USA Compression Partners LP

Good morning. Welcome to USA Compression Partners, LP's third quarter 2021 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. This conference is being recorded today, November 2, 2021. 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 September 30, 2021. 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 12, 2021. During this call, our management will discuss certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures, 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 managed views as of today, November 2nd, and 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 Compressions.

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 2021, reflecting another quarter of continued stability in our infrastructure-driven business model, with results that were, again, consistent with the prior quarter and in line with what we expected. Before Matt gets into the specifics of the quarter, I want to highlight some key facts and observations that help form the decision-making process of your management team. I think that you may actually find them enlightening. Simply put, considering the lack of regulatory clarity and uncertainty emanating from both the executive branch and Congress regarding major policy decisions which may profoundly impact the energy industry, tax structures, and our domestic economy, USA Compression will continue to do what we have done in periods of uncertainty. We hunker down, we power through, we maintain a consistent course of action, providing exemplary levels of natural gas compression services to our long-term and strategic infrastructure-oriented customers. We intend to do the same for the balance of 2021 and throughout 2022. Right now, there is a lot of discussion around the topics of ESG and energy transition. Both are important and are front and center here at USA Compression. For our investors, we believe that it is important to differentiate between the policy noise with all of the feel-good, wish-to-be-true prognostications of the future versus the realities of economics and technology. World leaders with varying degrees of commitment appear to be committed to achieving net zero by the back half of this century. With the emerging energy crises in China and Europe, as well as the positions taken by China, India, and Russia regarding their continued use of coal well into the middle of this century, this commitment appears to be wavering somewhat. What is coming to light is that, one, the energy transition will be one of the most capital-intensive and most complex undertakings in human history. Multiple tens if not hundreds of trillions of dollars will be spent pursuing these undertakings. And three, policy decisions, which currently appear focused on constraining capital required for transitory hydrocarbon sources, meaning natural gas, are disconnected from the realities of today's growing energy needs and the ultimate achievement of net zero. The bottom line. Demand for energy of all types is up, supplies of conventional energy sources are down, and we know of no technology that exists at scale to backstop the intermittent nature of solar and wind supplies. Natural gas prices are surging around the world, part of an emerging global energy crisis, spilling into the coal market, causing power prices to spike. While the Henry Hub front month natural gas price is in the upper $5 per MMBTU range, Average spot prices for LNG in September were $25.45, a 40% increase on the prior month and more than four times the price from the year before. Prices have continued to rise in October of 2021 and traded at $34 per MMBTU. The utilization of U.S. LNG facilities continues to be high and countries around the globe are building inventories in anticipation of tight supply this coming winter. Dutch natural gas for December delivery touched $187 per MMBTU, with December LNG at Japan-Korea currently $32 and a penny per MMBTU. The effects of these high natural gas prices include government intervention regarding electric power in Europe to reduce cost to consumers, shuttering of manufacturing supplies in China, and subsequent mandates to secure coal supplies, quote, at all costs. So what is happening in the UK? Renewables, mostly wind, displaced coal and power generation over the past decade, increasing reliance on natural gas for base load electric power. Utility scale battery storage is essentially nonexistent. Nuclear power is about 20% of generation capacity. Seventy percent of the UK's gas storage capacity was shuttered in 2017, with regulators expecting newly constructed renewables and natural gas imports to meet demand. With the combined reduction in gas storage and domestic gas production from the North Sea declining more than 65% since the year 2000, the UK became reliant on LNG imports. Both Japan and Europe are also bidding on limited LNG supplies, resulting in UK power prices jumping four to 10 times historical norms. With the UK being colder than normal and experiencing lower than average wind speeds, renewables have been unable to meet electricity demand. Bottom line, Demand for electricity is up at a time when the wind doesn't blow, the sun doesn't shine, available domestic gas supplies and storage are down, coal has been cut, and no meaningful utility-level battery storage exists. So shifting gears to the oil side and the domestic drilling and supply side, here are some comments from sources ranging from The Economist to noted industry analysts to energy-focused private equity firms and others. Demonization of oil and gas is unprecedented in the history of the industry. This is leading to capital starvation, the exit of major oils, with only 40% of cash flow being redeployed into supply replacement. OPEC Plus has done an effective job of managing pricing. Further, signals suggest that OPEC Plus will be out of excess capacity by mid-2022. This is unprecedented. Global upstream capital expenditures average 320 to 350 billion in 2020 and 2021. This is one-half the levels of 2011 to 2014 and 25% short of what is needed to hold oil production steady at 100 million barrels a day, of which two-thirds is for transportation and one-third for industrial use. Over the past 18 months, the world has been undersupplied by 2 million barrels a day. Oil and storage is down over 950 million barrels since the peak in May of 2020, and now runs 200 million barrels below normal. DUC, or drilled and uncompleted drawdown. It took three years to build an inventory of 3,300 DUCs, and they have been wiped out in the last 12 months. The U.S. E&P sector is now completing 270 more wells than we are drilling on a monthly basis, which is unsustainable. In 2022, additional drilling capital will be needed to sustain production levels. By the end of 2030, the global electric vehicle fleet is expected to be lower than consensus penetration of 30 to 40%. Worldwide, we will need an additional 7 million barrels per day to balance the market demand. And where is it going to come from? And finally, we have the regulatory uncertainty relating to the domestic oil and gas industry overall, implications regarding potential methane regulation and taxation, considerations from the myriad and ever-changing proposals emanating from various factions of the current Washington administration, as well as the specter of a CO2 tax. So what does all this mean for USA compression as we head into 2022? It appears to us that as the world economies continue to open and regain strength, demand for energy in all forms, and especially natural gas, will continue to increase. It is also apparent that the supplies of oil and natural gas have declined due to underinvestment, and that in the interim timeframe, renewable sources of energy are insufficient to meet the overall needs for energy. We believe that over the next several years, domestically, we will see increasing, albeit measured, drilling and completion activity for both oil and natural gas, and that demand for our compression services will continue to increase in 2022 and beyond. We've mentioned before that USA Compression is developing the use of an exclusive proprietary technology developed by Energy Transfer, Dual Drive, as a potential cost-effective offering to allow our customers to switch from natural gas quickly and reliably to electricity as a fuel source. Dual drive is effectively a hybrid compressor, similar to a Toyota Prius, which has the potential to be an important breakthrough for our customers seeking to reduce their carbon dioxide and methane emissions. Dual drive will provide the reliability and redundancy of natural gas during what we believe will be a multi-decade transition period to expand the electric grid. We expect growing instability of the electric grid over the intermediate term, exacerbated by the specter of policy mandated reliance on renewables without access to cost effective utility scale storage. During 2022, we intend to continue the development of dual drive units across several horsepower ranges. One final note before I turn the call over to Matt to walk through our results of the third quarter. With this quarter's payment, we've now achieved 35 quarters of distributions, returning over $1.2 billion to unit holders since our IPO back in 2013. The stability of the business and strong cash flow generation has allowed us to power through the downturns and be positioned to take advantage of the upticks as we are starting to see out in the marketplace. We envision continued stability as we focus on working with our infrastructure-oriented customers in 2022. Matt?