USA Compression Partners' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.26.13 | About: USA Compression (USAC)

USA Compression Partners LP (NYSE:USAC)

Q4 2012 Earnings Call

February 26, 2013 10:00 am ET

Executives

J. Gregory Holloway – Vice President, General Counsel and Secretary

Eric D. Long – President and Chief Executive Officer

Joseph C. Tusa, Jr. – Vice President and Chief Financial Officer

Analysts

James M. Rollyson – Raymond James & Associates, Inc.

Sharon Lui – Wells Fargo Advisors LLC

Ted J. Durbin – Goldman Sachs & Co.

Operator

Welcome to the USA Compression Partners LP’s Fourth Quarter and Full Year 2012 Earnings Conference Call. During today’s call, USA Compression Partners LP may be referred to as USA Compression or USAC. At this time, I would like to inform you that this conference is being recorded. We will be facilitating a question-and-answer session after management’s remarks. (Operator Instructions)

I would now like to turn the call over to Mr. Greg Holloway, General Counsel. Sir, you may proceed.

J. Gregory Holloway

Well, thanks, Kandith. Also would you let people know and perhaps that’s what I’m doing right here now that this call will be available on our website for the next eight days. Are there any other instructions Kandith on that?

Operator

No, sir. But I can add that in.

J. Gregory Holloway

Okay, thanks. Well, welcome everybody to our call. As most of you know, yesterday afternoon, we released our financial results for the fourth quarter and the full year ended December 31, 2012. Copies of our earnings release may be obtained at our website, which is www.usacpartners.com. During this call, USA Compression will discuss certain non-GAAP measures in reviewing our performance such as adjusted EBITDA, gross operating margins, and distributable cash flow. You will find definitions and the reconciliation of these measures to GAAP measures, in the summary pages of the earnings release on our website.

I want to remind listeners that the news release issued yesterday afternoon by USAC, our officers prepared remarks on this conference call and the related question-and-answer session including forward-looking statements. These forward-looking statements includes projections, and expectations of our performance and represents USA Compression’s current beliefs, various factors could cause results to differ materially from those projected in the forward-looking statements. Information concerning the risks, challenges and uncertainty that could cause actual results to differ materially from those in the forward-looking statements can be found in our press release, as well as in our finalized year perspective as filed with the Securities and Exchange Commission on January 16, 2013, and those set forth from time to time in our other filings with the SEC, all of which are available on our website at www.usacpartners.com. Except this required by law USA Compression expressly disclaims any intention or obligation to revise or update any forward-looking statements.

You host for this mornings call is Eric Long, President and Chief Executive Officer of USA Compression, I will now turn the call over to Eric.

Eric D. Long

Thank you Greg and good morning to everyone. With me today along with Greg Holloway, our General Counsel is Jody Tusa, CFO of USA Compression. On today’s call I will review our performance for the fourth quarter and full year results for 2012 and provide commentary on our growth opportunities for 2013.

Starting with our performance, we’ve reported record levels of revenue for both the fourth quarter and the full year 2012. Revenue for the fourth quarter of 2012 was $31.8 million compared to $28.4 million for the fourth quarter of 2011.

Revenue for the full-year 2012 was $118.8 million, an increase of 20% over the $98.7 million, we reported in 2011. Adjusted EBITDA for the fourth quarter of 2012 was $16.8 million versus $14.1 million for the fourth quarter of 2011, and with $63.5 million for 2012 compared to $51.3 million for 2011.

We believe we will continue to see significant growth in our revenues, and adjusted EBITDA as a result of the additional capital expenditures we invested in new compression units in 2012, and with expected to be invested in 2013.

We added 200,000 horsepower of new compression units to our fleet in 2012, and end of the year with approximately 920,000 total fleet horsepower, making USA Compression one of the largest independent providers of compression services in the U.S.

In addition our horsepower utilization rates remain strong throughout 2012 at well above 90%. We continue to see strong demand for our contract compression services throughout the shale in unconventional plays, in which we operate, but especially in the Marcellus, and Eagle Ford shale’s and the Mississippi Lime in Granite Wash areas. Based on continued strong demand signals from our customers, we have ordered approximately 87,000 horsepower of new compression units, scheduled for delivery predominately over the first half of this year, of which 51.7% is currently under customer contracts.

Our 2013 financial guidance contemplates the addition of 100,000 horsepower of new compression units, but we will continue to evaluate our customer demand to determine whether to increase the size of our compression unit purchases for this year. Our revenue generating horsepower increased from 649,285 horsepower at the end of 2011 to 794,324 horsepower at the end of 2012 due to the additional horsepower we placed into service in the Marcellus, Fayetteville, Woodford and Eagle Ford shale plays as well as the Mississippi Lime in Granite Wash areas. We expect our growth in 2013 to primarily in the liquid rich portions of shale and unconventional plays.

I would like to take a few minutes to outline the five components of our business strategy, which we believe are central to our success. First, we will capitalize on the increasing need for natural gas compression in conventional and unconventional plays. With a particular emphasis on the continued shifting of natural gas production to domestic shale plays as well as on the declining production pressures of ageing basins.

Next, we will continue our focus on organic growth opportunities by increasing our business with existing customers, obtaining new customers in our existing areas of operations and extending our operations into new geographic areas.

Next, we will continue to partner with existing new customers who have significant compression needs, particularly those who have major acreage positions, acreage dedications or regional franchises in active and growing areas.

Four, while our principal growth strategy is to continue to grow organically we made from time to time pursue accretive acquisition opportunities of complementary assets or businesses.

Finally, and not least importantly, we intend to maintain our financial flexibility to take advantage of growth opportunities. We look forward to communicating with you in the future on the execution of our growth business strategy and our plans.

I will now turn the call over to Jody Tusa, who will take you through a review of our financial performance.

Joseph C. Tusa, Jr.

Thank you Eric, as Eric mentioned USA Compression recorded record revenue levels for the fourth quarter and full year 2012, and we continue to generate improvement in our gross profit margins. We also reported record levels of adjusted EBITDA for 2012. Revenue in the fourth quarter of 2012 was $31.8 million as compared to $28.4 million for the same period in the prior year, an increase of 12%. The decrease was primarily driven by an increase in our contract operations revenues as a result of adding revenue generating horsepower, and was partially offset by some incremental retail parts, and service revenue in the fourth quarter of 2011 that did not recur in the fourth quarter of 2012. Excluding this retail products and service revenue in 2011, incremental increase in contract operations revenue in the fourth quarter of 2012 hence compared with the fourth quarter of 2011 was 24%. Revenue for 2012 was $118.8 million versus $98.7 million in 2011, an increase of 20%. The increase in our contract operations revenue from 2011 to 2012 of 24% was driven almost exclusively by the growth in our revenue generating horsepower.

Average revenue generating horsepower was 792,000 for the fourth quarter of 2012, as compared to 629,000 for the same period of the prior year, an increase of 26%. Adjusted EBITDA for the fourth quarter of 2012 was $16.8 million as compared to $14.1 million for the same period last year, an increase of 19%. Adjusted EBITDA for 2012 was $63.5 million as compared to $51.3 million for 2011, an increase of 24%.

Gross operating margin in the fourth quarter of 2012 was $21.9 million as compared to $16.8 million for that same period of the prior year, an increase of 30%. And our gross operating margin for 2012 was $81 million as compared to $59.1 million for 2011, an increase of 37%. The gross operating margin percentage increased from 59.3% in the fourth quarter of 2011 to 58.9% in the fourth quarter of 2012, an increase from 59.9% in 2011 to 68.2% in 2012.

These increases primarily resulted from the operating leverage we achieved by adding large horsepower compression units to our revenue generating horsepower portion of our fleet and the elimination of expenses under an operating lease with Caterpillar.

On December 15, 2011, we purchased the compression units that were previously leased under this Caterpillar operating lease for $43 million. Excluding the Caterpillar operating lease expense of $770,000 during the fourth quarter of 2011, the gross operating margin percentage was 62%. Excluding this operating lease of $4.1 million in expense during 2011 the gross operating margin percentage was 64%.

Maintenance CapEx and cash interest expense were $3.5 million and $3.8 million, respectively, for the fourth quarter of 2012, while expansion in CapEx was $28 million for this period, and which use primarily to purchase new compression units. Maintenance CapEx and cash interest expense were $13.3 million and $14.1 million respectively, for 2012. While expansion CapEx was $166.7 million, it was also used primarily to purchase new compression units.

Distributable cash flow in the fourth quarter of 2012 was $9.2 million as compared to $5.9 million for the same period last year, and was $34.9 million in 2012 and $22.8 million in 2011.

USA Compression closed its initial public offering on January 18, 2013 and used the net proceeds of $180.8 million to repay a portion of the outstanding balance under our revolving credit facility. Our balance under our revolving credit facility as of December 31, 2012 was $502 million and was $322 million after applying the net proceeds of the IPO, which results in leverage ratio of five times on a trailing 12 monthly basis.

Based on our full-year projections from 2013, we expect our leverage ratio to be reduced to approximately 4.5 times by the end of 2013 due to the increase in adjusted EBITDA anticipated as a result of the expansion capital expenditures invested in 2012, and that we expect to invest in the first half of 2013. Our remaining revolver capacity subject to certain financial covenants, upon a completion of the IPO was $279 million, which we believe combined with cash flows generated by the business is adequately current to our planned organic growth over the next several years.

We believe that we have attractive organic growth opportunities particularly in the liquids-rich portion of shale in our conventional plays. We are confirming our 2013 forecast of revenue and adjusted EBITDA of $145.4 million and $82.1 million respectively as contained in our final IPO perspectives recently filed with the Securities and Exchange Commission, and providing 2013 guidance on the distributable cash flow of $56 million. While we’re confirming the specific amounts in our annual forecast, we expect at some point in the future to provide a range of annual guidance on these components to our investors.

Finally, we expect to file our Form 10-K with the Securities and Exchange Commission on or about March 27, 2013.

With that, we’ll open the call to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question will come from the line of Jim Rollyson with Raymond James. You may proceed.

James M. Rollyson – Raymond James & Associates, Inc.

Or you can call me Joe if you like. Eric, just going back to your comments about the 87,000 horsepower, is a little over half of that is spoken for with contracts. When you go into a period of looking at the market and sizing the orders kind of tracking to your 100,000 horsepower annual growth kind of target, do you have some magic formula as far as, what percent of the business or the horsepower gets contracted before you pull the trigger or is it just more kind of a touch you feel customer conversations, and how the market seems to be shaping up, just try to kind of figure out, how you think about that when you guys go about placing orders?

Eric D. Long

Sure, Jim. Kind of like the secret sauce of any particular restaurant, there is some science and some magic here. We really do have a pretty good feel in visiting with our customers, what’s some of their developing plans are. So we have a mix of customers who have forward-looking plans that are six to nine months even a year out in some cases. and then we have some folks who, when they’re on the midst of their development programs, see that their needs may intend to accelerate. So as these infrastructure plays are being built out, as new pipe is being laid, completions of fracs are improving, as you’ve seen with type curves and decline profiles, sometimes folks, type curves improve significantly requiring an acceleration of delivery compression in some cases depending on the areas that they see some change for the negative of that.

So we’re continually in the marketplace listening to our customers seeing what commodity prices are doing, seeing what’s going on with fuel switching, to the extent, natural gas prices may have declined a little, you see extensive with coal burn and fuel switching, weather patterns, all of these things affected.

So it’s not just one component that goes into it, but sufficed it to say, as we get into being at the levels contracted where we are pushing 60ish percent, to the extend over the next 30, 45, 60 days, we see continued strong demand signals, it will be time for us to pull the trigger on some potentially warrants as well.

James M. Rollyson – Raymond James & Associates, Inc.

Okay, that’s very helpful, and then just kind of follow-up here on your revenue per horsepower is trended lower as you noted in the press release. Just based on the fact that you’ve been adding higher horsepower units of the fleets, just the way the revenue per horsepower works out, with those larger units. Can you remind us, if you kind of expect that trend to continue as you primarily order larger horsepower units; number one and number two, you guys see any market opportunity for any pricing help?

Eric D. Long

Jim, let me just comment, the first component on the forward trend on the horsepower, we do indeed continue to see some of that average dollars per horsepower monthly service fee declining as due to the mathematical average with the additions of bigger horsepower. Now, I will point out that our operating margins do have improvement with the bigger horsepower machines, so we anticipate that although that dollars per horsepower monthly service trend may decline a little bit, we will actually see improvement in our overall EBITDA margin.

Joseph C. Tusa, Jr.

Jim, I might add that the really the largest category of horsepower compression that we have 1,800 horsepower per unit actually runs at a price point that it’s just slightly over $14 per horsepower per month. So that will continue to give us the opportunity to weigh up that average over time.

And the other thing that drives the other component of your question is, we did continue to see some strengthening in pricing in the market and we have taken advantage of that albeit just incrementally, but we’d also expect as we get contract return to have some components of our revenue base hitting improved pricing in the market.

James M. Rollyson – Raymond James & Associates, Inc.

That’s helpful, larger units have better margin there in returns no problem there, I will turn it over. Thanks guys.

Eric D. Long

Welcome.

Joseph C. Tusa, Jr.

Thanks Jim.

Operator

Our next question will come from the line of Sharon Lui with Wells Fargo. You may proceed.

Sharon Lui – Wells Fargo Advisors LLC

Hi, good morning.

Eric D. Long

Good morning, Sharon.

Sharon Lui – Wells Fargo Advisors LLC

Just wondering if you are still comfortable with your growth CapEx budget of $94 million?

Joseph C. Tusa, Jr.

We are Sharon, in fact as we mentioned in the release, we have on Eric’s commentary 87,000 horsepower on firm purchase orders, and so we are on track to look at the $94 million of growth CapEx for this year, and organically we see some opportunities that we can increment that up that makes sense on the underlying economics that we’ll consider that, but we are comfortable to confirm also the growth CapEx that we have been indicated in the perspectives.

Sharon Lui – Wells Fargo Advisors LLC

Okay, and maybe if you can adjust give us a sense, where you new units will be deployed in terms of which regions, and perhaps also which new regions do you see some growth opportunities, Eric.

Eric D. Long

Sure Sharon. We obviously with commodity prices where they are with the strengths in the liquids complex on the oil side, the very liquid-rich plays, the oil legs of the some of the shale plays, what we’re seeing a lot of activity right now. We see ongoing activity in Marcellus, we see development in the Utica occurring, we see lots of activity in the Eagle Ford, the liquids rich component of the Eagle Ford shales.

Interestingly there are some dry gas areas that although activity has slowed, but we’re not seeing the complete shuttering of activity. So we do see some continued activity in the Fayetteville. We see some continued activity in the dry gas portion of the Marcellus, obviously there are activities in some of the newer areas that we don’t have a footprint currently in the Rocky Mountains, in the West Texas complex, and in Southern Louisiana. So I think that our broad geographic basinal coverage today gives us lots of stability as some of the areas as I mentioned with the dry gas areas may slow some activity that activity doesn’t seize. We continue to have a very strong footprint and arresting decline in those areas, with some nominal growth as well as substantial growth in those liquids rich legs.

Sharon Lui – Wells Fargo Advisors LLC

That’s very helpful. Thank you.

Joseph C. Tusa, Jr.

Thank you Sharon.

Operator

Our next question will come from the line of Ted Durbin with Goldman, Sachs. You may proceed.

Ted J. Durbin – Goldman Sachs & Co.

Thanks good morning.

Eric D. Long

Good morning Ted.

Ted J. Durbin – Goldman Sachs & Co.

Can you talk a little bit about as you are seeing these contract renewals to shift away from maybe some of the month to month contracts, you’ve done versus maybe in the long-term contract, how are you seeing that shift if it all are you continue to stay around 40% of revenues on month to month.

Joseph C. Tusa, Jr.

Yeah Ted, we our composition at least have presence limiting at about 40% we’re seeing opportunities to get some components of that turns out, and we would like to move those that month-to-month component back to something smaller than 40% as we were a couple of years ago, Eric is signing up, some attractive term on contracts with those renewals as well as the new units that we’re taking in numbers those as longest that’s five years in duration, so we expect to improve the month to month component some may during the course of 2012, but probably will remain in that range for sometime.

Eric D. Long

So, let me expand just a little bit on that, the new contracts for new units in new activities that we deployed don’t go out on a month to month basis. Our primary term of new units that are set typically somewhere in the two to five year type primary term range. What we see our units that have been installed, and then after they go off of primary contract, we effectively have an evergreen well those things go month to month at that point in time.

We look at a low profile of our machines to look at those month to month units since they got do our customers need the machines, are they running fully loaded, or are they running lightly loaded being they are paying for horsepower they don’t necessarily use, and what we’re finding is that a high percentage of those units that our month to month basis are running at a highly loaded profile. So we have made some decisions on some of these not to re-term on extended term pricing or extended term contracts due to some the pricing cycles we saw in the marketplace over the last year or so. So as Jody mentioned due to the extent that we start to some firming in the marketplace, we see some up lift in our monthly service fees, we may at that point in time, to revisit some of the terming tenure of those month to month contracts with our existing customers.

Some of the folks have been looking for optionality, we saw softness in commodity price obviously last spring at $1.90 an Mcf, some folks were raining in their drilling programs, and not overly clear on what 2013 and on into 2014, the development plans might look like. So with the rebound in commodity price, off half of that’s more coupled with continued performance, and needs for our compression horsepower. I think that we will have the ability to potentially re-term some of those contracts in the future.

Ted J. Durbin – Goldman Sachs & Co.

That’s very helpful, thanks. The second one from me, is just talking about your mix of customers, as you’re signing up some of the new horsepower, both on the (inaudible) order, plus what else you’re seeing. would you categorize as is more sort of midstream type customers, maybe more E&Ps are looking to outsourcer, and then maybe talk about the credit quality of the new customers you’re bringing on?

Eric D. Long

Yeah, sure, Ted. A lot of the folks we deal with might be the call it the midstream affiliates of some of the major E&P players. We have major oil companies that we’re working with. we’re working with the gathering affiliates of some major independent producers, and then we’re working directly with the E&P arms of both major oils as well as some of the larger, and its entity NP type of producers. When we look at the credit quality, we’re very pleased with what our book looks like, with the major oils in some of the very major large E&P players. We have very few client customers, who are exclusively dry gas pipes, so when I look at the research of following our top ten public company type of customers, they’re all extremely strong credits. When I look at some of our private customers, who would be in our top 15 or 20 customers, again very strong credit quality.

So Joe, you might speak to some of our past receivables, and when you look at how we build and advance our credit quality, and the implications of our mission critical service really follow through.

Joseph C. Tusa, Jr.

So Ted, you may recall that we build our revenues 30 days in advance of the service month. So that not only gives us good visibility in our revenue and cash flow trends, write-offs for us have been de minimis. So if you look over that a five-year history, the write-offs run less than 0.5%, and by Eric’s commentary since we are looking at large customers you’d certainly credit more than, we don’t expect any kind of significant exposure to bad quality credits.

Ted J. Durbin – Goldman Sachs & Co.

Great, thanks. And then last one, quick one from me, it looks like G&A for the quarter was a little higher than what we’re looking. So I’m just wondering if there’s any kind of one-time items in there?

Eric D. Long

Yeah. Actually all we had a little bit of the reclassifications to line up our final annual bonuses between our operating expense and our SG&A components. So Ted, you did see a little bit of a slight pickup there, but we would expect that to normalize out as we look into the quarters in 2013.

Ted J. Durbin – Goldman Sachs & Co.

Great, that’s it from me. Thanks a lot.

Joseph C. Tusa, Jr.

Okay.

Operator

Our next question will come from the line of [Marc Silverberg] with Barclays Capital. You may proceed.

Unidentified Analyst

Hi, good morning everyone.

Eric D. Long

Hey, Marc.

Joseph C. Tusa, Jr.

Good morning, Marc.

Unidentified Analyst

Can you comment a bit on the current lead times you’re seeing through from some of your providers for new compression units, just trying to get a feel for when any potential upside in your spending plan, it could lead to the growth in cash flow.

Eric D. Long

Yeah, sure, thanks. We look at the major suppliers of our components would be predominantly Caterpillar and Ariel. They are different product mixes from really big stuff to care we small things, with our focus on large horsepower north of the 1,000 horsepower per unit, the lead times right now, if we were to not have equipment already in queue with our fabricators, we’d be somewhere in the four to six month range depending on the actual type of equipment. So if you look at it today, we are in the first of March, so that was equation positive about where are we with looking at our possibility of our next order.

So we do have 87,000 horsepower scheduled for delivery during Q1, and in Q2 a little bit of carryover into Q3. So today we would be looking at deliveries realistically in that July 1, type timeframe for orders that would be placed today. Potentially at August through September range, so that’s four to six months lead right now.

Joseph C. Tusa, Jr.

Hey, Marc, I might add, you see that we continue to run consistent utilization rates so in terms of modeling out revenues and cash flow from those lag times, we would expect it to continue to be most of that new equipment under customer contract by the time, we take possession of it. So in terms of utilization rates translating into cash flow, we expect those to be pretty consistent with our past performance.

Unidentified Analyst

Okay, great. And I guess somewhat related to that and a bit similar to the question Jim had asked earlier, can you comment a bit more specifically on the general timeframes you’re seeing on signing some of these new contracts. I know you’re about 50%, 60% for the 87 today, just trying to get sense for how far in advance you sign contracts and how that may be compares to some of the timeframes you’ve seen in the past.

Eric D. Long

Sure, the contracts are being signed up sometimes in advance in taking possession of the equipment, and more often in our case, the lag times that we are modeling out would indicate that it perhaps takes a month or two after taking possession of the equipment, before it’s hitting our revenue base.

So we again, we would expect Marc, that in terms of completing the rest of the customer contacts for the 87,000 horsepower that most of that would be signed up over the remainder of the first and second quarter, and to some extend in early Q3, that we would not have significant levels of horsepower being idle for new unit deliveries because they are not under customer contracts.

Unidentified Analyst

Okay, great. And then sort of variation on the scene, but just want to confirm as far as the step up in EBITDA growth obviously this new spending low travel pretty significant ramp throughout the year, should we still expect that most growth in Q3 or it sounds that it maybe like maybe quarter line on the Q4 event.

Eric D. Long

We still expect to see a significant step up in Q3 and consistent with the kind of quarter by quarter, revenue generating horsepower that we had in the perspectives, so we’re now seeing these slippage Marc, in terms of taking position of new equipment and increasing the revenue generating horsepower, so still looking at our meaningful step up in the third quarter of this year.

Unidentified Analyst

Okay, perfect that was it from me, thanks very much.

Eric D. Long

Okay, thank you.

Operator

Our next question will come from the line of James (inaudible). You may proceed.

Unidentified Analyst

Hi, thanks for taking my question. Given that you guys are a little bit more levered that most NLPs, do you foresee any scenario where you, what we file in S1 and raise more equity during the year this year, to bring a leverage ratio lower.

Joseph C. Tusa, Jr.

We really don’t see that James, we just want the cash flow that we will generate and retain under our distribution reinvestment program. We would see the leverage running in about 4.5 times at the end of the year, without an equity offering next year that can increase to something that looks perhaps a little more like upper 3s or right at four times. So if we look at doing something in the equity markets, we don’t have the final scenario that we include during so this year, acquiring some areas potentially we could be looking at them in 2014, but again we have the growth plans that we have outlined at 100,000 horsepower per year can de-lever the business from our and further generating cash flows.

Unidentified Analyst

Would it be fair to say that if you did an acquisition you might need to have an equity offerings?

Joseph C. Tusa, Jr.

Let’s say, that’s a fair comment, so there were transactions, I think we would look at although large growth components of the capital structure, the transaction would be kind of dictate what we look this in terms of debt versus equity financing.

Unidentified Analyst

Okay thank you very much.

Joseph C. Tusa, Jr.

Okay.

Operator

This concludes the question-and-answer portion of today’s conference. I will turn the call back to management for any closing remarks.

Eric D. Long

We appreciate the interest in our company, and the continued support, all of our new investors post public, the management team is here at any time for reach-out and questions, review our relationship with our shareholder of the true Partnership, we value the relationship and look forward to being transparent as we grow our business together into future. Thank you very much.

Operator

We thank you for your participation, you may now disconnect. Have a great day.

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