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Archrock Advantages Hiding In Plain Sight

Apr. 12, 2021 6:59 AM ETArchrock, Inc. (AROC)86 Comments


  • Contract gas compression company Archrock offers well-considered operations in a vital, but easily-overlooked midstream sector: natural gas compression.
  • The company’s current market capitalization is $1.4 billion and it pays a 6.2% dividend. Growth comes from the ongoing need to move produced natural gas to domestic and export markets.
  • While the company showed a net loss for 2020, free cash flow was positive, offering 2.9x dividend coverage. Earnings estimates for 2021 and 2022 are also positive.
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Compressor station
Photo by esemelwe/E+ via Getty Images

The oil and gas services sector has been battered for well over a year, so it’s been easy to overlook the vital niche of natural gas compression. Compression services are growing again as drilling picks up, as oil fields get gassier, as LNG exports

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This article was written by

Laura Starks profile picture

Laura Starks is the CEO of Starks Energy Economics, LLC and has a degree in chemical engineering and an MBA with a concentration in finance which she has used to invest personally and share her ideas about energy companies for many years.

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Comments (86)

ganswijkw profile picture
Europe buys more LNG than ever. Ships redirected from Asia Maior to Europe. Hope that drives EBITDA etcetc.
Any update on this little disaster of a stock?
Laura Starks profile picture
@Randol33 sounds like you have one
@Laura Starks Sitting on a $7 cost basis from last year. Already has given up all gains and I cannot decide if it is time to bail before it bleeds out another 20% or to let it ride.
Laura Starks profile picture
@Randol33 FWIW, drilling activity is picking up. US nat gas production above 2019 at 96.5 BCF/D with lots of new action in the Haynesville. And worldwide, from Saudi Arabia to Russia to US are discussions of the underinvestment that has occurred. There is even discussion of the Permian being gas-capacity-constrained again within a few years, which could bode well for Archrock. But I appreciate your dilemma.
why high ng price not helping aroc stock ?
Biological profile picture
@gutcheck AROC's fortunes are tied to NG volume(s), not NG price. They produce nothing. They compress gas for shipments. Production has to increase for AROC to benefit. NG prices are providing a market signal that more NG is needed -- there isn't enough. But NG producers got burned chasing NG, too much production, and are these days a bit more owner-centric, cautious.
@gutcheck If oil and NG stay at current levels for another quarter or two (above $70 oil and above $4.00 NG), AROC will do very well. Their compressor units are used for both oil and NG. E&P companies have not been spending as much on CapX this year. However, at current oil/NG prices that is likely to change soon and in a big way. Once the E&P folks increase activity, they will need AROC's equipment and Compression rates and utilization should increase significantly.
Laura Starks profile picture
@gutcheck Good responses from @Thomas Gandolfo @Biological The supply of DUCs (drilled uncompleted) is smaller--to keep up production, more spending is needed. The market has preferred companies return $ to investors instead of chasing production, but the huge global gas shortage--if it continues--and the ability to export production may incentivize additional gas production-volumes-compression--AROC.
Couple things probably going on here. The obvious one is oil prices have dropped from $75 in mid July to $63 today. Nat Gas has held up a bit better ($4.16 to $3.84). Covid come back concerns likely responsible. Second, in the past, Public E&P companies use to pick up capital spending big time at $60 oil. This go around they have been more cautious. I think we will need consistent $60+ and maybe even $70 WTI in order to see Cap Spending pick up significantly. Given the restrictions in certain U.S government land leases and hopefully a post Covid world, WTI should increase. However, no one can know for sure. AROC seems like a cheap option to play a rising WTI price if that is your view.
If you can afford a hamburger you can can buy this.
@khatcher Next week will be French fries and next month will be a can of soda.
Looks like AROC share price is in some serious distress. Not hanging around for another 20% drop in Share price. Getting close to stop loss, will see if it executes today.
@Randol33 Looks like they need to change the ticket to (A-ROCK) as in falling like A ROCK.
ganswijkw profile picture
Cannot find reasons SP going South.
@ganswijkw Probably a 2 pronged response, one the entire sector was getting sold off, mostly irrational due to more lock down fears if I had to guess. Second would be the declining EPS estimates for AROC would account for some of the selling pressure over the last few months.
Laura Starks profile picture
@ganswijkw @Randol33 has good response. Also El Paso declared forced majeure in w TX (EIA Natural Gas Week.) Strong sense that 2q results will lag current action : 97 rigs now drilling for gas. While publics are hewing to relatively constrained drilling, privates are accounting for a lot of the action--thus, in addition to dry gas drilling, we could see more associated gas from the Permian. These high gas prices due to low inventory in US and Europe (and high NW cooling demand but little hydro in electricity gen) are a strong incentive right now.
From today's WSJ (June 20, 2021):

"Natural-gas prices are starting the summer air-conditioning season nearly twice as high as they were a year ago.

Demand for the fuel is picking up as the world’s economies reopen and as Americans dial down their thermostats for what is expected to be a hot summer. Meanwhile, U.S. producers have stuck to the skimpy drilling plans they sketched out when prices were lower, eliminating the glut that was keeping them depressed.

Natural-gas futures ended Friday at $3.215 per million British thermal units, up 96% from a year ago and the highest price headed into summer since 2017. Futures traded even higher—and regional spot prices jumped—when triple-digit temperatures baked the Southwest earlier this month. Analysts expect prices to be even higher later in the year when it is time to fire up furnaces."

It isn’t just in the U.S. where gas is running high. Dutch gas futures, a barometer for prices in Western Europe, have more than doubled over the past year—including a sharp rise since February—to multiyear highs. In Asia, imported liquefied natural gas is fetching more than five times what it did last June, beckoning tankers full of chilled shale gas across the Pacific."
Down -7% from article and its down -22% from its high. Its times like this I am glad I do my own research instead of trusting SA Authors.
Biological profile picture
@Randol33 I see; so you would rather buy a highly valued stock with immense downside than one that is selling, for whatever reason, at 22% below its high. Nothing has changed in this company's economics. It is still out there compressing gas just as it was last month and will likely bee in two years. I personally suggest you change your investment approach 180 degrees. Buy now; sell later at higher prices. And do own research.
@Biological Its EPS estimates has been dropping continuously for the last 4 quarters so it is no surprise the share price has fallen continuously for the last 3 months and flat over the last 6 months.
My point was highlighting a bullish article on a stock that has dropped 10% since the article was published. I am a buyer in the $5 range, which shouldn't be too long when losing 5% a day.
Biological profile picture
@Randol33 Ah, that old chestnut - the last 4Q's....those were, I think, mostly COVID quarters. I am looking forward to the next 4 and I am almost certain that they'll be better than the last. Thus, buying at these levels may make sense.
Good article, thank you. AROC should be setting up for a strong second quarter and outlook with oil now north of $70. It's important to note that their compressors are important to oil production, not just natural gas. Their customers in the oil/gas industry are in much improved financial condition than last year (again thanks to high oil prices). This is all setting up AROC in a nice position. Note the following from the 10K:

"Gas Lift Applications. Compression is used to reinject natural gas into producing oil wells to maintain reservoir pressure and help lift liquids to the surface, which is known as enhanced oil recovery or natural gas lift operations. These applications utilize low- to mid-range horsepower compression equipment located at or near the wellhead or large horsepower compression equipment of over 1,000 horsepower for a centralized gas lift system servicing multiple wells."
firemanbob0854 profile picture
@Laura Starks Thanks for the article!
any update after div and er announcement
Laura Starks profile picture
@gutcheck Didn't follow up at depth but I'd go to mngmt commentary on stabilization and reduced decline. OFS (oil field services) are coming back but companies are waiting to see improvement outside the US on Covid and are cognizant of continued OPEC+ supply curtailments before increasing budgets to pre-Covid levels. seekingalpha.com/...
cedarwoodken profile picture
How much of the AROC disrtribution was ROC last year? TIA
@cedarwoodken I'm not sure I understand your question. AROC is a C-Corp and pays dividends not distributions
cedarwoodken profile picture
@og123 Dividends and ROC are both forms of distributions paid by C-corps. I believe AROC in the past has paid significant amounts of ROC which in non-taxable. However Schwab says there was no ROC in the Nov 20 distribution and the AROC website is no help.
@cedarwoodken They converted from MLP to C-Corp 2 or 3 years ago. They might have paid their ROC during their time as an MLP.
Larry Hall profile picture
Very informative, had not heard of AROC until a comment on another article today. Thanks.
firemanbob0854 profile picture
@Larry Hall this is one of a group of companies that we follow. if you would like to have your horizons expanded look into Darp Research blogs here on SA. A very good group of savy investors to follow and debate with.
LostinShalimar profile picture
@Larry Hall Seriously? Cash Flow Kingdom has been bullish on AROC for years now.
Larry Hall profile picture
@LostinShalimar Have not delved into CFK's work on AROC..
metal27 profile picture
Utilization percentage was touched on briefly but should be emphasized as a key indicator of performance. AROC and USAC are really asset leasing companies more than oilfield service companies; the higher their asset utilization percentage, the higher their income. Both companies saw lower utilization percentage in 2020, I believe both wrote off material amounts of old equipment and both should see utilization rebounds in 2021.
Laura Starks profile picture
@metal27 Thx for emphasizing utilization. Yes, lots of asset writedowns in the energy sector in 2020.
bvrdublin profile picture
Nice piece. You got a new follower!
metal27 profile picture
AROC and USAC are in effect a duopoly, both pay very nice dividends and their customers need them regardless of prices, yet they trade with oil prices due to the ETF passive investing effect. Buy them when oil prices take a dip.
@metal27 I own both USAC and AROC - couple of years with USAC and AROC since Fall of last year. Been dripping both, and USAC has become one of my largest income-producing positions.

Agree but what is surprising is how frequently they don’t move in tandem. Often see one up and the other down, or one up
/down significantly and the other only a bit.

Happy with my results - see this as buying the proverbial ‘picks, shovels and dungarees’ for miners, an essential part of the natural gas infrastructure that isn’t going anywhere.

Long both.
krc112 profile picture
13 Apr. 2021
@metal27 AROC/USAC have little to no cash and short term investments $1M/$0. Is that any reason for concern?
Laura Starks profile picture
@krc112 Clearly the company has cash. Also, per the 10-K, the company has a $393 MM credit line.
darnoc111 profile picture
Like most of the companies in the energy sector they have not performed very well. Since most investors look for income in this sector my question would be is, when will AROC be able to restart their dividend growth. Without a growing dividend, and perceived inflation growing the stock will continue to wallow and even possibly fall slowly in price. I sold out in 2018 and have watched as many have recommended this stock only for it to not do much of anything. Thanks for your help.
@darnoc111 At 6% dividend, why worry about inflation? Hard to get that dividend. Love dividend growth investors. Get 2% dividends and thrilled with fractional increases.
Laura Starks profile picture
@darnoc111 2020 was truly a wallop for OFS (oilfield services) companies Issues were showing up in 2019 as investors wanted more cash back (instead of acreage/production investments by producers) and especially as gas companies experienced a warm winter and even more oversupply.
CincinnatiRick profile picture
@darnoc111 "Sin" stocks have always been available at a substantial discount...and these days anything related to carbon-based energy is in the cross hairs (pun intended) of our modern puritans. My guess is that the carbon energy curve will more resemble that of the tobacco stocks than the private prison industry simply because of differentials in the relative capacity of government to control the market. So I'm long Archrock with a mid 8 handle and been happy to collect the nice dividend and sell covered calls...rinsing and repeating several times now. Currently have May calls out with a $10 strike. We'll see what happens but it's a profit whatever way the cookie crumbles.
Greg_Maryland profile picture
Nice note, I'm long.
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