USA Compression Partners LP

Good morning and welcome to USA Compression Partners LP's third quarter 2020 earnings 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. This conference will be recorded today, November 3, 2020. I would now like to turn today's call over to Chris Porter, Vice President, General Counsel, and Secretary. Please go ahead.

Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter-ended September 30, 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 November 13, 2020. During this call, our management will discuss certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures to the most comparable GAAP 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 filings. Please note that information provided on this call speaks only to management's views. As of today, November 3rd, it may no longer be accurate at the time of a 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. Also with me is Matt Liuzzi, our CFO. This morning, we released our financial and operational results for the third quarter of 2020, which reflect a fair amount of stability both operationally and financially. Coming out of the second quarter, there was still a good deal of uncertainty in the marketplace, and as we've managed through the third quarter, we are encouraged by the resiliency demonstrated by both the natural gas market as well as USA Compression's business. While we are no means out of the woods just yet, we expect a relatively attractive macro environment for natural gas to continue to support our business as we get through the remainder of the year and into the beginning of 2021. Over the course of USA Compression's existence, we've experienced multiple cycles. Throughout all of them, we've never changed our primary focus on large horsepower compression used in large, regional, infrastructure-oriented facilities. As we've come out of each of those previous downturns, the business model has been proven out. Our customers and the demand-driven applications which our assets serve move very large amounts of natural gas. These facilities are constantly operating 24 hours a day, 7 days a week, 365 days a year, and the barriers to exit to demobilize and return our equipment, the cost of which is borne by our customers, can be substantial. We believe this creates relative stability in our business, which differentiates USA Compression from other service providers, whether compression, oilfield service providers, or even some midstream operators. We continue to be encouraged by the relative stability of our business model and look forward to managing the business through the rest of the year into 2021 and beyond. Our employees continue to work hard within the current environment to deliver the excellent service that USA Compression has been known for. Despite the challenges that COVID-19 has brought to the businesses throughout the country, I am proud of the dedication by our entire team to do their job safely and efficiently. Turning to the third quarter, we saw a modest decrease in revenues in distributable cash flow versus the second quarter as we felt the impact of unit returns during the second quarter as well as some continued pricing concessions. Total revenues were $162 million, approximately 4% below Q2. Similar to last quarter, we were able to continue to manage the expense side aggressively resulting in adjusted EBITDA for the third quarter of approximately $104 million representing less than a 2% decrease from Q2. We delivered strong operating margins with adjusted gross margin and adjusted EBITDA margin of 71.1% and 64.3% respectively. These results point to the stability of our business model in times when many others in the energy industry are struggling. Average utilization throughout the quarter was 83.9%, down as expected from the Q2 level of 88%. As we mentioned in the prior quarter, barring any major events, we expected Q3 would be the trough in terms of utilization, and we continue to believe that will be the case at this time. While we did experience some utilization degradation, the rate of equipment returns was much less than what we experienced in the second quarter. As customers continued to evaluate their businesses, especially as they headed into the budget season, we saw some units return, which was not unexpected. We ended the third quarter with approximately 3 million active horsepower, which was off a little less than 4% from the end of Q2, while the total fleet remained consistent at about 3.7 million horsepower. Just to add a little perspective to this, by comparing it to the end of the first quarter back in March, the utilization is down about 8.5 percentage points, which is similar to what we saw during the 2014 through 2016 downturn. Average pricing across the fleet decreased about 1% during the third quarter, which reflected both unit returns and the continued impact of selective temporary service rate decreases. A good portion of these rate concessions have run their course and in many of these cases, pricing is returned to the contractual levels in place before the pandemic and commodity upheaval started in the first quarter. Average monthly revenue of $16.62 per horsepower was down slightly from $16.79 in the second quarter. Capital spending continued to moderate during the quarter with growth CapEx of $15.3 million and maintenance CapEx of $4.7 million. The growth capex included delivery of approximately 11,000 new horsepower, all of which was in the mid to large horsepower range. Maintenance capital was consistent with the prior quarter as we continued to limit spending, awaiting an uptick in activity. For the year, we expect expansion capital spending to total between $90 and $100 million. Based on the third quarter results, the Board decided to keep the distribution consistent at 52.5 cents per unit, which resulted in distributable cash flow coverage ratio of 1.12 times, which was largely consistent with Q2. Our bank covenant leverage ratio was 4.76 times for the quarter. As we mentioned previously, our Board of Directors determines the quarterly distribution on a quarterly basis, and the Board can opt to maintain, reduce or suspend the distribution as it deems most appropriate. Now let's turn to the overall marketplace. I'd like to make a few general observations about the energy markets and where we are watching and ultimately how we think it could impact our business going forward. It's hard to believe that just eight months ago we were all faced with the unprecedented one-two punch of an emerging worldwide pandemic coupled with a crude oil price war. As you'll recall, there were dire predictions of tremendous global and domestic demand destruction, both with regards to crude oil as well as natural gas, which were both predicted to last well into next year. As regions around the world and throughout our country began to close down indefinitely, along with substantially weak commodity prices, it caused a hit to demand, which forced many in our industry to take decisive action. CapEx budgets were slashed, drilling was slowed or stopped, and in some cases even existing production was curtailed. It is remarkable when you look back at how quickly we found the bottom of commodity prices as well as the relative speed with which crude and natural gas prices rebounded and ultimately stabilized. Crude oil traded at an average price of about $40 per barrel during the third quarter. Natural gas spot prices averaged about $2 per MMBTU and the 12-month forward NYMEX Strip now averages over $3 per MMBTU. Part of the reason for the rebound and subsequent stability is due to the more positive demand outlook today than we experienced back in March and April. Overall, the expectations for demand destruction in 2020 have been meaningfully reduced, driven by the reopening of economies and the growing economic activity. The EIA in a recent report estimates total U.S. consumption of natural gas in 2020 will be down only about 1.8% from 2019 levels. We've talked about this in the past. The stability of USA Compression's business model is driven by the resiliency of demand for natural gas in this country. And that resiliency is contributing to our operational and financial results through the first nine months of this year. While USA Compression's demand is natural gas-driven, we have been impacted somewhat by reduced oil drilling and production activities, predominantly in the Mid-Continent and Permian and Delaware Basin regions, where associated gas production has been impacted. However, there are signs that could point to improving the longer-term oil fundamentals, and an improving oil market will help support associated gas production, which is positive for our business. One important facet of the oil industry that is often overlooked in this regard has to do with the global inventory levels and the ever-changing crude oil inventory dynamics. Let me spend a minute and share a few statistics with you. First, the U.S. is one of 37 OECD countries, not quite 3% of the total, yet our oil storage is estimated to comprise 45% of the total. So what goes on in the U.S. is what tends to drive global inventories. Next, OECD North America and OECD Pacific comprise approximately two-thirds of global storage. So the demand in China and the U.S. are the two dominant markets driving inventories. With the economy in China already picking up, demand has as well. Third, and this is hard to believe, but number one, U.S. crude oil storage, including the Strategic Petroleum Reserve, is within spitting distance of the five-year average. Two, U.S. gasoline stocks are already at year-ago pre-COVID and normal levels. And three, U.S. jet fuel inventories are now below a year ago and back to their normal five-year average. Finally, the oil futures market now has open interest over 30 times the world demand, which appears to be trading lockstep with COVID news. The lockdown measures in Europe over the past weekend said crude prices tumbling. The trading of paper barrels somewhat disconnects from the fundamentals of the physical market, driven in no small part by market psychology. So remember, barely six months ago, headlines were focused on domestic oil storage overflowing, and now inventories are back at fairly normalized levels. So now that we've apparently worked off some of the excess inventory, what happens going forward? Well, using the IEA's Q4 demand projections, and assuming that OPEC production remains at a similar level during the last two months of the year, the implied global oil inventory draw could approach 5 million barrels a day. That would equate to over 400 million barrels for the quarter. Those are dramatic numbers and could have meaningful implications for the overall oil market. What's more, Apart from the projected Q4 inventory decline being multiple times larger than the five-year average, is that if this Q4 demand figure holds up during the quarter, it could work off the remaining excess stockpile build from the second quarter with all of the COVID-induced demand reduction. No, we're not out of the woods yet. The pace of the demand recovery is still critical for recovery in the energy sector. But there have only been four instances in the last 36 years when inventories didn't decline in the final quarter of the year. And even if the IEA demand forecast completely misses the mark, we expect to see a meaningful inventory decline, a major step forward for the sector. So what I see coming up is that supply and demand fundamentals appear to be coming into equilibrium and setting up a much improved scenario in the future. For the past several quarters, most in the industry have maintained capital discipline as we all wanted to see what the rest of the year would bring post the COVID-induced slowdown. You are seeing some very modest uptick in rig counts, currently around 280 total onshore rigs, down more than 75% from recent peak levels. Oil rigs have seen a greater percentage decrease while gas rigs are down, but less severely. We expect to see this decreased level of RIC activity to continue for some time with continued scarcity of capital for E&P companies. This will coincide with the continuing decline of shale well production curves. When coupled with both crude oil storage and natural gas demand statistics I previously cited, the production siding equation may cause for a tight supply-demand balance as we get to the end of 2020 and into 2021. In fact, with the regional curtailments and CapEx reductions, there is a sense that the U.S. could find itself in an undersupplied natural gas situation in 2021, and certainly the natural gas futures prices would indicate as such, recently getting up to the near $3.50 per MMBTU area for certain near-term months in 2021. As it always does, the market will balance itself out and higher prices will spur additional production. The more gas is moving around the country, the more compression you will need. As I mentioned earlier, capital budgets both at USA Compression and throughout the broader energy industry remain very much in focus, and we expect this will continue to be the case as everyone works through their 2021 budgets. This has already impacted, and we believe will continue to impact, production growth, which will also highlight the nature of production curves in shale wells. After the flush production of the initial years, these wells will move into more of a steady state environment as the curves flatten out. This lends stability to the need for compression in such situations where our equipment is required to keep those gas volumes moving. Assuming the CapEx moderation and discipline we've witnessed the last few quarters hold, we expect to see a higher proportion of overall production in that flat, steady state part of the curve were declined as meaningfully slow. As I've noted, this is a favorable situation for USA Compression because our business is focused on the infrastructure applications that support these steady state operations. As the wells age, the natural gas volumes exhibit a very stable profile. Remember, as long as gas is being produced and moved throughout the system, pipelines, processing plants, et cetera, compression is required. Another critical dynamic in our business is the relationship between compression horsepower and declining reservoir pressure. As pressures decline, to move the same volume of gas requires an exponential increase in compression horsepower. We expect to continue to witness this dynamic, especially as new well drilling activity is substantially reduced in the coming years. In this instance, compression stays around for a long time and requires more effort, i.e., horsepower, to move that gas. So in all types of applications, even though gas volumes may be declining, the compression required may actually increase as pressures also decline. The dynamics I mentioned above, along with relatively resilient demand, have historically made large horsepower compression a less volatile business. The business model that USA Compression is based on is a business model that can easily adapt to current markets one that doesn't require multi-year capital projects and commitments, yet is one that is able to move between growth mode and stability mode with relative ease. When required, we grow with our customers. During periods of reduced activity and even production declines, our large horsepower compression services or required horsepower have remained relatively resilient. So turning to the customers. In terms of customer behavior on a whole, our customers continue to take a cautious approach to the remainder of 2020. Both code activity as well as unit deployment has picked up during the quarter, as well as conversations regarding 2021 compression needs. As we've seen in the past, given the infrastructure nature of the large horsepower equipment, our customers place a lot of value on the reliability and customer service we provide. But as I mentioned, we are all in the middle of budget season and so there is naturally some uncertainty out there that we'll get work through over the next few months. Our geographic diversity has been an advantage in this time of somewhat disconnected energy markets. Through our customers, we have exposure to different producing regions and depending on the customer, varying motivations are driving different behaviors. We have seen the trajectory of returning underutilized assets experienced in Q2 and early Q3 decrease significantly. Our customers have moderated their drilling, completion, and development activities following the market dynamics earlier in the year. And while there remains a fair amount of uncertainty out there, the stability in the marketplace of late combined with the continued strong demand has a lot of people working to figure out how to meet that demand in 2021. The vast majority of our assets serve either dry gas activities and natural gas handling activities, such as those connected to gas processing plants or large volume centralized gas lift applications beyond the flush production stage and in the stable, shallow decline steady state mode. With the geographical diversity of our asset base, we have exposure to different producing regions, and as such, have a balance throughout the fleet. Events in one particular area, like associated gas declines in the Permian and Delaware basins, while they affect us, have been partially offset by increased activity in other regions like Appalachia and the Haynesville. Our contract structure and portfolio continue to benefit the business and enhance its stability. but historically, we would typically have between 40 and 50% of our assets on a month-to-month basis. We have brought that number down meaningfully and we are currently below 30%, reducing our month-to-month exposure significantly. While we are no means out of the woods, things certainly feel better than three months ago when we last communicated with all of you. As I've discussed, The slowing level of unit returns combined with some steady recent redeployment activity gives us a bit of cautious optimism. We have taken the necessary actions with regards to cost cutting and capital spending to weather the storm and expect to see an eventual recovery, although the exact timing and extent is difficult to predict. We have purposely focused on large horsepower multi-unit centralized compressor stations over the recent years which applications serve that resilient natural gas demand discussed earlier. We expect that demand to continue as it has proven the last several months, and as the physics of natural gas production kick in, we expect to see aging wells and declining reservoir pressures, all of which is beneficial for our compression services business. I will now turn the call over to Matt to walk through some of the financial highlights of the quarter. Matt?