Q2 2024 USA Compression Partners LP Earnings Call
Speaker Change: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. This conference is being recorded today, August 6, 2024. I now would like to turn the call over to Chris Porter, Vice President, General Counsel, and Secretary.
Operator: If you would like to withdraw your question, press star 1 again. Thank you. This conference is being recorded today, August 6, 2024. I now would 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 ending June 30, 2024. 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 earnings report.
Chris Porter: Good morning everyone and thank you for joining us. This morning we released our operational and financial results for the quarter ending June 30, 2024. You can find a copy of our earnings release as well as recording of this call in the investor relations section of our website at usacompression.com.
Chris Porter: 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.
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. Actual results might differ materially from these statements. Please review the risk factors included in this morning's earnings release and in our other public filings. Please note that information provided in this call speaks only to management's views as of today, August 6, 2024, and may no longer be accurate at the time of a replay. I will now turn the call over to Eric Long, President and CEO of USA Compression.
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 in other forward-looking matters.
Chris Porter: Actual results might differ materially from these statements.
Chris Porter: Please review the risk factors included in this morning's earnings release and in our other public filings. Please note that information provided in this call speaks only to management's views as of today, August 6, 2024, and may no longer be accurate at the time of a replay.
Chris Porter: I will 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 am joined on the call by Eric Scheller, our COO. To provide you with some color on the electrification of the Permian Basin, ERCOT recently completed their five-year forecast of electrical demand that shows power demand in the Permian Basin growing to 24 gigawatts by 2030, approximately half of which is related to the oil and gas industry.
Eric Long: Thank you, Chris. Good morning, everyone, and thanks for joining our call. I am joined on the call by Eric Scheller, our COO.
Speaker Change: This morning, we released our second quarter 2024 results, which reflect the continued strength of our business.
Speaker Change: Our period end utilization was at an all-time high, and average utilization remained near an all-time high, both at 95%, with our large horsepower over 1,000 horsepower effectively fully utilized at 99%.
Speaker Change: These results indicate a strong and stable contract compression market, which we believe will continue for the foreseeable future.
Speaker Change: Our results also reflect the continued impact of our disciplined approach in past periods of maintaining pricing levels that support our margin as we deployed horsepower.
Speaker Change: We now continue to increase pricing to record highs at essentially full utilization levels with extended contract tenors.
Speaker Change: Our leverage ratio also continued its downward trend in line with our long-term goal between 3.75 times to 4.25 times, reducing to 4.23 times.
Speaker Change: We expect this downward trend to continue as the impact from the adjusted EBITDA generated from the capital expenditures during the first half of the year, which were a majority of our expected capital expenditures for the year, begin to fully impact our results.
Speaker Change: As we mentioned last quarter, our distributable cash flow coverage ratio was very slightly impacted from the conversion of our Series A Preferred Units to Common Units by EIG.
Speaker Change: We are happy to report that EIG has sold all of the common units from their conversions during the first half of this year. We only have $180 million in preferred units outstanding.
Speaker Change: The remaining conversion of the preferred units will have a very, very small impact on our distributable cash flow coverage ratio, but will provide enhanced liquidity to our common unit holders.
Speaker Change: When all of the Series A preferred units are converted and the resulting common units are sold into the open market, we will have added almost 25 million common units to our public float with no resulting meaningful equity value dilution from the conversion.
Speaker Change: Switching to our views of the near and long-term environments for USA Compression and the general macro environment which underlies our business.
Speaker Change: In the near term, we see steady and growing opportunities as our customers continue to maintain their steady, capital-disciplined growth to support the increasing oil and natural gas demand drivers in the United States and globally.
Speaker Change: Due to our long-standing strategy of return-based pricing and margin discipline, which are consistently the highest margins in the contract compression space, we anticipate satisfying near-term demand with the previously outlined strategy of converting idle equipment to active status.
Speaker Change: We were able to deploy this idle equipment with capital expenditures that are far less than if we were to purchase new compression equipment, but maintain the pricing at attractive levels due to the tightness we are currently seeing in the natural gas compression market.
Speaker Change: Further, despite the high utilization within the contract compression industry, we have not seen a meaningful trend of our customers moving to purchase their own compression equipment, and we do not expect to see such a trend in the foreseeable future.
Speaker Change: Obviously, these factors should continue to support our underlying financial fundamentals, our distribution policy, and leverage goals long term.
Speaker Change: As a reminder, we believe focusing on our capital structure, including the eventual refinancing of our senior notes due 2027, renewing our credit facility, and fully exiting our Series A preferred units is the prudent course of action before we consider changes to our distribution policy.
Speaker Change: In the long term, we remain bullish on the natural gas compression market in the natural gas industry, which we believe will continue to support the growth of the contract natural gas compression industry.
Speaker Change: As we previously discussed, forecasted natural gas demand remains strong through 2050.
Speaker Change: We believe power generation, pipeline exports to Mexico, and LNG exports will remain strong demand growth drivers for natural gas.
Speaker Change: Further, the continuing maturity of the Permian Basin will continue to require more natural gas compression as wells mature and the gas to oil ratio increases over time.
Speaker Change: Regarding power demand, the continued electrification of the Permian Basin for the foreseeable future creates additional incremental power generation requirements.
Speaker Change: for which we believe natural gas will be a primary player in the electrical generation mix to support baseload power generation needs.
Speaker Change: To provide you with some color on the electrification of the Permian Basin,
Speaker Change: ERCOT recently completed their five-year forecast of electrical demand that shows power demand in the Permian Basin growing to 24 gigawatts by 2030, approximately half of which is related to the oil and gas industry.
Speaker Change: To put that in context, the amount of growth would make the Permian Basin comparable to the power demand of the Houston coastal region.
Speaker Change: Zooming out and looking at the entire power demand growth in the ERCOT region, ERCOT now forecasts 152 gigawatts of power demand by 2030.
Speaker Change: The peak demand last summer, which was the all-time high, was approximately 85 gigawatts. So we will need almost twice the power generation in five years that we currently have in ERCOT. One of the primary drivers of this demand is data centers and artificial intelligence.
Speaker Change: One tidbit we recently heard from the CEO of ERCOT that we thought really painted the picture of the power demands of AI was that each microchip of the most recent generation used for AI requires the same amount of power as the average U.S. home.
Speaker Change: Wow, that is a staggering amount of power that will be needed to support the AI revolution and the most practical consistent power generation is currently natural gas fired power plants.
Speaker Change: Given this increased need for power generation in the near future, including the large growth in the Permian region, which is our largest operating region, we have started the process to begin beta testing the ability of our dual-drive compression units to generate power.
Speaker Change: Allowing us to opportunistically sell power back to the grid when electricity prices are at attractive levels.
Speaker Change: It is currently too early to know the impact that opportunity presents to us, but we are very excited about its potential and why we believe our dual-drive product offering will provide better value and more versatility to our customers than conventional standalone electric compression.
Speaker Change: We view our dual-drive product offering akin to the difference between a hybrid car and an all-electric car.
Speaker Change: Dual drive's ability to run on electricity or natural gas provides enhanced versatility, as the electrical grid transformation that will be needed to support large horsepower electrical compression will take decades to complete.
Speaker Change: The addition of power generation to our dual drive product offering provides even greater value to us and our customers.
Speaker Change: Before turning the call over to Eric Scheller to discuss second quarter results, I would like to make a few comments regarding safety. The most important thing we do is to ensure that our employees, contractors, and customers return home safely each day.
Speaker Change: We remain steadfastly committed to the continued development and improvements of our safety programs, culture, and expertise so that we remain one of the safest operators in the oil field.
Speaker Change: I appreciate each and every one of our employees' commitment to safety and the safety culture they have created at USA Compression.
Speaker Change: With that, I will turn the call over to Eric Scheller, our COO,
Eric Scheller: Thanks, Eric, and good morning, all.
Speaker Change: As Eric noted, we were pleased to deliver our unit holders another excellent quarter of results.
Speaker Change: In addition to the record results Eric mentioned, we deployed approximately 41,000 additional horsepower during the quarter as we continued to deploy large horsepower units on contracts with extended tenor and enhanced pricing.
Speaker Change: Our revenue continued to grow, driven primarily by increasing utilization, exiting the quarter at an all-time high of 95%.
Speaker Change: And pricing improvements, also at an all-time high, averaging $20.29 for the second quarter.
Speaker Change: Our revenue increased 3% in sequential quarters and 14% compared to the year-ago period. The second quarter also saw our sector-leading margins of approximately 67% continue.
Speaker Change: As a reminder, we expect productivity improvements and contractual pass-through pricing adjustments to continue supporting our margins in line with our current levels over the long run, regardless of foreseeable inflationary pressures.
Speaker Change: Regarding financial results, our second quarter 2024 net income was $31.2 million, operating income was $77.4 million,
Speaker Change: Net cash provided by operating activities was $96.7 million and cash interest expense net was $46.6 million.
Speaker Change: Cash interest expense increased by approximately 1.9 million dollars on a sequential quarter basis, primarily due to higher average outstanding borrowings.
Speaker Change: However, higher cash interest expense was mitigated by $2.5 million of cash payments.
Speaker Change: received under our $700 million Notional Principal Fixed Rate Interest Rate Swap, which locks in 30-day SOFR until December 2025 at 3.9725%, compared to the current 30-day SOFR that exceeds 5.25%.
Speaker Change: Under our current leverage ratio, this results in an interest rate of 6.47% on $700 million of our credit facility borrowings.
Speaker Change: Turning to operational results, our total fleet horsepower at the end of the quarter was approximately 3.9 million horsepower as we accepted delivery of 5,000 horsepower of new large horsepower units during the quarter.
Speaker Change: Our revenue generating horsepower increased by 1% on a sequential quarter basis, primarily due to the conversion of current fleet idle units to active status and the deployment of 10,000 horsepower of new large horsepower units.
Speaker Change: as we had secured customer contracts prior to the delivery of the new units.
Speaker Change: Second quarter 2024 expansion capital expenditures were $67 million and our maintenance capital expenditures were $8.9 million.
Speaker Change: Expansion capital spending continues to consist of reconfiguration and make-ready of idle units.
Speaker Change: along with the aforementioned delivery of 5,000 horsepower of new large horsepower units and the opportunistic acquisition of other large horsepower units in the market.
Speaker Change: We also expect additional and ongoing conversion of current fleet idle units to active status.
Speaker Change: Throughout the remainder of 2024, we anticipate the deployment of between 30,000 and 50,000 horsepower of existing uncontracted fleet assets at capital costs substantially below those of new organic growth equipment builds.
Speaker Change: Finally, I am pleased to share that we are increasing our financial guidance for the full year 2024.
Speaker Change: Our net income range is now $105 million to $125 million dollars. Adjusted EBITDA range is now $565 million to $585 million dollars. And distributable cash flow range is now $345 million dollars to $365 million.
Speaker Change: And with that, I'll turn the call back to Eric Long for concluding remarks.
Eric Long: Thank you, Eric. We are extremely proud of our second quarter results. We continue to take advantage of the strong and stable compression market, which we believe will continue for the foreseeable future as natural gas demands for power generation, LNG, and other uses continues to increase over the coming years.
Eric Long: We are bullish on the long-term prospects of the natural gas industry, and believe we are well positioned to continue enhancing unit holder value.
Eric Long: To conclude, we are extremely pleased with our second quarter 2024 results, highlighted again by record quarterly revenues, adjusted EBITDA, and adjusted gross margin.
Speaker Change: We expect to file our Form 10-Q with the SEC as early as this afternoon, and with that, we will open the call to questions.
Speaker Change: At this time, I would like to remind everyone in order to ask a question, press star then the number 1 on your telephone keypad. Again, it's star followed by the number 1 on your telephone keypad.
Speaker Change: Your first question comes from the line of Jeremy Tonette with JP Morgan. Jeremy, your line is now open.
Eli: Hey, this is Eli on for Jeremy. I wanted to start on compression equipment lead times. It seems like we continue to see a hot compression market overall, but I just want to get a sense of how lead times have evolved in the past few months.
Eli: Maybe more specifically, were there any of the delays discussed in your press release related to the ability to source equipment? Any color there would be great, thanks.
Eli: Hey, Eli, this is Eric Scheller. So materially, the deliveries for units has not really come in. Supplies were discussed last quarter. I think we were still in the 30 to 40 week mark for engines and then add another eight weeks to package.
Speaker Change: I think that we're continuing to see that kind of pace, think that the demand remains.
Speaker Change: So-so and you know we haven't seen a material growth in the market for that.
Eli: Got it, that's good color, thank you. And then maybe as a follow-up, I just want to get a sense of kind of these elevated CapEx spend levels and how they drive longer-term growth. You know, I know you guys revised everything up, you know, across all your guidance, but, you know, maybe just thinking about higher growth CapEx and how, you know, you might frame, you know, longer-term growth across the business with those elevated spend levels.
Eli: Yeah, this is Eric Long. You know, we're coming into an election cycle, and needless to say, there's a lot of...
Eric Long: Uncertainty with two very different approaches to the energy sector depending on who ends up in control of the House, the Senate, and the executive branch. So we're approaching this with a little bit of caution right now.
Eric Long: Electric compression is a niche market right now. There are extremely long lead times for utility scale transformers and equipment.
Eric Long: Here we have ERCOT looking at basically doubling electric demand in the state of Texas. So you start to think about who's going to end up getting that electricity. Clearly it's going to be residential need, it's going to be hospitals.
Eric Long: And when you look then at the competition for the molecules and who's willing to pay significantly higher electric costs, is it going to be an oil and gas company or is it going to be an AI data center?
Eric Long: So, we're remaining very optimistic about the convergence of electricity and hydrocarbons long term, with the caveat, with the stroke of a regulatory pen, it could significantly alter which direction in course of the future.
Eric Long: So, the reason...
Speaker Change: We are always somewhat conservative when there's a very clear direction. We mash the accelerator and we grow. We don't need to grow for the sake of growth. We grow for the sake of profitability.
Speaker Change: To the extent we can deploy the right type of equipment.
Speaker Change: Larger horsepower equipment at economic returns that we find attractive will continue to do so.
Speaker Change: So, at this stage, the crystal ball is a little fuzzy. Let's wait and see the results of the election.
Speaker Change: And the election goes one direction. We think it's extremely bullish for the conventional industry.
Speaker Change: If the election goes a different direction, TBD, what that's going to look like, in either direction we go, we think that our
Speaker Change: Large horsepower fleet with our focus on the dual drive opportunities and distributed generation is a differentiator between ourselves and our peers.
Speaker Change: That's great, thanks. I'll leave it there.
Speaker Change: Your next question comes from the line of Jim Rollyson with Draymond James. Jim, your line is now open. Good morning, Eric and Eric.
Eric: Morning Jim. Morning.
Speaker Change: The different basins and the volumes coming across, we're seeing the demand continue apace from all of our customers as they continue to optimize those fields in service of their producers.
Speaker Change: that market hasn't quite cooled as everybody knows and so when you even when you see an aggregate three and a half percent coming out from the government it's higher for the labor piece we have to deploy people to go check out the units that in the equipment that's available for
Speaker Change: in the labor force working to keep the units at a high rate of utilization. So is that going to wash? Probably.
Speaker Change: There's a high demand for electric generation backup equipment for the data centers, which are the same basic engines that the natural gas compression uses, the big...
Speaker Change: 1,500 horsepower up to 2,500 horsepower asset so
Speaker Change: There will continue to be competitive tension for the engines.
Speaker Change: There's only so many of these engines a Caterpillar can manufacture, and to the extent that...
Speaker Change: There's demand for data centers and compression and marine and other prime and secondary power applications.
Speaker Change: We envision Caterpillar is going to continue to push rate and push the cost up on their equipment. So we think there will continue to be some competitive tension, particularly as it pertains to new CapEx growth.
Speaker Change: And those will be things that all of us in the industry take into consideration as we look at 25, 26, and beyond with our customers.
Speaker Change: It remains to be seen what our customers are willing to...
Speaker Change: Employment Tenors, or Deployment Tenors, and this equipment's expensive, and correspondingly, you know, the monthly service fees go up. So, that's part of the yin and yang going on right now in our industry versus our customers of, yeah, you want the stuff, but the stuff's a lot more expensive, and we're not going to give the stuff away. We need to make our historical returns.
Speaker Change: It's going to be an interesting few years coming up to see how this all plays out, particularly in light of the regulatory environment.
Speaker Change: Yep. Appreciate the detailed answer, guys. Thanks.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Selman Akyol with Stifel. Selman, your line is now open.
Salman Akyol: Good morning. Thank you guys for the color so far. I just wanted to understand a little bit more about data centers. And as I think about compression,
Salman Akyol: And given, you know, we're hearing more and more about behind the meter, and so to the extent that data centers get built behind the meter, does that drive demand for the compression you provide?
Speaker Change: It absolutely can. So you think about the compression for data centers or generation for data centers.
Speaker Change: People are morphing and migrating data center compression.
Speaker Change: away from diesel-driven backups more and more toward natural gas backup. So if you think about a
Speaker Change: behind the meter generator that's burning natural gas is going to increase demand at that retail site, so to speak. So how does that affect us? Well, we're in gathering systems out in the Permian Basin.
Speaker Change: There's going to be increased takeaway coming out of the Permian. There's going to be increased capacity feeding into those pipes. And where is the outlet of those pipes going to end up? Behind the meter data centers in many cases.
Speaker Change: So, it's a pull-through effect and it's very beneficial for all of us, as well as some of us who are playing on the distributed generation and either behind the meter ourselves or actually feeding into the grid on a prime basis.
Speaker Change: Got it. Thank you very much for that. And then in terms of your idle fleet that you know that you're making ready...
Speaker Change: Can you just maybe talk about, can that be reconfigured to be large horsepower? Is it already large horsepower?
Speaker Change: Hey Selman, it's Eric Scheller. We have some mix of small and large. We prefer to get the large stuff out. There's a greater demand. People are looking for dropping that stuff in.
Speaker Change: Central processing points or gathering points. So, you know, we've had some combination to deploy. We have a...
Speaker Change: Also some additional assets in the back that we can package up.
Speaker Change: and satisfy some demand I think we're seeing, some reconfiguration demand based on field pressures and traveling those units from some basins to other.
Speaker Change: That requires us to touch them, but I think between what we have on the ground and what we have in inventory that we could redeploy for package, we have an adequate supply.
Speaker Change: to continue forward here for the next two quarters, three quarters.
Speaker Change: A little more color, Selman. If you think about like a 200 horsepower wellhead compressor package versus a 2500 horsepower big gas lift unit
Selman: You really can't take 12 200 horsepower guys and string them together and make the equivalent of a 2400-2500 horsepower package. So envision...
Speaker Change: A Hyundai versus a giant bus, right? You can't convert a little Hyundai into a bus. So the size of a 2,500 horsepower engine...
Speaker Change: is probably twice as long and twice as wide as the entire 200 horsepower package.
Speaker Change: So you really can't convert a little thing to a big thing or a big thing to a little thing. They're different mission types. It's no different than saying I've got a twin-engine King Air versus a 747. You know, the King Air doesn't fly 12-hour international routes.
Speaker Change: Different mission type, different technical applications, and really they're very different types of assets.
Speaker Change: Got it, I appreciate that. Two more quick ones for me, just on the pricing adjustments that you guys referenced, how much of the fleet is subject to that?
Speaker Change: Hey, Selman, it's Scheller. So.
Scheller: We have a rolling schedule that goes through time. Our contracts are laddered and are different than any other.
Speaker Change: Business, bonds, we don't like them to call, come, due at the same time, all those contracts on primary term are subject to some adjustments at the end of those, in the anniversaries of those contracts. So we're always looking every month on what's the active.
Speaker Change: renewals that are going on, what's subject to adjustments every every month and that's why we're able to continue to manage the price book as we do.
Speaker Change: Got it.
Speaker Change: And then the last one, you guys mentioned in your opening comments opportunistic acquisitions. Could you maybe just discuss that a little bit more, and do you see more of that out there?
Speaker Change: And this is Eric, and we generally don't comment on acquisition activity.
Speaker Change: I'll give you a little color. There are opportunistic asset packages.
Speaker Change: that we are able to source. We've acquired some equipment that's two, three years old that was deployed. Maybe the gas stream didn't show up. Contracts didn't materialize.
Speaker Change: And owner-operators, some of the E&P companies or midstream guys look at it and go, Well, this project didn't work out. What do we do with the excess compression?
Speaker Change: So we've been able to source opportunistically some of that type of equipment.
Speaker Change: You can envision that in some of the dry gas areas where the economics may have changed a little bit from the E&P perspective, there's some assets that we've been able to purchase at extremely attractive pricing, basically new equipment for less than new replacement costs.
Speaker Change: There are other pockets of opportunity ranging from onesies and twosies to very large fleets to some private companies from an M&A perspective so it's
Speaker Change: There are a lot of opportunities out there. We are laser focused on things that are accretive, things that would be leverage neutral to leverage de-levering positive for us.
Speaker Change: So there's plenty of opportunities to focus on, and I think as I've reiterated, we don't grow for the sake of growth, we grow for the sake of profitability and to the extent we can find things that opportunistically make sense.
Speaker Change: ranging small horsepower, meaning big horsepower but small amounts of it, to very large fleets to some corporate acquisitions. They meet our criteria. We'll see, but there's plenty of opportunities out there for us.
Speaker Change: Appreciate the color and the time. Thank you.
Speaker Change: Your next question comes from the line of Brian DiRubbio with Beard. Brian , your line is now open.
Brian Derubio: Good morning. Just a few questions for me. Eric Long, what percentage units would you say today are associated with gas lift?
Speaker Change: 40-ish to 50-ish percent.
Speaker Change: Great. Is that mostly in the Permian?
Speaker Change: Yes.
Speaker Change: Great, thank you.
Speaker Change: And then just as it pertains to the interest rate hedge, you know, given the expectation for the Fed to start lowering rates, is that something that you're thinking about selling in the open market and capturing a gain?
Speaker Change: That's always an opportunity to do so. We've got a board meeting coming up here soon and obviously we will be addressing those topics with our board.
Speaker Change: I think what we've indicated regarding our capital structure in general is we intend to be opportunistic.
Speaker Change: So, one of the elements to look at, of course, is the timing of that hedge. Do you monetize the hedge? Do we let the hedge roll off naturally? That'll be something that we work through with our bank group and our board to determine the best path of action to pursue on that.
Speaker Change: Okay, did you ever disclose how much you paid for that hedge?
Speaker Change: It was a non-cost collar, so it cost a zero.
Speaker Change: Great. And then just as we think about the full CAPEX spend this year, is maintenance CAPEX still supposed to be $32 million or is that moving higher as well?
Scheller: Hello, that continues at that pace.
Speaker Change: Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: Great, and just a final question for me, as you've mentioned in the last couple of calls, you know, you consider changes to distribution policy post the extinguishing of the preferred and the refi of the 27 nodes. Is it fair to assume that the bias is to then increase that distribution rate on the common units at that point?
Speaker Change: I wouldn't necessarily make that assumption. We look at the flexibility that it provides.
Speaker Change: That's a decision that our board will make at that point in time. You know, what we're paid to do is to create optionality and provide our board with the flexibility to pursue whichever course of action that they pursue.
Speaker Change: I wouldn't assume that that's automatically going to happen, but I would assume that that's something that will be revisited with the board as part of their strategic decisions of the direction for the company.
Speaker Change: Fair enough. Appreciate all the color. Thank you.
Speaker Change: Thank you, sir. Thank you.
Speaker Change: Your next question comes from the line of Josh Chain with Daniel Energy Partners. Josh, your line is now open.
Speaker Change: Thanks, good morning. I wanted to follow up on pricing just in the context of your comment that customers haven't moved to purchase their own compression equipment. Could you discuss just what would have to have to happen for customers to move in that direction? How much further you have
Speaker Change: From a runway perspective on pricing, etc. It would just be helpful to talk about that and expand on it a little bit more
Speaker Change: Yeah, obviously Josh, there's a lot of variables that go into that. Some of it is what is the strategic approach from our customers.
Speaker Change: E&Ps have different perspectives, some outsource all compressions, some outsource half and own half.
Speaker Change: Some acquire 100% on their own. So, different people are approaching it different ways. Midstreams look at it differently than E&P, and they look at it differently between different basins, dry gas and rich gas.
Speaker Change: So I think what's driving this are the cost of capital, their deployment cycles, what is baseload versus what is variablized compression.
Speaker Change: And that still continues as you increase production coming out of the Permian or the Eagle Ford or whichever basin you see.
Speaker Change: Incremental horsepower is required.
Speaker Change: And it depends which customer you're talking to. So, our customers have a mix of everything from 100% owned, where we do some retail activities.
Speaker Change: where assets are interspersed amongst existing assets we have.
Speaker Change: We've got customers that are half-owned and half-contract compression.
Speaker Change: where we oftentimes provide some retail activities on their company-owned machines, and then we've got customers at 100% outsourced. I think what's driving their decisions are...
Speaker Change: What's their development plan going to look like?
Speaker Change: 3%, 5%, 8% per year, do they exhibit no growth?
Speaker Change: The larger players who have more acreage to promulgate and develop.
Speaker Change: guys that have done some of the M&A things or rationalizing assets, determining I've got too much here, I don't have enough here. So there's a lot of moving pieces associated with it, but I think the simple construct is
Speaker Change: Equipment costs are a lot higher than they were 3, 4, 5 years ago. They're continuing to go up. There's some stiffer shock associated with it, so...
Speaker Change: Regardless of if they buy it or if they outsource it, their costs are going to go up. They have to pay for this stuff. So part of what we do as a logistics company is optimize our fleet, their fleets, others fleets.
Speaker Change: So that instead of having some underutilized horsepower, stuff that's not in the right location, we, in concert with our customers, are always looking to optimize the system so we can deploy and redeploy existing assets that, by definition, have a lower cost of capital than the newer assets.
Speaker Change: So, I think there's a lot of dynamics going on. I don't see a material change from our customers saying, I'm going to move from outsourcing to owning everything.
Speaker Change: I don't see companies going from we own everything to outsourcing at all. I think there's, again, kind of the combination of what they have always done they're going to continue to do and just have to wrap their head around the cost of the new equipment that's coming out of Caterpillar and others, just the stuff's expensive.
Speaker Change: Okay, thanks for all that color. I appreciate it. And then my follow-up, I think it's pretty timely your comments around the grid and power, and especially what's going on here in Texas. I was just curious if you could go into a little bit more what you...
Speaker Change: Talked about earlier with the dual drive compression units Their ability to generate power and potentially sell it back longer term Could you expand on that a bit more and what you view as the opportunity over the next couple of years?
Eric Scheller: Not at this stage, that's a...
Speaker Change: Not at this stage. That's a competitive trade secret that we have and that's one that we're sprinkling some breadcrumbs just to get some exposure to folks but it's from a competitive perspective we're not going to go into any detail today.
Speaker Change: Understood. Thank you.
Speaker Change: Thank you.
Speaker Change: There's no more there's no more question at this time. This concludes the question-and-answer session and also concludes today's conference call. Thank you all for joining. You may now disconnect.