate interest rate swap, which we modified and extended in October and now locks in 30-day SOFR until December 2025 at 3.9725% compared to the current 30-day SOFR, which currently exceeds 5%. Turning to operational results, our total fleet horsepower at the end of the quarter increased by one percent to approximately 3.8 million horsepower as we accepted delivery of 47,500 units of new large horsepower units during the quarter. Our revenue-generating horsepower increased by 1% on a sequential quarter basis, primarily due to the addition of these new large horsepower units.
Eric Long: Rate interest rate swap, which we modified and extended in October and now locks in 30 days so for until December 2025, and $3, 97% to 5% compared to current 30 day sulfur that currently exceed 5%.
Eric Long: Turning to operational results, our total fleet horsepower at the end of the quarter increased by 1% to approximately $3 8 million horsepower as we accepted delivery of 47500 horsepower of new large horsepower units during the quarter.
Our revenue generating horsepower increased by 1% on a sequential quarter basis, primarily due to the addition of these new large horsepower units.
Eric Scheller: Fourth quarter 2023 expansion capital expenditures were $90.1 million, and our maintenance capital expenditures were $6.6 million. Expansion capital spending continues to consist of reconfiguration and make ready of idle units along with the aforementioned delivery of 47,500 horsepower of new large horsepower units during the quarter. We currently expect to take delivery of an additional 52,500 horsepower of new large horsepower units during the first half of 2024, with almost all expected during the first quarter, plus additional and ongoing conversion of current fleet idle units to active status. The new units represent the remainder of our late 2022 order. Additionally, throughout 2024, we anticipate the deployment of between 85,000 and 115,000 horsepower of existing uncontracted fleet assets at capital costs substantially below those of new organic Growth Equipment Bill. Finally, I am pleased to share that on February 2nd, we made our 44th consecutive quarterly distribution payment. The 52.5 cents per unit distribution was flat compared to the previous quarter's distribution.
Eric Long: Fourth quarter 2023 expansion capital expenditures were $90 $1 million and our maintenance capital expenditures were $6 $6 million expansion.
Eric Long: <unk> capital spending continues to consist of reconfiguration and make ready of idle units along with the aforementioned delivery of 47500 horsepower of new large horsepower units during the quarter. We currently expect to take delivery of an additional 52500 horsepower of new large horsepower.
Eric Long: Units during the first half of 2024 with almost all expected during the first quarter plus additional an ongoing conversion of current fleet idle units to active status.
Eric Long: New units represent the remainder of our late 2022 order. Additionally throughout 2024, we anticipate the deployment of between 85000 and 115000 horsepower of existing contracted fleet assets and capital cost substantially below those of new organic.
Eric Long: Growth equipment builds.
Eric Long: Finally, I am pleased to share that on February the second we made our 44th consecutive quarterly distribution payment.
Eric Long: 52, five cents per unit distribution was flat to the previous quarters distribution and with that I'll turn the call back over to Eric long for concluding remarks. Thank you, Eric our 2023 full year and fourth quarter results again reflect USA <unk> commitment and ability to continue to deliver.
Eric Long: And with that, I'll turn the call back over to Eric Long for his concluding remarks. Thank you, Eric. Our 2023 full-year and fourth-quarter results again reflect USAC's commitment and ability to continue delivering meaningful value to our stakeholders. For the past five years, our total unit holder return has been 236%, beating the S&P 500 of 107% over the same time period. We are grateful for the value we've been able to deliver to our stakeholders. We believe that our near-term reduction in capital growth, while focusing on internal efficiency and optimization, will provide USAC greater financial flexibility and our stakeholders compelling value. While we are all facing some general economic and political uncertainty in the near term, we believe we are well positioned to weather this uncertainty and continue improving our financial metrics for further capital cost improvement, leverage reductions, and distribution policy changes.
Eric Long: During meaningful value to our stakeholders.
Eric Long: Over the past five years, our total unit holder return has been 236%, beating the S&P 500 or 107% over the same time period.
Eric Long: We are grateful for the value, we have been able to deliver to our stakeholders. We believe that our near term reduction in capital growth, while focusing on internal efficiency and optimization, we will provide USA see greater financial flexibility and our stakeholders a compelling value.
Eric Long: While we are all facing some general economic and political uncertainty in the near term. We believe we are well positioned to weather. This uncertainty and continue improving our financial metrics for further capital cost improvement leverage reductions and distribution policy changes to conclude we are extremely pleased.
Eric Long: To conclude, we are extremely pleased with our 2023 full year and fourth 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 contract pricing. We expect to file our Form 10-K with the SEC as early as this afternoon. And with that, we will open the call to questions. Again, if you would like to ask a question, press star followed by the number one on your telephone keypad.
Eric Long: With our 2023 full year and fourth 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 contract pricing.
Eric Long: We expect to file our Form 10-K with the SEC as early as this afternoon and with that we will open the call to questions.
Speaker Change: Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Speaker Change: We will now pause to compile the Q&A roster.
Operator: We will now pause to compile the Q&A roster. And this question comes from a line from Jeremy Tonnett with J.P. Morgan. Your line is open. Hey, everyone. This is Eli on for Jeremy.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Jeremy Tonet with J P. Morgan Your line is open.
Jeremy Tonet: Hey, everyone.
Jeremy Tonet: This is eli on for Jeremy.
Operator: Just hoping the team could provide some update color around lead times for cat engines and overall compression equipment. How should we be thinking about those lead time dynamics in the, you know, near and medium term? Thanks. Hey Eli, this is Eric Scheller.
Eli: Just hoping the team could provide updated color.
Eli: Around lead times for cat engines, and overall compression equipment.
Eli: How should we thinking about those lead times dynamics in the near and medium term.
Hey, Eli this is Derek seller lead times for our cat equipment now order.
Eric Scheller: Lead times for CAD equipment now are 40-45 weeks just to receive the engines and then you still have packaging time on top of that. We are always talking to customers as they're looking at their production profile, checking out what the demand is in excess of the current forecast that we have for. Eli, this is Eric.
Derek: Hitting 40% to 45 weeks just to receive the engines and then you still have packaging time.
Derek: It goes on top of that we are always talking to customers as they're looking at their production profiles and checking out what the demand is in excess of the current forecast we have for our horsepower.
Derek: Hi, This is Eric I'll give a little additional color because there's more than just new engine sourcing from cash and others.
Eric Scheller: I'll give a little additional color because there's more than just new engine sourcing from CAT and others. We continue to see supply chain bottlenecks. We've got subcomponent inventory issues. We've got manufacturing issues. So the misnomer that inflation is past and supply chain problems are fixed is quite the opposite. As we continue to offshore more and more activities, as we continue to have some of these geopolitical conflict escalations worldwide, we see continued pressure on the supply chain into the future. So things are not getting better. They roll around; one day it's the wiring harness, the next day it's bolts and nuts and gaskets, and the next day it's related to turbochargers or heads and valves and various things that go into keeping our engines running.
Eric Long: We continue to see supply chain bottlenecks.
Eric Long: We've got sub component inventory issues, we've got manufacturing issues. So.
The misnomer that inflation is passed through the supply chain problems are fixed it's quite the opposite as we continue to onshore more and more activities. As we continue to have some of these geopolitical conflict escalations worldwide.
Eric Long: We see continued pressure on supply chain.
Came into the into the future so things are not getting better.
Eric Long: They roll around one day, it's a wiring harness and next day as bolts and nuts in gaskets and next day, it's related to turbo Chargers or head to heads and valves and various things that go into keeping our engines running so.
Eric Scheller: So I think that's one of the differentiators that some of the major players can bring to the table, long-term stable relationships with manufacturers or other alternative suppliers of equipment so that we can make sure that our equipment continues to run. I think it's important for everybody to keep in mind that it's not just access to new equipment, but it's making sure you can keep your existing equipment up and operational. And trust me, in this environment, it's not an easy task right now.
Eric Long: I think that's one of the Differentiators that some of the major players can bring to the table as a long term stable relationships with manufacturers or other alternative suppliers of equipment. So that we can make sure that our equipment continues to run. So just I think it's important for everybody to keep in mind, it's not just.
Eric Long: Access to new equipment, but it's making sure you can keep your existing equipment up and operational and running and Trust me in this environment, it's not an easy task right now.
Speaker Change: Got it.
Eric Long: Yeah, I totally understand that. And then maybe just if we could pivot to kind of some of the 2024 DCF guidance you guys provided, you know, recognize there might be reduced growth CapEx, you mentioned in the opening remarks, but just wondering if you could dive further into your latest capital allocation prioritization. You know, how should we be thinking about deleveraging, especially as you approach your leverage target versus, you know, growth CapEx levels. And then, you know, how do equity shareholder returns fit into that? Thinking about the dividend and, you know, what you guys might do with that in the near term. Yeah, really good question.
Totally understand that.
Speaker Change: And then maybe just if we could pivot to kind.
Speaker Change: Kind of some of the 2020 for DCF guidance you guys provided.
Speaker Change: Recognize there might be reduced growth Capex you mentioned in the opening remarks, but just wondering if you could dive further into your latest capital allocation prioritization.
Speaker Change: How should we be thinking about deleveraging, especially as you approach your leverage target.
Speaker Change: Versus growth Capex levels, and then how do you kind of equity shareholder returns fit into that thinking.
Speaker Change: Thinking about the dividend.
Speaker Change: What you guys might do with that in the near term.
Speaker Change: Yeah really good question is probably a front and center on a lot of our investors minds.
Eric Long: It's probably front and center on a lot of our investors' minds, you know, from retail as well as from, you know, hedge funds and institutional. So, as we pointed out, we've got maturities coming up in the 26 and 27s on roughly $1.5 billion worth of high-yield debt. We want to make sure that before we address our distribution policy, we've been able to go through the refinance cycle that's coming up here in the coming years. You'll note that our distribution coverage was pushing 1.5 this time.
Speaker Change: From retail as well as from hedge funds and institutional.
Speaker Change: So as we pointed out we've got maturities coming up in 'twenty six 'twenty sevens on roughly $1.5 billion worth of high yield debt.
Speaker Change: We want to make sure that before we address our distribution policy that we've been able to go through the refinance cycle, that's coming up here in the coming years Youll.
Youll note that our distribution coverage was pushing one five this time, you'll notice that our leverage is just a skosh over four and declining rapidly. So we also flipside of that saw an increase in 10 year treasuries. This morning.
Eric Long: You'll notice that our leverage is just a skosh over 4 and declining rapidly. But on the flip side of that, we also saw an increase in 10-year treasuries this morning. You know, the probability of a rate cut in March that was almost 100 percent a few weeks ago is now less than 10 percent. So, you know, the 10-year treasuries today are back to almost 4.3 percent, a dramatic increase. We had a net income hit of $10 million, which was due to the swap valuation.
Speaker Change: The probability of a rate cut in March that was almost 100% a few weeks ago is now less than 10%.
Speaker Change: So you know the 10 year treasuries today are back almost four 3% a dramatic increase.
We had net income hit of $10 million, which was due to swap valuation while needless to say that swap is increase the value here in the short term.
Eric Long: Well, needless to say, that swap has increased the value here in the short term. So what we're basically trying to do is fix our capital structure and improve our capital structure. You know, we don't have any novated debt sitting in the parent company that is an overhang. What you see is what you get with USA, and our intent is to work on our capital structure with those two tranches of high yields. We've got plenty of time to address those things. EIG recently, as we noted, converted roughly $40 million of preferred stock into common. We actually like that.
So what we're basically trying to do is fix our capital structure and improve our capital structure.
Speaker Change: We don't have any novae to that setting up the parent company that is an overhang. What you see is what you get with USA and our intent is to work on our capital structure with those two tranches of high yields.
Speaker Change: We've got plenty of time to address those things.
Speaker Change: AIG re.
Speaker Change: <unk> as we noted converted roughly $40 million of preferred into common.
Speaker Change: We actually like that.
Eric Long: It gives us some additional liquidity and flows into the marketplace. We've had a couple of large institutions who've been holders of our securities, and CIPO, who've trimmed their positions recently. So I think what we have going on here is a longer-term secular rotation from some of the folks that have been in for a long period of time to some new players, the index funds, and some new institutions that have been coming into our securities. And what we want to do is just continue to methodically de-lever the balance sheet and get some clarity in the marketplace. With a year lead time on sourcing new equipment and with the cost associated with this new equipment, we think we've got honestly better returns for our shareholders in continuing to slow the growth and look opportunistically at some equipment sourcing opportunities that we have.
Speaker Change: It gives us some additional liquidity and float in the marketplace. We've had a couple of large institutions, who have been holders of our.
Speaker Change: Of our securities since the IPO trim their position recently, so I think what we have going on here is a longer term secular rotation from some of the folks have been in for a long period of time with some new players the index funds and some new institutions that have been coming into our securities and what we want to do is just continue to.
Speaker Change: Methodically delever the balance sheet get some clarity in the marketplace.
Speaker Change: With a year lead time on sourcing new equipment and what the cost associated with this new equipment.
Speaker Change: We think we've got honestly better.
Speaker Change: Returns for our shareholders and continuing to slow the growth look opportunistically at some equipment sourcing opportunities that we have we continue to focus on the de carbonization world.
Eric Long: We continue to focus on the decarbonization world with dual drive and various other elements associated with that. Electrification is not the panacea that everybody expects that it is, and if you think the compression business has supply chain bottlenecks, boy, the folks in the electric business have some very serious limitations on bottlenecks and equipment sources from China and India and places that we can't control the supply chain.
Speaker Change: Dual drive and various other elements associated with that.
Speaker Change: Electrification is not the panacea that everybody expected. It is and you think the compression business have supply chain bottlenecks boy the folks in the electric business have some very serious limitations on bottlenecks and equipment sourced from China, and India and places that we can't control the supply chain so long.
Eric Long: So, long winded way to say, right now we're focused, laser focused on maintaining financial flexibility. Our board, of course, makes the policy decisions related to distributions, but I think from all indications of what I see in my reading of the tea leaves, we're going to continue to be conservative over the coming quarters, continue to deliver, and build distribution coverage. We'll get our capital structure fixed up for the next round of five to eight years or so, and at that point in time, we will address what we do next. We've been through this rodeo many, many times, and when everything is from the bottom left of the page to the top right of the page, and there are bluebirds and rainbows, it's easy to manage.
Speaker Change: Winded way to say.
Speaker Change: Right now we're focused laser focused on maintaining financial flexibility.
Speaker Change: Our board of course makes it the policy decision related to distributions, but I think for them all indications of what I see in my reading of the tea leaves, we're going to continue to be conservative over the coming quarters continue to delever build distribution coverage.
Speaker Change: Get our capital structure.
Speaker Change: Fixed up for the next round of five years to eight years or so.
Speaker Change: At that point in times, when we will address what do we do next we've been through this radio many many times and you know what.
Speaker Change: When everything is from the bottom left of the page to the top right of the page and Blue birds in Rainbows, it's easy to manage through.
Eric Long: We've always pulled our horns in a little bit before our peers, and because of that, we've been able to weather and manage the inevitable downturns that come, pointed out the fact that our unit price is near a record high and we've been public for 10 years, and we bumped up $26 a unit here recently. So, you know... Good times when they get here; short times till they're gone.
Speaker Change: We've always pulled our horns in a little bit before our peers and because of that we've been able to weather and manage the inevitable downturns or Tom.
Speaker Change: Pointed out to the fact that the.
Speaker Change: Our unit price hit near a record high in.
Speaker Change: We've been public for 10 years, and we bumped up the 26 Bucks a unit here recently so.
Speaker Change: Good times when they get here short time still are wrong. So we want to make sure that we're positioned for stability there are growth opportunities at the appropriate time, we'll be able to capitalize upon but for right now a little bit of choppy waters ahead, and we intend to pull our horns in and make sure that we're here for the long haul what does that mean for our shareholders.
Eric Long: So we want to make sure that we're positioned for stability. There are growth opportunities that, at the appropriate time, we'll be able to capitalize upon. But for right now, there are a little bit of choppy waters ahead.
Eric Long: And we intend to pull our horns in and make sure that we're here for the long haul. What does that mean for shareholders? You look at our total shareholder returns over the last five years; it's outperformed the S&P, outperformed our peer group, and we're here to tell you that when you look into the crystal ball five years from now and you look in the rearview mirror, we intend that our TSR will be at the top decile or quartile of performance versus our peers and versus alternative investments. Yeah, I appreciate all the detail. I'll leave it there. Thank you.
Speaker Change: You look at our total shareholder returns over the last five years to outperform the S&P outperformed our peer group.
Speaker Change: We're here to tell you that you look into the Crystal ball five years from now and you look in the rearview mirror, we intend that our <unk> will be at the top decile or quartile performance versus our peers and versus alternative investments.
Speaker Change: Got it yeah I appreciate all.
All of the detail I'll leave it there thanks.
Speaker Change: Thank you.
Speaker Change: Okay.
Operator: Your next question comes from the line of Gabriel Marine with Mizzou Hose Securities. Your line is open. Hi, everyone. It's Rob on for Gabe.
Speaker Change: Your next question comes from the line of Gabriel Moreen with Mizuho Securities. Your line is open.
Speaker Change: Hi, everyone, it's Rob on for Gabe.
Rob: So there's been some.
Operator: So there's been some consolidation in the compression space; wondering how and whether you see that affecting the competitive dynamic in the space and, from your vantage point, are there bolt-on opportunities available out there for compression? And is that what you're alluding to in referencing equipment, equipment sourcing opportunities? You know, Rob, we never...
Consolidation in the compression space wondering how and whether you see that affecting the competitive dynamic in the space and from your vantage point are there bolt on opportunities available out there for compression and is that what youre alluding to and referencing equipment equipment sourcing opportunities.
Rob: You know Rob we never.
Eric Long: Speculate on M&A opportunities, you know; we look at everything that's out there; anything that we do would need to be strategic, it would need to be accretive. We don't need to grow just for the sake of growth, you know; we grow to enhance returns for our shareholders. So there are some things out there that we've looked at, there are things that we've passed on, and there are things that we'll continue to look at. So at this stage, you know, I think it will be more opportunistically driven. Consolidation is positive. You know, historically, we had an oligopolistic situation with two major players, and now we almost have a triumvirate with a new third. So it remains to be seen if the discipline that becoming a larger, more stable player in our industry brings will remain there. We expect that it will because, frankly, there are far more opportunities for the three large players to go around than there are, frankly, available equipment. So, so far, so good.
Rob: Speculate on M&A opportunities, we look at everything Thats out there anything that we do would need to be strategic that would need to be accretive.
Rob: We don't need to grow just for the sake of growth we grow too.
To enhance returns for our shareholders. So there are some things out there that we've looked at there are things that we passed on.
Rob: There are things that we'll continue to look at so at this stage I think it will be more opportunistically driven consolidation as a positive.
Rob: There is a.
Rob: Historically, we had an olive garden oligopolistic situation with two major players and now you almost have a triumvirate with a new third so it remains to be seen of the discipline that.
Rob: Becoming a larger and more stable player in it.
Rob: Our industry brains of that discipline remains there we expect that it will because frankly, there is far more opportunities for those three large players to go around and there is frankly available equipment. So.
Rob: So far so good I think we'll stay the course.
Eric Long: I think we'll stay the course, and if and when there are any M&A opportunities, you'll be the first to know in a press release. Thanks. I appreciate that, Eric. And maybe if you could unpack in your prepared remarks, you said that those commercial discussions for new units are still kind of at an impasse for customers not willing to commit on the rate or term. Maybe could you could provide some more color into whether there's been some softening around that dynamic, or is it still pretty similar to what you saw last quarter? Hey, this is Sheldon. I think it's like the ice cubes are starting to melt.
Rob: If and when there is any M&A opportunities you'll be the first to see in our press release.
Speaker Change: Thanks I appreciate.
Speaker Change: Nate that Eric and maybe if you could impact in your prepared remarks, you said that those commercial discussions for new units still kind of at an impasse for customers not willing to commit on the rate.
Eric Long: Or maybe could you could you provide some more color into whether there has been some softening.
Eric Long: Around that dynamic or is it still pretty similar to what you saw last quarter.
Seller: Hey, it's seller I think it is.
Seller: The ice cube, starting to melt we're now in the middle of the first quarter. We are taken some inbounds and discussions as people are looking at their production curves trying to figure out what available capacity, we could shuffle around to optimize networks into optimized flows into the pipe.
Sheldon: We're now in the middle of the first quarter. We are taking some inbound calls into discussions as people are looking at their production curves, trying to figure out what available capacity... you out there. Got it, appreciate the time everyone. Your next question comes from the line of James Spicer with TD Securities. Your line is open. Hi, good morning.
Seller: So we always have these conversations on a continuous basis with our customers to figure out what that forward looks like especially given that we're talking about a year out to get new units.
Speaker Change: Got it I appreciate the time everyone.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of James Spicer with TD Securities. Your line is open.
James Spicer: Hi, good morning.
Operator: You spoke about the need to refinance the high-yield bonds at some point and wanting to address the capital structure. Another component there is the revolver. You ended the quarter with $872 million of revolver borrowing. That's about $260 million year-over-year. Maybe you can just speak a little bit about your comfort level with that level of revolver utilization and how that factors into your overall plans for the balance sheet. Yeah, James.
James Spicer: You spoke about the need to refinance the high yield bond at some point and wanting to address the capital structure. Another component. There is the revolver you ended the quarter with 872 million of revolver borrowings that's about $260 million year over year, maybe you can just speak a little bit about your comfort around that level of revolver utilization and how that factors into our <unk>.
James Spicer: Your overall plans for the balance sheet, yes.
Speaker Change: Yes, James obviously, the revolvers are lowest cost of capital that we have in our capital stack.
Eric Long: Obviously, the revolver is our lowest cost of capital that we have in our capital stack. We've had a long relationship with our bank syndicate. I mean, literally, we're talking 12 years, 14 years associated with it.
Speaker Change: We've had a long relationship with our bank syndicate.
James Spicer: I mean literally we're talking 12 years 14 years associated with the.
Eric Long: I think our first financing was 2006. So we're in excess of 15-16 years now. We've got a $1.6 billion commitment with, as you pointed out, 850-875 drawings. We've got plenty of capacity. When you look at the availability, we've got plenty of availability to finance future growth to the extent we opt to do so. The bank group is very, very stable.
Speaker Change: Our first financing was 2006.
Speaker Change: Back with that group. So we are in excess of 15 to 16 years now.
Speaker Change: We've got a $1 6 billion dollar commitment with as you pointed out 850 875 drawn so we've got plenty of capacity.
Speaker Change: When you look at the.
Speaker Change: The availability, we've got plenty of availability to finance future growth to the extent, we opt to do so.
Speaker Change: The Bank group is very very stable, we've actually had a recent entrant who was able to.
Eric Long: We've actually had a recent entrant who was able to consolidate a couple of smaller players or some of the European institutions in energy who are migrating out of the domestic energy business, so we solidified that with a much larger, longer-term strategic type of financing institution who has an appetite to be in compression and in energy in general. So we're very comfortable with that ABL facility. I think our vision has always been, let's use that as a growth platform, and at some point, when it gets large and it grows to a certain point, rather than moving that from all floating rate debt, we'll turn some of that up and move that into a high-yield facility. So at this stage, we did put a $700 million notional float-to-fix commitment in place.
Speaker Change: Consolidated a couple of smaller players or some of the European institutions and energy who are migrating out of the domestic energy business. So we solidified that with a much larger longer.
Speaker Change: Longer term.
Speaker Change: Strategic type of financing institution, who has an appetite to be in compression in it and in energy in general.
So we're very comfortable with that ABL facility.
Speaker Change: Our vision has always been let's use that as the as a growth platform and at some point when it gets larger and it grows to a certain point.
Speaker Change: Other than moving that from all floating rate debt will term some of that up and move that into a high yield facility. So at this stage, we did put a $700 million notional float to fixed commit.
Speaker Change: Commitment in place our effective interest rate is sub 4% $3, 975% or so on that facility. So it's an attractive cost of capital for us and we just need to continually look to optimize a balanced fixed versus floating.
Eric Long: Our effective interest rate is sub-4%, 3.9725% or so on that facility. So it's an attractive cost of capital for us, and we just need to continually look to optimize and balance fix versus floating. We do have capacity and do have access to capital, unlike, frankly, most of the peers in the compression industry, which is pretty tapped out. So we've got a line to play with, should we so desire. And I think this is what your management team's paid to do, every single day and every single quarter, every single year, to look at that capital structure, figure out how we optimize that, how does that fit in with our growth plans, and we'll balance accordingly. Okay, that's a great color. I appreciate it. And one more, if I could, I was just curious about the drivers behind that preferred unit conversion and what your expectations are around additional conversion. And that's something we really don't have a lot of insight or color on.
Speaker Change: We do have capacity and do you have access to capital. Unlike frankly, most of the peers of the compression industry are pretty tapped out. So we've got line to play with should we so desire.
Speaker Change: And I think this is what your management teams paid to do is every single day in every single quarter ever.
Speaker Change: Every single year to look at that capital structure and figure out how we optimize that how does that fit in with our growth plans and low balanced accordingly.
Speaker Change: Okay. That's great color I appreciate it and one more if I could I was just curious about the drivers behind that preferred unit conversion and what your expectations are around additional conversions in 2024.
Speaker Change: Something we really don't have a lot of insight or color into.
Eric Long: I think it was probably done opportunistically. Pointing you to the public docs, you can figure out that they've got a conversion price of $20 and a penny, and when the units are running in that $25, $26 range, clearly there are some economic incentives for them to do so. They did have warrants associated with the preferred when we put that together, but those have all been cash settled and cleared out.
Speaker Change: I think there was it was probably done opportunistically.
Speaker Change: Point, you to the public data. So you can figure out that they've got a conversion price of $20 on a penny and when the units are running in that 25 to $26 range. Clearly there are some economic incentives for them to do so.
Speaker Change: They did have the warrants associated with the preferred when we put that together those have all been cash settled and cleared out. Some there was some converted to common and those have all been disseminated out into the public hands.
Speaker Change: Did convert $40 million.
Speaker Change: It depends where the unit prices of the unit prices.
Speaker Change: Look at underwriter discount.
Speaker Change: The current strike price minus underwriter discount less that 'twenty one if it's economic they may continue to do so theres some softness on the security price probably not so they are happy with the investment.
Speaker Change:
Speaker Change: It's nine a three quarters current pay so there is no big incentive for them to exit the facility and we got plenty of time in tenor associated with it so.
Speaker Change: I don't see them in a rush to exit.
Speaker Change: See them like any investor being methodical in trying to optimize our financial returns over time and with AIG I would expect nothing less than that in the future.
Speaker Change: Okay makes sense. Thank you.
Speaker Change: Thank you very much.
Speaker Change: Yeah.
Speaker Change: There are no further questions at this time. This concludes today's call you may now disconnect.
Speaker Change: [music].
Speaker Change: Sure.
Speaker Change: [music].