Archrock Inc (AROC) 2017 Q1 法說會逐字稿

Good morning. Welcome to Archrock Inc. and Archrock Partners L.P. First Quarter 2017 Conference Call.

Today, Archrock and Archrock Partners released the results for the first quarter of 2017. If you have not received a copy, you can find the information on the company's website at www.archrock.com.

During today's call, Archrock, Inc. may be referred to as Archrock or AROC and Archrock Partners is either Archrock Partners or APLP. Because APLP's financial results and position are consolidated into Archrock, any discussion of Archrock's financial results will include Archrock Partners unless otherwise noted.

I want to remind listeners that the news releases issued today by Archrock and Archrock Partners, the company's prepared remarks on this conference call and the related question-and-answer session include forward-looking statements. These forward-looking statements include projections and expectations of the company's performance and represent the company's current beliefs. Various factors could cause results to differ materially from those projected in the forward-looking statements. Information concerning the risk factors, challenges and uncertainties that could cause actual results to differ materially from those in the forward-looking statements can be found in the company's press releases as well as in Archrock's annual report on Form 10-K for the year ended December 31, 2016 and Archrock Partners' annual report on Form 10-K for the year ended December 31, 2016 and though set forth from time to time in Archrock and Archrock Partners' filings with the Securities and Exchange Commission, which are currently available at www.archrock.com. Except as required by law, the company has expressly disclaimed any intention or obligation to revise or update any forward-looking statements.

In addition, our discussion today will include non-GAAP financial measures, including EBITDA and adjusted gross margin, gross margin percentage, cash available for dividend and distributable cash flow. For reconciliations of our non-GAAP financial measures to our GAAP financial results, please see today's press releases and our Form 8-K furnished to the SEC.

Your hosts for this morning's call is Brad Childers, President and CEO of Archrock.

And now I would now like to turn the call over to Mr. Childers. You may begin.

Thank you, operator. Good morning, everyone.

With me today is David Miller, CFO of Archrock and Archrock Partners.

During the first quarter, we saw significant improvement in market conditions and after 8 consecutive quarters of challenging industry conditions, we believe that we're seeing the bottom of the cycle and that the industry upturn lies ahead. Although prior period horsepower and pricing declines, coupled with expenditures required to set up a company for future growth, impacted contract operations' gross margin percentage and EBITDA in the first quarter, we saw stabilization in our operations. And I'm excited about the continued steady progress, particularly on new orders that we're making, toward positioning Archrock for growth as we begin to experience increasing demand for our services, driven by both a move to the upcycle impacting the industry overall as well as the longer term secular growth in demand for natural gas being experienced by those companies like ours that are exposed to natural gas production.

Highlights from the first quarter include our highest level of new orders since the fourth quarter of 2014 as well as improved horsepower and revenue stability. We generated EBITDA as adjusted of $65 million on $190 million of revenue.

Operating horsepower declined by 36,000 horsepower or about 1% in the first quarter, which was primarily driven by agreements with 2 large customers to return units that were on standby rates. The revenue and gross margin impact of these returns was minimal and the units are now available for redeployment. Excluding this activity, our operating horsepower was up modestly from the fourth quarter of 2016.

Our contract operations revenue continued to stabilize in the quarter. Sequentially, contract operations revenue declined by $2 million or about 1% in the first quarter, a significant improvement from the larger sequential declines we experienced throughout 2016. Contract operations' cost of sales increased about $4 million in the quarter resulting in a gross margin percentage of 57%. About half the increase in cost was driven by higher make-ready and mobilization expenses and the other half was a combination of higher labor, freight and lube oil expenses and the result of severe weather events in January. And finally, we refinanced Archrock Partners' senior secured credit agreement with a new $1.1 billion asset-based revolving credit facility.

Turning to our operations, new orders during the quarter were robust. Our sales team capitalized on the higher level of customer activity in the quarter and delivered a strong book of orders that should enable us to drive top line growth in the second half of 2017 as we've previously discussed. From a play perspective, new orders were especially strong for the Permian, Eagle Ford, Haynesville and Niobrara. The actions we took in 2016 have positioned Archrock to take advantage of market opportunities that we believe are now emerging.

On the cost front, much of the higher costs we incurred were due to an increase in make-ready and mobilization expenses as well as an increase in labor expense, each necessary as we prepare to meet higher demand. As a later cycle participant, we believe 2017 will be a transition year as the current cycle turns from contraction to expansion. During this transition period, we will work to balance cyclical lows in pricing and utilization with a need to invest to meet the expected growth ahead.

As I discussed on our fourth quarter 2016 earnings call, we increased our newbuild capital budget for 2017 to $125 million to $145 million for the full year to meet expected demand from customers. In line with our budget, growth CapEx in the first quarter was $22 million, up from fourth quarter growth CapEx of $13 million. Our strong capital position provides us with the ability to invest in new units to meet our customers' needs.

In aftermarket services, revenues were down about $2 million or 4% from the fourth quarter of 2016 as we continued to see stability in this business, and the first quarter is seasonally a low quarter for the AMS business and we expect the business to benefit from improving market conditions going forward. The gross margin percentage was flat at 15% sequentially.

Turning to the partnership. In the first quarter, stabilization of operating horsepower and revenue as well as higher new order activity levels carried through to Archrock Partners. In the quarter, Archrock Partners' revenue increased by $2 million sequentially as the partnership benefited from a full quarter of the November 2016 drop-down. Operating horsepower decreased by 48,000 in the quarter driven by the customer returns that I referred to earlier. Gross margin percent was 59% due to higher make-ready and mobilization expenses as well as higher labor as we prepare to meet increasing customer demand. SG&A was $20 million of the partnership, up $2 million from the fourth quarter, due, in part, to an increase in allocated SG&A as a result of the drop-down.

Archrock Partners' distributable cash flow coverage was strong at 1.8x for the first quarter and has provided APLP with the financial flexibility to invest in its fleet for long-term growth. Leverage of the partnership increased slightly to 4.9x debt-to-EBITDA from 4.7x debt-to-EBITDA in the fourth quarter of 2016. APLP's leverage continues to be a primary focus for Archrock and we are committed to being -- to bringing it down over time.

Now I'd like to turn to the market and outlook for our businesses. We are navigating the current turn in the cycle in a strong market position. The U.S. rig count currently stands at about 870 rigs, up 32% from year-end 2016, and commodity prices were relatively stable during the first quarter. Additionally, we note that analysts expect North America upstream capital spending to increase by 27% from 2016, with large cap E&Ps potentially up as much as 58%.

In our contract operations business, we saw solid demand from our customers and significantly higher new order activity in the first quarter. And we expect to carry this momentum further into 2017. We expect this higher level of customer activity to translate into higher operating horsepower over the course of both 2017 and 2018.

We believe our business is in an excellent position to participate in and capitalize on the secular growth drivers that are expected to increase natural gas production by between 15% and 20% through 2020 and likely more beyond that. In the coming years, we believe the significantly improved quantities, accessibility and price stability of natural gas in the U.S. will continue to drive higher levels of demand for LNG export, pipeline exports to Mexico, power generation and use as a petrochemical feedstock. We believe that growth in natural gas production to meet this demand growth will lead to an increased demand for compression services that will absorb excess equipment in the market as well as require a significant amount of new compression capacity.

As we discussed in our fourth quarter earnings call, for these reasons, we expect to increase our investment in our fleet in 2017 so that we will have equipment available in configurations desired by our customers to meet this expected demand. Continued investment in our fleet, coupled with the structural and operational improvements we made to our company, has enhanced our ability to leverage our strong operating presence, solid customer relationships and our excellent service teams and capability to grow our business as the cycle now turns toward expansion.

Finally, let me turn to our financial strategy. As I've outlined in the past, we're focused on positioning our companies to be able to grow their respective dividend and distribution. In order to do so, we believe we need to see a path to achieving a debt-to-EBITDA ratio in Archrock Partners trending toward 4x or lower. We remain committed to growing our business, maximizing our cash flow and solidifying our financial position. The actions we took during 2016 provided a foundation for us to take advantage of growth opportunities that we believe we're just beginning to see.

Now I'd like to turn the call over to David for review of both companies' financial results.

Thanks, Brad. I'll start with a summary of first quarter 2017 results and then cover guidance for the second quarter.

Archrock generated EBITDA as adjusted of $65 million in the first quarter, including other income of $1 million, compared to $75 million in the fourth quarter, which included $4 million of other income. Revenues were $190 million for the first quarter compared to a $194 million in the fourth quarter. We also reported net loss from continuing operations attributable to Archrock stockholders, excluding certain items, of $0.11 per share in the first quarter compared to a loss of $0.06 per share in the fourth quarter.

Turning to our segments. In contract operations, revenue came in at $150 million in the first quarter, down from $152 million in the prior quarter due primarily to lower operating horsepower and the competitive pricing environment. Roughly 3 quarters of the decline in revenue is related to declines in operating horsepower and about one quarter related to declines in pricing. Gross margin percentage decreased to 57% from 60% in the fourth quarter as of -- in the fourth quarter as our cost of sales was up $3.9 million quarter-over-quarter. About half of this was due to higher make-ready and mobilization costs as we prepared to meet higher demand, 1/3 was the result of higher labor to meet future demand and address severe weather events in January and the remainder was attributable to higher lube oil and freight costs in the quarter.

In aftermarket services, revenues of $40 million for the first quarter decreased modestly compared to fourth quarter revenues of $42 million. Gross margin percentage was flat sequentially at 15%. SG&A expenses were $28 million in the first quarter, up about $1 million compared to fourth quarter of 2016 levels due to modestly higher compensation expenses.

During the first quarter, on a consolidated basis, we determined that approximately 80 idle compressor units totaling approximately 28,000 horsepower would be retired from the active fleet. As a result of the retirement of these units, we recorded an $8.2 million long-lived asset impairment charge. 65 or approximately 22,000 horsepower of these units were owned by the partnership and an impairment charge of $6.2 million was recorded at Archrock Partners.

In the first quarter, Archrock's growth capital expenditures were $22 million, up from $13 million in Q4 as we have increased our capital budget in 2017 from 2016 to meet demand for equipment from our customers. Maintenance CapEx for the quarter was $7 million, flat with fourth quarter levels.

In April 2017, pursuant to the separation agreement entered into in connection with the spinoff of Exterran Corporation, an Exterran subsidiary transferred to a subsidiary of Archrock $25 million, an amount equal to the contingent financing payment as defined in the separation agreement as a result of Exterran's successful qualified capital raise in the first quarter of 2017.

Also pursuant to the separation agreement, Exterran intends to contribute to us an amount equal to the remaining proceeds it receives from PDVSA relating to its previously nationalized Venezuelan asset. In January 2017, Exterran Corporation received payments of $19.7 million from PDVSA and transferred cash to us equal to that amount. As of March 31, 2017, PDVSA owes a remaining principal amount of $20.9 million. We cannot predict when PDVSA will pay the remaining amount.

First quarter ending debt on a consolidated basis was $1.44 billion, down approximately $5 million from fourth quarter levels. On a deconsolidated basis, Archrock's first quarter 2017 debt balance was $89 million, down $10 million versus fourth quarter levels. Pro forma for the contingent financing payment Archrock received from Exterran Corporation in April 2017, Archrock's debt on a deconsolidated basis would have been approximately $64 million at March 31, 2017.

Archrock's deconsolidated leverage ratio, which is debt-to-adjusted EBITDA, was 1.6x at March 31, 2017 and available but undrawn capacity on Archrock's revolving credit facility was approximately $142 million.

Cash distributions to be received by Archrock based on its limited partner and general partner interest in Archrock Partners were approximately $8.7 million for the first quarter 2017 and for the prior quarter.

Archrock's first quarter dividend was $0.12 per share, unchanged from the fourth quarter. The first quarter dividend amount of $8.5 million will be paid on May 16. Archrock's cash available for dividend coverage was a solid 1.35x for the first quarter.

Turning to the financial results for the partnership. Archrock Partners' first quarter EBITDA as adjusted was $61 million, down 11% as compared to $69 million in the first -- fourth quarter of 2016, primarily driven by higher labor and make-ready expenses as we prepare to meet future demand as well as a decrease in other income of $3 million. Net loss was $4.3 million in the first quarter compared to a net loss of $14 million in the fourth quarter.

Revenue for the first quarter was $137 million, up approximately $2 million from the fourth quarter as Archrock Partners received the full quarter benefit from the November 2016 drop-down. Revenue per average operating horsepower was $47.99 in the first quarter, down modestly from -- to 48 -- from $48.08 in the fourth quarter.

Cost of sales per average operating horsepower was $19.67 in the first quarter, up 8% compared to $18.25 in the fourth quarter 2016.

Gross margins were 59% in the first quarter, down approximately 300 basis points compared to the fourth quarter 2016. Again, this was due to higher make-ready and mobilization costs, an increase in labor expenses, cold weather in January and higher lube oil and freight expenses.

SG&A expenses for the first quarter were $20 million, up approximately $2 million from the fourth quarter of 2016, primarily due to an increase in the allocation of SG&A to APLP due to the November 2016 drop-down.

Distributable cash flow was $34 million in the first quarter of 2017, down from $41 million in the fourth quarter of 2016, primarily due to lower EBITDA. Our distributable cash flow coverage remained strong at 1.8x.

APLP's capital expenditures for the quarter were approximately $14 million consisting of $7 million for fleet growth capital and $7 million for maintenance activities.

On the balance sheet, Archrock Partners' total debt increased $5 million sequentially and stood at $1.35 billion as of March 31, 2017. Archrock Partners' cash increased $8 million sequentially as we froze debt repayment at the end of the first quarter to close the new credit facility.

On March 30, Archrock Partners refinanced its existing $975 million credit facility with a new $1.1 billion 5-year asset-based revolving credit facility. The facility will mature on March 30, 2022 unless any portion of APLP's existing senior notes due 2021 are outstanding on December 2, 2020, then the facility will be -- will mature on December 2, 2020.

The covenant ratios of the new facility included requirement to maintain total debt-to-EBITDA of less than 5.95x through the fourth quarter of 2017, 5.7x from the first quarter 2018 through the fourth quarter of 2018, 5.5x in the first and second quarters of 2019 and 5.25x thereafter. The facility also contains a requirement to maintain senior secured debt-to-EBITDA of less than 3.5x and EBITDA to interest expense of greater than 2.5x. We were very pleased to execute this deal on attractive terms for Archrock Partners in a challenging bank market.

As of March 31, 2017, available but undrawn credit capacity under Archrock Partners' debt facilities was $293 million and Archrock Partners had a total leverage ratio, which is covenant debt-to-EBITDA as adjusted, of 4.9x as compared to 4.7x at the end of the fourth quarter. Archrock Partners' senior secured leverage ratio, which is senior secured debt-to-EBITDA as adjusted, was 2.4x at March 31, 2017 as compared to 2.3x at the end of the fourth quarter. Leverage of the partnership continues to be a primary focus for Archrock Partners.

Now let's discuss Archrock guidance for the second quarter of 2017, which includes the consolidation of Archrock Partners' results. In contract operations, we expect revenue of $148 million to $152 million, with gross margins in the 57% to 60% range as we continue to incur higher make-ready and labor costs related to ramping up our operations for growth. For AMS, we expect revenue of $42 million to $48 million, with gross margins between 15% and 17%. We do expect a seasonal uptick from first quarter levels. On SG&A expenses, we're targeting $28 million to $29 million for the second quarter. Depreciation and amortization expense is expected to be in the low $50 million range, with interest expense in the low $20 million range.

For full year 2017, total CapEx is unchanged and is expected to be in the range of $185 million to $205 million. Maintenance capital spending for the year is expected to be $40 million to $45 million. Newbuild expenditures are expected to be in the $125 million to $145 million range for the full year 2017. At Archrock, we do expect to spend $7 million to $11 million of other capital in the second quarter as the result of a large expenditure on trucks in the quarter. At Archrock Partners, we expect newbuild capital expenditures to be in the $115 million to $135 million range and maintenance capital expenditures to range between $35 million and $40 million.

I'll now turn the call back to the operator and open it up for questions.

(Operator Instructions) And our first question comes from Andrew Burd from JPMorgan.

Two questions. First, on consolidated gross margin, it looks like you missed the guidance that was provided on the last call, and you did give some commentary about make-ready costs that might be kind of nonrecurring in nature. Was that the only thing that drove the gross margin miss? Or -- and anything else might be helpful there.

Sure. No, you're right. We're 1% off of where we were on the bottom level of the guidance for the quarter, and it was really driven by the factors that we mentioned. We are investing more in make-ready than we expected and it's not because the expenses for horsepower are up. It's that we're making ready more horsepower. So the horsepower made ready in the quarter were -- was higher than we expected. The other factors that went into it. We did have a spiky January severe weather event across the country that really did cause us to spend a lot more time during those weeks, and it impacted labor and overtime a lot. That's more -- definitely more one-timey, at least from a seasonality, not reoccurring perspective. And then, the other cost that were up. We had some carryover costs that were a little bit spiky, but some of the other costs that we see both in lube oil and labor are costs that are going to be in the numbers going forward and really required as we're setting up for growth. We've got to keep our labor and capability ahead of our horsepower growth. So we consider these -- that the make-ready, the mobilization expenses to be good investments from an expenditure perspective going forward, notwithstanding the appearance or the hit it brought us for gross margin in this quarter.

No. That's great color. And you've got to spend money to make money. Final question. I appreciate the very consistent messaging you had around distribution growth for the last year, pretty much unchanged and very consistent. Would you consider self-help levers like the drop-down or something else that would accelerate the deleveraging? Or is this really -- is the deleveraging plan really an exercise in increasing the denominator of the leverage equation?

So I think -- well, I think all options are on the table, of course. The best way -- as you mentioned, the best way to decrease leverage is to grow EBITDA, but we are evaluating all forms of supporting the leverage at the partnership because that's clearly a priority for us.

Our next question comes from Blake Hutchinson with Howard Weil.

Just, I guess, first of all, a pretty optimistic preamble there. And you cited in the release as well as your introduction, the new order levels exceeding those of 4Q '14. And I guess, this isn't really a metric per se that you've given out, but what does that mean to us? And how can -- how does it compare to maybe some of the tougher periods that we experienced over the last couple of years? Is this indications from customers for commitments to new equipment, idle equipment, both? And I guess, so what does it mean? And how does it compare to what we've seen recently?

Yes. Sure. So the easy answer is these are bookings for our services on new locations for both existing equipment as well as new equipment. It's really just the order book to commit our services for the future period with the customers. And it's such a significant move in the quarter that even though it's not a metric that we're going to introduce or report on, I'll come back to why for a minute, the magnitude of it felt very much like an indication of what we expected and have been saying in past calls and releases that we saw it coming, which is a wave of activity to start to see the industry catch up to the amount of underinvestment that we saw during this downturn. And so to catch up, we see customers seriously getting back to work now and requesting and committing to our services at a level that's such a significantly higher level than in the past that it is definitely noteworthy and we are optimistic about what it means for our business. One comment or thought on the metric that -- a challenge with new order activity, however, is that these are new orders that stretch all the way through '17 and even into 2018. So we see a good long tail on this book of business, which is good, but the timing of the starts will, of course, be offset by the timing of stop activity. And we think that it's the net growth in horsepower that really drives our business. So while we love to see this new order book because it stretches out over a longer period of time and because it definitely is one half of the factors against the normal churn and turnover of the business, we don't really think it's a metric to be followed, but a magnitude of order activity in the marketplace that we absolutely found noteworthy.

Got you. And, I guess, maybe just a couple of follow-ups in terms of your observations on that metric. Is there a point, as we make-ready and we have this -- the give and take friction within the business that, kind of all things being equal on the commodity front, you think you start to get a more definitive trend towards net horsepower additions?

Yes, I do. I do, but it starts with the cycle indicating new order activity where we see both existing operations staying in place longer as well as customers needing more services on location as they grow their production. And since we see production growth for '17 and ahead and we see production growth going strong for the next at least 5 years, we believe that is going to lead us into that position. We've always -- we've tried to consistently indicate -- we saw the back half of '17 is really the start of when we should see that. That really hasn't changed and what we're reporting out this period is very consistent with that.

Great. And then, just another follow-up to that. I guess, the last conference call, which wasn't really all that long ago, I think there was a little bit more of a tone of concern that while demand was improving, the pricing competition was fairly heated. And so there was an issue regarding how seamlessly added horsepower might enter the fleet from kind of a pricing and margin perspective. Any insights you can help us with on that? Do you think we're at this point that we might have a fairly seamless entry? Or do we need to be considerate of the fact that new horsepower may dilute all those metrics around the edges?

We still see a very competitive pricing environment in the marketplace. And you saw that our revenue per horsepower stepped down just a bit. And it's a nature of the competition and the amount of idle capacity in the marketplace today in certain horsepower ranges that will continue to derive, I think, relatively flat pricing as we all turn over horsepower that's at this more competitive pricing level this year than it was in the prior year. That said, where we see new horsepower coming in, we expect to see more stability as utilization within those categories and that equipment level is starting to tighten, which is why we're all buying some more. So it's a balance and I would expect that until we see industry utilization moving back into the mid-80% range, mid-80s, that we're going to continue to see a pretty competitive pricing environment. But the good news is step one is putting your horsepower to work, putting the existing horsepower to work. And as we see this order activity pick up, we see that path -- we see a path to getting there that's ahead of us now.

Our next question comes from TJ Schultz from RBC.

Just on that last point, how suitable is the current idle capacity in your asset base right now for redeployment? Or is there a sizable spend required to get those idle assets working?

Well, the sizable spend or the spend that we have to get the equipment ready is in our numbers. You can see that in our performance for the quarter. It's one of the things that impacted our gross margin percentage. And the equipment that we have in our fleet is good to go to work with a modest level of make-ready expenditure like you're seeing in the current period, although this period we made ready a lot more horsepower than we expected, which was a good thing. So we think the equipment and our fleet is good. We've been pulling equipment that we did not want to reinvest in out on a quarterly basis. And so we think it's equipment that will go back to work. Another indication of this is that when we look at our overall start activity, approximately 20% to 30% of our starts come from new equipment and the remainder from our existing fleet as we believe that's a validating metric as to the usefulness of what we're carrying in our existing idle fleet.

So the expenses are more in that make-ready nature, mobilization and so forth, not so much as far as having to change the specs on the equipment and so forth? Is that right?

That's correct. When we have to change the configuration of the unit to meet a different specification, we typically -- that typically would show up in CapEx more than in OpEx.

Right. Okay. That's right. That's what I was thinking. I guess, just moving on broadly, your view on the contract compression market from a M&A perspective. Are there opportunities for you at all? Or do you want to consolidate in the space?

Look, there are a number of players in the market today. And we believe that there's both maybe too much equipment and too much cost in the form of too many companies chasing these opportunities. We think consolidation would be a good thing in the industry, whether we lead it or a part of it or whether others are. We think consolidation would be a good thing. We have been a participant on the M&A front and consolidations in the past. But that's the only observation I'd really throw out is that, yes, we think there's room for consolidation in the industry.

Okay. Fair enough. Just one last one specific on how to think about distribution policy when you get the balance sheet where you want. Do you reset, pay out higher at some level, at the right coverage? And what is that coverage ideally for you long-term? Or do you just think you'd grow the distribution kind of more steady to work coverage down over time?

We haven't set what the distribution policy is going to look like when we get back to the point where we're comfortable raising it up. So it's too early to comment on where we going to set it and how it will move, but we do know that we're carrying pretty good leverage right now. That is our first concern. We want to see that move in the direction we've indicated. And the path to doing that includes the growth in our business, which we're seeing very strong indications of and positive indications of. And as for the coverage, we're also carrying robust coverage to address that leverage. So we believe the good news is, from a capital perspective, we have adequate -- a great capital position right now to participate in growth to drive that EBITDA going forward, mobilization and growth in horsepower, which is going to allow us to take those steps in the future. So we feel like we're in a really good position, but it's premature to talk about the distribution policy at this stage.

Our next question comes from Daniel Burke from Johnson Rice.

Okay. Just a couple left here. I was curious. This one's a bit specific. But in terms of the growth CapEx, it looks like the full year budget continues to contemplate the vast bulk of that will be sponsored at the APLP level. And yet in Q1, if I did my subtraction correctly, it looked like more of the growth CapEx remained at the Archrock level. What -- can you talk about the reasons or the rationale for that?

Yes. Going forward, the guidance we gave is how it would be reflected. The -- we have a large -- a decent amount of equipment that we ordered in 2016 for Archrock that we paid for in this quarter. And so going forward, we expect a much higher portion of the growth CapEx to be spent at the partnership than at Archrock.

Got it, David. And then, a broader question. I mean, can you characterize maybe the magnitude of stop activity you're seeing in the market in Q1 or into Q2 versus the environment last year? I mean, what's the net negative you've had to overcome to move back into net horsepower gain?

Well, I'll characterize it qualitatively. It is the case that is our customers have turned their attention away from the drastic cost-cutting activities that were prevalent during the downturn part of the cycle and they're looking more at growth, but I think they're also performing in a way that maximizes or at least maintains much more existing production as a base so they turn to looking at adding growth. So we have seen a moderation in the overall stop activities over the course of the last few quarters. That's the other side that we do see often running concurrently with the growth activity that we're seeing the front end of now.

Got it. And then, maybe just the last one. I appreciate that this will essentially be a gross over simplification. But when we look at the Q2 NACO revenue guide that essentially kind of brackets where Q1 shook out, I mean, is the right conclusion then that sort of average horsepower in the field and average pricing are essentially tilting to flat quarter-over-quarter?

Yes. That's a good assumption there. Like we said, we're seeing stabilization in revenues and in horsepower continue in our favor. So that's what we expect for Q2.

We have no further questions at this time.

I'd like to turn the call back over to Mr. Childers for final remarks.

Great. Thank you, operator. Thank you, everyone, for participating in our first quarter review call.

As we noted, we drove strong new orders in the first quarter and are positioned to take advantage of growth opportunities in 2017 and beyond. We'll balance our need to invest in our fleet to meet expected growth with cyclical lows in pricing utilization as we discussed. As we do so, we remain focused on providing exceptional coverage and service to our customers.

And on this point, let me take a moment and pause and thank our tremendously talented employees in the field, in our shops and throughout our organization for their incredibly diligent and hard work. Your commitment to work safely and deliver excellent service to our customers continues to drive our company, our performance and our future growth. Thank you, employees throughout Archrock, for your hard, safe and excellent work.

With that, we'll look forward to talking to everyone and updating you following our second quarter later this year. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.