Archrock, Inc.

Good morning. Welcome to the ArchRock First Quarter 2021 conference call. Your host for today's call is Megan Rapine, Vice President of Investor Relations at ArchRock. I will now turn the call over to Ms. Rapine. You may begin.

Thank you, Celine. 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, R-TRAC released its financial and operating results for the first quarter of 2021. If you have not received a copy, you can find the information on the company's website at www.RTRAC.com. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, based on current beliefs and expectations, as well as assumptions made by, and information currently available to our TRACS 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 metrics, 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 first quarter 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 discuss our financial results for the first quarter of 2021. A solid performance reflects the continued actions we're taking to maximize our profitability and cash flows in a volatile and evolving market. We're controlling what we can, including our operational execution, our cost structure, and our capital allocation. I'm proud of the results and pleased to share that during the quarter, overall economic trends improved and we saw continued signs of stabilization in our compression business. First quarter highlights include revenue declined less than 2% from the fourth quarter, a significant improvement from the larger sequential declines we experienced throughout 2020. We delivered a strong contract operations gross margin percentage of 63%. This was consistent with guidance and up 100 basis points compared to the first quarter of 2020. We maintain capital discipline, spending $12 million in total CapEx in the first quarter versus $72 million in the first quarter of 2020. In addition, our first quarter 2021 net capital expenditures were negative when taking into account asset sell proceeds of $27 million generated during the quarter as we continue to transform and standardize our fleet. We continue to enhance our financial flexibility, robust free cash flow generation handily funded our quarterly dividend and keeps us on track to deliver at least $100 million in debt reduction during 2021. The downturn has been a true test of the durability of our business and is evidenced by the stabilization and performance of our operations during the first quarter. We are no doubt realizing the beneficial returns we had targeted in our multi-year efforts to hydrate our fleets, operations, geographic footprint, and customer base. Based on our strong first quarter performance, today we are reaffirming our guidance for the full year 2021. And consistent with the expectation laid out on the fourth quarter call, we believe that the second half of 2021 will offer ARCHROC an opportunity to resume revenue growth as we focus primarily on deploying existing idle compression units. The first quarter was a positive one for commodity prices, with oil prices in the range of $60 per barrel. We believe commodity prices are providing the necessary cash flow visibility for our customers and are beginning to translate into responsible increases in U.S. onshore activity levels, even as producers prioritize capital discipline, moderate growth, and free cash flow generation. Upstream capital spending is expected to increase gradually, and the U.S. rig count currently stands at about 475 rigs, up more than 80% from the trough last summer. Most U.S. forecasts show natural gas production steadily increasing throughout the remainder of 2021, with year-over-year production growth anticipated to resume in 2022 and beyond. In fact, the EIA's 2021 Annual Energy Outlook predicts that U.S. natural gas production will return to pre-pandemic levels in 2023 and then continue to grow during the entire forecast period 2050. Even at a time when much of the focus in energy is on renewables, we believe that U.S. natural gas will continue to play a critical role in helping to power America well into the future. and so will our truck. Turning to our contract operations performance during the first quarter, we recorded the smallest sequential decline in our operating horsepower and contract operations revenue since the COVID-19 driven downturn began. Compared to the fourth quarter, our first quarter exit fleet utilization was flat at 82%, and operating horsepower declined by just 59,000 horsepower $29,000, about half of which was attributable to operating horsepower that we sold as we continued to prune our compression fleet. Pricing on our active fleet remained steady compared to the fourth quarter, the result of our contracting strategy and standby units returning to full monthly service rates. Booking activity ticked up towards the end of the quarter, and though it remains below pre-pandemic levels, we're hopeful to carry this momentum as the year progresses. We plan to satisfy much of this demand from existing units in our idle fleet. Our gross margin percentage expanded on an annual basis, driven by our proactive and aggressive efforts to align our cost structure with the market environment. I also want to highlight the incredible response by our team following the week-long extreme freezing temperatures across Oklahoma, Texas, and other states that severely impacted many of our customers. Our field team had the majority of our units back in operation in short order once it was safe to do so. Once again, we showed our customers what excellent customer service is all about. I'm proud to say the team exemplified great safety performance with zero weather-related safety and vehicle incidents recorded during this challenging period. In aftermarket services, performance during the quarter was softer than our internal expectations. Revenues were down 4% from the fourth quarter of 2020. First quarter is a seasonally low quarter for the AMS business, and due to the pandemic, in many cases, customers are choosing to leverage internal resources rather than outsource their service needs. Further, we experienced a meaningful setback to activity with the severe winter weather. We did see some more encouraging trends during March. First margin percentile is 12%. but low guidance due to the revenue pressure and higher than expected costs, including some that were more one-time in nature. In summary, we're off to a solid start in 2021, and I'm excited about what lies ahead for our truck as we move closer to the upcycle and as the longer-term secular and steady growth in demand for natural gas becomes as clear to others as it is to us today. We'll continue to maximize our near-term performance during this uncertain period, As we do so, we'll remain focused on providing exceptional and safe service for our customers, protecting our balance sheet, liquidity, and leverage position, and maximizing our free cash flow. At the same time, we'll also continue to prioritize and advance our long-term strategies, high grading our fleet, investing in technology, and increasing our focus on sustainability. I'm confident that our truck has the right people, assets, and financial strength in place to drive differentiated and enduring value for our customers and our shareholders within the compression industry and the broader energy landscape. With that, I'd like to turn the call over to Doug for a review of our first quarter performance and provide the latest on our 2021 outlook.