USA Compression Partners, LP
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Good day and welcome to the USA Compression Partners Second Quarter Earnings Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Greg Holloway, Vice President, General Counsel and Secretary. Please go ahead sir.

[J. Gregory Holloway:]

Well thank you Casandra. Good morning everybody and thanks for joining us. This morning, we released our financial results for the quarter ended June 30, 2015. You can find our earnings release, as well as a recording of this conference, in the Investor Relations section of our website at usacpartners.com. The recording will be available through August 16 of this year. During this call, our management will discuss certain non-GAAP measures. You will find definitions and a reconciliation of these measures to GAAP measures in the earnings release. As a reminder, our conference call will include forward-looking statements. These statements include projections and expectations of our performance, and represent our current beliefs. Actual results may differ materially. Please review the statements of risk included in this morning’s release and in our latest filings with the SEC. Please note that information provided on this call speaks only to management’s views as of today, August 5, and may no longer be accurate at the time of a replay. I’ll now turn the call over to Eric Long, President and Chief Executive Officer of USA Compression.

[Eric D. Long:]

Thank you, Greg, and good morning everyone. Also with me is Matt Liuzzi, our CFO. The second quarter was another strong quarter for USA Compression, as we continued to execute our growth plan while maintaining operational and capital discipline. We have been very pleased with our performance in the current market, and our results today speak to the dedication and competencies of our employees across all the regions in which USA Compression operates. With the first half of the year behind us, we are continuing to see the stabilityof our fee-based income-driven compression services business, which our financial results for the quarter clearly illustrate. You probably also noticed in the release this morning that we are revising our full-year guidance upward. As we’ve told you in the past, as we gained additional clarity, we would seek to provide further information and revision as appropriate. This revision reflects our strong performance in the first half of the year, the continued stability of our cash flows and what we see coming for the back half of the year. Matt will discuss the revised guidance a little bit later in the call. This confidence in our outlook is further evidenced by our recent increase in the distribution, which I’ll touch on momentarily. I’ll now spend some time on what we see driving the strength in our contract compression markets. While crude oil and natural gas liquids continue to dominate the headlines, domestic natural gas activity continues to move forward and demand continues to grow, as it has over the long-term. Without compression, the market demand for natural gas simply cannot be satisfied. The continued investment in natural gas infrastructure throughout the country bodes well for the ongoing growth and profitability of our business. While there is some general uncertainty out there, we think it is relatively short-term in nature and what people often overlook is the larger natural gas demand picture and what that means for compression demand, and consequently, USA Compression. While the recent volatility in commodity prices has affected, and will continue to impact, the aggregate amount of infrastructure projects being undertaken, customers throughout our regions are continuing to embark on projects that have sound economics and structure. We’ve even seen larger, strategic moves

[Matthew C. Liuzzi:]

Thanks, Eric. Good morning everyone. As Eric mentioned, today we reported recordlevels of revenue, adjusted EBITDA and adjusted distributable cash flow for the second quarter of 2015. In addition to a strong quarter in our base business, we continued to invest in the business and grow our compression fleet to be prepared to meet demand from our customers. We spent about $60 million in growth CapEx for the quarter, down from Q1’s total. As Eric mentioned, through Q2, we’ve spent almost three-quarter of the expected total growth capital for the entire year; and as we’ve discussed, we have purposely front-end loaded a lot of our spending. This investment allowed us to add approximately 50,000 horsepower of new compression units to our fleetduring the quarter, ending the quarterwith over 1.6 million total fleet horsepower. Our revenue generating horsepower increased to just over 1.4 million horsepower. During the quarter, we took an impairment charge of approximately $27 million related to certain units in our fleet. This non-cash charge, which involved approximately 58,000 horsepower, resulted from our evaluation of the future deployment potential of currently idle units under present market conditions. This marks the first time in the history of the company that we’ve taken a charge such as this; when you consider that we’ve been in business for 17 years, the impact is minimal

[Operator:]

[Operator Instructions] And we will take our first question from T.J. Schultz of RBC Capital.

[Unidentified Analyst:]

Hey, guys this is [indiscernible] filling in for T.J. Good morning and congratulation on the solid quarter.

[Eric D. Long:]

Good morning and thank you.

[Unidentified Analyst:]

I had a quick question just regarding your revenue per horsepower per month basically I mean how is pricing holding for your new horsepower deliveries, I mean like the average revenue per horsepower per month is holding strong due to roll off of lower rate legacy contracts or because of strong rates for your new deliveries?

[Eric D. Long:]

Good question and this is Eric, I would categorize it as a combination of things. First our industry is basically running at capacity, we do not have an excess horsepower, USA compression or frankly with our peer groups. So in the environment where we are coming into where there is some focus on capital efficiencies, we're frankly seeing high grading of opportunities and we've actually been able to push through some nominal rate increases with some select customers. Secondly we are also seeing a mix of different types of equipment, large horsepower tends to have a different operating margin in a different revenue profile, dollars per horsepower then some intermediate type of equipment. And then it’s the same situation with our gas-lift, so we are focusing on deploying equipment in the most profitable components of our marketplace and since there is not a plethora or excess of equipment in the industry, we think that it bodes well for stability of pricing.

[Unidentified Analyst:]

And has that - the reason why we are seeing margins kind of upwards because of other large weight towards your larger horsepower unit?

[Matthew C. Liuzzi:]

That is part of it and obviously the horsepower that we are adding as a percent of the total fleet is not meaningful for any given quarter, but most of the margin improvement is coming from lubrication savings, optimization of maintenance activities and things like that that we believe are sustainable into the future, not necessarily tied to temporary price dynamics.

[Unidentified Analyst:]

Okay. Great, another question I have was I see you have 215,000 horsepower deliveries for 2015, 140,000 you have already taken delivery of, I know you guys said 75% of that has been contracted of the 70,000 - of the 75,000 expected to be delivered in the second half or any of those contracted?

[Eric D. Long:]

The portion in the rest of the year most of the stuff that’s going to be delivered has not been contracted and that is consistent with how we and really the industry operates in terms of you basically contract them as we get closer to actual delivery of the units. We mentioned in the call that there were some units that we took delivery of, these are very large horsepower units that we took delivery of in the second quarter that were not contracted. And so we expect deploy those kind of in the normal course of business here in the back half of the year for customers, but we thought there was value to basically having those more or less on the shelf for when customers call.

[Unidentified Analyst:]

Okay. And in regards to M&A are you also looking actively opportunities in M&A market, I mean just kind of given your current cost of capital is that still option and what is the compression asset that regecny now wrapped into energy transfers, is there any chance those assets hit the market?

[Eric D. Long:]

Well, as you know we historically have not commented on potential M&A opportunities, I think it’s fair to say that we’re always looking in for opportunities in the marketplace, but as we’ve articulated in the past, our core focus has always been to grow our fleet organically and to focus on operational excellence and delivering high quality compression services to our core complementive customers.

[Unidentified Analyst:]

All right. That’s it from me. Thank you.

[Eric D. Long:]

Thank you.

[Operator:]

And we’ll go next to [Andrew Bird] (Ph) of JP Morgan.

[Unidentified Analyst:]

Hey, good morning and congratulations on another strong quarter.

[Eric D. Long:]

Thanks Andrew.

[Unidentified Analyst:]

So I guess the first question is with a strong first half, I think especially if you annualize it and seemingly strong exit rates and resilient pricing, looking at guidance, it almost seems a bit conservative, can you just give little insight and how you approach that figure and what the kind of implied deceleration in the second half is driven by?

[Matthew C. Liuzzi:]

Sure, Andy, it’s Matt. I think going back to February when we initially released our initial guidance for the year, the comment we made was that with more clarity throughout the year, that we would look to be able to increase and give more information on full-year guidance and certainly we’re sitting here kind of through with the first half of the year and we’re very pleased with where the first six months have landed. And so I thought it was prudent to move things up a little bit. That said, there is still some general uncertainty out there industry wide and so we thought the right move was to look at where we’ve been, see what we see out there for the back half of year and move it up at a prudent amount. Obviously, consistent we would like to be able to give you more information, three months from now in the next earnings call depending on where things go between now and then. But there is not, it’s not that we’re forecasting a decline, it’s we just need more clarity before we can give you better numbers.

[Unidentified Analyst:]

Great. That’s helpful. Yes. Definitely better, estimate that way than the opposite. I guess next question is kind of more for Eric, I mean, this commodity downturn isn’t your first at USA Compression you’ve seen this before but it is the first downturn since the company has come public. Can you comment how if at all you’re managing business differently this time as a public company versus a private company and if there is kind of anything we should be looking for when we’re comparing periods-to-periods that might not standout.

[Eric D. Long:]

Andy, that’s a really good question. We would like to say that from the formation of USA Compression back in 1998, we have run and managed the company as if we were a public company. We’ve got the same Auditor we’ve had for 17 years, we’ve got the same business philosophy we’ve had for 17 years and we really have not altered our business practice. Unlike the drilling and stimulations sector the true OFS component, which is highly volatile, tied to commodity pricing, we’re very much tied to the demand for natural gas. We’re working with customers who have very large acreage positions; very large infrastructure requirements as we touched on earlier the kneejerk reaction to kind of the rapid whips on in commodity environments a lot of the folks that we’re working with are frankly kind of agnostic to that. So we’ve always said that USA Compression is a story of stability and growth. We’ve tamped down the growth rate a little bit from last year but as you can see from our CapEx spend and our horsepower additions we are continuing to grow. So this is to me kind of the ideal way to manage our business through cycle like this, we focus on the stability we moderate our growth a little bit, continue to provide operational excellence for our client customers, we’re really not altering our business practice. We’re just moderating a little bit the growth rate and we’ll power through the next few quarters on things and as we come out of the tunnel on the backend, it will be a bright daylight on the other side.

[Unidentified Analyst:]

Great. And I think if I remember some of your previous comments, big headwinds during the last downturn was over capacity in the space. In your prepared comments today, you indicated that’s no longer the case. So again, if we’re looking period-over-period, I guess the question is, you don’t foresee a necessarily at this point getting worse than last time from the utilization and pricing perspective given that that over capacity situation is no longer prevalent, is that fair?

[Eric D. Long:]

You categorize that very accurately.

[Unidentified Analyst:]

Okay great. And then last couple of question just focusing on the Marcellus, you may gave some good color on Southwestern and their plans there, obviously Southwestern’s very longer relationship for you guys throughout your footprint, but given that there is somewhat new to some of the acreage in the Marcellus is that business that they’re able to easily transfer over to you is that a opportunity in the future, some kind of clarity in that relationship would be helpful.

[Eric D. Long:]

Sure, there are different components within the Southwestern, you’ve got the E&P side, you’ve got the Mid-Stream organization, as you’re aware they’ve recently monetized the Angelina Gathering System, so we have multiple touch points in the organization and we have very good forward visibility in light of our long-term relationship with them. So I think if Southwestern continues to grow and promulgate in the Marcellus holdings will be right alongside of them to back their play.

[Unidentified Analyst:]

Okay, and that kind of gets me to my final question is, it seems that and correct me if I’m wrong that customer relationships within the space are very sticky and that usually producers or customers don’t diversify contract compression providers within particular basin. Assuming that’s the case within the Marcellus it seems like you kind of have you know big list of the Who’s Who at this point is there much more many more big logos that you can add or at this point is it really just, you have your horses in the race and you’re going to grow alongside them?

[Eric D. Long:]

Compression continues to grow and evolve; we’re continuing to see a greater and greater move toward the outsourcing component. As you’re aware capital is crisis right now folks who two years ago had access on limited capital kind of reoriented their internal focus to some degree, compression is our core competency and there are folks who are coming to the realization that maybe it’s not their core competency, this is pretty big universe out there and there are many customers that both E&Ps and Mid-Streams that could be perspective clients for USA. They are not correctly USA customers or we’re not dealing with them in a material way. As we continue to move up in the size and capabilities of larger horsepower, station services fully integrated turnkey applications we think we can expand both our geographic footprint that we can increase our customer footprint and frankly do some more with some of our existing customers. Frankly, we have more opportunities than we can prudently continue to grow at the current time. So I think we’re in a unique situation where opportunity long and we want to properly manage both our leveraging coverage at this part of the cycle and that you know we will capitalize on the most profitable opportunities and frankly, I think there is more than enough for all of us in the sector to go around right now.

[Unidentified Analyst:]

Great, thanks a lot, Eric and congratulations again. That’s it from me.

[Eric D. Long:]

Thank you sir.

[Operator:]

And we’ll go next to Richard Verdi of Ladenburg.

[Richard A. Verdi:]

Hi, good morning guys and thanks for taking my call and excellent quarter. Quick question for you guys and following up on the first - Matt maybe you could help me out here with the horsepower that’s not contracted here that we are looking for in the back half of 2015, can you give us any color on potential timing of that for modeling purposes, do you think it might be balanced out more in Q3 versus Q4 or vice versa just a little bit of - would be really helpful.

[Matthew C. Liuzzi:]

Sure, Rich it will be weighted more towards Q3 again this was, I think consistent with how we end the year which is more of a front end weighted deployment and delivery schedule and so right now of that, the remaining capital the majority of it will be in the third quarter.

[Richard A. Verdi:]

Okay, great and just one last question for you guys most of my question have been addressed already, a notes far out but 2016 CapEx I think it about horsepower any kind of color you can give us there for next year, and just thinking high level.

[Eric D. Long:]

Rich part of this is, I don’t know how good your crystal ball is, but my crystal ball right now what is going on in the Mid-Eastern with OPEC and commodity pricing, the dollar all the things are revolving into it, I don’t think we have a lot of clarity. We do have demand signals with specific customers on some of the larger horsepower infrastructure applications, but it’s too early to tell that is why we came into 2015 with an initial range of guidance, we indicated as we got additional clarity, we would update and obviously we’ve updated and revised upward our guidance for the back half of this year. So I think at this stage, we’re just going to be cautiously waiting and seeing what happens we got plenty of time, lead times to deliver equipment from the fabrications from Caterpillar and Ariel have come in, a year 18 months ago we had about a year lead time to source equipment, that period has shortened. So we have the flexibility and the luxury to kind of watch away and we will respond to the market based on what we see here in the back half of the year.

[Richard A. Verdi:]

Okay, great. All right. Thanks guys and great quarter again.

[Eric D. Long:]

Thank you sir, thanks Rich.

[Operator:]

[Operator Instructions] And we’ll go next to John [indiscernible] of Washington Securities.

[Richard A. Verdi:]

Thanks very much and congratulations in a great quarter. I have one question, are you still happy with your corporate structures of partnership?

[Eric D. Long:]

When you look John how we structured USA Compression, I think we’re a classic fee based long-term contracted ideal candidate for an MLP, we are a story as I mentioned earlier stability in growth. We have methodically been able to increase our distributions, we are demand driven rather than kind of commodity price driven and I think when you look around. We are not a variable rate MLP, we’re not an E&P kind of MLP, we are frankly a gathering processing classic Mid-Stream oriented type of vehicle. So we think that the structure works, I think the baby has been tossed out with bath water, so to speak right now and there has been an over correction and we will just kind of watch and wait a little bit and over time we think things will self correct and we will get back in the fair way again.

[Richard A. Verdi:]

Great, thank you. End of Q&A

[Operator:]

And this concludes today’s question-and-answer session. I will now turn the call back to Mr. Eric Long for any additional or closing remarks.

[Eric D. Long:]

And we appreciate everybody’s continued interest in USA Compression and we look forward to hosting the call here in another quarter. Thank you.

[Operator:]

And this does conclude today’s conference. We thank you for your participation. You may now disconnect.