Archrock, Inc.

Good morning and welcome to the ArchRock fourth 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, Art Rock released its financial and operating results for the fourth quarter and full year 2022, as well as annual guidance for 2023. If you have not had a chance to receive a copy, you can find the information on the company's website at www.artrock.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 tracks 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. These 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, 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 dividends. 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. Thank you. I'll now turn the call over to Brad to discuss our truck 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 22 results and our extremely promising outlook for 2023 and beyond. We closed out 2022 with solid operating momentum and financial performance. I'm proud of what our team achieved from a financial, operational, and most significantly, strategic perspective. Among the accomplishments for the year, we grew our revenue by 8% and delivered meaningful net income growth compared to 2021. Our teams worked tirelessly to meet our customers' sharp increase in demand. We grew our contract compression operating fleet by approximately 375,000 horsepower, excluding non-strategic active asset cells. And we increased our exit fleet utilization by 900 basis points to an all-time high for our truck of 93%. In this exceptionally busy environment, we maintained excellent safety performance. In 2022, we exceeded our annual safety targets and achieved zero lost time incidents. We advanced our fleet high grading efforts, selling non-strategic assets, totaling 341,000 horsepower during 22, including 176,000 active horsepower. Large horsepower, the more stable segment of the compression market, now represents 84% of our total fleet compared to 74% at the end of 2019. I want to take a moment to thank our employees for their hard work, leadership, and dedicated customer service, which helped to deliver a great result in 2022 and to set us up for what we believe will be an even better 2023. Looking at the year ahead, we're at an exciting inflection point for our truck. Our outlook reflects the intersection of robust compression market fundamentals with our trucks radically transformed and differentiated platform. Fundamentals for the industry are as exciting as I've ever seen and demand for our large midstream horsepower exceeds available equipment. We expect 2023 performance to benefit from a full year of record high utilization and pricing. In the near term, WTI prices continue to support healthy economics for oil-directed drilling. The resulting associated gas volumes need to be transported and therefore compressed, driving strong demand for our midstream horsepower even in the lower gas price environment. While this dynamic has been most notable in the Permian Basin, we've been pleased with customer activity and growth across several liquids-rich shell plates. Some analysts forecast do predict a supply response in dry gas plays during 2023 to balance the market. However, we've yet to see and experience and do not expect a material impact to our business given the current tight and undersupplied compression market and the LNG demand growth expected in 2024 and beyond. In the long term, we believe the growing demand for energy generally natural gas in particular. Constraints in the supply of compression equipment, as well as disciplined capital spending by the oil and gas sector, support the strong and growing demand for the compression services of our truck. Furthermore, we believe two factors that have impacted profitability in the most recent two years are improving in 2023. First, inflation appears to be slowing, which will better enable us to stabilize and continue to work to improve our operating costs. Second, we expect the level of spending required to make ready existing units for redeployment will reduce, given the current high utilization of our fleet. Against the supportive economic backdrop, we will also continue to reap the benefits of the fleet high grading efforts and technology investments that have been central to our strategy for the last few years, including during a severe market downturn. Through these efforts, our goal has been to improve utilization and profitability through market cycles. We've repositioned our fleet, focusing on unit standardization, the large horsepower segment of the midstream market, high-grading customer relationships, and enhancing leverage to growth plates. And on the technology front, we've integrated fleet telematics and equipped our field service technicians with mobile-enabled communication and service tools. We expect this to drive increased asset uptime, improve the efficiency of our field service technicians, improve the supply chain and inventory management in our truck, reduce the miles driven by our field service technicians, and lower our emissions and carbon footprint. Although the heavy lifting is never truly done, 2023 should offer a more normalized environment where we can begin to demonstrate our improved earnings power, and focus on excellent operating execution. This means efficiently and profitably capturing robust demand for compression, continuing to deliver a first-rate customer experience, harnessing our upgraded technology platform and high-graded asset base, and prioritizing opportunities to help our customers with emissions management. Moving to our segments, we built significant momentum in our contract operations business throughout 2022. Utilization, committed backlog, total and idle fleet bookings all reached record highs during the year. Exit fleet utilization increased to an all-time high of 93%, and our operating horsepower grew by approximately 375,000 horsepower, excluding the 176 active horsepower we chose to sell as part of our fleet high-grading strategy. And our sales team did a fantastic job of getting our idle equipment back to work quickly to more than replace these strategic, non-strategic active horsepower cells with higher quality EBITDA. During 2022, we took swift action to proactively align pricing with the market and combat inflation. Pricing across several key asset categories set record highs for spot prices. And we also continue to move pricing higher on our installed base as contracts were renewed throughout the year. We will benefit from a full year's impact of these rate increases and also expect to maintain the pricing prerogative and capture additional meaningful increments during 2023. I'm proud to say that we delivered gross margin dollars for the year of $399 million, essentially flat year over year, despite the reduction in gross margin dollars from non-strategic asset sales, as well as record inflation and elevated reactivation costs to put our idle fleet back to work, which are customary in the early stages of an upcycle. And as Doug will cover later in his review of guidance, we expect to resume margin expansion for our contract operations segment during 2023. Moving to our after-market services segment, fourth quarter and full year 2022 activity and performance improved meaningfully compared to 2021. Both parts and service revenue are running at levels not experienced since 2019 as customers catch up on deferred maintenance work. We expect healthy levels of activity to continue into 2023. Shifting to our capital allocation framework for 2023, we remain committed to maximizing returns for ArchRocks shareholders with a balanced approach. First, capital returns to shareholders are front and center. As recently announced, our conviction in a multi-year up cycle for compression and ArchRocks strategy drove the decision to resume dividend growth, beginning with the February 2023 payment. The recently announced 3% increase in dividends per share is a meaningful step in our goal to deliver a leading return of capital strategy for shareholders and is supported by our expectation for dividend coverage of approximately two times for 2023. Future increases to shareholder return will be evaluated and determined by management and the board based on our investment opportunities, balance sheet, and cash flows, as well as dividend coverage. We're confident in the future cash generation profile of our business and anticipate significant and growing returns of capital to our shareholders over time. Second, we have the opportunity in 2023 to redeploy asset sell proceeds into an undersupplied market at returns well in excess of our cost of capital. Furthermore, customers have already begun planning for compression needs to support 2024 programs given the limited supply and long lead times for equipment. Our assets will be needed to meet growing production and energy needs, and as we indicated on a third quarter call, incrementally higher growth capital will be deployed in 2023 compared to 2022 to meet these demands. As such, yesterday we announced a growth capital budget of between $180 and $200 million. We're focused on growing responsibly with our strategic, growth-oriented customers in key basins. Our commitment to strong returns and helping our customers reduce their emissions footprint are driving our investment strategy. As such, we expect approximately $30 million of our growth CapEx budget to fund expansion of our electric motor drive horsepower. Finally, maintaining a strong balance sheet and liquidity underpins our ability to execute on our plans. We've completed $285 million in strategic investments of older non-strategic 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. In addition, proactive debt reduction and a visible expected increase in future earnings give us line of sight to achieving a leverage ratio of below four times this year, with our current near-term target debt to EBITDA ratio of 3.5 to four times. In summary, the positive momentum built in 2022 is carrying over into 2023. We have an exciting year ahead of us, and as we profitably capture market opportunities and execute our strategy, We are set up for a banner year, which will serve as a foundation for what I believe to be a lucrative and multi-year run for our compression business and our shareholders. With that, I'd like to turn the call over to Doug for a review of our fourth quarter and full-year performance and to provide additional color on our 2023 guidance.