USA Compression Partners LP

Good morning, welcome to USA Compression Partners LP third quarter 2022 earning conference call. Today conference call, all parties will be in listen only mute and following the conference will be open for questions. This conference has been recorded today, November 1st, 2022. I will now like to turn the call over to Chris Porter, Vice President, General Counsel and Secretary.

Good morning everyone and thank you for joining us. This morning, we released our financial results for the quarter ended September 30, 2022. You can find earnings relief 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 November 11, 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 earnings relief. 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 filing. Please note that information provided on this call speaks only to men's views as of today, November, 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. I would like to begin today's call by introducing our new CFO, Mike Pearl. Mike joined us in early August and brings a wealth of finance experience to USA Compression. Mike spent approximately 17 years as a finance executive at Anadarko Petroleum and Western Midstream Partners, most recently serving as Western's CFO. We are happy to welcome Mike aboard, and we sincerely thank Matt Liuzzi for his valuable contributions to USA Compression during his tenure as our CFO. Last quarter, we highlighted industry dynamics that we believe are driving increased demand for natural gas in a supply-constrained environment. Our views on the energy macro environment have not changed, and we continue to believe that we're in the early innings of a commodity price super cycle. IEA Executive Director Fatih Beral stated last week that tightening markets for LNG worldwide and major producers cutting over supply have put the world in the middle of the first truly global energy crisis. We believe that the oil and gas industry's disciplined capital investment approach that focuses on free cash flow generation and returns-based investing further underpins the existing tightness in energy markets and will contribute significantly to continued market tightness into the foreseeable future. We also expect the commodity price backdrop to remain supportive of production growth, which in turn will drive increased demand for our natural gas compression services. Our customers remain active across our operating regions. The primary basins in our largest operating areas have all registered year-over-year production increases, ranging from modest single digit to close to mid-teen growth percentages, and leading to continued levels of expanding natural gas production. Our increasing activity levels in these regions have kept pace with our customers' production activities. Generally, these regions have benefited from proximity to export markets, and ample transportation and takeaway availability. However, in the Permian and Delaware Basin, natural gas takeaway capacity continues as a future challenge for the industry, and we believe that this challenge will persist for the next several years. Based on anticipated Permian and Delaware growth, we believe increased tightness and natural gas takeaway capacity likely will occur in late 2023 and into early 2024, necessitating additional demand for compression services. In the Northeast, natural gas production growth has been more modest as operators in the region continue to work through an adequate pipeline capacity due to regulatory roadblocks. Compression has been used by several of USA Compression's Northeast customers as a means to arrest production declines and as a cost-effective alternative to drilling additional wells. We believe it is important to recognize that USA Compression's operational and financial performance is more dependent on the production cycle, the drilling cycle that correlates more closely with near to medium term commodity prices. In short, the compression services that we currently provide within most of the significant U.S. onshore basins serve as a vital component necessary to deliver natural gas from the wellhead to processing facilities, and ultimately to market centers. Given our current contracts and contracting strategy, we view our ability to continue to generate a meaningful and reliable stream of cash flow as durable irrespective of the drilling cycle. We believe the current drilling-supported commodity price levels and the expected production increases therefrom provide USA Compression readily achievable opportunities to drive operational efficiencies, grow organically, and ultimately secure financial optionality. Achieving financial optionality will allow USA Compression to deploy free cash flow to support incremental capital investment, debt reduction, distribution increases, or a combination thereof. We believe that the observed current trajectory of production growth in the basins that we serve will contribute significantly to our ability to grow through redeployment of existing compression, as well as organically with new compression deployed at attractive rates. Our current focus remains converting already owned equipment from idle to active status, and therefore to cash flow generating status. During the third quarter, we continue to increase our service position with our major customers through improved fleet utilization. Our third quarter utilization exit rate was 90.9%, up from 88.4% on a sequential quarter basis, and up from 83% for the year-ago comparable period. During the third quarter, we redeployed over 60,000 of currently owned and idle horsepower net. In addition to increasing utilization, we also realized increased average revenue per revenue-generating horsepower per month on a sequential and year-over-year comparable period basis. We are also witnessing meaningful increases in average contract tenor from the redeployment of idle units, as well as from contract renewals of currently deployed units. Current negotiations with our customers center on 30-month average renewal tenors, with new equipment deployments attracting contract tenors in excess of 60 months. We manage our contract portfolio returns and margins so that we are positioned to satisfy market demands for desirable service and equipment, protecting our cash flow during volatile and inflationary periods through CPI-based rate resets. We have seen market increases in the prices of fuel, fluids, and labor, and although our contract-based CPI adjustments allow us to mitigate this cost inflation, we did see a modest decline in margins resulting from input cost inflation that tends to precede the date that we are able to execute contract rate adjustments. Notwithstanding, we expect inflationary pressures to abate eventually and our adjusted gross margins to remain at or near their historic levels, normalizing around 68%. In addition to our increased utilization for the current fleet, We expect to improve our market share in key production basins in which we operate through our commitment to produce an additional 50 large horsepower compression units that we recently made in September of this year. These planned purchases were driven by pronounced demand from our major customers for compression and station services, and we'll bring our committed new unit order for 2023 to 66 units for a total of 165,000 of additional horsepower. By locking in unit delivery slots that now approach a full year's lead time, we expect to secure multi-year contracts with our customers for the deployment of this additional compression by year-end 2023. As we have previously discussed and announced publicly, We have been working on a dual-drive compressor unit design that takes advantage of the gradual transition to a location as the country's electric grid expands and ultimately gets built out. During last quarter's call, I mentioned that we had signed multi-year contracts to deploy our dual-drive units out in the field. These units have been installed at Cowan Petroleum sites and commenced operations the first week of August. We continue to be excited about this service offering as it allows our customers to further mitigate greenhouse gas emissions in a pragmatic, reliable, and economic manner. This ESG-friendly initiative is centered around retrofitting existing compression units for dual-drive capability. The dual-drive concept combines a natural gas-driven engine and an electric-driven motor to quickly and reliably switch from natural gas to electricity to compress natural gas depending on operating constraints and conditions. This technology results in decreased emissions while maintaining the flexibility and redundancy to switch to gas when weather conditions or grid demands make natural gas powered compression preferable. Economically, our dual-drive initiative makes a lot of financial sense for USA Compression's customers that will benefit from lower operating expenses, increased reliability, 99% runtimes, substantially lower greenhouse gas emissions, and the mitigation of interconnect delays. As these units get up and running and demonstrate their expected operational performance, reliability, and flexibility, We anticipate that we will continue to field an increasing number of indications of interest from customers that are seeking to deploy this cost-efficient and more environmentally friendly solution to compressing natural gas. We believe that the migration to electrification will be a multi-decade effort, and as customers realize that the dual-drive offering provides the reliability and redundancy of a natural gas backup driver, with the advantage of electricity as a prime power source, we believe that demand for this service offering will continue to increase over time. On October 13th, and based on our third quarter results, our Board maintained this quarter's distribution consistent at 52.5 cents per unit, which will be paid this Friday, November 4th. This distribution represents the 39th quarter of consecutive distribution payments and corresponds to a distributable cash flow coverage ratio of 1.07 times. In addition to maintaining a healthy coverage ratio, we reduced our bank covenant leverage ratio from 4.9 times to 4.84 times on a sequential quarter basis, consistent with our commitment to reduce leverage over time while providing meaningful returns to all of our stakeholders. With lengthening contract tenors for new equipment deployments and contract renewals of existing active assets, absent unexpected events such as further supply chain disruptions or major geopolitical events, we remain encouraged that both leverage and coverage metrics will continue to improve. Finally, before Mike discusses our third quarter results, I would like to make a few comments regarding safety. As a company, the most important thing we can do is ensure that our employees return home safely each day. We are extremely proud of our relentless focus on safety that has resulted in zero year-to-date recordable incidents for our last 1.2 million hours worked. This is a significant accomplishment, and I thank each and every USA Compression employee for the commitment and strict adherence to our safety policies and procedures. With that, I will turn the call over to Mike to discuss our third quarter 2022 results.