USA Compression Partners LP

NYSE:USAC

Earnings Call Transcript 2021-Q1

[Operator]

Good morning. Welcome to the U.S.A. Compression Partners, LP's First Quarter 2021 Earnings Conference Call. [Operator Instructions]. This conference is being recorded today, May 4, 2021. I would now like to turn the call over to Chris Porter, Vice President, General Counsel and Secretary. Please go ahead.

[Christopher Porter, VP, General Counsel & Secretary]

Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter ended March 31, 2021. You can find our earnings release as well as a recording of this call in the Investor Relations section of our website at usacompression.com. The recording will be available through May 14, 2021.

During this call, our management will discuss certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures in the earnings release.

As a reminder, our conference call will include forward-looking statements. These statements include projections and expectations of our performance and represent our current beliefs. Actual results may differ materially.

Please review the statements of risk included in this morning's release and in our SEC filings. Please note that information provided on this call speaks only to management's views as of today, May 4, and may no longer be accurate at the time of a replay.

I'll now turn the call over to Eric Long, President and CEO of USA Compression.

[Eric Long, President, CEO & Director]

Thank you, Chris. Good morning, everyone, and thanks for joining our call. Also with me is Matt Liuzzi, our CFO. This morning, we released our financial and operational results for the first quarter of 2021 and with results largely consistent with the fourth quarter of 2020, yet just a little better than we had expected as we started off the year.

Coming out of a year that was marked by unprecedented volatility in the energy markets and considerable uncertainty throughout the broader economy, the first quarter reflected continued stability and improvement in crude oil and natural gas prices as well as the anticipation of broader economic growth coming out of pandemic induced lockdowns.

We saw a tick up in utilization this quarter reflecting the approximately 70,000 horsepower deployed to customers starting in January, and we continue to see improving demand signals from our customers for the back half of the year.

While this stability has allowed our customers to begin to have better clarity around budgets and capital spending programs, there remains a fair amount of uncertainty around potential regulatory and legislative changes that may impact the broader energy industry.

That said, based on current indications of demand and projects in the works from our customers, we expect to see a continuing pickup in activity in the back half of 2021.

We expect that we will be able to meet the bulk of this demand from modern vintage, high-quality assets from our idle fleet, requiring little incremental capital cost. The demand for natural gas in this country continues to be robust and operators in both the upstream and midstream sectors will continue to meet that demand.

In the past, I have described how we manage our business model during alternating periods of stability and growth. USA Compression is focused on stable demand driven large horsepower natural gas compression services which fare well even in times when the overall market is not growing as was the case during the first quarter.

Yes, natural gas demand in the U.S. has continued to show resilience, driven by baseload electric power generation demand as well as growing exports and industrial demand. But we are not expecting large growth in demand in the near term.

So what does USA Compression do during these times? We rein in capital spending and focus on operating the business and rather than spending growth capital to acquire additional assets, we return capital to our unitholders, and that is exactly what we did in Q1.

I note that since our IPO back in January of 2013, and including the upcoming distribution for the first quarter, we will have returned over $1.1 billion to you, our unitholders, through 33 consecutive quarters of distributions.

We are continuing to do the exact same things we've done over our 20-plus year history, growing when it makes sense to grow, and maintaining stability in cash flows and distributions during periods of uncertainty.

We continue to believe that the worst is behind us, every day seems to bring more positive news about the improving prospects for the global and domestic economies. OPEC+ continues to be laser-focused on reducing what were excess crude oil inventories, which now have normalized to pre-COVID levels. The attractive macro environment for natural gas continues, and some recent events have demonstrated the critical role our industry plays in providing reliable energy throughout this country.

As we'll discuss a little later, there are some indications that domestic gas demand could be poised for some meaningful growth in the intermediate term.

In the current environment, it seems that companies involved with traditional sources of energy such as crude oil and natural gas, tend to get lumped together and not always in a good way.

We have witnessed this vilification for the past several quarters, and we believe this simplifies the discussion far too much. There is clear differentiation between various energy commodities, and we believe our focus on the natural gas side of the equation keeps us properly aligned as the country transitions over time to cleaner, more environmentally friendly ways of providing energy to consumers.

We all understand that you can't just shut down the natural gas grid overnight and switch to alternative sources of energy. As the Texas freeze storm back in February demonstrated reliability and redundancy are critical when you're dealing with must have energy. Our compression assets worked exactly as designed, and we're actually part of the solution that saw a dramatic surge in the use of natural gas in Texas during winter storm Uri.

I want to say thank you to our dedicated employees who kept our compression units running during the storm. Our units kept the gas flowing through gathering systems and processing plants allowing for the resumption of normal life much sooner than might otherwise have happened. Going forward, natural gas will be required to generate power, fuel industrial manufacturing, act as a feedstock for petrochemicals as well as serve as a critical source of fuel in many parts of the world.

Like I said, we can't shut down the natural gas grid overnight, and our assets will continue to play a critical role in moving natural gas from areas of production to areas of consumption. Turning to the first quarter results. Total revenues were $158 million, essentially flat with Q4. We achieved adjusted EBITDA for the first quarter of approximately $100 million which translated to an adjusted EBITDA margin of 63.2%, more than 1 percentage point better than the previous quarter.

Average utilization throughout the quarter was 83.1%, up to slightly from the Q4 level of 83.0%. We have now witnessed utilization stay essentially flat for a few quarters, which is as we expected. Coming out of past downturns, compression utilization has historically lagged 4 to 6 quarters behind improved drilling and completion activity levels. In this downturn, activity came to a screeching halt virtually overnight in March of 2020. The drilling rig count bottomed out in August of 2020. And while there has been modest increases in the rig count depending on the basin, operators overall have taken a more cautious approach to both spending and producing. So from an activity standpoint, while we are only about 2 or 3 quarters removed from the recent trough, we are seeing firming demand signals as operators see both stable and higher commodity prices.

We expect that to translate to continued activity and improved utilization for the balance of 2021. The our total fleet horsepower remained essentially flat from where we started out the year, and we continue to not have any new units on order for delivery in 2021. None, 0 we are focused on redeploying our idle horsepower and are taking a measured and disciplined approach to our go-to-market efforts, maintaining attractive contract economics with our customers and not just dumping equipment on the market. We are already seeing expanded poll levels and contract activity for the back half of the year and believe that we will be able to redeploy our idle assets with nominal make ready costs. With continued capital discipline throughout our sector, the few of us who have newer vintage, high-quality fleets that customers prefer ought to be uniquely positioned as compression demand increases.

Average pricing across the fleet ticked up slightly during the first quarter as we were able to push through some service rate increases. Average monthly revenues of $16.60 per horsepower was up slightly from $16.55 in the fourth quarter. As we continue to put the breaks on capital spending, during the quarter, our growth spending decreased approximately 60% from fourth quarter levels to $4.2 million, primarily for reconfiguration of idle equipment being redeployed in first-time cost associated with units deployed at the end of 2020.

Maintenance CapEx of $4.5 million was slightly below the fourth quarter, but consistent with our expectations and obviously important to maintaining our fleet. Based on the first quarter's results, the Board decided to keep the distribution consistent at $0.525 per unit, which resulted in a distributable cash flow coverage ratio of 1.03x, slightly improved from the Q4 level. Our bank covenant leverage ratio was 4.99x, also a modest improvement from the previous quarter. Consistent with prior quarters, our Board of Directors determines the quarterly distribution on a quarterly basis, and the Board can opt to maintain, reduce or suspend the distribution as it deems most appropriate.

So to touch on current market dynamics, we've reached an interesting place in the energy markets. While we are largely past the COVID and OPEC panic and prices have stabilized, continued broader discussion around renewable, green energy and the associated potential legislative and regulatory actions and industry costs required to make it a reality, have kept the cloud of uncertainty over the industry. Operators have cut back significantly on CapEx going into 2021 to better manage overall domestic supply, which had arguably gotten a bit frothy. Currently, it feels like we are in a status quo phase where capital discipline predominates, producers are working to maintain volumes, and everyone is in a waiting game to see what happens with demand and win. Within the natural gas portion of the industry, we have seen relatively more stability in both prices and volumes with more certainty on the demand side.

More and more every day, it seems like projections for natural gas demand, and therefore, production are beginning to take on a bullish tone. A recent third-party analysis predicts that U.S. natural gas production in 2022 could set a record at 93.3 Bcf per day while continuing to rise to over 100 Bcf per day in 2024. These are not only important data points, but also consistent with the worldwide view that still understands their critical nature of natural gas and the industrial manufacturing and export drivers that are expected to require these increased volumes over time. We've often pointed to the resiliency of demand for natural gas in this country. Power generation, industrial and petrochemical feedstocks as well as exports to other areas of the globe and have driven USA Compression's business throughout its entire existence.

And when you realize that these drivers will not go away anytime soon, you get a better understanding of why we like our position and the prospects for natural gas. In order to meet the resilient demand for natural gas, operators in the more attractive basins are not standing still. In our Northeast region, which encompasses both the Marcellus and Utica basins, operators have been requesting additional compression horsepower to continue and enhance their production in order to avoid spending additional capital dollars on drilling new wells.

In the Delaware Basin, we are seeing continued activity, in part driven by the majors and large independents to produce natural gas and ship it out of the basin to consuming regions, including the Gulf Coast region for export as LNG and exports to Mexico. In case you haven't noticed, both LNG exports and exports to Mexico continue to set records, and we don't believe this will subside anytime soon. The Eagle Ford Shale has seen increased rig activity year-to-date in 2021, driven in part by its proximity to export facilities and the abundance of pipeline options for transport.

Our geographic diversity has benefited the partnership so far in 2021, and we will continue to shift resources around to different regions as market demand dictates. Expanding the view, the oil market seems to be in a pretty stable place right now. I mentioned a number of times, the trends around global inventories, and we continue to see a general trend of tightening supply and demand for crude oil, led by OPEC+ compliance and continued capital discipline. As economies around the world open up and residents travel more, the demand for crude oil and products made from crude oil is expected to increase. And in a world characterized in part by restraint on drilling activity, we believe that, that translates into continued inventory draws.

The data has borne this out. Overall, in Q1, inventories from the North America and Pacific regions, which account for an estimated 67% of all global storage decreased by an estimated 89 million barrels. That is a marked contrast from the same quarter last year, we saw a build of 36 million barrels. At this point, the inventory level in North America is just slightly above the 7-year average. If demand continues to pick up, we could see that relationship invert with inventories falling below the 7-year average. These fundamentals are obviously much improved from a year ago, and the news out of OPEC+ continues to paint a positive picture. The entire industry is keeping a close eye on oil inventories if enough large economies around the world pick up, as many expect, we could be in a situation that results in meaningful demand increases. And with that, strengthen prices.

Also, let's not forget about the declined dynamics of shale well production, which will continue to lend strength to the oil markets and by extension the associated natural gas markets. Shale wells declined hyperbolically, with initial decline rates dramatically steeper than those of conventional wells, thereby depleting the wells at a much faster rate.

In order to offset this decline, in the past, operators have continued to drill new wells and bring on new production, thereby maintaining, or in most cases, increasing overall production volumes. This was ultimately predicated on the ability of and continued access to growth capital. Fast forward to today and physical discipline on the part of E&P companies has significantly changed the landscape and the outlook for the industry.

Capital has become much scarcer across the entire energy sector, but more so for the upstream participants than other subsectors. In sub cases, capital budgets are up 70% or more from the recent highs back in 2014 and 2019 before previous cyclical downturns. And keep in mind that the negative impact on production volumes from the relative lack of investment short-term will continue well into the future. As existing producing wells age decline profiles flatten and natural gas volumes exhibit a shallow and very stable profile.

In our business, we are seeing this happen in multiple basins where volumes have begun to naturally stabilize, but without meaningful new production coming online. Recently, operator has been looking to wells that have been drilled but uncompleted, DUCS, as we call them, to bring additional production online to make up for volumes lost due to declines. However, this can only last so long. We have seen some additional activity in the Delaware basin of this nature.

In addition, we have seen customers looking to use booster compression throughout their entire systems to hold production volumes at previous levels. In these situations, compression is a low-cost way for them to maintain production and offset both pressure and volume declines.

All in all, we are seeing more production hit that flattish, steady state part of the decline curve, where decline is meaningfully slowed as we are focused on infrastructure applications that support these steady state operations, we believe this industry dynamic will benefit USA Compression over the medium to long term. I've mentioned before that this point is worth repeating as well as age and pressures decline to move the same volume of gas requires an exponential increase in compression horsepower. In order to maintain production, we'll likely take more work, i.e., horsepower to move the gas. So even though gas volumes may be declining, the compression required may actually increase as pressures also decline.

Given the current state of play in the industry, one characterized by reduced and more precise capital spending, we think our business model is one easily adaptable to the changes going on in the industry. We already own a lot of new vintage equipment that will be used to help our customers keep their gas volumes moving.

Just like in the past, we can easily shift from periods of growth to periods of stability, all while maintaining strong operating margins. Let's turn to some customer activity. As I touched on above, while we are seeing reduced capital budgets on the part of our customers, there is still activity in more economic basis.

I mentioned that USA Compression has always been a lagging indicator as it regards upstream activity levels. Our activity pickup will typically lag activity further upstream by 4 to 6 quarters. The rig count in the U.S. bottomed out in August of last year and has begun to tick up moderately since then. Since the August low, the rig count total has increased 80%.

And since the end of 2020, it has increased about 25%. The oil driven Permian Delaware basins continue to lead the pack with over 50% of the active rig count, having added 51 rigs since year-end. After the Permian Delaware, the areas of greatest rig count increase since the beginning of the year include the oil driven Eagle Ford and dry gas driven Utica shale basins.

In terms of absolute number of rigs running, the dry gas driven Haynesville region is second in total rig count, followed closely by the Appalachian region, consisting of the dry gas driven Marcellus and Utica shales. The commodity price stability, driven in part by resilient demand on the natural gas side and rebounding demand for crude oil has helped support operators putting more rigs to work. We have begun to see more signs of activity, including, in some cases, request for multiunit stations, particularly in the Delaware Basin, whether it is at large station installations or natural gas handling activities like those at gas processing plants or large volume centralized gas lift applications, our assets are likely to stay out in the field. Adding to the stability, our contract portfolio continues to lend stability to our operations with month-to-month contracts comprising approximately 30% of the fleet.

So to summarize, we are in a period of stability, while we wait for both the resolution of regulatory and legislative uncertainty as well as the timing and extent of the economic rebound, which many are starting to see but expect to really pick up steam later this year.

Our business has stabilized, customer dialogue is picking up, and we are seeing more requests for the larger multiunit, longer-term installations. We continue to manage the expense side of the business and achieve operating margins consistent with our past performance.

We have managed our capital spending appropriately and are positioned well for the eventual recovery. What hasn't changed is our belief that our focus on large horsepower, multiunit centralized compressor stations will be in demand as we experience an economic rebound, which will further bolster USA Compression's stability throughout economic cycles. Natural gas demand has proven to be resilient, and some indications are for some meaningful growth in the intermediate term.

We expect that demand to require continued natural gas compression services. I will now turn the call over to Matt to walk through some of the financial highlights of the quarter. Matt?

[Matthew Liuzzi, VP, CFO & Treasurer]

Thanks, Eric, and good morning, everyone. Today, USA Compression reported first quarter results, including quarterly revenue of $158 million, adjusted EBITDA of $100 million and DCF to limited partners of $53 million, all of which were either flat or slightly up from last quarter. In April, we announced a cash distribution to our unitholders of $0.525 per LP common unit, consistent with the previous quarter, which resulted in improved coverage of 1.03x. And our total fleet horsepower at the end of the quarter remained largely consistent with the previous quarter at approximately 3.7 million horsepower.

Our revenue-generating horsepower at period end was also essentially flat at just under 3 million horsepower. Our average horsepower utilization for the first quarter was 83.1%, ever so slightly up from the fourth quarter. Pricing, as measured by average revenue per revenue-generating horsepower per month, was $16.60 for Q1, which was also a slight increase from the previous quarter's level of $16.55. Of the total revenue for the first quarter of $157.5 million, approximately $155.5 million reflected our core contract operations revenues, while parts and service revenue contributed roughly $2 million.

Adjusted gross margin as a percentage of revenue was 69.1% in Q1, in line with USA Compression's historical levels and slightly above the Q4 number. Net income for the quarter was $0.4 million and operating income was $32.8 million.

Net cash provided by operating activities was $39.6 million in the quarter. Maintenance capital totaled $4.5 million in the quarter. And lastly, cash interest expense net was $30 million. And at this point, we are not making any revisions to our previously communicated guidance for 2021. Last, we expect to file our Form 10-Q with the SEC as early as this afternoon.

And with that, we'll open the call to questions.

[Operator]

[Operator Instructions]. Our first question comes from Brian Reynolds, UBS.

[Brian Reynolds, UBS]

Given 1Q '21 EBITDA annualized kind of implies the high end of your guidance range, could you provide some color on the upper end of your current guidance range, just given expected strength and compression over the balance of the year?

[Matthew Liuzzi, VP, CFO & Treasurer]

Yes, Brian, I would just say at this point in the year, it's May. There's still, I think Eric hit on some of the uncertainty that's kind of lingering out there. So we thought the prudent thing was to kind of keep it where it was until we had a little more clarity kind of throughout the year. I think it's probably -- last year aside, but pretty consistent with how we've treated it in years past. And so I would just say, stay tuned. And as soon as we have better clarity and more information, we'll be sure to update everybody.

[Brian Reynolds, UBS]

Great. Just as a follow-up, some midstream peers with in-house compression. I continue to talk about investing in electric or hybrid compression. Just kind of curious as to where you stack stands on that? And are you seeing some interest in electric or hybrid compression sources? And are you factoring that into your '22 capital spend?

[Eric Long, President, CEO & Director]

Yes, Brian, it's a great question. What's interesting, electric compression isn't the panacea that a lot of people think that it is. You've got reliability, the electric grid that may or may not actually exist. You've got the ability to start an electric motor requires copious amounts of electricity in rush current and surge. The concept of hybrid compression is intriguing.

Our parent company energy transfer does have some technology that they call dual drive, which is essentially a hybrid compressor, combines electric as well as natural gas. That is something that we are exploring and are actively taking a look at as far as applicability to the potential retrofit of our fleet. So it's something on our radar screen and maybe a fair way to say is more to come on that in the future.

[Brian Reynolds, UBS]

Great. Super helpful. And I guess, just quick as a follow-up based on the energy transfer comments and the recent acquisition of Enable. Is there any interest in a potential drop-down of enable compression units to USAC? Or is that something not discussed at this time?

[Eric Long, President, CEO & Director]

Yes. I think, Brian, right now, we don't know. Obviously, they do have -- given Enable's business footprint. They do have compression. Obviously, et has not closed on that deal yet. So I think we'd have to wait until all that stuff kind of got cleared and then take it from there.

[Operator]

There are no further questions in the queue at this time. I would now like to turn the call over to Eric Long for closing comments.

[Eric Long, President, CEO & Director]

Well, the start to 2021 has been relatively quiet. We've experienced the stability in our business that we have become accustomed to over USA Compression's history, stability driven by our focus on large horsepower and the resilient global natural gas demand.

Natural gas prices have remained constructive, and the outlook for production is positive, which bodes well for our business. Our business remains the same, and we believe natural gas will continue to be important to this country and many others around the world. We have a great asset base from which to be involved in the transition to cleaner energy, of which natural gas will clearly play an important part.

We believe that the underlying stability of our large horsepower, infrastructure focused contract compression services business model, coupled with the science between the need for compression, driven by the interplay between pressures and volumes will be a key point of positive differentiation for USA Compression.

We continue to be well-positioned to benefit as the domestic and global recovery takes place. Thanks for joining us, and please be safe. We look forward to speaking with everyone on our next call.

[Operator]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.