Archrock, Inc.

Good morning. Welcome to the ArchRock first quarter 2023 conference call. Your host for today's call is Megan Repine, Vice President of Investor Relations at ArchRock. I'll now turn the call over to Ms. Repine. You may begin.

Thank you, Michelle. 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 first quarter of 2023. If you have not received 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 assumptions made by and information currently available to our TROCS 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, 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 dividends, and cash available for dividends. 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 will now turn the call over to Brad to discuss ArchGross first quarter results and to provide an update of our business.

Thank you, Megan. Good morning, everyone, and thank you for joining our call today. With a strong first quarter in the books, 2023 is shaping up to be the exciting year we anticipated. The benefits of our Transform platform are already coming through in our first quarter results. and we are profitably capturing opportunities created by the continued tightening in compression market fundamentals. In the first quarter, our net income of $16 million was up from $2 million in the first quarter of 2022. We generated adjusted EBITDA of $97 million, reflecting solid underlying business performance and meaningful growth in both revenue and gross margin dollars across our business segments. We grew operating horsepower sequentially, adding nearly 70,000 in the quarter, excluding asset sales, and we increased our exit fleet utilization to another all-time high for our truck of 94%. As we met the strong customer demand, we continued to return cash to our shareholders, maintaining our 15 cent per share per quarter dividend. This was complemented by robust dividend coverage of two times. In addition, we continue the deleveraging process, ending the quarter with a debt to EBITDA ratio of 4.1 times. First quarter performance is a great example of the step change in the momentum we are experiencing in our business. We believe we're realizing the beneficial returns we targeted in our multi-year franchise transformation. And these benefits could be coming at a better time in the market when demand for compression is strong and infrastructure is in short supply. We believe this significant inflection in ARCHROC's 2023 performance is created by market supply and demand fundamentals to support a robust multi-year outlook for natural gas, for compression, and for ARCHROC. The natural gas production forecasts we track all continue to show growth in 2023 volumes which is consistent with the elevated customer demand we continue to experience. Current WTI prices support healthy economics for oil-directed drilling. Compression infrastructure is required to transport the resulting associated gas volumes, driving strong demand for large midstream horsepower in the Permian and other liquids-rich shell plays, where the majority of our operating fleet is located. As natural gas production in the U.S. continues to grow to record levels, we're seeing the impacts of underinvestment by the industry in large midstream horsepower over the past few years, specifically during and coming out of COVID. We expect the natural gas compression market to remain very tight for the foreseeable future, even in this current soft gas price environment for two reasons. First, our truck, and other outsourced compression providers, like others in the energy industry generally, are exercising a serious level of discipline demanded by the broader market and limiting the amount of growth capex being invested. And second, lead times for new equipment now extend beyond a year. Longer term, abundant natural gas supply has led to economically favorable U.S. natural gas pricing. The stability of pricing and abundance of supply have facilitated investment in long-term, capital-intensive projects such as LNG and petrochem plants that use natural gas as their feedstock. We believe the drivers behind this growth extend the attractive fundamentals for our industry well into the future. And moving to our contract operations segment. The compression market is as tight as we've seen in decades and natural gas production overall does not appear to be slowing down. In addition, our fleet transformation efforts over the past several years are paying off in a big way. As we sold small non-strategic horsepower, we've quickly replaced this with higher quality EBITDA by investing in large and standardized horsepower in the more stable infrastructure segment of the market. high grading our customer relationships, and enhancing leverage to growth plays. Today, you can see this in the all-time high levels of fleet utilization that our truck is achieving. Fleet utilization exited the first quarter at 94%, another record for our truck. We also delivered approximately 70,000 in horsepower growth, excluding non-core active asset cells of 13,000 horsepower. Our team continues to do a great job putting our remaining idle fleet back to work and deploying new built horsepower under multi-year contracts at robust returns. In addition, we're seeing historically low customer stop activity. And in the few cases where we have equipment returned from the field, most of this horsepower has been promptly rebooked at higher rates. Spot prices continue to follow utilization higher. making great progress moving rates up on our installed base and implemented a meaningful price increase late in the first quarter given high levels of horsepower utilization for our truck and the industry we expect to maintain pricing prerogative and capture additional increments during 2023 gross margin dollars for the quarter were up five percent sequentially And we expect a continuation of this trend over the course of a year or two based on a couple of factors. First, we expect make-ready expenses to trend to more normal levels with our more fully utilized fleet. And second, we expect that the price increases we're implementing this year will catch up with inflation. We believe these factors will translate into meaningful increases to gross margin percentage in the coming quarters. The aftermarket service segment had a solid quarter during what is typically a seasonally slower period. Revenues and gross margins are expanding nicely to levels not seen since 2019 as customers continue to catch up on deferred maintenance and our pricing power builds. We expect improved levels of activities continue through 2023. Shifting to our capital allocation framework, we're committed to creating and returning value to our shareholders through a disciplined capital allocation approach. We're confident in the strengthening outlook for compression and ARCHROC, as well as our ability to grow free cash flow over time. Our current expectation is this will provide flexibility for consistent and meaningful increases in returns to our shareholders, while we also maintain the strong balance sheet position that we've worked so hard to achieve. Consistent with this, we resumed dividend growth in January, announcing a 3.4% increase in dividends per share. And just last week, the Board approved a $50 million buyback authorization, giving us an additional capital allocation tool and the flexibility to opportunistically act on any broader market dislocation. We believe both actions represent meaningful steps toward our goal of delivering a leading return of capital strategy for our shareholders, one that we believe could include additional dividend increases, opportunistic share repurchases, or both. As we plan for future shareholder return increases, our immediate focus is on getting our leverage ratio to below four times. which we expect to achieve this year. And our current near-term target debt to EBITDA ratio remains 3.5 to 4 times. Our full-year CapEx guidance is unchanged, including our expectation for growth CapEx of between $180 million and $200 million. As planned, this is up from 2022. as we redeploy some of the $314 million in asset cell proceeds generated over the last three years into an undersupplied market that returns well in excess of our cost of capital. Over the past several years, we've worked hard to build a platform that will profitably support the consistent and more modest growth in demand for natural gas compression forecasted ahead. We've modernized our fleets invested in technology, and standardized practices in the field and across the organization. With this solid foundation, we expect to continue to responsibly invest in our fleet. We believe the capital demands on our business are substantially and sustainably lower compared to the 2018 and 2019 time period when we spent to both upgrade our fleet and and to place our compression in the field as part of the then huge infrastructure deployment required to support record natural gas production growth in the US. As management works with the board on determining the appropriate level of growth capex going forward, growth in free cash flow and shareholder returns are both significant priorities. In summary, with the investments we've made, to transform and differentiate our franchise. We believe ArchRock has never been in a better position than it is today. Great first quarter performance is the warm-up act for what we believe will be a lucrative and multi-year run for our compression business and our shareholders. To achieve success, we remain focused on demonstrating our improving earnings power through excellent operating execution continuing to deliver a first-rate customer experience, harnessing the benefits of our upgraded technology platform and high-graded asset base, and prioritizing opportunities to help our customers with emissions management. With that, I'd like to turn the call over to Doug for a review of our first quarter and to provide additional color on our outlook for the remainder of 2023.