Q3 2024 USA Compression Partners LP Earnings Call
Good morning, welcome to USA Compression Partners.
224 earnings conference goal.
Speaker Change: During today's call, all parties will be in a listen-only mode, and the conclusion of management for bread remarks, the call will be open for Q&A. If you'd like to ask a question during these times, the press star follows by the number one on your telephone keypad. If you'd like to withdraw your question, please press star one again.
Speaker Change: The screen is recorded today in November 5, 2024. I'll 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 to the quarter-Indeed September 30, 2024. You can find a copy of our earnings release as well as recording of this call on the Investor Relations section of our website at ufsacampression.com.
Chris Porter: During this call, our management will reference certain non-gat measures. You will find definitions and reconciliation of these non-gat measures to the most comparable UF Gat measures in our earnings relief.
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 may differ materially from these statements.
Please reduce the risk factors included in this wine's earnings release and our other public violence.
Chris Porter: Please note that the information provided on this call speaks only to management's views as of today, November 5, 2024, and may no longer be accurate at the time of a replay.
Before I turn the call over to Clint Green, President and CEO of USA Compression, I would like to welcome him to the USA Compression family. Clint has a long history in the compression and midstream space, working at Hanover Compression, CDM, and leading SEC Energy for a period of time.
Quint has continually risen through the ranks within the Energy Transfer Organization and I think we are fortunate that USAC is his next stop.
With that, I will turn the call over to class.
Clint Green: Thank you, Chris.
Clint Green: Good morning, everyone, and thank you for joining our call. Chris and I are joined on the call by Eric Scheller, our COO.
Quint: First, I want to thank everyone at USA for the hospitality and warm welcome over the past month. I've had the opportunity to meet some talented people, and I am more excited than ever to join this team.
Second, I want to thank Eric Long. As you all know, Eric was a special leader that grew the company from a single compression unit to one of the largest independent compression companies in the country.
I look forward to continuing what he started. Third, I am excited to have Chris Paulsen join us as CFO on November 18th.
Quint: Chris brings a long history of E&P experience, most recently as the Senior Vice President of Business Development and Strategy at Pioneer Natural Resources.
Clint Green: I believe Chris's prior experience will help USA Compression continue driving the business not only financially, but through continued development given his experience in the E&P space.
Clint Green: I am looking forward to working with Chris and as we further develop our long-term financial strategy.
Clint Green: Finally, I wanted to touch on our third quarter results we released this morning. Our third quarter ended with records in revenue, adjusted gross margin, adjusted EBITDA, distributable cash flow, and average revenue generating horsepower.
These results reflect a very supportive environment in the compression service space.
Clint Green: allowing for an increased pricing as we continue to deploy horsepower. We expect this trend to continue as we see strong demand for compression services from our customers.
Clint Green: We will continue to strategically evaluate growth opportunities going forward with a focus on creating additional customer and unit holder value.
Clint Green: Before turning the call over to Eric Scheller to discuss third quarter results, I would like to also update you on an internal organization initiative to streamline back office operations.
Clint Green: We have made the decision to implement the Energy Transfer Shared Services model at USA Compression. There will be more to come on this in the future quarters. With that, I will turn the call over to Eric Scheller, our Chief Operating Officer, to discuss our third quarter highlights.
Eric Scheller: Thanks Clint and good morning all. We were pleased to deliver to our unit holders another excellent quarter of financial and operational results.
Eric Scheller: The continuing pricing improvements, up to an all-time high averaging $20.60 per horsepower, for the third quarter primarily drove our continued revenue growth.
Eric Scheller: Our revenue increased 2% in sequential quarters and 11% compared to the year-ago period. Our third quarter margins were approximately 66%.
Eric Scheller: Regarding the financial results, our third quarter 2024 net income was $19.3 million. Operating income was $75.7 million. Net cash provided by operating activities was $48.5 million.
Eric Scheller: And cash interest expense, net, was $47.1 million.
Eric Scheller: Cash interest expenses increased by approximately a half a million dollars on a sequential quarter basis, primarily due to higher average outstanding borrowings.
Clint Green: However, higher cash interest expense was mitigated by $2 million of cash payments received under our $700 million notional principle fixed rate interest rate swap during the quarter.
Clint Green: We monetized our position in the swap during the third quarter for $0.4 million. Our leverage ratio also continued its downward trend, reducing to 4.2 times.
Clint Green: Turning to operational results, our total fleet horsepower at the end of the quarter was approximately 3.9 million horsepower, essentially flat to the prior quarter.
Clint Green: 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.
Clint Green: Our average utilization for the third quarter was 94.6 percent, essentially flat to the prior quarter, and a 1 percent increase compared to the third quarter of 2023.
Clint Green: Third quarter 2024 expansion capital expenditures were $34.1 million and our maintenance capital expenditures were $9.1 million.
Clint Green: Expansion capital spending primarily consisted of reconfiguration and make ready of idle units. We also expect additional and ongoing conversion of current fleet idle units to active status.
Clint Green: Throughout the remainder of 2024, we anticipate the deployment of up to 10,000 horsepower of existing uncontracted fleet assets at capital costs below those of new organic growth equipment bills.
Clint Green: Finally, I would like to reaffirm our financial guidance for the full year 2024. As a reminder, our net income range is $105 million to $125 million. Adjusted EBITDA is $565 million to $585 million.
Clint Green: and the distributable cash flow range is $345 million to $355 million.
Clint Green: Additionally, we are increasing our expansion capital expenditures for the full year 2024 to between $240 million and $250 million.
Clint Green: primarily due to the cost associated with preparing active compression units that are returned by a customer for redeployment and the increased cost on the idle to active fleet conversion. And with that I will turn the call back to Clint for concluding remarks.
Clint Green: Thank you, Eric. My first few weeks at USA Compression have been incredible. I've enjoyed getting to meet so many wonderful folks and seeing some from earlier in my career at CDM.
Clint Green: 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: Again, if you'd like to ask a question, simply press star followed by the number one on your telephone keypad. We'll pause for a short moment to compile a Q&A roster.
Speaker Change: And your first question comes from the line of Jeremy Tonette with J.P. Morgan. Jeremy, please go ahead.
Clint Green: Hey, this is Eli on for Jeremy congrats on the strong quarter guys wanted to start on the cap x-rays and
Eli: You know, maybe thinking about how we should interpret this for 2025 spend. Is some of this pulled forward or, you know, relatively? Should we expect a lower spend next year? Just thinking about puts and takes for, you know, growth opportunities and where you kind of see the business run rate growth capex spend right now. Thanks.
Clint Green: Yeah. Good morning, Eli. This is Clint.
Clint Green: Yeah, two.
Clint Green: That's a good question and, you know, we are going to, we'll lay out our 25 capital plan at normal times, which is, you know, we state our fourth quarter earnings next year. We will become more capital disciplined and moving through next year, but we will also look for opportunities that become accretive to the company and its investors.
Speaker Change: Fair enough. And then maybe just on the broader compression market, you know, I know we're continuing to see strong pricing, which you mentioned in the opening remarks, and that's translating to those, you know, strong dollars per horsepower metrics. So, you know, should we continue to think about upside to these levels as well, or, you know, or might be nearing a ceiling just in terms of, you know, how high those those metrics can go?
Eric: Eli, this is Eric.
Eric: I think the structural compression market for me is really strong. It's robust, supporting the gas flows that we're seeing for demand pulls through the system.
Clint Green: Frankly, I don't see any meaningful trend to changing the trend of the revenue. We continue to see people continuing to want the horsepower, want to hold it for longer, and really aggressively making that market work for us.
Speaker Change: Thank you. Thank you.
Speaker Change: All right, thanks. I'll leave it there.
Speaker Change: Your next question comes from the line of Doug Irwin with Citi. Doug, your line is now open.
Doug Irwin: Hey, thanks for the question and welcome aboard, Clint. I wanted to maybe touch on the idle to active conversion strategy and some of the increased costs that you pointed to this quarter and I'm just curious as some of these these costs if if they're more persistent, if that changes the way you kind of think about the strategy.
Speaker Change: of conversions versus new builds moving forward, and then if he could maybe just remind us how much idle capacity you still have across the fleet that could be brought back online.
Eric: This is Eric.
Speaker Change: So, let me break it down into a couple of easier pieces. You saw utilization continues to run at...
Speaker Change: highest rates we've ever had. We have near on the large horsepower
Speaker Change: almost at the end of our available stuff. So we are always looking for
Speaker Change: opportunity to either buy new, to buy from customer, to optimize working capital, to get all units out in order to serve our customers. We continue to work through that.
Clint Green: On the second question concerning the capital, I think we did see a large amount of churn coming through the system. When system units come back and they go to different regions that have different requirements, we do have to...
Clint Green: Enhance for either environmental or for operational reasons the asset before they're redeployed. Churn has been coming up as we've optimized the fleet. We're happy to put those units out at higher prices, recognizing that we did have to enhance the technology that went with them.
Speaker Change: Got it. That's helpful. Thanks. And then maybe just a higher level question for you, Clint.
Speaker Change: I realize you're only a few weeks into the job, but I was just wondering if you could talk about maybe what excites you the most about the business moving forward. Maybe if anything surprised you since you've joined, and then just maybe if we should expect any broader strategic changes here over the near term.
Speaker Change: Yeah, so I think that
Speaker Change: First off, thank you for that, and the most exciting thing I see here is, you know, I started with CDM back in 1999, which became USA Compression.
Speaker Change: go, go, go, go, go.
Clint Green: Maybe the administration that we have today, we have a huge opportunity for our dual drop technology with a bigger push for electrification.
Speaker Change: Got it. I'll leave it there. Thanks for your time.
Speaker Change: Your next question comes from the line of Jim Rolison with Raymond James. Jim, please go ahead.
Jim Rolison: Hey, good morning, everyone, and welcome aboard also, Clint.
Jim Rolison: Maybe just circling back to the CapEx, so just trying to understand, obviously, you guys, over time, get units back from time to time and go through this, as you said, transitioning from one...
Speaker Change: basin to another. Just curious kind of what happened in this case, you know, how much horsepower was impacted. It's just a relatively large change in cap back. So I feel like maybe this was a little bit unexpected that you got units back, but just trying to get a little more color around kind of the situation and what happened. And
Speaker Change: if this is somewhat of a one-off situation outside of what you normally see.
Speaker Change: Yeah, I'll start answering this and may pass it off to Eric Scheller here in just a second,
Speaker Change: So, I think one of the drivers was there was equipment that was in the yards or in the field that were brought out of the field to be reworked, and that cost ended up being more than was budgeted or expected.
Speaker Change: And I think that was the main driver for the CapEx, or that is the main driver for the CapEx increase.
Speaker Change: and Eric, I'll let you add to any of that. Yeah, I think the other thing that drove some of it was that there was unbudgeted capital that we used to deploy units that we had purchased from third parties.
Speaker Change: We're always opportunistic in how we think about growing revenue and EBITDA.
Speaker Change: These were units with pretty big...
Speaker Change: ability to move gas.
Speaker Change: to help a customer, and we got a robotistic, and when we did the first quarter capital, that was not included in our estimates. And so that's the other activity that was associated with capital burn for the year.
Speaker Change: Got it and and presumably based on your history the the return profile there is
Speaker Change: justifiable or I assume you wouldn't spend the money but maybe just help us as you spend this capital
Speaker Change: You'll have some, it should be I presume, a nice step up in active horsepower once you get through this capital program. I know it's not 25 yet, but any color just kind of on magnitude so we can think about how this CapEx is being deployed in terms of future revenue and profit benefits.
Speaker Change: Yeah you know I think that the return certainly for those assets were commensurate with the hurdles that our general partners established for us otherwise we would not spend that
Speaker Change: and Carpenter.
Speaker Change: The other part for how we think about how this rolls to 25 and where it impacts, that'll come out I think in the first quarter as Clint had previously indicated.
Speaker Change: got it and then just one last little one related party revenue was a bit higher than usual this quarter just seeing if there's anything unusual there or if there's something that's like this is a one-off or if that's more sustainable
Speaker Change: Hey Jim, it's Chris Porter. I think what you're seeing there a little bit is energy transfer to acquisition of WTG. They continue to become a bigger and bigger customer of ours as they are, you know, acquiring some of our customers and that's what's really causing that. And you'll obviously see that going forward as they remain a customer of ours.
Speaker Change: Got it. Thank you, Jim. Appreciate the color.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Gabe Marine with Missoula. Gabe, your line is now open.
Gabe Marine: Hey, good morning everyone and welcome, Clint. I just wanted to ask a little bit, I know it's a little bit previewed here in terms of the Energy Transfer Shared Services Agreement, but is that strictly going to be on the G&A line? I know the last question was a little bit about the commercial relationship there, so I'm just curious if you could expand a bit more on timing magnitude and sort of see how you see the shared services thing proceeding.
Clint Green: Yeah, Gabe, thank you for that. Yeah, you know, the shared service, it's already on.
Gabe Marine: still trying to get our arms around it, but we do see it as a shared service and become a bigger part or have an energy transfer support as we move forward with a separately run company.
Gabe Marine: We'll dig into it a little deeper and probably in that first quarter of guidance we'll explain more of what we think will come with that.
Speaker Change: Just curious kind of what your appetite or approach might be to something like that, and yeah, just I'll leave it at that.
Speaker Change: Yes, sir. So we don't comment on M&A, but I will say we look for opportunities.
Speaker Change: Understood. Thanks Clint, appreciate it.
Speaker Change: There's no further question at this time, and that concludes today's call. Thank you all for joining, and you may now disconnect.