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?

Thanks, Eric, and good morning, everyone. Today, USA Compression reported first quarter results, including quarterly revenue of $163 million, adjusted EBITDA of $98 million, and DCF to limited partners of $50 million, all of which were in line with the quarter. As Eric mentioned, we saw pricing for the fleet as a whole increase during the first quarter, up to $16.87 per horsepower per month. reflecting the strengthening market for our compression services and contractual price escalators. Our adjusted gross margin as a percentage of revenue was 67% in the first quarter, a slight decrease from the previous quarter, which had benefited from some one-time offsets to expense. We achieved adjusted EBITDA for the first quarter of approximately $98 million, consistent with previous quarters, and Adjusted EBITDA margin of 60% was again consistent with our averages. Our total fleet horsepower at the end of the quarter of approximately 3.7 million horsepower was flat with the fourth quarter. Average utilization for the first quarter was up two percentage points from the fourth quarter to just under 85%, illustrating the strengthening market mentioned earlier. Utilization at the end of the first quarter, though, was up almost 3.5% from the end of Q4. For the quarter, we had total expansion capital spending of $20 million, consisting of some new unit payments and reconfiguration of idle units. Our maintenance capex was approximately $6 million. As Eric mentioned, during the first quarter, we did place orders for an additional $20 new large horsepower units for delivery in late 2022 and early 2023, which brings the total commitment for new units to 30 new large horsepower units. These new units will go to specific customer editions, and the remainder of our expansion capital for the year will be focused on redeployment of existing idle units. Net income for the quarter was $3 million, and operating income was $35 million. Net cash provided by operating activities was $35 million in the quarter. And lastly, cash interest expense net was $30 million. Based on the first quarter's results, the Board decided to keep the distribution consistent at 52.5 cents per unit, which resulted in a distributable flow coverage ratio of 0.98 times. While lower than we would normally expect, we expect that ratio will improve over the course of the year as we deploy additional horsepower and fleet utilization improves. Our bank coverage leavenant ratio was 5.18 times. Consistent with prior quarters, 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. At this point in the year, we are keeping our full year 2022 guidance unchanged. We expect adjusted EBITDA between $406 million and $426 million in distributable cash flow of between $213 million and $233 million. Also, you may have noticed that late last week, a tranche of warrants with the right to purchase 5 million common units was exercised in full by the holders. The exercise of the warrants was net settled by the partnership of for a total of approximately 534,000 common units. These warrants were part of the preferred equity financing we undertook back in 2018 for the CDM acquisition. And finally, we expect to file our Form 10-Q with the SEC as early as this afternoon. With that, we'll open the call to any questions.

Thank you. And as a reminder, ladies and gentlemen, it is Star 1 to ask a question. Our first question comes from TJ Schultz of RBC Capital Markets.

Hey, good morning.

Hey, so there's a lot of discussion about takeaway constraints from different basins with natural gas, particularly in the Permian. And then we've seen a few announcements about increasing compression, going through various compression expansions to address bottlenecks. So I guess the question is how you think about those constraints, the impact on your view on gas volumes and producer activity and growth outlook, and then also, I guess, the competition and tightness for new compression from suppliers as you're spending to order new horsepower this year.

Yeah, TJ, this is Eric. Great questions. I think one of the things that we are clearly seeing is With the bottlenecks and supply chain issues for access to new equipment, those of us who during the last couple years downturn had some new vintage modern assets returned and went idle, we have assets that can be deployed extremely quickly. and relatively low CapEx incremental cost to deploy. You know, as we mentioned in our prepared thoughts there, topics that utilization for the first quarter averaged, you know, two percentage points higher, run rate at 3% higher Q over Q. April is up. May is also up. So I think one of the reasons we saw a little bit light or we were a little light on coverage and our leverage was a little up was that we kind of pre-funded some of this conversion CapEx, make ready CapEx to deploy the equipment. So lead times for new equipment are a year plus out. We've been working with our core suppliers, people we've had long relationships with, to make sure that we've got access to parts and pieces, major components. We got in the queue ahead of some of the others. So it's a problem. Some of the larger, particularly when you look at big volume projects coming out of the Permian, some of the bigger diameter lines, the lead times for this mega equipment have lengthened excessively. So I think what we're going to be seeing, and we'll be the beneficiary, is field gathering guys will be supplying incremental volumes into pipes at higher pressures. So I think from a competitive perspective, those of us who have equipment, there's just a couple of us, are going to be the beneficiaries of that. We're executing significantly longer-term contracts. We're pushing through significantly higher monthly service fees. We're increasing the rates on units that come off a primary term and go month to month to the extent that a little bit of equipment is being returned to us. We quickly redeploy it to other places at significantly higher rates. So it's kind of the perfect storm. Lead times for equipment have lengthened. Inflation is hitting us all. We're fortunate that we can offset inflation with some operating efficiencies. So this is exactly as we expected when we come out of the downturn. We focus on redeploying idle fleet. We focus on repricing our existing assets. And I think we will be the beneficiaries of a rising tide that just a couple of us are able to capitalize upon.

And TJ, Matt, just one thing to add is when you think back to the last few downturns, kind of the 08-09 downturn and then the 14-15-16 timeframe, you know, in both of those, and I'll just draw the difference between where we are now, both of those previous ones, you had more of a buildup of equipment kind of leading into those downturns, both in 08-09 as well as kind of the 14-15 downturn. what we've seen in the industry over the last, call it six, seven, eight years now is there's been a lot more discipline on the capital spending. So I think that's in part what's caused what Eric was talking about, which is this longer lead time and versus coming out of kind of the 08, 09 and 14, 15, there just isn't a whole lot of extra equipment out there. And so you're, the lead times are pushing, but also sort of the, the idle equipment inventory of especially the large horsepower stuff just isn't there like it was before.

Okay. Great. That all makes sense. I appreciate it, Eric, and that's all I've got. Thanks, TJ.

Our next question comes from Salman Akyal of Stifel.

Thank you. Good morning, all. So just starting off with your last comment there on inflation, could you maybe bifurcate that and maybe discuss it between what you're seeing on, you know, for people and then also for consumables. Should we think of one as being greater weighted than the other?

Yes, that's a great question. When you look at the components that drive our OpEx costs, labor is a large component. We pointed out we drive over a million miles a month, so diesel fuel, gasoline is a major component. lubricating oil that we use for both our caterpillar engines and aerial compressors has gone up significantly. We're fortunate that a lot of the contract mechanisms we have, for example, lube oil, we're able to pass through increases. So as we've seen, oil prices go from $30 a barrel to $100 a barrel. You've seen refined lube oil prices increase proportionately, you know, 2.5, 3x. We're able to pass that along to our customers. You know, people are in short supply, you know, in any and all industries right now. We're fortunate that USA Compression is viewed as a place that people want to be. We are seeing some competitive tension. Out in the field with some of our frontline service technicians, we're trying to get ahead of that with some constructive things. But as we point out to our folks, the grass isn't always greener on the other side. We've actually had some folks that have left over the last couple of years chasing a higher wage and a higher rate. Interestingly, we've had a large, a significant percentage of those folks come back. It's one thing to say, you know, I can make X number of dollars more and I can work overtime, but when folks end up working 80, 90, 100 hours a week for six months in a row with literally seven days a week with no downtime in a period of six months, it catches up in quality of life. So I think we try to balance work, have a good work-life balance. Our men and women out in the field, are well compensated. You know, we didn't cut a 401k plan during the downturn. We paid bonuses at the end of both of the years during the downturn. We've got a good benefits package for folks. So I think when you look at it holistically, that's viewed positively. Vehicles, costs of buying new trucks are up. Lead time to acquire new trucks are up. Parts and pieces coming from Caterpillar, coming from Ariel, and coming from some of our other suppliers. Lead times are up. Again, because of some of the long-term relationships that we've had with these folks, we've been able to lock in some nominal price increases over the course of 2022 and even on into 2023 as well. So I think we've done a very good job of getting ahead of the curve. And unlike some industries that may be seeing 20, 30, 40, 50% increases. You look at the day rates for drilling rigs. You look at the cost of fracked sand. You look at the cost of fracked fluids, the various elements that go in to support the energy infrastructure. We've been able to mitigate a bunch of these operating costs with some operating efficiencies and honestly just aggressive contracting coming out of this downturn.

Got it. Very helpful. And you refer to significantly longer contracts and increasing rates, but when I think about your new large units that you have on order, are you able to contract those for five years or so on those new units?

Those are generally the terms that we're talking about. Our industry with big horsepower typically is somewhere in the two to five, Every now and then we'll see a seven-plus-year contract. But, yeah, when we're looking at these new bigger horsepower units, five years is kind of down the fairway.

And, Selman, remember a lot of that new stuff is going to big stations, so they're not kind of onesie, twosie units out there. They're actually part of, you know, six, eight, ten unit installations with all the associated other infrastructure, piping, controls, et cetera. So it tends to be a lot more of a kind of an infrastructure application than just a unit out in the field.

Yeah, and let me further the comments, Matt. That's a great concept. At the end of the five-year primary term – these units don't automatically get repriced and come home. Either party can reopen the contract at that point in time. During this five-year initial primary term, we generally build in price escalations. Some are type CPI, some are price specific. But at the end of the five-year term, it just doesn't automatically come home. Things evergreen, things go on a 30-day notice where either party can say, hey, I do want to send it home or I want to renegotiate. With this really big horsepower, as Matt points out, it rarely comes home. So we typically, either coming into the prior to the expiration of the five years or right afterwards, we enter into another term contract that are in the kind of the three to five year horizon again and extend the operational deployment time of those assets. We have always talked about barriers to entry, but our industry with big horsepower has very large barriers to exit. The freight costs are borne by our customers. So there's cranes, there's trucking costs. You may be looking at multiple hundreds of thousands of dollars to send one of these, an individual piece of equipment home. And as Matt points out, there's four to eight of these units on a given pad site. And these pads may be moving anywhere between 30,000 barrels of oil and 100 million cubic feet of gas a day. So you can envision what the downtime and loss of revenues would look like if this equipment were to be sent home. They don't just take our stuff, send it home. Then you've got to build a duplicate facility with somebody else to have the piping, the vessels, the separation, dehydration, treating, all the stuff that goes with it. Once we're in, we're in. And it's really only when there's a significant change in these big central facilities that a unit might get sent home or two units might get sent home. So you can envision with a major oil or a large independent having multiple hundreds of thousands of acres in a geographic area, they've developed these big central facilities on a hub-and-spoke basis. where they'll develop pad site one, drill, develop, move to another pad site two, and then interconnect that new pad site or multiple pad sites with gathering lines to provide the oil and the gas back to these central facilities. So we're literally involved in the regional infrastructure for an extended period of time.

Got it. Very helpful. And then You talked about reconfiguration of units, and I'm just kind of curious how much of that is left. And so as we roll into 2023, should we be thinking about everything you do would be presumably have to be new order?

We do reconfigure a little bit. As we think about dual drive going forward, there will be some reconfiguration capital associated with it. the bulk of our equipment generally stays in the basin where it was originally deployed. So if you think about Permian Basin, you think about Mid-Continent, you think about Appalachia, generally the assets stay in those basins. They may have come home. They were underutilized during the downturn. They were sent home. So we'll spend some make-ready capital You know, you've got to paint the thing. You've got to do some, you know, control valves and, you know, do a little bit of work, you know, site vessels and, you know, electronic gizmos and stuff to get it ready to go out in the field. But it's a small percentage of capex cost versus buying a brand new unit or even reconfiguring a unit. So I would say predominantly the bulk of the reconfiguration dollars are going to be spent on dual drive. There will be some incremental make-ready capital costs to take idle equipment and get it moved out into the field. And that will continue on into 2023. And it depends on the trajectory how quickly we redeploy the idle fleet. We're honestly ahead of what we modeled coming into 2022 as far as redeploy of idle assets. And just a question of how long it takes to redeploy in the field. And with the lack of access to new equipment, obviously that trend is going to tend to accelerate.

Got it. All right. That does it for me. Thank you so much.

Thank you very much.

As there are no further questions, I'll hand the call over to Eric Long for any additional or closing remarks.

Thank you. The first quarter of 2022 kicked off a year in which we expect continued growth and activity across the energy industry. Starting with the upstream producers, the quarter reflected solid operations with some positive trends as we move through the quarter, including utilization and pricing gains and increased quoting activity. In order to be ready for demand that we see coming, we will continue to prepare our idle fleet for redeployment to the field, as well as selectively make capital investments in new units earmarked for specific customers in infrastructure applications. Natural gas prices and production continue onward and upward for now, and the ever-important need for natural gas has only become more so given the global political events currently taking place. We expect these factors to continue to drive the demand for compression and demand for our business during 2022 and beyond. One thing has not changed. The fundamental driver of our business is the demand for and the production of natural gas. We see natural gas usage increasing in the U.S. and throughout the world. We believe that the underlying stability of our large horsepower infrastructure-focused contract compression services business model has served our unit holders well over the last few years, and for the nearly 25 years we have been in business. We have a great asset base from which to be involved in the longer-term transition to cleaner energy in which natural gas will clearly play an important part. Thanks for joining us, and please be safe. We look forward to speaking with everyone on our next call.

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect. Thank you. Thank you. Yes. Thank you.

Thank you.

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 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 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 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 mmbtu. 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 are 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 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?

Thanks, Eric, and good morning, everyone. Today, USA Compression reported first quarter results, including quarterly revenue of $163 million, adjusted EBITDA of $98 million, and DCF to limited partners of $50 million, all of which were in line with the quarter. As Eric mentioned, we saw pricing for the fleet as a whole increase during the first quarter, up to $16.87 per horsepower per month. reflecting the strengthening market for our compression services and contractual price escalators. Our adjusted gross margin as a percentage of revenue was 67% in the first quarter, a slight decrease from the previous quarter, which had benefited from some one-time offsets to expense. We achieved adjusted EBITDA for the first quarter of approximately $98 million, consistent with previous quarters, Adjusted EBITDA margin of 60% was again consistent with our averages. Our total fleet horsepower at the end of the quarter of approximately 3.7 million horsepower was flat with the fourth quarter. Average utilization for the first quarter was up two percentage points from the fourth quarter to just under 85%, illustrating the strengthening market mentioned earlier. Utilization at the end of the first quarter, though, was up almost 3.5% from the end of Q4. For the quarter, we had total expansion capital spending of $20 million, consisting of some new unit payments and reconfiguration of idle units. Our maintenance capex was approximately $6 million. As Eric mentioned, during the first quarter, we did place orders for an additional $20 new large horsepower units for delivery in late 2022 and early 2023, which brings the total commitment for new units to 30 new large horsepower units. These new units will go to specific customer editions, and the remainder of our expansion capital for the year will be focused on redeployment of existing idle units. Net income for the quarter was $3 million, and operating income was $35 million. Net cash provided by operating activities was $35 million in the quarter. And lastly, cash interest expense net was $30 million. Based on the first quarter's results, the board decided to keep the distribution consistent at 52.5 cents per unit, which resulted in a distributable flow coverage ratio of 0.98 times. While lower than we would normally expect, we expect that ratio will improve over the course of the year as we deploy additional horsepower and fleet utilization improves. Our bank coverage leavenant ratio was 5.18 times. Consistent with prior quarters, 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. At this point in the year, we are keeping our full year 2022 guidance unchanged. We expect adjusted EBITDA of between $406 million and $426 million, and distributable cash flow of between $213 million and $233 million. Also, you may have noticed that late last week, a tranche of warrants with the right to purchase 5 million common units was exercised in full by the holders. The exercise of the warrants was net settled by the partnership for a total of approximately 534,000 common units. These warrants were part of the preferred equity financing we undertook back in 2018 for the CDM acquisition. And finally, we expect to file our Form 10-Q with the SEC as early as this afternoon. With that, we'll open the call to any questions.

Thank you. And as a reminder, ladies and gentlemen, it is Star 1 to ask a question.

Our first question comes from TJ Schultz of RBC Capital America. Hey, good morning.

Hey, so there's a lot of discussion about takeaway constraints from different basins with natural gas, particularly in the Permian. And then we've seen a few announcements about increasing compression, going through various compression expansions to address So I guess the question is how you think about those constraints, the impact on your view on gas volumes and producer activity and growth outlook, and then also, I guess, the competition and tightness for new compression from suppliers as you're spending to order new horsepower this year.

Yeah, TJ, this is Eric. Great questions. I think one of the things that we are clearly seeing is With the bottlenecks and supply chain issues for access to new equipment, those of us who during the last couple of years downturn had some new vintage modern assets returned and went idle, we have assets that can be deployed extremely quickly. and relatively low CapEx incremental cost to deploy. You know, as we mentioned in our prepared thoughts there, topics that utilization for the first quarter averaged, you know, two percentage points higher, run rate at 3% higher Q over Q. April is up. May is also up. So I think one of the reasons we saw a little bit light or we were a little light on coverage and our leverage was a little up was that we kind of pre-funded some of this conversion CapEx, make ready CapEx to deploy the equipment. So lead times for new equipment are a year plus out. We've been working with our core suppliers, people we've had long relationships with, to make sure that we've got access to parts and pieces, major components. We got in the queue ahead of some of the others. So it's a problem. You know, some of the larger, particularly when you look at big volume projects coming out of the Permian, some of the bigger diameter lines, the lead times for this mega equipment have lengthened excessively. So I think what we're going to be seeing, and we'll be the beneficiary, is field gathering guys will be supplying incremental volumes into pipes at higher pressures. So I think from a competitive perspective, those of us who have equipment, there's just a couple of us, are going to be the beneficiaries of that. We're executing significantly longer-term contracts. We're pushing through significantly higher monthly service fees. We're increasing the rates on units that come off a primary term and go month to month to the extent that a little bit of equipment has been returned to us. We quickly redeploy it to other places at significantly higher rates. So it's kind of the perfect storm. Lead times for equipment have lengthened. Inflation is hitting us all. We're fortunate that we can offset inflation with some operating efficiencies. So this is exactly as we expected when we come out of the downturn. We focus on redeploying idle fleet. We focus on repricing our existing assets. And I think we will be the beneficiaries of a rising tide that just a couple of us are able to capitalize upon.

And TJ, Matt, just one thing to add is when you think back to the last few downturns, kind of the 08, 09 downturn, and then the 14, 15, 16 timeframe, you know, in both of those, and I'll just draw the difference between where we are now, both of those previous ones, you had more of a buildup of equipment kind of leading into those downturns, both in 08, 09, as well as kind of the 14, 15 downturns. What we've seen in the industry over the last, call it six, seven, eight years now, is there's been a lot more discipline on the capital spending. So I think that's in part what's caused what Eric was talking about, which is this longer lead time. And versus coming out of kind of the 08, 09, and 14, 15, there just isn't a whole lot of extra equipment out there. And so the lead times are pushing, but also sort of the the idle equipment inventory of especially the large horsepower stuff just isn't there like it was before.

Okay.

Great. That all makes sense. I appreciate it, Eric, and Matt. That's all I've got. Thanks, TJ.

Our next question comes from Salman Akyal of Stifel.

Thank you. Good morning, all. So just starting off with your last comment there on inflation, could you maybe bifurcate that and maybe discuss it between what you're seeing on, you know, for people and then also for consumables. Should we think of one as being greater weighted than the other?

Yes, that's a great question. When you look at the components that drive our OPEX costs, labor is a large component. We pointed out we drive over a million miles a month, so diesel fuel, gasoline is a major component. lubricating oil that we use for both our caterpillar engines and aerial compressors has gone up significantly. We're fortunate that a lot of the contract mechanisms we have, for example, lube oil, we're able to pass through increases. So as we've seen, oil prices go from $30 a barrel to $100 a barrel. You've seen refined lube oil prices increase proportionally, you know, 2.5, 3x. We're able to pass that along to our customers. You know, people are in short supply, you know, in any and all industries right now. We're fortunate that USA Compression is viewed as a place that people want to be. We are seeing some competitive tension. Out in the field with some of our frontline service technicians, we're trying to get ahead of that with some constructive things. But as we point out to our folks, the grass isn't always greener on the other side. We've actually had some folks that have left over the last couple of years chasing a higher wage and a higher rate. Interestingly, we've had a large, a significant percentage of those folks come back. It's one thing to say, you know, I can make X number of dollars more and I can work overtime, but when folks end up working 80, 90, 100 hours a week for six months in a row with literally seven days a week with no downtime in a period of six months, it catches up in quality of life. So I think we try to balance work, have a good work-life balance. Our men and women out in the field, are well compensated. You know, we didn't cut a 401k plan during the downturn. We paid bonuses at the end of both of the years during the downturn. We've got a good benefits package for folks. So I think when you look at it holistically, that's viewed positively. Vehicles, costs of buying new trucks are up. Lead time to acquire new trucks are up. Parts and pieces coming from Caterpillar, coming from Ariel, and coming from some of our other suppliers. Lead times are up. Again, because of some of the long-term relationships that we've had with these folks, we've been able to lock in some nominal price increases over the course of 2022 and even on into 2023 as well. So I think we've done a very good job of getting ahead of the curve. And unlike some industries that may be seeing 20, 30, 40, 50 percent increases. You know, you look at the day rates for drilling rigs. You look at the cost of fracked sand. You look at the cost of fracked fluids, the various elements that go in to support the energy infrastructure. We've been able to mitigate a bunch of these operating costs with some operating efficiencies and honestly just aggressive contracting, you know, coming out of this downturn.

Got it. Very helpful. And you refer to significantly longer contracts and increasing rates, but when I think about your new large units that you have on order, are you able to contract those for five years or so on those new units?

Those are generally the terms that we're talking about. Our industry with big horsepower typically is somewhere in the two to five, Every now and then we'll see a seven-plus-year contract. But, yeah, when we're looking at these new bigger horsepower units, five years is kind of down the fairway.

And, Selman, remember a lot of that new stuff is going to big stations, so they're not kind of onesie, twosie units out there. They're actually part of, you know, six, eight, ten unit installations with all the associated other infrastructure, piping, controls, et cetera. So it tends to be a lot more of a kind of an infrastructure application than just a unit out in the field.

Yeah, and let me further the comments, Matt. That's a great concept. At the end of the five-year primary term – these units don't automatically get repriced and come home. Either party can reopen the contract at that point in time. During this five-year initial primary term, we generally build in price escalations. Some are type CPI, some are price specific. But at the end of the five-year term, it just doesn't automatically come home. Things evergreen, things go on a 30-day notice where either party can say, hey, I do want to send it home or I want to renegotiate. With this really big horsepower, as Matt points out, it rarely comes home. So we typically send either coming into the prior to the expiration of the five years or right afterwards, we enter into another term contract that are in the kind of the three to five year horizon again and extend the operational deployment time of those assets. We have always talked about barriers to entry, but our industry with big horsepower is has very large barriers to exit. The freight costs are borne by our customers. So there's cranes, there's trucking costs. You may be looking at multiple hundreds of thousands of dollars to send one of these, an individual piece of equipment home. And as Matt points out, there's four to eight of these units on a given pad site. And these pads may be moving anywhere between 30,000 barrels of oil and 100 million cubic feet of gas a day. So you can envision what the downtime and loss of revenues would look like if this equipment were to be sent home. They don't just take our stuff, send it home. Then you've got to build a duplicate facility with somebody else to have the piping, the vessels, the separation, dehydration, treating, all the stuff that goes with it. Once we're in, we're in. And it's really only when there's a significant change in these big central facilities that a unit might get sent home or two units might get sent home. So you can envision with a major oil or a large independent having multiple hundreds of thousands of acres in a geographic area, they've developed these big central facilities on a hub-and-spoke basis. where they'll develop pad site one, drill, develop, move to another pad site two, and then interconnect that new pad site or multiple pad sites with gathering lines to provide the oil and the gas back to these central facilities. So we're literally involved in the regional infrastructure for an extended period of time.

Got it. Very helpful. And then You talked about reconfiguration of units, and I'm just kind of curious how much of that is left. And so as we roll into 2023, should we be thinking about everything you do would be presumably have to be new order?

We do reconfigure a little bit. As we think about dual drive going forward, there will be some reconfiguration capital associated with it. The bulk of our equipment generally stays in the basin where it was originally deployed. So if you think about Permian Basin, you think about Mid-Continent, you think about Appalachia, generally the assets stay in those basins. They may have come home. They were underutilized during the downturn. They were sent home. So we'll spend some make-ready capital You know, you've got to paint the thing. You've got to do some, you know, control valves and, you know, do a little bit of work, you know, site vessels and, you know, electronic gizmos and stuff to get it ready to go out in the field. But it's a small percentage of CapEx cost versus buying a brand new unit or even reconfiguring a unit. So I would say predominantly the bulk of the reconfiguration dollars are going to be spent on dual drive. There will be some incremental make-ready capital costs to take idle equipment and get it moved out into the field. And that will continue on into 2023. And it depends on the trajectory how quickly we redeploy the idle fleet. We're honestly ahead of what we modeled coming into 2022 as far as redeploy of idle assets. And just a question of how long it takes to redeploy in the field. And with the lack of access to new equipment, obviously that trend is going to tend to accelerate.

Got it. All right, that does it for me. Thank you so much.

Thank you very much.

As there are no further questions, I'll hand the call over to Eric Long for any additional or closing remarks.

Thank you. The first quarter of 2022 kicked off a year in which we expect continued growth and activity across the energy industry. Starting with the upstream producers, the quarter reflected solid operations with some positive trends as we move through the quarter, including utilization and pricing gains and increased quoting activity. In order to be ready for demand that we see coming, we will continue to prepare our idle fleet for redeployment to the field, as well as selectively make capital investments in new units earmarked for specific customers in infrastructure applications. Natural gas prices and production continue onward and upward for now, and the ever-important need for natural gas has only become more so given the global political events currently taking place. We expect these factors to continue to drive the demand for compression and demand for our business during 2022 and beyond. One thing has not changed. The fundamental driver of our business is the demand for and the production of natural gas. We see natural gas usage increasing in the U.S. and throughout the world. We believe that the underlying stability of our large horsepower infrastructure-focused contract compression services business model has served our unit holders well over the last few years, and for the nearly 25 years we have been in business. We have a great asset base from which to be involved in the longer-term transition to cleaner energy in which natural gas will clearly play an important part. Thanks for joining us and please be safe. We look forward to speaking with everyone on our next call.

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect.