Chris Porter - VP, General Counsel and Secretary Eric Long - President and CEO Matt Liuzzi - CFO.

Praveen Narra - Raymond James Andrew Burd - JP Morgan Sharon Lui - Wells Fargo Mike Gyure - Janney.

Good day and welcome to the USA Compression Partners Third Quarter Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call [technical difficulty] Porter, Vice President, General Counsel and Secretary. Please go ahead..

Good morning everyone and thank you for joining us. This morning, we released our financial results for the quarter ended September 30, 2017. You can find our earnings release, as well as recording of this conference, in the Investor Relations section of our website at usacompression.com. The recording will be available through November 18, 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 information provided on this call speaks only to management’s views as of today, November 7th, 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..

Thank you, Chris. Good morning, everyone and thanks for joining our call. Also with me today is Matt Liuzzi, our CFO.

This morning, USA Compression released its third quarter 2017 financial and operational results which reflected continued growth in Compression services and overall improved market conditions, continuing the positive themes we’ve experienced throughout the year.

In recent quarters, we spent a significant amount of time discussing the positive momentum in the compression services sector.

And during the quarter, we saw continued strength, both on a macro level in terms of demand for compression services generally as well as with our individual customers who have continued to develop natural gas infrastructure which requires compression.

Our business performed well during the quarter, strong margins and growth in active horsepower due in part to an overall continued tightening in the markets we serve. We have been expecting the back half of 2017 to show increased activity, and it has played out as we expected.

In some ways, it was a relatively quiet quarter, a business as usual quarter. Utilization continued to pick up; we took delivery of additional large horsepower units which generate very attractive returns on invested capital and are highly accretive; and we continued to operate with very attractive operating margins.

While the straightforward quarter, we believe we are well-positioned to take advantage of the continued sector recovery. I’m going to now discuss a few important drivers and performance metric for USA Compression, give you some color on the market, and then turn it over to Matt for the financial discussion. First, customers.

Our customers, the key to our business, continue to be busy. I often talk about steadily increasing domestic gas production and demand, and things today are no different. Our customers throughout our operating regions are continuing to invest in infrastructure to move gas around the country.

Producers are making investment decisions to address longer term requirements, whether it be LNG exports, petrochemical plants, pipeline exports to Mexico or other demand-driven markets.

We are seeing supply development activity, not just in the Permian and Delaware basins but also in the Midcontinent SCOOP/STACK plays as well as the Northeast, areas where we have long had a presence in and have strong customer relationships.

I’ll talk a little more about the market in a bit, but our business begins with our customers, and their activity levels and future outlook give us increased optimism about the prospect for USA’s services into the future. Second, equipment.

As those who have followed us, know, at USA Compression, we specialize in large horsepower compression used in critical infrastructure applications, and we've talked for a while now about the increasing scarcity of the compression equipment we use every day.

Extended lead times have led to accelerated demand from customers, planning capital investment projects several years out, and thus has provided better visibility for our own operations.

We made the decision late last year and earlier this year to place orders for delivery of selected large horsepower units throughout 2017 and well into 2018, knowing that the market would be tight. That decision has proven to be a prudent decision, as this type of equipment has become more scarce throughout the year.

Like any situation where demand exceeds supply, the large horsepower equipment we’ve seen upward pressure on service rates as customers are willing to pay premium rates for the best equipment and availability that fits their technical needs and development schedules.

With the positive market backdrop for compression services, we reported strong operational and financial metrics for the third quarter. On the operating side, our total fleet horsepower at period end was about 1.8 million horsepower, an increase of approximately 21,000 horsepower compared to the second quarter.

More importantly, active horsepower as of period-end was over 1.5 million horsepower, an increase of about 80,000 horsepower versus Q2. This drove utilization at period-end up to 94.2%, up 1.6% since the last quarter and about 6% year-over-year.

This level of utilization is now at a level we last saw before the oil price decline had started in late 2014. In the industry, we often refer to utilization at these levels as being effectively fully utilized. High utilization obviously implies low levels of idle horsepower.

As we entered the year, we told you our unitholders that redeploying idle equipment was a high priority for us. As of quarter-end, we had about 200,000 horsepower of fleet horsepower that was not active, down from about 350,000 horsepower a year ago. And approximately half of that amount is either on contract or pended for specific customers.

So, when you step back and consider that out of a fleet of 1.8 million horsepower, we have about 100,000 horsepower truly idle, most of which is small horsepower by the way, you realize just how much progress we have made to deliver on that goal during the course of 2017.

Keeping our assets in the field was important, driving cash flow growth and attractive investment returns. This also speaks to the quality of our assets, the continued demand for large horsepower infrastructure compression and a long-term stability of our business across cycles.

Our average pricing also increased during the quarter as a combination of large horsepower deployments and price increases took hold. I mentioned how the scarcity of equipment has led to upward pressure on service rates.

When you consider the price compression as a portion of the economic value of the natural gas being moved, it is a very small portion, and so we have seen customers willing to pay increased rates in exchange for the certainty of equipment deliveries, our history of proven high run times, and exemplary level of service and safety in the fields provided by the dedicated men and women at USA Compression.

So, on that note, third and extremely important, our employees and our safety culture. Our safety vision remains zero incidence in all we do. And while our recordable incident rate is about 40% below the average of our industry, we continually strive to do better. In addition to being the right thing to do, safety pays.

We have structured our workers’ compensation insurance on a bonus penalty basis with our insurance carrier. For policy year 2016, we will receive a dividend check of almost $0.5 million for our outstanding safety results and are on track for 2017 dividend as well. Our drivers are among the safest on the road.

While we will drive almost 11 million miles this year, year-to-date, only two vehicle incidents have occurred involving a USA Compression driver and another vehicle. Our employee headcount is stable with low turnover. Roughly 90% of our employees are highly trained field based folks with solid industry and functional expertise.

USA Compression continues to be viewed by prospective employees as the place they want to be to build a long-term career. So, we are able to attract the best talent in the industry. Fourth, CapEx and growth.

In terms of equipment in our capital spending, we also told you we were approaching capital spending in 2017 with a very prudent eye and only ordering the very large horsepower units, because we believe that’s where we could earn the most attractive returns.

Year-to-date, we have taken delivery of approximately 52,000 horsepower, all of which has consisted of the new age [ph] Cat 3608 model. As of the end of the quarter, our fleet included over 200,000 horsepower in this class for which many of our customers is the most desired type of unit for today’s requirements.

For the fourth quarter of 2017, we are on track to take delivery of another 45,000 horsepower, consistent with our prior expectations. Virtually, all of the units we’ve taken delivery of 2017 had immediately been deployed to the field on executed contracts.

So, the capital we’ve spent has been high return assets and has quickly generate cash flow from credit worthy customers. We think this has been a prudent strategy and one that we expect the Partnership will continue to pursue.

As we look forward into 2018, we’ve contracted for and continue to expect to take delivery of approximately 150,000 horsepower throughout the year, all consisting a very large horsepower units. So, on the financial side, looking at the operational and financial results for the quarter. We are obviously pleased with how the business performed.

On last few calls, we’ve been talking about the upturn in this sector and the macro drivers that we believe were contributing to that expectation. Well, in the third quarter, we saw the impact of what we’ve been talking about. That said, we think there is a good amount of running room for this activity uptick, as I’ll talk about in a minute.

The business conditions continue to be well-positioned to benefit from improved market conditions. Strong operational results drive strong financial results and the positive pricing trends and cost management resulted in continued attractive margins. While Matt will get into the specifics later, a few key highlights.

I have said for the years that one benefit of a fleet of new age, large horsepower compression units is that you typically achieve better operating margins.

Both adjusted EBITDA and DCF showed increases versus Q2, and we expect the future delivery of selected new events as well as the redeployment and re-contracting of existing units to continue to drive increases in these metrics.

Our reported overall gross operating margin of 67.8% was up 50 basis points over Q2 and included the impact of a higher level of lower margin retail work this quarter. This is a great result and one not to lose sight of.

If you look back over the last few years, our core compression services activity has continued to achieve gross operating margins in the mid to high 60s percent level. The adjusted EBITDA margin of 56.1% was likewise up over the previous quarter.

Maintaining these margins through one of the more severe industry downturns, speaks volumes about the stability of the USA Compression business model, the critical nature of midstream compression and the focus by our operations team on managing and optimizing the cost structure of the business.

We've demonstrated the ability to maintain attractive operating margins, not just year-to-date in 2017, but over the last several years through a softer business cycle. This in part is due to our focus on cost management and operational efficiencies, as well as generating attractive returns that a primarily large horsepower fleet can achieve.

We continue to be focused on leverage and coverage metrics, and with the improved cash flow profile, those metrics improved this quarter as well. One advantage of this business is that it is relatively easy to stop and start the growth.

The last few years were great examples of being able to really ratchet back capital spending, and as a result, cash flow growth moderated. And while leverage moved higher and coverage was lower than we ordinarily like, both were within manageable levels.

As I’ve said before when customer demand, investment returns and capital markets signal that it is time to grow, we will grow, as we have this past quarter and methodically plan to in the coming quarters.

The resiliency of this business model has proven itself since our formation nearly 20 years ago, through the collapse of the financial markets in 2008 and the initial downturn in energy in late 2014. USA Compression has powered through where others may have stumbled, allowing us to maintain our distribution.

And we are now positioned to capitalize on the improving market for compression services. So, little color on the market in general. I would say that the market has remained relatively stable over the past quarter and our outlook for the remainder of 2017 and into 2018 is similar.

As you’re all aware, natural gas production in this country continues to steadily move forward. The relative stability and commodity crisis, both crude oil and natural gas, has provided much needed confidence for producers and midstream providers to move forward with large infrastructure projects.

The big picture for natural gas demand and production continues to look strong and that is good news for the compression business. We're seeing operators in all our geographic regions continue to execute on strategic capital spending as well as develop plans not just for months, but years to come.

Just as producers have gained operating efficiencies for pad side drilling to multiple zones and multistage fracking, we’re seeing our customers require larger compression facilities in order to handle increasing volumes of gas and further gain efficiency.

Particular areas of activity continue to be the Permian and Delaware basins, the Marcellus and Utica shales in the Northeast and the SCOOP/STACK plays in Midcontinent.

In terms of seeing demand for our compression services, it has been very strong throughout the quarter and we're now getting customer indications and contracts for deliveries into late 2018.

Whether it is increasing volumes of associated gas in the Permian and Delaware basins or debottlenecking going on in both the Northeast as well as Midcontinent, our customers continue to invest capital in infrastructure projects and continue to call us for the compression needs.

More so than in the last few years, our customers are playing further and further into the future, which has given us great visibility in the overall demand trends and allowed us to make arrangements to have the equipment available.

Considering the lag in our business between customer activity and the deployment of compression, things have been taking into gear and we expect foreseeable quarters to be busy. So, the big picture and some demand drivers. I’ve said it many times before but it bears repeating, our business is a demand-driven business.

Natural gas is here to stay, whether for clean burning, domestic power generation, feedstock or drawing petrochemical production or exports to other countries by way of pipeline or LNG tanker. The US E&P industry will continue to meet those demands with appropriate levels of supply.

Increasing supply means increased demand for our critical compression services. After few years of slower growth and a focus on doing the most with what we had, things have definitely turned for the positive and the level of activity out in the market underscores that.

Our customers are calling us every day for compression, and we’ve been able to take the opportunity to redeploy significant amounts of idle equipment alongside taking delivery of some new assets and putting both to work at attractive rates of return.

We believe the large horsepower strategy has proven to be a good one and we expect to continue to experience high utilization in our assets and further tightening in our business. I’ll now turn the call over to Matt who will walk through some of the financial highlights for the quarter.

Matt?.

Thanks, Eric, and good morning, everyone. Today, USA Compression reported a solid third quarter with revenue of $72.8 million, adjusted EBITDA of $40.8 million and DCF of $30.8 million. In October, we announced the 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 the third quarter was 1.8 million horsepower, up about 21,000 horsepower from Q2 as we took delivery of the new unit spending about $27 million in growth capital. Our revenue generating horsepower at period-end was up about 80,000 horsepower or about 5.4% to over 1.5 million horsepower.

Our average horsepower utilization for the third quarter was 94.1%, up meaningfully from the 91.2% in Q2, continuing the upward movement throughout the year. Pricing, as measured by average revenue per revenue generating horsepower per month, also increased in Q3 to $15.13, up from $14.95 in Q2.

These increases reflected the continuing shift in our fleet to larger and larger horsepower. Total revenue for the third quarter was $72.8 million, up about 10% as compared to the second quarter.

While we did have slightly higher aggregate parts and services revenue, our core contract operations revenues increased more than $5 million or about 8%, reflecting the increase in active horsepower. Gross operating margin as a percentage of revenue was 67.8% in Q3, up from 67.3% in the second quarter.

Eric mentioned the slight increase during the third quarter in our level of retail activities. If you were to remove the margin impact of the retail activity, gross margin for the quarter would have been not only consistent with but above prior quarters.

This quarter continued the consistently strong margin performance of the contract compression business. To briefly address some of the specific line items, adjusted EBITDA increased 11% to $40.8 million in the third quarter as compared to $36.7 million in the prior quarter and up from $34.6 million in the year ago period.

DCF in the third quarter was $30.8 million as compared to $27.1 million quarter-over-quarter and $27.2 million year-over-year. Net income in the quarter was $4.8 million as compared to $0.6 million for the second quarter and a net loss of $2.1 million in Q3 of 2016.

Net cash provided by operating activities was $33 million in the quarter compared to $34 million in last quarter and $36.1 million in a year ago. Operating income was $11.5 million as compared to $6.7 million for the second quarter and $3.2 million year-over-year. Maintenance capital totaled $3.5 million in the quarter versus $3.7 million in Q2.

You’ll note that we've slightly increased expected maintenance capital for the year as throughout the year, we spent capital to redeploy more idle equipment than we had expected. Cash interest expense net was $6 million for the quarter.

Outstanding borrowings under our revolving credit facility as of quarter-end were $752 million, resulting in a leverage ratio of 4.6 times, a decrease from Q2 and well within our covenant level of 5.25.

Over the course of this year, we have pointed to the back half activity ramp up in our sector to help the Partnership to delever and build coverage, both of which happened in the third quarter.

Total distributable cash flow coverage of 0.92 times was a meaningful improvement from the second quarter level of 0.81 times, and with the DRIP participation, cash coverage for the quarter was 1.01 times. As you can see with the improving cash flow from the business, we have been able to grow closer to more appropriate coverage metrics.

With three quarters behind us, we are pleased with the performance of the business. And with the visibility into Q4, we are making slight upward adjustments to our adjusted EBITDA and DCF guidance for 2017.

We now expect full-year adjusted EBITDA of between $152 million and $157 million, and DCF of $115 million to $120 million, while we expect full-year net income of $11 million to $16 million. Finally, we expect to file our Form 10-Q with the SEC as early as this afternoon. With that, we’ll open up the call to questions..

Thank you. [Operator Instructions] We’ll take our first question from Praveen Narra with Raymond James..

Good morning, guys and certainly great quarter..

Thanks, Praveen..

When we think about the average revenue per horsepower, it certainly went up quarter-over-quarter.

Can you talk about how much of that is either pricing, is it fair to think that is pure pricing on a like-for-like basis, is there some mix going into that as well? And then, if you could, as we see those legacy contracts roll off, is this price -- is it rolling on to higher pricing, are we still rolling over on to lower price contracts, but sequentially pricing is moving higher?.

Great questions. I’m going categorize pricing in a couple of different ways. First, in the world that we live in which is predominantly larger horsepower, the types of assets that we have are all exhibiting upward movement in pricing.

So, as new units are built and deployed into the field, the spot rates for that type of equipment are up substantially quarter-over-quarter or year-over-year, which then would suggest as units roll off of their primary term, one-year, three-year, five-year or initial type for primary term, and we have the opportunity to either reterm those contracts or to the extent our customers’ conditions change and they send that equipment home, we redeploy it; in all of those cases, we are also pushing through rate increases.

So, we are methodically looking at our book of existing assets. As Matt has mentioned on previous calls, roughly 40% of our units are on month-to-month contracts.

It’s fair to assume that we are looking at what the current spot prices are in those units and are looking to reterm those units under contracts that have higher monthly service fees than they’re currently deployed at.

So, it’s kind of a perfect storm, both new units and existing fleet get deployed at rates that are higher than what they’ve been in the past..

Right. That’s certainly great news. When we think about the cost side, one of your peers talked about seeing increased lube costs. You guys seem to still have better cost per horsepower sequentially.

Can you talk about what you’re seeing there, whether that’s something that you guys are contracted against, that’s kind of hedging you out right now? Can you talk about what you’re saying and how we should think about that moving forward?.

We actively manage all of our expenses from lube oil and antifreeze and small parts to large parts et cetera. So, can’t speak for their business. We can only speak to our business. We’ve I think been very successful in managing our commercial relationships and our cost components of all the operational drivers.

So, we’re not seeing just massive increases or pressures upward on our cost components. Part of that has to do with our supply chain efficiencies and productivities that we’re able to bring to the table; we have lots of cycle terms on our parts and pieces.

And we don’t have a hedging program in place for lube oil but we’ve been able to secure very favorable pricing and frankly have not seen a lot of upward movement on small parts, large parts overhauls and lube oil expenses that maybe some others have suggested..

Okay, perfect. Thank you very much, guys..

We’ll go next to Andrew Burd with JP Morgan..

Hi. Well done on another strong quarter. Just one question for me, more high level for Eric. Recently, we saw a producer sponsored MLP talk about starting a compression business. It’s hard to tell if that’s just repackaging, what we’ve always looked at is owned equipment.

But, what are your thoughts on this development and doe it change to your outlook for the leased compression business long-term, especially with more and more producers spinning out their own MLP arms?.

We’ve always been believers that we’ll never have 100% of the compression market. They’re truly are owner operators who have base load equipment that will have a 30 or 40-year lifecycle, and those folks need to own their equipment. We see, however, the converse side of that where people are looking at their core competencies.

And is their core competency compression or is their core competency drilling horizontal wells and becoming the most efficient explorer and producer that they can on the upstream side, are they the most effective gatherer and processor that they see on the midstream side. So, our opinion is that it will always continue to be a hybrid model.

When you look at our top 10 or top 20 customers, most of these folks actually have some company-owned equipment as well. So, our view of the world is with the increases in demand for natural gas, the increasing requirements for compression horsepower over time, there is more than enough business to keep all of us in our industry busy.

And to the extent, an upstream decides that they want to be in the compression business and gear up and develop safety training programs and inventory tracking systems and overhaul processes and figure out how to cost effectively redeploy equipment in the field, more power to them. So, it doesn't change our outlook on the business model.

It’s been this way for 35 years and 20 years as USA Compression, and our sector hasn’t gone away yet; it’s actually grown..

Yes. It seems easier to use you guys. Thanks a lot, Eric. Nice quarter..

We’ll go next to Sharon Lui with Wells Fargo..

Hi. Good morning. Just wondering if you could touch on, I guess the extended lead times for equipment, especially for the engine part.

Do you I guess, anticipate that the deliveries you have through the back half of this year into and 2018 is sufficient to meet, I guess, demands next year?.

Yes. Sharon, the manufacturing slots that we secured for the back half of 2017 and on into 2018, have firm delivery dates. So, we’ve made these commitments recognizing and understanding that the supply chain was becoming tighter in lead times were lengthening.

So, when we talked about the deliveries for the back half of this year, 150,000 horsepower on into next year, those are firm commitments that we've already secured.

What you'll find, if you visit with our peers or playing customers or end users is that to source engines -- and it depends on the horsepower size, some of the smaller equipment is more readily available than the larger equipment. We're talking lead times that are somewhere in the 40-week to 60-week range right now.

So, someone has not made commitments to secure equipment over the course of let’s say the next year or so, they really have no opportunities to get their hands on that equipment.

To say it another way, we made some judicious based on our balance sheet, our levels of revenues, our leverage, our coverage, and we're very comfortable with that 150,000 horsepower commitments that we've made for next year that we can secure those equipments, not need to issue additional equity in the marketplace and meet the level of requirements that our customers have.

Frankly, if there was another 150,000 or 200,000 horsepower of available equipment, those opportunities exist out there in the marketplace, but frankly, the equipment doesn’t exists and the lead times are so long that it will be difficult to secure some of those capacity. So, it’s a balancing act. We're comfortable with what we’ve committed to.

It’ll be sufficient enough to back the plays of our longer term customers, very attractive acquisition multiples are highly accretive and it won't stress our balance sheet and it will allow us to continue to maintain improving levels of coverage and ultimately delever the balance sheet..

Okay. That’s great.

So, I guess, based on those lead times, at what point do you have to even start thinking about 2019?.

We’re thinking about that as we speak..

Okay.

And so, the plan is to, I guess, use the credit facilities to fund the capital program and that’s adequate?.

Yes. Sharon, it’s Matt. I think when we look out, obviously, we’re getting increasing cash flows and EBITDA level because we’re -- the equipment that went out during the third quarter is sort of we’re getting full quarters of cash flow come out as well as stuff going out -- fourth quarter stuff going out first part of next year.

So, as all that stuff goes out and gets deployed, generated cash flow, as we look out, we don’t need to access any of the third party capital and we kind of remain within our covenants and within the facility side to take care of the capital spend..

Okay, great. And then, just I guess the question on the make ready costs.

Which components are I guess reflected in higher maintenance CapEx versus like higher cost of sales impacting the gross margin?.

Yes. Sharon, that’s going to be -- that pick up in maintenance CapEx that you saw kind of in Q2 and Q3 is in most part reflecting kind of increased make ready costs. So, all that stuff, reconfiguration, that sort of stuff would show up in the maintenance CapEx versus the OpEx side..

Okay, great. Thank you..

We’ll go next to Mike Gyure with Janney..

Yes. Good morning, guys.

Can you talk a little bit on the 150,000 horsepower for next year, kind of the ramp of when you expect to sort of that horsepower to come on to the fleet, kind of beginning of the year, middle of the year, sort of average during the year kind of thing? And then, maybe if you could touch on I guess any geographies in particular that maybe you’re outsized taking some of that capacity for the horsepower?.

Sure, Mike. It’s Matt. In terms of the funding, it’s more weighted in the front half of the year. I think probably, I would estimate maybe a two-third spending in the first half of the year, and the back half of the year is the remaining one-third. We obviously have the ability to kind of shift timing around.

And we’re obviously always in conversations with customers to make sure we got the timing right for them, so that we’re not sitting on equipment that they don’t need et cetera. In terms of geographical presence for that new capital, you know it’s going to be a little more spread out, maybe than it was this year.

I think primarily, I would say the majority of it will go out in those West Texas and Delaware basins, Permian basin areas but we also have a lot of new equipment going up to the Northeast and the Midcontinent that SCOOP and STACK. So, a little more disburse than it was this year.

This year was much more focused just on Permian and Delaware basin but a little bit more SCOOP/STACK in Marcellus, Utica next year. .

Great, thanks very much..

You bet..

And with no further questions in the queue, I would like to turn the call back over to Eric Long for any additional or closing remarks..

Thank you, operator, and thank you all for joining us on the call today. While our third quarter was strong, we’re even more excited about upcoming future quarters. Our metrics improved this quarter just as we told you they would, and with the continued strong business environment, we expect those will continue to move in the right direction.

Our focus at USA Compression has not changed, large horsepower, operational density in areas of activity and growth and our long established commitment to providing safe and exemplary levels of customer service. We look forward to updating you on the next quarterly call. Thank you for your continued interest in and support of USA Compression..

This does conclude today’s conference. We thank you for your participation. You may now disconnect..