USA Compression Partners LP

Good morning. Welcome to USA Compression Partners' second quarter 24 earnings conference call. During today's call, all parties will be in a listen-only mode. At the conclusion of management's prepared remarks, the call will be open for Q&A. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your attention, press star one again. Thank you. This conference is being recorded today, August 6, 2024. I now would 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 operational and financial results for the quarter ending June 30, 2024. You can find a copy of our earnings release as well as recording of this call in the investor relations section of our website at usacompression.com. During this call, our management will reference certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures to the most comparable U.S. GAAP measures in our earnings release. As a reminder, our conference call will include forward-looking statements. These statements are based on management's current beliefs and include projections and expectations regarding our future performance in other forward-looking matters. Actual results may differ materially from these statements. Please review the risk factors included in this morning's earnings release and in our other public filings. Please note that information provided on this call speaks only to management's use as of today, August 6, 2024, and may no longer be accurate at the time of a replay. I will 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 am joined on the call by Eric Scheller, our COO. This morning, we released our second quarter 2024 results, which reflect the continued strength of our business. Our second quarter ended with record revenues, record adjusted gross margin, record adjusted EBITDA, record average revenue generating horsepower, and record average revenue per revenue generating horsepower. Our period end utilization was at an all-time high, and average utilization remained near an all-time high, both at 95%, with our large horsepower over 1,000 horsepower effectively fully utilized at 99%. These results indicate a strong and stable contract compression market, which we believe will continue for the foreseeable future. Our results also reflect the continued impact of our disciplined approach in past periods of maintaining pricing levels that support our margin as we deployed horsepower. We now continue to increase pricing to record highs at essentially full utilization levels with extended contract tenors. Our leverage ratio also continued its downward trend in line with our long-term goal between 3.75 times to 4.25 times, reducing to 4.23 times. We expect this downward trend to continue as the impact from the adjusted EBITDA generated from the capital expenditures during the first half of the year, which were a majority of our expected capital expenditures for the year, begin to fully impact our results. As we mentioned last quarter, our distributable cash flow coverage ratio was very slightly impacted from the conversion of our Series A preferred units to common units by EIG. We are happy to report that EIG has sold all of the common units from the conversions during the first half of this year, and we only have $180 million in preferred units outstanding. The remaining conversion of the preferred units will have a very, very small impact on our distributable cash flow coverage ratio, but will provide enhanced liquidity to our common unit holders. When all of the Series A preferred units are converted and the resulting common units are sold into the open market, we will have added almost 25 million common units to our public float with no resulting meaningful equity value dilution from the conversion. Switching to our views of the near and long-term environments for USA compression and the general macro environment which underlies our business. In the near term, we see steady and growing opportunities as our customers continue to maintain their steady capital discipline growth to support the increasing oil and natural gas demand drivers in the United States and globally. Due to our longstanding strategy of return-based pricing and margin discipline, which are consistently the highest margins in the contract compression space, we anticipate satisfying near-term demand with the previously outlined strategy of converting idle equipment to active status. We were able to deploy this idle equipment with capital expenditures that are far less than if we were to purchase new compression equipment, but maintain the pricing at attractive levels due to the tightness we are currently seeing in the natural gas compression market. Further, despite the high utilization within the contract compression industry, we have not seen a meaningful trend of our customers moving to purchase their own compression equipment, and we do not expect to see such a trend in the foreseeable future. Obviously, these factors should continue to support our underlying financial fundamentals, our distribution policy, and leverage goals long-term. As a reminder, we believe focusing on our capital structure, including the eventual refinancing of our senior notes due 2027, Renewing our credit facility and fully exiting our Series A preferred units is the prudent course of action before we consider changes to our distribution policy. In the long term, we remain bullish on the natural gas compression market and the natural gas industry, which we believe will continue to support the growth of the contract natural gas compression industry. As we previously discussed, forecasted natural gas demand remains strong through 2050. We believe power generation, pipeline exports to Mexico and LNG exports will remain strong demand growth drivers for natural gas. Further, the continuing maturity of the Permian Basin will continue to require more natural gas compression as wells mature and the gas-to-oil ratio increases over time. Regarding power demand, the continued electrification of the Permian Basin for the foreseeable future creates additional incremental power generation requirements for which we believe natural gas will be a primary player in the electrical generation mix to support baseload power generation needs. To provide you with some color on the electrification of the Permian Basin, ERCOT recently completed their five-year forecast of electrical demand that shows power demand in the Permian Basin growing to 24 gigawatts by 2030, approximately half of which is related to the oil and gas industry. The other half of the growth comes from data centers, cryptocurrency, green hydrogen, and other traditional industrial projects. To put that in context, the amount of growth would make the Permian Basin comparable to the power demand of the Houston coastal region. Zooming out and looking at the entire power demand growth in the ERCOT region, ERCOT now forecasts 152 gigawatts of power demand by 2030. The peak demand last summer, which was the all-time high, was approximately 85 gigawatts. So we will need almost twice the power generation in five years that we currently have in ERCOT. One of the primary drivers of this demand is data centers and artificial intelligence. One tidbit we recently heard from the CEO of ERCOT that we thought really painted the picture of the power demands of AI was that each microchip of the most recent generation used for AI requires the same amount of power as the average U.S. home. Wow, that is a staggering amount of power that will be needed to support the AI revolution, and the most practical consistent power generation is currently natural gas fired power plants. Given this increased need for power generation in the near future, including the large growth in the Permian region, which is our largest operating region, we have started the process to begin beta testing the ability of our dual drive compression units to generate power, allowing us to opportunistically sell power back to the grid when electricity prices are at attractive levels. It is currently too early to know the impact that opportunity presents to us, but we are very excited about its potential and why we believe our dual drive product offering will provide better value and more versatility to our customers than conventional standalone electric compression. We view our dual-drive product offering akin to the difference between a hybrid car and an all-electric car. Dual-drive's ability to run on electricity or natural gas provides enhanced versatility, as the electrical grid transformation that will be needed to support large horsepower electrical compression will take decades to complete. The addition of power generation to our dual-drive product offering provides even greater value to us and our customers. Before turning the call over to Eric Scheller to discuss second quarter results, I would like to make a few comments regarding safety. The most important thing we do is to ensure that our employees, contractors, and customers return home safely each day. We remain steadfastly committed to the continued development and improvements of our safety programs, culture, and expertise so that we remain one of the safest operators in the oil field. I appreciate each and every one of our employees' commitment to safety and the safety culture they have created at USA Compression. With that, I will turn the call over to Eric Scheller, our COO, to discuss our second quarter highlights.