USA Compression Partners LP (USAC) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2013 USA Compression Partners, LP earnings conference call. My name is Jackie and I will be your coordinator today.

At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the presentation over to Mr. Greg Holloway, Vice President and General Counsel. Please proceed.

Thank you Jackie. Good morning everyone, and, welcome to our call. This morning, we released our financial results for the quarter ended June 30, 2013. You can find our earnings release in the Investor Relations section of our website at www.USACpartners.com.

During this call, USA Compression will discuss certain non-GAAP measures 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 releases issued this morning, as well as the prepared remarks and the related comments made during the question-and-answer session during our conference call, will include forward-looking statements. These statements include projections and expectations of our performance and represent USA Compression's current beliefs. 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 releases 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. Also with me today are Jody Tusa, Vice President and Chief Financial Officer, and Matt Luizzi, who is Senior VP of Strategic Development and heads up our Business Development efforts.

This morning, in addition to announcing our second-quarter earnings, we also announced a very significant and strategic acquisition of a fleet of compression assets from an affiliate of George B. Kaiser for approximately $187 million.

I'd like to begin with a high level look at the transaction before touching on the results for the second quarter of 2013, and providing commentary on our growth opportunities for the remainder of 2013 and beyond. I'll then ask Matt to provide a more detailed look at the deal, and Jody will finish up with details of our financial results and how the pending transaction will impact our balance sheet and 2013 guidance.

If you're participating in our call today by telephone, you may want to take moment to go to our website where you'll find the slide deck Matt will refer to located next to the webcast link for today's call on the Investor Relations page. With that, I'll pause for a minute to give everybody an opportunity to go to the deck.

This morning's announcement of the acquisition of the rental compression fleet from Tulsa-based S&R Compression represents USAC's first acquisition since our IPO in January of this year. As Jody and I have discussed with many of you either during our IPO roadshow, investor conferences or in various other forums, USA Compression has always been and remains a story of stability and growth.

We conveyed to you that while our primary focus would be on organic growth, we would also pursue acquisition opportunities that are one or more of the following -- one, complementary to our geographic and customer-centric focus; two, comprised of new vintage quality infrastructure oriented assets; three, financially accretive; and four, capable of delevering our balance sheet. The S&R Compression transaction accomplishes all of those objectives. Needless to say, we are very excited about the current and future growth opportunities that these assets bring to USAC.

S&R Compression has built a substantially new, quality fleet of smaller horsepower compression units that are primarily used in gas lift operations in connection with crude oil production. While these units are smaller horsepower than what USAC has historically owned and operated, the business rationale remains the same -- quality infrastructure assets serving a customer base located in strategic geographical regions. The vast majority of these units are located in Oklahoma and Texas, where they are serving the growing needs of crude oil producers in the Mid-Continent.

S&R has built its fleet with a very similar philosophy to USAC -- build quality assets and they will tend to last longer, perform better in the field, and require less unplanned maintenance. This transaction increases the size of USA's fleet, as measured by horsepower, by almost 15%, and provides a meaningful entry into the crude oil side of the Compression business.

Given the macro factors that are driving crude oil development in the US, we like the fundamentals driving the gas lift compression business and we believe these assets represent a new platform from which USA can and will continue to grow the Partnership. With this transaction, which is 100% financed with equity, we are welcoming an experienced strategic investor as a major unit holder while at the same time delevering our balance sheet.

We are excited that the Kaiser affiliate has decided to take back equity. It clearly demonstrates their positive view of the business prospects of the combined USAC going forward.

Now let me turn briefly to our performance in the quarter. We reported record levels of revenue, adjusted EBITDA and DCF for the second quarter of 2013. Revenue was $33.3 million compared to $28.9 million for the second quarter of 2012, an increase of over 15%. Adjusted EBITDA was $18.1 million, a 17% increase compared to the $15.5 million for the second 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 half of 2013, and capital that we expect to invest in the remainder of 2013.

We added 25,536 horsepower of new compression units to our fleet in the second quarter of 2013, and ended the quarter with approximately 968,000 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 well above 90%. We continue to see strong demand for our contract compression services throughout the shale and then unconventional plays in which we operate, but especially in the Marcellus, Utica, and Eagle Ford shales and the Mississippi lime and Granite Wash areas.

Based on continued strong demand from our customers, we ordered approximately 95,000 horsepower of new compression units for delivery during 2013. We have customer contracts for all of the new compression units that were delivered primarily in the first quarter of 2013 comprised of 35,880 horsepower, and 84% of the new compression units that were delivered primarily in the second quarter of 2013 comprised of 59,205 horsepower. Our order of approximately 95,000 horsepower of new compression units supports our full-year 2013 guidance range. We continue to evaluate our customer demand to determine the appropriate level of new unit orders for delivery during the course of 2014.

Our revenue generating horsepower increased from 807,988 at the end of the first quarter 2013 to 836,427 at the end of the second quarter of 2013 due to the additional units we placed into service in the Marcellus, Fayetteville, Woodford, and Eagle Ford shale plays, as well as the Mississippi lime and Granite Wash areas.

In our base business, we expect continued growth for the remainder of this year and 2014 to occur primarily in the liquids-rich portion of shale and unconventional plays which hold the best economics, given today's commodity pricing environment. 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, and are pursuing accretive acquisition opportunities of complementary assets or businesses.

Now, with that, I'll turn it over to Matt to walk you through the details of the S&R Compression transaction.

Thanks, Eric. My comments will be directed to the slides which Eric mentioned and posted on our website under the Investor Relations tab. On Slide 2, this morning, we announced an agreement to acquire substantially all of the compression assets of S&R Compression in a transaction worth approximately $187 million. The assets being acquired consist of 983 compression units representing approximately 138,000 horsepower. This is a young fleet; the average age is approximately 2.2 years with an established footprint in the Mid-Continent region. These compression assets are predominately used in gas lift operations associated with a very active crude oil production in those areas. The seller has agreed to take back 100% equity consideration for the assets, and in doing so will become a 20% unit holder in USAC. In addition to gaining an experienced strategic investor in USAC, the equity consideration will also meaningfully reduce USAC's debt-to-leverage ratio, strengthening the balance sheet considerably.

We expect to be able to close the transaction in the third quarter. At closing, USAC will also be purchasing for cash additional S&R units that have been built and deployed since the effective date of June 30, 2013. While the transaction is immediately accretive to distributable cash flow, because of the timing of closing, the impact will really not be seen until Q4 of this year and into 2014.

On Slide 3, I'll add more to what Eric shared as to why we believe this is an attractive investment for us. The S&R Compression fleet complements what we've been doing at USAC, providing services that address infrastructure needs. Whether it is USAC's large horsepower gathering system compression units or S&R's smaller horsepower gas lift equipment, all of our assets are focused on the medium to long-term service requirements of our customers.

The units we are acquiring have been fabricated to high standards in-house by S&R Compression over the last several years. I would remind you that USAC is not taking on any of the fabrication activities or assets. That business will remain with S&R.

These units are new with an average age of approximately 2.2 years. Newer assets tend to equate to better performance in the field and lower maintenance costs over time.

We also intend to hire the skilled employees related to the S&R fleet. These employees have helped build the strong customer relationships from which S&R has benefited in growing its businesses.

These smaller units are primarily used in gas lift operations in connection with crude oil production. As you know, driven by a strong commodity market, domestic crude oil production continues to grow, and the Mid-Continent area has been a key participant in that overall growth.

The assets being acquired have a strong presence in very active areas such as the Granite Wash and Mississippi lime plays. That said, we believe the demand for these types of machines extends beyond the Mid-Continent region into many of the other active regions, including many in which USAC is already involved.

As I mentioned, we believe there will be opportunities for our teams to cross-sell a wider range of product. We continue to get strong demand signals from our current customers for units that we currently don't provide, so we think this will open up opportunity for additional organic growth. As part of the transaction, we are also entering into an agreement with S&R to fabricate certain small horsepower units for use in our fleet, so we will have a steady supply of these well manufactured units to provide to our customers. While USAC will continue to be primarily a large horsepower compression provider, the crude focused gas lift units will be an important part of our fleet.

With a 100% equity consideration, an affiliate of George B, Kaiser will own 20% of USAC's LP units going forward. We are excited to have an experienced energy investor with a long-term view of the major holder of our units. The entire Kaiser organization has substantial experience in the energy industry, and we hope to benefit from that knowledge. Both the Kaiser affiliate and Riverstone have committed to taking their distributions in the form of additional common units through the second quarter of 2014, further supporting USA's growth plans by reinvesting in the Partnership.

Slide 4 provides a little more detail regarding the assets being acquired. To reiterate, these are new, quality assets with a history of strong utilization. The fleet has been growing at a very rapid pace, as shown on the bottom left side. The pie chart on the right illustrates not only the strong presence in the Mid-Continent, but also the opportunity we have for expansion into other states, both those with current operations as well as those in which S&R has no presence yet.

I don't need to spend too much time on Slide 5, but these graphs show you why S&R has been growing so much and why we like the assets. There's a remarkable amount of activity going on and with continued favorable crude oil economics, we expect that trend and the related need for our equipment to continue for some time.

On Slide 6, investors in USAC are familiar with our footprint. Currently, about half our horsepower is in the Mid-Continent Gulf Coast area and the other half is up in the Northeast, focused mainly on the Marcellus and Utica shales. S&R has a well established footprint in the Mid-Continent and is also active in the Fayetteville and Haynesville regions.

What we are excited about is all the areas on this map in blue without any red nearby, those are areas where we expect to be able to serve existing USA customers with our new product offerings from S&R. In addition, we plan to leverage the S&R customer base to introduce them to USAC and what we can provide.

As you can see on Slide 7, the S&R fleet is complementary to USAC in a way that you don't often see in the compression business. Adding the S&R fleet results in USAC owning approximately 1.1 million horsepower as of June 30. The smaller nature -- smaller horsepower nature of the S&R fleet, however, doubles the size of the fleet in terms of unit count. Those fleets are young and have operated at high utilization levels. While USAC's operating footprint is larger, we think that creates opportunities on both sides for growth.

What we also like about this transaction is that it diversifies us into the crude oil side of things. Given the state of the commodity markets, crude oil production has been a very active part of the sector and we think there is value in adding leverage to crude oil.

On Slide 8, as I mentioned earlier, an affiliate of George Kaiser will become a 20% owner of USAC LP common units. USAC Compression Holdings, owned by Riverstone and management, will continue to hold the 2% GP interest, the IDR, as well as a 50% LP interest and the public will hold the remainder.

On Slide 9, we expect to close the transaction at the end of August, so our Q3 financials will likely only reflect one month of combined operations. The transaction has an effective date of June 30, however. While we cannot recognize the EBITDA and DCF for July and August in our reported earnings, we will receive the benefit of those operations since the effective date.

The numbers on Slide 9 reflect pro forma financial results assuming cash flows were included in our financials starting on June 1. Most notably, our leverage comes down meaningfully, estimated to be 4.1 at year's end. Jody will speak more about 2013 guidance in his remarks in a moment.

I won't walk through all the points on Slide 10, but with this acquisition, we believe we have prudently grown and diversified our fleet, both through the assets we are acquiring as well as gaining exposure to crude oil, all while maintaining our focus on the infrastructure needs of our customers. We think the key investment highlights of USAC have only been strengthened through the S&R acquisition, and we look forward to continuing to deliver on our growth plans.

With that, I will turn the call over to Jody who will take you through a review of our Q2 financial performance.

Thanks Matt, and good morning, everyone. As Eric mentioned, USA Compression reported record revenue, adjusted EBITDA and distributable cash flow for the second quarter of 2013, and we continue to generate improvement in our gross operating margins.

Revenue in the second quarter of 2013 of $33.3 million increased 15.4% over the same period last year, and that was primarily driven by an increase in our contract operations revenue as a result of adding additional revenue-generating horsepower. Contract operations revenue in the second quarter of 2013 increased 17% to $33.1 million as compared to the second quarter of 2012, which was $28.4 million.

The year-over-year increase in our contract operations revenue was driven almost exclusively by the growth in our revenue-generating horsepower. Revenue-generating horsepower was 836,427 for the second quarter of 2013, as compared to 869,106 for the same period forecasted in our final IPO prospectus. While we had lower revenue-generating horsepower, we generated $13.55 average revenue per horsepower per month, which is higher than what we had expected. Average revenue-generating horsepower increased 12.4% to 829,684 as compared to 738,186 for the same period of the prior year.

Adjusted EBITDA increased 17% to $18.1 million as compared to $15.5 million for the second quarter of 2012.

Distributable cash flow in the second quarter of 2013 was $11.9 million as compared to $6.8 million for the same period last year, which is an increase of 75.2%.

Gross operating margin increased 17.4% to $23.2 million as compared to $19.7 million a year ago. The gross operating margin percentage increased from 68.4% in the second quarter of 2012 to 69.6% in the second 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 was $3.7 million versus $4.9 million a year ago. Cash interest expense was $2.4 million compared to $3.3 million in the second quarter of last year. Expansion CapEx was $25.9 million and was used primarily to purchase new compression units. That compared with expansion CapEx a year ago of $58.3 million, which was also primarily used to buy new compression units.

On July 23, 2013, we announced a cash distribution of $0.44 per unit on our common and subordinated units. The second-quarter distribution corresponds to an annualized distribution rate of $1.76 per unit. The distribution we paid on August 14 to unit holders of record as of the close of business on August 2. USA Compression Holdings LLC, the owner of 62.6% 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 second quarter of 2013 is 0.9 times, and cash coverage for the actual distributions to be paid as a result of USA Compression Holdings LLC reinvesting under our distribution reinvestment plan is 2.4 times.

Our balance on our revolving credit facility as of June 30, 2013 was $353 million, resulting in a leverage ratio of 5.1 times on a trailing 12-month basis, in compliance with our leverage ratio covenant within our credit facility. For the quarter ending September 30, taking into account the impact of the S&R transaction, we expect our leverage ratio to drop to 4.3 times. Based on our full-year projections for 2013, including the permitted contribution from the S&R assets we are acquiring, we expect our year-end leverage ratio to be approximately 4.1 times on a pro forma basis.

As a result of the S&R Compression transaction, we are revising our guidance range for 2013. Including actual contributions from the acquired assets and taking into account estimated transaction expenses of about $1 million, we expect full-year adjusted EBITDA to be in a range of $82 million to $86 million, and we expect to generate adjusted distributable cash flow of $56.6 million to $60.6 million.

Finally, we expect to file our Form 10-Q with the Securities and Exchange Commission tomorrow, August 14, 2013.

And with that, operator, we will open the call to questions.

(Operator Instructions). Ted Durbin, Goldman Sachs.

Good morning, guys. Just on the transaction, I am trying to figure out the EBITDA being generated by the assets that you just acquired. Maybe you can help us here. It looks like the change in the guidance on the full-year, it would imply call it $12 million of new EBITDA. If I look at the $95 million pro forma, maybe that's $15 million. I'm just trying to actually get a sense of what you think the EBITDA generation from these assets is.

Sure. It's Matt. When we look at the EBITDA, the business has been ramping up so quickly that I think, kind of on an LTM basis, it's probably not nearly as relevant. As of June 30 when we look at it, we would get about kind of 8 to 9 times on an EBITDA, on a forward-looking EBITDA basis as of June 30. As that moves into sort of the end of this year, you are sort of down in 8 to 8.5 range. And then looking forward through 2014, you're into the kind of 7 to 8 times range on a multiple basis.

I got it. So there's a pretty steep ramp in the EBITDA. Got it. And is there anything that's changed in the base business sort of pre-acquisition that would have made the guidance shift, or is this all -- this guidance shift all related to the acquisition?

We still expect to be within our guidance range as we previously provided. So no significant shift in the base business. We would expect to run likely somewhere between the low end to the midpoint of what we previously provided, so again, no significant underlying shift in the core business.

Got it. Then if I can just ask one more on the new assets. Can you talk about the margin profile we should expect for these? Obviously, as you mentioned, you've got much lower average horsepower per unit, so I would imagine it's lower margin, and then maybe talk about the contract length?

I'll pick up the margins. You're exactly right, Ted. We do better operating margins on the larger horsepower, so these assets will run in the 60% to 65% gross margin range, so a little bit south of the composite for the existing fleet. With that said, as Matt mentioned, the ramp on the volumes and the assets we are putting to work here is significant. So the margins run a little bit smaller on the smaller horsepower, but the volume growth from the business, in the S&R business, has been significant.

Could you mention the contract length?

There was a little interruption there, Ted.

It's Matt again. On the contracts, these contracts are generally 6 to 12 months initial term. And that's just really a matter of the nature of the business, and that's kind of how all of them are. When you're closer to the well. But interestingly, we find it's very similar to the way USAC has operated, where units go out and then they stay sticky in the field. The S&R units on average have remained in the field for 20 months after they've been deployed out there.

And in terms of kind of reviewing them and looking through them, even then units have left the initial site, they have been quickly redeployed either on that same customer's lease in a different area or they come back and they go right back out. When we look at utilization, again it's similar to USAC. Historically since -- if you look at when all these new units were actually initially placed out in the field, they've basically been utilized 95%, 96% of the time.

Got it. That's all very helpful. I'll leave it at that. Thank you.

Sharon Lui, Wells Fargo.

Good morning. I'm just wondering if you could maybe comment on the commitments to acquire additional units? How much capital is that I guess to acquire the additional 200 units earmarked? And if you could also maybe talk about the return on investments of these smaller horsepower units versus your traditional compressor units.

Sure, Sharon. It's Matt again. In terms of our capital -- the CapEx plan, we've obviously entered into this agreement with S&R to buy a certain amount of units. That CapEx basically for the second half of this year will total roughly around $35 million, and it will be an equal amount next year throughout the entire year. So, you're looking at about $65 million to $70 million kind of from July 1 of this year through December of 2014.

Okay.

Then on the return, the return on the units, I think it's still very attractive from our standpoint. These are kind of mid teens-ish returns, so it's a similar profile as the stuff we are putting out, the bigger horsepower stuff.

Okay, great. And in terms of I guess the units owned by Kaiser, is there any type of restriction on the sale of those units for a certain period of time?

This is Greg. We do have a contractual lock up of six months on all of the units. And as you may know, George and his team have agreed to drift the units through the second quarter of next year, which is essentially a structural lock up in that regard as well.

Okay. And just following up on the drip, is the GP's intention just drip until I guess the second quarter and pay cash distributions thereafter?

Not necessarily. What is going to occur is both for the units that are being issued to the Kaiser Group as well as the existing units held by our sponsor, those will be dripped through the second quarter of 2014 and potentially after that point in time. So, the arrangement that we have doesn't necessarily mean that the sponsor would not continue to drip their distributions. And again, with that, besides the delevering that we get from this transaction down to around 4 times, which is of course significant for giving us runway for growth in the business, that continued drip out of the sponsor in the Kaiser Group would allow us to further delever.

Okay, great. Thank you.

It's Matt again. Just to follow-up, I was thinking more about your question on the rates of return. I was thinking of the whole fleet. But when you look at the stuff that we are purchasing going forward, we've obviously agreed with S&R on a process. And I think we find that to be a very attractive agreement with them, and I think you could probably model that we are buying stuff in kind of a 6.5 to 7.5 EBITDA multiple range going forward. So as time goes on and we are spending that capital, we will see the benefit of that attractive organic growth.

That's very helpful.

Before we take the next question -- this is Eric. I'm glad that the analysts are digging into some of the details here, and clearly we will focus in on that, but I want to make sure we don't lose sight of what we have accomplished with this transaction, that this is a very transformative opportunity for USA Compression to diversify our asset mix, to expand our customer focus, to pick up some incremental customers that we currently don't have, as well as being able to provide a new type of product line and services to an existing customer complement we have. This opportunity is immediately accretive to the Company, it provides us with a substantial delevering, and requires no capital raise because we were able to issue equity to a long-term shareholder.

So I really want to make sure that we don't lose sight of the forest from the trees here of what we've actually accomplished today with this transaction. It's extremely meaningful. It's consistent with what we have shared with the Group all along, which is we intend to delever the balance sheet to focus on high quality assets, to be able to focus on expanding our footprint, and to continue the stability and growth story of USA Compression. So with that, obviously let's take our next question.

Marc Silverberg, Barclays.

Good morning, everyone. I guess following up on that, just a quick question as far as coverage moving forward here. In the past, I think you've had an average contract life of about three years, and that was sort of a 115% target coverage that you've indicated in the past. With a growing piece of 6- to 12-month type contracts here, do you envision the long-term coverage maybe being a bit more supportive going forward, or how do you think about that?

Yes, so, in terms of the transaction for this year, this put us at about 1.05 times coverage. So we would expect to get a little bit of lift out of the transaction itself.

Moving forward, I think the predictability of the cash flow is still very strong even though the contract tender may be a little bit shorter with these assets. But we would see still targeting a 1.1 to 1.15 times coverage as we look forward to the next several years.

Got it, okay. Great. And then you sort of touched upon this earlier with I think Sharon's question, but the ongoing agreements that you have with S&R Fabrication to purchase some new units there, do you envision that as being incremental to call it the roughly $100,000 that you generally guiding towards in the past as far as achieving your long-term growth rates, or is this complementary in addition to that?

We do see this as incremental. So the kind of view that we've tried to guide folks is looking at a growth rate of 100,000 horsepower per year. These purchases that Matt was describing under the requirements agreements by additional compression units from S&R would be incremental to that. And please be mindful that we continue to evaluate new horsepower unit growth for the base business, so the potential for growing above the 100,000 horsepower rate with the strength and demand we are seeing now is still there.

Okay, that's helpful. Thank you. That's all I had for now. Thank you.

James Rollyson, Raymond James.

Good morning guys. Eric, going back to your interlude, when you look at the mix of where these guys are running, it doesn't jump off the page as being the most oily regions in the country that are the most active, which would seem to me to be opportunity for you to get into places like the Eagle Ford and some of the up-and-coming oily plays. Can you maybe talk a minute about where you see opportunities to take S&R's current footprint into some of the other operating regions you're in?

Great question. If you look at where S&R operates predominantly today, it would be the Texas Panhandle, the Oklahoma Panhandle, draw a circle 100 miles or so around Canadian County. Clearly, gas lift equipment in the Eagle Ford, ultimately gas lift equipment up in North Dakota and Montana, in the Bakken play, clearly the footprint of operations that we have in the Marcellus as well as the Utica bodes extremely well for deployment of this type of equipment.

The other opportunity that we see, Jim, is clearly pull-through with the S&R existing customer base. There's a group of customers that USA Compression has never had dealings with before. And this is a way we can get our foot in the door with the gas lift equipment, and then start to focus on our intermediate and larger horsepower equipment that has typically been our core area of focus. So, I think it's an opportunity to expand geographically.

As we mentioned on a previous call, we have identified the West Texas area as an area for growth, and we are starting to deploy some larger horsepower equipment in that area. Clearly, there will be tons and tons of gas lift equipment required with the oil focus in West Texas and southeast New Mexico. So I think this is a springboard for us to substantially amp up our rate of growth not just with the existing S&R fleet, but the USA infrastructural larger horsepower fleet as well.

Thanks for that color. Then as a follow-up, you mentioned historically your kind of rule of thumb is the 100,000 horsepower of growth, and then hopefully it seems like last year and maybe this year and going forward there's room to top that. Any rough rule of thumb of how we should think about the growth rate in terms of horsepower maybe for this? And then Jody, maybe just some rough revenue per horsepower kind of ballpark numbers we can use, at least kind of build up to the EBITDA numbers that Matt implied?

Actually, Matt, I'll go ahead and let you pick up the horsepower. Jim, obviously with the small units, the revenue per horsepower per month is north of our fleet as it exists today. It runs roughly about $25 per horsepower per month. And so just to help guide you a little bit, that would bring the average composite for USA Compression combined to $15 to $15.50 per horsepower per month. So that will help give you a little bit of color there. And then Matt, maybe on the horsepower addition as you look forward?

Sure. It's a little difficult because the range of units is somewhat wide. All of these units that S&R makes are kind of under 400 horsepower, but it does range from 150 up to 380. But I think if you look at kind of our commitments for the year, you're probably talking about 200 machines for the rest of 2013. So depending on the assumption that you make, you're probably in the 30,000 to 40,000 horsepower.

As we look at it, as I mentioned, we are still very much a large horsepower entity. And I think, as we project out, we look at the smaller horsepower as a percent of kind of the total horsepower and we are in that 15% to 20% range of the stuff that we are buying. So we continue to grow it, but obviously the smaller horsepower nature of it, we can add a lot of units without skewing the balance too much.

Sure. That's helpful just to kind of build up the picture. Then are you going to break this out separately or is this going to get all aggregated together?

It will be aggregated together, so it's just one business, one segment.

Okay, thanks.

T.J. Schultz, RBC.

Good morning. You've really hit on most of what I had, but maybe just one question on the Kaiser organization. Obviously, as you said, Eric, a new long-term kind of strategic partner here. If you could just expand on maybe some of the Kaiser industry experience and really what this is giving you that maybe wasn't in your wheelhouse before this transaction.

I said there's a lot of things that come associated with this. And I want to focus back on the S&R side and then go back into the Kaiser side.

Historically, by not having this horsepower range of equipment, and some of our competitors have this type of equipment, it's allowed some of our competitors some entree into the some of our core customers. And this, frankly, in addition to being a growth opportunity, gives us some additional arrows in our quiver from which to quell some of the alternative product offerings from our customers. So, I'm really excited about what this means for us to be able to effectively offer a broader range of compression services and compression horsepower than what we have been able to do in the past.

Clearly, with the delevering opportunity and the no issuance of -- or not requiring any cash equity on the deal, this is going to help our expanded focus on a high horsepower marketplace. By delevering our balance sheet, it's going to allow us to continue to amp up our growth. We are excited about the demand signals that we are seeing coming from the marketplace right now in the big horsepower as well as the smaller horsepower.

Do keep in mind when Jody and Matt have been talking about the S&R transaction, those are some contractual minimums that we've committed to, and that's not necessarily to say that's all we're going to limit ourselves to. So, we are very excited about the growth prospects that we see from big horsepower, extremely excited about what this means for the S&R side as well.

On the Kaiser side, George has a major, major presence in the LNG business. He is involved in the gas storage business. The Kaiser-Francis organization has major production assets located in the Rocky Mountain arena of the world as well as some areas in the Mid-Continent area.

George is a very bullish proponent of the domestic gas business, as evidenced by an investment that he made alongside of Riverstone with an entity Houston-based called Sage. So it's a major, major equity commitment from which to expand and grow into some very strategic opportunities.

So I think if the Group were to do some homework on Kaiser and look at his investments in the LNG infrastructure, in major gathering opportunities, and looking at the focus of Kaiser-Francis in the Rockies and the Mid-Continent arena, and his bullish outlook on natural gas storage, etc., this is a specific investment that the Kaiser organization looked at for the long haul as they see, longer-term, how compression fits into feeding not just the domestic natural gas food chain but the worldwide natural gas food chain with the advent and the adjunct expansion into the LNG market worldwide.

Okay. Appreciate it, Eric. Thanks.

Matt Niblack, HITE.

Thank you. So just wanted to better understand this ramp in profitability in the new assets. So, is that driven by sort of your estimate of growth in the underlying production and your orders, or what's driving that ramp?

Sure. Yes, it's basically is predicated on what S&R has been seeing recently, which is essentially not being able to keep the stuff on the shelf. These units have been fabricated and they are immediately going out and going into the field and put to use. So, again, the areas that they are most active in is kind of the -- I showed on the map kind of western Oklahoma and the Mississippi lime and Granite Wash areas. And the activity there has just been truly relentless. And their orders, they've got, I think they've got customers who would love to take more than they can make. And so I think we are hopeful the S&R shop will continue to run at capacity and we will continue to take as many units as we can from them.

So, the ramp is predicated on production running at capacity?

Yes.

-- and how fast you get the units out the door?

Absolutely.

Great. Then at what level of oil prices do you start to see this trend change in the areas that the assets serve?

Keep in mind there's a combination of things that are going on here. There's a large backlog of wells that are being drilled in the liquids-rich components. There are hundreds of wells that currently are not flowing in the Utica awaiting expansion and installation at some regional gathering systems. You see some of the same phenomenon in the Eagle Ford and you're starting to see some of the same phenomenon in the scoop area of west central Oklahoma as well.

So, I think there's a combination of things. One would be looking at the growth projections on a go-forward basis. Our producer contacts are telling us that they are locking in some forward hedges right now at prices that from an oil perspective are economic for the next three to four years down the road. So the swaps, the hedge opportunity, allow these folks to lock in some very substantial commodity prices.

We are seeing very strong demand signals for next year, both in the S&R fleet as well as on the large horsepower USA Compression fleet. We are finalizing what our Q1/Q2 build program as USA Compression is going to look like, and, frankly, we think it will be substantially turbocharged from what we saw last year. We haven't pulled the trigger yet; we're close to doing it. But honestly, I think we are looking at an initial order somewhere in the 100,000-ish horsepower range for the first six months or so of the year. So, again, fairly substantial growth, turbocharged opportunities not just from the S&R side but from the USA side as well.

Great. And what's the timeframe around which you have a more firm sense of what that first-half figure is going to be?

I think we will know it within the coming few short weeks. So leadtimes are still roughly 5.5 months to 6 months for new equipment. So it will not be a long time before we will be signing up the firm committed purchase orders for that new equipment.

Great. Then last question just on the base business. It looks like your horsepower is running at the low end of what you had expected. Is that driven by the extent to which you participate in the small horsepower business in the traditional gas fields, or what's driving that? And what's changing for next year?

That for this year was driven a little bit more by what we communicated on our last conference call, which was while we are signing up contracts with very nice initial terms, you've got two to five years for the large horsepowers that we're ordering. We have seen some timing in when we originally anticipated that those units would start, and when they are actually starting. So, it doesn't have any particular thing to do with a class of horsepower that we have, and certainly not the smaller horsepower units that we run. So, it's mainly that, just kind of anticipating when we expected new unit starts and then they're actually starting.

As Eric mentioned, we pretty much now have all of our new equipment that we're taking possession of this year under customer contracts, so all of that equipment will get deployed throughout the year. And then finally, the pricing that we are seeing for the fleet is running ahead of what we had communicated while we were on our IPO roadshow, so we are getting a bit of a benefit there.

Okay. So you are not seeing a material impact from increased stop activity like Exterran has, for instance?

No. We certainly have seen the level of stops. There is some variability quarter by quarter. It's been very manageable because how seen our utilization rates have actually taken a little bit of an uptick this quarter, and so nothing material in terms of the regular stop rates that we've seen.

Great, thank you.

Jeremy Tonet, JPMorgan.

Hi, good morning. I just wanted to recap on the transaction and what it would look like in 2014, make sure I had that straight. So the total purchase price is $187 million and then there will be $65 million to $70 million committed for new units to come online. And when we look at what the 2014 multiple could be for that, was it 7 to 8 times on that number? Am I correct in understanding that?

I think if you load in that CapEx burden, you end up closer to around 9 times.

Okay, great.

(multiple speakers) just pure price over EBITDA.

Got you, great. Thank you. Then I was wondering if you could give us a little bit more background on how the deal originated, who approached who or was this an auction process, or any details like that that you could share?

It was not an auction process. It actually came about from the Kaiser organization looking at ways to position S&R for the long term. So it, frankly, was kind of a mutual opportunity where Kaiser had a very high quality asset base in USA Compression's backyard with some customers that we intended to aggressively go pursue.

From Kaiser's perspective, it was an opportunity to diversify their portfolio from just the gas lift regional opportunity into an equity investment that has a broad geographic footprint across all of the producing basins domestically with a complementary horsepower range. So clearly it was one that the Kaiser Group was looking to take -- either take S&R Compression to a completely different level, or to join forces with somebody who already had a strategic platform that shared the similar focus for the growth prospects long-term as USA Compression. So it's not a process. Frankly, it was an opportunity to marry the combined assets with the long-term strategic focus from George. And obviously he liked what he saw.

That's helpful. Thank you. Last one from me, I'm just following up on that. How do you see the M&A landscape out there in other -- are there many other opportunities like this? Just any thoughts on that would be helpful.

It's Matt. This is obviously a fairly unique opportunity for us. As I kind of mentioned, you don't see stuff where -- in this industry very often where you can put two entities together. And at least in our view, we think it's a one plus one equals three type transaction.

There is other stuff out there, big and small. We look at stuff all the time but, again, we are going to be very disciplined in looking at the stuff that we want to buy. This is, for all the reasons I think we've talked about, we believe this makes a ton of sense for USA.

Buying just to buy I don't think is going to make -- is going to get a whole lot of traction with us. So we do want to build the scale out there, and we'll do it in kind of a prudent way that I think makes sense for our organization. But there is stuff out there to be bought of varying quality, so we'll just continue to look at stuff like that.

Great, thank you and congratulations on the deal.

Peter Van Roden, Spitfire Capital.

At this time, we have no further questions. So I would like to turn the call over to Mr. Greg Holloway. You may proceed.

I'll proceed by thanking you all for getting on our call here, and we look forward to talking to you next time. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.