Archrock, Inc.

Good morning. Welcome to the ARCHROC First Quarter 2020 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at ARCHROC. I will now turn the call over to Mrs. Repine. You may begin.

Thank you, Christine. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of ARCHROC, and Doug Aaron, Chief Financial Officer of ARCHROC. Yesterday, ARTRAC released its financial and operating results for the first quarter of 2020. If you have not received a copy, you can find the information on the company's website at www.artrac.com. During the call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. Based on our current beliefs and expectations, as well as assumptions made by and information currently available to our TROC management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can have no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause factual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, gross margin, gross margin percentage, and cash available for dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release and our Form 8K furnished to the SEC. I'll now turn the call over to Brad to discuss our truck's first quarter results and provide an update of our business.

Thank you, Megan, and good morning. I appreciate everyone joining the call today. A lot has changed since our last quarterly earnings call. In response to the unforeseen COVID-19 pandemic and the resulting drop in commodity demand and prices, our truck moved swiftly and decisively over the last several weeks to adjust our strategy, spending, and action plan for 2020. Before addressing the current market and the company's plan, I don't want to miss the opportunity to discuss our solid first quarter performance, which highlights several of the significant operational strengths we will leverage in this market. We had an outstanding execution in the quarter, driven by our high-quality asset and customer base and our excellent customer service and dedicated employees. Among the accomplishments in the quarter, we grew adjusted EBITDA by 24% as compared to the prior year period, We continued to transform and standardize the fleet with additional non-core asset sales totaling 35,000 horsepower. We maximized the performance in our contract operations segment, delivering a 19% year-over-year increase in gross margin. We maintained excellent financial flexibility, including substantial liquidity and reduced our leverage to 4.0 times. 4.05 times. And as always, we've prioritized the safety and well-being of our employees, customers, and communities. We took appropriate steps early in the COVID-19 pandemic to minimize risks of exposure and community spread of the virus. I'm pleased to report that we have maintained full capabilities and our operations continued and continue without interruption. On our fourth quarter conference call, I emphasized that in my time with our truck, our fleet has never been younger and our competitive position has never been better. This is evident in the company's first quarter performance. And while the road ahead is much different than we expected coming into the year, I'm confident we're prepared for success in the face of its challenges. We entered 2020 expecting a slowdown in the annual natural gas production growth rate. with declines materializing in the second half of the year. Since then, the COVID-19 pandemic has driven severe demand destruction in a very short period of time, particularly for oil. Given the resulting price declines and widespread capital reductions by producers and midstreamers, we too are now planning for more significant declines in associated natural gas production for the balance of this year and into 2021. In the next few months, it's also likely that some producers will temporarily shut in on economic wells as storage constraints further hamper oil prices. On the natural gas demand side, the near-term outlook has also softened, driven primarily by a sharp decrease in COVID-19-related industrial demand. Even though demand will be off record highs from earlier in the year, the summer season should still benefit from solid levels of exports to Mexico, and LNG demand, both of which are expected to be up year over year. In longer term, we remain optimistic that as a low-cost and cleaner burning fuel, natural gas will experience healthy growth and demand, and in turn, U.S. natural gas production will resume. We believe these supportive fundamentals will hold even in the event of a prolonged oil price challenge. The exact magnitude of the downturn as well as the shape of recovery, is unknown today. Just as we've done in the past, we'll manage through this environment by differentiating performance that our more stable compression businesses can deliver, drawing on our leadership team's deep experience and keeping our employees engaged. As we do so, we'll remain focused on the following, providing exceptional service to our customers, retaining our technical expertise, thriving free cash flow generation, and preserving long-term value for our shareholders and maintaining our opportunity set for eventual recovery. With these guiding principles, we've taken the following actions to date, which translate into annualized cash savings of between $75 and $85 million. we've further reduced our planned 2020 capital expenditures to between $140 and $170 million. At the midpoint, that's a reduction of 60% compared to 2019 capital expenditures of $385 million. Of this, our growth capital is now anticipated to be between $70 and $90 million. At the midpoint, this represents a reduction of $220 million. compared to 2019 growth capital expenditures. About $49 million in growth capex was spent during the first quarter, and 90% of the units to be acquired in 2020 are already contracted with customers. We completed a business unit reorganization as we saw an opportunity to streamline our organizational structure and better align our teams for maximum customer service and profitability. This included the rationalization of headcount at the executive and senior leadership levels. Now we are taking further steps to align our corporate cost structure with the current environment. This includes deep cuts to discretionary spending as well as compensation adjustments. The executive management team and the board of directors have voluntarily agreed to a reduction in base salaries and retainer fees. with retainer fees for the members of the board to be reduced by 25%, my base salary by 25%, and the executive management team's base salary is being reduced by 10%. We're also implementing temporary decreases in employee base salaries of between 5% and 10% with no expected change for employees below a targeted compensation threshold. For hourly employees, we're optimizing labor efficiency including a significant reduction in overtime hours. We recently declared a dividend of 14.5 cents per share, 58 cents annualized, unchanged from last quarter, and a 10% increase compared to the first quarter of 2019. Turning to our operations, in contract operations, first quarter results reflect our leading position in the U.S. compression industry. With our focus on large force power units deployed in midstream applications, our first quarter exit utilization was flat sequentially at 89%. And we drove an increase in contract operations gross margin to 62% in the first quarter, up 300 basis points versus the first quarter of 2019. As we moved through the year, Absent a material rebound in commodity prices, we would expect to see top-line pressures from both horsepower and pricing declines. However, we are working closely with our customers to develop solutions to mitigate equipment returns and long-term price reductions. In addition, a significant portion of our operating costs are variable. This enables rapid adjustments to changing market conditions while still meeting the needs of our customers. This puts us in a good position to hold and maintain margin at attractive levels. Moving on to our aftermarket services business, customers are still delaying maintenance activity on their equipment, and in some cases, they're using internal resources to perform work they have historically outsourced. That said, first quarter revenue and margin comparisons were favorable compared to the fourth quarter of 2019. As I've emphasized in the past, Pressure maintenance cannot be deferred indefinitely, and we expect an uptick in this business when the environment improves. Meanwhile, we remain focused on optimizing gross margins through this challenging period. Our capital allocation framework remains focused on balancing appropriate levels of investments, leverage, and return of capital to shareholders through commodity cycles. We invested significantly in our fleet over the past three years to meet the needs of our customers, participate in the significant infrastructure buildup required to support the 20% plus growth in natural gas demand and production, and capture the attractive investment opportunities generated by the market. Our updated 2020 capital and adjusted EBITDA guidance continues to support free cash flow generation, and we're adjusting our capital allocation to reflect what we expect to be a meaningful reduction in investment required to meet our customers' compression needs and to adjust to a market with infrastructure that should be mostly sufficient to support natural gas production for the next few years. As a result, we've shifted our capital allocation priorities given today's environment as follows. First, we believe having a reliable and attractive dividend is important to our investors. and the value of our company. We will continue to prioritize shareholder returns even during this downturn, and as we always do, we'll work with our board each quarter to assess our forward views of future cash flows and the dividend. Our second priority is debt reduction. We will execute all available measures to reduce our debt and protect our strong financial position. As we de-emphasize growth through the downturn, we expect capital investment to be a distant third priority. I can assure you we remain prepared, operational and financially, to resume fruit growth from high return investments once customer demand returns. Before turning the call over to Doug, I want to share why I'm so grateful to be entering this downturn from ArchDrox's unique position of strength. We provide must-run services. Compression is a critical part of the midstream value chain, bringing natural gas from production to end markets. We typically enter into multi-year contracts for our compression services. These are fee-based with no direct commodity or volumetric exposure. We've worked diligently over the past several years to create a modern, diverse, and scalable fleet. We've aligned ourselves with great customers and will preserve these strong relationships during this challenging period. We also have a solid liquidity position with no need for external financing and a business that we expect to and will manage to generate free cash flow. These factors, combined with our production-related business model, will help mitigate the impacts of this downturn. And finally, we've assembled an experienced management team We know what it will take to navigate this downturn successfully, and as we've demonstrated in the past, we will emerge from this challenging time even stronger. With that, I'd like to turn the call over to Doug for a review of our first quarter performance and our updated 2020 guidance.