USA Compression Partners LP (USAC) 2014 Q4 法說會逐字稿

Good day and welcome to the USA Compression Partners' fourth-quarter and full-year 2014 earnings call. Today's conference is being recorded.

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

Thank you, Jamie; and good morning, everyone. Thanks for joining us this morning. As you know, we released our financial results for the quarter ended December 31, 2014, and full-year 2014. You can find out earnings release and, later, a recording of this conference in the Investor Relations section of our website at usacpartners.com. The recording will be available through February 28.

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

As a reminder, our conference call will include certain forward-looking statements. These statements include projections and expectations of our performance and represent our 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 information provided on this call speaks only to management's views as of today, February 17, and may no longer be accurate at the time of the replay. I'll 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 is Matt Liuzzi, our CFO.

I'm pleased to report that we were finished 2014 on a strong note. This morning we reported record levels of revenue, adjusted EBITDA, and adjusted distributable cash flow for both the fourth quarter as well as the full year.

During 2014 USA Compression deployed a record amount of capital -- over $370 million, taking advantage of market conditions to grow our business and further strengthen customer relationships, all while maintaining our business strategy: providing compression services on take-or-pay basis without taking on direct commodity risk.

I'll get into the details of 2014 in a moment; but first, let me address head-on the elephant in the room: just what impact has the volatility in oil prices had on USA Compression's business? While the headlines in the news are focused on oil price volatility and the reaction to lower oil prices by producers, the midstream natural gas industry has so far been weathering the storm. As our longtime investors and business partners understand, our business depends primarily on the domestic production of natural gas, which drives the bulk of our business.

We like the intermediate and longer-term outlook for natural gas, both on a global basis as well as closer to home in the domestic market, where it has a more direct impact on our business. I'll discuss this further in just a moment. As we get going into 2015, like many of our peers and customers, we are exercising a great deal of caution in terms of capital spending and how we pursue business opportunities. We will respond to customer demand for compression, but we expect to proceed through the year at a measured pace and one that allows us the greatest flexibility to react to further market movements, whether positive or negative.

At investor conferences and meetings and on previous earnings calls like this one, you may have heard me speak to two key tenets associated with how we run our business and how the natural gas demand-driven compression sector is fundamentally different from other commodity-price-, drilling-driven service providers.

Those two tenets revolve around growth and stability. We grow prudently and methodically when market conditions dictate, like they did over the past several years and especially in 2014. In the current commodity price environment, though, I want to draw attention to the stability of our business that I have spoken about in the past with our fee-based, infrastructure-oriented applications and contracts and what that means in the current marketplace.

It is not all gloom and doom in the energy patch. We are seeing customers continue with planned infrastructure projects, and they are contracting with USA Compression for our compression services since compression services like ours are required for large-scale, capital-intensive undertakings move natural gas to the marketplace. As an example, in the Marcellus Shale play, our customer CONSOL Energy has announced a 2015 CapEx cut of about 20%, yet they expect production for 2015 and 2016 to increase at a 30% compound annual growth rate. Marcellus Shale peers Range Resources and Antero cut 2015 CapEx by 45% and 50% year over year while expecting production to grow at about 20% and 40%, respectively.

We are seeing this theme in other basins and with other customers as well. And to reiterate, rising natural gas production such as this is good for our business. As you will recall, the vast majority of our business is focused on traditional midstream applications, where our assets serve a critical role in transporting and processing natural gas.

Our customers tend to take a long-term investment view in constructing these large gathering systems and processing facilities, and compression is a required component of getting those assets online and moving natural gas to the marketplace. As a result, we believe that customers such as these will be moving forward and contracting for our services.

Our customer base is made up of counterparties with strong balance sheets, who have the liquidity to continue to operate and grow even in market periods like the current one. To provide a sense of the stability and strength of our customer base, our top 10 customers, who represented about 46% of our revenues in 2014, have an average credit rating of investment-grade levels at BBB+/Ba1.

We place importance on partnering with the right customers, and we are proud that we have developed a stable, loyal, and long-term customer base of companies with substantial financial strength. This gives us further confidence in our ability to successfully execute and grow our business even in softer market conditions.

So, reflecting the strong performance of our fourth-quarter 2014, we announced a distribution of $0.51 per limited partner unit, an increase of approximately 6% of the same period in 2013. We have introduced the distribution every quarter since our IPO. The increase in our distribution reflects both the methodical growth and long-term stability of our underlying business.

We believe that it is important to note that our all-in adjusted distributable cash flow coverage for the quarter was 1.11 times. For 2015 we will be prudent in our capital spending plans as we continue to manage both our cash coverage and total coverage as well as our leverage. Bottom line -- our business is performing well. Matt will provide some more specific details on our operating and financial performance a little later.

Touching on the macro natural gas picture, as I mentioned earlier, there are some positive drivers going on in the market that are and will continue to drive our business. The supply/demand balance in the US is currently close to equilibrium. Raymond James suggests there is about 2 to 3 BCF a day of seasonally-adjusted oversupply right now and an excess of only about 3% or 4% on a total domestic production base of about 81 BCF a day. This base is up substantially since last year -- about 7 BCF or so a day -- and is projected by the EIA to continue growing in 2015 and 2016 and beyond.

Virtually all of this increase in natural gas supply will need compression to get into and through the pipeline infrastructure and move to the marketplace. With the impending completion of domestic LNG export facilities as soon as the end of this year, the continued conversion of coal-fueled power plants to gas-burning plants, and further expansion of gas exports south to Mexico, that balance is expected to tighten up in the near term.

We think the global export of LNG -- the export of natural gas to Mexico alone -- have the potential to generate approximately 10 BCF in demand in the intermediate term. We would expect the supply/demand situation to lend support to the price of natural gas? If, as expected, overall domestic demand goes up, domestic producers will continue to produce in order to meet that demand. And the midstream operators will continue to invest in the infrastructure and the associated compression needed to transport, process, and deliver that gas to the end user.

The EIA projects that about 70% of the increase in natural gas production will come out of the domestic shale plays. This fits in well with our business model of providing compression services through our flexible assets designed to handle a wide range of operating conditions.

We have broad geographic diversity, yet we are focused primarily on shale in the unconventional plays, including the Utica and Marcellus Shales and the Permian and Delaware Basins. These, along with other areas of operation, including the Eagle Ford Shale as well as the Barnett and Fayetteville Shales, are where we expect to need to be to take advantage of the market opportunities we see coming in the very near future.

We have the geographic diversity so as to not be overly concentrated in one single play, yet we have a presence in the most active areas to be able to drive our growth. As you also know, the small portion -- about 15% -- of our total fleet horsepower consists of smaller horsepower units that are primarily used in gas lift operations.

Given the recent volatility in the crude oil market, we are taking a cautious outlook and focusing on our biggest customers to best ensure that the units we have out stay working. Contrary to popular belief, drilling and, more importantly, oil production has not come to a screeching halt. Certainly, in oil-oriented drilling programs, producers seem to be shifting their focus toward the most economical areas. But as I said earlier, when you dig into the details on a customer-by-customer basis, while headline CapEx budgets have been slashed, in many cases actual oil production is expected to be up in 2015 -- in some cases meaningfully over 2014 levels.

And so while we don't expect the gas lift part of the market to be growing at the rates we have seen in recent years, we do think there will to continued demand for gas lift compression, especially in the areas that are economically advantaged -- areas like the Permian and Delaware Basins and the SCOOP, for instance, exhibit attractive economics for producers, including rapid initial payouts and low lifting costs once the wells move into the stable, long-lived tail of production.

When these wells go into a steady-state mode, requiring gas lift energy to move the oil to the surface is where our units can add value, keeping production going for these producers. While we expect to continue to see some near-term pricing softness as the market gets sorted out, we are also proactively engaging in discussions with some of our largest customers to ensure that their gas lift compression needs can be met throughout the year -- and, in some cases, contractually agreeing to exclusivity in providing their incremental gas lift compression requirements.

So to summarize what we are seeing out in the marketplace: natural gas looks strong, and our customers continue to invest in infrastructure projects supported by ongoing shale production and global factors driving domestic supply. And while the drilling of new crude oil wells has slowed, providing compression in these applications is a small part of our business. We are monitoring this activity closely and are taking a more cautious approach.

Our fleet -- and based on what we have seen in the markets -- the fleets of our comparable peers remains highly utilized. So far we see continued need for the existing infrastructure-oriented compression assets deployed in the field.

As I mentioned earlier, 2014 was a record year in terms of capital spending for USA Compression. We invested over $370 million in new compression units throughout the year, most of which are on the ground, generating revenue.

Utilization is important in our industry, and we managed this significant level of capital spending while keeping our utilization at near-record levels -- 94% at the end of the fourth quarter. So not only did we grow our fleet; we kept existing assets deployed and earning a return for our unitholders. This level of activity is consistent with our long history of high utilization and reflects the infrastructure nature of our business. We have been providing compression services since 1998 and have experienced multiple commodity price cycles. And the gathering systems and processing plants that our assets serve run 24 hours a day, 7 days a week, 365 days a year.

Our mission-critical equipment is core to our customers' businesses. Without compression, natural gas will not move into and through the pipeline infrastructure. And it is because of our expertise, quality of assets, and caliber of our field service employees that our customers put their trust in us each and every day.

The activity in the market and executing on our business plan resulted in strong financial results for the quarter. For the fourth quarter I am pleased to report that total adjusted distributable cash flow coverage was 1.11 times. Some of our major unitholders have continued to participate in our DRIP program, taking back additional units instead of cash payments. This provides our public common unitholders additional cushion, boosting our cash coverage ratio to 2.7 times.

Our aim has always been to provide our unitholders with attractive distribution growth while balancing coverage and leverage. Matt will address leverage in his comments, but we still believe 3.5 to 4.0 times is the right level for our business over the long term. We continue to be focused on the managing business with appropriate long-term coverage and leverage metrics.

During the fourth quarter we added approximately 100,000 horsepower to the fleet, bringing our total fleet to about 1.5 million horsepower. The full year's additions were approximately 350,000 horsepower for the year -- a record for USA Compression. As discussed, we are deploying those units in active areas and earning attractive rates of return on that capital.

We continue to spend maintenance capital for the upkeep of the fleet. That investment is necessary to maintain high utilization levels and runtimes. This has always been a priority for USA Compression -- something our customers demand -- and is a meaningful part of our value proposition.

Looking forward, we expect continued demand for our compression services and have already placed orders for approximately 230,000 horsepower for delivery in 2015, primarily in the first three quarters. These units will go to serve producers and midstream operators as they continue to build out the country's infrastructure in the Northeast, West Texas, the Mid-Continent, and elsewhere. Of that 230,000 horsepower about 200,000 is expected to be large horsepower units, and we have already contracted approximately 43% committed to customers.

Breaking that down a little further, we have approximately 63% of our Q1 deliveries committed and, at this point in time, approximately 42% of Q2 deliveries. We expect the first and second quarters of 2015 to represent up to 69% of our total large horsepower spend for the entire year, and so we feel like we are in a good spot with regards to contracting new units.

The remainder of our spend will be for the smaller horsepower units, which we also expect to be front-end loaded this year. As a data point, this level of smaller horsepower units is about one-third of what we ordered in 2014. As you can see, by design we are front-end loading our capital spending for the year, which provide us significant flexibility in the back half of the year, as the market settles out and we get more visibility as to what our customers need.

We expect to continue our focus on optimizing the financial returns for both our existing fleet and the units to be added in 2015, deploying units to where they can generate the highest long-term returns.

Summing up, I am pleased to say that we have executed and will continue to execute on our business plan and deliver results for our unitholders. In 2014 we took advantage of favorable market conditions to invest in the long-term growth prospects of USA Compression; and as we come into 2015, we are taking a more measured view of the marketplace -- but one which we believe provides us both growth opportunities in the near term as well as flexibility over the longer term.

The midstream sector is not shutting down. And we benefit from the same fundamental business drivers that the gathering and processing MLPs do, but without any direct commodity price exposure. The market continues to move forward in spite of the recent weakness in commodity prices; but, importantly, natural gas is increasingly becoming global and remains the fuel of choice domestically, which is favorable for our customers and USA Compression's prospects.

Now with that, I will turn it over to Matt to walk you through the details of our operational and financial performance.

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

Touching on fourth-quarter operational highlights, we added approximately 100,000 horsepower of new compression units to our fleet during the quarter and ended the year with approximately 1.5 million total fleet horsepower. As we have discussed on previous calls, during 2014 we took advantage of market opportunities and took delivery of approximately 350,000 horsepower of new compression units as compared to our initial expectations of 220,000 horsepower going into 2014.

We spent over $370 million in growth CapEx for the year. Reflecting the cautious approach to the coming year, we have ordered approximately 230,000 horsepower for delivery in 2015, which we expect to be delivered primarily over the first three quarters of 2015.

Our revenue generating horsepower increased from 1.3 million at the end of the third quarter of 2014 to 1.4 million at the end of the fourth quarter of 2014 due to the additional units we have placed into service. We continue to see initial contract terms of six months to five years, depending on application.

Turning to the financial performance for the fourth quarter of 2014, revenue increased 25% compared to the fourth quarter of 2013, primarily driven by an increase in our contract operations revenues as a result of adding revenue generating horsepower. Contract operations revenue in the fourth quarter of 2014 increased 27% to $60 million as compared to $47.4 million in the fourth quarter of 2013. The fourth quarter of 2014 increase in our contract operations revenue was driven almost exclusively by the organic growth in our revenue generating horsepower.

Average revenue per revenue generating horsepower per month increased 3% to $15.82 for the fourth quarter of 2014 as compared to $15.36 for the fourth quarter of 2013. Adjusted EBITDA increased 30% to $33 million in the fourth quarter of 2014 as compared to $25.4 million for the fourth quarter of 2013. Adjusted distributable cash flow in the fourth quarter of 2014 was $26.3 million as compared to $18.9 million for the same period last year, an increase of 39%.

Gross operating margin for the fourth-quarter 2014 increased 28% to $42.1 million as compared to $33 million for the same period last year. The gross operating margin percentage increased from 67.9% in the fourth quarter of 2013 to 69% for the fourth-quarter 2014.

Maintenance capital expenditures were $3.4 million in the fourth quarter, which was consistent with expected levels for the quarter. Expansion capital expenditures, primarily used to purchase new compression units, were $109.3 million for the fourth quarter of 2014. Cash interest expense net was $3 million compared with $2.7 million in the third quarter of last year.

On January 22, 2015, we announced a cash distribution of $0.51 per unit on our common and subordinated units, which represents an approximate 6% increase year after year. This is his seventh consecutive increase to our distribution since our IPO in January 2013. This fourth-quarter distribution corresponds to an annualized distribution rate of $2.04 per unit.

Consistent with previous quarters, USA Compression Holdings, LLC, the owner of 42% of the Partnership's outstanding limited partnership units; and Argonaut Private Equity, an affiliate of George B. Kaiser; together with other related investors, the owners of approximately 16.3% of our outstanding limited partnership units, have agreed to reinvest all of the cash distributions they receive on their units pursuant to our DRIP through the first quarter of 2015.

Adjusted distributable cash flow coverage for the fourth quarter of 2014 is 1.11 times. Cash-based coverage for the actual distributions to be paid as a result of USA Compression Holdings, Argonaut Private Equity, and other investors participating in our DRIP is 2.7 times.

Also during the quarter, we worked with our banker to increase and extend our credit facility. And on January 6, 2015, the partnership closed the second amendment to its fifth amended and restated credit agreement. The amendment provides for an increase in the facility capacity from $850 million to $1.1 billion and an extension of these maturity to 2020.

The amendment also provides additional flexibility under the financial covenants. Outstanding borrowings under our revolving credit facility as of December 31, 2014, were $595 million, resulting in a leverage ratio of 4.5 times on a trailing three-month annualized basis.

We are providing our full-year 2015 guidance range as follows -- we expect full-year EBITDA to be in a range of $130 million to $140 million, and we expect to generate distributable cash flow of $91.3 million to $102.3 million. This guidance reflects the current market realities. Given the overall industry uncertainty, we are proceeding with caution and prudence, planning for near-term stability and longer-term flexibility.

Finally, we expect to file our Form 10-K with the Securities and Exchange Commission in the next several days. With that, we will open the call to questions.

(Operator Instructions) Praveen Narra, Raymond James.

You touched on it a bit in your comments -- and, obviously, it's a much smaller piece of your business -- but how do you think about the outlook for utilization in the gas lift and the well-side compression part of the business? Does it actually start to decrease in this environment, or how should we think about it?

Praveen, I guess we looked at it a couple different ways. One, we anticipate that incremental new growth activities will slow. Obviously, deployment of new gas lift equipment is tied to new drilling activity, which is going to have somewhat of a slowdown.

That said, it's a fairly large universe, and the opportunity set is somewhat large. I think one of the reasons we are backing off on the new CapEx for 2015 on gas lift is to make sure that we can maintain our historical high utilization rates that we have seen.

So, clearly, producers are not going to be removing gas lift equipment from wells that are making 50, or 100, or 250 barrels a day that need lift energy -- provides the source of energy to get the oil out of the ground and, obviously, provide the cash flow that the producers need. So I think we are going to be somewhat guarded coming into the year, but our view is if we back off on the new unit deploys, that will allow us to maintain a high degree of utilization that we have in the existing base fleet.

Okay. that's helpful. And then could you give us a sense on both you guys and the industry in terms of the horsepower buildout and the prevalence of building on specs versus building on contract? You had mentioned what it was for your current orders, but is that about right for the industry? Or do you see your book as a little bit more contracted for the industry -- and this on all compression, not just gas lift?

I obviously can't comment on others. We spend time visiting with our packagers. Some of our competitors package their own equipment, and I don't believe -- a couple of these guys haven't made their -- haven't presented their quarterly call yet.

So I do have a sense from visiting with the manufacturers on the engine and the compressor frame side of the equation that lead times are still long. We are looking at 30- to 40-week lead time right now for the major components. In visiting with a couple of our fabricators, their contract book is strong for 2015 and, in some cases, on into 2016.

So the demand still high. Clearly, some of that would be for owner/operators -- some of the major gatherers and processors who purchase equipment for the projects that have very long cycle times. Our sense is, in looking at what we've seen coming through the end of the year is that the utilization of the domestic fleet for guys like us is still very high.

So I think I would contrast that to 2008 and 2009 time period, where there seemed to be a fairly large, I will call it, glut of large horsepower equipment. And our discussions with our packagers and what we are hearing from customers and out of the field is that is not the case today -- that we are highly utilized, and it seems like our peers are highly utilized. We'll wait to hear what some of the commentary is from some of our other public peers after they announce.

Okay. And if I could just sneak in one follow-up: in terms of the pace of newbuild orders in horsepower going forward -- and, obviously, you can only speak for yourselves, but I guess if you had to guess on the industry -- would you think that the pace from here continues at a 2014 pace, or would it moderate in terms of ordering?

I think, clearly, in our case -- you know, we came into 2013 looking to deploy 220,000. And we did 350,000, 370,000. This year we came into it looking to do about what we did coming into 2013 -- again, 220,000; 230,000; 250,000 horsepower range.

So I think maybe this year people are looking at the back half of the year. Probably have a little bit less visibility for the second half of this year than we did last year at this time for looking at the back half of the year.

So I think it's premature to conject what the back half of the year is going to look like for the industry. Based on current pricing and current signals, probably a little more conservative than last year.

That's very helpful. Thank you.

And Praveen, it's Matt. I'll just add one other thing -- you mentioned spec builds. You know, when we go through our budget when we are developing our capital plan, we don't think about it like a spec unit.

We go out, and when we come up with that range of capital that we think we are going to spend for the year, what we are basing that on is detailed conversations with customers throughout all the regions about their needs for the remainder of the year. So we don't think about it as we are going to get 100,000 horsepower in the back half of the year, and we better find somebody to use it.

These numbers are based on continual conversations with customers. So I just wanted to draw that distinction -- that it's not quite spec ordering, I think, like other industries may have.

That's helpful. Thanks and congratulations on the strong coverage.

T.J. Schultz, RBC Capital.

Kind of staying there first on some of the utilization -- and it sounds like you were discussing kind of defending utilization as you have in the past. But just any more specific color on utilization and pricing changes year over year in 2015 as it relates specifically to your 2015 EBITDA guidance? I'm just trying to see how we should think about some of the puts and takes between utilization and pricing near-term to get there?

Sure, T.J. It's Matt. When we look at the utilization -- I mean, pricing obviously was up year over year in the quarter. And so we continue to see out there attractive -- you know, we continue to sign up deals at attractive rates.

So when we project out, we don't really show a big decrease in rates. We are looking at flat rates with -- you know, if there's upside to rates, that is going to be a little bit additional on top of that.

In terms of utilization, I think as Eric mentioned, when we look out there, we see that there is still demand on both sides of the business. People are still spending money on these big infrastructure projects.

And so with our CapEx at the level where it is -- and we think -- when we kind of look around across the industry, we think the demand for equipment is going to remain clearly solid and fairly tight throughout the rest of the year, which should support both continued utilization and pricing trends.

And, T.J., along that line, having the focus that we do on infrastructure equipment -- we continue to move up and up and up in the size of the compression assets that we are adding to our fleet. When you look at what we are adding this year, it's -- a large component of equipment being deployed are in the 3600 series -- 3606, 3608, even 3616 type compression equipment.

That last one, the 3616, is just a scosh under 5,000 horsepower per gizmo. So not everybody can do this. There is just a couple of us in the industry who have the wherewithal, both financially and operationally, to be able to deploy this type of iron.

That type of equipment typically goes out under much longer-term contract and tends to be less, I'll call it, price-sensitive than some of the other lower-horsepower, more commodity-oriented, more wellhead-oriented type of equipment. So I think that's a big differentiator this year: when you look at the amount of horsepower that we'll add, the average size of the fleet this year that is being added will be significantly larger than what we added last year on an average basis -- bigger stuff.

Okay. Thanks. I guess just lastly, you have a 3.5 to 4 times kind of target leverage ratio. Given the 2015 CapEx and cash flow guidance, it seems, not surprisingly, that equity funding will need to be part of the funding mix longer-term. But maybe if you could just discuss how you think about that, given where your yield is right now?

And then in the past you've talked about looking at strategic acquisitions as a way to improve liquidity in your stock, maybe, and hopefully the yield. So maybe just touching on that lever as well as a way to get to where you want to be?

Sure, T.J., you have certainly hit it on the head in terms of kind of the current yield -- you know, as we sit here today, it's not super attractive to be out there issuing equity. The amendment that we get to the credit facility back at the beginning of this year obviously gives us some flexibility to kind of let things sort themselves out in the market.

Equity is obviously an important part of kind of the overall capital structure. And we realize that. And really getting from kind of that 4.5 times level down to the 3.5 to 4 target range is going to require a balance between the leverage, and the distribution growth, and coverage, etc. So we are definitely still keeping an eye on everything, but understand that it's got to be a balance of capital.

In terms of strategic M&A, we continue to look at things regularly. Last year there were the value expectations, I think, amongst all subsectors in the MLP-land tended to get pretty high. So I think this year is sort of -- remains to be seen kind of where those trends move. But certainly we continue to look at things. And to the extent that it would accelerate us getting into a more manageable leverage scenario, we would absolutely look at things.

Okay. Thanks, Matt.

Shneur Gershuni, UBS.

Just a couple of quick questions, and some of them, I guess, are follow-ups. In your prepared remarks you had sort of emphasized how you really have to pay attention to natural gas production rather than crude production. Everybody is announcing CapEx cuts and so forth.

But I guess I was wondering if you could square a peg for me here: there are a lot of gathering and processors who tend to focus more on gas and on the NGL side of the equation. That seems to be cutting CapEx and headcount aggressively. We saw Enable this morning; we've seen DCP Midstream and so forth. Some of them are in some of the basins that you deal with and so forth.

Is it a scenario now where things are fine for you now because of the producer plans for the next year or so, and more of the lagged nature of your business? I was just sort of wondering if you can help us a little bit here? Because it's one thing to see the crude CapEx cuts and being able to say that's differentiated from your business, but when we look at when we look at the gathering and processors, and they are sort of taking strategic cuts, how does that fit with your business? Do we see that later on? Is it just growth slowing? I was wondering if you could just sort of comment about that.

Sure. One of the things we see in an environment like this -- and we have seen this historically through multiple cycles -- is we tend to become an avoided capital game at this stage. So when folks cut their CapEx budgets, they look at incremental needs and say, you know, is compression really a core competency? Is that something that we want to take our precious amount of CapEx dollars and truly deploy?

So I think you'll see a balancing act. You will see some folks who may have some Company-owned equipment that they will deploy in the short-term. Some of the folks will look at it and say, I've got $100 million worth of compression that needs to be deployed over the course of the next year or two. Am I going to buy the whole thing? Am I going to outsource part of it to USA or outsource it all?

So I think historically, again, what we've seen in marketplaces is like this is a little bit more of a shift to the outsourcing model -- the avoided capital type of game. I also think it's specific to certain G&P companies. So the drivers in the Utica and the Marcellus are very different than the drivers in the Mid-Continent; are very different than the drivers in the Delaware and the Midland Basin right now.

So I don't think it's, Shneur, one that you can paint with a broad brush and paint the entire industry. There are areas that are what we call Tier 1, high-quality properties in the Permian and the Delaware which are being developed, where you don't have sufficient pipeline and processing capacity to handle either the very high BTU-rich gas or the condensate and/or oil that's coming out from the Wolfcamp or the Wolfberry in that area.

So very different drivers in the SCOOP, very different drivers in the Utica and the Marcellus. So could have some potential impact, but that's, I think, why we are coming into 2015 being a little more cautious and guarded, just to see what visibility for the back half of the year truly looks like.

So if I can paraphrase a little bit -- is it fair to say that while everybody is looking at their budgets and reviewing their business models, it's fair to say that we are more likely to see them act towards preservation of capital and outsourcing the CapEx really onto you rather than them trying to insource compression to try and lower variable costs?

Generically, yes.

Okay. Cool. Follow-up question to that -- a lot of the good questions have been asked already. But kind of curious if you can sort of talk about capital costs at all? Are your dealers cutting costs at all for equipment and so forth?

You know, we've seen some of the major machinery companies report disappointing earnings and so forth. I'm just wondering if you are starting to see some of the benefit in terms of lower costs for equipment that you'd be purchasing or looking to purchase over the next year or so?

I wish we could tell you today we are seeing that. Caterpillar historically has not been receptive to reducing their first costs. I think they view the marketplace similar to Ferrari -- they have never been the low-cost provider. They have been bearing kind of the perfect storm, where they have had reductions in mining equipment; they had the strong dollar implications; the energy sector has been one of their big drivers for the past few years.

That said, Caterpillar is not the only game in town, and that there are other providers of compression equipment -- the drivers' side -- who are aggressively looking to make some inroads in this marketplace. So I think it's one that at this stage of the game, unlike what you are seeing in some of the other service industries, where there are some fairly major reductions in equipment costs -- and hence the ability to reduce some of those service fees -- we have not seen that yet in our industry. But that's something that, obviously, we are going to spend some time on this year.

Okay. Great. Thank you very much, guys.

Sharon Lui, Wells Fargo.

I'm just trying to follow up on T.J.'s question about guidance. On an annualized basis the fourth-quarter numbers was about $132 million in EBITDA. Looking to your guidance for 2015 of $130 million to $140 million, it just seems very conservative, given where the current run rate is.

You indicated, I guess, that utilization should remain pretty solid as well as the rates. Just wondering -- were there unusual items in the fourth quarter, perhaps? Or maybe we should be thinking about the margin going forward?

Sure, Sharon. It's Matt. A couple of things -- in the fourth quarter we did have a few benefits just from some timing items that boosted that up a little bit. When we you look at the next year, again, I think we are taking a cautious approach. As Eric mentioned, we don't have as much visibility in the latter part of the year.

So we understand that when you look at the fourth quarter and you annualize it, you get to levels where you had mentioned. But basically what we put out there for our range on both EBITDA and BCF just reflects kind of an uncertain market as we sit here today. Certainly throughout the remainder of the year, we hope to be able to update that and provide updates to our investors. But right now we are taking that cautious approach to the year.

Okay. And I guess maybe if you could provide some color on any recent conversations you've had with your customers -- Do they seem -- you know, discussing more in terms of pricing, or deferring their commitments to lock-in contracts at this point in time? Just trying to think about what type of conversations you've been having.

So, again, Sharon we can't just generalize and put the broad brush across the entire US. I would say that there are pockets of strength, and there are pockets of a little softness. There are certain companies that are highly levered, with limited hedge capacity on the E&P side. They are having a more difficult time than some of the larger folks, who might have a stronger balance sheet and had a much more actively hedged program.

Even with that, although CapEx budgets have been cut with the E&Ps, in some cases -- I mean, in most of the cases, fairly dramatically, we are continuing to see -- and we are hearing from our customers, both midstream and E&P alike -- that their overall production for 2015 will be increased over 2014. And when we then look at how they are going to get their gas into and through the pipelines, compression is needed.

I think the reason we are being a little more cautious and conservative, and why we've set a little bit larger guidance range this year is: looking at the back half of the year, there is a little less clarity than there was this time last year due to the volatility in commodity prices. If prices remain soft or slip further, probably a different scenario than if prices tend to tick up a little bit.

We are seeing -- particularly when you look at the Marcellus and the Utica, there is a lot of volumes, there's a lot of gas that's been developed that does still need to get to the marketplace. So, again, I think we are cautiously optimistic as to what the back half of the year will look like.

But my crystal ball -- and I don't think anybody on the call has the ability to accurately forecast what's going to go on with instability in Middle Eastern countries and the other things that we can't control. So I think we are all taking a somewhat guarded view for the back half of the year, and just make sure that we don't overcommit, and that we actually are able to deliver with what our forecast projections are going to look like.

That's helpful. And I guess the last question is just in terms of the DRIP program. Any update on that front?

Sharon, no change in the DRIP program. Obviously, this quarter Riverstone and Argonaut both elected to participate. They have committed through the first-quarter payment, which will happen in May. So at this point there have been no decisions made further out than that.

Okay, great. Thank you.

Jeremy Tonet, JPMorgan.

All of our questions have been answered.

Jerren Holder, Goldman Sachs.

Appreciate the guidance on 2015. Any thoughts on distribution growth, though?

Jerren, No. We don't provide actual distribution growth guidance, but obviously that's something that the Board will review on a quarterly basis and make the determination based on that quarter as well as kind of the outlook for the rest of the year.

Is it fair to -- seeing, I mean, every quarter you guys have increased the distribution, that that trend should continue in 2015?

I would have to leave that to the Board to make that decision.

Okay. And on the covenants, there were some amendments to the credit facility. Can you talk about some of the key metrics -- any sort of debt-to-EBITDA sort of limits that you guys need to be aware of as you go about financing the CapEx program here?

Sure. So we closed the deal in early January of this year. The covenants relief -- that flexibility that I had mentioned -- basically gives us the ability to go up to 5.95 times coverage for the first and second quarters of this year. And then it steps down to 5.5 times, basically through the second quarter of 2016.

So that -- basically, we bumped it up and gave us a little more breathing room, really to let the market sort itself out and continue to execute on the capital program. So, again, right now we are at 4.5 times at the end of the year versus a leverage covenant of 5.5 times.

And those metrics are -- they are going to be, I guess, trailing three months annualized, like you used the 4.5 times?

Yes. Trailing three months annualized. That's right.

Okay. All right. Thank you.

Andy Gupta, HITE Hedge.

Good morning, guys. I just wanted to follow up on Sharon's question on potential customer behavior. We had one midstream company on Friday suggest that they were going to do more owned compression equipment and leased equipment. Do you have any thoughts? Are you hearing some more comments from your customers?

I'm actually -- I sat in on that same call on Friday, and that particular company has a propensity to purchase equipment because it tends to have 20- to 30-year applications for that type of product. Again, we don't see a wholesale move toward we want to own everything versus we want to outsource everything.

A fair number of our midstream customers approach kind of a balance, where the outsource some and then they own some. And we are not seeing a radical, wholesale shift one way or the other from that historical philosophy.

Got it. And sorry to go back to gas, because I know that's a smaller percentage of your business, but just to understand a little bit better -- you mentioned you may see some pricing softness on that part of the business. Can you elaborate a little bit more?

And sort of a related question on the utilization. I'm not sure if you break out utilization for this business, but what are you sort of seeing for the gas in terms of utilization as well?

So I think part of the reason we are being a little more conservative with our future growth outlook is -- you know, we acquired the gas lift assets a couple of years ago. This is the first supercycle or first softness in the oil price side that we are coming into. So we are approaching it probably more cautiously, maybe, than others.

At this stage of the game, we are not seeing a wholesale change in utilization. Utilization of the gas lift fleet is still strong. So I think we are proactively contemplating that utilization and/or pricing might soften a little bit. So we are trying to hunker down before the storm hits, so to speak. At this stage of the game, though, we have not seen a wholesale return or much degradation at all, frankly, in the utilization of the gas lift fleet.

I understand. Just to think about what the softness could be -- is a 10% range reasonable? Or plus/minus?

Again, too early at this stage to contemplate one way or the other. It may be no degradation in utilization, no degradation in pricing; and could be some. And at this stage, since we are not seeing it, I can't really conject.

Understood. Thank you, guys. Congratulations on the quarter.

And it appears there are no further questions at this time, so I will turn the conference back over to our hosts for any additional or closing remarks.

Thank you, everybody, for your time today. I know it was kind of a long-winded call. A lot going on in the industry. And as you heard me say before, the story of USA Compression has been and will continue to be a story of growth and stability.

We had a very good year in 2014. We are having the makings of a good year for 2015. We will balance the growth, and we will continue to focus on the stability side. So we'll update you with press releases every now and then, if they are germane, for an operational update; and we will continue to update you as to the performance of business on our next quarterly call. Appreciate your continued support, and everybody have a great day.

Thank you for your participation. This does conclude today's call.