USA Compression Partners LP (USAC) 2013 Q1 法說會逐字稿

Good morning. Welcome to the USA Compression Partners LP first quarter 2013 earnings conference call. During today's call, USA Compression Partners LP may be referred to as USA Compression Partners, or USAC, at this time. I would like to inform you that this conference is being recorded and I would like to turn the call over to Greg Holloway, Vice President and General Counsel and Secretary. Thank you.

Well, thanks, Stephanie. Last time when we begin the call, I had mentioned that we had a replay that was available, and it was only available for seven days. I really misspoke a bit; that replay is a telephone replay. The webcast is up for quite a bit longer. So, Stephanie, would you confirm that I've gotten it correct this time?

That's correct. And the replay will be available at the moment -- sorry, bear with me one second -- it's for eight days.

Okay, that's the telephone replay. Thanks, Stephanie.

Well, good morning, everyone, and welcome to our call. This morning, as you know, we released our financial results for the quarter ended March 31, 2013. Copies of our earnings release may be obtained on our website at www.usapartners.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 this morning 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 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, everyone. With me today along with Greg Holloway, our Vice President, General Counsel and Secretary, is Jody Tusa, the Vice President and Chief Financial Officer of USA Compression. On today's call, I will review our performance for the first quarter of 2013 and provide commentary on our growth opportunities for the remainder of 2013.

Starting with our performance, we reported record levels of revenue and adjusted EBITDA for the first quarter of 2013. Revenue for the first quarter of 2013 was $32.6 million compared to $27.1 million for the first quarter of 2012, an increase of over 20%. Adjusted EBITDA for the first quarter of 2013 was $17.4 million, a 22% increase compared to the $14.3 million for the first quarter of 2012.

We believe we will continue to see significant growth in our revenues and adjusted EBITDA as a result of the additional capital expenditures invested in new compression units in 2012, the first quarter of 2013 and expect it to be invested in the remainder of 2013.

We added 23,521 horsepower from new compression units to our fleet in the first quarter of 2013 and ended the quarter with approximately 943,000 total fleet horsepower, making USA Compression one of the largest independent providers of compression services in the US, based on total fleet horsepower.

In addition, our horsepower utilization rates remained strong throughout the quarter at above 90%. We continued 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 for our customers, we have ordered approximately 90,000 horsepower of new compression units which are scheduled for delivery predominantly over the first half of this year, including the 23,521 horsepower that we acquired in the first quarter of 2013.

We have customer contracts for all of the new compression units ordered and scheduled for delivery, primarily in the first quarter of 2013, comprised of 35,880 horsepower and 51% of the new compression units ordered and scheduled for delivery, primarily in the second quarter of 2013, comprised of 50,915 horsepower. We expect to order a total of 100,000 horsepower of new compression units, which supports our full-year 2013 guidance range. But we will continue to evaluate our customer demand to determine whether to adjust the size of our compression unit purchases for this year.

Our revenue-generating horsepower increased from 794,324 at the end of 2012 to 807,988 at the end of the first quarter of 2013, 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 continued 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 once again outline the five components of our business strategy, as we believe are essential to our success. One, 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.

Number 2, 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.

Number 3, we will continue to partner with existing and new customers who have significant compression needs, particularly those that have major acreage positions, acreage dedications or regional franchises in active and growing areas.

Number 4, 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.

And number 5, we intend to maintain our financial flexibility to take advantage of growth opportunities.

We look forward to communicating with you in the future on execution of our business strategy and our plan. I will now turn the call over to Jody, who will take you through a review of our financial performance.

Thank you, Eric. As Eric mentioned, USA Compression reported record revenue and adjusted EBITDA levels for the first quarter 2013, and we continue to generate improvement in our gross operating margins. Revenue for the first quarter of 2013 was $32.6 million as compared to $27.1 million for the same period in the prior year, an increase of 20.2%. This increase was primarily driven by an increase in USA Compression's contract operations revenues as a result of adding revenue-generating horsepower to our fleet.

Contract operations revenues in the first quarter of 2013 were $31.9 million as compared to the first quarter of 2012, which was $26.6 million, an increase of 20.1%. The increase in our contract operations revenue from first quarter 2012 to first quarter 2013 of 20% was driven almost exclusively by the growth in our revenue-generating horsepower. Revenue-generating horsepower was 807,988 for the first quarter of 2013 as compared to 827,720 for the same period forecasted in our final IPO prospectus. While we have slightly lower revenue-generating horsepower, we generated $13.59 average revenue per horsepower per month, which is higher than what we had expected.

Average revenue-generating horsepower was 801,574 for the first quarter of 2013 as compared to 680,063 for the same period of the prior year, an increase of approximately 18%. Adjusted EBITDA for the first quarter of 2013 was $17.4 million as compared to $14.3 million for the same period last year, an increase of 22.4%.

Gross operating margin for the first quarter of 2013 was $22.2 million as compared to $18.1 million for that same period of the prior year, an increase of 22.5%. The gross operating margin percentage increased from 66.7% in the first quarter 2012 to 68% in the first quarter of 2013, or 69.1% excluding retail services and related operating expenses for the first quarter of 2013. 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.

Maintenance CapEx and cash interest expense were $3.1 million and $2.6 million, respectively, for the first quarter of 2013, while expansion CapEx was $20.3 million for this period and was used primarily to purchase new compression units. Maintenance CapEx and cash interest expense were $2.6 million and $3.2 million, respectively, for the first quarter of 2012, while expansion CapEx was $48.8 million and was used primarily also to purchase new compression units.

Distributable cash flow for the first quarter of 2013 was $11.6 million as compared to $8.4 million for the same period last year, an increase of 37.6%. On April 23, 2013, we announced a cash distribution of $0.348 per unit on our common and subordinated units. This prorated amount corresponds to 72 days of the quarterly cash distribution rate of $0.435 per unit, which exceeds the minimum quarterly distribution of $0.425 per unit.

This first-quarter distribution corresponds to an annualized distribution rate of $1.74 per unit. The first distribution is prorated to cover the portion of the quarter after January 18, 2013 the closing date of our initial public offering, through March 31, 2013. The prorated distribution will be paid on May 15 to unit holders of record as of the close of business on May 3, 2013.

USA Compression Holdings LLC, the owner of 62.2% of our outstanding common and subordinated units, has elected to reinvest under our distribution reinvestment plan all of the distribution it receives on its units. Distributable cash flow coverage for the first quarter of 2013 is 0.9 times and cash coverage for the actual distributions to be paid as result of USA Compression Holdings' reinvesting under our distribution reinvestment plan is 2.4 times.

Our balance under our revolving credit facility as of March 31, 2013 was $335.6 million and was $502.3 million on December 31, 2012. Our credit facility balance at March 31, 2013 results in a leverage ratio of 5.1 times on a trailing 12-month basis, in compliance with our leverage ratio covenant within the credit facility. Based on our full-year projections for 2013, we expect our leverage ratio to be reduced to 4.6 times to 4.9 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, the first quarter of 2013 and that we expect to invest during the remainder of 2013.

We believe that we have attractive organic growth opportunities, particularly in the liquids-rich portion of shale and unconventional plays. We are providing our guidance range for the remainder of 2013. Our current revenue guidance range for the full year 2013 is $140.5 million to $145.4 million, net income guidance range of $15.9 million to $19.9 million and adjusted EBITDA guidance range of $78.1 million to $82.1 million. And we expect to generate distributable cash flow of $52 million to $56 million for 2013.

Finally, we expect to file our Form 10-Q with the Securities and Exchange Commission on or before May 15, 2013.

With that, we will open the call to questions. Stephanie, I'll turn the call back over to you.

(Operator instructions) Jim Rollyson, Raymond James.

Eric or Jody, whomever, just on the guidance real quick, since you've brought in kind of a lower bottom end of the range and the top end is still where your original guidance was, can you maybe give us a little color on what introduced the bottom, a little bit lower side of that range? Is it equipment timing or is it customer contract timing or just maybe some color?

Sure, Jim. It's more customer contract timing, and so we have captured in our guidance range the initial expectation that was in the prospectus, as you've noted. We didn't take advantage of signing up some five-year contracts at attractive rates with some customers, but the start dates were moved out a little bit from our original anticipation. So we have some timing like that going on with the expected actual start dates, but then, again, continue to sign up contracts with good term and attractive pricing.

So we are just trying to be a bit cautious in terms of recognizing that while the underlying fundamentals remain strong, if we continue to see a little bit of some of these start dates getting pushed out on a selective basis, that's really what the primary driver was for the lower end of the range.

Got you. And on the -- revenue per unit picked up a little bit this quarter. Can you maybe talk about just how the mix of units and what your customers are demanding coming in throughout the year look and how that would shape up for your -- do you expect revenue per unit to trend up or remain static, or just maybe some thoughts there?

Yes, Jim, this is Eric, and we are seeing a couple of trends here. First, demand for our largest horsepower range remains extremely strong. We have seen some improvement in pricing with our intermediate and large horsepower as well. And interestingly, we are seeing a lot of demand for oily-oriented infrastructure, gas lift type of equipment.

So I think we are seeing pretty strong demand trends, both small, intermediate and particularly with our large horsepower units. And actually, we are seeing some improvement, to some degree, in the pricing across the range.

And as a follow-up, I presume that part of the sequential increase in cost per horsepower was mix related. But maybe you could talk about -- margins came down just a little bit, up year over year but down a little bit from the last three quarters. Maybe trends going on with margins and how you see those just going through the year'.

Jim, in my commentary one of the things I was attempting to point out is, we had a pretty large retail component in the first quarter. It was approximately $700,000 with a low margin on that network. So if you factor that out, we actually had a sequential increase in our gross margin. So we don't see a trend other than continued improvement in the gross operating margins for 98% of our revenue base, which is in the contract operations revenue.

So on the costs trends, they continue to stay at what we projected in terms of just general inflationary types of increases, nothing that's really moved significantly. So we do also get a little bit of shift in the mix from one quarter to the next. But again, factoring out that retail component, we actually had a sequential increase in the operating margins. And with what we are seeing in terms of the pricing trends for our services and the addition of the -- continued the addition of the large compression units, we would expect to see solid margins throughout the year.

Thanks for the clarification and color, guys, I appreciate it.

Jeremy Tonet, JPMorgan.

Congrats on the solid quarter. I was just curious; as far as the units to be delivered in 2Q, it's 51% contracted now. I was wondering when you think that might hit 100%, or would some of those be contracted in the third quarter? How do you see that unfolding?

Much like we did in the first quarter, Jeremy, we would expect to see nearly all of that new compression unit purchases contracted and at the time that we are taking delivery. So most of the 51,000 horsepower is being delivered in the second quarter, but some of that is scheduled for delivery in July and early August. So again, we would expect that customer contracts would be signed up at roughly the point in time that we are taking possession of the equipment -- again, pretty much what we did for the first quarter.

Okay, great. And then touching on I think it was the fourth tenet of the five that you outlined as far as the potential for acquisitions out there, I'm just wondering if you could provide any updated thoughts on how the M&A market looks out there. Has anything changed in your mind over the past few months?

As we have indicated before, we will look at opportunistic, accretive opportunities. We have nothing definitively pulled together at this stage, but we continue to opportunistically review a couple of opportunities.

Okay, that's great, thank you comment.

Marc Silverberg, Barclays.

I guess just a quick question -- you sort of alluded to the fact of potentially up-sizing the order book as the year progresses here and you have just hit on some strong demand point here. Just trying to, if you can, elaborate a bit on the opportunities you are seeing to potentially up-size above the 100,000 horsepower that you have originally targeted.

Yes, Mark. You may recall that we added 200,000 horsepower of new compression units and 2012. So we continue to see strong demand for our services and we don't anticipate adding new horsepower equipment for 2013 at that level.

But could we slightly up-size the 100,000 horsepower? That is a possibility. The customer demand certainly does remain strong. We are being very mindful of the leverage levels that we are running, particularly through the first couple of quarters this year. And so we are trying to have a judicious balance between moving to de-levering by the end of the year. And so that will influence, in part, our timing of how much, if any, we would up-size the new compression equipment order and how quickly that translates into revenue and EBITDA.

Got it, okay, thank you. Next question would be around pricing. Just want to make sure I'm understanding correctly; and if you hit on this, I apologize. But obviously, as you put these larger horsepower units in place, they have a bit of a dilutive effect on revenue per horsepower, but obviously offsetting that would be better margins. But net-net, we saw an increase in pricing. So is it correct to allude or assume the fact that pricing was a bit stronger than was actually on the face of the numbers, just because you did have some offsetting reductions from the nature of the large horsepower units?

A couple of things there, Marc. So we do continue to see improvement in the spot pricing for the contracts that we are signing up in the early portion of this year. So we have run at higher rates than we originally have projected.

The other thing to consider is that for the very largest horsepower component of our fleet, these 3600 types of units that are 1800 horsepower, without getting into the specifics, that average revenue per horsepower per month is actually north of the composite revenue per horsepower per month for our fleet. So you have both those components at work.

Okay, perfect. And then, lastly, with regards to the monthly contracts, I think it was Eric in the past who had alluded to potentially terming out some of those contracts if you do see the pricing environment firm up a bit, which certainly sounds like you have been experiencing. So I just wanted to hear your latest thoughts around potentially terming out those month-to-months.

That's one of those things, Marc, that our sales and our operations team are continually looking forward. We always look at are our machines running fully loaded, partially loaded, lightly loaded? What are the market rates or the monthly service fees? So it's one of those. This is an ongoing project that is actively on our radar screen, and over time we continue to move toward trying to term up some of the existing month-to-month contracts.

Okay, perfect, that was it for me, thanks so much.

Sharon Lui, Wells Fargo.

Since one of your competitors did implement the price increase in the first quarter, have the impacts been an improvement in the spot pricing that you have realized? And is there an opportunity for you to do the same across your fleet?

One of the reasons we have let some of our units when they come off the primary term roll into to month to month was some of the pricing trends that we saw. So we will be selective and judicious in working with our customer mix to potentially move to look towards some pricing improvement as well.

Okay. Have you been able to quantify how meaningful is the increase you would be able to implement?

Yes. We would probably, one, be a little bit careful with that, Sharon, in terms of the forward projections. If you look at the composite rate for the fleet, for the first quarter we were about roughly call it $0.25 per horsepower per month above our initial projections. And so it isn't moving the composite for the fleet, as of yet, in a very significant way because we still have a lot of units that are out there that are under contracts that were signed a couple, two to three years ago.

So we would expect to have opportunities to continue to have at least some level of slight improvement, perhaps a little bit more meaningful in the composite pricing for the fleet as these contracts, as Eric mentioned, come back in and get renewed at improved rates. But we are trying to be fairly judicious in how much we would project out in the overall revenue stream for this year, from these spot price improvements.

Okay. And then in terms of the absolute growth CapEx spending for 2013, is your guidance still around $94 million?

It is, that's correct.

Okay, and do you anticipate the same type of levels for next year or a pickup in spending?

Again, based on the early commentary or earlier commentary that I made, we did acquire, as you well know, Sharon, a couple hundred thousand in horsepower last year. It's a little bit early to reach out to see where we may set levels for 2014. Most of the research reports that are out there are tracking us at continuing at about 100,000 horsepower per year. So we will make that evaluation as we get into the early third-quarter period and haven't made any commitments for new compression equipment yet in 2014.

But with that said, again, we still see strong demand, and so if there's an opportunity to have a higher growth rate above that 100,000 horsepower case, we will certainly evaluate that and consider that in our commitments.

Okay, and with the pickup in natural gas prices, have you seen any change in inquiries from producers in conventional areas?

Sharon, that's a really good question. We see -- it almost various company to company. We are seeing some pickup in the dry gas areas. Folks who, say, six months ago were looking at the potential for down-sizing some of their fleet needs and horsepower needs have actually come back and we've seen some pickup in the number of rigs running in these areas. So we've seen a stabilization to a pickup.

So I would say, when you look at dry gas areas, it tends to be company-specific. We are seeing extremely strong demand in the liquids-rich areas, both on the processing side as well as on the casing head gas side in the high-BTU condensate type wells.

So I would say in general, because of the pickup in the commodity price, we have seen a pickup in demand signals.

Okay, great, thank you so much.

(Operator instructions) Matt Niblack, HITE.

So regarding the Q2 delivery, it sounded like from your earlier comments that you were basically on track for getting those contracted. So is it safe to say that the 50% contract rates for this time relative to the -- relative to the quarter is typical, based on your past history?

Yes, Matt, that is correct. So it moves in a progression just as you are indicating, so that is quite typical based on where we are at this juncture. So early May in the quarter, there's quite a bit of the quarter left to get those signed up. Again, some of those units are getting delivered in the July and early August time frame. So this kind of run rate for contracting up new compression equipment is quite typical.

Great. And then clarifying the range of guidance again in response to an earlier question, so it sounds like these are largely in-year contract timing-related issues, as you describe. So is it also safe to say that you still feel comfortable being able to hit your original plan in terms of 2013 exit rate of contract volume?

It certainly is possible and why we have that captured in the guidance range, so we will see how the quarters continue to unfold. But we have the compression units that we anticipated in our plan this year nearly all on order. So again, about 90,000 horsepower of that compression equipment is being delivered, primarily in the first half of the year. So there's not going to be an issue with having the equipment to get that at work. Again, we are seeing a normal pattern in terms of getting the contracts signed up, have had -- seen some timing issues early in the year here but certainly a potential to still hit the full year and exit rates that we initially projected.

Great. And then last question -- any sign that there is increasing competition or that you are losing contracts you would have expected to win? Particularly, it seems like Exterran is performing quite well recently. Any commentary on that competitive landscape?

Obviously, we live in a competitive world. We see different competitors in different geographic regions. I know that Exterran has some alliance relationships with some folks who are very active in certain geographic areas. Honestly, we have not lost contracts to competitors that we expected to win. So it's a pretty big marketplace out there, and at this juncture it seems like there's more than enough to go around for all of us in the industry.

Great, thank you.

There are no more questions. I now would like to turn the call back over to Mr. Greg Holloway.

Thanks, Stephanie. And thanks to everybody for participating in our first quarter call. I hope everybody has a great rest of the week. Thank you.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.