USA Compression Partners LP (USAC) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. And welcome to the USA Compression Partners third-quarter earnings conference call. During today's presentation all parties will be in a listen-only mode and following the presentation the conference will be open for questions. (Operator Instructions).

This conference is being recorded today, November 7, 2013. I would now like to turn the call over to Greg Holloway. Please go ahead, sir.

Good morning, everyone, and thanks for joining us. This morning we released our financial results for the quarter ended September 30, 2013. You can find our earnings release in the Investor Relations section of our website at www.USACpartners.com.

During this call, our management will discuss certain non-GAAP measures. You'll find definitions and a reconciliation of these measures to GAAP measures in the summary pages of our earnings release and on our website.

As a reminder, our conference call will include certain forward-looking statements. These statements include projections and expectations of our performance and they represent USA Compression's current beliefs. Actual results may differ materially. Please review the statements of risk included in this morning's release and in our latest filings with the SEC.

Please note that the information provided on this call speaks only to management's view as of today, November 7, and may no longer be accurate at the time of a replay.

I will now turn the call over to Eric Long, President and Chief Executive Officer of USA Compression.

Thank you, Greg, and good morning to everyone. It looks like we have a good turn out today. Also with me on the call is Jody Tusa, our Vice President and Chief Financial Officer, as well as our Treasurer, and Matt Liuzzi, our Senior Vice President of Strategic Development.

Pleased to report that this morning we reported record levels of revenue, adjusted EBITDA and adjusted DCF for the third quarter of 2013. Year over year, our revenue increased 24%, adjusted EBITDA increased 19%, and adjusted distributable cash flow increased 30%. We are pleased that we successfully completed the acquisition of $182 million of Compression assets owned by S&R Compression on August 30 of 2013 and we have hired the skilled employees operating this Compression fleet.

As we discussed at the time of the announcement these assets were primarily used in crude oil production gas lift operations. As we have become more familiar with these assets and the gas lift market over the last four months, since the June 30 effective date, we have continued to be excited about the opportunity we are seeing in this market and are very, very pleased with the performance of the acquired assets thus far.

To reiterate what we said back in August, this transaction is immediately accretive to distributable cash flow. Due in part tp the performance of the S&R assets, we have increased our cash distributions from $0.44 per unit in the second quarter of 2013 to $0.46 in the third quarter of 2013.

The fourth quarter of 2013 will represent the first full quarter of operations for the S&R assets in the USA results. we believe we will continue to see significant growth in our revenues and adjusted EBITDA as a result of the capital expenditures invested in new compression units in 2013, committed for the first half of 2014 as well as capital that we expect to invest in the remainder of 2014.

We added approximately 194,000 horsepower of new compression units to our fleet in the third quarter of 2013, including organic capital growth and the addition of the S&R gas lift fleet and we ended the quarter with approximately 1.162 million total fleet horsepower. This makes USA Compression one of the largest providers of compression services in the United States based on total fleet horsepower.

In addition, our horsepower utilization rates remain strong throughout the quarter at well above 90%. We continued to see strong demand for our contract compression services throughout the shale and unconventional play in which we operate but especially in the Marcellus, Utica and Eagle Ford sales and the Mississippi Lime and Granite Wash areas.

To date in 2013, we have taken delivery of approximately 111,000 horsepower of newbuild compression units which includes 95,000 horsepower of midstream compression units as well as a total of 16,000 horsepower of gas lift equipment consisting of 12,000 horsepower at the time of the closing of the S&R transaction and 4,000 horsepower since closing.

In addition we expect to acquire an additional 42,000 horsepower of newbuild compression units which includes 24,000 horsepower of midstream compression units as well as 18,000 horsepower of gas lift equipment in the fourth quarter of this year. This will give us approximately 1.2 million total fleet horsepower by the end of 2013.

We have customer contracts for 97% of the new compression units that were delivered primarily in the first three quarters of 2013. Our actual and expected purchases of new compression units for the year 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 in 2014. Currently, we plan to order approximately 220,000 total horsepower, consisting of 170,000 horsepower of midstream compression units and about 50,000 horsepower of gas lift units.

Our revenue-generating horsepower increased from 836,427 at the end of the second quarter of 2013 to 1,035,664 at the end of the third quarter of 2013, due to the additional units we placed into service in the Marcellus, Fayetteville, Woodford, Utica, and Eagle Ford shale plays as well as the Mississippi Lime and Granite Wash areas, including the S&R fleet.

In our core midstream business we expect continued growth for the remainder of this year and 2014 to occur primarily in the liquid rich portions of shale and unconventional plays, areas where we see the largest production growth driven by the most favorable economics. We continue to see very strong demand for our gas lift units, primarily in our core areas in western Oklahoma and the Texas Panhandle where our horizontal drilling has continued at a very robust pace and our services play a critical role in the production of crude oil.

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; while continuing to pursue accretive acquisition opportunities of complementary assets or businesses much as we did with the S&R transaction.

Now with that I will turn it over to Jody to walk you through the details of our financial performance.

Thank you, Eric, and good morning, everyone. As Eric mentioned, USA Compression reported record revenue, adjusted EBITDA and adjusted DCF for the third quarter of 2013 and we continued to generate improvement in our gross operating margins. Revenue in the third quarter of 2013 increased 24% compared to the third quarter of 2012, primarily driven by an increase in USA's contract operations revenues as a result of adding revenue generated horsepower and the addition of the revenue generated by the S&R Compression assets for the month of September.

Contract operations revenues in the third quarter of 2013 increased 25% to $37.9 million as compared to $30.4 million in the third quarter of 2012. The year-over-year increase in our contract operations revenue was driven almost exclusively by the growth in our revenue-generating horsepower including fleet growth due to the S&R transaction. Average revenue generated horsepower increased 17% to 919,000 in the third quarter of 2013 as compared to 789,000 for the same period of the prior year. Again, primarily due to growth in our core midstream, compression business along with the acquisition of the S&R Compression assets.

Average revenue for revenue-generating horsepower per month increased 6% to $14.13 for the third quarter of 2013 as compared to $13.33 for the third quarter of 2012. Adjusted EBITDA increased 19% to $20.2 million in the third quarter of 2013 as compared to $16.9 million for the third quarter of 2012. Adjusted distributable cash flow for the third-quarter 2013 was $13.7 million as compared to $10.5 million for the same period last year, an increase of 30%.

Gross operating margin increased 25% to $26.4 million as compared to $21.2 million a year ago. The gross operating margin percentage increased from 68.5% in the third quarter of 2012 to 68.9% in the third quarter of 2013. These increases primarily resulted from the operating leverage we achieved by adding higher horsepower compression units to our revenue-generating horsepower portion of our fleet, partially offset by the addition of lower horsepower units acquired in the S&R transaction.

Maintenance CapEx was $3.9 million versus $2.3 million a year ago as interest expense was $2.6 million compared with $3.8 million in the third quarter of last year. Expansion CapEx was $52.2 million excluding the purchase price of the S&R acquisition and it was used primarily to purchase new compression units. That compared with expansion CapEx a year ago of $39.6 million which was also used to buy compression units.

As you will recall, we issued common units to the affiliate of George B. Kaiser and the other related investors as consideration for the S&R assets which units were valued at approximately $182 million at closing. On October 24, 2013, we announced a cash distribution of $0.46 per unit on our common and subordinated units, which represents a 4.5% increase over the second quarter.

The third-quarter distribution corresponds to an annualized distribution rate of $1.84 per unit, the distribution we paid on November 14 to unitholders of record as of the close of business on November 4. USA Compression holdings LLC, the owner of 50.4% of the partnership's outstanding limited partnership units and Argonaut Private Equity and affiliate George B. Kaiser again along with a few other related investors had owned approximately 19.2% of our outstanding limited partnership units and have elected to reinvest all of this cash distributions they received on their units pursuant to our distribution reinvestment plan.

Adjusted distributable cash flow coverage for the third quarter of 2013 is .9 times and adjusted cash coverage for the actual distributions to be paid as a result of USA Compression Holdings LLC and Argonaut Private Equity reinvesting under our distribution reinvestment plan is 2.64 times, both calculated as if the S&R common units were outstanding for one month for the quarter ended September 30, 2013.

Our balance under our revolving credit facility as of September 30, 2013, was $390.3 million resulting in a performance leverage ratio of 4.6 times on a trailing 12-month basis, in compliance with our leverage ratio covenant within our credit facility.

We are confirming our guidance for 2013 including actual contributions from the acquired assets and taking into account estimated transaction expenses of about $1.5 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. We currently however do expect to trend to and be at the low end of this guidance range for 2013.

Finally, we expect to file our Form 10-Q with the Securities and Exchange Commission later this afternoon. With that, operator, we will open the call for questions.

(Operator Instructions). T.J. Schultz, RBC Capital Markets.

Good morning. Maybe just on the S&R business, if you can talk about your comfort level still there with the return profile that you had mentioned before, I think it was maybe 4 to 9 times multiple at June 30 kind of trending into the 7 to ate range just as you look at the assets if you are still comparable with those expectations.

We have got Eric here and I'm going to -- obviously Jody and Matt chime in. The business is actually performing better than what we had modeled and pro forma'd and we are obviously going to be very, very comfortable pulling in the acquisition multiple significantly consistent with what we've articulated before.

Just to supplement that. We are in fact seen very strong growth out of the business and as Eric mentioned, at deploying horsepower in advance of our initial modeling. So high level of comfort in terms of their business trends.

And, Eric, you mentioned growing through new business with existing customers both in existing geographies and new geographies and also looking to increase your customer base. If you could provide maybe a little bit more color on where the best leverage is near-term or where you think you have the best options for growth.

We continue to consistent with the peer group see growth in the oily plays. We have expanded significantly into West Texas with new customer mix. We have moved significantly into what we are calling station services which are complete turnkey full-blown compressor stations with dehydration separation manned operations in the Midcontinent region and we are deploying similar or have similar opportunities in other geographic regions that we operate, the Northeast, as an example. We are seeing strong growth in the Marcellus. We are continuing to see significant growth in the Utica. We are seeing growth in the Eagle Ford. We are seeing very significant growth in the S&R backyard over in the Western Oklahoma/Texas Panhandle area.

Some of the dry gas basin, surprisingly, we are seeing some tick up in demand as well. The Fayetteville Shale in Arkansas we have seen some tick up in demand and we are actually gaining some market share in some of the classic dry basin areas, Barnett Shale, as an example. I think that is driven predominantly from our commitment to excellence in the high-quality level of service that we are delivering in the marketplace.

So, strong in all areas. Very, very strong in the oily areas in actually pockets of strength and growth in the dry gas areas as well.

Okay. Thanks.

Sharon Lui, Wells Fargo.

Good morning. Maybe if you could comment on the integration process with S&R and what type of milestones we should look out for going forward?

Sure, so the integration in terms of the scope it was really pretty straightforward because we had essentially an operating unit for those compression assets. As Eric mentioned we hired the -- all the individuals that were running the business and, operationally, we moved those assets under an individual who has been a senior operator with our Company for some time. So in terms of the operations of the business, as it has continued to perform as they did prior to the acquisition and we are just now wrapping up some of the back office types of activities along with the abilities and payables and those sorts of things to get those operations onto our systems.

So milestones really would be finishing that in the fourth quarter. We have a lot of upfront communication with the employee base so they understood how important their growth profile is to our business. And Eric may want to add some commentary, but he and our Chief Operating Officer Bill Manias personally visited the key locations to explain how everything would operate and integrate, including all the human resource types of benefit plans and compensation, which actually aligned up quite nicely to our structure. So --

Let me toss in a couple of comments. We have 100% retention with the employee complement. If you think about it this was a straightforward asset purchase with service personnel, pickup trucks, bar stools, et cetera. The contracts of the S&R format were under rental agreements rather than service contracts; so we are going through a conversion process which is going swimmingly well.

The largest customer of S&R was Apache. We very quickly got that contract converted. Roughly 40% of the S&R revenue stream is associated with some existing USA customers. So we can fold those folks underneath existing USA master service agreements and quickly move from the rental contract into the service agreement template.

The other thing that we are experiencing is actually some significant pull-through opportunity. With some of the new customers that we acquired through the S&R organization, we are looking at moving some of our larger midstream type of horsepower and then with some of the existing USA customers, where we didn't have this service offering historically in the past, we are now picking up some opportunities where, prior to this point in time, these customers may have turned to competitors of USA.

So the employee complement is strong. The integration effort is extremely far along and we are hitting the ground running and offering now complementary services and seeing the pull-through in the cross-selling beginning.

Great. That's very helpful. So it sounds like S&R is performing better than expectations. Maybe you can just touch on why I guess you think you may fall at the low end of guidance. Is it maybe a deferment of either contract or equipment into 2014? How should we think about that?

Yes and when I look, our utilization rates remain strong. We have had some timing or some slippage with some of our midstream assets in some of the dryer gas areas. But I would say it is not that there is a degradation of business. It is more of a timing question associated with just a couple of pockets. Jody?

Yes, Eric, that is exactly right. So, just to show the strength that we see going into 2014, we put purchase orders for new compression units that we didn't anticipate in Q4 that actually took our leverage up a little bit at the end of the year. But we, as Eric mentioned, are looking at 40,000 horsepower over the balance of the year between our midstream assets and S&R and looking at 2014 with all-in horsepower additions at about 200,000 horsepower.

So again expecting a very strong [public] demand in 2014 and we've even looked at front end loading some of those deliveries. So as Eric mentioned there were just some contracts that we did anticipate that we would have signed up for new compression units in Q4, but we are seeing some of those move into the first quarter of 2014.

But in terms of demand and placing, these units against the fundamentals are very strong with the demand signals from our customers so we have significant amount of growth CapEx that we expect to deploy in the first half of next year.

Great. Very helpful. Thank you.

(technical difficulty) [Matt Niblack, HITE].

Two questions. One is could you just comment on the pricing environment you are currently seeing in market, distinguishing between both the core business and the S&R business. And, secondly, given the success of the S&R integration of the S&R business how soon, if ever, would you expect to be back in the acquisition market?

Yes, Matt, this is Eric and appreciate your questions here. I would say pricing environment remains -- it's relatively stable right now. USA Compression has never been the price setter, so to speak. We have a public peer who is significantly larger than us and tends to have a dominant toehold in position. They have indicated that they have actually had a couple of rate increases that have been pushed through and I think it is fair to say that maybe we become the beneficiary and kind of draft behind those guys.

So I guess I would categorize the environment that we are living in right now as Goldilocks. Things are not too hot, they are not too cold, they are kind of just right as it pertains to the pricing environment.

The demand for our services is extremely high. As everybody on the call knows, we are basically building or rebuilding the infrastructure midstream infrastructure in new areas or areas that are not capable of moving the significant volumes of dry and rich gas to the marketplace are being developed with all the new shale activity.

So we see continued demand for 2014 on into 2015 for the product and services that we are offering in the marketplace with stable pricing and probably looking at inflationary CPI type of environment. And again just -- we don't expect things to get too hot or too cold and just kind of business as normal.

As it pertains to the acquisition question. We have grown the Company since 1998 up until the S&R acquisition organically. When we are looking at a 200,000 horsepower of additions that are front ended loaded or front end loaded into 2014, obviously we see a lot of opportunity for organic growth at very attractive multiples for us.

That said, the S&R opportunity came along. It was an infrastructure oriented expanse of opportunity for us. All brand-new equipment. So it is not old equipment. It is not gas-oriented toward dry gas applications. It is an infrastructure opportunity consistent with what USA has focused on in the past.

So to the extent that another opportunity equivalent quality of assets, equipment age of assets or something that strategically came along I think we would be frankly after the first of the year we are ready to capitalize upon something if it was dropped in our lap. Not something that we are actively pursuing today.

That is helpful on both counts. Thank you.

(Operator Instructions). At this time, I am not showing any further questions. I would now like to turn the call back over to Eric Long for any closing comments.

We appreciate everybody's continued interest in USA Compression. It has been a good quarter for us and we are excited about what the fourth quarter of 2013 holds in store and more importantly we are really excited about how we are positioned for growth in our asset base and, hopefully, growth in distributions forward in 2014.

So, everybody, have a great day and appreciate your continued interest in USA Compression.

Thank you. Ladies and gentlemen, that will conclude the conference call for today. There will be a replay available of this conference and that information is available in the news release. We do thank you. Again we do thank you for your participation. You may now disconnect your lines at this time.