Archrock, Inc.

Good morning. Welcome to the ArchRock third quarter 2020 conference call. Your host for today's call is Megan Repine, Vice President of Investor Relations at ArchRock. I will now turn the call over to Mrs. Repine. You may begin.

Thank you, Doug. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of ArchRock, and Doug Aaron, Chief Financial Officer of ArchRock. Yesterday, ArchRock released its financial and operating results for the third quarter of 2020. If you have not received a copy, you can find the information on the company's website at www.archrock.com. During this call, we will make forward-looking statements within the meeting of Section 21E of the Securities and Exchange Act of 1934, based on our current beliefs and expectations, as well as the assumptions made by and information currently available to ArchRock's management team. Although management believes that these expectations reflected in such forward-looking statements are reasonable, it can give 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 actual 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 dividends. For reconciliations of these non-GAAP financial measures to our GAAP financial statements, please see yesterday's press release and our Form 8K burnished to the SEC. I'll now turn the call over to Brad to discuss our truck's third quarter results and to provide an update of our business.

Thank you, Megan, and good morning. I appreciate everyone joining our conference call today. Last night, we posted solid third quarter results despite significant demand headwinds brought on by COVID-19. I could not be prouder of how well the ArchRock team has responded to the challenges we faced this year. Our standout third quarter results were driven by excellent execution in the field and an unrelenting effort to attack our cost structure wherever possible. Among the accomplishments in the quarter, we generated adjusted EBITDA, of $113 million, up slightly compared to the prior year period. We defended our strong contract operations gross margin percentage, driving more than a 100 basis point increase versus the prior year period after adjusting for a non-recurring tax benefit in this current quarter. We further reduced SG&A expenses by 12% in Q3 on a sequential basis and also adjusting for that non-recurring tax benefit. We continue to pay an attractive dividend, complemented by peer-leading dividend coverage. And finally, we continue to generate robust free cash flow, both before and after dividends in the quarter. Year-to-date, our free cash flow after dividends totals $117 million. This is the combined result of operating cash flow resilience, lower capex spending, and approximately $50 million in non-core asset sale proceeds. In total, this has enabled us to repay borrowings on our credit facility and reduce our leverage to 4.0 times. These positive quarterly outcomes demonstrate the impact of the aggressive cost reduction and operational improvement measures we've implemented over the last several months. The disruptions to our industry require sacrifices from everyone in our track, and I'm very grateful for the continued efforts of our employees everywhere. We've taken significant action to squeeze costs out of our business, and our efforts have cut across all segments and all geographies. We maintain disciplined capital spending across the board in growth, maintenance, and other capital expenditures. Year to date, our total capital expenditures were $130 million compared to more than $300 million at this point in 2019. We expect to reduce our full-year 2020 total CapEx budget by $250 million, or approximately 65%, compared to 2019. We reduced SG&A substantially on a run rate basis in both Q2 and Q3. We continue to tightly manage overtime hours and discretionary spending And the previously announced salary reductions for certain employees in the executive leadership team, as well as reductions to board retainer fees, all remain in effect. While we're focused on retaining our great talent as much as possible, we've also had to make difficult decisions to right-size the organization for the opportunity set. This has resulted in a headcount reduction of more than 20% since the end of 2019. We continue to invest in technology. Even as we manage costs tightly in this downturn, we've been investing both SG&A and capital dollars to lay the foundation for continued improvement in both our customer service delivery and our operating cost structure. These investments will also help us reduce our emissions and carbon footprint in the future. Finally, we continue to high-grade our business. Year-to-date, we sold 133,000 horsepower with an average age of 22 years. And in July, we sold a portion of our AMS business at an attractive multiple. These efforts to upgrade our fleet, invest in technology, and enhance our operations and our profitability will continue to support our commitment to deliver on our capital allocation objectives, including delivering significant full cycle, free cash flow. Now I'd like to turn to the market and outlook for our business. Overall, energy market conditions have improved over the last few months compared to the second quarter. U.S. natural gas and oil prices have stabilized at higher levels. The rig count grew modestly during the third quarter, and customers are beginning to draw down inventories of drilled but uncompleted wallets. At the same time, we're cautious about assuming an immediate and full recovery, which is ultimately dependent on highly uncertain external developments, including the path of the COVID-19 pandemic and the timing and magnitude of a future economic recovery. Looking into 2021, most natural gas forecasts show a modest annual decline in U.S. natural gas production as producers limit drilling and completion activity to achieve maintenance levels of production and cash flows. Accordingly, we're planning for softness in the compression market to persist into 2021 with the potential for improved conditions later in the year. Beyond 2021 and long-term, we remain confident in the positive fundamentals for the critical infrastructure we provide to our customers, particularly as natural gas provides an affordable, reliable, and cleaner burning solution to meet growing energy needs worldwide. We believe natural gas will play a prominent role in a cleaner energy mix even as energy generation from renewables increases. According to the U.S. EIA, natural gas has been the largest contributor to lower energy related greenhouse gas emissions in the U.S. electric generation sector as it continues to displace higher emission fuels such as coal. In fact, between 2005 and 2019, U.S. natural gas production increased by 88%, while energy CO2 emissions in the U.S. declined by 14%. We look forward to continuing to play an important role in keeping our customers' natural gas streams flowing, partnering with them to meet their safety and environmental objectives, and powering America well into the future. Turning to our operations and contract compression, we're focused on what we can control, including how we manage our cost structure, how we execute, and how we service our customers. Our third quarter results are evidence that our focus is paying off. Revenues fell by 7% sequentially, primarily due to the full impact of quarterly horsepower declines. Pricing decreased modestly and is overall holding up well. The 148,000 horsepower decline in the third quarter was a significant improvement compared to the losses we sustained during the second quarter. Our third quarter exit utilization declined to 83% from 86% at the end of the second quarter. We expect to see modest horsepower declines for the next few quarters but believe our multi-year fleet high-grading efforts will keep us on track to outperform our utilization performance in the last downturn. Even with the top-line pressures, Archerox operations teams drove excellent gross margin performance. We posted a 66% gross margin in the quarter, or 63% adjusting for the tax benefit. This is up nicely from 62% in the year-ago period and consistent with our annual guidance range. In our aftermarket services business, we're focused on maximizing profitability and performance through this challenging period. We believe that we have right-sized the business for our opportunity set and will continue to focus on maintaining gross margin levels through this period. And early in the third quarter, we made the strategic decision to sell a portion of our AMS business, bringing in additional cash, which were redeployed to debt repayment. From a capital policy standpoint, we remain committed to our well-defined capital allocation strategy, which focuses on two key priorities, shareholder return and reducing debt. While others have been forced to get dividends, our truck has been able to maintain an attractive dividend and prudent dividend coverage through this sharp downturn. Our dividend yield continues to compare well to other energy companies and other income-oriented sectors. Of equal importance, we will continue to execute all available measures to reduce our debt and protect our financial position. We strongly believe reducing debt and paying a dividend are key value drivers for our truck, and we're confident in our ability to do both in the current environment. Before turning the call over to Doug, I'll share with you that in September, our company celebrated the 66th anniversary of our founding as South Coast Gas Company in 1954. While other companies in this industry have come and gone, our company has endured and grown to become the industry leader in U.S. natural gas compression. With that, I'd like to turn the call over to Doug for a review of our third quarter performance and outlook.