Archrock, Inc.

Good morning. Welcome to the ArchRock fourth quarter 2021 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 Ms. Repine. You may begin.

Thank you, Julianne. 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, ARTRAC released its financial and operating results for the fourth quarter and full year 2021, as well as annual guidance for 2022. If you have not had a chance to receive a copy, you can find the information on the company's website at www.artrac.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 our assumptions made by and information currently available to our trucks 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 made during the fall. In addition, Our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, gross margin, gross margin percentage, free cash flow, free cash flow after dividend, and cash available for dividend. For reconciliations of these non-GAAP financial measures for our GAAP financial statements, 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 discuss our strong fourth quarter and 2021 results and our outlook for 2022 and beyond. As I look back on the year, we delivered operational excellence, demonstrated the cash-generating power of our business, and advanced several strategic priorities. And we achieved all of this with, and despite the pressures of, reduced revenue due to the market downturn, a tight labor market, significant inflationary pressures, and the continued composition of COVID-19. I want to offer my heartfelt thank you to our dedicated employees who never missed a beat and helped us deliver these results in 2021. Among the accomplishments for the year are proactive actions to maximize financial performance, delivered positive net income, and record free cash flow after dividend at the bottom of the cycle. We maintain strong capital and cost discipline, sharply reducing new equipment capital to align with the market for the second year in a row. Growth CapEx totaled $37 million during 2021, down 53% compared to 2020. We reduced our SG&A year-over-year after normalizing for the non-recurring tax benefit that we recorded in 2020. We achieved exceptional safety performance made possible by the safety culture permeating our entire organization. In 2021, we delivered 51 weeks with no recordable incidents. We continue to repay a considerable amount of debt while at the same time returning a significant amount of capital to shareholders. Since the end of 2019, we've demonstrated the stability of our cash flows, repaying $314 million in debt and returning $178 million to shareholders. Over the last three years, we've invested nearly $50 million in a digital transformation. capped by the achievement of several important technology milestones in 2021. We completed the installation of expanded telematics across our fleet, launched a new suite of mobile tools for our field service technicians, and migrated key support functions to our new cloud-based ERP system. We now get to demonstrate the benefits of these improvements, and I'll talk more about these expectations in a moment. On the fourth quarter, market fundamentals continued to strengthen, and execution by Team Archrock remained excellent. We delivered a sequential increase in our contract operations revenue, as well as our highest quarterly levels of operating horsepower growth and bookings for the year during the fourth quarter. This was a great way to end the year and has given us significant momentum as we kick off 2022. As I step back to reflect on our position today, we have radically transformed our business to ensure our franchise offers our customers the best service available in the compression market, is built to maximize financial returns to our investors, and is prepared for energy transition. Before and during the downturn, we've hydrated all aspects of our operating platform, including our customer base, our fleet, our technology, and our talent. First, regarding our customers, we've built relationships with stable, financially strong companies that approach their relationships with our truck as partnerships and that value our industry-leading service levels, safety performance, equipment, and technical expertise. Through the investments and strategic investments we've made over the most recent years, our fleet is now positioned in the more stable large horsepower segment of the market and deployed on midstream compression applications. This has improved our returns and will differentiate us as we look to reduce greenhouse gas emissions from our fleet. Third, technology. Even in the midst of a severe downturn, we continue to invest and work hard to improve our technology platform. And we've just completed several major phases of the digital transformation. We've only just begun harnessing technology in all aspects of our business. Over time, we expect our improved technology platform to help us achieve increased asset uptime, improve the efficiency of our field service technicians, improve our supply chain and inventory management, reduce the miles driven by our field service technicians, and lower our emissions and carbon footprint. Last, we have the talent to leverage this technology to deliver an enhanced customer experience. We've been highly focused on workforce development, not just equipping our highly experienced field service technicians with leading edge tools, but also prioritizing the training component so we realize the full benefit of our investment. How can you see the results of these transformational investments and actions? Our fleet is younger. Our utilization through the downturn outperformed prior cycle lows. Our profitability on a per unit basis is higher. Our field service technicians are more experienced and more efficient. And critically, our franchise is now prepared and poised to participate in energy transition. Moving on to the market backdrop, confidence in a multi-year, recovery in natural gas increased in Q4 and so far in 2022. Oil prices in excess of $90 a barrel and U.S. natural gas prices in order for $4 per MMBTU significantly de-risk producer cash flows and activity plans. This attractive investment environment for our customers should drive healthy reinvestment rates, and budget increases of at least 20 to 30% compared to 2021, even as companies increased payouts to their investors. Natural gas production outperformed expectations in 2021, increasing more than 2% compared to expectations of an annual decline going into the year. And lower 48 natural gas production hit an all-time record in December. The EIA currently forecasts 2 to 3 percent annual growth in U.S. natural gas production in both 2022 and 2023. However, our positive view on natural gas fundamentals extends well beyond the next two years. Our bullishness is rooted in the undeniable role that U.S. natural gas can play in reducing CO2 emissions as energy consumption grows both at home and abroad. Given the abundance, accessibility, and price stability of natural gas in the U.S., our country is ideally positioned to satisfy what we expect to be a massive call on LNG globally. And our truck will be there to help transport and deliver this gas to the market. Our current positive long-term view has been further reinforced by the recent energy crisis in Europe, which highlights the complexities created when ambitious net zero targets meet the realities of a growing energy demand and unplanned but inevitable geopolitical tensions. The improved recognition that traditional sources of energy will be needed alongside new energy sources to meet the world's growing consumption is palpable, especially for natural gas. And we expect the value of our natural gas platform to become even more visible and more appreciated over time. Moving on to our segments, the positive momentum in our contract operations top line drivers accelerated during the fourth quarter bolstering our confidence that the industry is in the early stages of recovery. Compared to the third quarter, our fourth quarter exit fleet utilization increased to 84% from the cycle bottom of 82%. And our operating horsepower grew by 56,000, excluding the 5,000 active horsepower we chose to sell as part of our fleet's high-grading strategy. Moving to booking activity, our sales team capitalized on the higher level of customer activity in the quarter. The Permian and Northeast continue to lead the charge, but we're also seeing higher bookings in other basins as commodity prices have continued to strengthen. We delivered contract operations gross margin for the fourth quarter and this year of 62% down from 2020, but well above historical levels. This performance is even more impressive. in the context of the unique market we experienced in 2021. As our revenues hit cyclical lows, we started to see higher costs due not only to an increase in make-ready expense as we prepared to meet higher customer demand, but also due to rapidly rising parts, lube oil, and labor expenses impacting the entire global economy. We expect these pressures will persist in 2022 and have aggressive plans in place to mitigate impacts as much as we can through tight cost control, supply chain and inventory management, efficiency gains, and technology. In addition, as discussed on our last quarter call, we began taking necessary commercial action, implementing our own price increases during the fourth quarter. These rate increases will continue to benefit us throughout 2022 And we've already executed an additional increase this year to combat inflation as the market continues to tighten. Moving to our aftermarket services segment, we saw improved performance for the second quarter in a row. Revenues in the second half of 2021 were up 18% compared to the first half. Parts activity has picked up in a meaningful way as our customers resume internal maintenance programs. We're starting to see more encouraging trends in the service business as well, with greater visibility into our planned field maintenance schedule. We expect the business to benefit from improving market conditions going forward and are focused on growing higher profit AMS business activity and ensuring we have the manpower to fulfill our customers' needs. I'd now like to outline our capital allocation framework for 2022. As we transition to the upcycle for natural gas and therefore compression, we intend to make high return investments in our fleet to grow prudently and profitably with our customers, continue our dividend commitment, all the while maintaining a healthy balance sheet and financial flexibility. First, on fleet investment, I'm excited about the opportunity to deploy capital at premium pricing under multi-year contracts at returns well in excess of our cost of capital. Our assets will be needed to meet growing production and energy needs and, as we indicated on our third quarter call, higher growth capital will be required in 2022 compared to 2021 to meet these demands. In line with this, yesterday we announced a growth capital budget of approximately 150 million dollars this is up from 2021 but significantly less than the 250 to 300 million dollars spent in both 2018 and 2019 when we experienced record natural gas production growth in the united states we are focused on growing responsibly with our strategic growth oriented customers in key bases Our commitment to strong returns and reducing our emissions footprint are driving our investment strategy. To further this strategy, we expect approximately 25% of our growth capex budget to fund expansion of our electric motor drive horsepower. Second, as we reinvest in our business, our quarterly dividend will remain a fundamental pillar of our 2022 capital allocation. reflecting our confidence in ArchRock's strong cash generation capacity. As shareholders, the Board and I recognize cash return is an important component to the overall value equation. And today, our yield is a compelling 7%. Finally, maintaining a strong balance sheet liquidity underpins our ability to execute on our plans. We've completed nearly $250 million in strategic investments of older non-core assets over the last three years. This allowed us to effectively manage our leverage through the downturn. And now, with a much improved investment environment, we've essentially pre-funded our growth investments in higher profit, large midstream compression units. Although it's not our practice to incorporate future asset sales into our guidance, we continue to look for opportunities to divest non-strategic assets. We haven't quantified potential proceeds for the year. However, we expect non-core asset sales will be an important tool for us in 2022 as we strive to be as close to free cash flow neutral as possible during this reinvestment period. Regarding leverage, I'm confident in our ability to drive higher quality EBITDA growth. It's accelerating, and over time, we intend to meet our long-term leverage objective of three and a half to four times. In summary, with our optimized, standardized, and now digitized business platform, we're at an exciting inflection point. We have visible technology and ESG catalysts on the horizon that will help us achieve new pinnacles of operational excellence, customer service, employee satisfaction, and sustainability. The stage is set for a multi-year recovery in natural gas and therefore our compression business. And we'll continue leveraging the strong foundation of our core compression business as we explore decarbonization opportunities. Let me expand on our approach to decarbonization before turning the call over to Doug. We've spent the last several years demonstrating our commitment to ESG disclosure and performance. More recently, Through work led by our internal sustainability, technology, and new ventures teams, we've increased our business focus on reducing the emissions intensity of our fleet. The work underway has already helped inform our investments in incremental electric-driven compression, a trend we expect to continue. The team is also working diligently to evaluate technologies and opportunities that will help us steward our business and our customers' businesses through energy transitions. I can assure you that we are being highly selective in progressing these solutions that play to our strengths and can help us deliver a long-term value for our customers and shareholders while we stay true to our core as the leading provider of natural gas compression in the U.S. It's still very early days, and I look forward to updating you on these potential sources of upside for our track in the future. 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 2022 guidance.