USA Compression Partners - Q3 2024

Transcript

Operator (participant)

Good morning. Welcome to USA Compression Partners, Third Quarter 2024 Earnings Conference Call. During today's call, all parties will be in listen-only mode. At the conclusion of management's prepared remarks, the call will be open for Q&A. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press star one again. This conference is being recorded today, November 5, 2024. I would now like to turn the call over to Chris Porter, Vice President, General Counsel, and Secretary.

Chris Porter (VP, 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 September 30, 2024. You can find a copy of our earnings release as well as a 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 and 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 the information provided on this call speaks only to management's views as of today, November 5, 2024, and may no longer be accurate at the time of a replay. Before I turn the call over to Clint Green, President and CEO of USA Compression, I would like to welcome him to the USA Compression family. Clint has a long history in the compression and midstream space, working at Hanover Compressor Company, CDM, and leading SEC Energy for a period of time. Clint has continually risen through the ranks within the Energy Transfer organization, and I think we are fortunate that USAC is his next stop. With that, I will turn the call over to Clint.

Clint Green (President and CEO)

Thank you, Chris. Good morning, everyone, and thank you for joining our call. Chris and I are joined on the call by Eric Scheller, our COO. First, I want to thank everyone at USA for the hospitality and warm welcome over the past month. I've had the opportunity to meet some talented people, and I'm more excited than ever to join this team. Second, I want to thank Eric Long. As you all know, Eric was the special leader that grew the company from a single compression unit to one of the largest independent compression companies in the country. I look forward to continuing what he started. Third, I am excited to have Chris Paulson join us as CFO on November 18th. Chris brings a long history of E&P experience, most recently as the Senior Vice President of Business Development and Strategy at Pioneer Natural Resources.

I believe Chris's prior experience will help USA Compression continue driving the business not only financially, but through continued development given his experience in the E&P space. I am looking forward to working with Chris and as we further develop our long-term financial strategy. Finally, I wanted to touch on our third quarter results we released this morning. Our third quarter ended with records in revenue, Adjusted Gross Margin, Adjusted EBITDA, Distributable Cash Flow, and average revenue-generating horsepower. These results reflect a very supportive environment in the compression service space, allowing for an increased pricing as we continue to deploy horsepower. We expect this trend to continue as we see strong demand for compression services from our customers. We will continue to strategically evaluate growth opportunities going forward with a focus on creating additional customer and unitholder value.

Before turning the call over to Eric Scheller to discuss third quarter results, I would like to also update you on an internal organization initiative to streamline back office operations. We have made the decision to implement the Energy Transfer Shared Services Model at USA Compression. There will be more to come on this in the future quarters. With that, I will turn the call over to Eric Scheller, our Chief Operating Officer, to discuss our third quarter highlights.

Eric Scheller (COO)

Thanks, Clint, and good morning, all. We were pleased to deliver to our unit holders another excellent quarter of financial and operational results. The continuing pricing improvements up to an all-time high averaging $20.60 per horsepower for the third quarter primarily drove our continued revenue growth. Our revenue increased 2% in sequential quarters and 11% compared to the year-ago period. Our third quarter margins were approximately 66%. Regarding the financial results, our third quarter 2024 net income was $19.3 million. Operating income was $75.7 million. Net cash provided by operating activities was $48.5 million, and cash interest expense net was $47.1 million. Cash interest expenses increased by approximately $500,000 on a sequential quarter basis, primarily due to higher average outstanding borrowings. However, higher cash interest expense was mitigated by $2 million of cash payments received under our $700 million notional principal fixed-rate interest rate swap during the quarter.

We monetized our position in the swap during the third quarter for $0.4 million. Our leverage ratio also continued its downward trend, reducing to 4.2 times. Turning to operational results, our total fleet horsepower at the end of the quarter was approximately 3.9 million horsepower, essentially flat to the prior quarter. Our revenue-generating horsepower increased by 1% on a sequential quarter basis, primarily due to the conversion of current fleet idle units to active status. Our average utilization for the third quarter was 94.6%, essentially flat to the prior quarter and a 1% increase compared to the third quarter of 2023. Third quarter 2024 expansion capital expenditures were $34.1 million, and our maintenance capital expenditures were $9.1 million. Expansion capital spending primarily consisted of reconfiguration and make-ready of idle units. We also expect additional and ongoing conversion of current fleet idle units to active status.

Throughout the remainder of 2024, we anticipate the deployment of up to 10,000 horsepower of existing uncontracted fleet assets at capital costs below those of new organic growth equipment builds. Finally, I would like to reaffirm our financial guidance for the full year 2024. As a reminder, our net income range is $105 million-$125 million, Adjusted EBITDA is $565 million-$585 million, and Distributable Cash Flow range is $345 million-$365 million. Additionally, we are increasing our Expansion Capital Expenditures for the full year 2024 to between $240 million and $250 million, primarily due to the cost associated with preparing active compression units that are returned by a customer for redeployment and the increased cost on the idle-to-active fleet conversion. And with that, I will turn the call back to Clint for concluding remarks.

Clint Green (President and CEO)

Thank you, Eric. My first few weeks at USA Compression have been incredible. I've enjoyed getting to meet so many wonderful folks and seeing some from earlier in my career at CDM. We expect to file our Form 10-Q with SEC as early as this afternoon, and with that, we will open the call to questions.

Operator (participant)

Again, if you'd like to ask a question, simply press star followed by the number one on your telephone keypad. We'll pause for a short moment to compile a Q&A roster. And your first question comes from the line of Jeremy Tonet with J.P. Morgan. Jeremy, please go ahead.

Eli Jossen (Equity Research Analyst)

Hey, this is Eli on for Jeremy. Congrats on the strong quarter, guys. I wanted to start on the CapEx raise and, you know, maybe thinking about how we should interpret this for 2025 spend. Is some of this pulled forward or, you know, relatively should we expect a lower spend next year? Just thinking about puts and takes for, you know, growth opportunities and where you kind of see the business run rate growth CapEx spend right now. Thanks.

Clint Green (President and CEO)

Yeah, good morning, Eli. This is Clint. Yeah, that's a good question, and you know, we are going to, we'll lay out our 2025 capital plan at normal times, which is, you know, we state our fourth quarter earnings next year. We will become more capital disciplined moving through next year, but we will also look for opportunities that become accretive to the company and its investors.

Eli Jossen (Equity Research Analyst)

Fair enough. And then maybe just on the broader compression market, you know, I know we're continuing to see strong pricing, which you mentioned in the opening remarks, and that's translating to those, you know, strong dollars per horsepower metrics. So, you know, should we continue to think about upside to these levels as well, or, you know, or might be nearing a ceiling just in terms of, you know, how high those metrics can go?

Eric Scheller (COO)

Eli, this is Eric. I think that the structural compression market remains really strong. It's robust, supporting the gas flows that we're seeing for demand pulls through the system. Frankly, I don't see any meaningful trends to changing the trend of the revenue. We continue to see people continuing to want the horsepower, want to hold it for longer, and really aggressively making that market work for us.

Eli Jossen (Equity Research Analyst)

All right, thanks. I'll leave it there.

Operator (participant)

Your next question comes from the line of Doug Irwin with Citi. Doug, your line is now open.

Douglas Irwin (Equity Research Analyst)

Hey, thanks for the question and welcome aboard, Clint. I wanted to maybe touch on the idle-to-active conversion strategy and some of the increased costs that you pointed to this quarter. And I'm just curious if some of these costs, if they're more persistent, if that changes the way you kind of think about the strategy of conversions versus new builds moving forward. And then if you could maybe just remind us how much idle capacity you still have across the fleet that could be brought back online.

Eric Scheller (COO)

Hey, this is Eric. So let me break it down into a couple easier pieces. You saw utilization continues to run at the highest rates we've ever had. We have near on the large horsepower, almost at the end of our available stuff. So we are always looking for opportunity to either buy new, to buy from customer, to optimize working capital, to get units out in order to serve our customers. We continue to work through that. On the second question concerning the capital, I think we did see a large amount of churn coming through the system. When system units come back and they go to different regions that have different requirements, we do have to enhance for either environmental or for operational reasons the asset before they're redeployed. Churn has been coming up as we've optimized the fleet.

We're happy to put those units out at higher prices, recognizing that we did have to enhance the technology that went with them.

Douglas Irwin (Equity Research Analyst)

Got it. That's helpful. Thanks. And then maybe just a higher-level question for you, Clint. I realize you're only a few weeks into the job, but just wondering if you could talk about maybe what excites you the most about the business moving forward, maybe if anything surprised you since you've joined, and then just maybe if we should expect any broader strategic changes here over the near term?

Clint Green (President and CEO)

Yeah, so I think that first off, thank you for that, and the most exciting thing I see here is, you know, I started with CDM back in 1999, which became USA Compression. So I've gotten to see a lot of folks that I started out with years ago. I believe there's huge opportunity going forward. I think, you know, today's election day, and I think that depending on which way the change in administration, if we stay with maybe the administration that we have today, we have a huge opportunity for our Dual Drive technology with a bigger push for electrification. You know, if we get a different administration, we could see the permits for LNG export lifted, and that could drive huge demand across our industry.

Douglas Irwin (Equity Research Analyst)

Got it. I'll leave it there. Thanks for the time.

Operator (participant)

Your next question comes from the line of Jim Rollyson with Raymond James. Jim, please go ahead.

Jim Rollyson (Director and Equity Research Analyst)

Hey, good morning, everyone, and welcome aboard, also Clint. Maybe just circling back to the CapEx. So just trying to understand, obviously, you guys over time get units back from time to time and go through this, as you said, transitioning from one base into another. Just curious kind of what happened in this case, you know, how much horsepower was impacted. It's just a relatively large change in CapEx. So I feel like maybe this was a little bit unexpected that you got units back, but just trying to get a little more color around kind of the situation and what happened and if this is somewhat of a one-off situation outside of what you normally see.

Clint Green (President and CEO)

Yeah, I'll start answering this and may pass it off to Eric Scheller here in just a second. But so I think one of the drivers was there was equipment that was in the yards or in the field that were brought out of the field to be reworked, and that cost ended up being more than was budgeted or expected. And I think that was the main driver for the CapEx, or that is the main driver for the CapEx increase. And Eric, I'll let you add to any of that.

Eric Scheller (COO)

Yeah, I think the other thing that drove some of it was that there was unbudgeted capital that we used to deploy units that we had purchased from third parties. We're always opportunistic in how we think about growing revenue and EBITDA. These were units with a pretty big ability to move gas, help a customer, and we were opportunistic. And when we did the first quarter capital, that was not included in our estimates. And so that's the other activity that was associated with the capital burn for the year.

Jim Rollyson (Director and Equity Research Analyst)

Got it. And presumably based on your history, the return profile there is justifiable, or I assume you wouldn't spend the money. But maybe just help us, as you spend this capital, you know, you'll have some, it should be, I presume, a nice step up in active horsepower once you get through this capital program. I know it's not 2025 yet, but any color just kind of on magnitude so we can think about how this CapEx is being deployed in terms of future revenue and profit benefits.

Eric Scheller (COO)

Yeah, you know, I think that the return certainly for those assets were commensurate with the hurdles that our general partners established for us. Otherwise, we would not have spent that capital. The other part for how we think about how this rolls to 2025 and where it impacts, that'll come out, I think, in the first quarter, as Clint previously indicated.

Jim Rollyson (Director and Equity Research Analyst)

Got it. And then just one last little one. Related party revenue was a bit higher than usual this quarter. Just seeing if there's anything unusual there or if there's something that's like if this is a one-off or if that's more sustainable.

Chris Porter (VP, General Counsel, and Secretary)

Yeah, hey, Jeff, it's Chris Porter. I think what you're seeing there a little bit is Energy Transfer acquisition of WTG. They continue to become a bigger and bigger customer of ours as they are, you know, acquiring some of our customers, and that's what's really causing that. You'll obviously see that going forward as they remain a customer of ours.

Jim Rollyson (Director and Equity Research Analyst)

Got it. Thank you, Jim. Appreciate the color.

Eric Scheller (COO)

Thank you.

Operator (participant)

Your next question comes from the line of Gabe Moreen with Mizuho. Gabe, your line is now open.

Gabe J. Moreen (Managing Director)

Hey, good morning, everyone, and welcome, Clint. I just wanted to ask a little bit. I know it's a little bit previewed here in terms of the Energy Transfer shared services agreement. Is that strictly going to be on the G&A line? I know the last question was a little bit about the commercial relationship there. So I'm just curious if you could expand a bit more on timing, magnitude, and sort of see how you see the shared services thing proceeding.

Clint Green (President and CEO)

Yeah, Gabe, thank you for that. Yeah, you know, the shared service, it's early on. We're still trying to get our arms around it, but we do see it as a shared service and become a bigger part or have an Energy Transfer support as we move forward with a separately run company. But we'll dig into it a little deeper, and probably in that first quarter of guidance, we'll explain more of what we think will come with that.

Gabe J. Moreen (Managing Director)

Thanks, Clint. And then maybe if I can just ask a little bit on M&A and kind of your approach. And I know there's been talking about that opportunistic purchases of horsepower. But in thinking about bigger M&A within compression, there's been obviously a couple of larger deals that have gone down over the last couple of quarters. Just curious kind of what your appetite or approach might be to something like that. And yeah, just I'll leave it at that.

Clint Green (President and CEO)

Yeah, sir. So we, you know, we don't comment on M&A, but I will say we look for opportunities, so.

Gabe J. Moreen (Managing Director)

Understood. Thanks, Clint. Appreciate it.

Operator (participant)

There's no further question at this time, and that concludes today's call. Thank you all for joining, and you may now disconnect.