USA Compression Partners LP (USAC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the USA Compression Partners fourth-quarter earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. This conference is being recorded today, February 18, 2014.

I would now like to turn the conference over to Mr. Greg Holloway, Vice President, General Counsel, and Secretary. Please go ahead sir.

Thanks, Camille. Good morning, everybody, and welcome to our call. This morning, we released our financial results for the quarter ended December 31, 2013 and the full-year 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 will find definitions and a reconciliation of these numbers to GAAP measures in the summary pages of the 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 release. 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 views as of today, February 18, 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, everyone. Also with me today is Jody Tusa, our Vice President, Chief Financial Officer and Treasurer, and Matt Liuzzi, our Senior Vice President of Strategic Development.

Last month, we marked the one-year anniversary of USA Compression as a publicly traded partnership. When we went out on the road during the IPO, I spoke about the favorable trends in the contract compression industry and how USAC was well positioned to capitalize on those trends. I discussed USA Compression as a story of stability and of growth. And a year later, we are pleased to report a strong year for USA Compression, one in which we've not only delivered on our expectations set at the beginning of last year, but also one in which we've taken actions that position us well for 2014 and for the years beyond.

We've grown the business, completed an accretive acquisition and strengthened the balance sheet by both reducing leverage and refinancing our credit facility, leaving us meaningful liquidity with which to execute our growth plan. As our capital investment throughout 2013 has been deployed, we have built our distribution coverage, which was 1.03X in the fourth quarter.

We continue to see strong market demand for our compression services. The shale revolution continues to change the energy industry, and as these changes have taken place, we have strategically partnered with our customers to take advantage of the changing industry dynamics. In furtherance of this strategy, we intend to commit record levels of capital for organic growth of our fleet in 2014, more than double of what we spent in 2013, as we continue to see strong market demands for our services driven by the macroeconomic trends that have been impacting the Partnership and the industry during the course of the past year and the robust fundamentals underlying the gathering and processing segment.

Concluding our first year, we reported in our earnings release this morning record levels of revenue, adjusted EBITDA, and adjusted Bcf for the fourth quarter of 2013. Year-over-year for this quarter, revenue increased 53%, adjusted EBITDA increased 51%, and adjusted distributable cash flow increased 106%.

Included in our results is a full quarter of operations from the acquired S&R Compression gas lift assets. You will recall that we closed the acquisition on August 30. We have integrated all of those assets into USA Compression, and they continue to perform well ahead of our expectations at the time we announced the acquisition. This acquisition has broadened our service offerings in energy infrastructure applications and has created yet another avenue of growth for USA Compression.

Being able to provide compression services for producers of crude oil has diversified our fleet, our geographic focus, and generated new opportunities for us. On January 23, we announced an increase in our cash distributions from $0.46 per unit in the third quarter of 2013 to $0.48 in the fourth quarter. This reflected an increase of 4.3% over Q3 2013 and nearly 13% over the minimum quarterly distribution rate established at the time of our IPO. The combination of strong organic growth in our core midstream assets and the immediately accretive S&R acquisition have provided for meaningful distribution growth during the year.

Turning to fourth-quarter operational highlights, we added approximately 40,000 horsepower of new midstream and gas lift compression units to our fleet in the fourth quarter of 2013, and ended the quarter with about 1.2 million total fleet horsepower. This continues to make USA Compression one of the largest independent providers of compression services in the US based on our total fleet horsepower.

In our business, it isn't just about fleet size. It is also critical that you have the units in the fleet deployed, generating a return on invested capital and working efficiently.

Our horsepower utilization rates remained very strong throughout the quarter at well above 90%, demonstrating the strong demand for our services from both our existing customers as well as new customers. We continued to see good demand for our contract compression services throughout the shale and unconventional plays in which we operate but especially in the Marcellus, Eagle Ford, Utica and Permian Basin shales and the Mississippi lime and Granite Wash areas. To date, we have ordered approximately 180,000 horsepower of new compression units for delivery, primarily in the first half of 2014. Similar to 2013, our delivery schedule in 2014 will be front-end weighted as we capitalize on the strong demand and work to deploy our units for customers in the most attractive regions. Already, we have customer contracts for over 36% of the new compression units that are on order for 2014, which is ahead of our historical practice. As we get closer to taking delivery at various times throughout the first half of 2014, we expect to have substantially all the new units contracted for service.

We continue to evaluate our customer demand to determine the appropriate level for new unit orders for delivery throughout 2014. Currently, we anticipate placing orders for approximately 220,000 total horsepower consisting of 170,000 horsepower of midstream compression units and 50,000 horsepower of gas lift units with potentially more to come. Our demand signals remain very strong.

Our revenue generating horsepower increased from 1,035,664 horsepower at the end of the third quarter of 2013 to 1,070,457 horsepower at the end of the fourth quarter of 2013 due to the additional units we placed into service in the Marcellus, Fayetteville, Woodford, Utica, Permian Basin and Eagle Ford Shale plays as well as the Mississippi lime and Granite Wash areas, including the gas lift leak.

Today's robust market dynamics have allowed us to sign contracts with attractive terms, generally in the two- to five-year initial range for our larger fleet services. Also included in the growth in Q4 is growth into more comprehensive service offerings for customers, what we are calling station services. This includes installation, operation, and maintenance of turnkey compressor stations with all the attendant equipment. These projects, which consist of a turnkey package of multiple midstream service offerings, including compression, allow USA Compression to do more of what we already do very well -- utilize high quality assets, operate the assets at very high runtimes, and ultimately provide our customers with a seamless outsourced operation.

As I mentioned, we expect 2014 to be a very strong year for USA Compression, driven by continued attractive market dynamics for services utilizing our midstream assets as well as our crude oil and gas lift compression units. For our midstream compression services, we expect continued growth for 2014 to occur primarily in the liquids-rich portions of shale and unconventional plays, areas where we see the largest production growth driven by the most favorable economics.

We tend to be selective in where we want to operate, and as a result, we believe that we are able to compete very well on the most attractive projects. We continue to see very strong demand for services utilizing our gas lift units, primarily in our core areas of western Oklahoma and the Texas Panhandle, where horizontal drilling has continued at a robust pace and our services play a critical role in the production of crude oil.

In gas lift, we have seen a clear difference between the crude oil production related equipment that S&R assets represent and a traditional marginal gas well gas lift unit utilized to remove formation water from the borehole. The production economics between the two are vastly different, currently favoring gas lift. As a result, we have found that the infrastructure nature of our assets has proven to be very much in demand. We will continue our focus on our organic growth opportunities by working to increase our business with existing customers, obtain new customers in our geographic areas of operation, and expand our operations into new geographic areas while continuing to pursue accretive acquisition opportunities, complementary assets or businesses, to the extent they come available, much as we did with the S&R transaction.

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

Thanks, Eric, and good morning everyone. As Eric mentioned, USA Compression reported record revenue, adjusted EBITDA and adjusted distributable cash flow for the fourth quarter of 2014.

Revenue in the fourth quarter of 2013 increased 53% compared to the fourth quarter of 2012, primarily driven by an increase in USA Compression's contract operations revenues as a result of adding revenue generating horsepower. Contract operations revenue in the fourth quarter of 2013 increased 53% to $47.4 million as compared to $31.1 million in the fourth 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 acquisition. Average revenue generating horsepower increased 34% to $1.058 million in the fourth quarter of 2013 as compared to $792,000 for the same period of the prior year, primarily due to growth in our core midstream compression business and again along with the acquisition of the S&R Compression assets. Average revenue per revenue generating horsepower per month increased 15% to $15.36 for the fourth quarter of 2013 as compared to $13.39 for the fourth quarter of 2012 due to higher revenue per horsepower per month from the gas lift compression units.

Adjusted EBITDA increased 51% to $25.4 million in the fourth quarter of 2013 as compared to $16.8 million for the fourth quarter of 2012. Adjusted distributable cash flow in the fourth quarter of 2013 was $18.9 million as compared to $9.2 million for the same period last year, or an increase of 106%.

Gross operating margin for the fourth quarter of 2013 increased 51% to $33 million as compared to $21.9 million a year ago. The gross operating margin percentage decreased slightly from 68.9% in the fourth quarter of 2012 to 67.9% in the fourth quarter of 2013. The slight decrease in gross operating margin percentage is due to the addition of the lower horsepower units acquired in the S&R transaction and organically after the acquisition, which have lower gross operating margin percentages than our midstream assets. We continue to see improved margins in our midstream compression assets resulting from the operating leverage we achieved by adding higher horsepower compression units to our revenue generating horsepower portion of our fleet.

Maintenance CapEx was $3.6 million in the fourth quarter of 2013 versus $3.5 million in the fourth quarter of 2012. Cash interest expense was $2.7 million compared with $4.3 million in the fourth quarter of last year. Expansion CapEx was $59.3 million for the fourth quarter of 2013 compared to $28 million for the fourth quarter of 2012, and was used primarily to purchase new compression units. Full-year 2013 revenue increased 28.7% over full-year 2012 revenue from $118.8 million to $152.9 million. Full-year 2013 adjusted EBITDA increased 27.8% over 2012 from $63.5 million to $81.1 million. Lastly, full-year 2013 adjusted distributable cash flow increased 60.9% over 2012 from $34.9 million to $56.2 million.

On January 23, 2014, we announced a cash distribution of $0.48 per common unit and subordinated units, which represented a 4.3% increase over the third quarter. This fourth-quarter distribution corresponds to an annualized distribution rate of $1.92 per unit. The distribution was paid on February 14 to unitholders of record as of the close of business on February 4.

USA Compression holdings LLC, the owner of 50.9% of the Partnership's outstanding Limited Partnership units, and Argonaut Private Equity, an affiliate of George B. Kaiser, together with other related investors who own approximately 19.4% of our outstanding Limited Partnership units have elected to reinvest all of the cash distributions they receive on their units pursuant to our distribution reinvestment plan. Adjusted distributable cash flow coverage for the fourth quarter of 2013 is 1.03 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 3.53 times.

On December 13, 2013, the Partnership entered into the fifth amendment and restated credit agreement. This agreement provides for an increase in the facility capacity from $600 million to $850 million and an extension of the maturity to 2018. In addition, the revolving credit facility contains an accordion feature whereby it can be expanded to $950 million under certain conditions. The amendment to the Partnership's revolving credit facility reduces the applicable interest rate margins on borrowings and provides additional flexibility under the financial covenants.

We appreciate the continued support and confidence of our lender group, which includes multiple institutions with long-term relationships with USA Compression, and we view the strong initial commitments from several new institutions in our lender group as a strong vote of confidence in our partnership. This financial commitment to our partnership from the lender community provides us with additional financial flexibility as we see -- continue to execute our growth strategy and deliver long-term value to our unitholders.

Outstanding borrowings under the revolving credit facility as of December 31, 2013 were $420.9 million resulting in a pro forma leverage ratio of 4.1 times on a trailing three-month annualized basis, which is consistent with the leverage ratio covenant within the facility.

We are providing our full-year 2014 guidance range as follows. We expect full-year EBITDA to be in a range of $109 million to $115 million, and we expect to generate distributable cash flow of $75 million to $81 million. Finally, we expect to file our Form 10-K with the Securities and Exchange Commission on February 20, 2014.

With that, we'll open up the call to questions.

(Operator Instructions). Igor Grinman, JPMorgan.

Hey guys. Thanks for taking my call here. A couple of quick ones. If I just annualize the 4Q 2013 adjusted EBITDA, it kind of gets me to $102 million, still below but not far from the low end of the 2014 guidance. Can you talk a bit about what you're assuming on the maybe utilization or gross margin ratio side? Because the range seems a little bit conservative just running that simple math. I am incorporating the new horsepower additions throughout 2014?

Sure Igor. And your calculations are accurate. In terms of the gross margins, we see that the gross margins overall for the business would be about 1 point below our current run rate on the low end of the guidance range. And there is some level of conservatism built into the low end of the range. Also, we do get a full-year effect of the gas lift compression units, which as you know have gross margins that run below the midstream assets that we have in the fleet.

The other thing I might add is that we have definitely built into our guidance for this year some infrastructure cost in supporting the business. So, our second full year as a public company, we have some operations support positions that we're going to add to generally support the operations across all of the basins where we have our business. And we also have some SG&A infrastructures that we are adding pretty much across the board to make sure that we are in a position to continue to support our growth. So, those are the components that would be in the projected run rate for 2014 that would be incremental or different than the exit rate out of the fourth quarter of this year.

Got it, thanks. And just one more, just one quick one. Sorry if I missed it, but is there any explicit guidance for growth CapEx for 2014 that you guys put on the call?

There was not, but I would be happy to walk you through that. So, we have approximately $235 million of growth CapEx in our plan for the horsepower additions that Eric mentioned in his commentary, which was approximately 220,000 horsepower for 2014. So of the $235 million, approximately $210 million is related to new compression units and the rest are for trucks and other expenditures that support the addition of the compression unit growth CapEx.

This is Eric. As we mentioned, we are contemplating kind of front-end loading the growth of 2014, which gives us an opportunity to look for the back half of 2014 as well as for additional growth. We have extremely strong demand signals right now, and as I indicated in the commentary, the placement of our units is running ahead of what we have historically seen. So we are in the midst of looking at what does the back half of 2014 from a commitment to some additional unit CapEx look like? And we are visiting with our fabricators and our packagers right now as to what some of those incremental commitments might look like. We may end up looking at adding as much as another 100,000 horsepower to delivery in the back half of 2014. Keep in mind leadtimes right now at the fabricators are running in call it the six month or so range. So, to the extent we end up with some additional orders, it would tend to be towards the tail end of 2014, possibly carry on into 2015. But we are looking at some additional new unit CapEx for delivery in the latter half of 2014 to further the growth due to the strong demand that we see.

Got it. Thanks guys. That's very helpful.

Marc Silverberg, Barclays.

Good morning everyone. For the $180,000 that's already on order for this year, it sounds like those are first-half deliveries. But when does your guidance assume those are fully cash generating? And given that those are about one-third contracted today, give or take, is it fair to assume that most of those deliveries are concentrated in the second quarter of this year?

The acquisition of those units are a little bit more weighted into Q2, but we have a significant amount of horsepower coming in the first quarter of this year. And the modeling assumption that we use for guidance purposes is a three- to four-month lag from getting the units acquired to those producing cash flow. As you know, our history looks more like having those under customer contracts at the time we take delivery of the units, and as Eric mentioned, we are off to a running start in 2014 that is stronger than we've seen in the last several years. So we have that lag built in for modeling and guidance purposes, but we do expect to have most of that equipment under customer contract as we take delivery from our packagers.

Got it. That's helpful. Thank you. And then for the full year 2013, EBITDA came in just below the low end of the range you had laid out there in November. Was that timing related or were there other impacts that we could see carry forward into early 2014?

It was not timing, and would not carry into 2014. So a good question there. We had actually expected to sell a couple of compression units to a third party that we did not consummate for some good reasons. But that is really the difference in terms of the $400,000 roughly of differential long distributable cash flow for the year. And so that was a nonrecurring transaction. It was a little bit of a unique opportunity. We elected to not push that through, and so therefore it doesn't have any carryover effect into 2014.

Got it, okay. Thank you. And then you had mentioned that the higher pricing was due to the addition of gas lift units. Is that the sole driver of the increase, or was there any element of I guess more broad-based pricing improvements? And can we expect these pricing levels that you're running today to carry forward into 2014 as you deploy more gas lift type units?

Yes, I'll go ahead and start with that one. So, we are continuing to see some basic -- basically inflationary price improvements as we renew contracts with customers or put new units out. The landscape in terms of pricing is still quite competitive, but we have seen improvements through 2013, and we expect to be seeing modest improvements in 2014 as well.

If you look at the kind of the weighted average for 2014 on the pricing for the fleet, it will look a whole lot like what we saw in Q4 because the fourth quarter of 2013 had a full quarter of the S&R acquisition. So something in that $15.50 range is the composite pricing that we would expect to see in 2014.

Perfect. And lastly, obviously, the hot topic, weather. Were there any weather-related impacts to the operations during the quarter, or maybe the start of this year, freeze to the wellhead or just limited ability to run your units or maybe mobilize them around some of the basins?

That's a really good question. Clearly, when you look at the magnitude of our operations in the Mid-Continent area, the Texas Panhandle, western Oklahoma, there were sizable and significant weather-related impacts. We have a major base of operations in Appalachia, and there were lots of snow days for the kids as I'll indicate. That said, when you look at our revenue stream, which is fee-based downtime for customer reason such as freeze off, unlike guys who take commodity risk and throughput risk, we actually do get paid on our dollars per month contract. It does have an impact on some of our operating expenses. Overtime tends to run up. There are some unanticipated mechanical failures that tends to hit some of your OpEx costs a little bit, but unlike some of the E&P peers who may have a substantial loss of throughput and obviously cash flow impact, the beauty of our contract structure provides that we get paid anyway. It does have a little bit of impact on our expenses, but in the scheme of life not that material.

Perfect. That's all I had. I appreciate the color guys.

Sharon Lui, Wells Fargo.

Just to confirm, I think your guidance for 2014, does that incorporate the full 220,000 of horsepower that you're planning to add, or just 180,000?

That includes the full 220,000. And of course, as you know, the equipment that we will take possession of in the second half of this year has a relatively small effect in 2014, but it does incorporate the full 220,000 horsepower.

Okay. And I guess, based on the midpoint of your DCF guidance, it kind of implies close to a 1 times coverage ratio based on your current distribution. How do you view I guess distribution growth and coverage? Is it on a paid basis, or how should we think about that?

Yes, I think we'll continue to guide folks to look at it both ways. So you're exactly right with your calculation and so the low end of the range on an all-in basis would be slightly undercovered. We continue to point to the cash coverage, which on the high end of the range would look like 2 3/4 times coverage with the anticipation that Riverstone and Argonaut would continue to pick their units through 2014.

So, in terms of distribution growth, we still are looking for this low 10% to 12% growth as we look over the next several years with our organic growth plan, and we would still like to grow over 1 times all-in coverage, and it's still our objective. But for our planning for 2014, particularly with the pick on the distributions, again cash coverage we would expect to be running nearly 3 times for the year.

Okay. That's very helpful. And then just your growth CapEx for the fourth quarter, if you look at the amount of horsepower, it seems like it trended a lot higher, close to $1500 per horsepower. Was there anything unusual in that number?

Yes, not unusual, but the gas lift units, those were run at about call it $1400 to $1500 per horsepower, and so clearly those have the higher average acquisition costs, as is the case with other small horsepower that we would acquire. And so for the large horsepower units, we are still running at about $850 per horsepower, so that has not really changed. But the weighting for the addition of the gas lift units clearly will drive up that amount on a per-horsepower basis.

Okay, okay. And then I guess the last question. For your horsepower of 180,000, is the split pretty much in line with what you're thinking about for the full year? Meaning 170,000 for the regular horsepower and 50,000 for gas lift?

Yes. We still anticipate that will be the split between gas lift and the midstream assets for the full year 2014.

Okay, great. Thank you.

T.J. Schultz, RBC Capital Markets.

Eric, just to expand on some of the potential for horsepower above the 220,000, it's pretty sizable upside potentially. I guess just a couple of follow-ups, mainly the mix for potential new horsepower between midstream applications versus gas lift, or where you are seeing that potential growth. You mentioned a focus for growth obviously in the liquids rich plays, and you're being selective on locations and projects. Just if you could expand on where specifically you think you have the most opportunities kind of geographically over the next couple of years.

And then just a second follow-up, the potential for that much horsepower. How do you think about the balance sheet and your comfort level carrying different levels of leverage during periods of pretty high demand such as this?

Good questions, T.J. We indicated early on that we don't want to get out of kilter and overweight the gas lift side of the equation. What's interesting, the ability to digest that 50,000 horsepower of gas lift units for deployment in 2014 is right down the fairway.

The incremental growth upwards of that 100,000 horsepower is our classic core midstream focus. We are seeing very strong continued demand in Appalachia, both the Marcellus and the Utica. We are seeing very strong demand signals right now for the Permian Basin where we moved into a little over a year or so ago, and we continue to see very strong growth in that area. We are seeing continued growth in the Eagle Ford Shale. And interestingly, with some of the build out, continued build out in western Oklahoma with midstream assets, we are seeing fairly sizable processing demand already in it. So, bottom line, that additional demand signals back half of 2014 for upwards of 100,000 horsepower would be midstream oriented.

And on the balance sheet, so even with our 220,000 horsepower adds, if you look at leverage on an annualized trailing three-month basis, that would put us at 3.95 times leverage at the end of 2014. A trailing 12 basis, that number is right at 4.2 times to 4.3 times. And so that against our covenant leeway of 5.5 times, we are very comfortable in terms of adding that amount of growth CapEx into the system. And so even if we look at deploying the horsepower that Eric just described and the timing for getting that horsepower under customer contracts, we think we can still make progress against our leverage and improve our balance sheet in that regard. So again, we are quite comfortable with adding growth CapEx and at the levels that we are describing.

Let me follow-up also kind of on that backend 2014 100,000-ish horsepower potential. A fair component of that would be targeted toward the station services business that we've talked about. We see additional margin associated with that. When you look at the CapEx cost of a project like that, call it half would be compression assets, half would be the other tangible equipment. And we see some very substantial operating lift associated with that. The margins are significant for us.

So part of what we are looking toward right now is looking to improve our return on invested capital to bring not just the assets to the table, but the services infrastructure that we have, and push through some additional leverage on higher margin projects. So, it's not like we want to just go chase incremental growth opportunities for the sake of growth. We actually want to chase incremental growth opportunities that can bring incremental margin to the table. So call it a high graded opportunity for us for the second half of the year.

Okay, great. Thanks. Just lastly really quick, you mentioned the focus on kind of cash coverage. So the distribution reinvestment plan, how we think about how long that should continue?

You probably know we get asked that question quite a lot. So, Riverstone and Argonaut are committed through the second quarter of 2014. They're certainly eligible to elect to take cash after that period of time on a quarter-by-quarter basis. But I can't speak really to specific timetables, T.J., but we really don't anticipate seeing either group taking cash out of the business in the near term.

So, our planning, particularly for 2014, is -- at least our planning around balance sheet is the pick will continue. And then again we see how that shapes up in future years, but both groups are still fairly new into the investment, like the growth opportunity in the units, and really not looking to take out cash.

Good. Thanks.

Jim Rollyson, Raymond James.

Good morning guys. Maybe first of all for Jody, just going back to your margin commentary on what's kind of embedded, what's driving some of the maybe higher costs this year to bring EBITDA only up marginally from 4Q, what should we be thinking in terms of SG&A and even DD&A for that matter? Just for our models for 2014?

Sure. So the SG&A will be up incrementally in 2014. Again, we are looking at making adds to support the business really all across the board in terms of the systems and people processes, our HR staff, legal. And while these additions are being made to support future growth, we are making the decision to move some of these people and systems into the mix in 2014. I just believe that will help improve our platform for not only our organic growth but also for future acquisitions. So, the modeling around our SG&A is up again just incrementally over 2013, nothing that's far different because we still expect EBITDA margins to run in a range of where we've exited 2013.

So in terms of DD&A, nothing different there either in terms of how we would depreciate our growth CapEx and maintenance CapEx, so still looking at a 25-year straight line on growth CapEx, and the same assumptions either three to five years or seven years, depending on the type of maintenance CapEx component that we have.

So, again, we are looking at these as relatively minor adjustments in our projections around gross and EBITDA margins, but we are going to invest not only in operations support but in different components of SG&A cost base in 2014.

That's very helpful. And maybe one for Eric. Eric, obviously demand outlook continues to be pretty strong. What does the competitive landscape look like when you're talking to customers? What kind of competition are you getting to add new horsepower? How has that changed or is that still similar?

Really good question. And what we are seeing from our customers, they are trying to figure out how they do more with not having access to lots of talent and personnel right now. So pick a name of a midstream company, pick a name of an E&P company, there's continued build-out going on. People are drilling wells. People are finalizing gathering systems. People are bringing on processing plants.

As everybody on the line knows, we are in the midst of an extended "energy boom" right now. So people are in short supply.

We are seeing needs being driven by safety, needs being driven by people. And compression assets don't operate themselves in the field. So what we are seeing, frankly, is kind of a I'll call it a migration toward folks like USA Compression who can bring the bundled solution to the table and say turn this over to us, outsource this to us, be it in a rich gas play, be it in a dry gas play, as people gear up and ramp up and continue to promulgate, the needs for our services continue to be there and frankly are being expanded upon.

From a competitive stance, there are some people who say we view compression as a core competency. We will do it ourselves. There are some people who say I'm going to have some of my baseload long-term equipment and I'll do that myself and I'll variablize some of the growth stuff and work with a company like USA Compression.

And not everybody can really do what USA Compression does. Mission-critical big horsepower is a true differentiator, our geographic footprint. We may run into a regional competitor in south Texas or west Texas or east Texas or Oklahoma. We may run into a different regional player up in Appalachia. But when your get into the bigger mission-critical bigger horsepower iron that are safety driven, not everybody can do that.

We see the same cast of characters. I think some of the folks are looking at their business mix. Some folks have divested recently of some fabrication capabilities and are looking to rationalize, and what do they look like on a go-forward basis. We see folks who look at the compression industry and maybe some private companies have been around for a while and looking at how do they position themselves and compete against a USA Compression that has a good strong public platform and public currency to play with.

So, I think that the competitive landscape is actually, from our perspective, improving, allowing us to continue to do what we do well. There is a recognition of a value-added service that we provide, the strong safety focus that we have, the access to equipment that we have, the big broad geographic footprints. And as folks like Anadarkos of the world, the Apaches of the world, tend to divest themselves of their international holdings and focus back domestically, I think they are looking for the service capabilities of a bigger platform player like a USA to help back their play.

Perfect color. Last one, just on gas lift. Now that you have a platform to grow from, is the general thought just to continue to work that up organically, or are there other acquisition targets out there that could help fill that in in different geographic regions?

That's also a good question. Our view is we have a strong platform with USA Compression. We've got a broad regional geographic footprint. We look at the economics of the organic growth right now, and that tends to make sense for us. Some of the assets that we've taken a look at on the smaller horsepower side, frankly, from a technical perspective, we are oriented more toward marginal gas well gas lift rather than some of the higher pressure regimes needed to focus on the oil well gas lift side. So, if it's not the right assets, a little bit older assets, don't have the type of ideal footprint we need, kind of at this stage of the game, I'd say our focus will probably be to continue to grow organically rather than to troll for acquisition opportunities in the gas lift sector.

Thanks guys. Appreciate it.

(Operator Instructions). Matt Niblack, HITE.

Thank you. A couple of questions. Number one, you mentioned the 36% contracted rate of incremental capacity as the headwind you normally see. Can you provide some color on exactly what you're going to see at this point in the cycle?

Secondly, the additional SG&A and OpEx that you are seeing this year, is it sort of a one-time thing that you could see the 2014 level be sufficient for material growth beyond the expected 2014 levels?

And then lastly, what need do you see given, your CapEx program and leverage, to assess the overnight equity market in the first six months of 2014? Thank you.

Sure. We'll take those in order. In terms of the 36% contract rate, so we more typically would see -- again, we are taking the equipment and having customer contracts at about the time that we take possession of the orders. So to be sitting here basically in the mid-February timeframe and to have nearly 40% of the entire 180,000 horsepower under contract, that's probably running at least 2X the kind of rate that we would typically see, if not more than that. So, as Eric's commentary outlined, in terms of customer demand, we are seeing demands hit very high levels for new additions into the fleet.

On the OpEx and SG&A, we are not going to provide guidance beyond 2014, obviously, but there probably is some level of catch up, if you will, in terms of positions that we are adding that could provide a couple, two or three years, of forward support in terms of operations support and the other corporate areas that I mentioned. But we would certainly still expect, as the business grows, that the SG&A levels will increase. We work to try and keep those in a reasonable range as a percentage of revenues. But again, some of the positions that we are adding we think could give us some longevity.

In terms of the CapEx program and what we may need to do in terms of an overnight, and it could be in the form of an overnight or a one-day marketed deal, we are going to stay nimble in terms of both the equity markets that we would see an opportunity to raise additional primary equity along with the continued rates that we get under our distribution reinvestment program. We, as you probably have seen, filed a shelf with $1 billion of primary proceeds. That's a three-year longevity on that shelf.

So I think it would be fair to assume that it is possible that we could look to go back to the equity markets and possibly even in the first half of this year. Again, we're going to continue to monitor rough CapEx additions and cash flow and leverage. And in the event that we are successful with another acquisition, that would have us look at the capital structure in connection with a deal. So, we are staying quite flexible at this point in time. We think the shelf that we filed gives us the capability to do that.

Thank you.

There are no further questions at this time. I would now like to turn the call back over to Mr. Long for closing remarks.

We appreciate the continued interest and support of USA Compression. We look forward to our next call and seeing folks have who been on the call at our next round of analyst get-together. Thank you much and have a great day.

Ladies and gentlemen, this does conclude the USA Compression Partners fourth-quarter earnings conference call. A replay of today's conference is available in this morning's news release. Thank you for your participation. You may now disconnect.