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.

Thanks, Brad, and good morning. Let's look at a summary of our fourth quarter and full year results and then cover our financial outlook. Net income for the fourth quarter of 2021 was $6 million and included a non-cash $6 million long-lived asset impairment, a $3 million insurance settlement related to damages caused by Hurricane Ida, and nearly $1 million in restructuring costs. We reported adjusted EBITDA of $83 million for the fourth quarter of 2021. Our fourth quarter adjusted EBITDA performance put us firmly ahead of our annual guidance range. Underlying business performance was strong in the fourth quarter as we delivered higher contract operations, gross margin dollars, and lower SG&A. And we would have reported a sequential increase in adjusted EBITDA, but for the more than $15 million in third quarter asset sale gains. Turning to our business segments, contract operations revenue came in at $160 million in the fourth quarter, up slightly compared to the third quarter. Operating horsepower and pricing both increased sequentially. We delivered a strong gross margin percentage of 62%, This was ahead of third quarter levels and above our internal expectations as our operating team continued to pull out all the stops to manage costs in the face of continued inflationary pressures on labor, lube oil, and parts. In our aftermarket services segment, we reported fourth quarter 2021 revenue of $36 million, similar to third quarter levels and up nearly 17% on a year-over-year basis despite seasonal softness as customers began catching up with maintenance deferred during the downturn. Fourth quarter AMS gross margin of 15% was consistent with guidance and third quarter performance. Growth capital expenditures in the fourth quarter totaled $13 million and reflected an increase in customer activity. Our full year growth CapEx of $37 million was down from $79 million in 2020 and down from $300 million in 2019. Maintenance and other CapEx for the fourth quarter of 2021 was $14 million, bringing the full year total to $61 million. We exited the year with total debt of $1.5 billion, down $159 million for the year, and as Brad mentioned, down by $314 million compared to the end of 2019. This significant reduction helped mitigate the leverage ratio impact of lower adjusted EBITDA for the year. Our leverage ratio at year end was 4.3 times, just a small uptick compared to 4.2 times in the fourth quarter of 2020. We had available liquidity of $503 million as of December 31st, 2021. We recently declared a fourth quarter dividend of 14.5 cents per share, or 58 cents on an annualized basis. Our latest dividend represents a compelling yield of 7% based on yesterday's closing price, especially given the protection provided by our industry leading dividend coverage. Cash available for dividends for the fourth quarter of 2021 totaled $46 million, and for the full year totaled $200 million, leading to impressive 2021 dividend coverage of 2.2 times. As you saw in our earnings release issued yesterday, ARCHROC introduced 2022 annual guidance. All of the customary details can be found in the materials published last night, and for the purposes of this call, I will keep my comments high level. We announced a 2022 adjusted EBITDA guidance range of $320 to $360 million. As we have discussed for some time, Success with our divestiture program has and will continue to provide significant operational and financial benefits for ARCHR. Keep in mind, when comparing our 2022 EBITDA performance with 2021, however, that the expected EBITDA sold in these transactions was approximately $19 million on an annualized basis. In contract operations, we expect full-year revenue to be in the range of $660 to $690 as we continue to grow our operating fleet and benefit from higher pricing on existing and newly deployed units. We expect gross margins of between 60% and 62% for the year, as we maximize our profitability by leveraging technology and continuing our focus on controlling expenses as we face continued inflationary pressure. In our AMS business, we forecast full-year revenue of $140 to $155 million, up 11% at the midpoint. Higher revenue should translate into better cost absorption and we will continue to focus on higher margin activity. This results in our expectation of an annual increase in gross margin to a range of 16 to 18 percent. The first and fourth quarters generally experience some seasonal impacts compared to the second and third quarters. Turning to capital, on a full year basis we expect total capital expenditures to be between $213 and $235 million. Of that, we expect new build CapEx to total approximately $150 million to support higher startup costs and unit modifications as we deploy additional horsepower, repackage CapEx, as well as building new horsepower. Maintenance CapEx is forecasted to be approximately $55 to $75 million. The increase compared to 2021 reflects overhaul timing and our expectation for lower horsepower returns in 2022. We also anticipate $8 to $10 million in other CapEx, primarily for new vehicles, as well as building and shop repairs and upgrades. With that, Julianne, I think we're ready to open up the lines for questions.

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star 1 again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from TJ Schultz from RBC. Please go ahead. Your line is open.

Great. Good morning. You made the comment that utilization held in better during this downturn when compared to prior cycles, and I assume That's driven by the higher mix of larger horsepower and your investments that you've talked about. But is there anything else you saw in the downturn that allowed utilization to outperform prior cycles? And then coming out of this downturn, is there any change to your view on how quickly you may see utilization start to increase as the market improves? And where would you expect utilization to exit this year?

Good morning, TJ. Thanks for the question. You're right, by the way. I think that the position of a larger midstream position of horsepower is definitely an aid to stabilize utilization in this most recent market cycle compared to prior cycles. But I think another expression of that is reflected in the amount of upgrading we've done, not just on size and positioning in the market, but in just improving the quality of our fleet through investments and divestments over the last five plus years. And that results in just a higher quality, more stable operation. I think that's the second part of it. To the second part of your question, we're pleased to see utilization already moving up a couple of percentage points so quickly in this market today. We think that that is a good sign of things to come. I'm not sure we'll keep up the pace of two percentage points of improvement per quarter. But we do expect to see utilization continue to tick up at a pretty good pace as the market tightens.

Okay. And what was the comment on price increases? Are you able to push through price increases right now, even at utilization where it is?

We are. We are. And I appreciate that question because what I need to highlight is that, you know, not all parts of the fleet are at the same level of utilization. On our largest horsepower category, so in the close to 1800 horsepower and up especially, utilization in the market is already tight. And that's the reason we're ordering new equipment today is that the market just doesn't have any. And so in that category, we're seeing pricing is very good and we have increased our spot pricing in that category particularly. There are other categories of smaller horsepower where utilization is lower and it's harder to push a price increase through. So what we try to do is in a disciplined way and working with our customers so as to not catch them off guard with their budget process is to where we have the ability to move pricing up in our contracts, have that dialogue early and yes, we've already pushed through pricing at the end of 2021 and we're still continuing to implement those price increases especially on the installed base in 2022.

TJ, I might also mention lead times on new equipment are really starting to push out. I mean, I think in that large horsepower class, frankly, new build equipment is starting to push somewhere into the, you know, call it mid 40s to low 50s, depending on who you ask. So I think that's instructive of a market that we started to see more as sort of the upturn as opposed to coming out of a downturn and I think can help you appreciate that yes, pricing is moving back up particularly on that large horsepower class.

Okay, thanks. And then just lastly on the electric motor drive horsepower, do you see that trend accelerating even more into 2023. I guess it's what made 25% of the CapEx mix on electric the right percentage this year. Is it availability from suppliers, demand from customers? Just trying to think about how that makes the horsepower new spin may shift over the coming years.

It's more a pull through an identification of the market from our customers than it is availability or supply driven. So that's where we see the market moving. We believe that over time we'll see the increasing electrification of the oil field, including compression. And this is the start. I'm going to point out, however, that we've been operating electric motor drive horsepower in this industry and certainly as our truck for a number of years. But in the past, it has been driven by locations that have had the most stringent air quality regimes placed on it, for example, in the northern Rockies. So that's where we've seen it in the past, and what's happening now is we're seeing an expansion of demand for emissions management, as well as increasingly available power generation and distribution in the field. I think that's going to be the gating item, is that we see electrification as an opportunity to reduce emissions, but it's going to going to require that the power grid continue to expand. And that's not going to happen rapidly, but I believe it's going to happen steadily.

Perfect. Thank you. Thank you.

Our next question comes from Daniel Burke from Johnson Rice. Please go ahead. Your line is open.

Yeah. Hey, good morning, guys. Good morning. Let's see, Brad. When I look at the outlook on the contract ops side, for gross margin percentage to be caught flat to down a touch year over year. I guess the question I'd have is, are you achieving net pricing gains as we look at 22 versus 21, or is the right baseline then to think that the pricing gains you're capturing are largely offset by the input cost pressures that you, industry, and everyone will continue to contend with?

Yep. No, we think we're achieving net pricing gains, and the difference that's not allowing that to come through in the gross margin line is primarily driven by increased investment in make-ready, Daniel, because we just have to invest more right now to put more of the units back to work. And so that's helpful to drive up utilization, but it does stabilize or have extra expense in the gross margin line that's getting in the way of you seeing that net pricing gain come through. And what we're excited about on that is that even with that, if you look at our overall revenue per horsepower over the last four, even six quarters, it's been very stable and now it's slightly improving. We expect to see that continue to improve even though we're investing a bit more in make ready to put horsepower and grow both our operating horsepower and improve utilization.

Okay. That's a helpful point. Can you, well, let's see, let me ask one on maintenance. I know Doug mentioned a couple reasons, maybe call it maintenance capex per deployed horsepower be a little bit higher. Help me better understand the lower horsepower returns element of that trend in 22 and whether that also maybe dissipates a bit taking a longer view.

Yeah.

So just to be clear, you're asking about our higher maintenance, the guidance on that end as it relates to... I'm asking you about the year-over-year step-up in maintenance capex, and you mentioned lower horsepower returns as one of the contributors to that. I just wanted to better understand that factor.

Let me try to answer part of it, and then... Make sure we're on point too, Daniel. If we're not answering the question you asked, please tell us. The main step up in the maintenance CapEx that we're seeing for the year, it's really driven by the timing of fleet overhaul demand and fleet maintenance demand. When we add units to the fleet, it takes roughly three years before they have their midlife cycle, roughly six to seven years before we have a major maintenance event. And when we see an uptick in our major maintenance activity, it's primarily driven by the operational needs of the units. That's what we're seeing for the step up in our maintenance capex this year. And it's just totally driven by the fleet, by timing, and by maintenance.

And the lower, yeah, the less horsepower returns, meaning As utilization goes back up, you've got more maintenance that has to be accomplished versus units that come back that don't require that maintenance. Daniel, apologies. I had to go back and look at my note as to what I said in the guidance and now appreciate what you were asking. But it's really a utilization question more than anything. More active horsepower is more maintenance.

Okay. That's fair. And thanks for circling back to that element of it, Doug. All that makes sense. Let me ask one final one, maybe a more straightforward question. When I look at the EBITDA guidance for this year, just to be clear, does the high end of the guide incorporate any assumption or any amount of asset sale gains?

It does not.

Okay, great. Thank you for the clarification. All right, guys, I'll leave it there. Thank you. Thanks, Daniel.

Our next question comes from Kyle May from Capital One Securities. Please go ahead. Your line is open.

Hi, good morning, everyone. Following up on the... Hey, Brad, good morning. I want to follow up on the electric motor drive horsepower that you talked about. Maybe two questions here. First, can you talk about the cost difference between electric drive versus your other equipment? And then second, are there any notable differences on the operational side between different types?

So on the First part of the question, the cost for acquisition is really comparable for electric motor drives compared to internal combustion driven natural gas fired compression. On the operating expense, candidly, the OPEX for the maintenance of electric motor drive is incrementally less expensive than natural gas fired. Point that that doesn't take into account, however, is someone has to actually pay for the price of power, and that's the customer who pays for the prices of the electricity. So that's the way it stacks out. And then finally, from an operational perspective, no, there are not significant operating differences, though the reason the electric motor drives are incrementally less expensive to operate is canceled, but they're also less demanding for operational maintenance than an internal combustion engine.

Got it.

Okay, that's helpful. And then maybe one shifting gears to maybe broader optionality for the business. We're hearing more about carbon capture projects more recently, and I was wondering if you could share any thoughts about how our truck and the compression business could potentially factor in.

Yeah, so the market's struggling quite a bit to understand the full scope of carbon capture opportunities. I'll end my comment with that, but as I look at the broader, stepping even back further, and the goal we have around emissions management, you're not going to be surprised to hear that our first focus is to control what we can control initially and then continue to expand our perspective and potentially our activity to help our customers with the full scope of emissions management and emissions and carbon capture. So starting with the stuff that we can do first, the switch to electric motor drives is not going to be inconsequential to the marketplace. We see a lot of the incremental growth really should be and will take electric motor drive horsepower across all horsepower classes, and that's going to be a good thing, good thing for the business overall. We also see that our migration to large horsepower equipment is also a step in the right direction, both in limiting the amount of emissions and pollutants coming out of the compression part of the oil and gas business. So those first two steps have already taken place. And then also with the technology we've put in place, we're really focused on improving overall performance for our customers, run time, and that should reduce the number of trips we make into the field to really attack our miles driven and the amount of emissions we're generating from that activity. Those are the closest to home opportunities that we're focused on now. and we expect to make some good progress on. As we make progress on those, other opportunities, including monitoring and leak detection and repair, as well as thinking about capture opportunities for CO2 and carbon capture, are in the sights of things the industry is working on and focused on. The challenge is small-scale carbon capture at the level we look at for a production location and a compression location is still way too expensive and without more action from the government in the form of carbon offsets or direct pay subsidies, we just don't see that we're going to reach that level of carbon capture in the near term. The carbon capture opportunities that are likely to hit the market first are going to be all at really massive scale. And then it'll move as the carbon economy develops, we see it could move into smaller scale carbon capture opportunities. And when and as that happens, we expect to be a participant.

Understood.

And appreciate all the additional color there. Maybe one last question. And as we think about the budget for this year, can you just help remind us, does our truck see the full benefit of that new equipment this year, or is there going to be some carryover into 2023? Yeah, great question, Kyle.

We won't see all of the benefit. The spending is forecasted to be largely rateable for the year. And so, as you think about it, the stuff we spent in the first quarter, we'll get benefit for three quarters and then on down. I'd say, for the most part, that quarter of that capital budget that we spend in Q4, we really won't start to see the benefit for until Q1 of next year. You know, again, as you think about that guidance and then maybe ask, well, what about the same capital that was spent in Q4 of 2021? That was off of a base that was, you know, less than $40 million. So we'll be dramatically different.

But all that should be reflected in our current guidance.

Got it. Appreciate the time this morning. Thank you. Thank you.

Our next question comes from Selman Akyol from Stifel. Please go ahead. Your line is open.

Thank you. Good morning. Just wanted to follow up a little bit on the CapEx comments or at least start there. So you noted sort of 40 to 50 weeks extended lead time. And I think in your opening comments, you also discussed some pretty positive conversations with the producers. So if I start thinking about 2023 and lead times extending. Should we be expecting your CapEx budget to increase over the year as you guys start spending money in order to secure slots for 2023 for assets?

No. What we've put in our CapEx budget for the year, we think is what is in the year for the guidance that we've offered. It would take an unforeseen increase injection of a cool opportunity for us to think about spending more in the year, and we're just not seeing that. Also, with lead times out as far as they are, we think that it's going to be hard to spend more in 2022, candidly, because lead times are already pushing into 2023. So, no, we're very comfortable with CapEx budget that we've laid out. We don't expect to see an increase. Never say never. But if there is an increase, it's going to be one we're going to be talking about why it increased with an identifiable opportunity category or opportunity attached to it. Understood.

And, Selman, I just, yeah, Selman, I'd maybe just top it up with saying that, you know, we have, you know, again, we have no plans. You know, full stop on that, as Brad said. Our guidance is our guidance. That said, you know, if we can continue to convert, you know, 20-plus-year-old equipment and sub-400 horsepower into the more highly demanded either electric motor drive or larger equipment, it's going to need to happen pretty soon because, as Brad said, you know, you're looking at 50 weeks. And as, you know, you also sort of had part of your question being 2023 CapEx. We're obviously not yet ready to guide on what our 2023 CapEx number is going to be. But Brad also mentioned in the prepared remarks section that, look, we are very focused on continuing to try to target leverage long term between three and a half and four times. On generating as close to free cash flow positivity or break even, albeit in a growth cycle like the one we're in right now, have that being break even is very much a goal. The focus has not changed here, and I think that it won't change as we try to triangulate on all three of those things.

Got it. And I appreciate that. I was really just trying to understand the dynamics between ordering long lead time equipment and when you guys have to commit capital in order for that. So very helpful in all of that. In terms of the asset sales, I presume that will be assets that are generating EBITDA And that's been captured in guidance as well, you're thinking?

Yeah, so again, asset sales are not included in guidance because they're very difficult to forecast. That said, yes, you know, in 2021 and in 2020, we sold some assets that were producing EBITDA and we sold some assets that were in our idle fleet. So that will continue to be the case as we look to migrate all parts of our business and move towards more midstream focus, larger horsepower.

Understood. And then just the last one for me. Can you guys, you took a restructuring charge for a million dollars and not large, but can you just maybe explain a little bit of what was being written down?

You know what, I'll tell you the categories historically when it was larger in 2022 were largely around reductions in force. We had some building disposals. That's the type of thing that it would be. Nothing else stands out to me of that million dollars.

All right. Thank you. Thank you.

No more questions. Now I'd like to turn the call back over to Mr. Childers for final remarks.

Great. Thank you, everyone, for participating in our Q4 review call. We're entering a multi-year upturn in natural gas. And I'm excited about the value our franchise can deliver today and well into the future. I look forward to updating you on our progress next quarter. Thanks, everyone.

This concludes today's conference call. You may now disconnect.