USA Compression Partners LP (USAC) 2017 Q4 法說會逐字稿

Good day, and welcome to the USA Compression Partners Fourth Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over the Chris Porter, Vice President, General Counsel, and Secretary. Please go ahead.

Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter ended December 31, 2017. You can find our earnings release as well as recording of this conference in the Investor Relations section of our website at usacompression.com. The recording will be available through February 23, 2018.

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

As a reminder, our conference call will include 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 risks included in this morning's release and in our SEC filings. Please note that information provided on this call speaks only to management's views as of today, February 12, and may no longer be accurate at the time of the replay. I'll now turn the call over to Eric Long, President, and CEO of USA Compression.

Thank you, Chris. Good morning, everyone, and thanks for joining our call. Also with me is Matt Liuzzi, our CFO.

A year ago, I started out my commentary by saying what a difference a year makes. In 2017, USA Compression continued that upward trajectory with a strong year of commercial, operational and financial performance in our compression services business. And several weeks ago, we topped it off with the exciting announcement about a transformational deal to acquire Energy Transfer's compression business as part of a total deal worth about $1.8 billion. Both achievements speak to the positive momentum we are experiencing in our sector, and position USA Compression for an exciting 2018 and beyond.

This morning, USA Compression released its fourth quarter and full year 2017 financial and operational results, which reflected the improving market conditions we've been experiencing throughout the year.

After a full year of stability in commodity prices benefiting our E&P and midstream customers, 2018 is shaping up to look a lot like the back half of 2017. Both types of customers continue to make significant infrastructure investments, and with positive forward commodity prices, coupled with reducing levels of both crude oil and natural gas storage, they are better able to plan for the months and years to come, all of which translates into increasing demand for our compression services.

The overall macro environment continues to be constructive and was relatively unchanged from the previous few quarters. Our business achieved strong margins in growth in active horsepower. One important metric for our business, utilization, continued to tick upwards. Average utilization inched up over 0.5% during the quarter, and we are now over 7% higher than at the end of 2016. We generally consider utilization in the mid-90% area to be fully utilized, and this is certainly true right now. We have very low idle equipment, especially the large-horsepower class to deploy into the field.

The tightness in the market for our services translated into strong operational and financial quarterly results. On the operating side, our total fleet horsepower at period-end was about 1.8 million horsepower, an increase of approximately 43,000 horsepower over the third quarter. Active horsepower at period-end was over 1.6 million horsepower, an increase of approximately 67,000 horsepower versus Q3. This resulted in fleet utilization at period-end of 94.8%, up 0.6% since last quarter and nearly 8% year-over-year. As I've mentioned, this level of utilization is now at a level we last saw before the oil price decline had started in late 2014.

During 2017, we placed a lot of focus on redeploying idle equipment. As of year-end 2017, we had about 175,000 horsepower of fleet horsepower, about 10% of the total fleet that was not active. Backing out horsepower that was either on contract or tendered for specific customers that left us at year-end 2017 with only about 100,000 horsepower that was truly idle, the majority of which was smaller horsepower, about the same as the prior quarter-end.

Average pricing ticked up slightly during Q4 as a result of selective price increases. The tight supply-demand balance for compression services has resulted in customers willing to pay increased rates in exchange for the certainty of equipment deliveries, and we expect that to continue to be the case in the marketplace.

Throughout 2017, I've spoken about our CapEx program and our focus on ordering the very largest horsepower units due to the fact that those unit types generate the most attractive economic returns.

During Q4, we took delivery of approximately 42,000 horsepower. For 2017, we took delivery of approximately 94,000 horsepower, substantially all of which consisted of the newest vintage 2,500 horsepower sized Cat 3608 model. 2017 was a year of bulking up in the 3608 class.

At year-end, our fleet included over 245,000 horsepower in this class. This particular size of equipment is in extremely high demand, with limited availability, with a technical configuration that ideally meets the increased volumes derived from the continued evolution for multi-well pad type development, increased lateral length and increasing proppant concentrations.

As we look forward into 2018, we have contracted for and continue to expect to take delivery of approximately 150,000 horsepower throughout the year, all very large horsepower units of the 3608 class and even larger equipment. It is still a little early due to competitive reasons for us to share our 2019 orders, but we'll provide updates as the year progresses.

So a little on the financial overview. The fourth quarter continued the improving financial performance we experienced throughout the year driven by strong metrics as we continued to execute on our core business strategy of providing contract compression services focused on large horsepower compression.

With a good portion of 2017's total horsepower deliveries installed, both adjusted EBITDA and DCF increased to $42.1 million and $33.2 million, respectively. Reported overall gross operating margin of 66.8% was down slightly from Q3. As a reminder, our reported gross margin always has a little bit of noise in it due to the inclusion of retail services, which earn lower gross margins. Adjusted EBITDA margin of 55.9% was essentially unchanged from the previous quarter.

As we mentioned before, our large horsepower infrastructure base business model helps maintain the strong margins. As a result of the high utilization of our fleet, the attractive economic returns of our new units and continued focus on cost, we ended the year with a leverage ratio of 4.65x, total distribution coverage for the quarter increased to approximately 1.0x and these metrics are in line with where we expected to exit the year and represent a solid achievement.

So a little bit about the status of the CDM acquisition. Last month, we announced a series of transactions, by which USA Compression will acquire Energy Transfer's compression business known as CDM Resource Management. At the same time, Energy Transfer Equity, ETP's parent, will acquire control of our general partner, and we will also eliminate the economic GP interest in IDRs. This transaction brings together 2 high-quality large horsepower infrastructure focused compression service providers. At the same time, it simplifies our structure and provides a mechanism for the eventual independence of USA Compression.

As part of the transaction, we received a commitment for $500 million in preferred equity from EIG and other unaffiliated funds. Right now, we are working through customary closing requirements and continue to expect the transaction to close in the first half of the year. We are very excited about this transaction. The 2 entities have very similar assets and operating philosophies, yet different geographic presences and operating relationships. Until closing, we are limited in what we can do share, but we are doing a lot of preparation so that following closing, we can hit the ground running and continue to drive strong performance from the combined organization.

So let me turn to a little color on the marketplace. 2017 was a positive year for the broader oil and natural gas industry, marked by steadily increasing production, meaningful progress on exports, stability in prices and continued investment by producers and midstream providers. The emphasis on operating efficiency through pad side drilling, multistage fracking, et cetera has helped operators not only survive the market down cycle but position themselves to grow in the future. As our customers have reassessed the market and the role in it, they have continued to require larger compression facilities to handle the larger volumes of gas they are dealing with.

In our business, our core areas continue to be active, the Permian and Delaware basins, the Marcellus and Utica shales in the Northeast and the SCOOP/STACK merge plays in the Mid-Continent. As I have previously mentioned, almost all of our new unit deliveries for 2018 are under contract or committed to specific customers. They are all very large horsepower 3608 class or larger units. As in the past, exact timing will continue to get turned up as we move through the first part of the year. But otherwise, we will focus on the existing active fleet, making sure we are earning attractive service rates on existing applications and looking for opportunities to either put idle equipment out in the field and/or redeploy units to more attractive situations.

So a little bit on the big picture and what we see with demand. Looking back on 2017 confirms what we have always believed about the compression business. It is a demand-driven business, a critical part of the natural gas value chain and a service for which our customers require not only a significant operating experience but also the knowledge that we will be there alongside of them as they grow their businesses.

Natural gas is an important part of our country's energy infrastructure and is not going anywhere. Whether it is clean burning domestic power generation, feedstock for petrochemical production, LNG exports or pipelines into Mexico, we believe the industry will continue to meet that demand with appropriate levels of supply. Increased supply means increased demand for compression. The overall market activity we are seeing confirms what the macro fundamentals indicate. The natural gas infrastructure build-out is continuing, and our compression is a critical part of the equation. We believe the large horsepower strategy is the right strategy, underscored by the announced CDM acquisition.

I will now turn the call over to Matt, to walk us through some of the financial highlights of the quarter. Matt?

Thanks, Eric, and good morning, everyone. Today, USA Compression reported another strong quarter, with fourth quarter revenue of $75.4 million, adjusted EBITDA of $42.1 million and DCF of $33.2 million.

In January, we announced the cash distribution to our unitholders of $0.525 per LP unit consistent with the previous quarter. Our total fleet of horsepower as of the end of Q4 was 1.8 million horsepower, up about 42,000 horsepower from Q3 as we took delivery of some new units, spending about $50 million in growth capital during the quarter.

Our revenue generating horsepower at period-end was up about 67,000 horsepower, or about 4% from Q3 to over 1.6 million horsepower. Our average horsepower utilization from fourth quarter was 94.7%, up slightly from 94.1% in Q3. As Eric mentioned, at these levels, we are practically fully utilized. Pricing as measured by avenue revenue -- average revenue per revenue generating horsepower per month also increased in Q4 to $15.21, up from $15.13 in Q3. This was due in part to new unit deliveries as well as selective price increases on the existing fleet.

Total revenue for the fourth quarter was $75.4 million, up about 4% as compared to the third quarter. Our core contract operations revenues increased about $4 million or about 5%, reflective of the increase in active horsepower.

Gross operating margin as the percentage of revenue was 66.8% in Q4, down slightly from 67.8% in the third quarter. Similar to previous quarters, that number does include a little bit of noise from retail parts and service. Our core gross operating margins continue to be largely consistent with prior quarters.

Walking through a few of the specific line items. Adjusted EBITDA increased 3% to $42.1 million in the fourth quarter as compared to $40.8 million in the prior quarter and up from $36.5 million in the year-ago period. DCF in the fourth quarter was up 8% to $33.2 million as compared to $30.8 million quarter-over-quarter and $28.7 million year-over-year.

Net income in the quarter was $4.5 million as compared to $4.8 million for the third quarter and $3.3 million in Q4 of 2016. Net cash provided by operating activities of $39.3 million in the quarter compared to $33 million last quarter and $9.1 million a year ago.

Operating income was $11.5 million in the fourth quarter as compared to $11.5 million for the third quarter and $8.9 million year-over-year.

Maintenance capital totaled $2.2 million in the quarter versus $3.5 million in Q3. For the year, we spent maintenance capital of $12.6 million.

Cash interest expense net was $6.3 million for the fourth quarter.

The activity in the second half of 2017 helped the partnership maintain reasonable leverage while building coverage. Outstanding borrowings under our revolving credit facility as of year-end were $783 million, resulting in a leverage ratio of 4.65x, essentially flat from Q3 and well below the covenant level of 5.25x. Total distributable cash flow coverage of 0.99x was up significantly from the third quarter level of 0.92x. And cash coverage for the quarter was 1.0x. You'll recall, we started 2017 with much lower coverage due to the equity offering we executed in late 2016 in order to prefund some of our '17 CapEx program. As we expected, we've been able to grow out of that situation over the course of the year and are now much better positioned moving forward.

As has been our practice at this time of the year, we are providing full year guidance for the standalone USA Compression. We expect adjusted EBITDA of $180 million to $190 million, DCF of $130 million to $140 million and net income of $30 million to $40 million. As we have not yet closed the CDM acquisition, we are not in a position to provide specific guidance around those operations. We look forward to updating you as we are able to regarding the CDM closing and the impact on the combined company.

Last, we expect to file our Form 10-K with the SEC as early as this afternoon. With that, we'll open up the call to questions.

(Operator Instructions) And we'll take our first question from TJ Schultz with RBC Capital Markets.

What's the timing or cadence for putting the 150,000 into the field this year?

TJ, it's Matt. We've put in those orders kind of going back to middle of this past year. And they're going to come in fairly pro-ratably over the course of the year. It will be a little bit -- right now, it will be a little bit more weighted toward the first half of the year. But again, there's always flexibility and a little bit of fluidity with that stuff. As we kind of work through month-by-month, we try to match up the customers' needs with the packagers' capability. So I would say slightly weighted to the first half of the year but with the ability to move stuff around as needed.

Okay. And then I know you don't want to talk too much about 2019. But can you just talk about lead times for new orders these days? And is it the same as you talked about the 3608 class versus some of the larger stuff? And then as we think about the larger units, just kind of where are those being delivered to?

TJ, this is Eric. The demand is -- for the type of units is consistent with what we've seen in the past. A lot for the Permian and the Delaware basins. I would say that the past 2 or 3 or 3 or 4 years that area has been red-hot and it continues to be red-hot. The SCOOP/STACK and Merge plays in the last year or so have really come into bode. And that's probably, frankly, a lot of growth that we'll see in 2018, 2019 and even into 2020 will be coming out of that Mid-Continent area. The Northeast has been a little bit of a lag, or a laggard in comparison to those 2 other areas, just because of bottlenecks on some of the interstate pipelines. And as you know, some of those major takeaway projects have been delayed a little bit for permitting purposes or environmental limitations, et cetera. So that's kind of more like the tortoise and less the hare, where it's kind of crawling along and we've seen continued activity. But I think when some of these major pipelines start debottlenecking that area, we expect to see some accelerated growth. So those are the 3 major areas that we see growth occurring in. And we'll address the CDM market opportunities post closing later in the year. As far as lead times on the large horsepower equipment, Caterpillar has made a little bit of progress on improving deliverabilities -- or delivery times. These things were in the 52-, 56-week lead time range. They've now improved that back into kind of 42- to 46-week timeframe. So it's still -- we're talking about 9, 10 months out. So lead times are pretty long right now. There is some fabrication capacity available. A few engines pop up every now and then for some nearer-term deliveries. And we're working with our various packagers and suppliers for sourcing needs, both towards incremental opportunities in the back half of 2018 and then on into 2019. So lead times are still long. We can get a little bit of time since these things are coming into the mid-40s weeks. And we're in the midst of those discussions and looking at both pricing associated with the new packages, how much equipment is going to be available when it's going to be available in 2019.

Okay. And just last one from me, I guess. On the 2018 EBITDA guidance, what kind of pricing assumptions are in there? I think you just -- you said, you just passed through some small price increases. Just kind of directionally, how are you forecasting pricing into that guidance?

Yes, I think TJ, on that, given where we are on the utilization front, what we're seeing out in the field is not many units coming back. And so the kind of the broad assumption is that a lot of that stuff stays out. I think we've talked on previous calls that, even where we've made pricing bumps expecting to get some units back to redeploy, we actually haven't gotten those units back to our surprise. So I think what you'll see is the budget is a fairly conservative take. As you know, pricing increases is kind of in our business, it's not a blanket increase across all customers. So what we're going to be doing over the course of the year is what we kind of hinted at in some of these different areas, which is looking at it region-by-region, customer-by-customer and figuring out where it makes sense to bump up those prices. So that stuff comes in kind of throughout the year, I would expect. But there's not a wholesale price increase that we assume on the forecast.

And we'll go next to Andrew Burd with JP Morgan.

On the new equipment deliveries for this year that are already earmarked to specific customers, have you agreed on price there? Or will they -- will those units be priced at prevailing market rates upon delivery?

Yes, Andy, we were able to lock in pricing at the point that we've ordered this equipment roughly a year ago. Caterpillar announced a price increase toward the end of last year for equipment that had not yet been ordered, to be delivered in 2018. So we were able to lock in pricing preincreases. Caterpillar and Ariel more than likely will be pushing through some pricing increases into 2019. And we expect, as part of our ongoing activities for commitments in 2019, that we'll be able to lock some pricing in at kind of the current 2018 rates as well and mitigate the impact of future price increases for the next call it 1 year to 2.5 years or so.

Great. And then kind of a follow-up on the existing installed base and price increases there, and realize that it's typically an evolutionary process, both on the way up and the way down and it doesn't all happen at once. But I'd appreciate any color you guys can provide on the -- kind of what inning we're in for price increases on the installed base? And if there's a subsegment of your portfolio that still -- there's a lot of opportunity there?

Andy, I would characterize that we're kind of in the early innings. When you have 7/8th of our fleet or 85-ish plus or minus percent of our fleet being large horsepower that were installed on term contracts, of which 60%, 65% of those contracts are at their original primary term, it doesn't allow a lot of upward movement on pricing. So once the units move to month-to-month contracts or some of the existing contracts roll up in their initial primary term, that's when we have the potential for price increases. So I think a fair way to say it is, if you look at our average book, kind of dollars per horsepower per month and then look at the spot pricing, it depends on types of equipment. Some of the smaller horsepower, the spot rates are about the same as what the average book would look like. When you move into certain horsepower classes, some of the small large horsepower, kind of the 800-ish horsepower range or when you get into the really big equipment, kind of 1500 horsepower north, you start to see pricing that where spot rates are anywhere between 10% to 20% higher than the current average book would look like. So that would infer that on certain types of equipment after they come off of contract or with certain customers that we have the opportunity to go back and reprice. There is a meaningful upward pricing potential moving forward.

Great. That's helpful. And then my final question, thinking about capital allocation in 2019 and beyond, specifically, the trade-off between potentially higher growth CapEx that might require some incremental equity capital as opposed to maybe a smaller more return-driven outlook, where USAC theoretically might be able to self-fund. How do you think about the trade-off there, 2019 and beyond?

Yes, Andy. It's Matt. I think Eric hinted that, but '19 is a little early. And obviously, we don't have any orders or contracts yet for the year. But you know as we think about it, we spent the last couple of years I think very honed in on capital allocation, and I think that's why you've seen us only order the 3608 and above units because those are the ones that are earning very, very attractive rates of return. So my take is, I think you'll see it continue into '19. I think we're not interested in growth just for growth's sake. But I think what you'll see is we'll continue what we've done over the last couple of years, which is invest in the higher return stuff. The beauty about that plan, I think, is as we contracted all these big units, the new units, that has a trickle-down effect on the rest of the fleet, at least, really on the large horsepower side. So again, I think, prudently buying these new units and pricing them at where we've been able to price them has sort of a follow-on effect on the rest of the fleet. And I think in my view that's the way to go.

And we'll move next to Mike Gyure with Janney.

Can you maybe talk a little bit about how much more expansion capital you have to go with, maybe with that 150,000 horsepower you have coming in '18?

Sure, Mike. It's Matt. What we've -- where we think that's going to equate to is probably about $130 million to $140 million of growth CapEx for the year. We do -- on these big units, you get some economies of scale when you're purchasing them. So we're kind of underneath the $1,000 of horsepower if you will. But I think that's what we'd expect to spend. Right now -- and again, this is just on USAC standalone fleet right now.

Okay. And then maybe on the idle equipment, I think you did give some metrics regarding, sort of, what's inactive and what's truly idle. I guess, how do you envision where you are in that stage. It sounds like almost what's remaining left is just kind of smart horsepower stuff. And that you really are kind of fully utilized at this point. Is that fair to say?

It's fair to say. I think we indicated the majority -- and it's more than just a little of the majority is the small horsepower -- a lot of the majority is being big small horsepower. And that tends to have a lot of higher beta, a lot more churn, so stuff comes in and out. And when it does come back, it kind of come back in big tranches, 10, 20, 30, 40 units at a time. So that will continue to be relatively lumpy. But our big horsepower, the idle stuff, we virtually work through. It's all been made ready. And then what we'll be working off of is kind of normal fleet churn over the course of the next 12 to 18 months. As conditions may change a little bit, you see some basin rotations activity, for example, the Fayetteville shale continues to slow down and equipment will continue to come home from that area. We'll take that equipment and redeploy it into either the Delaware or Permian Basin, to the SCOOP/STACK Merge or even up into the Northeast. So again, we -- the tinker toys we get to play with will be the new build units coming out in 2018, the 3608 series or larger, which are virtually all spoken for. And then a little bit of idle fleet predominantly small horsepower. And then over the course of the year as normal fleet churn comes back, we'll turn it out and redeploy it elsewhere.

And we'll go next to Marshall Adkins with Raymond James.

So you got a lot of questions on pricing and utilization stuff. And you gave some very helpful guidance for '18. Help us to kind of bridge that next $30 million of EBITDA and in terms of how we get there pricing versus utilization versus new horsepower? It seems like there's not a whole lot of room to move on the utilization side. And so just help us understand, kind of, where that next $30 million comes from?

Sure, Marshall, it's Matt. You're spot on the utilization. We look forward on our standalone '18 budget, that utilization number for the fleet really stays pretty constant. What you see happening is basically you've got a whole bunch of deliveries. Recall 2017, we were a lot busier in terms of deliveries in the back half of the year. And say, you're getting basically that full years’ worth of a lot of those new unit deliveries. You're getting the full year's cash flow there. So it's that. It's really, I think, order of magnitude, utilization may pick up a couple tenths of a point, that sort of type amount. But it's really the full year impact of all these 3608s that we took delivery of and installed during the year '17.

All right. And then going to the distributable cash flows, if EBITDA was going up $30 million and you're kind of guiding to $10 million to $20 million move in distributable cash flows. I was -- we were seeing a little bit more flow through distributable cash flows. But help us also bridge that gap in terms of the step down between the EBITDA growth and the distributable cash flow growth?

Yes, and I think it really all you're seeing there. You've got 2 major things, that the interest and maintenance CapEx, at $15 million, the maintenance CapEx is very much, I think, in line with what we spent in '17 and in previous years. And so you have the effect of some higher interest expense over the course of the year that I think is probably making up that difference.

Okay. That's kind of what I figured, just wanted to check. Lastly from me, when you think about returns when you guys are saying, we're going to add 150,000 horsepower, what kind of returns are you envisioning since you're locking into the pricing and whatnot for those -- for the additional horsepower?

You're talking about economic returns, Marshall?

Yes.

I think, on the big step, we look at -- we've kind of over 20% returns on those units at kind of current market pricing, and what we're paying for them. So -- and again, that's far better than what we get on some of the other stuff, which is why we focused entirely on that 3608 larger package. So it's mid--- it's probably low push in mid-20s in some situations. But again it's all -- I think it's all reflective what Eric was talking about and the demand, the supply of the units generally and the demand formed by the customers. That's driven that.

And that does conclude today's question-and-answer session. Mr. Eric Long, at this time, I will turn the conference back to you for any additional closing remarks.

Yes. Thank you, operator, thank you, all, for joining us on the call today. 2017 was a year that showcased the 2 core business tenants of USA Compression. The first half of 2017 highlighted the stability of our business model as we operate within our means, focused on redeployment of partner with our customers as we all collectively rebounded from the softness of previous years. In the second half of 2017, we resumed our pattern of manageable profitable growth, and our business picked up meaningfully with increased net unit deliveries and the associated uplift to our cash flow. We executed on our plan for 2017 and are excited about the commercial prospects for the year ahead in 2018. Since our announcement in January regarding the acquisition of the CDM business, that excitement has only been amplified. As we discussed at that time, the combination of the 2 entities makes sense from an industrial logic perspective. We believe we have structured a transaction that sets USA Compression on a path to be a stronger company financially and operationally in the years to come, sets us up for continued methodical and profitable growth and to ultimately exist as a standalone provider of compression services, all of which should benefit our unitholders well into the future.

I'd like to talk about our focus at USA Compression on large horsepower, operational density and our long-established commitment to providing safe and exemplary levels of customer service. As we bring CDM to the USAC platform, we're staying [true-to-you] strategy that got us here, and we're excited about what the combined business can achieve for all of our unitholders. We look forward to updating you on the next quarterly call. Thank you for your continued interest in and support of USA Compression. Be safe.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.