USA Compression Partners LP (USAC) 2012 Q4 法說會逐字稿

Thank you for your patience. Welcome to the USA Compression Partners, LP's fourth quarter and full year 2012 earnings conference call. During today's call, USA Compression Partners, LP may be referred to as US Compression or USAC. At this time, I would like to inform you that this conference is being recorded.

(Operator Instructions)

I would now like to turn the call over to Mr. Greg Holloway, General Counsel. Sir, you may proceed.

Well thanks, Candace. Also, would you let people know, and perhaps that's what I'm doing right here now, that this call will be available on our website for the next eight days. Are there any other instructions, Candace, on that?

No sir, but I can add that in.

Okay, thanks. Well welcome, everybody, to our call. As most of you know, yesterday afternoon we released our financial results for the fourth quarter and the full year ended December 31, 2012. Copies of our earnings release may be obtained at our website which is www.usacpartners.com. During this call, USA Compression will discuss certain non-GAAP measures in reviewing our performance, such as adjusted EBITDA, gross operating margin and distributable cash flow. You will find definitions and a reconciliation of these measures to GAAP measures in the summary pages of the earnings release and on our website. I want to remind listeners that the news release issued yesterday afternoon by USAC, our officers' 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 our performance and represent USA Compression's current beliefs.

Various factors could cause results to differ materially from those projected in the forward-looking statements. Information concerning the risks, challenges and uncertainties that could cause actual results to differ materially from those in the forward-looking statements can be found in our press release, as well as in our final IPO prospectus as filed with the Securities and Exchange Commission on January 16, 2013, and those set forth from time to time in our other filings with the SEC, all of which are available on our website at www.usacpartners.com. Except as required by law, USA Compression expressly disclaims any intention or obligation to revise or update any forward-looking statements. Your host for this morning's call is Eric Long, President and Chief Executive Officer of USA Compression. I will now turn the call over to Eric.

Thank you, Greg, and good morning to everyone. With me today, along with Greg Holloway, our General Counsel, is Jody Tusa, CFO of USA Compression. On today's call, I will review our performance for the fourth quarter and full year results for 2012 and provide commentary on our growth opportunities for 2013. Starting with our performance, we reported record levels of revenue for both the fourth quarter and full year 2012. Revenue for the fourth quarter of 2012 was $31.8 million, compared to $28.4 million for the fourth quarter of 2011. Revenue for the full year 2012 was $118.8 million, an increase of 20% over the $98.7 million we reported in 2011. Adjusted EBITDA for the fourth quarter of 2012 was $16.8 million versus $14.1 million for the fourth quarter of 2011 and was $63.5 million for 2012 compared to $51.3 million for 2011.

We believe we will continue to see significant growth in our revenues and adjusted EBITDA as a result of the additional capital expenditures we invested in new compression units in 2012 and expected to be invested in 2013. We added 200,000 horsepower of new compression units to our fleet in 2012 and ended the year with approximately 920,000 total fleet horsepower, making USA Compression one of the largest independent providers of compression services in the US. In addition, our horsepower utilization rates remained strong throughout 2012 at well above 90%. We continue to see strong demand for our contract compression services throughout the shale and unconventional plays in which we operate, but especially in the Marcellus and Eagle Ford shales and the Mississippi Lime and Granite Wash areas. Based on continued strong demand signals from our customers, we have ordered approximately 87,000 horsepower of new compression units scheduled for delivery predominantly over the first half of this year, of which 51.7% is currently under customer contracts.

Our 2013 financial guidance contemplates the addition of 100,000 horsepower of new compression units, but we will continue to evaluate our customer demand to determine whether to increase the size of our compression unit purchases for this year. Our revenue generating horsepower increased from 649,285 horsepower at the end of 2011 to 794,324 horsepower at the end of 2012 due to the additional horsepower we placed into service in the Marcellus, Fayetteville, Woodford and Eagle Ford shale plays as well as the Mississippi Lime and Granite Wash areas. We expect our growth in 2013 to occur primarily in the liquid-rich portions of shale and unconventional plays.

I would like to take a few minutes to outline the five components of our business strategy, which we believe are essential to our success. First, we will capitalize on the increasing need for natural gas compression in conventional and unconventional plays, with a particular emphasis on the continued shifting of natural gas production to domestic shale plays, as well as on the declining production pressures of aging basins. Next, we will continue our focus on organic growth opportunities by increasing our business with existing customers, obtaining new customers in our existing areas of operation, and expanding our operations into new geographic areas. Next, we will continue to partner with existing and new customers who have significant compression needs, particularly those who have major acreage positions, acreage dedications or regional franchises in active and growing areas.

Fourth, while our principal growth strategy is to continue to grow organically, we may from time to time pursue accretive acquisition opportunities of complementary assets or businesses. Finally, and not least importantly, we intend to maintain our financial flexibility to take advantage of growth opportunities. We look forward to communicating with you in the future on the execution of our business strategy and our plan. I will now turn the call over to Jody Tusa, who will take you through a review of our financial performance.

Thank you, Eric. As Eric mentioned, USA Compression reported record revenue levels for the fourth quarter and full year 2012 and we continue to generate improvement in our gross profit margins. We also reported record levels of adjusted EBITDA for 2012. Revenue in the fourth quarter of 2012 was $31.8 million as compared to $28.4 million for the same period in the prior year, an increase of 12%. This increase was primarily driven by an increase in our contract operations revenues as a result of adding revenue generating horsepower and was partially offset by some incremental retail parts and service revenue in the fourth quarter of 2011 that did not recur in the fourth quarter of 2012. Excluding this retail parts and service revenue in 2011, the incremental increase in contract operations revenue in the fourth quarter of 2012, as compared to the fourth quarter of 2011, was 24%.

Revenue for 2012 was $118.8 million versus $98.7 million in 2011, an increase of 20%. The increase in our contract operations revenue from 2011 to 2012 of 24% was driven almost exclusively by the growth in our revenue generating horsepower. Average revenue generating horsepower was 792,000 for the fourth quarter in 2012 as compared to 629,000 for the same period of the prior year, an increase of 26%. Adjusted EBITDA for the fourth quarter of 2012 was $16.8 million as compared to $14.1 million for the same period last year, an increase of 19%. Adjusted EBITDA for 2012 was $63.5 million as compared to $51.3 million for 2011, an increase of 24%. Gross operating margin in the fourth quarter of 2012 was $21.9 million as compared to $16.8 million for that same period of the prior year, an increase of 30%. And our gross operating margin for 2012 was $81 million as compared to $59.1 million for 2011, an increase of 37%.

The gross operating margin percentage increased from 59.3% in the fourth quarter of 2011 to 68.9% in the fourth quarter of 2012, and increased from 59.9% in 2011 to 68.2% in 2012. These increases primarily resulted from the operating leverage we achieved by adding large horsepower compression units to our revenue generating horsepower portion of our fleet and the elimination of expenses under an operating lease with Caterpillar. On December 15, 2011, we purchased the compression units that were previously leased under this Caterpillar operating lease for $43 million. Excluding the Caterpillar operating lease expense of $770,000 during the fourth quarter of 2011, the gross operating margin percentage was 62%. Excluding this operating lease of $4.1 million in expense during 2011, the gross operating margin percentage was 64%. Maintenance CapEx and cash interest expense were $3.5 million and $3.8 million, respectively, for the fourth quarter of 2012, while expansion CapEx was $28 million for this period and was used primarily to purchase new compression units. Maintenance CapEx and cash interest expense were $13.3 million and $14.1 million, respectively, for 2012, while expansion CapEx was $166.7 million and was also used primarily to purchase new compression units.

Distributable cash flow in the fourth quarter of 2012 was $9.2 million as compared to $5.9 million for the same period last year and was $34.9 million in 2012 and $22.8 million in 2011. USA Compression closed its initial public offering on January 18, 2013 and used the net proceeds of $180.8 million to repay a portion of the outstanding balance under our revolving credit facility. Our balance under our revolving credit facility as of December 31, 2012 was $502 million and was $322 million after applying the net proceeds of the IPO which results in a leverage ratio of five times on a trailing twelve monthly basis. Based on our full year projections for 2013, we expect our leverage ratio to be reduced to approximately 4.5 times by the end of 2013 due to the increase in adjusted EBITDA anticipated as a result of the expansion capital expenditures invested in 2012 and that we expect to invest in the first half of 2013. Our remaining revolver capacity, subject to certain financial covenants, upon the completion of the IPO was $279 million, which we believe, combined with cash flows generated by the business, is adequate to fund our planned organic growth over the next several years. We believe that we have attractive organic growth opportunities, particularly in the liquids-rich portion of shale and unconventional plays.

We are confirming our 2013 forecast of revenue and adjusted EBITDA of $145.4 million and $82.1 million, respectively, as contained in our final IPO prospectus recently filed with the Securities and Exchange Commission, and providing 2013 guidance on distributable cash flow of $56 million. While we are confirming those specific amounts in our annual forecast, we expect at some point in the future to provide a range of annual guidance on these components to our investors. Finally, we expect to file our Form 10-K with the Securities and Exchange Commission on or about March 27, 2013. With that, we will open the call to questions.

Thank you, sir.

(Operator Instructions)

Jim Rollyson, Raymond James.

Or you can call me Jill, if you like. Eric, just going back to your comments about the 87,000 horsepower, you said a little over 50% of that is spoken for with contracts. When you go into a period of looking at the market, and sizing up the orders, kind of tracking to your 100,000-horsepower annual growth target, do you have some magic formula as far as what percent of the business or the horsepower gets contracted before you pull the trigger? Or is it just more of a touchy-feely customer conversations, and how the market seems to be shaping up? Just trying to figure out how you think about that when you guys go about placing orders.

Sure, Jim. Kind of like the secret sauce of any particular restaurant, there is some science and some magic here. We really do have a pretty good feel, in visiting with our customers, what some of their developing plans are. So, we have a mix of customers who have forward-looking plans that are six to nine months, even a year out in some cases, and then we have some folks who, when they are in the midst of their development programs, see that their needs may tend to accelerate. So, as these infrastructure plays are being built out, as new pipe is being laid, completions and fracs are improving. If you've seen with type curves into client profiles, sometimes folks' type curves improve significantly, requiring an acceleration of delivery of compression in some cases, depending on the areas that may see some change to the negative of that.

So, we are continually in the marketplace listening to our customers, seeing what commodity prices are doing, seeing what's going on with fuel switching. To the extent natural gas prices may have declined a little, you see extensive coal burn and fuel switching, weather patterns, all of these things affect it. So, it's not just one component that goes into it, but suffice it to say, as we get into being at the levels contracted where we are, pushing 60%-ish -- to the extent over the next 30, 45, 60 days, we see continued strong demand signals, it will be time for us to pull the trigger on some potential new orders as well.

Okay. That's very helpful. Just as a follow-up here on -- your revenue per horsepower has trended lower, as you noted, or in the press release, just based on the fact that you've been adding higher horsepower units to the fleet just the way the revenue per horsepower works out with those larger units. Can you remind us if you kind of expect that trend to continue as you primarily order larger horsepower units, number one? And number two, do you guys see any market opportunity for any pricing help?

Jim, let me hit the first component on the forward trend on the horsepower. We do indeed continue to see some of that average dollars-per-horsepower monthly service fee declining due to the mathematical average with the additions of bigger horsepower. Now, I will point out that our operating margins do have improvement with the bigger horsepower machines. So, we anticipate that although that dollars-per-horsepower monthly service trend may decline a little bit, we'll actually see improvement in our overall EBITDA margin.

And Jim, I might add that the largest category of horsepower compression that we have at 1,800-horsepower per unit, actually runs at a price point that is just slightly over $14 per horsepower per month. So, that will continue to give us an opportunity to weight up that average over time.

And the other thing, to address the other component of your question is, we do continue to see some strengthening in pricing in the market, and we have taken advantage of that, albeit just incrementally. But would also expect, as we get contracts returned, to have some component of our revenue base hitting improved pricing in the market.

That's helpful. And obviously the larger units have better margins and return. So, no problem there. I'll turn it over. Thanks, guys.

Thinks, Jim.

Sharon Lui, Wells Fargo.

Hi. Good morning.

Good morning, Sharon.

Just wondering if you're still comfortable with your growth CapEx budget of $94 million?

We are, Sharon. In fact, as we mentioned in the release, we have -- or rather in Eric's commentary, 87,000 horsepower on firm purchase orders, and so we are on track to look at the $94 million of growth CapEx for this year. Again, if we see some opportunities that we can increment that up, that make sense [under] the underlying economics, then we will consider that. But we are comfortable to confirm also the growth CapEx that we had then indicated in the prospectus.

Okay. And maybe if you could just give us a sense where the new units will be deployed, in terms of which regions? And perhaps also, which new regions do you see some growth opportunities in?

Sure, Sharon. We -- obviously, with commodity prices where they are, with the strengths in the liquids complex on the oil side, the very liquid-rich plays, the oil legs of some of the shale plays are where we're seeing a lot of activity right now. We see ongoing activity in the Marcellus. We see development in the Utica occurring. We see lots of activity in the Eagle Ford -- the liquids-rich component of the Eagle Ford shales.

Interestingly, there are some dry gas areas that, although activity has slowed, we are not seeing a complete shuttering of activity. So, we do see some continued activity in the Fayetteville. We see some continued activity in the dry gas portion of the Marcellus. Obviously, there are activities in some of the newer areas where we don't have a footprint currently, in the Rocky Mountains, in the west Texas complex, and in southern Louisiana.

So, I think that our broad geographic basinal coverage today gives us lots of stability. As some of the areas, as I mentioned with the dry gas areas, may slow some activity, that activity doesn't cease. We continue to have a very strong footprint in arresting decline in those areas with some nominal growth, as well as substantial growth in those liquids-rich legs.

That's very helpful. Thank you.

Thank you, Sharon.

Ted Durbin, Goldman Sachs.

Thanks. Good morning.

Morning, Ted.

Can you talk a little bit about -- as you are seeing these contract renewals -- this shift away from maybe some of the month-to-month contracts you've done versus moving into the long-term contracts? How are you seeing that shift, if at all, or are you continuing to stay around 40% of your revenues on month to month?

Yes, Ted, our composition, at least at present, remains at about 40%. We are seeing opportunities to get some component of that termed up, and we would like to move those -- that month-to-month component back to something smaller than 40%, as we were a couple of years ago. Eric is signing up some attractive term on contracts for both renewals, as well as the new units that we are taking, a number of those as long as five years in duration. So, we expect to improve the month-to-month component some amount during the course of 2013. But probably we'll remain in that range for some time.

Ted, let me expand just a little bit on that. The new contracts for new units in new activities that we deployed, don't go out on a month-to-month basis. Our primary term of new units that are set typically are somewhere in the two- to five-year type primary term range. What we see are units that have been installed, and then after they go off the primary contract, we effectively have an evergreen, where those things go month to month at that point in time.

We look at a low profile of our machines to look at those month-to-month units and say -- gosh, do our customers need the machines? Are they running fully loaded, or are they running lightly loaded, meaning that they're paying for horsepower they don't necessarily use? And what we're finding is that a high percentage of those units that are on month-to-month basis are running at a highly loaded profile.

So, we have made some decisions on some of these not to re-term on extended term pricing or extended term contracts due to some of the pricing cycles we saw in the marketplace over the last year or so. So, as Jody mentioned, to the extent that we start to see some firming in the marketplace, we see some uplift in our monthly service fees, we may opt at that point in time to revisit some of the term and tenor of those month-to-month contracts with our existing customers.

Some of the folks have been looking for optionality. We saw softness in commodity price, obviously, last spring at $1.90 an Mcf. Some folks were reining in their drilling programs, and not overly clear on what 2013, and on into 2014, their development plans might look like. So, with the rebound in commodity price up off of that floor, coupled with continued performance and needs for our compression horsepower, I think that we will have the ability to potentially re-term some of those month-to-month contracts in the future.

That's very helpful. Thanks. The second one for me is just talking about your mix of customers as you are signing up some of the new horsepower, both on the stuff that's on order plus what else you're seeing. Would you categorize those as more midstream-type customers, maybe more E&Ps that are looking to outsource? And then maybe talk about the credit quality of the new customers you're bringing on?

Sure, Ted. A lot of the folks we deal with might be, call it, the midstream affiliates of some of the major E&P players. We have major oil companies that we're working with. We're working with the gathering affiliates of some major independent producers. And then we're working directly with the E&P arms of both major oils as well as some of the larger, independent E&P type of producers.

When we look at the credit quality, we're very pleased with what our book looks like, with the major oils and some of the very major, large E&P players. We have very few client customers who are exclusively dry gas types. So, when I look at the research following our top-10 public company type of customers, who are all extremely strong credits. When I look at some of our private customers who would be in our top-15 or-20 customers, again, very strong credit quality.

So, Jody, you might speak to some of our past receivables, and when you look at our -- how we bill in advance, how the credit quality and the implications of our mission-critical service really follow through.

Ted, you may recall that we bill our revenues 30 days in advance of the service month. So, that not only gives us good visibility into our revenue and cash flow trends; write-offs for us have been de minimus. So, if you look over about a five-year history, the write-offs run less than 0.5%. And by Eric's commentary, since we are looking at large customers who are certainly credit worthy, we don't expect any kind of significant exposure to bad quality credit.

Great. Thanks. And then a last one, quick one for me -- it looks like G&A for the quarter was a little higher than what we were looking for. I'm just wondering if there is any kind of one-time items in there?

Actually, there are. We had a little bit of a reclassification to line up our final annual bonuses between our operating expense and our SG&A component. So, Ted, you did see a little bit of a slight tick up there. But we would expect that to normalize as we look into the quarters in 2013.

Great. That's it for me. Thanks a lot.

Mark [Sliaverg], Barclays Capital.

Hi. Good morning, everyone.

Good morning, Mark.

Can you comment a bit on the current lead times you're seeing from some of your providers for new compression units? Just trying to get a feel for when any potential up-size in your spending plans could lead to growth in cash flow.

Sure thing. We look at the major suppliers of our components would be predominantly Caterpillar and Ariel. There are different product mixes, from really big stuff to fairly small things. With our focus on large horsepower, north of 1,000 horsepower per unit, the lead times right now, if we were to not have equipment already in queue with our fabricators, would be somewhere in the four- to six-month range depending on the actual type of equipment.

If you look at it today, we're the first of March -- so there was a question posited about where are we with looking at our possibility of our next order? So, we do have 87,000 horsepower scheduled for delivery during Q1 and in Q2, a little bit of carry-over into Q3. So, today we would be looking at delivery realistically in that first of July type timeframe for orders that would be placed today, potentially in the August or September range. So, it's four- to six-month leads right now.

And, Mark, I might add, you see that we continue to run consistent utilization rates, so in terms of modeling out revenues and cash flows from those lag times, we would expect it to continue to get most of that new equipment under customer contract by the time we take possession of it. So, in terms of utilization rates translating into cash flows, we expect those to be pretty consistent with our past performance.

Okay, great. And I guess somewhat related to that, and a bit similar to a question Jim had asked earlier, can you comment a bit more specifically on the general timeframes you're seeing on signing some of these new contracts? I know you're about 50%, 60% for the 87,000 today. Just trying to get a sense for how far in advance you are signing contracts, and how that compares to some of the timeframes you have seen in the past.

Sure. The contracts are being signed up sometimes in advance of taking possession of the equipment. And more often than not, though, the lag times that we are modeling out would indicate that it perhaps takes a month or two after taking possession of the equipment before it's hitting our revenue base. So, again, we would expect, Mark, that in terms of completing the rest of the customer contracts for the 87,000 horsepower, that most of that would be signed up over the remainder of the first and second quarter, and to some extent in early Q3. But we would not have significant levels of horsepower being idle from new unit deliveries because they are not under customer contracts.

Okay, great. And then sort of a variation on the theme, but just want to confirm, as far as the step up in EBITDA growth, obviously, this new spending will drive a pretty significant ramp throughout the year. Should we still expect the most growth in Q3, or it sounds a bit like it may be borderline on a Q4 event?

We still expect to see a significant step up in Q3. And consistent with the kind of quarter-by-quarter revenue-generating horsepower that we had in the prospectus. So, we don't see any slippage, Mark, in terms of taking possession of new equipment and increasing the revenue-generating horsepower. So, still looking at a meaningful step up in the third quarter of this year.

Okay. Perfect. That was it for me. Thanks so much.

Okay. Thank you.

James [Jameblo].

Thanks for taking my question. Given that you guys are a little bit more levered than most MLPs, do you foresee any scenario where you would re-file an S-1 and raise more equity during the year this year to bring your leverage ratio lower?

We really don't see that, James. We, just from the cash flow that we will generate and retain under our distribution reinvestment program, would see the leverage running at about 4.5 times at the end of the year. Without an equity offering next year, that could improve to something that looks perhaps a little more like upper 3s or right at 4 times. So, if we look at doing something in the equity markets, we don't have a planning scenario that would include doing so this year. A planning scenario potentially could be looking at that in 2014, but, again, we have by the growth plans that we've outlined at 100,000 horsepower per year can de-lever the business from our internally generated cash flows.

Would it be fair to say that if you did an acquisition, you might need to have an equity offering?

That's a -- I think that's a fair comment. So, if there were a transaction, I think we would look at all the logical components of the capital structure, and the transaction would kind of dictate what would make sense in terms of debt versus equity financing.

Okay. Thank you very much.

Okay.

This concludes the question-and-answer portion of today's conference. I will turn the call back to management for any closing remarks.

We appreciate the interest in our Company, and the continued support of all of our new investors, post-public. The management team is here at any time for reach-out and questions. We view our relationship with our shareholders as a true partnership. We value the relationship, and look forward to being transparent as we grow our Business together in the future. Thank you very much.

We thank you for your participation. You may now disconnect. Have a great day.