Archrock, Inc.

Good morning. Welcome to the ARCROC first quarter 2022 conference call. Your host for today's call is Megan Repine, Vice President of Investor Relations for ARCROC. I will now turn the call over to Ms. Repine. You may begin.

Thank you, Rob. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of ARCROC, and Doug Aaron, Chief Financial Officer of ARCROC. Yesterday, we released our financial and operating results for the first quarter of 2022. 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 TROC 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 this call. In addition to our discussion today, we'll 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 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 appreciate everyone joining the call today. It's certainly been an eventful start to 2022 for the energy industry, with all eyes now on North American oil and gas supply. For our truck, fundamentals in our natural gas compression business strengthened during the first quarter. At the same time, we continue to prioritize and advance our long-term strategies, high grading our fleet, harnessing technology across the organization, and increasing our focus on sustainability. First quarter highlights include the contract operations revenue increased $4 million or 3% from the fourth quarter as we grew our operating horsepower and benefited from the initial price increases we implemented late last year. Strong customer engagement drove bookings 40% higher on a sequential basis. This is providing us great visibility into new starts, through the remainder of 2022 and well into 2023. Our team did an excellent job maximizing our profitability in an inflationary environment, delivering a 61% contract operations gross margin. This is consistent with our annual guidance range and meaningfully above historical levels in this phase of the cycle. Last, AMS revenue increased 14% on an annual basis and their customers began catching up on major maintenance. We've also enhanced our free cash flow outlook for the year. When we laid out our 2022 capital program on last quarter's call, we indicated non-core asset sales would be an important financial tool for us during this reinvestment period. I'm pleased to share that in May, we closed the sale of an additional non-core compression horsepower package of assets for proceeds totaling $56 million. And we now expect to generate positive free cash flow after dividends in 2022. This transaction, like others we've completed over the past few years, creates significant value for our truck. We're selling horsepower at attractive multiples and redeploying the proceeds to help advance our strategic priorities and to fund our investment in new standardized large horsepower. This new horsepower will be deployed in the more stable midstream segment of the market for decades to come. These strategic divestitures have improved our returns and position us well to continue to reduce greenhouse gas emissions from our fleet. Moving on to the market backdrop, the macro environment during the first quarter further reinforced our outlook for the year. Recent midstream underinvestment and limited spare capacity drove commodity prices higher during the quarter and resulted in strong booking activity as our customers implement their 2022 growth plans. U.S. natural gas production forecasts continued to tick higher, with the EIA now forecasting an annual increase of 4% in both 2022 and 2023. We're even more excited about the larger-term outlook, Geopolitical tensions have quickly driven the realization that a more diverse energy mix is needed to satisfy global energy demand and preserve energy security. In particular, we're encouraged by the growing potential for another wave of LNG projects that would result in a meaningful call on U.S. natural gas production and therefore our natural gas compression services. These secular forces lay the foundations for a more robust and sustained upturn than previously anticipated. With the increasingly critical role natural gas will play to decarbonize energy, we now have the opportunity as an industry to further strengthen the case for natural gas by reducing emissions across the value chain. We intend to do our part and help our customers with low emissions solutions. Powering a cleaner America is the right thing to do. for our customers, our environment, our shareholders as we seek to maximize the value of our natural gas platform. Turning to our contract operation segment, our customers are proceeding with their growth plans for the year as they also return cash to shareholders. Compared to the fourth quarter, we grew our operating horsepower by 28,000. As our customers take advantage of higher commodity prices, horsepower stops are at historically low levels, and we expect start activity to accelerate as the year progresses. The recovery and our exceptional customer service drove a 40% sequential increase in horsepower bookings during the quarter, and we're effectively sold out of several horsepower categories. This is a great indicator of what lies ahead for our truck. with strong visibility into compression demand now reaching well into 2023. In the context of a high inflation environment, I'm proud of our gross margin performance. We expect inflationary pressures will persist at least through the remainder of the year. As a result, we implemented another pricing increase in April and are prepared to take additional commercial action as necessary to protect our margins. In addition to rate increases, we continue with tight cost control and are in the early stages of leveraging an upgraded technology platform in our field operations, recently installing expanded telematics across our fleet and launching a new suite of mobile tools for our field service technicians. We're just four months in and have more work to do to operationalize and integrate these enhancements into our business. Over time, I'm confident we will 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. Moving to our after-market services segment, we saw improved performance for the third quarter in a row. Revenues were up 14% compared to the prior year period. Parts activity has been the primary driver of top line growth since the recovery began as our customers resume internal maintenance programs. And more recently, we've seen encouraging trends on the services side of the business as well. We expect the business to benefit from improving market conditions going forward and are focused on growing higher profit AMS business activity. In support of this, we implemented rate increases for our AMS business as well. In summary, our multi-year efforts to high-grade all aspects of our operating platform are reflected in our first quarter performance, and I'm confident that these investments in our customer base, our fleet, our technology, and our talent will continue to pay dividends and differentiate us as the current upcycle continues to unfold. Our capital allocation remains clear. We intend to make strategic investments high return investments in our fleet to grow prudently and profitably with our customers and continue our dividend commitment all while maintaining a healthy balance sheet and financial flexibility. In addition to returns, our commitment to helping the oil and gas industry decarbonize is a critical element of our investment strategy. Through work led by our internal sustainability, technology, and new ventures teams, we've already advanced our fleet hydrating strategy and accelerated investment in electric compression. And most recently, we agreed to acquire a 25% minority stake in Ecotech, a company with impressive and tested technology that identifies and quantifies methane gas emissions. In addition to the strategic investment, we will also begin working with our customers to bring Ecotech's suite of solutions to support their sustainability goals as many of them are committing to thoughtful ESG strategies to measure and reduce their methane emissions. Ecotech provides a highly differentiated offering. It is proven technology that is already applied in the landfill, biogas, utility, carbon credit, and air quality industries. It continuously monitors methane emissions. which is a competitive advantage given our expectation for the market to transition to a standard that requires measured and quantified emissions. And it includes an integrated software compliance engine that provides auditable data. In addition to advancing our ESG strategy and helping our customers, this is a financially compelling opportunity that can create meaningful shareholder value for our truck as we work to connect Ecotech's proven technology with our leading U.S. natural gas compression infrastructure and customer network. As for next steps, we intend to demonstrate this proven suite of methane monitoring and mitigation products in oil and gas applications this year with a handful of customers, and we look forward to updating you on our progress later in the year. Last, I'll mention this is the first of what I hope to be an expanding set of products and services we can bring to our customers to help them produce, compress, and transport natural gas in an environmentally responsible way. With that, I'd like to turn the call over to Doug for a review of our first quarter performance and to provide color on our 2022 guidance.