USA Compression Partners LP (USAC) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the USA Compression Partners first quarter earnings call. Today's call is being recorded. We will be conducting a question-and-answer session after the prepared remarks, and instructions will be given at that time. Now I would like to turn the conference over to Kelly Jamison, Associate General Counsel and Assistant Secretary. Please go ahead.

Good morning, everyone, and thanks for joining us. Greg Holloway is under the weather today. This morning, we released our financial results for the quarter ended March 31, 2015. You can find our earnings release as well as a recording of this conference in the Investor Relations section of our website at usacpartners.com. The recording will be available through May 18, 2015.

During this call, our Management will discuss certain non-GAAP measures, and you will find definitions and 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, May 7th, 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 at USA Compression.

Thank you, Kelly, and good morning, everyone. Also with me is Matt Liuzzi, our CFO. I'm pleased to report that we started off 2015 with a very strong quarter of performance in what we all recognize is an uncertain marketplace.

Starting back at the time of our IPO more than two years ago, I described our business as one of both stability and growth. As we manage USA Compression through a business environment marked by commodity volatility and some general uncertainty in the oil patch, we are seeing the stability side of our fee-based, income-driven business taken on a more pronounced role.

This relates back to a core principle on which we founded this Company -- natural gas compression is tied to natural gas production, which is driven in turn by the demand for natural gas. And like in years past, through up and down cycles, natural gas demand continues to grow. That is good for compression because, as you all know, you must have compression to move natural gas into and through the pipeline system.

Investment in natural gas pipeline systems and processing facilities continues, albeit at a more measured pace, and that means more compression will be needed in the months and years to go. In an environment where management teams are focused on executing core business strategies, our customers continue to make the strategic decision to outsource their compression needs to USA Compression and let our people handle all aspects of operating and maintaining equipment that is critical to their operations.

Moving on to the summary financial results, for the first quarter, USA Compression reported record adjusted EBITDA of $37.5 million and adjusted DCF of $29.5 million. We previously announced the Board-approved distribution for the LP units of $0.515 per unit, which results in an adjusted distributable cash flow coverage ratio of 1.22 times. Leverage stood at 4.8 times at quarter end.

You can see that we have delivered on our ongoing pledge to build coverage while maintaining our balance sheet. With the stability underpinning our base business, we were also able to capitalize on some attractive growth opportunities. During the first quarter, we spent almost $115 million in expansion capital primarily for new build, large horsepower compression units.

As I mentioned last quarter, we have front-end loaded a good deal of our capital spending for 2015, as we have the greatest visibility in the first half of this year. We continue to expect to spend approximately $250 million to $270 million in new unit CapEx over the course of the year, and so we're off to a solid start in executing on that plan.

We continue to differentiate USA Compression in the marketplace by moving up the ladder in the size of our iron by ordering even larger horsepower units. In fact, in the second half of 2015, we will take delivery of and deploy in Appalachia under long-term contracts the largest equipment in the history of the Company, driven by the continued build out of the domestic natural gas gathering and transportation infrastructure.

The units we took delivery of this past quarter and onward into the second half of 2015 are being deployed to areas of continued strong production growth, including the Utica and Marcellus shales in the Northeast, the Permian and Delaware basins in West Texas, as well as our Mid-Continent region.

Despite the continued headlines focused on depressed crude oil prices and the impact they are having across the economy, we remain optimistic on the outlook for natural gas demand growth, both on a global and domestic basis. 2014 was a strong year for gas production, with US producers producing a record of about 74.7 Bcf a day of gas over the course of the year, a 6.2% increase over the previous year.

Production continues the strong growth into 2015 and beyond, with EIA expecting an increase of almost 4 Bcf a day, or about 5%, to 78.5 Bcf a day in 2015. This increased gas production will require compression to get to the growing marketplace.

I'd like to touch on one interesting dynamic on the production side of things, and that is the recent increase in dry gas production. In fact, total dry gas production in mid-April was almost 8% higher than the same time period of last year. For the past five or so years, the focus has been predominantly on crude oil and then more recently the impact that (inaudible) will have on crude oil production.

What is often overlooked is that those crude oil wells were also producing approximately 8 Bcf a day of associated gas alongside the crude oil from shale plays. This associated gas satisfied much of the recent growth in end-user demand in the domestic market. As the crude oil rig count is dropped, so should the associated gas production, which in turn should require producers to drill dry gas wells to get past the continued longer-term growth in natural gas demand.

One of our customers, Range Resources, sees 20 Bcf a day of demand growth by 2020 at 2 to 4 Bcf per day per year, and believes that the market over-supply is minimal. Customer views like this, when coupled with the likely decline of associated gas production from shale plays, demand growth domestically, as well as exports to Mexico and LNG cranes coming online later this year and into the future all bodes extremely well for the continued and future demand for our compression services in 2015 and beyond.

We also see supply and demand close to being in equilibrium. The EIA is projecting a 4% increase in natural gas demand in 2015 to 76.3 Bcf a day. This near-term growth continues to be driven primarily by demand in the industrial and electric power sectors. LNG is also expected to play a large part in the increased demand for US natural gas in the longer term.

The recent Shell-British Gas merger announcement clearly supports the belief by major oil companies in the future growth of LNG worldwide. The construction of four major Gulf Coast and one East Coast LNG export facilities, which together represent nearly 9 Bcf a day of export capacity, continues. And all are expected to be in service in 2018, with some LNG exports possible as soon as the end of this year.

Exports to Mexico will continue to drive demand for US natural gas in the near to medium term based on Mexico's growing electric power sector and conversion of electric generation capacity from oil to natural gas.

To reiterate what I've said before, we don't need natural gas production and demand to grow at astronomical rates of growth. If, as expected, overall domestic gas demand goes up incrementally, domestic producers primarily in the shale plays 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.

Spending a minute on the crude side of things, economical new drilling and development has continued, albeit at a significantly slower pace. After three years of double-digit production growth, the EIA projects that crude oil production will increase in 2015 by about 500,000 barrels a day, or 6% over 2014 levels.

We are, however, already seeing evidence of the rollover of crude oil production in the Eagle Ford and the Bakken plays, and depending on crude oil prices and producers' future development programs, we may see declining levels of oil production in the back half of 2015.

The EIA's projected 2015 oil prices of $48 a barrel in Q2 and $57 a barrel in the second half remain high enough for some of the more financially strong companies to support continued development drilling activity in the core areas of many of the pipe plays, including the Eagle Ford shale and Permian and Delaware basins. Upstream operators with lower drilling and debt service cost who operate in the sweet spots are expected to continue to drill highly productive wells in 2015.

Further, production from wells that have been previously drilled and are now on production remain economic in the current pricing environment and are being used as a source of stable cash flow to service debt, pay dividends and fund continued activity by upstream companies.

Given this backdrop, our smaller-horsepower units, primarily used in gas lift operations for crude oil production, proved resilient in the first quarter. As producers continued to focus their efforts and resources towards the most economical areas during the first quarter, we saw customers not just keep what they had installed with us, but continued to contract incrementally for our gas lift compression services.

As we discussed during the Q4 call, we do not expect the small-horsepower portion of our fleet to grow as rapidly as it has in the past. However, we are seeing signs of activity in economically advanced areas, like the Permian and Delaware basins and the (inaudible) play and elsewhere. We have customers who are increasing their rig count in what they consider to be some of their core areas, which is a positive sign.

Like others, we have been having conversations with our customers with the goal of keeping our equipment working while doing what we can to help them manage their lease operating costs. I'd note that these discussions, however, have not been one-sided. We have been taking the opportunity to term up units currently on month-to-month contracts. And in fact, we have increased about 50% the percentage of our gas lift fleet under term contracts from 39% in Q4 of 2015 to over 58% today.

We have also reached agreements with certain customers for commitments to deploy additional gas lift units over the course of the year as well as contracting to become the exclusive provider of compression services for certain customers. This provides us with better forward visibility into the back half of 2015, knowing that we already have customers for a large component of our new gas lift unit. As of today, we don't expect to purchase additional small-horsepower units during the second half of 2015.

So to summarize the first quarter marketplace -- natural gas demand remains strong, and ongoing shale production and the prospects for near-term exports, both via pipelines to Mexico and LNG worldwide, are driving the domestic natural gas supply and, accordingly, the demand for our compression services.

And while it looks like domestic crude oil production has begun to peak in the near term, we are still seeing demand for our compression services, which are required for an extended period of time, to provide the lift energy to produce oil in areas of economical crude production. In times like these, operational excellence, customer service and long-term relationships count even more, and we are seeing the benefits of a long history of providing exemplary levels of service to our customers.

Our customers are normally the leaders in their respective regions, with ownership or dedication to substantial acreage holdings, and we expect them to continue to invest in infrastructure projects, including compression.

In light of the economic uncertainty, we still invested meaningfully in our fleet and kept utilization at strong levels, averaging almost 92% for the quarter. This speaks volumes about the stability of the business and continues our long history of maintaining high utilization throughout commodity price cycles.

Looking forward, we expect continued demand for our compression services and have already placed orders for approximately 240,000 horsepower to be delivered in 2015, primarily in the first three quarters. Of that 240,000 horsepower, about 210,000 is expected to be large-horsepower units, and we have approximately 50% of these units committed to customers already.

Breaking that down a little further, we have approximately 89% of our Q1 deliveries committed and, at this point in time, approximately 50% of our Q2 deliveries. This is right where we expected to be as we approached the midway point of the second quarter.

We expect the first and second quarters of 2015 to represent up to 58% of our total large-horsepower spend for the entire year. The remainder of our spend will be for gas lift 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 will 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 return.

To summarize, Q1 was a great start to the year, and our performance reflects the stability of our fee-based income, infrastructure-oriented business model. As we've discussed, we are taking a more major view of the marketplace, and we're focusing on doing exactly the same things we've done for the last 15-plus years -- operational excellence and high levels of customer service.

In this environment, our customers need to be able to depend on their partners, and Q1 proved that we continue to be the partner of choice for our customers' compression needs. We are constantly monitoring not just our business, but that of our customers, and frankly, we're encouraged by what we're seeing. We have no direct commodity price exposure, and our fee-based services provide stability of cash flows.

We remain bullish on the long-term outlook for natural gas. We see that the global marketplace and domestic drivers of the natural gas market are favorable for our business over the near to longer term. Lastly, in case you did not see it at the time, back in March, USA Compression was added to the Alerian Natural Gas MLP Index, ticket ANGI.

Now, with that, I'll 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 we reported record levels of revenue, adjusted EBITDA and adjusted distributable cash flow for the first quarter of 2015.

In addition to a strong quarter in our base business, we continued to invest in the business and grow our compression fleet. We spent about $115 million in growth CapEx for the quarter. You'll note this is a good portion of the expected total $250 million to $270 million in growth capital for the entire year. As discussed, we have front-end loaded a lot of our spending.

This investment allowed us to add approximately 91,000 horsepower of new compression units to our fleet during the quarter, ending the quarter with over 1.6 million total fleet horsepower. Our revenue-generating horsepower increased by about 50,000 horsepower from the end of the year to just under 1.4 million horsepower at the end of the first quarter.

Turning to the financial performance for the first quarter, revenue increased 29.5% compared to the first quarter of 2014, primarily driven by an increase in our contract operations revenues as a result of adding revenue-generating horsepower. This increase in our revenue was driven almost exclusively by the organic growth in our revenue-generating horsepower.

Average revenue per revenue-generating horsepower per month increased over 3% to $15.85 for the first quarter, as compared to $15.30 for the first quarter of 2014. Adjusted EBITDA increased 49% to $37.5 million in the first quarter, as compared to $25.2 million for the first quarter of 2014. Adjusted distributable cash flow in the quarter was $29.5 million, as compared to $16.8 million for the same period last year, an increase of 75.5%.

On an absolute basis, gross operating margin for the quarter increased 41% to $45.8 million, as compared to $32.5 million for the same period last year. The gross operating margin as a percentage of revenue increased from 64.7% in the first quarter of 2014 to 70.4% in the first quarter this year. This was driven primarily by fluids and fuel price decreases, and we also benefited from favorable timing impacts of certain expenses during the quarter.

While this improvement in margin reflects a concerted effort by our operating team to identify areas where we can wring out productivity and optimize our maintenance activities, we don't necessarily expect these margins to continue at this level but, rather, to moderate slightly for the remainder of the year.

Maintenance capital totaled $4.1 million in the quarter. Expansion capital expenditures, which were primarily used to purchase new compression units, were approximately $150 million for the quarter. Cash interest expense net was $3.5 million.

On April 23, 2015, we announced a cash distribution of $0.515 per unit on our common and subordinated units, which represents an approximate 5% increase year over year. This is the eighth consecutive increase to our distribution since our IPO in January 2013, and corresponds to an annualized distribution rate of $2.06 per unit. Adjustable distributable cash flow coverage for the first quarter is 1.22 times.

As Eric mentioned earlier, we continue to work hard to balance growth, leverage and distribution coverage. The first quarter was a strong reflection of that focus. We previously announced that in early January, we closed an amendment to our credit facility, providing for an increase in the facility capacity to $1.1 billion and an extension of the maturity to 2020. Outstanding borrowings under our revolving credit facility as of March 31, 2015, were $712 million, resulting in a leverage ratio of 4.8 times on a trailing three-month annualized basis.

As it regards our full-year 2015 guidance, at this point in the year, we are affirming the ranges we provided on the last call -- adjusted EBITDA of $130 million to $140 million and adjusted Bcf of 91.3 to 102.3 million. As everyone on this call can appreciate, we are still relatively early in the year, and as the year progresses, we would expect to be in a better position to be a little more specific.

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

(Operator Instructions). [John Whittiel], Raymond James.

Hi. Good morning, guys. Great quarter overall.

Thank you very much.

I remember back in the third quarter when you were lowering your distribution growth rate to $0.005 a quarter. It was mostly to be able to increase coverage. Now that your coverage has been above 1 times for a couple quarters now, have you given any thought to either taking away the dividend reinvestment program or altering your distribution growth strategy? And how should we think about how leverage -- your leverage target of 3.5 to 4 times should play in here?

Sure, Matt, it's John. Why don't I take the DRIP question first? So you noticed we have had -- this is the second quarter of good coverage. This has, obviously, been a big goal of ours as we kind of balanced the coverage and the distribution growth. I would note that the DRIP program is not something that we choose. That is something that is open and available to any of our public unitholders, and all of the unitholders have the option to elect to participate in that DRIP on a quarterly basis.

Certainly, the strong coverage I think gives us a lot of comfort going forward that no matter what people elect to do, we're going to have good coverage for the quarter. So I can't speak to what individuals may or may not do on a quarterly basis, but from our standpoint, I think we're comfortable with strong coverage and balancing that with what we think is a prudent level of distribution growth for the quarter.

I will that, obviously, the distribution amount and growth really every quarter is up to our Board, and so that decision gets made on a quarterly basis by the Board.

Okay.

Switching to the leverage side, we ended at 4.8 times. We still have -- we did the amendment to the revolver earlier this year. The covenant level was just under 6 times, and so I think as we stand here today, we have a lot of -- we feel like we have a lot of cushion, and so we continue to watch that, we continue to watch the markets, but we're certainly comfortable with the capacity that we have and the ability to fund the CapEx plan for the rest of the year.

Longer term, leverage continues to be a focus of ours, and we will continue to look to bring that leverage down to levels that are, I think, more appropriate for an MLP.

Okay. All right, thanks. That's very helpful. And then kind of just more big picture here, looking at customer behavior during this downturn and just in general their focus on reducing capital spending, have you seen that hesitation to using CapEx for in-house compression services has been a net positive to you all for contract compression?

This is Eric, John, and I think that's a pretty astute observation, as we've seen in this cycle and in past cycles folks who a couple of quarters or a year or two or three years ago, when they had access to unlimited capital, viewed compression as something maybe they would opt to keep it in-house and do themselves.

When you get into an environment where capital is tight, people then kind of rethink their business models, and clearly compression is not viewed as something that adds (inaudible) value to an E&P company's balance sheet. Midstream companies look at speed and efficacy to get into the marketplace, and we start to see that compression becomes more of a -- becomes viewed less of a core competency and something that maybe we should elect to outsource.

So we're starting to see -- I'm not going to call it a groundswell support, but the waves are starting to increase a little bit on the beach as people look at their CapEx programs and decide maybe compression should be an avoided capital gain, and if we're going to work with somebody, let's work with somebody who has a history of providing exemplary levels of service, has the inventory, has the footprint to be able to back our play.

All right, that's helpful. All right, thank you, and great quarter, guys. I'll turn it back.

Thanks, John.

Thanks, John.

Jeremy Tonet, J.P. Morgan.

Hey, good morning. It's actually Andy for Jeremy. Just one quick question.

Hey, Andy.

Hey, good morning. First, you have some -- you have kind of a leading position or a good position in the Marcellus -- kind of a two-part question. First is what trends are you seeing from your customer base there, and second, what do you view is the bigger opportunity within the Marcellus specifically, market share gain or kind of just growing alongside with producers and potentially getting a bigger share of their wallet?

So maybe let's hit number one, which is I think you see folks in the Marcellus and the Utica as well who are positioned probably somewhat differently depending on the company. Some people have access to firm transportation capacity. Others don't. People are relying on third-party gatherers and processors to hook up wells. Some people control that themselves.

So it varies customer by customer, but having the dominant footprint like we do in Appalachia -- we have north of 500,000 horsepower in that part of the world right now -- we're able to work with the folks who continue to promulgate and have a lot of ongoing activity. So I would put it in the buckets of some folks have slowed down because they've got basis differential issues, they don't have access to adequate takeaway capacity, while others who have those and are growing some monster well have the ability to continue to promulgate and process.

We're actually seeing our equipment move up in size. Historically, we focused on what we call the 3516, 3606, which were in the -- call it 1350 to 1800 horsepower range. Now we're moving up into the 3608, 3612 and 3616 arena, which is pushing 5000 horsepower per machine, with multiple units installed on applications, so we've got a -- I think a fair way to say it is we're seeing a fair amount of activity, but it is customer specific.

Back to the second question, which is are we looking to gain market share at the expense of others or are we seeing kind of the rising tide lifts all boats -- it's probably a combination of both of those things. When you have a reputation of providing operational excellence, when you have a large footprint like we do of mission-critical equipment, pick-up trucks, inventory, people, support infrastructure all over the Appalachian basin, frankly I think we've become the provider of choice.

So it's an area of core focus for us. We've been able to work with some of the preeminent customers in Appalachia, both on the E&P side and on the midstream side, so as they continue to grow, we continue to grow. As some of the folks look at is compression considered a core competency -- maybe thought it was, now maybe we're rethinking and outsourcing -- we actually think we might see some acceleration of opportunity sets for us in the Marcellus, in the Utica and elsewhere throughout Appalachia.

Great. That's very helpful color. And just a quick follow up, more housekeeping -- what percentage of the fleet roughly is focused on the Marcellus now?

So on our existing horsepower, we're about 1.6 million, 1.65 million horsepower. We're north of 500,000 horsepower in Appalachia right now. I think it is fair to say that when we look at our growth opportunities so far in 2015 and what we're seeing for the balance of this year and on into 2016, the Marcellus and the Utica will continue to be one of our larger areas of growth.

Great. That's all for us, and congratulations on a great quarter.

Thanks, Andy.

Thanks, Andy.

Sharon Lui, Wells Fargo.

I guess one of your competitors indicated that it's experienced some pricing pressure in the current environment. I'm just wondering if you could maybe provide some commentary on whether your customers have been starting to request for some pricing discounts as well.

Sure. And Sharon, clearly we're different than some of our peer groups. We don't specialize in wellhead applications. We don't specialize in smaller-horsepower, dry gas-driven applications. We're much more oriented to demand-driven, big horsepower, big volume, commodity-priced (inaudible) opportunity sets.

I think you'll notice that when you look at our gross margin and when you look at some of our dollars-per-horsepower metrics, we've actually seen some enhancements and some improvements associated with it. Certain folks recognize our value proposition. You get what you pay for, and historically, USA Compression has never been the cheapest guy in town, but we back our play with exemplary levels of service -- must run mission critical, 24/7/365, on big installations.

So when you look at the cost of compression as a percentage of the hydrocarbon throughput either as for an E&P company or for a midstream, the difference between a little tweak here and a little tweak there on pricing really is fairly immaterial.

Where you see that type of driver tends to be on smaller-horsepower wellhead applications, which historically has been very volatile -- high beta utilization comes and goes, low barriers to entry, it's viewed more as a commodity. So I think you might see one or two of our peers kind of have that as a core component of their business model, which we don't.

That said, we have had a couple of our customers on our gas lift side approach us about looking for some pricing concessions, and we have granted on a selective basis one or two of those. And as I noted in my commentary, it's not been one-sided. Do a trick, get a treat kind of thing, so we worked with some folks on some pricing. They made substantial commitments to us for this year, for next year and into the future some sole-source relationships, some substantial commitments on additional business, as well as terming up some assets that were month to month.

So from our perspective, when we look at taking even more beta out of those types of installations, assuring a longer-term deploy cycle, our economics are -- frankly, we're pleased with where we ended up with that.

So on balance, I would say that we tend to see less pricing pressure because of the market niche that we're playing, longer lead time, bigger projects, much more mission critical, less commodity-oriented type of equipment and services.

Okay, great. That's really, really helpful. And just, I guess, a housekeeping item -- I guess given the proposed regs on qualifying income, maybe if you can just remind us like what percentage of contracts have been converted to like service agreements and where you stand on those efforts.

Yes, Sharon, so if you go back, USA Compression has been around since 1998. We actually went down the services agreement approach way prior to being a public company. We have made one acquisition during our tenure as a public company. That was the S&R acquisition. If we look at a percentage of our total today, we're 93%, 94%.

On the acquired company, over 93%.

So, Sharon, I just asked Greg [sic]. On the acquired company, we're 93%, 94% converted. On the historical legacy USA side with our infrastructure equipment, we're 99%-ish. So on a combined basis, we've got to be 96%, 97%, 98% QI, already converted contracts.

Thank you very much.

Thank you, Sharon.

Richard Verdi, Ladenburg Thalmann.

Good morning, Eric and Matt. Great quarter, and thanks for taking my call here. And so just kind of a follow up to the last caller's inquiry about the pricing, I guess I'm having a little bit of a hard time grasping it and want to make sure I walk away with a solid understanding. So when I'm thinking about it, traditionally USA Compression would capture about $13 or $14 per horsepower on the gas side, $25 on the oil side, and you said today that you're putting larger-size equipment in the field, and I believe that larger size -- the 3616s and 3608s, they capture around $17 or $18.

So if we're moving away from the smaller side and into the larger-size equipment, but there's a potential for crude weakening, how should we think about pricing moving forward? Is this quarter's $15.58 a fair number? Should we think about a little bit of pressure on that? Just any kind of color would be really helpful.

Hey, Rich, it's Matt. I mean, I think you hit on kind of all the relevant points. Obviously, the gas lift stuff does get a higher dollar per revenue service rate. As we do -- as we back off on that, that's going to, obviously, bring the blended part down, but you have to understand, I mean, we're talking about 25,000 horsepower of small gas lift stuff this year versus over 200,000 of the larger stuff, so it's going to be a balance between getting higher rates on the higher-horsepower units that we're putting into place on the midstream side coupled with sort of a slight pullback on the crude oil side.

So I think going forward, the way we look at it is we take a pretty conservative look when we look out at revenue, and we don't project huge, huge price increases on either of them. And we factor in the pullback on the crude side, but the midstream side, I think as Eric hit on in some of his comments, has been very resilient, obviously, because of the nature of the equipment and where it's going, and so we like the prospects there.

And I think on the crude side, slight headwinds that we talked about, but we took that in exchange for some qualitative factors, whether it's terming out, whether it's becoming an exclusive provider, and so we think that has passed us as well.

And Richard, maybe one other tidbit for you -- having a bigger horsepower fleet with longer contract terms -- we've got some assets that have five-year contracts that are coming off the primary term, assets that were installed seven years ago, had a five-year contract term that have been month to month for a couple-year period.

So envision coming out of the 2008, late, 2009, 2010 environment -- to the extent we have things that come off of contract, we look at the rates today and they're actually improved significantly from that point in time.

So when you have a big fleet like we do, you've got pockets of weakness that -- and kind of some legacy stuff that we're able to term up and improve, so we're a little different than maybe guys that have their entire contract book as month to month or six months or even 12-month type average terms, where there's a lot more volatility up and down, whereas we tend to have a little bit lower beta on our overall pricing.

So it's probably not as simple as taking today's spot price, applying that to the entire fleet. We're probably not going to accelerate pricing up and ramp up environment as quickly as some others might because of the nature of our longer-term contracts, nor in a softening environment would we tend to overshoot on the downside as well.

Okay, great. That's helpful. Thank you, guys. And another question -- I apologize if I missed this, but in the prepared remarks, you had indicated that CapEx this year would be $250 million to $270 million, and so I'm assuming that that translates into potential horsepower adds, and so I'm wondering if you could give us maybe what the percentage breakdown would be of gas versus the oil side for those horsepower adds.

Yes, just kind of very high level, envision -- call it 200,000, 225,000 horsepower of midstream, the big stuff, and envision something that's 20,000, 25,000-ish horsepower on the oily and gas lift side, so, I mean, we're talking 8X, 9X the amount of midstream horsepower versus the gas lift. So the oily-oriented stuff -- much smaller percentage.

Okay. Excellent. And so that dovetails into my next inquiry, where if horsepower for the gas side is 200,000, 225,000-ish -- and that's about the range you guys have been in this year, so this -- or, I'm sorry, over the past few years. So let's just hypothetically say the crude side completely disappeared. More likely than not, horsepower add next year would probably be 200,000 in 2016? Is that fair?

Yes, I mean, Richard, we're still -- we're early in the year, and so, obviously, I think where our focus is here in mid-May is kind of on the balance of 2015. Over the next few months and into kind of the second half of the year, I think we'll have a better view of what 2016 looks like, but I don't think that's unreasonable.

We'll have a fleet of -- right now, we're standing at 1.6 million horsepower, and so you think about kind of that level of growth on the base of horsepower that we'll have kind of by the end of this year, and that's probably not unreasonable, but we obviously haven't put in any firm orders or anything at this point in the year for deliveries in 2016.

Sure. Okay, great. Hey, great quarter, guys, and excellent color. I appreciate it. Thank you very much.

Thanks, Rich.

Thanks, Rich.

T.J. Schultz, RBC Capital Markets.

I think just (inaudible) keeping the EBITDA guidance, but obviously running ahead of that, so I understand some of the puts and takes here and margins normalizing, but just any color on targeting at least the high end of that range?

C.J., you've been around us for a long time, and we're guys that like to under-hype and over-deliver. We want to be careful coming into the back half of 2015. I don't know what OPEC is going to do. I don't know what's going to happen in the Mideast. I don't know what some of the plans of the E&Ps look like. I will say that I am pleasantly surprised with what we're seeing so far on the macros, demand signals, quote logs, stick rates, all the things that we typically do.

So we came into 2015 being somewhat cautious. We've delivered in the first quarter. The second quarter hasn't occurred yet, we're in the middle of it, but I think we can say we've been pleasantly pleased with how the sales and operating team are performing. We're starting to see customers -- Pioneer announced that they're going to be adding two rigs a month coming up for the back half of the year. We're seeing some pretty good continued activity up in Appalachia.

So I don't want to connect too many dots right now. We'd prefer to, again, under-hype and over-deliver, but we're pleased with what we're seeing so far.

Okay, fair enough. And then just lastly from me, just thinking about debt leverage and your focus to get that down a bit, how do you think about best affecting that? Would it likely be a function of just as you guys improve coverage and hope to see that play out through valuation on your equity and find the right time in the market, or having dealer activity and maybe over-equitizing something that is really additive to growth just play out here similar to how you've tackled it in the past?

Yes, T.J., it's Matt. I think both of those are absolutely fair comments. We're obviously happy to see the units kind of claw back from that December timeframe, but we do look at the revolver and we have a lot of capacity sitting on that and will here into the near future, so we don't feel like we kind of are in a rush or have been painted into a corner to have to do something, so we continue to keep an eye on that sort of as a regular course financing mechanism.

And then I think your point on acquisitions are spot on. Finding the right deal to do and taking that opportunity to over-equitize it I think would be very much in our playbook.

Okay. How active are you guys on the acquisition front? I mean, is that something where you -- I know you guys look at a lot of stuff, but are valuations at a point in the market where you think something is possible this year?

T.J., we don't speculate on M&A opportunities. Just suffice it to say, we're always looking, we're always kicking tires, and we're -- you know us, we're always optimistic.

Fair enough. Thanks, guys.

Thanks, T.J.

(Operator Instructions). Lin Shen, HITE.

Thanks for taking my question. Congratulations for a good quarter. A quick one for the leverage. I was just wondering, what do you think is a good target average rate for your -- that EBIT leverage at the end of this year?

Lin, it's Matt. We have historically, I think, talked about kind of a 3.5 to 4X times metric is where we'd like to be. Obviously, we balance that with distribution growth, with coverage, et cetera, so certainly we are focused on working to get that down. At the end of the day, we want to make sure our balance sheet is -- we have enough capacity to not only execute on the capital plan that we have in front of us, but also to give us some dry powder in the case some opportunistic things kind of rear their head.

So that is very much on our minds, and we continue to kind of look to get that leverage level down throughout the year, but it is a balance between the coverage leverage and, obviously, distribution growth for the holders.

Great. And just to clarify that, the current covenant of 6 times is just a temporary. When is it going to end?

Yes, that -- so right now, it's a hair under 6 times. It's 5.95 times for the first quarter and the second quarter, so that takes us through June, and then it steps down for the third quarter -- basically for the following four quarters, so from the third quarter of this year through the second quarter of next year down to 5.5 times. So certainly our -- the way we're looking at it, we have a lot of capacity under that even when the covenant steps down.

Okay, thank you very much. Appreciate it.

Yes, thank you, Lin.

And we have no further questions in the queue. I'd like to turn it back to you for closing remarks.

We appreciate everybody's continued interest in USA Compression. Be safe. Go give your wife, your kids and your girlfriend a hug, and we'll see you on the next quarterly call. Thank you.

That concludes our call for today. Thank you for your participation.