Archrock, Inc.

Good morning and welcome to the ArchRock third quarter 2022 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, Regina. 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 third quarter 2022. 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 our current beliefs and expectations, as well as assumptions made by and information currently available to RTRAC's 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 FCC 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 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 and our Form 8K furnished to the SEC. I'll now turn the call over to Brad to discuss our truck's third quarter results and to provide an update of our business.

Thank you, Megan, and good morning, everyone. Results for the third quarter reinforce my excitement about what lies ahead for our truck. Demand for natural gas remains resilient, and the market conditions for large, midstream compression are excellent, as evidenced by several leading indicators across our business. Third quarter highlights include that we generated adjusted EBITDA of $92 million, reflecting solid underlying business performance and sequential growth in total gross margin dollars. In addition, quarterly results benefited from a net gain on the sale of assets as we continued to advance our fleet high grading strategy. The market for contract compression continues to be strong, backed by a sharp customer demand high utilization of existing compression equipment, and long lead times for new build units. For the second quarter in a row, we grew our operating horsepower by 100,000 horsepower, excluding asset sales. We increased our exit utilization by 200 basis points to a record 89%, achieved 90% utilization as of the end of October, and expect that utilization will continue to increase through the end of the year and into 2023. Spot rates for our compression services are tracking utilization higher as we made additional progress on repricing our installed base of horsepower during the quarter. Year-to-date bookings have doubled compared to this time last year, and our backlog remains robust. This is providing us great visibility into horsepower growth, utilization, and as a result, pricing power for the remainder of the year and into the next. During the quarter, we also sold small non-core units totaling 124,000 horsepower. Included in this number is a sizable asset cell transaction divesting approximately 100,000 horsepower. including all of our remaining active small horsepower units in south texas east texas the barnett and louisiana fleet high grading efforts have been central to our strategy for several years through these efforts our goal has been to improve utilization and profitability through market cycles by focusing on standardization the large horsepower segment of the midstream market high grading customers and enhancing leverage to growth plays. Since the end of 2019, we've closed major transactions and other assets, other asset cells, a small horsepower totaling 3,500 units and over 700,000 horsepower with an average size of 200 horsepower per unit. Today, You can see the benefits of our fleet transformation in our fleet quality and standardization in terms of size, age, and the configuration of our equipment, reduced volatility in our utilization, and improved profitability. Looking ahead, our focus shifts to adding more large horsepower that will continue to improve our earnings quality and emissions efficiency. This includes pursuing more electrification of our fleet, both by converting some of our existing units to electric motor drive, as well as building new electric units. Since the end of 2019, cell proceeds of nearly $250 million have been used to reduce debt and manage our leverage during and as a result of a market downturn, and are now also available to pre-fund investment into new, standardized, and large horsepower for growth, enhanced earnings, and corporate returns. Energy fundamentals and macro drivers confirm what we're experiencing with our customers and are powerful indicators of the multi-year opportunity that lies ahead for our compression business, one that we expect will provide a solid foundation for strong performance in the near term and improve stability and performance and utilization and profitability through future cycles. Supply-demand balances for oil and gas are tight as demand for hydrocarbons continues to prove resilient, and at the same time, as supply risks and constraints persist. As a result, the range of commodity prices has shifted higher, and these elevated levels are supportive of strong well economics and investment returns for our customers' development programs. Increases to capital budgets continue to be measured balanced by now well-established cash flow objectives and, in the near term, supply chain and logistics challenges. Taken together, we expect prudent and steady investment by our upstream and midstream customers, yielding low to mid single-digit production growth rates. This is consistent with the EIA's latest projection for production growth in 2022 and 2023 of 2% to 3% for natural gas, and 4% to 5% for oil. A diverse energy mix is needed to satisfy global energy demand and preserve energy security for decades to come. In particular, we remain 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. Turning to our contract operations, demand for our large midstream compression is robust. Momentum continues to build across leading indicators for our business, including horsepower growth, utilization, and bookings. The 100,000 horsepower of organic horsepower growth that we delivered for the second quarter in a row reflects outstanding efforts by our team to put our idle fleet back to work. We started 155,000 horsepower in the quarter, a near record, and approximately 75% of this demand was met by our idle fleet. Similarly, stop activity continues to run at historically low levels as customers take advantage of higher commodity prices and as the market supply of available horsepower remains extremely limited. Moving to horsepower utilization, we exited the quarter at 89% up from 87% in the second quarter, and our fleet was 90% utilized as of the end of October. In addition, our robust backlog provides outstanding visibility into future start activity and to off-the-chart utilization levels for our fleet as we enter 2023. Utilization increases are driving spot prices sharply higher with our spot pricing for new deployments currently up a minimum of 20% year over year across the majority of asset classes. We also implemented additional price increases on our installed base during the quarter and expect to maintain pricing leverage throughout 2023. Similar to last quarter and as expected, The acceleration of customer demand is requiring significant make ready and labor expense. This short term dynamic of incurring higher costs to reactivate the idle fleet should abate in 2023 with a highly utilized fleet, just as we've experienced with our late cycle business in prior cycles. In addition, and as detailed on last quarter's call, our third quarter results reflect the impact of higher prices across major cost categories, labor, parts, and lube oil. We remain confident in our ability to fully reclaim these impacts over the course of 2023 and are focused on navigating this reactivation phase of the upcycle with disciplined cost management and by continuing to use price increases to gain ground against the inflation-driven cost increases we've experienced. Moving to our aftermarket services segment, year-to-date activity and performance has improved meaningfully compared to 2021. Both parts and service revenue are running at levels not experienced since 2019 due to customers catching up on deferred maintenance work. Better pricing helped us achieve good gross margin performance consistent with our annual guidance range. We're focused on continuing to optimize the performance and profitability of the segment as our revenue improves. On New Ventures, I'm very excited about the progress we're making to develop a suite of solutions to help our customers decarbonize. Over the last two years, our internal team has been tasked with exploring opportunities with the following guiding principles. Evaluate existing and emerging emissions reductions technologies for our existing business and installed asset base. identify ways to monetize our differentiated technological capabilities, and analyze complementary new venture services aligned with our skill sets and competencies. Through their work, the team has identified methane emissions management as a segment of the clean tech market that is tightly proximate and value enhancing to our existing customer offerings. In addition, we expect mitigating methane from leaks and ordinary operations will be critical in solidifying the important role natural gas will continue to play in delivering clean energy into the future. ArchRock is committed to being part of that solution and this week we announced a second cutting-edge solution that we're excited to begin commercializing. The timing is ideal as the recent passage of the Inflation Reduction Act has further incentivized emissions management for many of our customers while we are coming to market with these solutions for methane emissions. Building on the Ecotech investment that we first announced in April, we've developed a patent-pending methane capture technology that reduces fugitive emissions from certain parts of the compressor package, including unit blowdowns and compressor packings. The device is a skid-mounted solution for natural gas-powered and electric motor-driven compressor packages. for both existing compression facilities as well as greenfield locations. This technology is complimentary and value enhancing to our core contract compression services as many of our customers seek responsibly sourced gas certifications. We believe it is cost competitive with our customer's internal cost of carbon and will allow us to maintain our commitment to maximize uptime. Over the last several months, we successfully piloted the technology in the field at a United Production Partners gathering facility operated by Intervest in the Barnett Shell. The field pilot comes following extensive testing of the technology in a lab setting. We've already engaged with multiple customers across all basins on the technology, have received positive reception, and look forward to commencing full marketing efforts during the fourth quarter. This is an important milestone for our company, reflecting our commitment to power a cleaner America. And I'm extremely proud of our new ventures team for their dedication to designing, developing, and successfully testing a technology which has the potential to be a game changer for methane capture in the industry. In addition, as you know, we acquired a 25% stake in Ecotech earlier this year. a company with impressive and tested technology for continuous methane emissions monitoring and management. During the quarter, we assisted Ecotech in successfully demonstrating their proven suite of solutions in oil and gas applications at a couple of customer locations. This further validated the value of Ecotech's comprehensive approach to methane mitigation through the notification, identification, and quantification of emissions. I look forward to sharing updates on these new ventures as we work to drive our next leg of improvement, further differentiation in our industry, and ensure our sustainable future. Now turning to capital allocation, we're making high return investments in our fleet to grow prudently and profitably with our customers, continuing our dividend commitment while maintaining a healthy balance sheet and financial flexibility. First on CapEx, we continue to hold the line on 2022 growth CapEx at $150 million. 2023 demand is shaping up to be robust across our customer base, and we're beginning the annual work with our board of directors to solidify a capital budget for next year. We have the opportunity to re-employ asset-sell proceeds into an undersupplied market at attractive long-term returns And based on our customer engagements today, we expect the level of 2023 CapEx required to meet demands with core strategic accounts will be higher than in 2022. In fact, customers have already begun planning for compression needs to support 2024 programs, given the limited supply of and long lead times for equipment. This is an ideal time as it comes just as we're also beginning to reap the benefits of a multi-year strategic transformation to standardize and digitize our platform. We intend to balance this investment in profitable growth with our other capital allocation objectives of leverage reduction, shareholder returns, and new ventures development. Maintaining a strong balance sheet and liquidity underpins our ability to execute on our plans. Over the last three years, strategic investments of older, non-core assets have allowed us to effectively manage our leverage through the downturn. And now, with a much improved investment environment, we have essentially pre-funded a portion of our growth investments in higher profit, large midstream compression units. We remain committed to returning capital to our investors. This quarter will mark the company's 36th consecutive dividend payment. Today, our yield is a compelling 8% and is well covered at 1.8 times. The profitable growth we see ahead gives us line of sight to leverage of below four times, which will provide us enhanced financial flexibility and the opportunity to increase shareholder returns in 2023. We believe record utilization and robust backlog levels set us up to perform exceptionally well in 2023. We expect to generate higher financial returns as we continue to reprice our installed base of horsepower and as we at the same time work aggressively to drive cost optimization in our operations. Market fundamentals for the compression industry are as exciting as I have ever seen, and we intend to continue leveraging our best-in-class customer service and operational execution, capturing the benefits of digitalization, and advancing our emissions management and reduction strategy. With that, I'd like to turn the call over to Doug for a review of our third quarter performance and to provide color on our updated 2022 guidelines.