Q4 2023 Archrock Inc Earnings Call
Okay.
Operator: Ladies and gentlemen, good morning. Welcome to the Archrock fourth quarter 2023 conference call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Repine. You may begin. Thank you, Abby.
Ladies and gentlemen, good morning, welcome to the Archrock fourth quarter 2023 conference call.
Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock.
I will now turn the call over to Missouri Pine you may begin.
Yeah.
Megan Elizabeth Repine: Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of Archrock, and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the fourth quarter and full year 2023, as well as annual guidance for 2024. If you have not received a copy, you can find the information on the company's website at www.archrock.com
Missouri Pine: Thank you Abby Hello, everyone and thanks for joining us on today's call with me today are Brad Childers, President and Chief Executive Officer of Archrock, and Doug Aron Chief Financial Officer of Archrock.
Missouri Pine: Yesterday, Archrock released its financial and operating results for the fourth quarter and full year 2023, as well as annual guidance for 2024. If you have not received a copy you can find the information on the company's website at Www Dot Archrock Dot com.
Megan Elizabeth Repine: During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, based on our current beliefs and expectations, as well as assumptions made by and information currently available to Archrock's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, gross margin, gross margin percentage, free cash flow, free cash flow after dividend, and cash available for dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release in our Form 8K furnished to the SEC. I'll now turn the call over to Brad to discuss our truck's fourth quarter and full year results and provide an update on our business. Thank you, Megan, and good morning, everyone.
Missouri Pine: During this call we will make forward looking statements within the meaning of section 20, <unk> of the Securities and Exchange Act 1934 based on our current beliefs and expectations as well as assumptions made by and information currently available to Archrock management team, Although management believes that the expectations reflected in such.
Missouri Pine: Forward looking statements are reasonable it can give no assurance that such expectations will prove to be correct.
Missouri Pine: Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward looking statements made during this call.
Missouri Pine: In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA gross margin gross margin percentage free cash flow free cash flow after dividend and cash available for dividend for reconciliations of these non-GAAP financial measures to our GAAP financial results.
Missouri Pine: Please see yesterday's press release, and our form 8-K furnished to the SEC I'll now turn the call over to Brad to discuss our trucks fourth quarter and full year results and to provide an update of our business.
Missouri Pine: Okay.
Brad Childers: Thank you Megan and good morning, everyone.
Brad Childers: Simply put, 2023 was a tremendous year for Archrock. We exited the year with excellent fourth-quarter performance, building significant momentum in utilization, pricing, and profitability. As we wrap up a record-breaking year for our company, I want to extend my congratulations to our dedicated employees on an extensive list of accomplishments. Among the highlights:
Brad Childers: Simply put 2023 was a tremendous year for Archrock.
Brad Childers: We exited the year with excellent fourth quarter performance building significant momentum in utilization pricing and profitability.
Brad Childers: As we wrap up a record breaking year for our company I want to extend my congratulations to our dedicated employees on an extensive list of accomplishments.
Brad Childers: Among the highlights.
Brad Childers: Our teams worked around the clock to meet our customers' sharp increase in demand. We grew our contract compression operating fleet by 214,000 horsepower, excluding cells of non-strategic assets. And we increased our exit fleet utilization by 300 basis points to an all-time high of 96%. As we met this demand, we recorded over 4.4 million man hours and drove 22 million miles. In this exceptionally busy environment, and despite a dynamic labor market, we continue to deliver industry-leading safety performance, achieving a total recordable incident rate of 0.05. And for the third consecutive year, we achieved zero lost time.
Our teams worked around the clock to meet our customers' sharp increase in demand.
Brad Childers: We grew our contract compression operating fleet by 214000 horsepower, excluding sales of nonstrategic assets.
Brad Childers: And we increased our exit fleet utilization by 300 basis points to an all time high of 96%.
Brad Childers: As we met this demands we recorded over four 4 million man hours and drove 22 million miles.
Brad Childers: In this exceptionally busy environment and despite a dynamic labor market, we continue to deliver industry, leading safety performance, achieving a total recordable incident rate of <unk>.
Brad Childers: So 0.05.
Brad Childers: And for the third consecutive year, we achieved zero lost time incidents.
Brad Childers: We more than doubled net income and earnings per share compared to 2022, and we grew our adjusted EBITDA by 24% year over year. This step change in our earnings power enabled us to return more than $105 million in capital to our shareholders through two dividend increases and the initiation of a share buyback program. We also concurrently delivered outstanding dividend coverage of 2.4 times and drove our leverage ratio to an all-time low of 3.5 times.
Brad Childers: We more than doubled the net income and earnings per share compared to 2022.
Brad Childers: We grew our adjusted EBITDA by 24% year over year.
Brad Childers: This step change in our earnings power enabled us to return more than $105 million in capital to our shareholders through two dividend increases and the initiation of a share buyback program.
Brad Childers: We also concurrently delivered outstanding dividend coverage of two four times and drove our leverage ratio to an all time low of three five times.
Brad Childers: From the separation of the international and fabrication operations at the end of 2015, to the navigation of two significant market disruptions in 2016 and 2020, and our steps to upgrade our fleets, our technology, and our market. I'm exceptionally proud of the strong market and financial position we've built through multiple years of effort to transform our company. This transformation has contributed to record successes across multiple metrics in 2023, but we expect it will benefit our operations, financial performance, and investor returns well into the future. We kick off 2024 in an enviable position. Our fleet quality is first-rate.
Brad Childers: From the separation of the international and fabrication operations at the end of 2015, so the navigation of two significant market disruptions in 2016 and 2020.
Brad Childers: Our steps to high grade our suites, our technology and our markets I'm exceptionally proud of the strong market and financial position, we've built through multiple years of effort to transform our company.
Brad Childers: This transformation not only contributed to record successes across multiple metrics in 2023, but.
Brad Childers: But we expect will benefit our operations financial performance and Investor returns well into the future.
Brad Childers: We kick off 2024, and an enviable position.
Brad Childers: Our sleep quality is first rate.
Brad Childers: We have a fleet of highly standardized large horsepower units deployed in the most stable infrastructure segment of the market. Our service quality is excellent. We have the talent, technical expertise, and safety processes in place to deliver the high level of service that our customers require. And we've only begun to leverage the capabilities of our innovative technology and process investments to digitize and increasingly automate our operating platform, which will enable us to take our customer service to new heights. Our customer relationships are deep.
Brad Childers: We have a fleet of highly standardized large horsepower units deployed in the most stable infrastructure segment of the market.
Brad Childers: Our service quality is excellent and we have the talent technical expertise and safety processes in place to deliver the high level of service that our customers require.
Brad Childers: And we've only begun to leverage the capabilities of our innovative technology and process investments to digitize and increasingly automate our operating platform, which will enable us to take our customer service to new Heights.
Brad Childers: Our customer relationships are deep.
Brad Childers: We have strategic partnerships with key customers that span multiple decades, and we are an integral part of their critical midstream operations. And we're preparing for a greener economy. The work we're progressing on methane and carbon capture could contribute meaningfully to the industry's efforts to reduce emissions and create long-term value for Archrock and our shareholders. We are encouraged by the early results in field tests and expect to demonstrate commercialization progress for certain products during 2024. We're proud to continue Archrock's mission to lead our industry in powering a cleaner America.
Brad Childers: We have strategic partnerships with key customers that span multiple decades.
Brad Childers: And we are an integral part of their critical midstream operations.
Brad Childers: And we're preparing for a greener economy.
Brad Childers: We're progressing on methane and carbon capture.
Brad Childers: Contribute meaningfully to the industry's efforts to reduce emissions and create long term value for archrock and our shareholders.
Brad Childers: We're encouraged by the early results in field tests and expect to demonstrate commercialization progress for certain products during 2024.
Brad Childers: We're proud to continue archrock submission to lead our industry empowering a cleaner America.
Brad Childers: Okay.
Brad Childers: Turning to compression fundamentals, we continue to experience an opportunity-rich market, one that contributes to our ability to grow our earnings and cash flows in the future. Over the long term, our repositioning and investments in technology and processes should also reduce the volatility and further improve the stability of our operational and financial results. The opportunities we see in the market for compression and for Archrock are driven by several factors. First,
Turning to compression fundamentals, we continue to experience an opportunity rich market, one that contributes to our ability to grow our earnings and cash flows in the future.
Brad Childers: Over the long term, our repositioning and investments in technology and processes should also reduce the volatility and further improves the stability of our operational and financial results.
Brad Childers: The opportunities we see in the market for compression and for Archrock are driven by several factors.
Brad Childers: First.
Brad Childers: Growth in Natural Gas Production. In 2023, U.S. natural gas production grew to a new all-time high of 104 billion cubic feet per day, eclipsing the previous record set in 2022, and the National Gas Production Forecast Sweet Track all continue to show growth in 2024 volumes. National gas production growth continues to be led by key Archrock oil producing markets that have associated gas like the Permian. In the near term, the visible slate of global LNG projects that have already been approved and sanctioned is expected to result in a sustained and secular call on U.S. natural gas production. Longer term, the EIA forecasts US natural gas production growth through. The second factor is the heightened capital discipline across the energy sector. Customers, peers, and suppliers are balancing growth with returns to shareholders. Industry-wide, additional investment and compression, a critical piece of infrastructure needed to move gas to market, is required to meet current and growing demand. For Archrock, this has created a healthy and visible backlog of customer orders.
Brad Childers: Growth in natural gas production.
Brad Childers: In 2023 U S natural gas production grew to a new all time high of 104 billion cubic feet per day.
Brad Childers: <unk> the previous record set in 2022.
Brad Childers: And the natural gas production forecasts, we track all continue to show growth in 2020 for volumes.
Brad Childers: Natural gas production growth continues to be led by key archrock oil producing markets that have associated gas like the Permian.
Brad Childers: In the near term the visible slate of global LNG projects that have already been approved and sanctioned are expected to result in a sustained and secular call on U S natural gas production.
Brad Childers: Longer term the EIA forecasts U S natural gas production growth through 2015.
Brad Childers: The second factor is the heightened capital discipline across the energy sector.
Brad Childers: Customers peers and suppliers are balancing growth with returns to shareholders.
Brad Childers: Industry wide additional investment in compression a critical piece of infrastructure needed to move gas to market as required to meet current and growing demands.
Brad Childers: For Archrock. This has created a healthy and visible backlog of customer orders.
Brad Childers: We are sold out of new build equipment for 2024 and have already begun building a meaningful new order book for 2025. Longer term, the increased level of capital discipline we're seeing throughout the oil and gas value chain should support higher returns for investors across the entire sector, including Incompression and for Archrock. This brings me to a third point: the increasingly critical role natural gas can play to decarbonize energy.
Brad Childers: We are sold out of Newbuild equipment for 2024 and have already begun building a meaningful new order book for 2025.
Brad Childers: Longer term the increased level of capital discipline, and we're seeing throughout the oil and gas value chain should support higher returns for investors across the entire sector, including income freshen and for Archrock.
Brad Childers: This brings me to a third points the increasingly critical role natural gas can play to Decarbonize energy.
Brad Childers: We now have the opportunity, as an industry, to further strengthen the case for natural gas by reducing emissions across the value chain and in Archrock. We intend to do our part. Our new ventures team is advancing opportunities to bring methane emissions, detection, measurement, and capture solutions to market. These opportunities are directly adjacent and complementary to our core contract compression service. Currently, we're in the development, pilot, and early marketing phases of these investments, which will make their expected financial contributions minimal in the near term. However, we believe they could contribute meaningfully to the industry's efforts to reduce emissions over time, thus enabling our core operations to continue to expand while providing exciting new markets for growth opportunities for Archrock. And despite being still in the early days, we believe the potential impact of our proprietary methane capture device is further enhanced by the final Quattro B rules published by the EPA last December.
Brad Childers: We now have the opportunity as an industry to further strengthen the case for natural gas by reducing emissions across the value chain.
Brad Childers: And at Archrock, we intend to do our part.
Brad Childers: Our new ventures team is advancing opportunities to bring methane emissions detection measurement and capture solutions to market.
Brad Childers: These opportunities are directly adjacent and complementary to our core contract compression services.
Brad Childers: Currently we're in the development pilots and early marketing phases of these investments, which will make their expected financial contributions and minimal in the near term.
Brad Childers: However, we believe they could contribute meaningfully to the industry's efforts to reduce emissions over time, and thus, enabling our core operations to continue to expand while providing exciting new markets for growth opportunities for archrock.
Brad Childers: And despite being still in the early days, we believe the potential impact of our proprietary methane capture device is further enhanced by the final quite Ob rules published by the EPA last December.
Brad Childers: If we as an industry succeed in materially reducing emissions associated with natural gas production and use, we believe we help answer the call on all businesses to reduce carbon emissions. We extend our social license to operate. And we extend the use of our affordable and abundant natural gas resource as a low emission source of reliable power generation, as well as the value of billions of dollars of existing infrastructure for decades to come. Moving on to our segments, our contract operations business segment is firing on all cylinders. We exited 2023 with a record fleet utilization rate of 96%. For the full year, our operating horsepower grew by approximately 214,000, excluding the active horsepower we sold as part of our fleet high-grading strategy.
Brad Childers: If we as an industry succeed and materially reducing emissions associated with natural gas production and use we believe we help answer the call on all businesses to reduce carbon emissions.
Brad Childers: We extend our social license to operate.
Brad Childers: And we extend the use of our affordable and abundant natural gas resource as a low emission source of reliable reliable power generation as well as the value of $1.
Brad Childers: <unk> of dollars of existing infrastructure for decades to come.
Yes.
Brad Childers: Moving on to our segments our contract operations business segment is firing on all cylinders.
Brad Childers: We exited 2023 with a record fleet utilization rate of 96%.
Brad Childers: For the full year, our operating horsepower grew by approximately 214000, excluding the active horsepower, we sold as part of our fleet high grading strategy.
Brad Childers: The fourth quarter marks our ninth consecutive quarter of sequential increases in our monthly revenue per horsepower. In 2024, we will benefit from a full year's impact of these rate increases. And we expect to capture additional meaningful increments this year. I'm proud to say that we delivered gross margin dollars for the year of $503 million, up $100 million, or 26% compared to 2022. This translated into a 300 basis point increase in our gross margin percentage for the year.
Brad Childers: The fourth quarter marks our ninth consecutive quarter of sequential increases in our monthly revenue per horsepower.
Brad Childers: In 2024, we will benefit from a full year's impact of these rate increases.
Brad Childers: And we expect to capture additional meaningful instruments this year.
Brad Childers: I am proud to say that we delivered gross margin dollars for the year of $503 million up a $100 billion or 26% compared to 2022.
This translated into a 300 basis point increase in our gross margin percentage for the year.
Brad Childers: Notably, we achieved a quarterly high for 2023 of 64% during Q4. Looking ahead, we remain ambitious about driving additional profitability gains in 2024 and the long term, especially as we leverage the capabilities of our technology investments to digitize and increasingly automate our operating platform. Moving to our aftermarket services segment,
Brad Childers: Notably, we achieved a quarterly high for 2023% to 64% during Q4.
Brad Childers: Looking ahead, we remain ambitious about driving additional profitability gains in 2024, and long term, especially as we leverage the capabilities of our technology investments to digitize and increasingly automate our operating platform.
Okay.
Brad Childers: Moving to our aftermarket services segment full year 2023 activity improved meaningfully compared to 2022, and we saw steady activity in the fourth quarter with solid demand for our services.
Brad Childers: Full year 2023 activity improved meaningfully compared to 2022, and we saw steady activity in the fourth quarter with solid demand for our services. Profitability remains substantially higher than historical levels as we focus on higher quality and higher-margin work. We expect healthy levels of activity to continue into 2024.
Brad Childers: Profitability remains substantially higher than historical levels, as we focus on higher quality and higher margin work.
Brad Childers: We expect healthy levels of activity to continue into 2024.
Brad Childers: Moving to our capital allocation framework for 2024, Doug will walk through our capital investment in connection with our full year 2024 guidance later in our call, but I'd like first to review our approach to capital allocation and growth. On our third-quarter 2023 earnings call, we committed to free cash flow generation in 2024, supported by efficient execution of our operations, price increases, and strategically managed investment in our Our 2024 budget reaffirms our free cash flow expectation and our commitments to a prudent and returns-based approach to capital allocation, consistent with the following priorities. First.
Brad Childers: Shifting to our capital allocation framework for 2020 for Doug.
Brad Childers: Doug will walk through our capital investment plans in connection with our full year 2024 guidance later in our call.
Douglas S. Aron: I'd like first to review our approach to capital allocation and growth.
Douglas S. Aron: On our third quarter 2023 earnings call, we committed to free cash flow generation in 2024 supported by efficient execution of our operations price increases and strategically managed investment in our fleets.
Douglas S. Aron: Our 2020 for budget reaffirms, our free cash flow expectation and our commitments to our prudent and returns based approach to capital allocation <unk>.
Douglas S. Aron: Consistent with the following priorities.
Douglas S. Aron: First increasing capital returns to shareholders.
Brad Childers: Increasing capital returns to shareholders. As shareholders ourselves, management and the board are committed to maintaining a well-covered dividend that grows along with the profitability increases we are driving in our underlying business. Given our confidence in the outlook for compression, as well as Archrock's sector-leading financial flexibility, we recently announced a 6.5% sequential increase in our quarterly dividends, and Share Buybacks remain another value creation tool available to us in 2024. These investments will be funded by operations and supported by attractive returns. And finally, third, maintaining an industry-leading balance sheet and leverage. As our fourth quarter performance shows, we are well on our way to achieving a consistent leverage ratio of 3 to 3.5 times.
Douglas S. Aron: As shareholders ourselves management and the board are committed to maintaining a well covered dividend that grows along with the profitability increases we're driving in our underlying business.
Douglas S. Aron: Given our confidence in the outlook for compression as well as archrock sector, leading financial flexibility, we recently announced a six 5% sequential increase in our quarterly dividend.
Douglas S. Aron: Share buybacks remain another value creation tool available to us in 2024.
Douglas S. Aron: Second continuing to meet the needs of our customer base through new build investments.
Douglas S. Aron: These investments will be funded by operations and supported by attractive returns.
Douglas S. Aron: And finally third maintaining an industry, leading balance sheet and leverage position.
Douglas S. Aron: As fourth quarter performance shows we are well on our way to achieving consistent leverage ratio of three to three five times.
Brad Childers: In summary, we're delivering record performance, reflecting four primary drivers, which are also contributing to Archrock's strong outlook. These drivers include one, our transformation platform, to our incomparable financial position and capital allocation. Three, a robust market for compression, and four, future opportunities for natural gas to meet the growing demand for cleaner energy and the prospect for Archrock to leverage technology for a more digitized, Automated, Sustainable Futures. With that, I'd like to turn the call over to Doug for a review of our fourth quarter and full year performance and to provide additional color on our 2024 guide. Thank you, Brad. Good morning, and thanks to all of you for joining us.
Douglas S. Aron: In summary.
Douglas S. Aron: We're delivering record performance, reflecting four primary drivers, which are also contributing to archrock strong outlook.
Douglas S. Aron: These drivers include one our transform platform.
Douglas S. Aron: Two are in comparable financial position and capital allocation.
Douglas S. Aron: Three a robust market for compression and for the future opportunity for natural gas to meet the growing demand for cleaner energy and the prospects for Archrock to leverage technology for a more digitized automated.
Douglas S. Aron: <unk> automated and sustainable future.
Douglas S. Aron: With that I'd like to turn the call over to Doug for a review of our fourth quarter and full year performance and to provide additional color on our 2020 guidance. Thank you Brad good morning, and thanks to all of you for joining us.
Douglas S. Aron: Let's look at a summary of our fourth quarter and full year results and then cover our financial outlook. Net income for the fourth quarter of 2023 was $33 million. This included a non-cash $4 million long-lived asset impairment, as well as a non-cash $1 million increase in the fair value of our investment in Ecotech. We reported adjusted EBITDA of $120 million for the fourth quarter of 2023. Underlying business performance was strong in the fourth quarter as we delivered higher total gross margin dollars for both segments on a sequential basis. Results further benefited from $2 million in net asset sale gains related to non-strategic horsepower sales. Included in our quarterly results was a $4 million increase in selling, general, and administrative expenses during the fourth quarter.
Douglas S. Aron: Let's look at a summary of our fourth quarter and full year results and then cover our financial outlook.
Douglas S. Aron: Net income for the fourth quarter of 2023 was $33 million.
Douglas S. Aron: This included a noncash $4 million long lived asset impairment as well as a noncash $1 million increase in the fair value of our investment and Ecotec.
Douglas S. Aron: We reported adjusted EBITDA of $120 million for the fourth quarter 2023.
Douglas S. Aron: Underlying business performance was strong in the fourth quarter as we delivered higher total gross margin dollars for both segments on a sequential basis.
Douglas S. Aron: Results further benefited from $2 million and net asset sale gains related to non strategic horsepower sales.
Douglas S. Aron: <unk> in our quarterly results was a $4 million increase in selling general and administrative expenses during the fourth quarter.
Douglas S. Aron: We do not anticipate this level of expense will continue as it was largely related to the increase in performance-based short-term and long-term incentive compensation expense given the outstanding year our employees delivered and the dramatic outperformance relative to earlier expectations in 2023. Turning to our business segments, contract operations revenue came in at $213 million in the fourth quarter, up 3% compared to the third quarter. This increase was primarily driven by higher prices. Compared to the third quarter, we grew our gross margin dollars by 4%. This resulted in a gross margin percentage of 64% for the second straight quarter.
Douglas S. Aron: We do not anticipate this level of expense will continue as it was largely related to the increase in performance based short term and long term incentive compensation expense given the outstanding year, our employees delivered and the dramatic outperformance relative to earlier expectations in 2023.
Douglas S. Aron: Turning to our business segments contract operations revenue came in at $213 million in the fourth quarter up 3% compared to the third quarter.
Douglas S. Aron: This increase was primarily driven by higher pricing.
Douglas S. Aron: Compared to the third quarter, we grew our gross margin dollars by 4%.
Douglas S. Aron: This resulted in a gross margin percentage of 64% for the second straight quarter.
Douglas S. Aron: In our aftermarket services segment, we reported fourth quarter 2023 revenue of $47 million, up slightly compared to the third quarter, despite typical seasonal softness, and up 12% on a year over year basis. Fourth quarter AMS gross margin of 22% compared to the third quarter of 20% and 17% versus the prior year period. We exited the year with total debt of $1.6 billion and strong available liquidity of $458 million. Variable rate debt continues to represent less than 20% of our total debt.
Douglas S. Aron: In our in our aftermarket services segment, we reported fourth quarter 2023 revenue of $47 million up.
Douglas S. Aron: Up slightly compared to the third quarter, despite typical seasonal softness and up 12% on a year over year basis.
Douglas S. Aron: Fourth quarter, Ams gross margin of 22% compared to the third quarter of 20% and 17% versus the prior year period.
Douglas S. Aron: We exited the year with total debt of $1 $6 billion and strong available liquidity of $458 million.
Douglas S. Aron: Variable rate debt continues to represent less than 20% of our total debt.
Douglas S. Aron: Our leverage ratio at year-end was 3.5 times calculated as year-end 2023 total debt divided by our trailing 12-month EBITDA. This was down significantly compared to 4.4 times in the fourth quarter of 2022. As Brad mentioned earlier, while we initially targeted a leverage ratio range of three to three and a half times by the end of 2024, stronger than expected earnings performance and continued capital discipline have allowed us to achieve this industry-leading milestone earlier than anticipated, and we are focused on maintaining a consistent leverage ratio of three to three and a half times through the cycle. The strong financial flexibility I just described continues to support increased capital returns to shareholders. Following two dividend increases in 2023, we recently declared an increased fourth quarter dividend of $0.165 per share, or $0.66 on an annualized basis.
Douglas S. Aron: Our leverage ratio at year end was three five times calculated as year end 2023 total debt divided by our trailing 12 months EBITDA.
Douglas S. Aron: This was down significantly compared to four four times in the fourth quarter of 2022.
Douglas S. Aron: As Brad mentioned earlier, while we initially targeted a leverage ratio range of three to three five times by the end of 2020 for stronger than expected earnings performance and continued capital discipline has allowed us to achieve this industry, leading milestone earlier than anticipated.
Douglas S. Aron: And we are focused on maintaining a consistent leverage ratio of three to three five times through cycles.
Douglas S. Aron: The strong financial flexibility I, just described continue to support increased capital returns to shareholders.
Douglas S. Aron: Following two dividend increases during 2023, we recently declared an increased fourth quarter dividend of $16.05 per share or <unk> 66 on an annualized basis. This is up six 5% from the third quarter dividend level and 10% versus the year ago period.
Douglas S. Aron: This is up 6.5% from the third quarter dividend level and 10% versus the year-ago period. Cash available for dividend for the fourth quarter of 2023 totaled $71 million, leading to impressive quarterly dividend coverage on the increased dividend of 2.8 times. In addition to increasing the dividend this quarter, we repurchased approximately 174,000 shares for $2.4 million at an average price of $13.58 per share.
Douglas S. Aron: Cash available for dividend for the fourth quarter of 2023 totaled $71 million.
Douglas S. Aron: Leading to impressive quarterly dividend coverage on the increased dividend of two eight times.
Douglas S. Aron: In addition to increasing the dividend this quarter, we repurchased approximately 174000 shares for $2 4 million at an average price of $13 58 per share.
Douglas S. Aron: This leaves $41.1 million in remaining capacity for additional share repurchases. Archrock introduced 2024 annual guidance with our earnings release yesterday. All of the customary detail can be found in the materials published last night, and for the purposes of this call, I will keep my comments high level. We announced a 2024 Adjusted EBITDA guidance range of $500 to $530 million. At the midpoint, this represents an increase of $65 million compared to $450 million in 2023, or 14%. In contract operations, we expect full-year revenue to be in the range of $890 million to $915 million, a year-over-year increase of 11% at the midpoint, driven by continued tight utilization and higher prices. We expect the gross margin percentage to be in a range between 64 and 65.5% for the year.
Douglas S. Aron: This leaves 41 <unk>.
Douglas S. Aron: <unk> $41 $1 million and remaining capacity for additional share repurchases.
Archrock introduced 2024 annual guidance with our earnings release yesterday, all of the customary detail can be found in the materials published last night and for the purposes of this call I will keep my comments high level.
Douglas S. Aron: We announced a 2024 adjusted EBITDA guidance range of $500 million to $530 million.
Douglas S. Aron: At the midpoint this represents an increase of $65 million.
Douglas S. Aron: Compared to the $450 million in 2023 or 2014%.
Douglas S. Aron: In contract operations, we expect full year revenue to be in the range of $890 million to $915 million a year over year increase of 11% at the midpoint driven by continued tight utilization and higher pricing.
Douglas S. Aron: We expect gross margin percentage to a range between 64 and 65, 5% for the year.
Douglas S. Aron: This reflects not only top-line growth but also continued efforts to maximize our profitability by leveraging technology and focusing on controlling expenses even during this up cycle. For our AMS business, we forecast full-year revenue of $170 to $185 million, consistent with the healthy activity we experienced in 2023. We also expect to defend the profitability gains we've worked hard to achieve, with an expectation for a gross margin percentage between 19 and 20.5%. Turning to capital, on a full year basis, we expect total 2024 capital expenditures to be approximately $275 million to $290 million. Of that, we expect growth capex to total between $175 and $180 million to support investment in new build horsepower and repackage capex to meet continued strong customer demand. This compares to growth capex of $190 million in 2023 and preliminary growth capital expenditure of approximately $160 million that we provided last November.
Douglas S. Aron: This reflects not only top line growth, but also continued efforts to maximize our profitability by leveraging technology and focus and focusing on controlling expenses even during this up cycle.
Douglas S. Aron: In our Ams business, we forecast full year revenue of $170 million to $185 million consistent with the healthy activity we experienced in 2023.
Douglas S. Aron: We also expect to defend the profitability gains we've worked hard to achieve.
Douglas S. Aron: With an expectation for gross margin percentage between 19 and 25%.
Douglas S. Aron: Turning to capital on a full year basis, we expect total 2020 for capital expenditures to be approximately 275 million to $290 million.
Douglas S. Aron: Of that we expect growth Capex to total between 175 and $180 million to support investment in new build horsepower and repackage capex to meet continued strong customer demand.
Douglas S. Aron: This compares to growth capex of $190 million in 2023, and preliminary growth capital expenditure of approximately $160 million that we provided last November.
Douglas S. Aron: The change reflects growth CapEx underspend and carry forward from 2023 due to some supplier equipment delays, as well as incremental new build horsepower investment supported by multi-year contracts to satisfy key customer demands. Maintenance CapEx is forecasted to be approximately $80 to $85 million, down from $92 million compared to 2023 due to reduced make ready activity. We also anticipate approximately $20 to $25 million in other CapEx, primarily for new vehicles. Total capital expenditures are expected to be fully funded by operations, with the potential for additional support from modest non-strategic asset sale proceeds as we continue to upgrade our fleet.
Douglas S. Aron: The change reflects growth capex understand and carry forward from 2023 due to some supplier equipment delays as well as incremental newbuild horsepower investment supported by multiyear contracts to satisfy key customer demand.
Douglas S. Aron: Maintenance Capex is forecasted to be approximately $80 million to $85 million down from $92 million compared to 2023 due to reduced make ready activity.
Douglas S. Aron: We also anticipate approximately $20 million to $25 million and other capex, primarily for new vehicles.
Douglas S. Aron: Total capital expenditures are expected to be fully funded by operations with the potential for additional support from modest non strategic asset sale proceeds as we continue to high grade our fleet.
Operator: Before we open up the line for questions, I will conclude by saying we believe a durable upcycle for our business has arrived, and we are focused on maintaining our position at Archrock, the premier compression company in America, for our employees, customers, and investors. We expect 2024 performance to benefit from a full year of record-high utilization and pricing, and we look forward to delivering on our promise of consistent execution, earnings growth, and free cash flow generation. With that, Abby, we'd now like to open up the line for questions. Thank you. If you would like to ask a question, press star 1 on your telephone keypad. If you would like to withdraw your question, press star 1 a second time.
Speaker Change: Before we open up the line for questions I will conclude by saying, we believe a durable up cycle for our business has arrived and we are focused on maintaining our position at archrock. The Premier compression company in America for our employees customers and investors.
Speaker Change: We expect 2020 for performance to benefit from a full year of record high utilization and pricing and we look forward to delivering on our promise of consistent execution earnings growth and free cash flow generation.
Abbvie: With that Abbvie, we'd now like to open up the line for questions.
Abbvie: Thank you.
Speaker Change: If you would like to ask a question press star one on your telephone keypad.
Speaker Change: If you would like to withdraw your question Press Star one a second time.
Operator: And we will pause for just a moment to compile the Q&A roster. Thanks for watching. Bye.
Speaker Change: And we will pause for just a moment to compile the Q&A roster.
Jim Rolison: And we will take our first question from Jim Rolison with Raymond James. Your line is open. Good morning, Brad and Doug. Good morning, Jim.
Speaker Change: And we will take our first question from Jim Rollyson with Raymond James Your line is open.
Jim Rollyson: Brad Doug.
Jim Rollyson: Good morning, Jim.
Brad Childers: Brad, if I just kind of step back and look at guidance for the year, for EBITDA, for CAPEX, it's pretty obvious you're going to get to that three times, leverage by year end, and obviously, throw off a lot of free cash flow as we go through this year. And I'm just kind of curious if you kind of hit some of your targets on the leverage side. And you have an awful lot of opportunity to, you know, not only allocate that between the buyback program, between growing dividends, you know, the board and yourselves have been pretty conservative on raising dividends and not getting too far out over your skis, but it seems like a lot of things are lining up for that to kind of crescendo into more capital returns or just maybe how you think about that as we go forward given the outlook for these, Sure. Thanks, Jim.
Jim Rollyson: Brad if I, just kind of step back and look at guidance for the year for EBITDA for Capex, it's pretty obvious you're going to get to that three times.
Jim Rollyson: Leverage by year end, and obviously throw off a lot of free cash flow.
Jim Rollyson: As we go through this year.
And I'm just kind of curious.
Jim Rollyson: I hit some of your targets on the leverage side and.
Jim Rollyson: And you have an awful lot of opportunity to.
Jim Rollyson: Not only supply customer demands for incremental horsepower in your capex budget, but youre going to have a lot of opportunity to <unk>.
Jim Rollyson: Provide capital back to shareholders, which you've been doing just curious as that.
Jim Rollyson: You kind of get down the road here, how do you think about.
Jim Rollyson: Allocating that between the buyback program between growing dividends.
Jim Rollyson: <unk> and yourselves have been.
Jim Rollyson: Conservative on raising dividends and not getting too far out over your skis, but it seems like a lot of things are lining up for that to kind of crescendo into more.
Jim Rollyson: Capital return so just maybe how you think about that as we go forward given the outlook for the year.
Sure. Thanks, Jim I'll speak and Doug Lebda Top me up.
Brad Childers: Number one, we're super excited about the financial flexibility that we've built to put us in this position to offer the level of returns that we can now deliver in this business and to our shareholders. As I stated in the prepared comments, when we look at this financial flexibility, our option set to return capital to our shareholders is really good.
Jim Rollyson: Yes.
Speaker Change: Number one we're super excited about the financial flexibility that we've built to put us in this position to offer the level of returns that we can now deliver in this business and to our shareholders.
Speaker Change: As I stated in the.
Doug Lebda: Can prepared comments when we look at the financial flexibility our option set to return capital to shareholders is really good and we're going to use a returns based approach to decide whether that where that incremental.
Brad Childers: And we're going to use a returns-based approach to decide whether that is where that incremental cash can best go to maximize returns for our investors. Growth in the core business, which we're investing in for really nice returns right now, and our customer base wants our services. In some ways, they can't get enough compared to increases in dividends or share buybacks. So it's all going to be driven by our analysis of where we can obtain the best returns for our industry. Yeah, and Jim, I just would top it up by saying I, you know, there's obviously a bit of a 'what have you done for me lately?'
Doug Lebda: Cash can best go to maximize returns for our investors growth in the core business, which we're investing at really nice returns right now in our customer base once our services in some ways they can't get enough.
Doug Lebda: Compared to the increases in the dividends or share buybacks. So it's all going to be driven by our analysis of where we can obtain the best returns for our investors.
Doug Lebda: And Jim just with top it up by saying.
Jim Rollyson: There is obviously a bit of a what have you done for me lately right, but as I said in my remarks.
Douglas S. Aron: Right. But as I said in my remarks, our year over year dividend increase represents 10%. So, look, we're going to keep looking for ways to add value. And, and that'll be a bit dynamic.
Jim Rollyson: Our year over year dividend increase represents 10%.
Jim Rollyson: So look we're going to keep looking for ways to add value and that'll be a bit dynamic.
Douglas S. Aron: It's, it's, you know, we said we intend to be sort of a steady presence on share buybacks. And, and I think all of the above are the boxes at the moment that we plan to check. Certainly, it's a high-class problem to have. And Brad on the market, it's interesting, you know; kind of feels like you've had a market that's been tight because of underinvestment.
Jim Rollyson: We said, we intend to be sort of a steady presence.
Jim Rollyson: On share buybacks.
Jim Rollyson: And I think all of the above are the boxes at the moment that we plan to check.
Jim Rollyson: It's a high class problem to have.
Jim Rollyson: And Brad on the market it's interesting.
Jim Rollyson: Kind of feels like you had a market thats been tight because of Underinvestment industry has been picking up investment, but as we roll into 'twenty five and in the next few years beyond because of the LNG Buildout you referenced obviously.
Jim Rolison: The industry has been picking up investment. But as we roll into 25 and the next few years beyond because of the LNG build out you referenced, obviously, volume demand for gas is going to go up, which kind of implies compression demand should proportionately go up.
Jim Rollyson: Volume demand for gas is going to go up which kind of implies compression demand should proportionately go up and yet when I look at what yourselves and your peers are doing growth capex across the space for the public guys at least seems like it's actually coming down a little bit and 24 versus <unk> 23.
Brad Childers: And yet, when I look at what yourselves and your peers are doing, growth capex across the space, for the public eyes at least, seems like it's actually coming down a little bit in 24 versus 23, which kind of feels like it maybe sets up for this tightness to continue. I'm curious how you think about that, and what your customers are thinking about that, because it obviously could be a challenge for the industry. Sir, I cannot speak for the industry. But what I can suggest is that capital remains very disciplined and tightly allocated in the space.
Jim Rollyson: Which kind of feels like it maybe sets up for this tightness to continue I'm curious how you think about that what your customers are thinking about that.
Jim Rollyson: Because it obviously it could be a challenge for the industry.
Sure.
Speaker Change: I cannot speak for the industry, but what I can suggest is that capital remains.
Speaker Change: Very disciplined and tightly allocated in this space and I think there are a few reasons for that that are really good for the industry overall and.
Brad Childers: And I think there are a few reasons for that that are really good for the industry overall and certainly good for compression and for Archrock and our investors. Number one, the cost of capital is up a bit. Everybody knows that right now.
Speaker Change: And certainly good for compression and for Archrock and our investors'.
Speaker Change: Number one cost of capital is up a bit everybody knows knows that right now cost of equipment is up quite a bit and so just the overall returns that the marketplace is going to offer has to take into account those increased costs that means prices rates returns has to go up.
Brad Childers: The cost of equipment is up quite a bit, and so just the overall returns that the marketplace is going to offer have to take into account those increased costs. That means prices, rates, and returns have to go up. Second, it's not just about the cost; it's also about the allocation.
Speaker Change: Second it's not just about the cost it's also about the allocation.
Brad Childers: Investors are demanding better returns from our industry. And let's face it, for the last decade, our industry has not had a fantastic track record; returns must go up across the sector, that includes compression, just to meet investor expectations. And for these reasons, but I think that equipment and new investment equipment is going to remain tight and constructive for the industry overall. Makes perfect sense. And last, you highlighted the kind of being still in the fairly early days in your investment in digitizing and automating operations. Curious kind of what you think about the long-term impact on margins from that. Thanks for the question. I like the question a lot.
Investors are demanding better returns from our industry and let's face it for the last decade, our industry has not had a fantastic track record.
Returns must go up across the sector that includes and compression just to meet investor expectations and for these reasons that I think that equipment and new investment equipment is going to remain tight and constructive for the industry overall.
Speaker Change: It makes perfect.
Speaker Change: Extension last just you.
Speaker Change: You highlighted kind of being still in the fairly early days and your investment in digitizing and automating operations curious kind of how you think about the long term impact on margins from from that investment.
Speaker Change: Thanks for the question I'll ask the question a lot. So first I'm going to say that what we've done to really transform our platform.
Brad Childers: So first, I'm going to say that what we did to really transform our platform is going to be great for our customers. The level of service, and the level of uptime that we can generate and deliver to our customers with our improved platform is going to be tremendous. And second, the platform is now in place, but what isn't in place is we're not practicing it yet as well as we can. We have this new business model in place, and our employees are just now adapting to a fully functioning platform, and we're going to be finding opportunities to deliver improved performance for, I think, for years to come with all the tools that we've now put in place that give us a flood of good information. It gives us live feed information that we can respond to in real time.
Speaker Change: Going to be great for our customers.
Speaker Change: The level of service the level of uptime that we can generate and.
Speaker Change: And deliver to our customers with our improved platform is going to be tremendous and second the platform is now in place, but what isn't in place as were not practicing it yet as well as we can we have this new business model in place and our employees are just now adapting to a fully fund.
Speaker Change: <unk> platform and we're going to be finding opportunities to deliver improved performance for I think for years to come with all the tools that we've now put in place that gives us a flood of good information. It gives us light speed information that we can respond in real time. It gives us much more data that we can and.
Selman Akiel: It gives us much more data that we can analyze from a predictive maintenance perspective. So the power of the tool, I think, is tremendous. And then finally, directly to your question, what this should do for investors in the future is that with this new service offering, and the quality of service that we can deliver to our customers, we believe we should be earning higher margins and better returns because we're delivering more value to our customers. So over time, I think that we're going to see both revenue impacts, but certainly also cost and efficiency impacts on the new platform. Great, guys. I appreciate it. Thank you. And we'll take our next question from Selman Akiel with Stiefel. Your line is open. Thank you, good morning.
Speaker Change: <unk> format predictive maintenance perspective, so the power of the tool I think is tremendous and then finally directly to your question what it should do for investors in the future is that with this new service offering with the quality of service that we can deliver to our customers. We believe we should be earning higher margins and better returns.
Speaker Change: Because we are delivering more value to our to our customers' silver over time, I think that we're going to see both revenue impacts, but certainly also cost efficiency impacts on the new platform.
Speaker Change: Great guys I appreciate it.
Speaker Change: Thanks, so much.
Speaker Change: And we will take our next question from Selman <unk> with Stifel. Your line is open.
Selman: Thank you good morning.
Brad Childers: I guess, first, just starting off, can you just talk about the supply chain and whether there is any improvement there? Are you still seeing long lead times and constraints there? Thanks, Solomon. Yes, there actually has been some improvement. We see that Caterpillar's lead times are in the 40 to 45 week time frame. We still see on the electric motor side longer lead times of a year or so on the VFDs that are required; the variable frequency drives that come in are required to operate those units.
Selman: I guess first just starting off can you just talk about the supply chain.
Is there any improvement there or are you still seeing long lead times and constraints there.
Selman: Thanks Alan.
Yes, there actually has been some improvement we see the cat Caterpillar's lead times are into the 40 to 45 week timeframe.
Alan: We still see on the electric motor side longer lead times of the year or so on the Ftes that are acquired the variable frequency drives that come in are required to operate those units.
Brad Childers: So, but overall, Caterpillar's in; the VFDs are still out. And then other supply chain bottlenecks that were pervasive last year have, for the most part, abated with single individual spots where we may have some individual supplier issues, but nothing that we were not able to or have not been able to work through pretty efficiently to not impact our offering to our customers. I got it. And then I know you already said you're sold out of new equipment in 2024. Curious, just anything on... Make ready. Do you have any additional horsepower, you know, sitting around? Back in the field,
Alan: So, but overall caterpillars and <unk> are still out and then other supply chain bottlenecks that that were pervasive last year as for the most part abated with single individual spots, where we may have some individual supplier issues, but <unk>.
Alan: Nothing that we were not able to or have not been able to work through pretty efficiently to not impact our offering to our customers.
Speaker Change: Got it and then.
Speaker Change: I know you already said you're sold out for new.
Speaker Change: New equipment in 2024 curious just anything on.
Speaker Change: Make ready.
Speaker Change: Do you have any additional horsepower sitting around that you can put back in the field.
Brad Childers: Yes. At 96% utilization, we're highly utilized, but we are not 100%. We still have some horsepower that we can reinvest in and get made ready and put to work in the market. We're certainly going to work on that. You talked about 2025 in terms of having initial discussions, but I'm wondering, can you just, maybe elaborate? Are you seeing price improvements over 24? Is there tenor lengthening on any of the contracts
Speaker Change: Yes at.
Speaker Change: At 96% utilization, we're highly utilized but we are not 100% and we still have some horsepower that we can reinvest in and get made ready and put to work in the market. We're certainly going to work on that.
Speaker Change: Got it and then.
Speaker Change: You talked about 2025 in terms of having initial discussions but I'm wondering can you just.
Speaker Change: Maybe elaborate or are you seeing price improvements over 24 as their tenure blanketing on any of the contracts are hitting inflation pass throughs in any of those conversations.
Brad Childers: Are you getting inflation pass-throughs in any of those conversations? There are a couple of questions there, so let me try to take them in order.
Speaker Change: Couple of questions. There, let me try to take them in order.
Brad Childers: So we'll start with pricing, and I'll turn to 2025. So for pricing, we absolutely are going to get, in 2024, the full year benefit of all the price increases we implemented in 2023, which, as you know, when you implement them in the year, you only get a partial uplift in the year you're implementing the price increase. So we'll get 12 months of those price increases prior in 2025.
Speaker Change: Let me start with pricing now I'll turn to 2025, so for pricing.
Speaker Change: Absolutely are going to get in 2020 for the full year benefit of all the price increases we implemented in 2023, which as you know when you implemented in the year you only get parcel.
Speaker Change: Up lift in the year Youre implementing the price increase so we will get 12 months of those price prior price increases in 2024.
Speaker Change: Second, we still see pricing pressure and the opportunity to get current market pricing pricing on our fleet as it rolls over into 2024. So there is some more pricing momentum that we're going to capture in 2024.
Brad Childers: Second, we still see pricing pressure and the opportunity to get current market prices on our fleet as it rolls over in 2024. So there's still more pricing momentum that we're going to capture in 2024 as the fleet rolls over and as some units benefit from pricing mechanisms built into the contracts that get an annual price increase. So yes, we absolutely see a pricing opportunity in 2024. And we expect to capture it. And then finally, in 2025, these are not just early discussions. These are the commitments.
As the fleet rolls over and as some units benefit from pricing mechanisms built into the contracts.
Speaker Change: An annual price increase so yes, we absolutely see pricing opportunity in 2024, we expect to capture it.
Speaker Change: And then finally on 2025 these are not just early discussions.
These are bookings.
Speaker Change: 125 is already.
Speaker Change: With committed horsepower moving into that year.
Speaker Change: So then just for the avoidance of doubt here.
What I'll add to that is I think Brad and I. Both mentioned in our prepared remarks, we've seen nine consecutive sequential quarters of revenue per horsepower growth.
Brad Childers: 2025 is already here, with committed horsepower moving into that. Hey, Sheldon, just for the avoidance of doubt here, you know, what I'll add to that is, you know, I think Brad and I both mentioned in our prepared remarks that we've seen nine consecutive sequential quarters of revenue per horsepower growth. That number, you know, on our fleet is still below the current spot price. We're not going to share the difference between those two prices, as much as I know that would be your next question.
Speaker Change: That number on our fleet is still below the current spot price.
Speaker Change: Not going to share.
Speaker Change: The difference between those two prices as much as I know that would be your next question. So I'll preempt it but just to simply say that.
Speaker Change: Again, Brad made a great point I think in response to the first question around both cost of capital and still albeit abated some inflation on Newbuild horsepower, yes pricing in 2025.
Speaker Change: And where those contracts are coming is still.
Douglas S. Aron: So I'll preempt it. But just to simply say that, you know, again, Brad made a great point, I think, in response to the first question around, you know, both cost of capital and still, albeit abated, some inflation on new build horsepower. Yes, pricing in 2025 and where those contracts are coming is still ahead of what you're seeing in reported results. And in some cases, moderately to significantly ahead.
Speaker Change: Ahead of what Youre seeing in reported results.
Speaker Change: And in some cases.
Speaker Change: Moderately to significantly ahead.
Speaker Change: Great well I will leave it there. Thank you so much for the color.
Speaker Change: Thank you.
Speaker Change: And we will take our next question from Steve <unk> with Sidoti Your line is open.
Steve: Good morning, Brad Doug Thanks, Raleigh detail on the call.
Steve: Just wanted to talk about the first about the sold out 2024.
Steve: I'm sure I know the answer just checking anyway.
Steve: Is this all going to the Permian or is it overwhelmingly going to the Permian.
Selman Akiel: Great. Well, I will leave it there. Thank you so much for the call.
60% of our.
Steve: Our new bookings and new equipment are going to the Permian.
Operator: Thank you. And we will take our next question from Steve Farazani with Sidoti. Your line is open. Morning, Brad, Doug.
Steve: Very very easy answer, but we're excited about the growth we're accomplishing but the basin is unrelenting right now and its demand.
And we're happy to provide.
Steve Farazani: Thanks for the detail on the call. I just want to talk about the first one about the sold-out 2024. I'm just sure I know the answer; I just checked anyway.
Steve: To provide the equipment for it.
Great.
Steve: 96% utilization, obviously, you're benefiting from.
Steve: A lack of returns.
Brad Childers: Is this all going to the Permian, or is it overwhelmingly going to the Permian? 60% of our new bookings and new equipment are going to the Permian, so a very, very easy answer.
Steve: You've indicated thats predicated in part on the.
Steve: The elevated lead times, which still are long.
Steve: However, there was some thought that some of the gas plays would start coming back just youre ahead of LNG export demand now with natural gas prices, where they are.
Brad Childers: We're excited about the growth we're accomplishing. I mean, the basin is unrelenting right now in its demand, and we're happy to provide the equipment for it. Right, the 96% utilization, obviously, you're benefiting from your lack of returns.
Steve: Are you seeing any risk or any movement in some of these gas plays to return equipment, knowing even with a year lead time, they're not going to need it.
Brad Childers: And I think you've indicated that's predicated in part on the elevated lead times, which still are long. However, there was some thought that some of the gas plays could come back this year ahead of LNG export demand, now with natural gas prices where they are. Are you seeing any risk or any movement in some of these gassier plays to return equipment knowing even with a year lead time they're not going to need it? I want to address the first part of your premise first and then come to the gas, the dry gas points.
Steve: I want to address the first part of your premise first and then come to the gas to dry gas in place and that is that.
Steve: As I tried to emphasize in a comment a minute ago.
Speaker Change: I do not.
Speaker Change: I believe that the tightness in this market the high utilization in the compression space, which is pretty consistent across our peers and us is driven solely by tight supply chain.
Brad Childers: And that is that, you know, as I tried to emphasize in a comment a minute ago, I do not believe that the tightness in this market, the high utilization in the compression space, which is pretty consistent across our peers and us, is driven solely by a tight supply chain. I think that the capital allocation that the industry is pursuing right now to constrain capital that's now more expensive is a major part. And the difference is important because if it's just a supply chain issue, then it's going to get fixed. If, on the other hand, it's that the market is demanding higher returns, which I believe it is, and that we, our peers in the industry, are allocating capital more prudently in a more disciplined way than I believe, then the returns for our investors as a sector and as an industry remain higher. I just think that I don't, I don't, I'm not in the position of agreeing with the supply chain being the driver of this comment.
Speaker Change: I think that the capital allocation that the industry is pursuing right now to constrained capital that is now more expensive is a major part and the difference is important because if it's just a supply chain issue than it's going to get fixed if on the other hand, it's that the market is demanding higher returns, which I believe it is.
Speaker Change: And.
Speaker Change: That we our peers in the industry are allocating capital prudently.
Speaker Change: Prudently and a more disciplined way than I believe the returns for our investors as a sector and as an industry remain higher I, just think that I don't I don't im not in the position of agreeing with the supply chain being the driver of this comment I want to make sure that we're communicating that clearly.
Speaker Change: As for pricing the gas price and the impact on dry gas plays we are not seeing much of a pullback remember that in our business were 70% to 75% tied to much more liquids prone liquids rich plays with associated gas and for the remaining part of our business that does have direct dry gas exposure.
Speaker Change: We're highly leveraged to production.
Speaker Change: And while the drill bit influences the level of production over a longer period of time. These short term fluctuations do not come through in our business very sharply and finally, even with the current low natural gas price. We incrementally grew our horsepower in a couple of the dry gas plays in the fourth quarter.
Brad Childers: I want to make sure that we're communicating that clearly. As for pricing, the gas price, and the impact on dry gas prices, we are not seeing much of a pullback. Remember that in our business, we're 70 to 75 percent tied to much more liquids-prone, liquids-rich plays with associated gas, and for the remaining part of our business that does have direct dry gas exposure, we're highly leveraged to production, and while the drill bit influences the level of production over a longer period of time, these short-term fluctuations do not come through in our business very sharply.
Speaker Change: Which just shows that people are still investing and getting ready for the increased production of LNG is going to require in the future.
Speaker Change: Great that's helpful. Thanks.
Speaker Change: I know I know, it's probably way too early for there. Since you just gave 2024 guidance, but you opened your books a couple months ago on 2025 bookings anything you can give us an early color.
Brad Childers: And finally, even with the current low natural gas price, we incrementally grew our horsepower in a couple of the dry gas plays in the fourth quarter, which just shows that people are still investing in getting ready for the increased production that LNG is going to require in the future. Great. That's helpful.
Speaker Change: Not knowing exactly.
Speaker Change: Xactly what color Youre looking for.
Speaker Change: Seriously I would suggest that it's really a continuation of what we saw in 'twenty three what we're seeing what we saw for bookings for 'twenty for moving into 2025, it's going to be weighted.
Steve Farazani: Thanks. I know it's probably way too early for this since you just gave 2024 guidance, but you opened your books a couple months ago on 2025 bookings. Anything you can give us on early color? not knowing exactly what color you're looking for.
Speaker Change: Heavily as you opened with or Permian bookings, but we're booking large horsepower only and electric motor drives as the combination of equipment that we see the market really wanting from us and our customer base wanting from us.
Brad Childers: I'm serious, but I would suggest that it's really a continuation of what we saw in 23, what we're seeing, what we saw for bookings for 24, moving into 2025. It's going to be weighted, you know, heavily as you open with four per million bookings. But we're booking, you know, large horsepower only. And the electric motor drive is the combination of equipment that we see the market really wanting from us and our customer base wanting from us.
Speaker Change: For 2025.
Speaker Change: Great. Thanks, Brad Thanks, Doug.
Speaker Change: Welcome.
Speaker Change: And we will take our next question from Elvira Scotto with RBC capital markets. Your line is open.
Elvira Scotto: Hey, good morning, everyone. Thanks for all the detail on on the call I just had one follow up question to the predicts previous question.
Elvira Scotto: With the capital discipline that we're seeing within the compression.
Elvira Scotto: For 2025. Thanks, Brad. Thanks. Welcome. Thank you for watching. See you next time. And we will take our next question from Elvira Scotto with RBC Capital Markets. Your line is open. Hey, good morning, everyone. Thanks for all the detail on the call. I just had one follow-up question to the previous previous question.
Elvira Scotto: Archrock in Japan, <unk>, and then with supply chain issues easing is there any risk that we would see a shift to more owned compression.
Elvira Scotto: Laura Thank you for the question.
Elvira Scotto: The market as I said in the past, we believe from an overall perspective.
Laura: Is about 70% owned and about 30% outsource.
Brad Childers: With the capital discipline that we're seeing within the compression, you know, Archrock and your peers, and then with supply chain issues easing, is there any risk that we would see a shift to more owned compression? Byron, thank you for the question. You know, the market, as I said in the past, we believe from an overall perspective, it is about 70% owned and about 30% outsourced. And what we see right now is that that ratio is not really changing. With the exception of in the Permian Basin, we think that the amount of least horsepower and horsepower provided by the providers like Archrock and our peers is a lot higher than that 30 percent mark in the space overall. The final thing I'll point out is that, or customers that wish to go buy their horsepower, they're still going to be paying a lot more. We've seen about 30% inflation in the cost of a new build unit over the last three years, so costs are up sharply for them to acquire them.
Laura: And what we see right now is that that ratio is not really changing with the exception of in the Permian Basin, we think that the amount of.
Laura: Leased horsepower and horsepower provided by that providers like Archrock and our peers.
Laura: Is a lot higher than that 30% mark in the space overall.
Laura: The final thing I'll point out is that or.
Laura: <unk> that wish to go buy their horsepower theres still going to be paying a lot more we've seen about 30% inflation in the cost of the new builds unit over the last three years. So the costs are up sharply for them to acquire at the second gating item is going to be access to trained labor to operate the equipment.
Laura: And so it's not just about capital allocation. It's also about the extent and the ability to deploy the right expertise to operate the equipment in the field, that's really supporting growth by growth in our sector and for the compression outsource sort of service providers and Archrock right now.
Brad Childers: The second gating item is going to be access to trained labor to operate the equipment. And so it's not just about capital allocation; it's also about the expense and the ability to deploy the right expertise to operate the equipment in the field that's really supporting growth in our sector and for the compression outsource service providers and Archrock right now. Great, thank you. That's very much appreciated. Thanks for watching. And that concludes today's question and answer session. I'd now like to turn the call back to Mr. Childers for his final remarks. Thanks for tuning in. Bye.
Speaker Change: Great. Thank you that's very helpful.
Mr. Childers: And that concludes today's question and answer session I would now like to turn the call back to Mr. Childers for final remarks.
Mr. Childers: Great. Thank you everyone for participating in our Q4 review call I'm.
Mr. Childers: I am excited about the value of our franchise can deliver today and well into the future.
Mr. Childers: We hope you'll join us for what we expect to be a lucrative right I look forward to updating you on our progress next quarter. Thank.
Thank you everyone.
Speaker Change: Ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
Brad Childers: Great. Thank you, everyone, for participating in our Q4 review call. I'm excited about the value our franchise can deliver today and well into the future. We hope you'll join us for what we expect to be a lucrative ride. I look forward to updating you on our progress next. Thank you, everyone.
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Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now go. Please wait. The conference will begin shortly. Please wait. The conference will begin shortly. Please wait. The conference will begin shortly. Please wait. The conference will begin shortly. Please wait. The conference will begin shortly.
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