USA Compression Partners' (USAC) CEO Eric Long on Q4 2015 Results - Earnings Call Transcript

| About: USA Compression (USAC)

USA Compression Partners, LP (NYSE:USAC)

Q4 2015 Earnings Conference Call

February 10, 2016 11:00 AM ET

Executives

Greg Holloway – Vice President, General Counsel and Secretary

Eric Long – President and Chief Executive Officer

Matt Liuzzi – Vice President, Chief Financial Officer and Treasurer

Analysts

Praveen Narra – Raymond James

TJ Schultz – RBC Capital Markets

Andrew Burd – JP Morgan

Sharon Lui – Wells Fargo

Richard Verdi – Ladenburg

Kurt Hoffman – Barclays

William Can – Private Investor

Operator

Good day, and welcome to the USA Compression Partners Full Year and Fourth Quarter 2015 Conference Call. Today’s conference is being recorded. After the presentation there will a question-and-answer session, instructions will be given at that time.

Now I would like to turn the conference over to Greg Holloway, Vice President, General Counsel and Secretary. Please go ahead.

Greg Holloway

Thanks Jim. Good morning everyone and thanks for joining us. This morning, we released our financial results for the year and quarter ended December 31, 2015. You can find our earnings release, as well as a recording of this conference, in the Investor Relations section of our website at usacompression.com. The recording will be available through February 21, 2016.

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 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, February 10th, 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 Long

Thank you, Greg. Good morning and thanks for joining the call. Also with me is Matt Liuzzi, our CFO. This morning USA Compression released our fourth quarter and full-year 2015 financial and operational results which demonstrated the stability and resiliency of our compression services business model, even when operating in a soft commodity environment.

We reported fourth quarter revenue, up 12%, adjusted EBITDA up 15%, and distributable cash flow or DCF up 7%, relative to Q4 2014. We held our distribution flat at $52.5, relative to the Q3 distribution which resulted in a DCF coverage ratio for the quarter of 0.99x and 1.17x for the year.

We continue to hear the investors’ desire in more acute focus on leverage and coverage metrics and we think our distribution levels of improvement in light of the market environment, while still rewarding our unit holders for our strong quarterly performance.

For the year 2015, our revenue was up 22%, adjusted EBITDA was up 34% and DCF was up 41% over 2014, additionally, exceeded the high-end of our final guidance range for both adjusted EBITDA and DCF. We believe these strong results demonstrate our ability to proactively manage the business, in an otherwise challenging market, while maintaining our focus on and dedication to operational excellence.

As I’ll discuss in a minute, we believe that we have the ability to pull certain leverage in our business to get through this tough environment just like we have done in past energy downturns. In conjunction with our 2015 results, we also released our preliminary 2016 guidance this morning, which reflects our conservative view for the year ahead.

Given timing and market uncertainty, our preliminary adjusted EBITDA and DCF guidance ranges are wider relative to the past year. We believe that based on our current view of the near-term, we should perform in excess of the guidance midpoint. While overall pricing and utilization were generally consistent in the fourth quarter, relative to Q2 and Q3 2015, it is difficult to predict exactly where those metrics might move over the course of 2016, at least, until we see better stability in the marketplace.

That said, as in the past, we will continue to provide updates to our guidance throughout the year, but financially and operationally and Matt will discuss the details of our guidance a little bit later in the call.

Let me share with you our strategy in managing our business in 2016. Just like we did from late 2008 into 2010, we are laser-focused on things in our control, such as capital spending, cost effective financing, expense control and operational excellence. Senior management team continues to be cautiously optimistic regarding our ability to generate strong results.

During our nearly 20-year history, we’ve been through multiple commodity cycles before and while each is unique, our business characterized by the infrastructure oriented, demand-driven nature of our asset base is built for stability in times like these. This isn’t our first rodeo senior management team is proactively all over it. First, we plan to spend considerably less in expansion capital this year than in 2015. We expect to spend somewhere at the range of $40 million to $50 million for 2016 versus $270 million in 2015, a reduction of over 80%. Roughly half of the total expansion capital will be spent on new, large, horsepower unit purchases. We will focus on allocating the limited capital we do plan to invest on the highest-return projects.

Unlike many pipeline companies with long multi-year lead time projects and large financing needs, our business provides for more flexibility and we have quickly moved to slash our capital budget. And we believe we can fund our minimal capital with operating cash flow and borrowings. We can and plan to live within our current capital structure.

Second, we will focus on maintaining the utilization of our existing fleet as we have done historically in down cycles which we believe will aid in maintaining margins and cash flows. We are proactively reallocating our resources, people, capital and equipment for regions of softness to areas of continued strength and demand. Additionally, we are utilizing currently idle or recently returned and refurbished compression units to the extent possible.

For years, we’ve discussed our flexible compression unit design with minor modifications most of our units can be utilized and applications with varying operating conditions and across various regions. We believe this provides us with a competitive advantage in this environment as we can move assets around and maintain utilization. Remember, we have term contracts on much of our equipment and utilization of large horsepower, infrastructure-oriented equipment remains relatively high.

Third, we will continue our plan to ring out operational and corporate efficiencies similar to what we did in 2015. In the event of a more pronounced downturn there are ongoing operations, we will continue to explore those types of cost-saving opportunities as additional levers to pull. We think that with the levers I just discussed, capital discipline, maintaining utilization and rigorous expense control, we will be able to deliver stable cash flows, just as we have over the better part of our nearly 20-year history as a business and importantly, as we have demonstrated through all four quarters of 2015.

As I have mentioned many times before, our business model is characterized by both stability and growth. We grow when it makes sense, when activity levels are high and capital costs are attractive. Clearly, we are in the opposite situation today, and are focused on proving out the stability of our infrastructure-oriented asset base.

Our utilization for the quarter was 89.5%, essentially flat from Q2 and Q3 levels of just over 90%. And our fleet’s average pricing actually continued to increase quarter-over-quarter in 2015. Given a critical nature of our assets, in the overall natural gas infrastructure, we have been able to hold these metrics at or near historical averages. We are very different than oil field service companies, who are closely tied to the drilling cycle, and these revenues maybe up 40%, 50%, or even more. While we may see some decline in utilization remember that existing gas production still requires compression to move it through the pipeline system.

Given the high barriers to exit, including direct cost associated with freight, cranes and demobilization, as well as certain permitting requirements, we find our compression assets particularly on the large horsepower midstream side of the business continue to be very sticky.

The circumstances under which we see this type of equipment return is typically only when there is a wholesale change in the operating positions or volumetric output from a field or region, which can happen either in the early steep decline stages of shale gas production or in more mature shale plays where the shallow production decline is not offset due to active growing activity.

As an example of the latter, let’s take the Fayetteville shale. There is little to no new activity in that region and has not been much activity for a few years. So overall volumes have begun to flatten or even decline. On a representative gathering system where we originally had eight to ten large compression units on long-term contracts or five years ago, a customer may overtime elect to return one or a few units, which we then refurbish and redeploy to other areas with continued activity and supply growth.

The volume metric trend seen in the Fayetteville is a result of the flattening of the production curves on thousands of wells, leading to a flattening or shallow decline in overall volumes. However, it is essential to remember that once the production flattens, you typically see the pressures of the well declining significantly, which means you again may need even more compression to move the same volume of gas. So even as some regions begin to see production flatten, compression requirements would actually increase over time as those pressures decline which would obviously be a positive trend for our business over the long-term.

Another important factor which drives the stability of our business is the nature of our service contracts and the customers we serve. As a reminder, our service contract rates are structured similar to take-or-pay contracts. They are hell or high water, 100% fixed fee-based, i.e. they are not in any way whatsoever tied to volumetric throughput or any direct commodity price exposure. Additionally, each of our approximately 2,700 active units has its own separate and discrete contract. And we typically bill one month in advance for service. That is to say on February 1, we billed our customers from March service.

Our contracts typically range from six months up to five years initial term and due to the sticky nature of our units they often stay in place for a significant amount of time beyond the initial term. Our customer base on the whole remains strong and credit worthy with an average credit rating of an investment grade for our top 25 customers, which represents over 70% of our revenues. These are all means you will not only recognize, but also take comfort in their ability to weather the storm. Importantly, we have minimal to no exposure to names that have recently been in the news, names like Chesapeake, Linn, Breitburn or Sand Ridge. This fee-based revenue stream with strong counter parties leads to fairly stable cash flows which we believe are essential for the MLP model. I think sometimes the infrastructure nature of our fleet gets lost in translation. Like I’ve said earlier, the price of oil and gas leads to much less fluctuation in our revenues than compared oilfield service companies.

To give you a sense of the size and critical nature of our compressor applications we estimate that our total active fleet of compression units is currently moving about 7.5 Bcf a day of gas into and through the pipeline system. This equates to proximately 10% of the total domestic gas production. Additionally, in the past two years alone we have placed into service approximately 375,000 horsepower of large equipment with an average size of over 1,500 horsepower per unit.

As of year end that same equipment was active with almost 50 different customers and had a horsepower weighted average remaining contract term of about 21 months. Roughly half of this 375,000 horsepower is active with five customers, including a large private midstream company, two large public gathering and processing MLPs, a pipeline subsidiary of a utility and a large cap independent E&P operator. These are the types of counterparties we really like.

Finally, over 70% of the same horsepower, since 2014, was placed into service in the Northeast and in West Texas, which we continue to believe will be our principal areas of demand. We believe both the stability of our business and the strategy we plan to employ to navigate this choppy market, will position us well for an eventual commodity revamp. And in turn a resulting increase in demand for our services. A few general equipment supply trends continue to work in our favor. Currently, we do not see a significant oversupply of equipment overall in the industry and we believe that the large horsepower compressions faced is still in relatively tight supply.

We have, and we believe our competitors have substantially reined in capital spending and the industry continues to see relatively high utilizations rates on the midstream equipment. All of which has resulted in relatively stable pricing. This industry wide capital discipline has resulted in positive trends and lead times and fabrication capacity. Trends which bode well, when activity levels rebound and we should be able to quickly respond.

We continue to be bullish on the long-term natural gas market domestically, and we are positioned to ramp up growth again when the market dictates. While current low commodity prices affect new drilling activity, we believe the overall gas supply picture appears to be robust in the future years. Part of the explanation for this is that producers continue to experience productivity gains and lower drilling and completion cost, all of which drive efficiencies meaning more volume with even fewer active rigs.

Additionally, we are seeing a slowing of production declines and in some cases even flattening production profiles from some of the more mature shale gas plays. This trend, as well as continued for our gas supply growth driven principally by the Marcellus and Utica shale, is bolstering the overall supply growth domestically and is expected to more than offset declines in associated gas from lower crude-oriented drilling. We expect that the demand growth side of the picture will still be driven by the same factors we have touched on in the past, including ongoing large scale coal plant retirements, pipeline exports to Mexico, and imminent LNG exports and increasing industrial demand, driven in part by new petrochemical projects.

We expect all of these factors will continue to drive demand for natural gas well into the future, especially to the extent that natural gas becomes the fuel choice globally. In fact Shell recently suggested that gas may replace oil as the world’s main energy source of energy as soon as the middle of the century. Shell is indeed putting their money where their mouth is with the upcoming February 15 closing on their $52 billion acquisition of natural gas centric BG Group. This expected continued increase in both domestic and international natural gas demand will drive increased domestic infrastructure investment of which compression will be an important part.

If it’s expected overall domestic gas demand goes up incrementally in the future, domestic producers, primarily in the shale plays will continue to produce in order to meet that demand and the midstream operators will continue to invest in the infrastructure and the associated compression needed to transport, process and deliver that gas to the end user.

I’ll wrap up my comments by reiterating our strategy to manage through this current trough in the latest energy cycle. Reign in capital and avoid external equity financing, focus on maintaining high utilization, pursue the track of incremental growth opportunities and ring out cost savings throughout the organization.

On the heels of strong execution in 2015, we continue to demonstrate the stability of our business model and our ability to quickly and efficiently respond to changing market conditions. We continue to be bullish on the outlook for compression, attractive macro fundamentals for growing natural gas demand, and infrastructure-oriented business model and stable cash flows, all set USA Compression up for future success and long-term sustainability no matter what the commodity and capital markets may do in the short term.

Now, I turn the floor over to Matt to cover some of the financial highlights for the year and for the quarter. Matt.

Matt Liuzzi

Thanks, Eric and good morning everyone. USA Compression reported another very strong quarter of operations against the tough market backdrop. For the fourth quarter of 2015, USA Compression reported revenue of $68.6 million, adjusted EBITDA of $38 million and Bcf of $28 million.

In January, we announced a cash distribution to our unit holders of $0.52 per LP unit which resulted in DCF coverage ratios of 0.99 times for the quarter and 1.17 times for the year.

In Q4, we saw continuation of the deliberate slowdown in our capital spend which Eric touched on previously. We invested approximately $37 million in expansion capital during the quarter, primarily focused on large horsepower equipment. We added approximately 26,000 horsepower of new compression units to our fleet during the quarter, ending the year with just over $1.7 million total fleet horsepower. Our revenue generating horsepower at year end was essentially flat relative to Q3 at just over 1.4 million horsepower.

We took delivery of a total of approximately 220,000 horsepower in 2015 and have contractually or otherwise committed over three quarters of that horsepower. While we invested a total of almost $270 million in expansion capital in 2015, as Eric mentioned, before we expect to spend considerably less than that in 2016, somewhere between $40 million and $50 million. We currently expect to take delivery of only 15,000 horsepower in 2016 and the remaining expansion capital will be spent on certain compressor package components, equipment reconfiguration, IT infrastructure, trucks and other necessary items to support the business.

Our average horsepower utilization for the fourth quarter was 89.5%, essentially flat from the previous two quarters. And our average horsepower utilization for the year topped 90%. Given our expected light expansion capital spend in 2016 our team will focus on continuing to maintain high utilization rates across our asset base, as we have historically been placing into service those remaining large horsepower compression units we purchased in 2015.

Turning to the financial performance for the forth quarter, revenue increased approximately 12%, compared to the forth quarter of 2014, primarily driven by an increase in our contract operations revenues as a result of organic growth. Full-year revenues increased 22%, driven primary by the same factors. Average revenue per revenue generating horsepower per month increased about 1%, to $15.97 for the fourth quarter, as compared to $15.82 for the fourth quarter of 2014 and was up slightly quarter-over-quarter, as well.

Full-year 2015 average revenue per revenue generating horsepower per month increased 2% relative to 2014.

Adjusted EBITDA increased approximately15% to $38 million in the fourth quarter, as compared to $33 million for the fourth quarter 2014. Full-year 2015 adjusted EBITDA of $153.6 million, was up 34% over 2014 levels and it exceeded the high-end of our final guidance range of $147 million to $152 million.

DCF in the quarter was $28 million as compared to $26.3 million for the same period last year, an increase of approximately 7%. Full-year 2015 DCF of $120.9 million was up 41% relative to 2014 and it too exceeded the high-end of our financial guidance range of $113 million to $118 million.

Q4 growth operating margin, as a percentage of revenue, was essentially flat from Q4 2014 at 68.9% and was up to 69.9% for the full-year 2015, relative to 66.6% in the full-year of 2014. Due primarily to lower prices related to lubrication fluids, motor fuel and optimization of maintenance activities.

Maintenance capital totaled $6 million in the quarter which was consistent with expected levels for the fourth quarter and a total of $16.1 million for the year. Cash interest expense net was $4.1 million for the quarter and $15.9 million for the year.

I want to briefly touch on the goodwill impairment we took during the quarter, what drove it and the implications going forward. While the absolute number was large, it is important to remember that is a non-cash charge and has absolutely no impact on EBITDA, or DCF, or the operation of our business going forward. Along with just about everyone else in the energy MLP sector our unit price moved considerably lower throughout the fall.

This suggested that the fair value of the partnership may have fallen below the carrying value, which required us to perform a specific impairment test required by U.S. GAAP standards. This is part of a regular evaluation that every public company, who has goodwill on the books is required to do annually. In our case, as we work through the analysis, we determine that goodwill had been impaired and as such we took a non-cash charge to earnings. Again this is a non-cash charge and does not have any significant impact other than reducing goodwill on the balance sheet. More details will be provided in our Form 10-K. once filed.

Outstanding borrowings under our revolving credit facility as of the end of the year were $729 million, resulting in a leverage ratio of 4.8 times at quarter end, based on a trailing three months annualized basis.

As Eric mentioned this morning we announced our preliminary full-year 2016 guidance and the ranges are as follows: we expect full-year adjusted to be in a range of $138 million to $153 million and we expect to generate DCF of $102 million to $117 million. This guidance reflects the current market realities, we are obviously proceeding with caution, but as we gain more clarity and conviction around trends in utilization, pricing and margins we will look to provide updated guidance. At this time we anticipate no change to the distribution in 2016.

Finally, we expect to file our Form 10-K with the Securities and Exchange Commission, as early as tomorrow afternoon.

With that we’ll open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll go first to Praveen Narra with Raymond James.

Praveen Narra

Hey, good morning guys.

Eric Long

Good morning.

Praveen Narra

Question on kind of the guidance, it just seemed pretty clearly you’re going to likely be certainly within the range and more likely to the upper end, can you give us a sense of where you think the risks are to maybe moving into the lower part of that range and what, whether it’s pricing or utilization where you see is more risky?

Matt Liuzzi

Sure and it’s Matt. I think there’s a number of items that I think everyone appreciates that go into coming up with that guidance range, on the one hand we look and we see the NASDAQ’s fundamentals and we like what we see out there. So that’s a positive. We mentioned utilization, pricing, both of those are obviously important parts of coming up with that guidance range and we’re sitting here 40 days into the year and there’s potential for movement, I think, on both of those.

And so I think that was the rationale behind making a little bit of a larger guidance range, a wider range, but also pointing to the fact that as we get better stability throughout the year we’re going to able update that range. So I think you hit on both of the risk factors being pricing and utilization. I think as we mentioned both of those were very stable in the most recent quarter. And I think we’ll just have to kind of see where they lead throughout the year.

Praveen Narra

Right. Absolutely. I think that is definitely true. So on the incremental risk to utilization from here, do you expect gas lift to remain as strong as it had been in 2015? I guess it was a little bit surprising to hear.

Eric Long

So keep in mind what is going on. The gas lift is installed on a well that might originally be flowing without any kind of lift energy at 1,000 barrels a day, decline to the clip of 60% to 80% for a year or so, decline to the clip of 30% or 40% for following year. And at that point in time, that’s when you need to install the gas lift equipment to provide that secondary lift energy. If you remember, gas lift generally is installed when the wells are capable of producing 100 barrels of oil or less a day.

And once they go on that lift environment, the decline rate becomes relatively shallow. It may be 20%, tapering to 10%, tapering to 5% later on down the line. What we are hearing from our customers is that although their incremental demand for new equipment – i.e., we are drilling a whole bunch more wells – is slowing down, the existing installed base continues to produce. Cash flow is king. All of the E&P, type of guys where gas lift is installed, need to cover their debt service, and take dividends, or pay distributions to the unit holders that they are structured as an MLP.

So what we’re seeing is these things are still producing at 10 barrels a day, or 20 barrels a day, or 30 barrels a day. And even in the environment of crude pricing, sub $40, sub $30, the marginal lifting cost per barrel is still economic. So we’re not seeing wholesale returns, wholesale degradation and utilization, excuse me, what we are seeing is some slowdown in the new appetite for growth opportunities. But again a lot of stability in the existing gas lift fleet.

Unidentified Company Representative

[Indiscernible]

Matt Liuzzi

And I will just add on a little bit to that, if you looked at kind of, if you saw our customer list on that side of the business, it is mostly Western Oklahoma, Texas Panhandle, West Texas area operators. And so I think as you appreciate those are the guys who are continuing to be active, generally speaking, those are the guys who have the balance sheets to kind of persevere and continue to work through the cycle. And so, when we look at the customer base on the gas lift side that gives us a lot of comfort too. And I think that helps keep that utilization higher than it might otherwise be.

Praveen Narra

Great, well said, good color. Thank you very much guys.

Eric Long

Thank you.

Operator

And we’ll go next to TJ Schultz with RBC Capital Markets.

TJ Schultz

Great, thanks. Hey guys. I guess just first, a couple of questions. But I think, first, just on rates. How have rates been for horsepower you have put into service here more recently versus where rates were a year ago? And then you mentioned that you are actively reallocating some resources and assets to stronger areas, which I assume is the Northeast and West Texas, maybe. So if you could just expand on some of the moving parts there and how it relates to trends on rates and some of the stronger areas.

Eric Long

Yes. I want to be a little careful because clearly I probably have a couple of my competitors listening in on the call. I think the overall pricing trends are relatively static. We are not seeing dramatic declines or suggestions of dramatic declines for the midstream iron. During my commentary, I indicated that there is not a glut of compression equipment on the big horsepower side. In fact, when you look at what we have done, which is curtail spending, my sense, after visiting with some of the fabricators and listening to customers, is that there is not – there is none of this stuff laying around right now.

So the existing fleet that we have stays deployed. Remember, a lot of that is deployed under term contracts, so really it kind of boils down to the spot market when you look at deploying either existing iron, the title or the few pieces of equipment that will come home during 2016. What is it – the incremental deploy look like at that point in time? It varies from customer to customer and region to region. Not all compression companies are created the same way. Some of us lead with service, others approach compression a little bit more as a commodity type of product.

So when you start to look at the economics of the quality of service that we render, you might be looking at just a few pennies per mcf cost associated with the compression. So we have focused on a marketplace where people truly value the mission criticality of the service and the equipment that we provide. We have instances where we are moving 100 million a day, half a bcf a day. And then one is, it is almost 1 bcf of gas a day through our compression equipment. Really big volumes, and the difference between X or X plus 10% or X plus 15% doesn’t really matter in the scheme of their economics. The gas lift equipment may be a little bit different. It is little more price- sensitive.

So I think what we have contemplated on our modeling work this year is probably some degradation in the monthly service fees that we’re able to recoup from the E&P gas lift guys. But, again, you think about what is coming up for re-contracting, and we look at how the units are deployed and they are pretty sticky on the units installed in play.

So, gas lift is such a small percentage of our fleet. The churn associated with a gas lift is so small, it really doesn’t move the dollar very much.

TJ Schultz

Okay. Good. That’s helpful. And then Eric or Matt, I think one of you mentioned, I guess just moving more specifically to the cost side, some opportunity to explore additional cost savings. I’m just trying to gauge how much room you may have there versus what is baked into guidance or just generally cost as we view it as an additional lever you may have, just kind of thinking high-level how hard you have already pulled on that lever.

Matt Liuzzi

Yes, TJ, I don’t know if I can exactly quantify it for you this morning. But as we look at it, last year, obviously, we did pull a lot of cost out and hit a lot of low-hanging fruit. As we have spent a lot of time going in and really looking in every corner of the business and seeing where, not just getting savings on motor fuel or kind of optimizing maintenance but sort of going to the next level and how can we be more efficient and how we do our maintenance activities how we do major work on the units and then I think a little bit of the reallocation is looking at on a regional basis, where the activity is and if one region slows down, obviously you don’t need as many folks in that region and so what’s to move those folks I think like you look into that, is it Northeast or into the West Texas area where there’s a lot more, some new activity, but then a lot more just ongoing maintenance for customers.

So if was a continual process and we do think there’s some additional upside therefore and that’s obviously something that we’re going through right now and will continue to throughout the year. But I think it the year goes on and we’re able to kind of dial in guidance for a little bit better for all you guys, will be the talk a little bit more about that.

Eric Long

We’ve done some alteration of our operating practices. We have rigorously in the past held to an hours-based approach so that X number of hours is time to change oil in your cars as an example. And I think it’s to illustrate, the conservative nature that we run and manage the company, TJ on your car has probably recommended that you change your oil every 5,000 miles, well you know you could probably change your oil at 7,500 miles and not really miss a beat associated with it.

So we’ve gone, evolved our maintenance approach to just an hour’s base to have an hours and performance based where if the unit has been running in heavy load in a heated condition hot environment, it’s going to suffer a little bit more wear and tear than if the machine was running likely loaded, kind of example of when you’re driving your car up the mountain versus coasting down the hill.

So we have taken on a little bit more of a rules-based approach which we think will impact positively some of the cost of maintenance CapEx is here. I think it’s also prudent to assume that we’re working with some of our suppliers on bringing out some additional cost and may be some pricing concessions from some of those folks. And we think that we’ll have the opportunity to potentially improve our margins over the course of the year a couple of things like that.

TJ Schultz

Okay. Thanks for that. Just lastly, a few weeks ago, CSI Compressco cut its distribution by 25%. And I know there are some major differences to you all, but some of the same premises carry as far as flexible CapEx and utilization holding in decently enough. But their decision to cut the distribution just gave them more breathing room. So the question is, how do you all think about the distribution at USA in the context of the guidance you laid out for 2016, particularly considering where coverage and debt leverage stand now and where they could be if you trend to the low end of your guidance?

Matt Liuzzi

Yes, T.J., obviously, CSI has a slightly different business model in kind of parts of their business than we do, so it’s tough to say it’s an apples and apples exactly. Going back to the third quarter, we obviously kept our distribution flat. We had a sense of what we saw coming in the market and the slowdown. And so, at the time, we made the decision to keep the distribution flat and then did again this most recent quarter.

Overall, we don’t anticipate any change to the distribution going through 2016. We think the stability of the cash flows are there. When we look forward at what we think is going to happen with the year, we’re comfortable kind of where it sits right now. So I think for them, obviously, there was some market reaction. And, at the end of the day, we had strong third quarter, strong fourth quarter and we felt the appropriate thing to do was to reward the unit holders.

TJ Schultz

Okay. Thanks, Matt.

Matt Liuzzi

Yes.

Operator

And we’ll go next to Andrew Burd with JP Morgan.

Andrew Burd

Hi, good morning and thanks for the guidance for this year.

Eric Long

Hi, Andy.

Andrew Burd

I guess on growth CapEx, roughly how much does the 15,000 horsepower of compression that you’ve ordered already represent of the full-year $40 million to $50 million of CapEx spending number that you provided?

Matt Liuzzi

It’s going to be roughly half kind of order of magnitude, Andy, a little bit less than half to half of it. The rest of it is going to be a lot of that CapEx will be reconfigurations, parts, tools, trucks, things that we’ll need to support the business. But as we kind of look at it being able to – a unit can come home and we can reconfigure that unit at a significantly less cost to us than going out and buying a new unit.

So rather than spend all the new – all the CapEx on new units, we can get a better return basically counting on the units that we know are going to come home or that we expect to come home throughout the year and refurbishing that. So a lot of that additional CapEx is going to be spent refurbishing and reconfiguring units.

Andrew Burd

Okay. But based on what has already been kind of committed, there is a little bit of flexibility surrounding that whole number.

Matt Liuzzi

Yes. For the year, yes. Absolutely. No, absolutely. In terms of what is absolutely committed, you’re looking at $15 million to $12 million of that amount.

Andrew Burd

Okay. And on the potential investments, certainly on the growth side and the new units that you are ordering, are the expected margins stronger given the current cost of capital levels or because you are debt financing them it’s kind of just, it’s more of kind of temporary dislocation and so the long term returns are kind of the same. Is that and you think about it?

Matt Liuzzi

I think the way you explained it in the latter part of that was correct. Obviously that's why given the capital cost of their cost of capital overall, that is why we reined in that capital spending, so dramatically. So that we’re not paying for stuff with more expensive capital. And we can kind of write it out. And use the stuff that we have in the fleet and the stuff that we know was coming home and use it as – use the year also as an opportunity to pursue high-grade investment opportunities and only put stuff out where it makes the most sense.

Andrew Burd

Great thanks and switching over to leverage Matt, can you just provide us with or remind us what the bank covenant leverage levels are at this point.

Matt Liuzzi

Sure. It is 5.5 times max leverage for the first part of the year. And then starting with the third quarter it steps down to five times.

Andrew Burd

And has there kind of been any thought of approaching the lending group to allow a little bit more flexibility? Certainly seems a little overly punitive at the bottom of the cycle. Maybe something similar to last year's increase, I guess, or…

Matt Liuzzi

We haven't – we like the capacity that we have looking forward on the year. We're not looking at borrowing any or very little capital on it. And so I think our position right now is, we’re comfortable looking forward to 2016 and kind of being able to operate throughout the year. Things can change and, obviously, we have a long-standing bank group that goes back 10 years, 12 years with this facility. And so obviously I think if we – if things changed in a way that we needed to go talk to them, we’d expect there to be support like there has been over the last 12 years. But nothing right now and we’re obviously comfortable with where we stand today.

Andrew Burd

Great thanks. And then on the on the DRIP program, going forward how are you thinking about approaching that in the upcoming quarters, given the current equity valuation and balancing that with distribution coverage and leverage going forward.

Matt Liuzzi

Yes, now it is a balancing act Andy as you know. Obviously, to state the obvious, the DRIP program is at the election of every holder; not just our sponsors, but, obviously, every holder of unit. That said, as we go back to the IPO, when Riverstone initially did it, the whole rationale behind the DRIP program was basically be a support mechanism for the partnership. And I think over the last two, three years, that has worked exceedingly well and has provided certainly cushion to kind of let the partnership kind of get its legs under it and up and running. And has provided a very ample cash coverage ratio for the LP guys. With that said, it has flipped over the last few months and now, as you know, is a little bit more of an expensive cost of equity for us. So I think it is fair to say that the sponsors recognize that, understand it. And my sense is that, going forward throughout the year, the elections that they make will be in the best interest of supporting the partnership.

Andrew Burd

Great. Thanks.

Matt Liuzzi

The one other thing I’d add is that, Kaiser and the Argonaut folks did not – they actually switched to cash pay this quarter. So we decreased the jerk amount by about 25% already.

Andrew Burd

Okay, great. Last question is on – this is probably on the broader space in general. Given the stress out there, and certainly the public markets make it tough for potential M&A, are you seeing private equity activity pick up in contract compression? And could there be any opportunities for USA to partner with private equity, I guess, either as a buyer of non-core assets to help liquidity or even as a financial partner to opportunistically pursue growth through the cycle if there is a really attractive opportunity that came your way?

Eric Long

Andy, this is Eric. I mean, you’ve heard me say this before, I mean, we obviously don’t commit on M&A type of things. We do have a committed equity sponsor already involved with the partnership. We have another deep pocketed financial investor involved with partnership in the form of Argonaut and George Kaiser. I think it is logical to assume that there are other private equity groups who are keenly attracted on the compression space for the obvious reasons that we have been through here today: stability of revenues, long-term growth prospects, strong counterparties, et cetera. So we are always conscious of M&A opportunities.

We are also conscious of making sure that any transactions we are involved with improve the financial outlook for all of our the members of our partnership. And I think we are excited about what the future holds in store for a Company like USA Compression with the newest asset base in the industry, strong operational performance, strong long-term contracts. We think we are a very logical platform if opportunities like this were to arise. So I don’t think the issue is going to be access to capital, it is just access to the right asset pool and the right type of capital at the appropriate time.

Andrew Burd

Thanks very much. And just to sneak a quick housekeeping question in, the parts and services revenue was above the historic average for the second quarter in a row. Is that a good run rate going forward, or is there some kind of lumpiness in there?

Eric Long

Yes. There is lumpiness in there. When we actually budget, we usually don’t even budget for that line item just because it sort of pops up here and there. So it is not something that we churn on, on a quarterly basis.

Andrew Burd

Great. Thanks for taking my questions.

Eric Long

You bet, Andy.

Operator

Well go next to Sharon Lui with Wells Fargo.

Sharon Lui

Hi, my questions have been asked and answered. Thank you.

Operator

Well go next to Richard Verdi with Ladenburg.

Richard Verdi

Hi, good morning Eric and Matt. And thanks for taking my call. Pretty good quarter and outlook, given the environment. Appreciate the outlook there. Just a few quick questions. Eric, you had touched on pricing in your commentary. I guess I'm still not quite clear. How should we think about pricing? Using the fourth-quarter figure of $15.97 as a benchmark, should we expect that to remain relatively consistent in 2016, or could there be some pressure on the number due to the type of equipment in the field, or maybe giving concessions to customers?

Matt Liuzzi

Yes. Hi Richard, obviously that the team number that you cited is sort of an average or a blend of the two sides of the business: the large horsepower, which is more in the $13, $13.50 horsepower; and the smaller gas lift stuff, which are somewhere in the mid-$20 of horsepower range. And so that $15, $16 is a blend of that based on the fleet. We had some concessions throughout the year. It is hard to predict what this year will bring. Crude seems to be at a fairly low point, so we certainly hope that we’ve flushed through a lot of that stuff on the gas lift side.

But, again, I think to Eric’s point, on the large-horsepower stuff, we are still – obviously, still getting request for that equipment these are larger infrastructure applications that go under longer-term contracts. And, really, when you think about that large-horsepower stuff, when you think about all the gas that runs through one of these things, you are talking – you know, the cost of compression may be a couple of penny per MMcf. And so we would expect to be too much rate pressure on that because, again, it is such a small portion of the overall cost to the producer or the pipeline guy that we expect to see some stability there. Overall, we will have to kind of see how the year goes, but I think a combination of pricing and utilization, you can see things pick up a little bit.

Eric Long

And, Richard, maybe another way to look at it, just take a look at the size of our fleet, what the utilization of the fleet is and over the course of a year how much – since we slowed the growth down, really what we're looking at is redeployment of some existing equipment. So on a percentage basis, that’s got to be a small piece of the overall fleet that, quote, churns over the course of the year that needs to be redeployed at whatever the rate is. And then, if you run sensitivities in your model, take a 10% price sensitivity, as an example, on a 10% churn rate or something like that, it is just a really small number, and it is not going to really deviate for modeling purposes very much, I wouldn’t think.

Richard Verdi

Okay. Great color. Thank you, guys. You know, Matt, you guys have kind of talked about this, but I want to expand on it a little bit. Now, when we have spoken here recently a few times, you mentioned that bringing down leverage in 2016 was going to be a focus. I think you guys are around 4.8 right now, give or take. What should we be thinking for leverage in 2016? Is that still a major focus, bringing that down, or could we expect that to kind of remain relatively flat here?

Matt Liuzzi

It obviously is a focus. We have to balance that with how do you bring it down and what kind of levers can you pull obviously I think going into 2015 we told people we were watching leverage and that at the right time we were going to do what we needed to do. In September, we did that equity offering which turned out to be well-timed and actually sold that to pay down debt. So obviously on the – the ability to raise equity the markets are ugly right now. We’ll monitor that and what appropriate pursue that avenue just like we did this past fall.

Otherwise that the other side of it is just we are not spending much money until we've rained in capital significantly from last year and expect it to be kind a little to no borrowing and really as we think about it the debt level stays generally in the same area kind of throughout the year, barring the ability to kind of go through an equity deal. But, again, that level is a level that we are comfortable with and can operate through, and I think the value of the assets clearly support it from a lender standpoint.

Richard Verdi

Okay. Great. Thank you. And just the last question for me. Following up on one of the earlier inquiries here, I guess I am not quite clear. The distribution – you guys have a high yield. The market is kind of signaling that maybe you should cut the distribution. It was mentioned earlier, CSI did it. And Matt, you indicated today that you don't see any need to cut the distribution – or any desire, I should say. I mean how comfortable are you guys with the distribution that it won't be cut? And what steps would you take to ensure that the distribution remains right where it is?

Matt Liuzzi

Well, right now, our intention is to keep it at the current level throughout the year. I think whether the yield predicts a cut or not – I mean, I don't know what the current yield predicts, quite honestly. But as we look forward throughout the year, we think we're going to be able to maintain that level. Obviously, if things change drastically to the downside, that is something that obviously is in our control and would be on the table. But as we sit here today, it is not on the table. We think that the business has a stability to it that supports the MLP structure that can allow for regular sustained distribution payments throughout the cycle. And we expect to kind of prove that out throughout the year.

So as we sit here, we like the level. We like the fact that we were prudent back in Q3 on holding it flat and didn’t need to come back at all. And I think looking forward we're comfortable with where we are today.

Richard Verdi

Okay. Great. That’s it from me. Thank you very much guys and good quarter outlook again.

Matt Liuzzi

Thanks, Rich.

Operator

We’ll go next to Kurt Hoffman with Barclays.

Kurt Hoffman

Hi guys. Just trying to put the last few questions together and maybe just make sure I’m understanding this correctly. Thinking about leverage at the end of the year, when it steps down, if you are kind of at the midpoint of guidance or even the lower end, would you just then consider to issue equity and repay the revolver at that point? Or would you consider working with the bank group to increase the covenant?

Matt Liuzzi

I think, Kurt, we would look – at that point, if we looked forward and thought we were going to run into trouble, everything is on the table. Obviously, it’s painful, the thought of issuing equity at 20% to 25% is not super attractive to us but who knows what things might look like in six, nine months or whenever we get to a situation like that. So yes, I think both of those options are on the table, and we would evaluate it at the right time.

Kurt Hoffman

Okay. Perfect. And, finally, I think you made a comment earlier, but on the DRIP program, did you say that 25% of the DRIP program was paid out through cash this quarter or?

Matt Liuzzi

Yes.

Kurt Hoffman

Probably I guess I'm trying to think how much could possibly be raised next year. Would that be – I think this year was $60 million. So if we do $25 million less than that would it be like $45 million to expect next year?

Matt Liuzzi

At current – yes, at the current level, basically Argonaut, which was about 25% of the units that were dripping, they switched to cash pay this quarter. So that was roughly about a $4 million cash payment to them this quarter. That leaves the value of the DRIP to Riverstone and USA Holdings, with approximately $11 million.

So if you extrapolated that for fourth quarter, you would be in that kind of mid-40s range. But that said, that’s a quarterly election and I think like I mentioned obviously there we are well aware of the impact that the DRIP has on the partnership growth from a leverage perspective as well as a coverage perspective. So there is a little bit of competing impact there. And so that is on the table, they are very mindful of it and I expect would do what is best for the partnership on a quarterly basis.

Kurt Hoffman

Perfect. That’s it from me. Thank you.

Matt Liuzzi

Thanks, Kurt.

Operator

We’ll go next to William Can, Private Investor.

William Can

Good morning, gentlemen.

Matt Liuzzi

Good morning.

William Can

The report sounds like very positive. But then, when the extras started to whittle in there, I started getting a little less positive. I have been watching your stock as we talk, and I would have thought the stock would have gone up, but it kept on going down. And it has gone down about almost 60% over the last year. And we can’t directly relate that to the stock market itself. Is there something I don’t know about as a neophyte that the other guys do that would indicate that there is less of a potential growth in your earnings were going to be either less than or no greater than they were last year in 2016. Is that correct?

Eric Long

Well, you missed there, I have been doing this a long time. I look at what is going on in the MLP sector – and I have had calls from lots of investors who make comments like, energy transfers in MLP and Linn Energy's in MLP and USA Compressions in MLP. Well, not all MLPs are created alike. There is big ones. There is little ones. There is ones that are involved with transporting natural gas through long-line pipelines. There are guys that are tied to the drilling cycle, and there are guys like USA Compression who are tied to the demand cycle.

I don’t think that there has been a differentiation in the marketplace between these. I think everybody, the baby is being lumped in and tossed out with the bathwater so to speak. So I don’t think you are not getting anything. I think that the MLP market in general is being driven by some of the new institutional holders that have rolled in and have rolled out. They are looking for short-term performance.

And I think when we take a look at our ownership mix, we have very little float in our units. So we have a lot of folks who buy and hold. There is daily volume activity. There is a lot of day trading that goes on and kind of quote, game in the system. So I just look at the long-term fundamentals the demand for gas going up?

Yes. Is demand for compression going up? Yes. Is our stock price in the dumper? Absolutely, I haven’t sold one unit of stock, actually added to my holdings, my familial holdings the last time that there was a window open to me, and the units have gone down since that point in time. And the next time the window opens, I will probably look at it again. So I don’t think you missed anything, I think you got it, it says that the story is either misunderstood or mispriced.

William Can

They talked about leverage, the one thing I can’t seem to find is your balance sheet online anywhere. So I don’t know really how much of debt carrying. But if the industry is go up, that’s a big cost to you guys?

Matt Liuzzi

Sure. William, its Matt. So to your first question on the balance sheet, that will be filed in conjunction with our 10-K filing which will probably be sometime tomorrow. So be on the lookout for that. But in terms of interest rate, our capital structure, we have a revolving credit facility where we are currently paying kind of in the 2.5% interest rate area on our debt, and so a very attractive facility from that standpoint. Obviously, the Fed raised rates not too long ago, and the 10-year rate actually has decreased since then. So, it’s hard to quite to figure out exactly what's going to happen, but currently we have a very cheap cost of capital. And even if the rates go up a little bit, our borrowing costs may go from 2.25%, 2.5%, up 25 basis points or so. It’s not going to have a huge impact.

Eric Long

Another thing to take a look at, William, if you were to look, with our low borrowing cost, before we went public, remember we didn’t go public until January of 2013, we founded the business back in 1998. We used to run leverage as a private Company routinely at the 7 to 8 times leverage range. And then today we’re kind of 4.8X or so. So, I used to sleep well as a private Company at 7X or 8X levered. Because of the nature of our business with the longer-term contracts, stability and cash flow, we got lots of asset coverage, valuing our assets.

We’ve got big headroom availability under our revolving line. We’re way below our pre-IPO leverage, borrowing costs are low. And, I think, frankly, our business model differentiates us from the herd, differentiates us from other oil field service company guys that are tied to the drilling cycle. The frac sand guys, the fracking guys that, once people quit drilling wells, those guys quit having business. And, in our case, people continue to pump the gas. We’re like the heart of the human body – we pump gas into and through pipelines. And, yes, new activity slows down, but the existing activity continues.

William Can

Just for my own edification, how did you do the first month of this year versus the last year? Or have you had those numbers yet?

Matt Liuzzi

We don't, William. And we obviously – just given where we are in the year, we can't disclose that.

William Can

You’re going to do it every quarter.

Matt Liuzzi

Yes, sir.

William Can

Okay. And I didn’t hear – I heard the EBT was going to be between 138 and 153. Is that correct? Where…

Matt Liuzzi

[Indiscernible]

William Can

Range is going to be?

Matt Liuzzi

The DCF will be – we expect will be between 102 and 117. And that’s all, if you refer to the press release that we went out with this morning, all that detail is in there for you as well.

William Can

I can only look at so many things in my…

Matt Liuzzi

We understand.

William Can

I don’t have more than one screen in front of me. I’m sure the guys who you were talking to have six screens in front of them and they are able to watch a lot more than I am. And I have talked to you guys before and I appreciate your honesty. I have talked to other companies who said they were not going to cut dividends and then, all of a sudden, the next quarter is [indiscernible] either did away with them completely or cut them down so drastically it was ridiculous. So…

Eric Long

Well, William, we appreciate your continued support and ownership of USA Compression.

William Can

Thank you very much. I wish you’d at least get back to what I paid for. But I have been watching it this morning, and it doesn’t look like it is going to get there in a while. And that is – either I am missing something, or you are not doing a good enough job selling yourself to the – to these institutions because…

Eric Long

Will, we will keep working hard at it William. And, obviously, we will look forward to sharing more information with you at the first quarter earnings call.

Operator

And that does conclude our question-and-answer session. I will turn it back over to our speakers for any closing remarks.

Eric Long

Well, again, everybody thanks for joining us on our Q4 2015 call. We look forward to giving you an update both financially and operationally at the end of the first quarter of 2016. And let’s all pray for a big dose of really cool weather over the next 90 days. Thank you very much.

Operator

And that does conclude today’s conference call. We appreciate your participation.

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