Good morning, and welcome to the Archrock and Archrock Partners Third Quarter 2017 Conference Call. Your host for this morning's call is David Skipper, Director, Investor Relations and Treasurer of Archrock. I will now turn the call over to Mr. Skipper. You may begin.

Thank you, operator. Good morning, everyone. With me today are Brad Childers, President and CEO of Archrock; and David Miller, CFO of Archrock. Today, Archrock and Archrock Partners released their results for the third quarter of 2017. If you have not received a copy, you can find the information on the company's website at www.archrock.com. During today's call, Archrock, Inc. may be referred to as Archrock or AROC, and Archrock Partners L.P. as either Archrock Partners or APLP. Because APLP's financial results and position are consolidated into Archrock, any discussion of Archrock's financial results will include Archrock Partners, unless otherwise noted. I want to remind listeners that the news releases issued today by Archrock and Archrock Partners, the company's prepared remarks on this conference call and the related question-and-answer session include forward-looking statements. These forward-looking statements include projections and expectations of the company's performance and represent the company's current beliefs. Various factors could cause results to differ materially from those projected in the forward-looking statements. Information concerning the risk factors, challenges and uncertainties that could cause actual results to differ materially from those in the forward-looking statements can be found in the company's press releases as well as in Archrock's annual report on Form 10-K for the year ended December 31, 2016, and Archrock Partners' annual report on Form 10-K for the year ended December 31, 2016, and those set forth from time to time in Archrock's and Archrock Partners' filings with the Securities and Exchange Commission, which are currently available at www.archrock.com. Except as required by law, the companies expressly disclaimed any intention or obligation to revise or update any forward-looking statements. In addition, our discussion today will include non-GAAP financial measures, including EBITDA as adjusted, gross margin, gross margin percentage, cash available for dividend, distributable cash flow and net loss from continuing operations attributable to Archrock's stockholders, excluding certain items. For reconciliations of our non-GAAP financial measures to our GAAP financial results, please see today's press releases and our Form 8-K's furnished to the SEC. I will now turn the call over to Brad to discuss Archrock's third quarter results.

Thank you, David. Archrock's horsepower growth accelerated in the third quarter and the company is positioned to capture improving earnings from the long-term secular growth of U.S. natural gas production as well as the current cyclical recovery in our business. We drove record new orders in contract operations and are excited about our growth opportunities as the cycle unfolds. In the third quarter, our contract operations revenue increased by 2% sequentially to $154 million. We increased our operating horsepower by 86,000 horsepower, and notably, 36,000 of this growth was with -- was at Archrock and represents about a 14% sequential increase in operating horsepower at Archrock. We drove new orders at the highest quarterly rate on record, setting the foundation for a strong 2018. For the second consecutive quarter, we were able to move prices higher on horsepower booked in the quarter compared to the previous quarter. And we completed a $60 million equity offering at Archrock Partners, which both strengthened our capital position and partially funded our growth CapEx. Turning to our operations. New orders during the quarter continued to be impressive. Our sales team once again capitalized on surging customer activity levels and delivered a record quarter for new orders. We believe that our strong book of new orders this year will enable us to drive top line growth in the fourth quarter and into 2018. Now from a play perspective, new orders were strong in growth plays where Archrock has a large operating presence, including the Permian, the Niobrara, the Eagle Ford and in the SCOOP STACK. Demand for large horsepower units continues to be robust, and we believe the utilization for large horsepower units across the industry is significantly higher than for midsized and small horsepower units. With the largest fleet of high-demand, large horsepower units…

Thanks, Brad. Let's look at a summary of third quarter 2017 results and then cover guidance for the fourth quarter. Archrock grew operating horsepower by 86,000 in Q3 of 2017, driven by both higher start and lower stop activity in the quarter. This is the second quarter of horsepower growth in our contract compression business as we enter into a cyclical recovery. In the third quarter, Archrock generated EBITDA as adjusted of $62 million, including other income of $3 million, compared to $72 million in the second quarter, which included $1 million of other income. Revenue was $198 million for the third quarter, flat with second quarter levels, as higher contract operations revenue was offset by lower AMS revenue. Turning to our segments. In contract operations, revenue came in strong at $154 million in the third quarter, up from $151 million in the second quarter, primarily driven by higher operating horsepower. Gross margin percentage in the third quarter decreased to 53% from 59% in the second quarter as our cost of sales was up $10 million sequentially. As Brad discussed, the increase in costs was due to higher medical and workers' compensation expenses and the receipt of late lube oil invoices due to a vendor billing issue as well as higher expenses due to elevated start activities and higher operating horsepower levels. In aftermarket services, revenues of $44 million for the third quarter decreased $3 million sequentially from $47 million in the second quarter. This was primarily due to lower field service revenues in the quarter. Gross margin percentage was down 200 basis points from 13% to 15% from -- to 13% from 15%, primarily due to lower revenue on our fixed cost base in the quarter. SG&A expenses were $29 million in the third quarter, up about $4 million…

[Operator Instructions] Our first question comes from Andrew Burd from JPMorgan.

Two questions. The first one, great to hear about the record new orders. At this point, how many idle units does Archrock have to deploy towards most of those new orders versus buying new units? And then, I guess, the follow-on to that is, do you see CapEx higher or lower in 2018 versus '17?

Sure. Thanks, Andy. The first point, from a starts perspective, in Q3, we saw our start activity at about 70% from the fleets and a little less than 30% from new build. It's a ratio we actually like to see. We have plenty of idle units in the fleet at lower horsepower, and increasingly, it tightens at mid-horsepower. And in the large horsepower portion of our fleet, candidly, we are at the position of needing to build new. And that's where the bulk of our CapEx is going. In fact, 90% of our CapEx being spent right now is going toward large units. So I hope that gives you a feel without going into the exact number of units but what we think we have to do from a how to deploy and where our CapEx is going perspective.

And our next question comes from Blake Hutchinson from Howard Weil.

Just to give us a feel, as a follow-on to that question, how much of the growth CapEx that you've outlined for 2017 has actually showed up in the field already?

Interesting question. We probably can't give an exact number. But it's going to be, through Q3, clearly greater than -- about 50% of it is going to be the right ratio. We still had a lot of it that was targeted for later in the year, which is why it's not greater than 50%. It's not exactly proportionate spend throughout the year; it ramped up. So I'm going to give you the opinion that it will validate and follow-up. But it's going to be around 50% of it is deployed currently. The other thing I'll throw out is that we're real happy about is the cycle time on when we have a unit that hits kind of ready to go and to the time that we get to get it in the field and started in billing is less than 40 days right now. So we're seeing a real good cycle time on getting that CapEx to work for us.

And what would a normal cycle time be?

It's a fair question. Longer.

Excellent. I guess I'll switch over because you're very forthcoming with regard to your kind of thoughts on pricing here. But even as leading edge improves, we've got a full fleet that is still probably in the midst of winding down a little, has some downward to sideways inertia that you have to arrest before we can actually see it hit the income statement. Just so we're exercising an abundance of caution, I mean, do we need to think about maybe midyear '18 for the fleet as a whole starting to gain pricing traction that we'll see?

Fair characterization, and I understand the question. The short answer is going to be, with power, yes. That's not to dictate exactly the timing of how we plan to move pricing, but rather as to when it can start showing up more visibly in the financial statements. It does take time to work through. And we have a large portion of the fleet that's been contracted recently, and so that's not available for pricing to move. We have a portion of the fleet that's with alliance agreements, where those are longer-term pricing mechanisms. And so I think your overall hypothesis is very responsible. And what I would add to that is that if we think about the downturn in thinking about our business, what I want people to see, and it's very visible in the way our financial performance rolls out right now, is that at the peak of the prior cycle, if you have high pricing, high utilization and responsible cost-management in margins, when the downturn hits, utilization comes down, followed by spending comes down, followed by pricing comes down. And as we're getting started, we're at that the real bottom and nadir from an overall financial performance. And what happens first is spending has to move, utilization has to move and then pricing. So not only are we delayed from the industry, as we've always discussed, by 6 to 9 months, but we also have somewhat of a whiplash effect in that we have to move spending and utilization before pricing moves based upon the industry dynamic that we see and experience in compression.

Great. And then, I guess, within your kind of cost-side discussion or cost of goods sold discussion for compression operations, I didn't hear a lot with regard to just kind of pure inflationary pressure. Are there some onetime items, some frictional costs? I mean, is that stable to manageable and so we don't have to necessarily consider that coming out of left field on us? Or where do we stand just in terms of inflationary pressures?

Yes, it's not going to come out of left field. There are inflationary pressures. We did see inflation impact on lube oil pricing in the quarter. We are experiencing some inflationary pressures that are more annualized but -- in our cost of equipment and cost of parts, and we're definitely going to see some cost pressure in compensation and labor as the market tightens, and the labor market especially is getting tightened at a few of the growth plays. So those are the pressures we definitely are experiencing in the market right now. But they're not going to be kind of violent appearances. They will be gradual cost pressures and headwinds that we're going to have to both manage and offset with some effort.

And our next question comes from Jerry [ Zhu ] from Citi.

Just a quick, kind of, couple of few questions. Just staying within the same train of thought in terms of the first few, I guess -- considered through the first few [ pennies ] of spending. Based off of what you said before, there's a contract, and I think based on what you guys said in the previous calls. Would you say that the contract length, on average, has gone down a bit or is staying around same? Just Because I know you guys mentioned something around the lines of stronger pricing power moving forward.

Yes. Thanks. You're right. We did see during the downturn the average contract length reduce-- contract length reduce, and we're at definitely a shorter contract length right now, and part of that does help us with pricing going forward, especially where it's contract pricing that's not also subject to kind of alliance pricing management. So that's true. And the other thing I want to point out, too, is that even though we've reduced our contract length, we have not seen a reduction into the average time that our services stay on location, which remains in that between 3- and 4-year period of time. So we really are talking about the contracting length that impacts pricing more than we're talking about the contracting length that impacts the time of service at a location.

Our last question comes from John Watson from Simmons.

A quick one on your active horsepower. Is any of it working on huff-and-puff jobs? Are you planning to build any fleets designed for huff-and-puff work? Or is that not something Archrock is interested in?

John, you're catching us a touch flat-footed. What's a huff and puff job?

Well, I think it's a colloquial term for enhanced oil recovery using a larger compressor for enhanced oil recovery.

So we have -- okay, thank you. Interesting expression. We'll talk to the operating team as to why we're not hearing that. So we have about 21% to 22% of our fleet currently on Gas Lift, which is more about the hydrostatic pressure in the well bore than it is about enhanced oil recovery on the reservoir itself. We do have and are hearing about some applications right now that a lot of the producers are exploring to use more gas, actual EOR, that is injection of gas into the reservoir for enhanced oil recovery. We haven't seen a lot of activity for the -- for our fleet in that application yet. But we do know that producers are looking at that hard, and that could be a an expected future application. Then finally, we do have some of our services, probably as much AMS, but also we have seen the application of some our -- some compression in the form of CO2, where CO2 floods occur. Also not a big part of what -- of our business historically. So that's the thought I have for you on where we apply compression for EOR. Primarily, it's Gas Lift in the well bore more than to date it has been for pressure in the reservoir.

There are no further questions at this time.

Okay. Operator, thanks very much. And thank you, everyone, for joining us for this Q3 call. We look forward to talking to you again when we have our results for Q4. Thanks very much.

Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating. You may now disconnect.