USA Compression Partners LP

Good day, everyone, and thank you for standing by. Welcome to the USA Compression Partners LP's first quarter 2020 earnings conference call. During today's call, all parties will be in a listen-only mode, and following the call, the conference will be open for questions. At that time, if you have a question, please press the star followed by the one. And if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. This conference is being recorded today, May 5th, I would now like to turn the call over to Chris Porter, Vice President, General Counsel and Secretary.

Good morning everyone and thank you for joining us. This morning we released our financial results for the quarter ended March 31, 2020. You can find our earnings release as well as recording of this call in the investor relations section of our website at usacompression.com. The recording will be available through May 15, 2020. During this call, our manager will discuss certain non-GAP measures. You will find definitions and reconciliations of these non-GAP measures, the most comparable GAP measures, in the earnings release. As a reminder, our conference call will include forward-looking statements. These statements include projections and expectations of our performance and represent our current beliefs. Actual results may differ materially. Please review the statements of risk included in this morning's release and in our SEC finals. Please note that information provided in this call speaks only to managing teams as of today, May 5th, and may no longer be accurate at the time of our replay. I'll now turn the call over to Eric Long, President and CEO of USA Compression.

Thank you, Chris. Good morning, everyone, and thanks for joining our call today. Also with me is Matt Liucci, our CFO, and Bill Manius, our COO. This morning we released our financial and operational results for the first quarter of 2020, achieving a solid quarter of operational and financial results. I plan to briefly highlight the quarterly results and then spend more time discussing our business model, what we are seeing out in the field, how we are managing the business in this uncertainty, and ultimately how we expect the rest of the year to play out. The first quarter went very much as we had expected. Revenues were $179 million, up approximately 5% over the first quarter of 2019. And likewise, adjusted EBITDA of $106 million was up about 5% over the year-ago period. We achieved a gross operating margin of 66.9% and an adjusted EBITDA margin of 59.3%. Both metrics consistent with year-ago periods. Average utilization throughout the quarter was 92.5%, down slightly from the year-ago period, and reflecting a modest amount of returns, in particular as we move towards the end of the quarter. We ended the quarter with approximately 3.3 million active horsepower, consistent with the year-ago period, and about 3.7 million total horsepower in the fleet. Average pricing across the fleet increased modestly during the first quarter, reflecting some new unit deliveries as well as the impact of selective service rate increases previously negotiated. We saw average monthly revenue increase to $16.89 per horsepower, up from $16.82 in the fourth quarter. This reflects our previously discussed expectation that pricing gains would moderate as we move into and through 2020. Our capital spending during the quarter consisted of $46.5 million of expansion CapEx, which included the delivery of 27,500 new horsepower, primarily consisting of large horsepower units. You will note that in our earnings release, I mentioned reducing our expected growth CapEx spend for 2020 by about 25%. That will take place over the back half of the year. Q1 and some amount of Q2 growth capex spending had already been locked in by the time we had the events of early March and everything that has followed. We anticipate cutting any discretionary spending that we have not already committed to. We will, however, continue our normal maintenance activities in order to keep our assets running in a safe and efficient manner. At this point in time, we expect expansion capital spending to total between 80 and 90 million compared to previous guidance of 110 to 120 million. While our total new unit delivery estimate for the year is 62,500 horsepower, we will be pushing the timing of some deliveries back towards the second half of the year. The capital savings we anticipate are due to cutting out planned reconfigurations and make ready work. As I mentioned at the outset, the first quarter went largely according to plan. Based on the results, the board decided to keep the distribution consistent at 52.5 cents per unit, which resulted in a distributable cash flow coverage ratio of 1.08 times. Our bank covenant leverage ratio was 4.56x for the quarter. Just as a reminder, the quarterly distribution is a decision that our board of directors makes on a quarterly basis. As has always been the case since our IPO, the Board can opt to maintain, reduce, or suspend the distribution as it seems most appropriate on a quarterly basis. We are proud of the efforts of the dedicated men and women of USA Compression. They delivered a solid first quarter, and even as the pandemic began to play out in March, continued to work safely every day for the benefit of our customers and the success of the partnership. As everyone listening to this call is aware, our equipment allows natural gas to move into and through natural gas pipelines. While the coronavirus and the oil market disarray has occupied a lot of headlines, our equipment is still critical to moving existing and future gas production, and our employees are still required to keep it in good running shape. So again, a big thank you to all of our hardworking employees. So a little bit on the macro market on natural gas and crude oil. Matt and I have taken many calls over the last few months, and one recurring theme has been the very different market dynamics currently affecting crude oil and natural gas markets. Sometimes it gets lost in the fog that lumps the entire energy sector together, and folks forget that USA Compression remains a business primarily driven by domestic natural gas demand. That has not changed, even in the face of $10 crude oil. We continue to take a long-term view for the overall need for and production of natural gas. Certainly some aspects of the gas market are impacted by the crude oil market. However, that has happened for years and the gas market has always adjusted and we will discuss that shortly. While we are actively managing through the current weakness in the energy market, our long-term view has not changed. We continue to believe that natural gas will play a more and more important role as a clean fuel of choice. Thank you very much. With demand softening due to the uncertainty of the global economy, the Saudis and Russians failed to come to a production agreement in early March. Combined with the realization around the economic impact of the pandemic, oil demand is down significantly and expected to remain so until recovery actions get fully underway globally. Some estimate global oil demand destruction to be as much as 10, 15, even 30 million barrels a day. that have done a global market of approximately 100 million barrels per day, so a fairly significant impact. The exact duration and depth is obviously unknown at the present point in time, but many observers anticipate a tough go of things for a while. In response, you've seen decisive actions by those most affected by collapsing oil prices, significant capex reductions by E&P companies, resulting in vastly reduced rig counts. The beginnings of oil well shut-ins in various basins, crude oil storage reaching maximum levels, refinery runs are also down significantly. The capex reductions around new drilling will slow the rate of overall production growth or even result in decline in a given basin or for a specific customer. Those shale-type curves, while steep at first, after a few years tend to flatten out significantly when a given well moves into more of a steady-state existence. In short, if the CapEx cuts hold, producers will simply not be drilling enough new wells to offset the decline of their existing flush production wells. And then over time, you'll have a large amount of wells in the flat, steady state part of the curve where decline has also meaningfully slowed. Recall that this played out in the Fayetteville and Eagleford shales about five years ago after rapid production growth. We have seen this occur in Appalachia over the past several years as well. A significant component of USA's larger horsepower fleet is deployed in infrastructure applications exhibiting the flat, steady-state, shallow decline profile. So even without new drilling activity, compression is continually needed to continue to move these stable volumes of natural gas. This is an important concept that often gets overlooked. Another extremely important concept that I have discussed in literally every investor presentation since our IPO relates to compression horsepower and declining reservoir pressure. Diving into the physics of gas compression for just a minute or two, as pressures decline, moving the same volume of gas requires an exponential increase in compression horsepower. Hugely important and a technical concept rarely appreciated and understood by those outside the industry. I'll say it another way. Assuming constant pressure to increase gas volumes requires more horsepower. Conversely, to maintain flat gas volumes in a declining pressure environment also requires more horsepower. But what happens when gas volumes decline and pressures also decline? It depends. Compression horsepower may decline a little, may remain stable, or might actually increase. The characteristics of individual wells, specifics of the reservoir rock and fluids composition, all factor into this multivariable quadratic equation. Simply stated, for both associated gas and dry gas applications, even though gas volumes may be on the decline, required compression may actually increase as pressures also decline. To complicate things further, for depletion drive oil production, over time as reservoir pressures decline, gas-oil ratios typically increase, leading to more associated gas production per barrel of oil produced. These important concepts are fundamental to the reason that during periods of reduced drilling activity and even declines in produced volumes, We have not historically, and do not expect to, experienced dramatic declines in the need for our large horsepower compression services or required horsepower. The dynamics I've mentioned above, along with the relatively resilient demand, have historically made large horsepower compression a less volatile business. Of course, there is still a great deal of uncertainty on how everything settles out of the commodity markets, but we do feel good about gas market and its long-term prospects. The natural gas markets have actually been more positive and for good reason. The demand for gas, while having some seasonality, remains resilient. There will be some near-term impact to domestic gas demand as schools and businesses temporarily close their doors due to the coronavirus. For most areas of the country, this has occurred during seasonally mild weather, and the impact on demand has not been as great. You also need to remember where most of that gas demand ends up Power generation, both commercial and residential, as well as industrial purposes like chemical plants and other industrial manufacturing. Estimates vary, but generally speaking, we have seen observers talking about demand destruction on the gas side in the single-digit BCF per day range. On a market of 95 to 100 BCF per day, that is more akin to a minor speed bump, which speaks to the relative stability in the natural gas market underlain by that resilient baseload demand. There is also an interesting dynamic we believe will play out in the gas market over the next 12 to 24 months. Right now, we are seeing some moderate demand destruction in the face of continued supply. Even with announced E&P growth cap X cuts on the oil side and the expected decrease in associated gas supply from recently drilled oil wells in the steep decline flush production mode, it will take a few months for that to show up in the data. Over the next few months, we expect to see supply overhang on gas, which will add to storage levels, keeping a cap on the near-term price. At some point in the early fall, underground gas storage could reach fairly full levels, but that is expected to happen just as declines in production really start to kick in. That gas and storage will be available to serve that relatively stable baseload demand during winter heating months. While the ultimate impact of associated gas production currently is uncertain, we believe the natural gas futures market give us an early indication. Recently, January 2021 gas futures were over $3 per MCF, and no month around the entire year was below $2.50 per MCF. As always, when indications of supply and demand get out of balance, prices react and serve to balance the market. Ultimately, assuming we do see significant reductions in associated gas production, that required supply will need to come from somewhere. You're hearing more these days about new activity in the Marcellus, Utica, and Gainesville shale plays. We see continued activity in the all-important Northeast. The price of gas will ultimately make sure there is enough gas to supply the demands of the marketplace. Obviously the drivers behind the crude oil and natural gas markets are not the same, nor do we think will the recovery timeline and near-term outlook be the same across both commodities. While it is hard to predict exactly when and to what extent things get back to something like normal, the relatively positive outlook for both natural gas pricing and resumption of stable demand should bode well for our business. So let's turn to our specific USA business model. The USA Compression's business model has remained very consistent over the past 22 years, whether as a private entity or the last seven years as a public partnership. We have always focused on large horsepower compression used in large, regional, infrastructure-oriented facilities. These facilities move very large amounts of natural gas. These are not facilities that are easily shut down, and the cost of demobilization, which are borne by our customers to send home the USA compression assets, may be extremely expensive. These barriers to exit, as we call them, provide further support in times like these to mitigate the return of iron that our customers most likely will need after a few quarters of excess oil overhang works itself off. We have always pointed to the stability of this business model and continue to be optimistic about the future of the large horsepower business. Over the past couple of years, since closing the CDM acquisition, we've made an effort to term up securing additional contract center after the primary term has passed and the contract moved into a month-to-month duration for more of our contracts. Historically, we had anywhere between 40% and 50% of our assets on a month-to-month basis. Coming into this downturn, we are positioned better than we have ever been with our recontracting activities, reducing our month-to-month exposure to approximately 35%. We also review the loading profile of the month-to-month assets. Those that are loaded are needed, which further reduces the likelihood that a unit gets sent home. Even with about 25% of our horsepower deployed in the Permian and Delaware basins, primarily serving associated gas production, We have the vast majority of our assets serving either dry gas activities and natural gas handling activities such as those connected to gas processing plants, our large volume centralized gas lift applications beyond the flush production stage, and in the stable, shallow, decline, steady state mode. So what are our customers up to? We last saw a commodity downturn back in 2014-2016 timeframe. Crude oil down as low as $27 per barrel. We had fleet utilization decline to the mid-80% area, with the larger midstream horsepower exhibiting greater stability as expected. The smaller horsepower, well-head-oriented gas-filled fleet was where our SOP has surfaced. We took aggressive cost control measures and maintained relatively flat EBITDA and cash flow margins, all while cutting growth cap X by almost 90% over two years. While this latest series of market events is somewhat different to the 2014 cycle, we have seen a similar response from customers. The initial shock of the crude oil price decline prompted the return of underutilized assets at the customer's expense. This was applicable only for that portion of the fleet of their month-to-month contracts. These are predominantly smaller gas lift units that have low demobilization costs, which are sitting on oil wells, which have now turned uneconomical. We've seen some redundant larger horsepower units get returned as well. In some cases the customer may have recently bought some units and so decided to replace our equipment with their own equipment. Overall our customers are working to figure out what the future holds for their particular operations as well as the overall industry and that creates different motivations for different customers in different basins. In a few cases customers have requested temporary and short-term rate concessions or the ability to move units to a standby rate while the dust settles a bit. Depending on the customer, the contract and proposed economics, we are considering it. We have seen the first wave of returns occur and we will wait and see how much additional horsepower comes home. At this junction, the 2020 collapse has been much like the 2014 to 2016 decline. with a quick wave of initial returns, followed by a much slower and somewhat nominal decline. We will continue to monitor returns closely over the next few quarters, where the risk of utilization declines from associating gas activities remains greatest. We have lots of levers we can pull, and we will pull them depending on the depth and duration of this downturn. There still seems to be a sense by some observers that USA Compression is an oilfield service business with significant exposure to wealth and activity and commodity price risk. This has been a common misperception over the years. Our focus has purposefully been away from activities that introduce commodity price risk and oriented toward larger installations serving demand-driven natural gas infrastructure applications. We have deployed significant amounts of horsepower in large multi-unit centralized compressor stations over the recent years. These installations have in many cases moved beyond the initial flush production phase and have settled into the steady state phase with shallow decline rates and thereby relatively more stable volumes and pressures. As these wells age and the reservoir pressures naturally continue to decline, more horsepower may be required to accomplish the customer's operational needs. I'll now turn the call over to Matt to walk through some of the financial highlights of the quarter. Matt?