USA Compression Partners LP

Good morning. Welcome to USA Compression Partners LP's first quarter 2022 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. If you would like to ask a question at that time, please signal by pressing star 1 on your telephone keypad. This conference is being recorded today, May 3rd, 2022. 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, 2022. You can find our earnings release as well as a recording of this call in the investor relations section of our website at usacompression.com. The recording will be available through May 13, 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 filings. Please note that information provided on this call speaks only to managed reviews as of today, May 3rd, and may no longer be accurate at the time of our request. 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. As usual, today I'll first briefly cover the operational results for the first quarter, which was a solid start to the year. But given the ever-changing world in which we find ourselves, especially within the energy industry, I plan to spend more of my time talking about the current state of the market and where we see our business going for the remainder of the year. But to give you a glimpse, I think the tailwinds that we've cautiously talked about over the last few quarters have finally arrived and begun to blow in earnest. We have a very supportive macro environment undergirded by tight supply-demand dynamics and a growing need for natural gas, leading to attractive commodity pricing. And while the first quarter was a good start, we are excited about the remainder of 2022 and we believe we will continue to see opportunities to increase the utilization and pricing of our fleet, driving returns for our unit holders. USA Compression is above all an operation-centric business, focused on providing the best possible compression services to our customers. To maintain the high service level to which our customers have grown accustomed, our employees are on call 24 hours a day, driving over a million miles every month, day and night, maintaining and repairing the large industrial equipment that makes up our fleet. As such, we have a relentless focus on safety throughout the organization. And I'm proud to say we have recently achieved another milestone. Four and a half million man hours worked without a lost time injury. As activity continues to pick up, our employees are going to be even busier. but with it, our commitment to safety will not waver. Safety is a way of life here at USA Compression, and I'm proud of how our team continues to embrace it. Turning to the first quarter of 2022, USA Compression started off the year with a solid quarter of operations. We continued to deploy horsepower for customers out in the field, bumping our average horsepower utilization two percentage points from the fourth quarter to 2021 to just below 85%. And when you look at where we actually ended the period, we were up above 86%, an increase of more than three percentage points from December 31st. These levels represent meaningful increases, the likes of which we haven't seen in a while, and are illustrative of the overall positive market environment in which we find ourselves. In addition to strong utilization gains, we saw revenues increase, both in average aggregate as well as on a per horsepower per month basis. We expect to see continued improvement in our fleet utilization over the balance of 2022 as we continue to redeploy some of our modern vintage idle fleet back into service out in the field. Matt will go through the financials a little bit later this morning. As a reminder, we once again maintained our distribution at 52.5 cents per unit, and when accounting for the distribution being paid this Friday, We have now returned over $1.3 billion to our unit holders since our IPO in 2013. While it has only been a few short months, the market environment of 2022 feels far different than the COVID OPEC Plus period during 2020 and 2021. The doom and gloom from the past few years seems like a long time ago. 2021 was generally a recovery year for the broader energy industry, as our customers buoyed by strengthening commodity prices generally focused on balance sheet repair, capex moderation, and a wait-and-see approach to the myriad of regulatory uncertainties introduced by the new administration since the elections in 2020. To remind you, during Q4 2021, crude oil averaged about $77 per barrel and natural gas about $4.75 per mm BTU. Those two Those two commodities ended the year around $75 and $3.80 respectively. Those levels are generally considered to be economic for operators to pursue production across various domestic basins. Production levels overall were up, in part driven by drilled and uncompleted DUCs reduction, which helped keep a lid on further price increases. According to EIA statistics, DUCs were reduced by a staggering 38% during the course of 2021. The ratio of drilled to completed wells for the year was approximately 0.7, which was almost 23% below 2020's ratio, and the lowest ratio since the EIA has begun tracking this statistic. We did see a nominal increase in rig counts, which was fortunate. because without new drilling activity, the country as a whole would have run out of DUCs sometime in the fall of 2021. The drawdown in DUCs allow the industry to keep production going to offset both natural decline and the reduction in new drilling and completion activity. But there is a limit to how much the DUCs can provide. Overall, the cloud of regulatory uncertainty and mixed inconsistent signals from our current administration kept a lot of industry participants from making the necessary level of growth capex and new investments during the year. This impacted the length of the downturn and delayed incremental demand that ultimately will lead to the redeployment of the USAC's idle fleet. So leading into 2022, the overall supply-demand situation had tightened dramatically, which helped support the commodity price environment and set the stage for a more active 2022. This has been dramatically exacerbated by the Ukrainian situation. The beginning of 2022 has built on where 2021 left off. The DUC count was down another 9% in Q1 alone. Rig count and production levels were up, driven by a very supportive commodity price environment and continuing strong current and expected demand. Crude oil during the first quarter averaged over $94 per barrel and into the quarter at $100 a barrel. Natural gas averaged $4.65 for the quarter and ended the quarter at about $5.50 per MMBTU. The upstream operators have responded to the price and demand signals, but as we all know, you can't just turn on and off the taps like your kitchen faucet. And the past years of underinvestment will take time to remedy. On April 20th, JPMorgan analysts noted that at prevailing levels of global spending on energy, By 2030, growth in supplies from renewables, oil, natural gas, LNG, and coal is projected to lag growth in demand by 20%. Further, to remedy the supply-demand imbalance, J.P. Morgan estimates $1.3 trillion of incremental CapEx is required, an average of $140 billion over the next nine years. It goes without saying that the war currently being waged in Ukraine has had a major impact on the energy markets. It seems to me that some of the fallacies of the view that the march towards a 100% electric everything world, driven by 100% renewables for everything, are now being pointed out. Spurred on by the EU's goal to quickly wean itself off Russian gas imports, Countries across Europe and beyond are competing to secure reliable and cleaner energy supplies. In the face of the growing realities around the timing, cost, and reliability of renewable fuels, natural gas has taken a front seat in the ongoing discussion about energy in the future, and we've seen what was a constructive commodity market in 2021 explode into an environment where security of production and supply of energy are foremost in world leaders' minds. With the supportive environment, our customers have begun to make investment decisions that a year ago would not have been considered. That is partly reflected in a revised capital spending plan in which we recently committed to buy an additional 20 large horsepower units to meet specific customer needs, particularly in West Texas and the Delaware Basin. Given the lead times for new units, half of these units are expected to be delivered towards the end of the year, with the remaining half in early 2023. From our perspective, the fact that our customers are once again making long-term investment commitments in natural gas infrastructure is encouraging for our business and the industry more broadly. As we look to the remainder of 2022 and beyond, there remains real uncertainty across the economy in general and our industry in particular. The ultimate outcome and future ramifications from the ongoing war in Eastern Europe will have impacts across the globe. Already, you have seen the impact on US LNG. Reuters recently reported that LNG March exports from the US hit record levels of roughly 12 BCF per day. Meanwhile, the domestic demand for natural gas, which powers a significant amount of electricity generation, as well as industrial and petrochemical manufacturing, continues. As of early March, domestic natural gas consumption was up 10.3 BCF per day year over year, driven largely by a substantial uptick of 25% in industrial demand. In a country and a world that is continuing to use large amounts of natural gas on a daily basis, many are looking to the U.S. as a key source of supply. But as we've mentioned, these actions take time, and they also require the confidence by the producers and midstream operators that governmental policies will not change with the political winds of the day. Our industry is uniquely positioned to help solve the world's energy needs. We just need to be allowed to do it in a way that is economically feasible and commercially efficient. Crude oil is also seeing positive demand signals as the world's economies have grown post-pandemic and populations across the world demand higher quality of living standards, which petroleum products have uniquely provided over the course of history. The EIA currently estimates demand for 2022 to be 99.8 million barrels per day, an increase over 2021, which was up over 2020. Further, 2023 demand is expected to further increase by approximately 2 million barrels per day. In the U.S. alone, we continue to see inventory draws. As of mid-April, we are about 15% below the five-year average for this time of the year. And don't forget that we are about to enter the summer driving season. On a global basis, the oil market continues to work down inventories. Combine that with increasing demand with shrinking storage, and you've got a recipe for continued strong commodity prices. Since the summer of 2020, OECD inventories have been reduced by about 700 million barrels, or more than 20%. While there have been releases of the Strategic Petroleum Reserve, the impact on crude oil and gasoline prices has been minimal. There is simply not enough extra cushion in the industry to be able to ramp up as quickly as some would like. The difficulty in securing and dramatically rising cost of rigs, hiring frack crews, and locating equipment can be substantial, and that assumes that the permitting is already in place. You've seen the impact of these dynamics in both crude prices as well as closer to home and gasoline prices, which are as high as many can remember. Crude oil, and to a lesser but growing degree, natural gas, are global commodities that are subject to global market forces. and the last few months have really made that exceedingly clear to consumers across the globe. So with all the global impacts on the commodity prices, what does this mean for USA Compression? Since our IPO, I have often made the comment that in many ways, we are gas price agnostic. Our role in the value chain is to provide the service that moves natural gas throughout the domestic pipeline system. Here in the US, we benefit from an abundant supply of natural gas, which in the current market can be economically produced. As an example, natural gas production volumes in the Permian Basin are up 12% in the last 12 months. And in the Hainesville Shale, which is favorably located near many of the country's LNG export terminals, production volumes are also up 12% in the last 12 months as well. So you can see the producers are responding to the demand signals. And we will continue to work with our customers, not just in those areas, but across our diversified footprint to help get that natural gas to the market. As always, the free market functions well when you let it do its job without undue interference. We do expect that during 2022 and beyond, ESG will continue to be a theme. Close to home, we have been working with customers as they identify areas in their own operations where USA Compression can lend our technical expertise to highly engineered requirements. We are currently providing large horsepower hydrogen compression services for a facility in the Midwestern US. That customer has further expansion plans requiring additional horsepower as they increase their hydrogen production. As our industry works through not only what is possible, but more importantly, what is economical, we expect more opportunities for USA compression to play a role in ESG-focused applications. More broadly, though, the current Ukrainian situation unfolding in Europe is causing energy-centric ripple effects across the globe regarding the importance of energy. The world is now seeing firsthand that moving from feel-good theoretical concepts of energy transition from hydrocarbons to renewables or hydrogen will require far more time and unfathomable levels of capital resources. Whether it is the relative slower adoption of electric vehicles due to price and accessibility, the ongoing strategic and political challenges of sourcing adequate rare metals and other raw materials, or simply the overall growth by major population centers like China and India to higher living standards, the challenges are not going away. As I've said before, that ultimately, we believe the realities of economics and technology will continue to shape the dialogue and the transition. No one knows exactly how it will play out into the future, but what we have seen in years past continued during the first quarter. Demand for energy of all types worldwide is up, supplies of conventional energy sources are down, and we know of no technology that exists at commercial scale to backdrop the intermittent nature of renewable energy supplies. As such, we believe that the need for USA Compression services will continue far into the future. So, as USA Compression continues through 2022, we expect to take advantage of this global need for energy, providing superior compression services to our customers, both large and small. Natural gas remains a clean-burning, abundant fuel that is easily transported throughout our country as well as the world, and our customers are doing everything they can to help get that gas to end users, whether here in our country or across the globe. While renewable sources of energy, and more importantly, ways to economically store that energy when the supplies are unavailable will continue to play a part in the supply of energy, at this point in development, they are insufficient to affordably meet the overall need for energy for the world population. This sets up well for demand for our compression services, as upstream producers respond to market signals with continued drilling activity to help supply a world faced with increasingly tight supply-demand dynamics. When you layer on top of all this the uncertainty caused by a war in Eastern Europe, the services that USA Compression provides become that much more critical. Lastly, I want to provide a brief update on our dual-drive offering, which as we've explained before, is a compression unit able to be powered by either natural gas or electricity, providing our customer not only redundancy as it regards the fuel source, but also the opportunity for significant emissions reduction. During the first quarter, we continued to progress with a retrofit and deployment of the dual-drive technology, recently entering into multi-year contracts for a series of large horsepower units with an existing USA Compression customer. This is an exciting time for USA Compression as we begin to reconfigure units in our fleet for dual drive operations. This retrofit of USAC's large horsepower fleet is a logical, practical, and proven economic solution involving greenhouse gas mitigation. As our work on dual drive continues throughout 2022 and beyond, we expect an uptick in customer inquiries, as further electric infrastructure begins to be built out. We believe dual drive is an attractive 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. The concept of dual drive is to combine a natural gas driven engine and an electric driven motor to quickly and reliably switch from natural gas to electricity depending on operating constraints, in order to compress natural gas. The field-proven dual-drive compression system allows companies to decrease emissions and permit their sites for electrical compression while still having the flexibility and redundancy to switch to natural gas when extreme temperatures, both summer and winter, put a strain on the power grid and utilities charge steep demand fees during resulting power outages. As a result, customers will realize lower operating expenses, increased reliability, 99% run time, substantially lower emissions of CO2 and methane, the mitigation of interconnect delays, and optimized fuel cost. One last comment on the stability of USA Compression's business before I turn over the call to Matt to walk through the results of the first quarter. This quarter's payment will be the 37th quarter of distributions. returning over $1.3 billion to unit holders since our IPO. I've often talked about the stability of this business, and having now worked through eight quarters since a pandemic threw the world into a mess, we have proven our ability to power through downturns. The last several years have really highlighted the attractiveness of the large horsepower compression business model, and we expect those tailwinds to not only continue, but improve over the course of 2022. Matt?