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

Robert Balsamo - FBR & Co. John Woodiel - Raymond James & Associates Andrew Burd - J.P. Morgan Securities.

Good day and welcome to the USA Compression Partners First Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to 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 ended March 31, 2017. 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 May 15, 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 risk 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, May 4th, and may no longer be accurate at the time of a replay. I'll now turn the call over to Eric Long, President and CEO of USA Compression..

The Northeast as a major supplier but also a large consumer in the future, Texas as an important supplier but also a stopping point on the way to Mexico, Northern Louisiana and the Perryville Hub increasing in importance as gas makes its way toward the Gulf Coast for industrial use and export, these flows represent a change to the traditional way domestic gas was supplied and moved around the country to markets.

The more this reshaping takes place, the more infrastructure is needed to support it, and the more compression will be required as an important part of the equation.

To sum it all up, our business is a demand-driven business, and we are seeing a lot of signs pointing to not only continued but increasing demand for natural gas from all sources, rich, associated and dry gas alike, which in turn is driving an increase in demand for our compression services.

The big picture and global demand factors are reshaping the way the natural gas business in this country will be managed, and we expect to be right in the middle of the growth, providing the all-important, in fact critical, compression to move that gas around.

Our large infrastructure-oriented strategy has kept our team very busy and our assets utilized, and as activity levels increase, we expect to continue to see things tighten in our sector. I will now turn the call over to Matt to walk through some of the financial highlights of the quarter.

Matt?.

Thanks, Eric, and good morning everyone. Today USA Compression reported a solid start to the year, both operationally as well as financially. For the first quarter of 2017, USA Compression reported revenue of $66 million, adjusted EBITDA of $36 million, and DCF of $27.2 million.

In April, we announced a cash distribution to our unitholders of $0.525 per LP unit, consistent with the previous quarter. Our total fleet horsepower as of the end of Q1 was 1.7 million horsepower, up about 20,000 horsepower over Q4. Our revenue generating horsepower at period end was up about 40,000 horsepower to over 1.4 million horsepower.

Eric mentioned our investment in large horsepower units for select customers. During the quarter, we invested expansion capital of roughly $25 million. And for the quarter, we took delivery of about 25,000 horsepower.

Our average horsepower utilization for the first quarter was 88.2%, up slightly from 87.4% in Q4, continuing the upward trajectory we have seen recently.

Pricing, as measured by average revenue per revenue generating horsepower per month, was down slightly to $14.98 from $15.07 in sequential quarters, due again to the larger units earning lower revenue per horsepower per month and declines in pricing in our smaller horsepower equipment.

Turning to the financial performance for the first quarter, total revenue was $66 million compared to $74.9 million in the fourth quarter. The decrease in sequential quarters was primarily due to less retail revenue in the first quarter.

As we discussed last quarter, we expect the retail revenues to occur throughout the year, but they can be somewhat lumpy, and Q4 was certainly a strong quarter in that regard.

When you look solely at contract compression revenues, we were up about $1 million in the quarter, illustrating the improving business environment in our core compression services business. Gross operating margin, as a percentage of revenue, was 65.9% in Q1 2017.

This was up from 60.2% in the fourth quarter, which included some impact from retail activities. While during the quarter, our level of retail activities was lower than in Q4, if you were to remove the margin impact of the retail activities, gross margin for the quarter would have been consistent with Q4.

So, while the absolute margin may tend to move around a little bit depending on retail activities, we are pleased with the continued consistently strong margin performance of the contract compression business.

Now to walk through some of the specifics, adjusted EBITDA decreased slightly to $36 million in the first quarter as compared to $36.5 million in the prior quarter, and down slightly from $38.4 million in the year ago period. DCF in the first quarter was $27.2 million as compared to $28.7 million quarter-over-quarter and $31.9 million year-over-year.

Net income in the quarter was $1.6 million as compared to $3.3 million for the fourth quarter and $8.5 million in Q1 of 2016. Net cash provided by operating activities of $18.3 million in the first quarter compared to $9.1 million last quarter and $22 million a year ago.

Operating income decreased to $7.4 million as compared to $8.9 million for the fourth quarter and $13.8 million year-over-year. Maintenance capital totaled $3.2 million in the first quarter versus $2.3 million in Q4. As we mentioned, as activity picks up, we would expect to spend a little more on maintenance CapEx.

Cash interest expense, net was $5.1 million for the quarter. Outstanding borrowings under our revolving credit facility as of quarter-end were approximately $715 million, reflecting the investment made in large horsepower units during the quarter. This resulted in a leverage ratio of 4.97x relative to our covenant level of 5.5x.

Over the longer-term, we will continue to proactively manage our leverage and coverage levels with the goal of getting them both to a level more in line with our MLP peer group.

While we have more than doubled the size of the fleet in the few short years since our IPO, this business generates significant cash flow, and as we make the turn from the recent softer years, we expect increasing cash flows which in turn will help the Partnership delever and build coverage throughout the course of 2017.

Based on what we are currently seeing with the business, we believe we will be in a position to demonstrate significantly improved coverage levels by the end of 2017. Looking back, we are proud of the way in which we've been able to manage over the last several years.

This reflects the stability of the business model, and would expect as the rebound happens, this will have a positive impact on our coverage and leverage. Through one quarter, we are affirming our previously released guidance for 2017.

We continue to expect full year adjusted EBITDA between $145 million and $160 million, and DCF between $108 million and $123 million. While we expect to spend additional capital this year, it is likely to be mostly back-end weighted during the year and thus the overall cash flow impact will be minimal for the year.

As we have done in the past, we will consider any revisions to the guidance as necessary throughout the year. One housekeeping item to note, as some of you may have seen, we recently filed a shelf registration on Form S-3 to replace the previous one that was about to expire.

Lastly, we expect to file our Form 10-Q with the SEC as early as this afternoon. With that, we will open the call to questions..

[Operator Instructions] We'll take our first question from Robert Balsamo. Please go ahead..

I apologize for I dialled in a little late and I don't know if you actually already spoke to this, but could you tell a little bit about your contract rollover, some of the accounts that are maybe more month-to-month and what other opportunity present itself for rate increases as you obviously demonstrated pretty strong market demand growth?.

Sure, Robert. When we look at the portfolio of our active fleet, we run roughly 40% of our contracts, have rolled off a primary term and are on evergreen month-to-month contracts.

I don't know if you were on the call when we mentioned that when we look at current spot pricing, particularly for the larger horsepower, it is now at rates in excess of kind of the average of certain classes of horsepower.

So it's logical to assume that if we have a tranche of our equipment which is month-to-month at rates that are now below spot rates that some upward pressure benefiting us as far as re-contracting activity may exist going forward..

Great.

Have there been any opportunities to relocate any assets to areas with greater development from some other maybe declining basins?.

That's the beauty of the compression business, which is particularly the large infrastructure horsepower which USA focuses on. Unlike a pipeline where you build your gathering assets and they are buried in the ground, our compression, which is part and parcel to the gathering and transportation activity, can be picked up and relocated.

We have seen some softening in some of the drier gas areas, most notably would be the Fayetteville Shale in Arkansas. The operating conditions in that area are very, very similar to what we see in the Permian and Delaware basins.

And over time, as we have seen some reduced activity and nominal decline occurring in the Fayetteville, we have picked up and relocated those assets out to the Permian and Delaware basins.

As you may recall, our customers bear the cost of mobilization, freight, trucking and cranes to remove equipment from location and then to redeploy to new locations.

So, as you've seen the flush production decline and then move into the shallow decline, the tail of production, in these dry gas areas, we saw declining activity frankly starting four, five, six years ago, and we're seeing some nominal decline and nominal return, and to your question, we have seen relocations of some equipment from a basin to another and entering into longer-term contracts..

Great, thank you.

And last question, did you mention anything about the exit rate for utilization for 2017?.

No, Robert, we haven't and we don't provide kind of forward-looking utilization. I think you can get to a decent place if you look at kind of where Eric was talking about some of the contracting going on and sort of general CapEx expectations for the year.

But it will have definitely been a positive move from where we ended the year and all the signs are kind of pointing to sort of increased steadily improving utilization..

We're seeing that existing units are staying on location longer. Our churn, as I mentioned at the outset, is off about 60%. New order book is increasing. So when we look at the increasing demand, increasing activity, coupled with the fact that units are staying on the location longer and demand is increasing, we're working through our idle fleet.

I think I mentioned, we have executed contracts in the first quarter for 100,000-ish horsepower coming out of our idle fleet.

So, obviously utilization is improving and will continue to improve, and then coupled with the lead times of some of the largest equipment that exist, which is our specialty, and being able to contract for a fair amount of this activity, I think we're uniquely situated for the back half of 2017 and the first couple of quarters of 2018, maybe even throughout 2018, to capitalize on the strong demand that we're seeing from some of our largest and key core customers..

Great. Thanks for the color. Congrats on a nice quarter..

We'll take our next question from John Woodiel. Please go ahead..

Great quarterly results.

So my question surrounds, first question surrounds, when you're thinking about the 100,000 horsepower net additions that you're seeing that you have, that were booked in the first quarter, what is the timing on those and is that stretching into 2018 at all or are you seeing much discussions for orders being booked out into 2018?.

So I'm going to hit it a couple of ways.

Units that we deploy out of our idle fleet, since it's available with some degree of make-ready work, minimal CapEx requirements, minor overhauls, basically kind of taking a car that's been sitting in the garage for six months or a year, two years and getting it into condition where it can be deployed, that has a fairly short cycle time.

So those will be units that are deployed kind of second and third quarter of this year. Some of the larger equipment, and if you look back in 2015, 2016 and now 2017, the type of equipment we're adding, very few people in the industry have this type of equipment. It's the largest that exist. It's what we specialize in with long lead times.

We were fortunate that we made substantial commitments before the shortage occurred. So we're kind of the early time guys who will be taking delivery of a fair amount of this equipment in the back half of 2017, and some of that new CapEx will delay on into the first half of 2018. The bulk of the idle fleet will be deployed yet in 2017..

And John, I would just add, we took delivery of about 25,000 horsepower in the first quarter. That was all very, very large horsepower units. And the trend that we're seeing is, as that stuff shows up on our doorstep as we take delivery of it, it is already contracted.

And so, really any of the new stuff that we're bringing in-house is basically immediately going out in those fields and earning revenue..

All right, thank you, that's extremely helpful. And then, as I'm thinking about your margins, obviously you have kind of the impact in both the fourth quarter and the first quarter of the higher retail component.

I'm trying to gauge, we've heard from some peers that they've seen higher expenses related to startup, both on the labor side and just in general relocation, which it sounds like your customers pay for that component.

But within the labor side, have you all seen a meaningful uptick within the costs that you're experiencing there or is it just a little difficult to parse that out given that we've had such a mix shift over the past two quarters?.

John, in terms of the cost increase, we really haven't seen any meaningful increase. I think we made the comments that if you were to look at just sort of the base compression business, which would include all the kind of things that you're talking about, we continue to run gross margins, EBITDA margins, at levels consistent with historical.

So, if you looked back 2015, 2016; we were able to achieve some pretty attractive margins and those margins are continuing in the current quarter..

Okay, that's helpful..

Little more color for you, John, when you look at our business, which 85% of our assets are the big horsepower midstream business, and then 15% or so would be the smaller gas lift type of equipment which is tied more toward the wellhead, when we look at our larger fleet, we differentiate ourselves in comparison with our peer group.

So when we hear others talk about utilization and competition and pricing and margins, it's still a knife fight out in the darkness of small horsepower will and we really don't experience that much of it.

So, I think there are going to be some others who because of overhang with a lot of the small horsepower, a lot of the older legacy equipment, they are going to start to slog through some of that. There are a few of us who have the large horsepower, and frankly, only one of us that has the largest actively deployed into the rental fleet.

So I think we're kind of uniquely positioned here to not just maintain margin, but to improve our margins over time with the highest utilizations in the industry, frankly because of the type of stuff we have. It really is a very different business model and a different mix in comparison with some of our other peers..

Right. So, it sounds like as you shift even more and more towards the large horsepower, you should see your margins continue to creep higher. All right, thank you. I'll turn it back now..

We'll take our next question from Andrew Burd. Please go ahead..

Eric, quick follow-up on pricing, are you at the point of lifting prices on the in-place compressors that currently sit at the low end of your pricing range? And also if you could comment on pricing dynamics of the smaller horsepower units, that would be great too..

I think the fair way to say it, Andy, is we've never been the lowest priced guy in town. Our view is that you get what you pay for.

And with the type of assets, the mission critical infrastructure applications, these massive facilities that we're involved with, I mean we're involved with facilities that there will be 15,000 or 20,000 barrels of oil a day and 75 million to 100 million cubic feet of gas coming off of those large pad sites that are going through our compression equipment, so a few minutes of downtime is significant and meaningful to either our E&P customers or our midstream customers.

So, as we look at it, what we're seeing with the types of equipment that we have, A, very long lead times for new equipment coming from the manufacturers, and B, the sheer fact that there's not a lot of it laying around right now, our utilizations from our midstream assets are back where they were prior to the decline of a few years ago.

So, I think it's logical to assume that we will look at customer by customer, installation by installation, and to the extent it makes sense to push through rate increases, we will begin to push through rate increases. We're not the guys that go out and have a blanket increase just across the board. We tend to be a little more selective.

We tend to be much stickier because of the type of contracts and relationships that we've developed. But I do think it's fair to say that we will be continuing to improve our portfolio and our return on our assets for deployed and idle fleet alike..

Great, that's helpful.

And clarification on the lead times, can you confirm that this is with Caterpillar and not fabricators or Ariel or something else that the backlog is really focused on the engines?.

The largest bottleneck right now on the largest horsepower indeed is Caterpillar. They've had some substantial reductions in manufacturing capacity as far as personnel and they've had many of their suppliers for small piece parts, frankly many of these folks have gone out of business.

So, depending on which fabricator it is, there are some short-term bottlenecks here over the next quarter or two, and then fabricators tend to open their capacity up. In our discussions with the folks at Ariel, we believe that they can amp up their manufacturing cycle somewhat faster than the folks at Caterpillar can.

So, yes, right now your bottleneck tends to be driven more by Caterpillar than it does anybody else in the supply chain..

Okay, great. Switching gears to industry M&A, we've seen a decent amount of portfolios transact and kind of forgotten about dry gas basins that are re-emerging often with private equity backed players buying non-core packages from E&P companies.

Does this create an opportunity for outsourced compression, specifically USAC, and are you trying to aggressively go after these players or is there a compression pretty much spoken for, and just because the assets or acreage change hands, there is really not an opportunity?.

They are good observations, and when you see portfolios move from a midstream player to a private equity or flip flopping that, a couple of components. First, I think that during this downturn, a lot of our customers have come to the conclusion that compression might not necessarily be a core competency of theirs.

And we're frankly seeing probably an increase in more outsourcing from some particular customers than what we've seen in the past. I think I've stated before, we've never seen an all-or-none scenario where a company says, we used to do it all in-house and now we're going to turn it all over to USA or one of our competitors.

We tend to see a hybrid model. When there are people who have 20 or 30 year requirements for compression, they tend to purchase that as part of a major project.

Some of the major processing guys purchase their equipment, some of the big gathering guys purchase their equipment, and where we and others of our peer group tend to shine are where you've got changing conditions, either increasing growth requirements early in the life as they ramp up projects.

So you can envision in the Permian and the Delaware basins and the SCOOP and the STACK play where there is no infrastructure and infrastructure is being rapidly developed, you've got people shortages, engineering shortages, capital shortages.

So, we're seeing a big demand and big growth right now for our goods and services in these areas frankly because people just can't keep up.

And then when they see the high-level performance that we're able to deliver and they start to look at the magnitude of their budgets, a lot of folks are looking at us saying, 'you know, let's just keep track with USA', and we're actually picking up more and more business from folks who historically would tend to do some things internally themselves.

And I also think then that you're going to see folks that may own some of their compression assets, who look at it and say, 'wow, you know, we've been using USA, we're happy with their service, why don't we monetize some of this existing large horsepower fleet and completely get out of the compression component in our midstream or upstream E&P gathering system supporting their drilling activity.' So, frankly, we're going to be really busy coming up over the next five years or so with organic growth and some select opportunities to acquire some strategic type of assets that make sense to us.

So right then it's the right type of equipment and the right customer profile..

That's fantastic color, thanks.

And then really quick final question, if I could, for Matt on financing, with all the very positive tailwinds emerging and demand increasing, should USA secure additional growth CapEx, material additional growth CapEx, is the status quo financing strategy appropriate or would you potentially have to do something larger or something besides just kind of adding to the credit facility [indiscernible]?.

Yes, Andy, and I think obviously it depends on exactly what the nature of it is, is it organic growth, which is what we're looking at now, is it chunky acquisition growth like Eric was just talking on.

So, obviously we're kind of in touch with a lot of folks around the industry who – there is like a lot of capital out there looking for a home and I certainly think that if things continue to turn in our industry and our growth opportunities and kind of what we think are pretty attractive margins and returns on that kind of stuff, we think there shouldn't be a shortage of financing available to help fund that..

Great. Thanks for taking my questions..

And we have no further questions at this time. I would like to turn the call back over to Eric Long for closing remarks..

Thanks, Martina, and thank you all for joining us on the call today. On our year-end earnings call, I told you that based on increased activity out in the field, we believed we were starting to come out of the recent cyclical lows and that the next few quarters would once again return to a growth environment.

As you can see by our improving metrics and the overall tone, we are cautiously optimistic that we have seen a positive turn in the market.

During 2017, you'll continue to see us do more of the same as what got us here to begin with; focus on large horsepower infrastructure oriented projects; partner with a few key players in the areas of activity and growth; and maintain our long-established commitment to providing exemplary levels of customer service.

Our four core pillars that differentiate USA Compression from our peers revolving around our people, our culture, our equipment, and our service, continue to guide our ability to earn the business of some of the largest, most demanding and sophisticated energy companies in the U.S.

Pricing and margins have remained strong and we expect our history of maintaining cash flow stability to continue. It's a great time to be in the natural gas midstream business, things are changing at a rapid pace and we like our position. We look forward to updating you on the next quarterly call.

Thank you for your continued support of USA Compression and be safe..

This does conclude today's call. You may disconnect at any time and have a wonderful day..