Eric D. Long - President and CEO Matthew C. Liuzzi - VP, CFO and Treasurer Christopher W. Porter - VP, General Counsel and Secretary.

TJ Schultz - RBC Capital Markets Praveen Narra - Raymond James Andrew Burd - JPMorgan Securities Robert Balsamo - FBR Capital Markets Sharon Lui - Wells Fargo.

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

Good morning, everyone, and thanks for joining us. This morning, we released our financial results for the quarter and fiscal year ended December 31, 2016. You can find our earnings release as well as a recording of this conference in the Investor Relations section of our Web site at usacompression.com.

The recording will be available through February 24, 2017. 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 risks included in this morning's release and in our SEC filings.

Please note that the information provided on this call speaks only to management's views as of today, February 13 and may no longer be accurate at the time of the replay. I’ll now turn the call over to Eric Long, President and CEO of USA Compression..

Thank you, Chris. Good morning, everyone, and thanks for joining our call. Also with me is Matt Liuzzi, our CFO. This morning, USA Compression released fourth quarter and fiscal year 2016 financial and operational results.

Overall, we are pleased with the strong finish to the year and we continue to see positive developments throughout the quarter, which we believe bode well for 2017 and beyond. As we’ve mentioned before, following the downturn, the contract compression sector and hence USA Compression tends to lag behind a pickup in our customers’ activity levels.

As activity in the industry picked up over the last six months, we’ve anticipated seeing increased demand from our customers and that started to occur in the fourth quarter. Things are quite different and much improved than a year ago.

Commodity prices for both oil and natural gas are significantly higher and have appeared to stabilize at levels that permit economic exploration and production. Energy industry activity, as measured by rig counts in CapEx spending, is quite encouraging.

The capital markets have opened up and the general level of confidence throughout the sector has risen significantly.

Before I launch into customer activity in our financial results, I’d like to first draw attention to the safety performance that our entire USA Compression team has embraced as one of the core fundamental tenants that is a true differentiator from our peers.

During the year, we achieved a streak of over 1 million man hours worked without a recordable injury, a record for our company. We also completed the year with zero loss time injuries. Further, our field employees drove almost 10 million miles during the year without a vehicle incident that resulted in an injury.

For a very mobile workforce dealing daily with large reciprocating equipment in industrial settings, these are achievements that don’t happen without a concerted effort and focus on safety.

Not only do our employees notice but our customers, especially the larger integrated major oil companies notice, as well as do our other partners including our insurance providers. Customer activity continues to be positive. Our business is beginning to benefit from the ramp up in activity by our core customer base.

These customers continue to pursue infrastructure projects in key areas and discrete and specific plays or basins, and are making the capital expenditures necessary to execute on their own growth plans.

As an example, we increased our active fleet by over 20,000 horsepower since the end of the third quarter and deployed almost all of that added horsepower in the midstream side of our business.

It will come as no surprise for you to hear that the Permian and Delaware basins continued to see the great amount of development activity followed by the SCOOP and the STACK plays of Oklahoma and that is where we have directed a lot of our resources.

We continue to have a backlog of indicative demand for units to be deployed in 2017 and we expect to satisfy this demand from existing units in our idle fleet as well as additional new capital expenditures for large horsepower units earmarked for specific high margin customer applications.

Throughout the year, our operations team demonstrated a keen focus on controlling costs, once again achieving attractive gross margins. The Q4 headline gross margin number we reported includes the impact of certain lower margin retail activities in the quarter.

Excluding that, our core compression services business gross margins would have been consistent with recent quarters. Matt will provide some further details on gross margin in a moment. We reported adjusted EBITDA of 36.5 million and distributable cash flow or DCF of 28.7 million for the fourth quarter.

Again, these numbers include some positive impact from retail work, which when excluded shows that our base compression service businesses remain steady throughout the quarter. For the full year, adjusted EBITDA was 146.6 million and DCF was 118.3 million, very much in line with previous guidance we’ve provided throughout the year.

During the fourth quarter, we saw modest improvement in utilization factors.

While our end of period utilization decreased slightly in the fourth quarter to 87.1% from 88.3% in Q3, you’ll notice our average utilization during the quarter increased from 87.3% to 87.4% due in part to increasing our active fleet by about 23,000 horsepower throughout the quarter.

We had a number of units moved from overhaul to idle, which indicates that work was performed in anticipation of specific customer needs and they are now ready to be redeployed in the field.

So while average utilization was essentially flat quarter-over-quarter, we are positioned to be able to quickly deploy a large number of our idle units having taken the time and spent the money to make sure they are ready for our customers. With respect to trends between the small and large horsepower units, Q4 saw a similar pattern to Q3.

We continued to deploy our large core horsepower units, active horsepower in the class has continued to climb since early 2016 and utilization is approaching 90%. For the smaller horsepower units, we are essentially unchanged from Q3 in terms of active horsepower as well as utilization which looks to have stabilized in the low 80s.

Overall, we are pleased with where the fleet utilization stands. As we’ve discussed, it has played out as we expected over the course of 2016 and we are seeing positive indications for continued business activity in 2017.

We expect the large horsepower units to continue to achieve strong utilization and as we work through the initial flush production on the crude oil side, we expect the gas lift part of the business will pick up over time.

Our active revenue-generating horsepower at year end of nearly 1.4 million horsepower is the highest it has been since earlier in 2016, gradually increasing every month for the last six months. Our on-contract or pending category also remains strong. As an indication of activity, we expect to move to active status in early 2017.

In addition to seeing encouraging activity levels by our customers, during the quarter we also raised approximately $80 million in equity. We used the proceeds to delever the balance sheet and position us to take advantage of higher margin growth opportunities in 2017. We continue to focus on capital spending and cost throughout the business.

We’ve reduced 2016 growth capital spending to coincide with market demand, and we spent a total of about $40 million for the year. For a more general and overall market perspective, Q4 continued the overall improved talent of customer discussions. We saw an uptick in customer inquiries and contracting activity.

With rig counts continuing to increase in the core and economically attractive areas, operators are becoming more and more focused on building out the infrastructure to move the oil and gas that will be eventually produced by those wells currently being drilled.

After bottoming around 400, the rig count has increased to over 700 rigs currently, up about 80% from the low point. Well cost reductions and production efficiencies have led to economic production at current strip prices for oil and gas.

Most of these rig increases have been in the Permian, Delaware and Marcellus and Utica basins and the STOOP, STACK and CANA Woodford, all great areas for USA Compression.

It is important for our business that we have a strong presence in these economically attractive operating areas where increased drilling activity is occurring and natural gas is being produced.

Overall, fleet pricing trends in the fourth quarter were pretty consistent with the third quarter with the large horsepower segment remaining strong and the smaller horsepower units still feeling the effects of an oversupplied marketplace and overall lack of price discipline.

This led to the decrease in blended fleet revenue per horsepower for $15.35 in the third quarter to $15.07 in the fourth quarter but remember that our larger horsepower units typically earned lower dollars per horsepower and so this reflects an active fleet mix more related to large horsepower units than in the past rather than degradation and pricing.

Our business model has always been centered on the belief that large horsepower compression assets continue to be very sticky on both pricing and utilization as well as staying in the field beyond the primary contract term. We expect this trend to continue.

The fourth quarter saw increased activity and as we stand here today, a lot of our large horsepower units were idle at year end or being earmarked for customer projects in 2017, which is what we expected would happen. The small horsepower portion of our fleet, primarily used in gas lift applications, continued to experience softness in rates.

With continued strong activity levels in certain crude oil basins, we expect an eventual return to higher utilization levels and more rationale pricing trends. We have begun to see some encouraging signs in the marketplace and we think we are well positioned to benefit from new avenues of growth in the near future.

As I mentioned at the opening of this call, I’ve always characterized our business as a lagging indicator. As our customers, the midstream and E&P operators spend capital and gradually build out infrastructure in a particular basin, we come along and provide compression services to help gather that natural gas and move it to the market.

With a nice tick up in activity over the last six or so months, we are now positioned to deploy our compression fleet to serve our customers. Through the end of 2016 and so far in 2017, we’ve seen those themes continue.

This business continues to be a demand-driven model, one that produces stability in slower times and is able to ramp up with growth as the market and our customers require it. We remain bullish on the outlook for compression given the attractive macro fundamentals for growing natural gas demand and the associated infrastructure build out.

Our strategy focused on large infrastructure-oriented equipment in areas of economic production positions us to capitalize on demand, as activity levels increase. I’ll now turn the call over to Matt to walk through some of the financial highlights of the quarter and our initial guidance for 2017.

Matt?.

Thanks, Eric, and good morning, everyone. As Eric mentioned, USA Compression reported a solid quarter of results to wrap up the year. For the fourth quarter of 2016, USA Compression reported revenue of $74.9 million, adjusted EBITDA of $36.5 million and DCF of $28.7 million.

In January, we announced a cash distribution to our unitholders of $0.525 per LP unit which results in a DCF coverage ratio for the quarter of 0.94 times. Taking into account the impact of the DRIP program, our cash coverage ratio for the quarter was 1.09 times.

This quarter, Riverstone elected to maintain its DRIP participation by taking 30% of its distributions in cash. Our total fleet horsepower as of the end of Q4 was 1.7 million horsepower consistent with Q3. Our revenue-generating horsepower at period end was up about 23,000 horsepower to 1.4 million horsepower.

We invested expansion capital of roughly $9.3 million in the quarter. For the year, we took delivery of 23,000 horsepower including 7,000 in Q4 alone. Our average horsepower utilization for the fourth quarter was 87.4%, up slightly from 87.3% in Q3 continuing the general upward trajectory since spring of 2015.

Pricing, as measured by average revenue per revenue-generating horsepower per month, was down slightly to $15.07 from $15.35 in sequential quarters, mostly due to declines in pricing in our smaller horsepower equipment.

Turning to the financial performance for the fourth quarter, total revenue increased to $74.9 million compared to $61.1 million in the third quarter, primarily driven by an increase in our retail revenues. For the year, revenue of $265.9 million came in slightly below the $270.5 million in 2016.

Gross operating margin as a percentage of revenue was 60.2% in Q4 2016. As we have in the past, during the quarter, we recorded retail revenue and corresponding expenses related to certain larger projects for customers. These projects realized a lower gross margin and as such lower our overall gross margin.

As Eric mentioned, if you were to remove the margin impact of the retail activities, which we’ll disclose in our 10-K, gross margin for the quarter would have been consistent with Q3. For the year, the gross margin was about 67% compared to approximately 70% in 2015.

Again, the gross margin for 2016 excluding the impact of retail activities would have been consistent with 2015. Adjusted EBITDA increased to 36.5 million in the fourth quarter as compared to 34.6 million in the prior quarter. DCF in the fourth quarter was 28.7 million as compared to 27.2 million quarter-over-quarter.

Net income in the quarter was 3.3 million as compared to a net loss of 2.1 million for the third quarter 2016. Net cash provided by operating activities of 9.1 million in the quarter compared to 36.1 million last quarter. Operating income increased to 8.9 million as compared to 3.2 million for the third quarter.

Maintenance capital totaled 2.3 million in the fourth quarter and 7.7 million for the year. We continued to optimize our maintenance capital spending throughout the year and better match spending with the deployment of our units. This resulted in significant savings and better overall management of the idle fleet.

Cash interest expense net was 5.1 million for the quarter and 19 million for the year. Following the equity rate in early December, outstanding borrowings under our revolving credit facility as of year-end was $685 million resulting in a leverage ratio of 4.7x relative to our covenant level of 5.7x.

As we’ve done in past years, today we are releasing our initial guidance for 2017. We expect full year adjusted EBITDA of $145 million to $160 million and DCF of $108 million to $123 million.

These preliminary ranges reflect our current view of the market for compression services and our expectations discussed earlier for the general improvement of the market throughout the course of the year. Finally, we expect to file our Form 10-K with the Securities and Exchange Commission as early as this afternoon.

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

[Operator Instructions]. We will take our first question from TJ Schultz of RBC Capital Markets. Your line is open..

Great. Thanks. Good morning..

Good morning, TJ..

Hi. So if I look at your headline reported utilization at year end of 87.1% compared to the actual horsepower-generating revenue at year end, it implies to me and correct me if I’m wrong about 110,000 horsepower that you have ready to hit the market essentially.

So for 2017, as this cycle improves, how much of the demand can be met by simply putting that into the field and how much needs to be met by additional growth CapEx?.

TJ, a really good question. I think what we have pointed out is that when we look peak to trough, our utilization has degraded, call it, kind of 8 to 10 percentage points.

So when you look at the overall size of our fleet and you’re kind of backed into what might be available on some of the larger horsepower equipment, the majority of that tends to be in the 3516 and 3606 driver range.

And at this juncture, the demand signals we see for that particular range of horsepower will indeed be met from our existing idle fleet.

To the extent that our customers demand even large horsepower equipment, of which neither we nor any of our competitors have laying around idle, we’ll beat that incremental demand with additional CapEx need over the course of 2017. So a lot is coming out of the idle fleet with some limited additional new unit CapEx for the really big stuff..

TJ, it’s Matt. We’ve discussed publicly before, we think the spending levels in '17 will look a lot like they did in '16, so kind of in that $40 million to $50 million range. So obviously between that and the idle fleet, that’s what we’ll expect to satisfy demand with..

Okay.

Are you getting indications for that bigger stuff from customers just for applications that are going to dictate spending new CapEx, or is that just kind of what you think is coming?.

We’re getting indicative signals/contracts..

Okay, good. And then what about pricing? It’s certainly another lever. I think we hear from operators talking about 10% to 15% service cost inflation for 2017.

Just given some of the slack in the compression utilization, how should we think about potential pricing power flowing through, or how far does this pricing recovery typically lag utilization recovery?.

Obviously when you have some equipment laying around particularly in the smaller horsepower range, it would tend to limit your upward pricing pressure.

I think when you listened to operators saying 10%, 15%, 20% movement or upward pressure in pricing that tends to be oriented towards folks in the short cycle drilling sector; the drilling fluids, the pressure pumping, the sand guys. I don’t think that we’ll see that level of movement in our industry.

If this cycle plays out like we’ve seen past cycles play out, we and others in our industry will work through their idle equipment which depending on demand indications could be anywhere between a couple of quarters to four to six quarters out. You work off all of your excess equipment.

And to the extent you have continued demand, equipment has to come from somewhere, which means either build new equipment which cost significantly more than it did four or five or six years ago, or you have to repatriate equipment from other places, all of which leads to some upward movement in pricing.

So I think we’re a couple of quarters out from seeing the move toward increase in prices. But again, if it plays out like it has in past cycles, it tends to be inevitable..

Got it. Thank you..

Thanks, TJ..

We will take our next question from Praveen Narra of Raymond James. Your line is open..

Hi. Good morning, guys..

Hi, Praveen..

Hi. Just following up on that last question in terms of – it’s good to hear the pricing cadence starting to at least come into discussion.

When you think about the smaller horsepower units to a degree, are you at least seeing less aggressive pricing from your competitors where that’s bottoming out, or are you still until we start to see utilization pick up a bit, do we still need to wait to see that?.

Probably in the latter. The small horsepower is a small piece of USA Compression’s business. We’re somewhere 15%, 17% of our total fleet and that continues to be a smaller and smaller component of our business today and going forward.

There are limited barriers to entry in that business and I do think that over time, there will be some better discipline in the industry. But with no barriers to entry and some private companies who don’t exert discipline like some of the public companies do, at times there are some rational decisions which are made.

So I think it will affect others probably more dramatically than it affects USA Compression just because it’s such a small component of our business..

Right, that’s fair. And then for you guys, I think the two areas where you really called out – the two basins where you’re seeing potential in 2017, you called out the Permian. You called it SCOOP/STACK.

I guess I was curious given kind of what the takeaway capacity pipeline looks like for 2017 and 2018 from the Northeast, what you guys were seeing or what you guys were expecting and hearing from customers looking out into the Northeast where you guys have a pretty decent footprint?.

Yes, obviously that’s one of our larger operating areas. And if you look at the history of the company that has been one of our larger growth areas historically. So I think what we’ll see is until you start to see some of the takeaway capacity – as you know, Rover recently received their FERC permit.

They’re working through right now looking through some imminent domain issues to secure the final rights away that are required so that they can commence construction. So I think 2017 will be, I’ll call it, nominal or limited growth opportunities for all of us in the sector followed by ramping up activities in 2018, 2019 and 2020.

Give it a year or two, that’s going to be a very active area for all of us in the industry..

Okay, perfect. So think of that more as next year as being the big inflection point. In terms of I guess when I go through kind of first blush, the implied cost guidance that you guys didn’t give but kind of the implied cost. It kind of seems to me that you guys are looking at cost to remain relatively stable in the upside.

So is that something we can assume can hold pretty steady and you can hold cost kind of in line with where they are today going forward?.

Yes. Praveen, I think that’s a fair assumption..

Okay, perfect. Thank you very much guys..

Thank you..

[Operator Instructions]. We will take our next question from Andrew Burd of JPMorgan. Your line is open..

Hi. Good morning.

First question; as more gathering build outs are announced in the Delaware, what’s the appetite for outsourced compression by the gathering operators as opposed to owning it?.

Andy, as we’ve touched on before, it depends and varies based on who the midstream operator is. Some folks, particularly some of the larger guys, do their own thing. Some of the private PE-backed organizations outsource everything. And then some of the folks big and intermediate alike, opt to have a balance, outsource some and then own some.

So kind of own some of the base load and variablize things.

What we have seen recently, because there’s so much activity and such limited infrastructure in the area, some activities that people used to do themselves both from speed to market, from an expertise and frankly just because of limitations on capital are outsourcing and accelerating some of the outsourcing trends.

So I think we’ve been pleased with what we’ve been seeing in the area that the trend toward outsourcing actually has picked up somewhat in that area for those reasons..

Great.

And then are you seeing any green shoots of activity maybe outside of these core basins starting to pop their head up, some of the out of favor basins?.

We have seen some demand signals starting to pick up in the Rockies. There are a couple of areas that we’re not actively involved with. I think when you go up into the Northern Rockies, we’re hearing from some folks some interest in some new projects that are starting to tick off or pick up.

And clearly some of the Western sedimentary basins in Canada are also seeing some potential opportunities. Not an area that we’re active in nor are we active in Mexico, but there are some increasing demand signals coming out of those areas.

Some of the dry gas basins, now that we’re seeing gas prices in that north of $3 range, $3.25; at some points, there were some $3.50, $3.75 dry gas pricing. The Haynesville is seeing an increase in rig count and some of the older Haynesville wells are ultimately going to require compression.

So with the price deck that we’re seeing, I think some of the dry gas areas are starting to show some life again and then some of the associated gas in some of the other higher cost areas are starting to show a little bit of life again..

Great.

And then on the new build horsepower or large horsepower units you were talking about, has the return profile for those units really changed much over the last few years, or has it stayed kind of constant given the tightness in supply?.

The larger horsepower – because of the shortage of supply and more importantly it’s not just supply, it’s actual technical capabilities. Not everybody can do this. It’s fairly limited on those of us in the sector who have the proper level of safety, adequate systems and technical capabilities to do the really big type of horsepower.

They have held their margins and I will say that the margins are relatively stable as well as being relatively attractive for us..

Great. And then a couple of housekeeping questions on the guidance.

Is there a material contribution from the parts and services in the guidance?.

No, not – again, I think people have pointed out this quarter. Looking forward, we’ve not included. I think we’ve looked very – very consistent with historical practice kind of going forward..

Okay, great.

And then final one is, Matt, as you’re thinking about kind of the trajectory for the year in terms of EBITDA growth and then what distribution coverage will look like on kind of an exit rate for 2017, anything you can share with us on that would be great?.

I can’t share too much. We don’t give coverage or distribution coverage guidance. But I think when you look at this quarter you kind of look at the components of the cash flow.

And as we think about going from here through the next four quarters, I think we expect as the market continues to pick up for that to be reflected in the overall level of cash flows. And obviously if that happens, that should improve coverage along the long..

Great. Thanks very much..

You bet..

We will take our next question from Robert Balsamo with FBR. Your line is open..

Hi. Good morning, guys. Congrats on a nice quarter..

Thank you..

So most of my questions have been answered. Just some clarity on guidance, if you can. You guys give a pretty – a reasonable range for guidance for 2017. I was wondering if you could talk about some of the drivers that would push you to the upper or lower end, if that’s utilization or pricing? It sounds like costs are going to be relatively flat..

I think Bob overall as we look at it, obviously we talked about kind of new CapEx spending $40 million, $50 million to Eric’s comment earlier. If things change in a dramatically positive way that allowed us to maybe take delivery and deploy more of those really, really large horsepower units, obviously that’s a positive.

Being able to work through a lot of the idle inventory and satisfying the market demand obviously is a positive. We have not incorporated a whole lot of pricing improvement. And so we’ve kind of just sort of taken it almost the status quo across the board.

So to the extent that the market tightens up, to the extent there’s not a whole lot of equipment and we can put out equipment at rates higher than we had expected to, I think that’s also another positive. So those would be I think general pricing upticks and the ability to put even more new capital to work would both be positive to the guidance..

Great.

And then I don’t know how much clarity you can give here, but do you have an expectation on the DRIP? Do you expect contribution or elections to be kind of consistent through '17 or potentially --?.

I can give you absolutely no clarity on the DRIP only because it is a quarter-by-quarter election by not only Riverstone but all the public LP guys. But certainly our expectation, our goal is to get it to a point where the DRIP doesn’t matter to us. And I think we’ve worked on that through the course of 2016.

Obviously, I think this quarter was a minimal amount of DRIP and I think I meant to say 30% -- Riverstone taking 30% in units not at cash earlier, so 30% units. We’ve really stepped down a good amount while still providing a lot of cushion and coverage for the public guys. So we like the trajectory we’re on.

I will say we also like the lever that that DRIP represents where if we need to, we can kind of move it up and down in concert with our largest unitholder..

Great. Thanks, guys. That’s it for me..

Thanks, Bob..

We will take our next question from Sharon Lui of Wells Fargo. Your line is open..

Hi. My questions have been asked and answered. Thank you..

Thanks, Sharon..

That concludes the Q&A session for today’s call. I would now turn the call over to CEO, Eric Long, for closing statements..

Thank you, operator, and thank you all for joining us on the call today. Many of you have been long-term investors in USA Compression and we thank you for your continued support and your interest. I’ve been at this for more than just a few years and as many of you know and appreciate, the energy sector has always been cyclical.

It is our belief that we are starting to come out of the recent cyclical lows and are seeing increased activity out in the field. Over the course of the new few quarters, we expect to once again return to a growth environment. Like our compression units, our business model is built to last.

Through the downturn, we manage the asset utilization well only declining approximately 8% to 10% from peak to trough. Our large horsepower strategy has played out well, pricing hung in there and we maintain high gross margins resulting in relatively stable adjusted EBITDA and DCF.

We like the macro trends that indicate good things are coming for domestic natural gas and we’ll be there ready to provide our compression services with our fleet of large horsepower equipment. We look forward to updating you on the next quarterly call. Thank you. And everybody be safe..

That concludes today’s conference. Thank you for your participation. You may now disconnect..