USA Compression Partners LP

Please stand by, we're about to begin. Good morning and welcome to USA Compression and Partners LP second 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. Additional questions or Q&A instructions will be given at that time. This conference is being recorded today, August 2nd, 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 June 30, 2022. You can find our earnings release as well as recording of this call in the investor relations section of our website at usacompression.com. The recording will be available through August 12, 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 future 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 Please note that information provided on this call speaks only to management's views as of today, August 2nd, and may no longer be accurate at the time of a replay. I'll now turn the call over to Eric Long, President and CEO of USA Compression.

Thank you, Chris. Good morning, everyone, and thanks for joining our call. Also with me is Matt Liuzzi, our CFO. Over the past few years, multiple investors have suggested to me that early on in our earnings call, I hit head-on two topics that folks want to hear about. How's business and is our distribution safe? First, our business is strong as you would expect right now. I will spend a large part of this call talking about how we see USA compression faring over the upcoming years in light of the spotlight being shown on the critical shortage of energy worldwide. And second, on July 14th and based on the second quarter results, our board decided to keep this quarter's distribution consistent at 52.5 cents per unit which will be paid this Friday, August 5th. This resulted in a distributable cash flow coverage ratio of 1.08 times, a nice improvement of over 10% from last quarter. This will be our 38th quarter of consecutive distribution payments, and we will have returned over $1.4 billion to our unit holders since our IPO in January of 2013. As always, our board determines the distribution on a quarterly basis, and they can opt to maintain, increase, reduce, or suspend the distribution as it deems most appropriate. Our bank covenant leverage ratio was 4.9 times, a healthy reduction of over 5% from last quarter. So now, on to how we see our business stacking up and where does USA Compression go from here. The second quarter continued the demand-driven improvements in our business that we saw towards the end of the first quarter and reflects the shortage of energy of all types in which the world now finds itself. The macro environment, driven by a growing need for natural gas and constrained supply, continues to reflect a tight supply-demand balance, which led to attractive commodity prices throughout the quarter. And while our compression services business does not have direct commodity price exposure, the strong backdrop does spur industry activity, which has been positive for demand for our services. Given everything going on in the world, we expect this trend to continue for the foreseeable future. Before I discuss the second quarter results and the broader business environment, I'd like to highlight our relentless focus on safety and recognize our employees for achieving a high standard of safety, day in and day out, here at USA Compression. Our employees are constantly on the road, driving to field sites, even with our extensive use of remote monitoring technologies. In fact, we drove over 4 million miles during the second quarter. This much driving has the potential to create significant risk for incidents. But we focused heavily on safety while driving, and I am proud that as of the halfway point of 2022, we have had zero recordable incidents. But driving isn't the only situation where our employees face risk. On the job sites, in warehouses, and even in the field offices, if our people are not committed to a culture of safety, All these activities can create hazards. As of July 1st, we had worked over 4.5 million hours since our last lost time injury, which stretches back more than two and a half years. Safety is a way of life here at USA Compression. The markets and business environment will undoubtedly go up and down, but the one thing that won't change is our team's commitment to safety. Now turning to the second quarter of 2022, we picked up where the first quarter left off and then continued to make gains from there throughout the quarter. We continued the utilization gains achieved during the first quarter as we deployed additional horsepower, with our average horsepower utilization increasing three percentage points from the first quarter 2022 to just below 88%. The second quarter ended with horsepower utilization of more than 88%. The market for compression is tightened as our limited new units being fabricated industry-wide, and so has the utilization of our fleet, which in turn led to increased revenues and cash flow. Total revenues were up approximately 5%, and adjusted EBITDA increased 7%, both compared to the first quarter of this year. We also saw revenue on a per-horsepower, per-month basis increase as we continued to push through both CPI and normal course price increases. We believe these trends will continue for the balance of the year 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 later this morning. Halfway through 2022, it sure feels like it's full steam ahead for energy in general and compression services in particular. Commodity prices remained high during the second quarter, with natural gas at Henry Hub averaging just shy of $7.50 per MMBTU, and West Texas Intermediate Crude Oil averaging over $108 per barrel, both at the highest levels since 2008. However, I believe the difference between now and 2008 is significant. Commodity prices today appear to be driven by the realities of physical supply, demand, and balance in the market versus financial trading dynamics, which played a big role in 2008. We live in a world that is hungry for energy of all types. Together, crude oil and natural gas represent the vast majority of energy consumption, both in the U.S. and around the world. The abundance, cost, reliability, and efficiency of both commodities have been unparalleled in the last 100-plus years. When you look at some of the key metrics within the energy industry, we believe signs are pointing to increasing tightness of supply amid increasing demand. Climate fear is driving the demonization of oil and has resulted in capital starvation across the broader energy space over the past few years, and with even more regulation. It is no wonder that unrealistic and misplaced policies have combined to create a general energy shortage across the globe. It's not just crude oil and natural gas, but also coal and electricity, which are seeing dramatic shortages in Europe, and as a result, strong prices. Further exacerbating these trends is the unprecedented rise in demand for key metals and minerals, which has inflated prices, reversing the decade-long trend of falling costs for wind turbines, solar modules, and batteries. According to a recent blog by noted energy and technology author Mark P. Mills, transition policies in place today are creating ever-rising minerals demand, yet the world's miners and mineral refiners do not have sufficient capacity in place or planned either for basic metals like copper and nickel, or for more exotic elements such as lithium, cobalt, and rare earths. From a policy perspective, Mark notes that governments should base transition strategies on what could be reasonably achievable at costs that don't cause broad economic harm. China's 80% global share of rare earth supplies didn't happen because they invented more effective mining or refining technologies, but instead for favorable policies. In the U.S., the regulatory environment for mining is, to put it bluntly, hostile. The U.S. went from producing nearly all of the world's rare earths in the late 1970s to depending on imports for 95% of its needs today. In fact, the U.S. now depends on imports for 100% of 17 minerals and half or more of 28 others. China controls the dominant sources of supply and the bulk of the refining capacity worldwide. The simple fact is that the U.S., along with Europe, has regulated its way into far greater mineral import dependencies. Mark's bottom line is that the scale of mineral supplies needed for transition policies won't be happening in the timeframe policymakers imagine. And what is currently playing out in Europe and the rest of the world regarding access to affordable oil, natural gas, coal, and electricity does not even factor the lack of key minerals needed in the future for the energy transition. For now and the foreseeable future in the real physical world, most of civilization's energy will still come from oil, natural gas, and NGLs. All of this bodes well for the long-term outlook for our business, natural gas compression services, and we will be a critical part of the longer-term energy transition well into the future. Scary stuff, and it points out just how disconnected from reality policymakers worldwide are. The good news is that people across the world are waking up to the real physical world and are shocked by the costs and shortages that are being caused by poor and misguided policies of their governments. So to restate the obvious, the supply-demand balance for both oil and natural gas is unbelievably tight right now, both here domestically as well as around the world. That is keeping commodity prices high and driving demand for our compression services as producers work to get as much natural gas out of the ground as possible. Our fleet of large horsepower, modern vintage units was designed to be flexible for our customers and serve conditions like we see today. Having a large fleet of reliable, efficient equipment that can be mobilized on short notice is a great advantage for USA Compression. And we are doing everything we can to get that equipment out to our customers who in turn are doing everything they can do to get natural gas to end users like you and me. There is much noise in the press right now about oil and gas prices coming down due in no small part to the prospects of a worldwide recession potentially destroying demand. In a recent presentation, noted Raymond James oil analyst Marshall Atkins points to several key indicators suggesting that the worst is yet to come regarding oil and natural gas prices. Worldwide, about 1.1 billion barrels have been worked off since May of 2022, hardly an indication of excess supply, and inventories are now about 375 million barrels below normal. U.S. E&P investment is down 64% from 2018. Worldwide oil and gas discoveries are down about 90% from a 2006 peak. Major oils are scaling back big time with final investment decisions down about 80% from a 2009 peak. Not an indication of increasing supplies. OPEC is at a 70-year low with virtually no excess or flex capacity. Saudi and the UAE have only a combined half a million barrels of spare capacity, which may be gone in just a few months. Global inventory is balanced in the second quarter of 2022 as China locked down due to COVID. removing 2 million barrels of oil a day of demand. The U.S. Strategic Petroleum Reserve has been pulling down storage by a million barrels a day, and when it ends in October, the SPR will be down to only 375 million barrels of oil. Who will replace the million barrels of oil a day when the SPR quits being withdrawn? In the second half of 2022, Marshall forecasts oil demand growing by 3.5 to 4 million barrels a day, half of it coming from normal seasonal global oil demand, and a half of that coming from the reopening of China. This results in inventories falling further by about 2 million barrels a day, and the oil market enters 2023 undersupplied by about 2 million barrels a day. During 2023 to 2025, Marshall projects total supply growth of about 3.7 million barrels a day. With about 2 million barrels coming from the U.S., OPEC Iran adds about 1.2 million barrels a day, and all others add only about a half a million barrels a day. He further projects Russian exports to fall by a million barrels a day through 2025. Think about what happens if Putin removes 3 million barrels a day as has been suggested. Bottom line, to balance 2023 to 2025, there can be no demand growth during those three years. None. Since 1970 and the Arab oil embargo, the 50-year average for oil demand growth has been 2%. Only once, from 1980 to 1982, was there no growth in demand for oil. Clearly, we look at all of these elements, and our take is that the need for hydrocarbons is not going away anytime soon. And in fact, over the next few years, the supply-demand imbalance most likely gets worse, which should bode well for continued demand for our compression services. Closer to home and across our operating regions, our customers are active. The primary basins in our largest operating areas have all registered a year-over-year production increases, ranging from modest single digits to close to mid-teens, with increasing rig counts in the second half of 2022, leading to continued levels of expanding natural gas production. Our business activity levels in these regions have followed that activity. These regions have benefited from both proximity to export markets as well as ample transportation takeaway capacity. In the Northeast, natural gas production growth has been more modest as operators in the region continue to work through inadequate pipeline capacity due to regulatory roadblocks. Something we've also noticed is that the activity among our customers is not concentrated on one group or another. Customers, both big and small, are calling, requesting quotes, and contracting for our compression services under contracts with longer duration than we have seen in a while. USA Compression is responding to customer demands by deploying as much idle horsepower back into the field as possible. During the second quarter, we deployed over 60,000 horsepower net. The bulk of that horsepower was already owned equipment that moved from idle, sitting in a field or warehouse, to actively deploy, earning revenue and generating cash flow. You'll recall that in 2020 and 2021, our utilization dropped modestly as units came home. We purposely limited new unit orders for 2022 because our strategy was and continues to be to primarily redeploy existing idle units, requiring less capex capital as the market improves. This quarter demonstrated the benefit that redeployment of idle assets has on our financial performance. An obvious question is, how has inflation affected our business? Our contracts provide for annual CPI escalators, which were designed to keep pace with any sort of cost inflation we experience. While we've experienced some inflation in our primary expense category of parts, labor, and lube oil, we're working to maintain and beginning to improve on what are strong gross margins. Excuse me. Our adjusted gross margins were 67.8%, 67.1%, and 70.9% for Q2 of 22, Q1 of 22, and Q2 of 21, respectively. So while we've been able to mitigate a good portion of our cost increases, whether through offsetting rate increases or active management of our various expense items, we believe we still have room for additional improvement in upcoming quarters. Before I update you on some of the innovative technology that USA Compression is deploying as part of our longer-term ESG initiatives, I want to highlight what I consider a must-read and well-written paper by EQT, the largest natural gas producer in the U.S., and CEO Toby Rice, entitled Unleashing U.S. LNG, the Largest Green Initiative on the Planet. It should be required reading by every policymaker and environmentalist. While I won't steal Toby's thunder, he presents a few key factoids we're sharing that I don't think most folks are aware of, let alone comprehend the implications. If the U.S. were net zero today, the world would still miss its climate goals. Without China and India dramatically reducing their coal use, it doesn't matter what the U.S. does. Since 2005, the U.S. has reduced CO2 emissions from coal by one billion tons a year, from 2.1 billion tons a year to 1.1 billion tons a year, while the rest of the world continues to increase CO2 emissions from coal by 4.4 billion tons per year, from 9.3 billion tons per year to 13.7 billion tons per year. Coal use represents roughly one-half of the CO2 emission sources, so curtailing its use should be mission number one to achieve Paris Accord targets. Worldwide, there are 176 gigawatts of new coal plants being constructed, with China adding one plant per week, which is nearly two times the coal capacity retired by the U.S. since 2005, which was 93 gigawatts. There is 175 BCF a day of coal to gas switching demand worldwide today, predominantly in China and India. Quadrupling U.S. LNG capacity from 12.4 BCF today to 55 BCF today by 2030 to replace about one-third of the coal plants would reduce international CO2 emissions by an incremental 1.1 billion tons per year and at no cost to U.S. taxpayers. This LNG plan, which requires no U.S. taxpayer funds, has the same CO2 reduction benefit as, one, electrifying 100% of the U.S. passenger vehicle fleet, two, powering every home in America with rooftop solar and battery packs, and three, adding 54,000 windmills, doubling U.S. wind capacity combined, and would cost taxpayers $2 trillion. Contrast this to the EIA net zero scenario based on renewables, only that will require a total investment approaching $16 trillion over the next nine years. This cost will have to be heavily borne by undeveloped and underdeveloped countries who can least afford it. The sample per capita GDP of China is $10,000, India $2,000, and those two combined have 70% of global coal use versus the U.S. with $64,000. And did you know that converting an electric plant from coal to natural gas has nearly the same percentage of emissions reductions as replacing a gasoline-powered vehicle with an electric one, 60% CO2 reduction versus 59%. So thank you, Toby Rice and EQT, for developing such a pragmatic and comprehensive program that lays out an alternative roadmap to actually achieve CO2 reductions by 2030 and not breaking the bank, so to speak. if this plan were to occur, the implications for the amount of gas compression required to move the additional volumes of natural gas to LNG plants, roughly a 40% increase from today's total U.S. natural gas production, should be very favorable for USA compressions. So for the reason I touched on earlier relating to lack of key minerals needed to meet renewables demand or the practical LNG alternative proposed by Toby Rice and EQT, that neither the U.S. nor the world will achieve adoption of renewable sources of energy anywhere near the levels projected anytime soon. But as we look out into the future, we have been working on a compressor unit design which will be able to take advantage of the gradual transition to greater electricity usage throughout our country as the electric grid expands and ultimately gets built out. During last quarter's call, I had mentioned that we had signed multi-year contracts with an existing customer to deploy our dual-drive units out in the field. These units have been installed at Cal and Petroleum sites and commenced operations last week. We continue to be excited about the service offering as it allows our customers to further mitigate greenhouse gas emissions in a pragmatic and economical manner. Remember, this initiative is centered around retrofitting existing compression units for dual-drive capability. Economically, this makes a lot of financial sense for both USA Compression and our customer base. We expect that as these units get up and running and have operational performance, reliability, and flexibility further proven out, we will field more inquiries and ultimately demand for this environmental-friendly solution to compressing natural gas. We continue to believe that the expansion of the electric will be a multi-decade effort. As customers realize the dual drive offering gives them reliability and redundancy of a natural gas backup driver with the advantage of electricity as a prime power source, we believe the demand will expand over time. As I have mentioned, 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. This allows companies to decrease emissions and permit their sites for electrical compression while still having the flexibility and redundancy to switch to 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% runtime, substantially lower emissions of CO2 and methane, the mitigation of interconnect delays, and optimized fuel costs. We are also involved with providing compression for new ESG-driven projects with some of our larger, long-time customers. We recently have provided large horsepower hydrogen compressive services for a facility in the Midwestern U.S. and are currently designing compression facilities for a current large customer as part of a major carbon capture utilization and storage project. There is more work to be done, but as the energy industry determines what is feasible and, more importantly, what is economical, we expect more opportunities for USA Compression to play a role in ESG-focused applications like these. My view remains that the realities of technology will continue to shape the dialogue, the shape and the speed of the transition, which will be far more expensive and take far longer than policymakers anticipate. Finally, for what is now nearly 10 years as a public company, you've heard me talk about the stability of USA Compression's business, which is underpinned by the long-term nature of natural gas as a fuel source. Natural gas remains a clean-burning, abundant fuel that is easily transported throughout our country as well as the world, more now than ever in our history. The continued and now increasing demand for natural gas around the world has provided a stability to our business. This stability has benefited stakeholders across the board. Whether it is paying out distributions to our unit holders or making timely interest payments to our debt holders, we believe USA Compression's business has always been more stable than many other companies in the energy sector. We have worked hard to maintain that stability during the radical and unprecedented volatility over the past few years, and now we're seeing the commercial uptick and benefits for our financial results. Capital allocation is always a balance. As I mentioned earlier, quarters distribution, we will have made 38 consecutive quarters of distribution, returning over $1.4 billion to unit holders since our IPO. In addition, we've used excess cash flow to manage our leverage at reasonable levels. This quarter showed a meaningful reduction as we have expected. All in all, the last several years have highlighted the attractiveness of our large horsepower, infrastructure-focused compression business model, and we foresee better days ahead, not just for the energy complex, but specifically for USA Compression. I'll now pass it over to Matt to run through the financials.

Thanks, Eric, and good morning, everyone. Today, USA Compression reported second quarter results, including quarterly revenue of $171 million, adjusted EBITDA of $105 million, and DCF to limited partners of $56 million, each of which represented an increase over last quarter's performance. Pricing continued to increase during the quarter, up to $17.20 per horsepower per month. The increase reflects a combination of a strengthening of the overall market for our compression services, as well as contractual price escalators designed to keep pace with CPI. Our adjusted gross margin as a percentage of revenue was 67.8% in the second quarter, which represented an increase from the previous quarter and is approaching our historical averages. In the quarter, we achieved adjusted EBITDA of approximately $105 million and an adjusted EBITDA margin of 61.5%. Both of these were also improvements from the previous quarter and demonstrate the ability of the business to generate meaningful cash flow as utilization tightens. Our total fleet horsepower at the end of the quarter was flat from the previous quarter at approximately 3.7 million horsepower. As Eric mentioned, average utilization for the second quarter was up three percentage points from the first quarter to just shy of 88%. For the quarter, we had total expansion capital spending of $32 million, which was in line with our budget, consisting primarily of reconfiguration and make ready of idle units, with the remainder consisting of the delivery of four large horsepower units for deployment in a compressor station in the Delaware Basin, and some associated additional station components. Our maintenance capital was approximately $6 million consistent with the previous quarter. Net income for the quarter was $9 million and operating income was $42 million. Net cash provided by operating activities was $94 million in the quarter. And lastly, cash interest expense net was $31 million. As Eric mentioned, the board decided to keep the distribution consistent at 52.5 cents per unit which resulted in a distributable cash flow ratio of 1.08 times, which was a nice improvement from the last quarter. Our bank coverage leverage ratio was 4.9 times, also a healthy improvement from last quarter. While the business outlook is positive, we continue to manage through inflationary pressures and take a prudent approach to spending capital. You notice the meaningful improvement in both leverage and coverage, We continue to believe that with an improved outlook, these metrics should improve over the course of the year, benefiting both our equity and debt stakeholders. On April 27, 2022, 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 with the issuance of a total of approximately 534,000 common units. These warrants were part of the preferred equity financing undertaken in 2018 for the CDM acquisition. 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, and distributable cash flow between $213 million and $233 million. Finally, we expect to file our Form 10-Q with the SEC as early as this afternoon. And with that, we'll open the call to questions.

Thank you. And if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star 1 if you'd like to ask a question. And we'll pause just for a moment to allow everyone an opportunity to signal for questions. And we'll go ahead and take our first question from Solomon.

Thank you. Good morning. First question, and I think you've referred to this prior, is utilization continues to tick higher. You're going to get more and more pricing power, and it really sort of kicks in in that low, you know, low 90%, you know, high 80s. So it seems like we're about there, and I'm just wondering, how much more do you think you can push gross margins up?

Yeah, Selman, it's Matt. You know, good question.

I think, you know, the way I would look at it is historically this business has always generated gross margins kind of in and around that high 60s to 70% range. And that would be true if you were to look at the USA compression standalone financials, you know, back to 2013 at the time of the IPO. There was a bit of noise when we did the CDM acquisition because of the accounting. So if you looked kind of in the 2018-2019, those margins would go a little lower. But, you know, the USA Compression core kind of legacy business has always kind of been able to operate around that 68% to 70% range. And so, I mean, I think it's hard to go and say you're going to get another $5. percentage points of gross margin impact. I mean, I think if we're running kind of in that 69% range, it's pretty strong and consistent with where we've been historically. So obviously the pricing, you know, a lot of the pricing increases we have done are both, you know, related to kind of the overall tightness of the market, but also working to manage any sort of inflationary pressures. So, you know, we'll continue to do that and, you know, hopefully keep run ahead of any cost inflation. But at some point, we found it back in 18, you do tend to hit a bit of a ceiling on pricing where you just can't push it any further. And obviously, the customers ultimately have the decision to either buy or lease or buy or get services from a third party like us.

understood. And so in this better environment, are you also seeing any change at all to tenor at all? Are you able to extend the contracts for, you know, lock in a period of time?

Yes, Alan. This is Eric. You know, we have historically been able to lock in a longer-term tenor on contracts. In periods when the market is a little softer, there's really no incentive for USA compression to be locking in longer-term contracts at lower rates. So in an environment where we are today, where you're seeing increasing rates, a willingness by producers to lock in for a longer term because of lack of available equipment, we're actually taking advantage of that opportunity. So I would say on a percentage basis, we're seeing longer term contracts at higher rates than we've seen for, you know, in recent years. And we can continue to expect that to occur on into the future.

Got it. That's good news. You've also talked about in the past using existing equipment, idle equipment, refurbishing and putting it back out there. Can you say how much of that you still have to go?

With our utilization, being in the upper 80s, you can mathematically take a look at our total fleet of around 3.8, 3.9 million horsepower. If you do the math, 12% of 4 million round number, that's still a lot of horsepower that we have to play with. Not all of that, of course, is Bigger horsepower, not all of that is readily deployable, but a large percentage of that is.

Got it. And then I guess lead time for large horsepower, how is that trending?

It's getting longer and longer as we speak. It, of course, depends on, you know, which are the elements, you know, because you've got the engine from Caterpillar, You've got the compressor and cylinders that would come from Ariel. You've got coolers that come from a couple of different providers. You've got electronic controls, et cetera, et cetera. So depending on the size of the equipment, it varies. But we're seeing quotes from certain types of Caterpillar equipment. The stuff that we specialize in are a year or, in certain cases, substantially longer than a year. So you're... you know, 60 weeks on the type of equipment that we typically add to our fleet. So it's way out there.

Got it. And then I guess the last question for me and maybe a two-parter, but you opened with saying the first question you always get is around the dividend. And I was really rather surprised on that because you guys have seen worse times and you didn't cut the dividend. And now you're certainly in a strengthening environment. and it seems like things are continuing to be up and to the right. So if you haven't cut it previously, I'm wondering why people would be concerned about it now. And I look out to your debt. You don't have any maturities until 26, and you mentioned your leverage ratio at 4.9 times. So I'm wondering, does the board think, you know, is looking that far out and going, we need to get our debt lower, and this is the easiest lever to think about? Or can you just maybe help me understand, I guess, where the concern for the distribution is coming from?

Yeah, and again, you know, I talk to a lot of people all the time. A lot of people look at us and, frankly, don't understand our business. They look at it and go, wow, you know, your yield is low double digits. You know, depending on the day, it's, you know, 11% to 13% or 14% distribution yield. People go, why is it so high? This must be a risky business, to which we respond just like you did. Salman, hey, we've been through worse. Things are going from the bottom left of the page to the top right of the page. If we could power through like we did a couple of years ago and we power through multiple down cycles, why would you be concerned today? So, you know, I'm just kind of trying to connect some dots for people. There's two ways to look at it. Either the yield is too high or our stock price is too low or a combination of the two. We've got to make the disclaimer. Our board makes the decision on a quarter-by-quarter basis. We've been through a lot worse times in the past than we are today, and we're pretty happy with how we're performing and what the future holds in store for us. We're just trying to connect some dots for some people who really don't understand our business. This isn't a drilling company, a mud company, a fracking company, a stimulation company tied to the drilling side. We're the heart of the human body that pumps gas into and through the pipelines. Without us, there is no cash flow. So in times like we are today with extremely high oil prices, extremely high natural gas prices, compression is just a very small component of the cost of the value-added chain. So people look at us and go, what matters today is getting access to compression, having compression, having high utilization runtimes, and making sure that we're safe, but more importantly that we're pumping gas into and through the pipelines. Times like these, you know, the cash register's got to ring, and we're the guys that help ring the cash register. So it's a stable business. It's a great time to be in our business, and we think that we're not being properly rewarded for the performance of the company and how we're performing versus other components of the energy sector.

Thank you very much.

Thank you, sir.

And we'll go ahead and take our next question from Gabe Marine with Mizuho. Please go ahead.

Morning, guys. Just a couple quick follow-ups. I don't know if I caught it, but was there any change since last quarter to come to the order backlog overall, particularly on large compression units?

In the form of contract activity, I think we're a little different than somebody who's a fabricator that might say, I've got a $400 million backlog. Somebody gave me an order. A year from now, we're going to commit to build an order. We don't really monitor and measure our business that way. We look at, you know, our utilization rate. So, you know, as we indicated, we deployed 60,000 horsepower net quarter or additional horsepower for the quarter. Our utilization is ticking up. That's probably the best way to look at it. You know, we're not – a lot of our contracts typically folks that are into – For deliveries, they'll sign a contract today for deliveries 90 days from now, deliveries 180 days from now. We've got a couple of projects that will involve some brand new equipment that have a greater than a year lead time. But generally, we're not looking at backlog like a fabricator, like one of our competitors might look to. That's an important metric because, again, we're not a one-time sale guy that when that backlog evaporates, all of a sudden you've got no revenues and no cash flow. We're signing these multi-year long-term contracts that even after the primary term expires, a lot of these units stay out in the field on a month-to-month basis generating cash flow.

Thanks, Eric. Yeah, no, I was just really referencing, I think, Matt's comments last quarter about the commitments to 30 new units and placing orders for 20 new units for late 2022 and 2023. Yeah.

Yeah, sorry about that. We were thinking kind of the flip side of that coin. No, no change. I think what you will see is, as Eric mentioned, these lead times on the new equipment continue to kind of move around, typically moving out, not in. And so our CapEx, you'll see the CapEx expectations in the queue reflect that reality. So I think we'll still get some more units here, previously ordered units showing up towards the end of the year, and then there'll be a number of things that get kicked into 2023. Got it.

Thanks, Matt. And I think Eric, you had mentioned about deploying some compression for a carbon capture project or being in discussions to do so. I appreciate that there's a lot of discussion around carbon capture, and some of them are more just blueprints than actual real plans at this point. But can you just talk about that project, who your customer may be there, is anything different about the unit, and do you see more of that in the future?

So I think you hit the nail on the head, Gabe, is there's a lot of people looking at various types of CCUS from ranging from air capture to stack capture to almost things dealing with some conventional recycling of tertiary recovery type of projects. So it's kind of across the map. It's very early in the project development. We remain somewhat guarded as to the feasibility of this. To compress CO2 requires some technical changes Typically, you're looking at some higher pressures. Instead of a three-stage unit, you might need a five-stage unit because you're injecting gas at a significantly higher discharge pressure. You need stainless steel on a lot of the piping. You can't have any what we call yellow metal or red metal, you know, brass and bronze and things like that because the CO2 will embrittle and the equipment will fail. CO2 with any kind of water vapor forms carbonic acid, which is highly corrosive. So you have to take all of that into your design considerations. So we're starting to see more and more interest, but have they actually moved forward to FID, final investment decision? Jury's still out yet. It's very early. I mean, we're kind of in the the beginning of the first inning, not even mid-innings, is this really going to occur? So like everything ESG-driven, we think a lot of it is going to be regulatory-driven. And obviously here over the last year or so, there have been some significant alteration in the current regime's outlook on carbon and CO2 and carbon taxes and incentives or disincentives. So economics aren't quite there yet and I think that's what people are waiting to see is let's test the waters let's be ready to move if it makes sense and until it makes economic sense there probably will be some continued can kicking so to speak great thanks Eric appreciate it thanks Gabe and with that that does conclude our question and answer session

I would now like to hand the call back over to Eric for any additional closing remarks.

A mere 15 months ago, many market watchers thought that sustained oil prices above $60 a barrel was an impossibility. With the recent softness in oil prices, much noise is centered around possible demand destruction and economic headwinds, and that we are entering a period of lower oil and refined products prices, benefiting consumers, and that inflation is being tamed. We do not hold the same belief. The economy, especially in the U.S. and in China, will improve. Once it does, the imbalance between inadequate supplies of all types of energy and the increasing levels of demand will surface again. Our sense is that we are in the early innings of an ongoing global energy crisis and that natural gas and compression will serve an ever-increasing role in helping to solve. The situation in Europe clearly shows that natural gas is going to be the bridge to renewables, and for reasons I pointed out earlier, will take far longer and be far more expensive than most people fathom. Alternatively, if an expanded role for U.S. natural gas in the form of LNG being shipped worldwide occurs, demand for U.S. natural gas skyrockets. Either way, USA compression is well positioned for the rest of the year and far into the which should benefit our utilization, revenues, and cash flow. We believe that the underlying stability of our large horsepower, infrastructure-focused, contract compression services business model that has served our stakeholders well for the nearly 25 years we have been in business will continue well into the future. Thanks for joining us, and please be safe. We look forward to speaking with everyone on our next call.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect. Thank you. Thank you Thank you.

Yeah.

Good morning and welcome to USA Compression and Partners LP's second 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. Additional questions or Q&A instructions will be given at that time. This conference is being recorded today, August 2, 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 June 30, 2022. You can find our earnings release as well as recording of this call in the investor relations section of our website at usacompression.com. The recording will be available through August 12, 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 future 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 files. Please note that information provided on this call speaks only to management's views as of today, August 2nd, and may no longer be accurate at the time of a replay. I'll now turn the call over to Eric Long, President and CEO of USA Compression.

Thank you, Chris. Good morning, everyone, and thanks for joining our call. Also with me is Matt Liuzzi, our CFO. Over the past few years, multiple investors have suggested to me that early on in our earnings call, I hit head-on two topics that folks want to hear about. How is business and is our distribution safe? First, our business is strong, as you would expect right now. I will spend a large part of this call talking about how we see USA compression faring over the upcoming years in light of the spotlight being shown on the critical shortage of energy worldwide. And second, on July 14th, and based on the second quarter results, our board decided to keep this quarter's distribution consistent at 52.5 cents per unit, which will be paid this Friday, August 5th. This resulted in a distributable cash flow coverage ratio of 1.08 times. a nice improvement of over 10% from last quarter. This will be our 38th quarter of consecutive distribution payments, and we will have returned over $1.4 billion to our unit holders since our IPO in January of 2013. As always, our Board determines the distribution on a quarterly basis, and they can opt to maintain, increase, reduce, or suspend the distribution as it deems most appropriate. Our bank covenant leverage ratio was 4.9 times, a healthy reduction of over 5% from last quarter. So now on to how we see our business stacking up and where does USA Compression go from here? The second quarter continued the demand-driven improvements in our business that we saw towards the end of the first quarter and reflects the shortage of energy of all types in which the world now finds itself. The macro environment, driven by a growing need for natural gas and constrained supply, continues to reflect a tight supply-demand balance, which led to attractive commodity prices throughout the quarter. And while our compression services business does not have direct commodity price exposure, the strong backdrop does spur industry activity, which has been positive for demand for our services. Given everything going on in the world, we expect this trend to continue for the foreseeable future. Before I discuss the second quarter results in the broader business environment, I'd like to highlight our relentless focus on safety and recognize our employees for achieving a high standard of safety, day in and day out, here at USA Compression. Our employees are constantly on the road, driving to field sites, even with our extensive use of remote monitoring technologies. In fact, we drove over 4 million miles during the second quarter. This much driving has a potential to create significant risk for incidents, but we focus heavily on safety while driving, and I am proud that as of the halfway point of 2022, we have had zero recordable incidents. But driving isn't the only situation where our employees face risk. On the job sites, in warehouses, and even in the field offices, if our people are not committed to a culture of safety, all these activities can create hazards. As of July 1st, we had worked over 4.5 million hours since our last lost time injury, which stretches back more than two and a half years. Safety is a way of life here at USA Compression. The markets and business environment will undoubtedly go up and down, but the one thing that won't change is our team's commitment to safety. Now turning to the second quarter of 2022, we picked up where the first quarter left off and then continued to make gains from there throughout the quarter. We continued the utilization gains achieved during the first quarter as we deployed additional horsepower, with our average horsepower utilization increasing three percentage points from the first quarter 2022 to just below 88%. The second quarter ended with horsepower utilization of more than 88%. The market for compression is tightened as our limited new units being fabricated industry-wide. And so has the utilization of our fleet, which in turn led to increased revenues and cash flow. Total revenues were up approximately 5% and adjusted EBITDA increased 7%, both compared to the first quarter of this year. We also saw revenue on a per horsepower per month basis increase as we continue to push through both CPI to normal course price increases. We believe these trends will continue for the balance of the year 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 later this morning. Halfway through 2022, it sure feels like it's full steam ahead for energy in general and compression services in particular. Commodity prices remained high during the second quarter, with natural gas at Henry Hub averaging just shy of $7.50 per MMBTU, and West Texas Intermediate Crude Oil averaging over $108 per barrel, both at the highest levels since 2008. However, I believe the difference between now and 2008 is significant. Commodity prices today appear to be driven by the realities of physical supply, demand, and balance in the market versus financial trading dynamics, which played a big role in 2008. We live in a world that is hungry for energy of all types. Together, crude oil and natural gas represent the vast majority of energy consumption, both in the U.S. and around the world. The abundance, cost, reliability, and efficiency of both commodities have been unparalleled in the last 100 plus years. When you look at some of the key metrics within the energy industry, we believe signs are pointing to increasing tightness of supply amid increasing demand. Climate fear is driving the demonization of oil and has resulted in capital starvation across the broader energy space over the past few years, and with even more regulation. It is no wonder that unrealistic and misplaced policies have combined to create a general energy shortage across the globe. It's not just crude oil and natural gas, but also coal and electricity, which are seeing dramatic shortages in Europe, and as a result, strong prices. Further exacerbating these trends is the unprecedented rise in demand for key metals and minerals, which has inflated prices, reversing the decade-long trend of falling costs for wind turbines, solar modules, and batteries. According to a recent blog by noted energy and technology author Mark P. Mills, transition policies in place today are creating ever-rising minerals demand, yet the world's miners and mineral refiners do not have sufficient capacity in place or planned to either for basic metals like copper and nickel, or for more exotic elements such as lithium, cobalt, and rare earths. From a policy perspective, Mark notes that governments should base transition strategies on what could be reasonably achievable at costs that don't cause broad economic harm. China's 80% global share of rare earth supplies didn't happen because they invented more effective mining or refining technologies, but instead for favorable policies. In the U.S., the regulatory environment for mining is, to put it bluntly, hostile. The U.S. went from producing nearly all of the world's rare earths in the late 1970s to depending on imports for 95% of its needs today. In fact, the U.S. now depends on imports for 100% of 17 minerals and half or more of 28 others. China controls the dominant sources of supply and the bulk of the refining capacity worldwide. The simple fact is that the U.S., along with Europe, has regulated its way into far greater mineral import dependencies. Mark's bottom line is that the scale of mineral supplies needed for transition policies won't be happening in the timeframe policymakers imagine. And what is currently playing out in Europe and the rest of the world regarding access to affordable oil, natural gas, coal, and electricity does not even factor the lack of key minerals needed in the future for the energy transition. For now and the foreseeable future in the real physical world, most of civilization's energy will still come from oil, natural gas, and NGLs. All of this bodes well for the long-term outlook for our business, natural gas compression services, and we will be a critical part of the longer-term energy transition well into the future. Scary stuff, and it points out just how disconnected from reality policymakers worldwide are. The good news is that people across the world are waking up to the real physical world and are shocked by the costs and shortages that are being caused by poor and misguided policies of their governments. So to restate the obvious, the supply-demand balance for both oil and natural gas is unbelievably tight right now, both here domestically as well as around the world. That is keeping commodity prices high and driving demand for our compression services as producers work to get as much natural gas out of the ground as possible. Our fleet of large horsepower, modern vintage units was designed to be flexible for our customers and serve conditions like we see today. Having a large fleet of reliable, efficient equipment that can be mobilized on short notice is a great advantage for USA Compression. And we are doing everything we can to get that equipment out to our customers, who in turn are doing everything they can do to get natural gas to end users like you and me. There is much noise in the press right now about oil and gas prices coming down due in no small part to the prospects of a worldwide recession potentially destroying demand. In a recent presentation, noted Raymond James oil analyst Marshall Atkins points to several key indicators suggesting that the worst is yet to come regarding oil and natural gas prices. Worldwide, about 1.1 billion barrels have been worked off since May of 2022, hardly an indication of excess supply, And inventories are now about 375 million barrels below normal. U.S. E&P investment is down 64% from 2018. Worldwide oil and gas discoveries are down about 90% from a 2006 peak. Major oils are scaling back big time, with final investment decisions down about 80% from a 2009 peak. Not an indication of increasing supplies. OPEC is at a 70-year low with virtually no excess or flex capacity. Saudi and the UAE have only a combined half a million barrels of spare capacity, which may be gone in just a few months. Global inventory is balanced in the second quarter of 2022 as China locked down due to COVID, removing 2 million barrels of oil a day of demand. The U.S. Strategic Petroleum Reserve has been pulling down storage by a million barrels a day, and when it ends in October, the SPR will be down to only 375 million barrels of oil. Who will replace the million barrels of oil a day when the SPR quits being withdrawn? In the second half of 2022, Marshall forecasts oil demand growing by 3.5 to 4 million barrels a day, half of it coming from normal seasonal global oil demand, and a half of that coming from the reopening of China. This results in inventories falling further by about 2 million barrels a day, and the oil market enters 2023 undersupplied by about 2 million barrels a day. During 2023 to 2025, Marshall projects total supply growth of about 3.7 million barrels a day, with about 2 million barrels coming from the U.S., OPEC Iran adds about 1.2 million barrels a day, and all others add only about a half a million barrels a day. He further projects Russian exports to fall by a million barrels a day through 2025. Think about what happens if Putin removes 3 million barrels a day as has been suggested. Bottom line, to balance 2023 to 2025, there can be no demand growth during those three years. None. Since 1970 and the Arab oil embargo, the 50-year average for oil demand growth has been 2%. Only once, from 1980 to 1982, was there no growth in demand for oil. Clearly, we look at all of these elements, and our take is that the need for hydrocarbons is not going away anytime soon. And in fact, over the next few years, the supply-demand imbalance most likely gets worse, which should bode well for continued demand for our compression services. Closer to home and across our operating regions, our customers are active. The primary basins in our largest operating areas have all registered a year-over-year production increases, ranging from modest single digits to close to mid-teens, with increasing rig counts in the second half of 2022, leading to continued levels of expanding natural gas production. Our business activity levels in these regions have followed that activity. These regions have benefited from both proximity to export markets as well as ample transportation and takeaway capacity. In the Northeast, natural gas production growth has been more modest as operators in the region continue to work through inadequate pipeline capacity due to regulatory roadblocks. Something we've also noticed is that the activity among our customers is not concentrated on one group or another. Customers, both big and small, are calling, requesting probes, and contracting for our compression services under contracts with longer duration than we have seen in a while. USA Compression is responding to customer demands by deploying as much idle horsepower back into the field as possible. During the second quarter, we deployed over 60,000 horsepower net. The bulk of that horsepower was already owned equipment that moved from idle, sitting in a field or warehouse, to actively deployed, earning revenue and generating cash flow. You'll recall that in 2020 and 2021, our utilization dropped modestly as units came home. We purposely limited new unit orders for 2022 because our strategy was and continues to be to primarily redeploy existing idle units, requiring less capex capital as the market improves. This quarter demonstrated the benefit that redeployment of idle assets has on our financial performance. An obvious question is, how has inflation affected our business? Our contracts provide for annual CPI escalators, which were designed to keep pace with any sort of cost inflation we experience. While we've experienced some inflation in our primary expense category of parts, labor, and lube oil, we're working to maintain and beginning to improve on what are strong gross margins. Excuse me. Our adjusted gross margins were 67.8%. 67.1%, and 70.9% for Q2 of 22, Q1 of 22, and Q2 of 21, respectively. So while we've been able to mitigate a good portion of our cost increases, whether through offsetting rate increases or active management of our various expense items, we believe we still have room for additional improvement in upcoming quarters. Before I update you on some of the innovative technology that USA Compression is deploying as part of our longer-term ESG initiatives, I want to highlight what I consider a must-read and well-written paper by EQT, the largest natural gas producer in the U.S., and CEO Toby Rice, entitled Unleashing U.S. LNG, the Largest Green Initiative on the Planet. It should be required reading by every policymaker and environmentalist. While I won't steal Toby's thunder, he presents a few key factoids we're sharing that I don't think most folks are aware of, let alone comprehend the implications. If the U.S. were net zero today, the world would still miss its climate goals. Without China and India dramatically reducing their coal use, it doesn't matter what the U.S. does. Since 2005, the U.S. has reduced CO2 emissions from coal by one billion tons a year, from 2.1 billion tons a year to 1.1 billion tons a year, while the rest of the world continues to increase CO2 emissions from coal by 4.4 billion tons per year, from 9.3 billion tons per year to 13.7 billion tons per year. Coal use represents roughly one half of the CO2 emission sources, so curtailing its use should be mission number one to achieve Paris Accord targets. Worldwide, there are 176 gigawatts of new coal plants being constructed, with China adding one plant per week, which is nearly two times the coal capacity retired by the U.S. since 2005, which was 93 gigawatts. There is 175 BCF a day of coal to gas switching demand worldwide today, predominantly in China and India. Quadrupling U.S. LNG capacity from 12.4 BCF today to 55 BCF today by 2030 to replace about one-third of the coal plants would reduce international CO2 emissions by an incremental 1.1 billion tons per year and at no cost to U.S. taxpayers. This LNG plan, which requires no U.S. taxpayer funds, has the same CO2 reduction benefit as, one, electrifying 100% of the U.S. passenger vehicle fleet, two, powering every home in America with rooftop solar and battery packs, and three, adding 54,000 windmills, doubling U.S. wind capacity combined, and would cost taxpayers $2 trillion. Contrast this to the EIA net zero scenario based on renewables only that will require a total investment approaching $16 trillion over the next nine years. This cost will have to be heavily borne by undeveloped and underdeveloped countries who can least afford it. The sample per capita GDP of China is $10,000, India $2,000, and those two combined have 70% of global coal use versus the U.S. with $64,000. And did you know that converting an electric plant from coal to natural gas has nearly the same percentage of emissions reductions as replacing a gasoline-powered vehicle with an electric one? 60% CO2 reduction versus 59%. So thank you, Toby Rice and EQT, for developing such a pragmatic and comprehensive program that lays out an alternative roadmap to actually achieve CO2 reductions by 2030 and not breaking the bank, so to speak. If this plan were to occur, the implications for the amount of gas compression required to move the additional volumes of natural gas to LNG plants roughly a 40% increase from today's total U.S. natural gas production should be very favorable for USA compressions. So for the reason I touched on earlier relating to lack of key minerals needed to meet renewables demand or the practical LNG alternative proposed by Toby Rice and EQT, I believe that neither the U.S. nor the world will achieve adoption of renewable sources of energy anywhere near the levels projected anytime soon. But as we look out into the future, we have been working on a compressor unit design which will be able to take advantage of the gradual transition to greater electricity usage throughout our country as the electric grid expands and ultimately gets built out. During last quarter's call, I had mentioned that we had signed multi-year contracts with an existing customer to deploy our dual-drive units out in the field. These units have been installed at Cal and petroleum sites and commenced operations last week. We continue to be excited about the service offering as it allows our customers to further mitigate greenhouse gas emissions in a pragmatic and economical manner. Remember, this initiative is centered around retrofitting existing compression units for dual-drive capability. Economically, this makes a lot of financial sense for both USA Compression and our customer base. We expect that as these units get up and running and have operational performance, reliability and flexibility further proven out, we will field more inquiries and ultimately demand for this environmental-friendly solution to compressing natural gas. We continue to believe that the expansion of the electricity will be a multi-decade effort. As customers realize the dual-drive offering gives them reliability and redundancy of a natural gas backup driver with the advantage of electricity as a prime power source, we believe that demand will expand over time. As I have mentioned, 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. This allows companies to decrease emissions and permit their sites for electrical compression while still having the flexibility and redundancy to switch to gas with extreme temperatures while 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% runtime, substantially lower emissions of CO2 and methane, the mitigation of interconnect delays, and optimized fuel costs. We are also involved with providing compression for new ESG-driven projects with some of our larger, long-time customers. We recently have provided large horsepower hydrogen compressive services for a facility in the Midwestern U.S. and are currently designing compression facilities for a current large customer as part of a major carbon capture utilization and storage project. There is more work to be done, but as the energy industry determines what is feasible and, more importantly, what is economical, we expect more opportunities for USA Compression to play a role in ESG-focused applications like these. My view remains that the realities of technology will continue to shape the dialogue, the shape and the speed of the transition, which will be far more expensive and take far longer than policymakers anticipate. Finally, for what is now nearly 10 years as a public company, you've heard me talk about the stability of USA Compression's business, which is underpinned by the long-term nature of natural gas as a fuel source. Natural gas remains a clean-burning, abundant fuel that is easily transported throughout our country as well as the world, more now than ever in our history. The continued and now increasing demand for natural gas around the world has provided a stability to our business. This stability has benefited stakeholders across the board. Whether it is paying out distributions to our unit holders or making timely interest payments to our debt holders, we believe USA Compression's business has always been more stable than many other companies in the energy sector. We have worked hard to maintain that stability during the radical and unprecedented volatility over the past few years, and now we're seeing the commercial uptick and benefits for our financial results. Capital allocation is always a balance. As I mentioned earlier, quarters distribution, we will have made 38 consecutive quarters of distribution, returning over $1.4 billion to unit holders since our IPO. In addition, we've used excess cash flow to manage our leverage at reasonable levels. This quarter showed a meaningful reduction as we have expected. All in all, the last several years have highlighted the attractiveness of our large horsepower, infrastructure-focused compression business model, and we foresee better days ahead, not just for the energy complex, but specifically for USA Compression. I'll now pass it over to Matt to run through the financials.

Thanks, Eric, and good morning, everyone. Today, USA Compression reported second quarter results, including quarterly revenue of $171 million, adjusted EBITDA of $105 million, and DCF to limited partners of $56 million, each of which represented an increase over last quarter's performance. Pricing continued to increase during the quarter, up to $17.20 per horsepower per month. The increase reflects a combination of a strengthening of the overall market for our compression services, as well as contractual price escalators designed to keep pace with CPI. Our adjusted gross margin as a percentage of revenue was 67.8% in the second quarter, which represented an increase from the previous quarter and is approaching our historical averages. In the quarter, we achieved adjusted EBITDA of approximately $105 million and an adjusted EBITDA margin of 61.5%. Both of these were also improvements from the previous quarter and demonstrate the ability of the business to generate meaningful cash flow as utilization tightens. Our total fleet horsepower at the end of the quarter was flat from the previous quarter at approximately 3.7 million horsepower. As Eric mentioned, average utilization for the second quarter was up three percentage points from the first quarter to just shy of 88%. For the quarter, we had total expansion capital spending of $32 million, which was in line with our budget, consisting primarily of reconfiguration and make-ready of idle units, with the remainder consisting of the delivery of four large horsepower units for deployment in a compressor station in the Delaware Basin, and some associated additional station components. Our maintenance capital was approximately $6 million consistent with the previous quarter. Net income for the quarter was $9 million and operating income was $42 million. Net cash provided by operating activities was $94 million in the quarter. And lastly, cash interest expense net was $31 million. As Eric mentioned, the board decided to keep the distribution consistent at 52.5 cents per unit which resulted in a distributable cash flow ratio of 1.08 times, which was a nice improvement from the last quarter. Our bank coverage leverage ratio was 4.9 times, also a healthy improvement from last quarter. While the business outlook is positive, we continue to manage through inflationary pressures and take a prudent approach to spending capital. You notice the meaningful improvement in both leverage and coverage, We continue to believe that with an improved outlook, these metrics should improve over the course of the year, benefiting both our equity and debt stakeholders. On April 27, 2022, 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 with the issuance of a total of approximately 534,000 common units. These warrants were part of the preferred equity financing undertaken in 2018 for the CDM acquisition. 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, and distributable cash flow between $213 million and $233 million. Finally, we expect to file our Form 10-Q with the SEC as early as this afternoon. And with that, we'll open the call to questions.

Thank you. And if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star 1 if you'd like to ask a question. And we'll pause just for a moment to allow everyone an opportunity to signal for questions. And we'll go ahead and take our first question from Solomon Ackel with Staple. Please go ahead.

Thank you. Good morning. First question, and I think you've referred to this prior, is utilization continues to tick higher. You're going to get more and more pricing power, and it really sort of kicks in in that low, you know, low 90%, you know, high 80s. So it seems like we're about there, and I'm just wondering how much more do you think you can push gross margins up?

Yeah, Selman, it's Matt. You know, good question.

I think, you know, the way I would look at it is historically this business has always generated gross margins kind of in and around that high 60s to 70% range. And that would be true if you were to look at the USA compression standalone financials, you know, back to 2013 at the time of the IPO. There was a bit of noise when we did the CDM acquisition because of the accounting. So if you looked kind of in the 2018-2019, those margins would go a little lower. But, you know, the USA Compression core kind of legacy business has always kind of been able to operate around that 68% to 70% range. And so, I mean, I think it's hard to go and say you're going to get another $5. percentage points of gross margin impact. I mean, I think if we're running kind of in that 69% range, it's pretty strong and consistent with where we've been historically. So obviously the pricing, you know, a lot of the pricing increases we have done are both, you know, related to kind of the overall tightness of the market, but also working to manage any sort of inflationary pressures. So, you know, we'll continue to do that and, you know, hopefully run ahead of any cost inflation. But at some point, we found it back in 18, you do tend to hit a bit of a ceiling on pricing where you just can't push it any further. And obviously, the customers ultimately have the decision to either buy or lease or buy or get services from a third party like us. So,

understood. And so in this better environment, are you also seeing any change at all to tenor at all? Are you able to extend the contracts for, you know, lock in a period of time?

Yes, Alvin. This is Eric. You know, we have historically been able to lock in a longer-term tenor on contracts. In periods when the market is a little softer, there's really no incentive for USA Compression to be locking in longer-term contracts at lower rates. So in an environment where we are today, where you're seeing increasing rates, a willingness by producers to lock in for a longer term because of lack of available equipment, we're actually taking advantage of that opportunity. So I would say on a percentage basis, we're seeing longer term contracts at higher rates than we've seen for, you know, in recent years. And we can continue to expect that to occur on into the future.

Got it. That's good news. You've also talked about in the past using existing equipment, idle equipment, refurbishing and putting it back out there. Can you say how much of that you still have to go?

With our utilization, being in the upper 80s, you can mathematically take a look at our total fleet of around 3.8, 3.9 million horsepower. If you do the math, 12% of 4 million round number, that's still a lot of horsepower that we have to play with. Not all of that, of course, is Bigger horsepower, not all of that is readily deployable, but a large percentage of that is.

Got it. And then I guess lead time for large horsepower, how is that trending?

It's getting longer and longer as we speak. It, of course, depends on, you know, which are the elements, you know, because you've got the engines from Caterpillar, You've got the compressor and cylinders that would come from Ariel. You've got coolers that come from a couple of different providers. You've got electronic controls, et cetera, et cetera. So depending on the size of the equipment, it varies. But we're seeing quotes from certain types of Caterpillar equipment. The stuff that we specialize in are a year or, in certain cases, substantially longer than a year. So you're... you know, 60 weeks on the type of equipment that we typically add to our fleet. So it's way out there.

Got it. And then I guess the last question for me and maybe a two-parter, but you opened with saying the first question you always get is around the dividend. And I was really rather surprised on that because you guys have seen worse times and you didn't cut the dividend. And now you're certainly in a strengthening environment. and it seems like things are continuing to be up and to the right. So if you haven't cut it previously, I'm wondering why people would be concerned about it now. And I look out to your debt. You don't have any maturities until 26, and you mentioned your leverage ratio at 4.9 times. So I'm wondering, does the board think, you know, is looking that far out and going, we need to get our debt lower, and this is the easiest lever to think about? Or can you just maybe help me understand, I guess, where the concern for the distribution is coming from?

Yeah, and again, you know, I talk to a lot of people all the time. A lot of people look at us and, frankly, don't understand our business. They look at it and go, wow, you know, your yield is low double digits. You know, depending on the day, it's, you know, 11% to 13% or 14% distribution yield. People go, why is it so high? This must be a risky business, to which we respond just like you did. Salman, hey, we've been through worse. Things are going from the bottom left of the page to the top right of the page. If we could power through like we did a couple of years ago and we power through multiple down cycles, why would you be concerned today? So, you know, I'm just kind of trying to connect some dots for people. There's two ways to look at it. Either the yield is too high or our stock price is too low or a combination of the two. We've got to make the disclaimer. Our board makes the decision on a quarter-by-quarter basis. We've been through a lot worse times in the past than we are today, and we're pretty happy with how we're performing and what the future holds in store for us. We're just trying to connect some dots for some people who really don't understand our business. This isn't a drilling company, a mud company, a fracking company, a stimulation company tied to the drilling side. We're the heart of the human body that pumps gas into and through the pipelines. Without us, there is no cash flow. So in times like we are today with extremely high oil prices, extremely high natural gas prices, compression is just a very small component of the cost of the value-added chain. So people look at us and go, what matters today is getting access to compression, having compression, having high utilization runtimes, and making sure that we're safe, but more importantly, that we're pumping gas into and through the pipelines. Times like these, you know, the cash register's got to ring, and we're the guys that help ring the cash register. So it's a stable business. It's a great time to be in our business, and we think that we're not being properly rewarded for the performance of the company and how we're performing versus other components of the energy sector.

Thank you very much.

Thank you, sir.

And we'll go ahead and take our next question from Gabe Marine with Mizuho. Please go ahead.

Morning, guys. Just a couple quick follow-ups. I don't know if I caught it, but was there any change since last quarter to come to the order backlog overall, particularly on large compression units?

In the form of contract activity? We're a little different than somebody who's a fabricator that might say, I've got a $400 million backlog. Somebody gave me an order. A year from now, we're going to commit to build an order. We don't really monitor and measure our business that way. We look at, you know, our utilization rate. So, you know, as we indicated, we deployed 60,000 horsepower net quarter or additional horsepower for the quarter. Our utilization is ticking up. So that's probably the best way to look at it. You know, we're not, a lot of our contracts typically folks that are into For deliveries, they'll sign a contract today for deliveries 90 days from now, deliveries 180 days from now. We've got a couple of projects that will involve some brand new equipment that have a greater than a year lead time. But generally, we're not looking at backlog like a fabricator, like one of our competitors might look to. That's an important metric because, again, we're not a one-time sale guy that when that backlog evaporates, all of a sudden you've got no revenues and no cash flow. We're signing these multi-year long-term contracts that even after the primary term expires, a lot of these units stay out in the field on a month-to-month basis generating cash flow.

Thanks, Eric. Yeah, no, I was just really referencing, I think, Matt's comments last quarter about the commitments to 30 new units and placing orders for 20 new units for late 2022 and 2023. Yeah.

Yeah, sorry about that. We were thinking kind of the flip side of that coin. No, no change. I think what you will see is, as Eric mentioned, these lead times on the new equipment continue to kind of move around, typically moving out, not in. And so our CapEx, you'll see the CapEx expectations in the queue reflect that reality. So I think we'll still get some more units here, previously ordered units showing up towards the end of the year, and then there'll be a number of things that get kicked into 2023. Got it.

Thanks, Matt. And I think Eric, you had mentioned about deploying some compression for a carbon capture project or being in discussions to do so. I appreciate that there's a lot of discussion around carbon capture, and some of them are more just blueprints than actual real plans at this point. But can you just talk about that project, who your customer may be there, is there anything different about the unit, and do you see more of that in the future?

So I think you hit the nail on the head, Gabe. There's a lot of people looking at various types of CCUS from carbon ranging from air capture to stack capture to almost things dealing with some conventional recycling of tertiary recovery type of projects. So it's kind of across the map. It's very early in the project development. We remain somewhat guarded as to the feasibility of this. To compress CO2 requires some technical changes Typically, you're looking at some higher pressures. Instead of a three-stage unit, you might need a five-stage unit because you're injecting gas at a significantly higher discharge pressure. You need stainless steel on a lot of the piping. You can't have any what we call yellow metal or red metal, you know, brass and bronze and things like that because the CO2 will embrittle and the equipment will fail. CO2 with any kind of water vapor forms carbonic acid, which is highly corrosive. So you have to take all of that into your design considerations. So we're starting to see more and more interest, but have they actually moved forward to FID, final investment decision? Jury's still out yet. It's very early. I mean, we're kind of in the the beginning of the first inning, not even mid-innings, is this really going to occur? So like everything ESG-driven, we think a lot of it is going to be regulatory-driven. And obviously here over the last year or so, there have been some significant alteration in the current regime's outlook on carbon and CO2 and carbon taxes and incentives or disincentives. So economics aren't quite there yet and I think that's what people are waiting to see is let's test the waters let's be ready to move if it makes sense and until it makes economic sense there probably will be some continued can kicking so to speak great thanks Eric appreciate it thanks Gabe and with that that does conclude our question and answer session

I would now like to hand the call back over to Eric for any additional closing remarks.

A mere 15 months ago, many market watchers thought that sustained oil prices above $60 a barrel was an impossibility. With the recent softness in oil prices, much noise is centered around possible demand destruction and economic headwinds, and that we are entering a period of lower oil and refined products prices, benefiting consumers, and that inflation is being tamed. We do not hold the same belief. The economy, especially in the U.S. and in China, will improve. Once it does, the imbalance between inadequate supplies of all types of energy and the increasing levels of demand will surface again. Our sense is that we are in the early innings of an ongoing global energy crisis and that natural gas and compression will serve an ever-increasing role in helping to solve. The situation in Europe clearly shows that natural gas is going to be the bridge to renewables, and for reasons I pointed out earlier, will take far longer and be far more expensive than most people fathom. Alternatively, if an expanded role for U.S. natural gas in the form of LNG being shipped worldwide occurs, demand for U.S. natural gas skyrockets. Either way, USA compression is well positioned for the rest of the year and far into the which should benefit our utilization, revenues, and cash flow. We believe that the underlying stability of our large horsepower, infrastructure-focused, contract compression services business model that has served our stakeholders well for the nearly 25 years we have been in business will continue well into the future. Thanks for joining us, and please be safe. We look forward to speaking with everyone on our next call.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.