Archrock, Inc.

Good morning. Welcome to ArchRock fourth quarter and full year 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 Mr. Repine. You may begin.

Thank you, Michelle. 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, ARCHROC released its financial and operating results for the fourth quarter of 2020, as well as annual guidance for 2021. If you have not received a copy, you can find the information on the company's website at www.archroc.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 the assumptions made by and information currently available to R-TRAC's management team. Although management believes that 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 results, please see yesterday's press release in our Form 8K, Furnished to the SEC. I'll now turn the call over to Brad to discuss our truck's fourth quarter and full year results and to provide an update of our business.

Thank you, Megan, and good morning, everyone. I'm happy to be with you today to close out the discussion on our financial results for 2020, a year that brought unforeseeable and even unthinkable challenges to our industry and the global economy. While I'm excited to turn the page to 2021, I'm also proud of and grateful to and want to take a moment to thank our dedicated employees who adapted quickly to help us navigate the rapidly changing environment and delivered excellent fourth quarter and full year results. On our first quarter 2020 conference call, I detailed our objectives and action plan for the downturn, including significant cost savings and capital reduction initiatives. We reacted quickly to protect the value of our natural gas compression franchise, maximize our near-term performance, and position the business to emerge even stronger from this downturn. As our 2020 results show, we delivered on these objectives. We maintained strong capital and cost discipline. As the market deteriorated in the spring, we sharply reduced new equipment capital and optimized our maintenance and other capital investments. We reduced our total capital by $245 million in 2020 to $140 million. In addition, we reduced our run rate SG&A by 12%, even as we continue to invest incremental SG&A into our technology upgrading project. We enhanced our financial flexibility. We paid down debt of $155 million during 2020 resulting in an exit leverage ratio of 4.16 times, which is essentially flat from 2019. We have no near-term debt maturities, and with our successful senior notes offering during the fourth quarter, we extended $300 million of bond maturities by four years to 2028. And we did this at a record low financing cost to the company, a strong signal of the market's confidence in ArchRock. We continue to transform our compression fleet and drive field efficiencies. We executed several highly strategic asset cells, completed a business unit restructuring, and aligned our business for the current environment. Together, these drove a 400 basis point increase in our contract operations gross margin percentage year over year, and further solidified our strong competitive position. Last, We continued our commitment to return capital to shareholders. We paid $89 million in dividends with internally generated cash flow and maintained a robust dividend coverage ratio of 2.9 times for the full year 2020. Due to our actions, we delivered adjusted EBITDA of $415 million in 2020, which was flat compared to 2019, despite a 9% decline in revenue. It's also in line with the low end of our pre-COVID guidance range, and with our cost and capital reductions, we actually increased our full-year free cash flow and cash available for dividend compared to 2019, as well as compared to our initial forecasts for 2020. We're entering 2021 with optimism about the outlook for natural gas compression and our truck. While a degree of uncertainty surrounds the pace of the COVID-19 vaccine rollout and the resumption of pre-COVID levels of overall economic activity, the energy markets are nevertheless showing early signs of a cyclical recovery. Oil prices have returned to pre-pandemic levels, supported by OPEC's actions in December, production declines, and the prospect of improved global demand. On the natural gas side, With favorable supply and demand dynamics, Henry Hub prices are trending around $3 per million BTUs. This provides the expectation of additional cash flow as producers look to increase drilling and completion activity in 2021, at least enough to achieve maintenance levels of production. Most US natural gas forecasts show a steady increase in production in 2021, though the annual 2021 average is still expected to be 1% below 2020. Year-over-year production growth is anticipated to resume in 2022. Structural natural gas demand drivers continue to point to consistent long-term demand for our compression services. We're seeing strong power generation demand, record LNG exports, and robust annual growth in natural gas exports to Mexico so far in 2021. Given this macroeconomic backdrop, we expect our operating performance and financial results to bottom in the first half of 2021 with a pickup starting in the back half of the year. Turning to our contract operations, our actions in 2020 have further solidified our leading position in the compression market, And we entered 2021 from a position of strength. For the full year 2020, contract operation revenues were $739 million, a decline of 4% compared to 2019. However, gross margin percentage increased approximately 400 basis points year over year due to our cost reduction activities throughout the year. Gross margin of $478 million in 2020 was actually up slightly from $474 million in 2019. With our focus on large horsepower units deployed in midstream applications and in the best U.S. basins, as well as our continued efforts to keep units out on location, our 2020 exit utilization continued to hold up well at 82%. This reflects a significant decline in the pace of horsepower returns over the past several months, with stop activity now beginning to approach normalized levels. Booking activity remains low, but we have a positive backlog of demand for units to be deployed in 2021. We expect to satisfy much of this demand from existing units in our idle fleet. Given the stability provided by our large base of contracted horsepower, the overall impact of pricing reductions to our financials is modest. As you would expect with our utilization hovering in the low 80s, we've certainly seen pressure on spot pricing, but given our higher quality fleet, spot pricing remains well above prior cycle lows. During the year, we continue to manage and prune our compression fleet, selling 150,000 horsepower, accelerating EBITDA recognition from less strategic horsepower, and bringing in additional cash, which we used to repay debt. And this month, we sold another 300 compressors totaling 40,000 horsepower, which will result in a gain on sale during the first quarter of 2021 of approximately $6 million. I also want to highlight that in the midst of a global pandemic and severe energy downturn, we continue to deliver exceptionally high service quality to our customers. Our customers have also been challenged by the downturn, and we continue to work closely with them to achieve maximum production uptime and cash flows. Prioritizing these relationships and proving the value we deliver to our customers during the downturn will pay long-term dividends. And our efforts to continue to improve our customer service haven't stopped in 2021. Even as we manage costs tightly in this downturn, we continue to focus on innovation and invest both SG&A and capital dollars into our multi-year technology project. Over the last several months, we've begun to leverage the expanded Telematics capabilities on our compression units to drive an enhanced and more efficient response to downtime events. I'm excited that will complete the planned installation of Telematics on the remaining operating units in our fleet throughout the course of 2021. This is just one of several ongoing initiatives which are critical to the future enhancing the value proposition for our customers, reducing our emissions and carbon footprint, and delivering attractive returns to our shareholders. Moving to our aftermarket services segment, I appreciate the team's heavy lifting to maximize performance given the difficult hand dealt by COVID-19. The work to maintain as much profitability as possible hasn't been easy, but its importance is reflected in our results. Our fourth quarter revenue increased slightly on a sequential basis. This is particularly encouraging given the fourth quarter tends to be seasonably slow. Based on conversations with customers, our cautious optimism has carried over so far into 2021, which is reflected in our guidance for modest revenue growth this year compared to 2020. On our third quarter 2020 earnings call, we previewed our expectation for significant free cash flow generation again in 2021, supported by another significant reduction in capital expenditures. Our 2021 budget reaffirms our free cashflow expectation, both pre and post dividend, and fine tunes our CapEx forecast to reflect our latest customer engagements and view of the market. Our existing ILO capacity provides us with meaningful capital allocation flexibility as we satisfy increased customer commitments later this year. As such, We plan to limit growth capital to between $30 and $50 million, down from $79 million in 2020 and $300 million in 2019. This 2021 growth capex includes repackaging capex and investments in a small number of new build units. These are high return, large horsepower opportunities with premium customers, including several electric motor drive units. There's no doubt the energy sector has been one of the hardest hit by the pandemic, but every market offers an opportunity to outperform against that market context, and ArchRock did just that in 2020. In 2021, we will continue to do what ArchRock does best, offer excellent customer service, operate safely and efficiently, and manage our financial position with discipline. These strategic principles provide a foundation for meaningful free cash flow generation, continuation of our capital allocation priorities, strong shareholder returns, and a sustainable future. Before turning the call over to Doug, I would be remiss if I did not highlight that our efforts to ensure our future have gone beyond our profitability initiatives to include a growing commitment to our ESG performance and disclosure. We published our second ESG report during the fourth quarter, and with it, adopted the SASB reporting standards for the midstream industry. We've also formalized the governance structure ARCHROC will use to manage our ESG efforts, which include board oversight of ESG matters and an internal employee-led sustainability committee that will assess opportunities within our operations and markets and consider and propose initiatives to improve performance. I'm confident our infrastructure assets are well positioned to participate in the global energy transition. Natural gas is reliable, affordable, and cleaner burning. It has and will continue to bridge the gap between declining reliance on coal and nuclear power and increasing support for renewable energy sources. We believe our focus on natural gas and our legacy of resilience and of delivering continuous improvement will ensure that we continue to play a critical role in helping to power America. With that, I'd like to turn the call over to Doug for a review of our fourth quarter and four-year performance and to provide additional color on our 2021 guidance.