Archrock, Inc.

Good morning. Welcome to the ARTRAC third quarter 2021 conference call. Your host for today's call is Megan Repine, Vice President of Investor Relations of ARTRAC. I will now turn the call over to Ms. Repine. You may begin.

Thank you, Charlotte. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of ARTRAC, and Doug Aaron, Chief Financial Officer of ARTRAC. Yesterday, ArchRock released its financial and operating results for the third quarter of 2021. 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 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 truck management team. Although management believes that the 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 during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, gross margin, gross margin percentage, cash available for dividend, and free cash flow after 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 R-Track's third quarter results and to provide an update of our business.

Thank you, Megan, and good morning, everyone. The positive trends in our top line drivers that we saw in the second quarter accelerated in the third, bolstering our confidence that the industry is in the early stages of recovery and setting the stage for a significant increase in activity as we move into 2022. During the quarter, we grew our operating horsepower slightly after adjusting for the non-core asset cells. Horsepower bookings exceeded second quarter levels. We're driving bookings at levels similar to early 2019, providing us greater visibility into new starts through the remainder of 2021 and into next year. And finally, our AMS revenue increased sequentially and on an annual basis, and our customers began catching up on major maintenance. Turning to our financial performance, the second half of the year is proving to be the transition period we'd expected and that we've experienced in the past as a late-cycle market participant. As we discussed last quarter, our revenue is at cyclical lows, and at the same time, we're beginning to invest to meet the expected growth ahead. And we're starting to face inflationary pressure from a tightening market. Despite the near-term challenge this presents, we're seeing the benefits of our actions to maximize our profitability, cash flows, and returns for our shareholders. Our total revenue of $195 million was down just $450,000 sequentially. Our contract operations gross margin percentage of 61% was within guidance expectations and above prior cycle lows, even in the face of sharp cost inflation. We generated impressive free cash flow after dividend of $98 million for the quarter and $179 million year to date, driven by disciplined capital allocation and proceeds from the sale of non-core assets. I'd also like to highlight that since the end of 2019, we've repaid a significant amount of debt together with returning a significant amount of capital to shareholders. In the midst of a global pandemic and through one of the most severe downturns in the energy industry's history, we've reduced our debt by $328 million and returned $156 million to our shareholders through dividends. At the same time as we've repaid debt and maintained our well-covered dividend, we've also continued to advance our multi-year strategic initiative to reposition our compression platform for a more efficient and sustainable future. We've done this through non-core asset cells, investment in large midstream compression units, and continuing our investment in technology on our existing fleet. Today, our truck's fleet is larger. As a percentage of our fleet, large horsepower has increased from 74% at the end of 2019 to 81% today. Our trucks fleet is digitized. We're just beginning to leverage the expanded telematics capabilities on our compression units to drive an enhanced and more efficient response to downtime events. We'll complete the planned installation of telematics across our fleet by the end of the year. And our trucks fleet is standardized. We've reduced the number of configurations in our fleet by 65% from the highs in 2011. Taken together, I'm excited about the benefits still to come as we deploy our enhanced fleet in steady midstream applications in the most critical US bases. These benefits include that our efforts will enhance our customers' experience and increase their uptime. Equipping our compression fleet with technology allows us to remotely monitor performance across our entire fleet and diagnose potential issues earlier. Our efforts will optimize our cost structure. Our vehicle telematics provide the data necessary to manage vehicle idle time and miles driven. Combined with our initiative to equip our entire compression fleet with telemetry, we expect improvements in how we supply the parts necessary for maintenance to decrease response time and reduce the number of trips our mechanics will make to the field. Finally, Our efforts have and will continue to reduce our emissions and carbon footprint. As we detail in our latest sustainability report, our compression fleet has become newer and more efficient for horsepower basis, and emissions have been reduced as a result. Reducing the number of trips required to the field will similarly reduce our miles driven. Turning now to a deeper review of the market backdrop. Oil prices have reached over $80 per barrel, and U.S. natural gas prices have exceeded $5 per MMBTU, levels we haven't seen for some time. This commodity price breakout is being driven by the concurrence of an accelerating vaccine-driven recovery and years of underinvestment by EMPs. Producers and midstreamers continue to hold the line on 2021 spending levels as investors remain focused on free cash flow generation and payout ratios. As a result, natural gas production, the largest driver of our compression business, has remained relatively flat this year. Looking into next year, we're increasingly optimistic. Based on our conversations with customers, we believe supportive commodity prices will drive higher reinvestment rates in 2022, though the magnitude of this expected increase will be solidified over the coming months. The EIA's forecast for natural gas production has increased since last quarter's call, with natural gas production now expected to exit 2022 at 99 BCF a day compared to 96 BCF a day previously. This represents a 10% increase from the low point experienced in the second quarter of 2020. This latest EIA forecast, combined with the additional perspective of rapidly increasing European gas prices due to constrained hydrocarbon investment and growing reliance on renewable energy, both reinforce our long view on structural natural gas demand growth in the U.S., even as the entire world works through energy transitions. Moving on to our segments, our contract operations top line performance was steady and compression demand signals continued to be encouraging. Compared to the second quarter, our third quarter exit fleet utilization was flat at 82%. And excluding the 101,000 active horsepower we chose to sell as part of our fleet high grading strategy, we grew operating horsepower slightly for the first time since the onset of the pandemic. We saw higher costs due to an increase in make-ready and freight expenses as we prepared to meet higher customer demand, and like others, also faced rising parts, lube oil, and labor expenses. Although we believe additional inflationary pressures are ahead for the entire industry, I can assure you that our supply chain and operations teams are doing their best to mitigate these cost headwinds through tight cost control, supply chain inventory management, and efficiency gains. We also began taking necessary action to implement our own price increases during the fourth quarter and expect these to be broad-based next year as the market continues to tighten. We expect this momentum to carry forward at a pace that should enable us to deliver horsepower growth in 2022. Taking a step back, Over the last two years, we've divested a significant amount of non-core compression horsepower based on size, age, or geographic location. We've strategically engaged in these transactions to drive concrete operational benefits for our truck. These benefits include that we've enhanced our competitive position and improved our returns, especially as we focused on a more stable large horsepower segment of the market and midstream compression applications. These actions have also made our fleet more durable as we approach energy transition and look to position the company to reduce greenhouse gas emissions from our fleet. And our high-grading efforts have ensured that we've retained the right equipment as we invest in telemetry and remote monitoring capabilities across our entire installed base. Finally, when it comes to safety, our employees can We've achieved great safety performance with zero recordable safety incidents recorded so far in 2021. In aftermarket services, revenues were up $5 million sequentially and $6 million on an annual basis, driven by both higher part sales and service activity. This is a walk of development following years of maintenance deferral by our customers. Turning to capital allocation, it's simply too early to lay out detailed guidance for next year on today's call. Just like our customers, we're in the early stages of planning for our 2022 budget. However, I can speak more broadly about how we're thinking about our capital allocation framework for next year. With the steady and modest growth in demand for national gas compression forecast ahead, The opportunity to deploy capital at premium pricing under multi-year contracts is beginning to unfold. This includes the growing potential to set new electric motor drive units for our customers. We're focused on redeploying existing idle compression units and responsibly investing in our fleet as necessary so that we have the equipment available in configurations desired by our customers. At this time, we expect that in order to meet the needs for our customers, higher growth capital will be required in 2022 compared to 2021. As we selectively invest in high profit, large midstream compression units, make no mistake, we will remain steadfast in our commitment to both maintain a solid balance sheet and return capital to shareholders. In summary, we're experiencing the lag effect typical of our business at this point in the cycle, but believe we're seeing the bottom of what has been an exceptionally challenging period for our truck and for others. We've performed remarkably well, and we've advanced the strategic priorities critical to our long-term success. I'm excited about the recovery that lies ahead, and I'm confident we're prepared to deliver value for our customers and shareholders in 2022 and beyond. With that, I'd like to turn the call over to Doug for review of our third quarter performance and provide the latest on our 2021 outlook.