USA Compression Partners LP

Good morning. Welcome to USA Compression Partners LP's fourth quarter 2021 earnings conference call. During today's call, all parties will be in a listen-only mode, and following that call, the conference will be open for questions. If you'd like to ask a question today, you may enter the queue by pressing star 1. This conference is being recorded today, February 15, 2022. I would now like to turn the call over to Chris Porter, Vice President, General Counsel, and Secretary.

Good morning, everyone. Thank you for joining us. This morning, we released our financial results for the quarter ended December 31, 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 February 25, 2022. 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 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's violence. Please note that information provided in this call speaks only to managers' views as of today, February 15th, 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 Compression.

Thank you, Chris. Good morning, everyone, and thanks for joining our call. Also with me is Matt Liuzzi, our CFO. Today, while I plan to cover our positive financial and operational results for the fourth quarter of 2021, I also want to give you, our unit holders, a sense of where we see the puck going, so to speak, for the balance of 2022 and into the future. We are living in unusual times in which both real and false information are quickly disseminated by news and social media outlets that often appear to have biased agendas. We are seeing firsthand in Europe that some feel-good beliefs have led to governmental and regulatory policies that appear to be in conflict with the pragmatic and economic realities of the real world in which we live. First, I want to say thank you to the dedicated men and women of USA Compression, who during the past two years of the COVID pandemic have continued to do what it is that they do best, meeting the needs of our upstream and midstream customers 24 hours a day, seven days a week, 365 days a year, which have helped to keep oil and gas producing in our country and whose efforts have helped to keep the lights on in America and to keep Grandma's house warm when much of our country was locked down. To give you a sense of the magnitude of what it takes to keep USA Compression up and running, our service teams drove almost 1.3 million miles and worked over 122,000 hours in January 2022 alone. And our folks embrace a culture of safety, with our service technicians now having worked almost 4 million hours without a lost time injury. Safety is a way of light USA Compression, and I am proud of how our team continues to embrace it. So let's turn to the fourth quarter of 2021 and wrap up the year in which USA Compression remained true to our core business strategy of providing exemplary levels of natural gas compression services to our long-term and strategic infrastructure-oriented customers. Our fourth quarter results came in consistent with the previous quarter and reflect the inherent stability in our business and the significant amount of baseload natural gas demand that underpins our active fleet of horsepower. The whole year, we achieved results that were at the higher end of our guidance range. We once again maintained our distribution at 52.5 cents per unit, and we have now returned over $1.3 billion to our unit holders since our IPO in 2013. During Q4, we also entered into a new five-year ABL agreement with our bank group. which would have gone current in early 2022, that resulted in additional flexibility at lower interest margin spread, while maintaining our total capacity of $1.6 billion. As of the end of 2021, we had about $516 million drawn. So now a little commentary on 2021 and leading into 2022. We saw two very different customer profiles in 2021. Our large public players continued to show financial and operational restraint, while our smaller private independent developers, who tended to take a more aggressive approach to their capital spending programs. While we were hopeful that 2021 would bring some additional clarity to policymaking as it regards the energy industry, What we got instead was continued mixed messaging by our government, which kept our larger public customers generally hunkered down with reduced levels of growth capex throughout the year. With the continuing uncertainty out of Washington, D.C., it appeared that restrained capital spending became the mantra, even in the face of very attractive commodity prices. Last quarter, I spoke of demonization of oil and gas and the capital starvation the energy industry has seen over recent years due to many factors, not the least of which has been shareholder pressure and the specter of more stringent governmental regulation. I mentioned how that underinvestment, combined with strong demand, has resulted in declining inventories and DUCs, the drilled and uncompleted wells, all of which are further exacerbating the supply-demand imbalance. During the fourth quarter, these trends only continued. We have seen preliminary estimates that show inventory draws in the fourth quarter several times larger than both in 2020 and when compared to historical averages. And according to EIA, the number of DUC wells was down 13% in the fourth quarter, and we ended 2021 down 40% from the end of 2021. The regulatory uncertainty relating to the domestic oil and gas industry overall, including implications regarding potential methane regulation and taxation, has not abated. However, with midterm elections on the horizon, the likelihood of action seems to have waned. That pause, combined with a precarious supply-demand balance and the expectation for continued attractive commodity prices in the near term, we believe ought to help our customers take investment actions which they might otherwise have been wary of last year. Let me make a few comments about where commodity prices currently stand. Crude oil prices in the fourth quarter were up over 80% from the year-ago period, and for the full year 2021, prices were up almost 75% over 2020. But it isn't just a comparison to a weak year in 2020. You'd have to go all the way back to 2014 to see crude oil prices at levels above what they are today. The biggest difference between now and 2014, though, is that the 2014 run-up in prices was in many ways fleet-driven. Today, we are looking at a combination of real-world factors which, taken together, are causing a supply-demand imbalance across the globe and resulting in very attractive oil prices. The same holds true on the natural gas side of things as well. Prices in the fourth quarter were up almost 100% over the year-ago period, and the same for the full year 2021 versus 2020. You would have to go back to the 2008 to 2009 time period to find prices like what we saw during the fourth quarter. For natural gas, the commodity strength is also being driven by real-world situations, including cold weather, lack of natural gas supply in parts of Europe, and also the general underinvestment in bringing on new sources of supply. Recall that energy was the best performing sector in the S&P 500 last year, driven in large part by the overall strength in commodity prices. So while interesting to consider where we've been, I think the more appealing aspect of what this situation potentially means for where we are headed. The current price situation reflects the realities of shrinking supplies and increasing demand for both crude oil and natural gas, the inherent tension to balance the massive cost to move to renewable forms of energy over the timeframes, and the harsh reality that energy supplies are a critical and powerful tool that can be used to hold governments hostage. One of the concerns that we as an industry have faced is the substantial underinvestment needed to add supply over the last few years driven primarily by the COVID panic, regulatory uncertainty, shareholder pressures, and other factors. The oil and gas industry is a longer lead time industry and requires a sufficient amount of capital investment. Projects take time to be developed and commercialized, and we continue to witness this reality in the struggles that certain OPEC Plus members have had in trying to meet their production quotas. Producers just can't turn on the spigot whenever they want. So we are now seeing very resilient demand running headlong into a tight supply situation that is ill-equipped to react quickly. This won't change dramatically in the short term, and continued geopolitical instability in Russia, the Ukraine, and Europe only exacerbates the issue. In fact, the EIA just revised upwards their demand forecast for 2022 to 100.6 million barrels a day, an increase of 3.5 million barrels a day over 2021, which was up 5.2 million barrels a day over 2020. This is at a time when U.S. crude oil inventories are 13% below last year and 9% below the five-year average. Further, the global oil market is estimated to be undersupplied by 1.5 to 2 million barrels per day for 2022. Add in geopolitical stability, both Russia and China, and we have the potential for a global energy squeeze the likes of which we have not seen since the embargo days of the mid-1970s. So how does this affect USA compression? The good news is that domestic natural gas is abundant, and we have the ability to export large volumes of LNG around the world. The importance of natural gas for heating and electricity generation is front and center in the conflict between Russia and Europe right now, which revolves around natural gas. At the end of 2021, the U.S. became the largest exporter of natural gas, surpassing Qatar and Australia. We believe the free market will continue to function to move natural gas where it is valued most highly, whether that is domestically or internationally. And as that gas comes out of places like the Marcellus Shale and the Permian Basin, producers and transporters will require compression to move it along. Another prominent theme during 2021 that continues into 2022 was a continued discussion around ESG and the energy transition. Both are important, and we expect both to factor into the dialogue across the energy spectrum for the years to come. However, I think 2021 also demonstrated that this transition will take a lot longer than many expect and will likely cost far, far more than many estimate. I want to share a few factoids I recently saw in the Financial Post to help point out the chasm between government policy and our energy reality. First, the EIA recently projected that the U.S. internal combustion car fleet won't peak until 2038. And today, less than about 3% of the U.S. car fleet is electric. We will need to convert 1.45 billion vehicles, 29,000 aircraft, and 54,000 ships to renewable fuel sources. Raw materials are forecast to enter structural deficit. Copper, as an example, a 32% deficit. Interestingly, the average person in the world consumes only five barrels of oil per year. In the U.S., where higher living standards translate to higher hydrocarbon demand, that number is 21 barrels of oil per year. The U.N. is forecasting the world's population will add 2 billion people by 2050, with the middle class growing in China and India. So run the math. How is it fathomable that the global demand for things such as plastics, fertilizer, mined metals for electronics and specially chemicals, all hydrocarbon intensive, will fall? As unit holders, you understand our core business, and you all likely have your own views on the role of natural gas into the future. We believe the realities of economics and technology will continue to shape the dialogue and the transition. The bottom line remains the same. Demand for energy of all types worldwide is up, supplies of conventional energy sources are down, and we know of no technology that economically exists at scale to backstop the intermittent nature of solar and wind supplies. The bottom line is that we believe the need for USA compression services will continue far into the future. So the USA compression begins 2022. We are looking out at a marketplace in dire need of energy in all forms, both crude oil as well as natural gas. Both fuels are essential to providing cost-efficient energy to the entire world. Natural gas remains a clean-burning, abundant fuel that is easily transported throughout our country as well as the world. And as the broader world continues to grow and develop, crude oil is critical to improving the quality of life for people all over the planet. In the near term, we are witnessing a focus on renewable sources of energy that are, quite frankly, insufficient to meet the overall needs of the population at a cost that is affordable to society. We expect major drilling and completion activity for both oil and natural gas in the years to come, and with it, demand for our compression services. Our work on the dual drive concept will continue in 2022 and beyond, and we expect an uptick in customer inquiries as further electric infrastructure begins to be built out. The dual drive product represents a potential and cost-effective offering to allow our customers to switch quickly and reliably from natural gas to electricity as a fuel source, which will allow them to reduce their carbon dioxide and methane emissions meaningfully. We believe dual-drive is an attractive transition offering for our customers with the ability to provide the reliability and redundancy of natural gas during what we believe will be a multi-decade transition period to expand the electric grid. One final note before I turn over the call to Matt to walk through our results of the fourth quarter. With this quarter's payment, we've now achieved 36 quarters of distributions returning over $1.3 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 most recent downturn, yet be positioned to take advantage of the tailwinds that we believe are coming in 2022. The last several years have really demonstrated the power of the large horsepower compression business model. And as we begin a more optimistic 2022, we expect to continue the path we've been on. Matt?