Welcome to the U.S.A Compression Partners Third Quarter Earnings Conference Call. [Operator Instructions]. Today's conference is being recorded. And at this time I would like to turn the call over to Mr. Greg Holloway, Vice-President, General Counsel and Secretary. Please go ahead, sir.

Well, thanks, Savannah. Good morning, everybody and thank you for joining us. As you know, this morning we released our financial results for the quarter ended September 30, 2016. You can find our earnings release as well as a recording of this conference in the Investor Relations section of our website at U.S.Acompression.com. The recording will be available through November 19, 2016. 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 8 and may no longer be accurate at the time of a replay. I will now turn the call over to Eric Long, President and Chief Executive Officer, U.S.A Compression.

Thank you, Greg. Good morning, everyone and thanks for joining our call. Also with me is Matt Liuzzi, our CFO. This morning, U.S.A Compression released third quarter 2016 financial and operational results. As anticipated, the cumulative effects from softer activity levels and declining utilization from predominantly smaller horsepower units experienced earlier in 2016 had an impact on Q3 results. Our business is generally a lagging indicator in the overall energy market, both on the upswing and during the downturn. The good news is we think that the industry pendulum is starting to swing in the right direction again, based on positive signals related to our activity levels, including a higher level of signed contracts for new projects and a slowdown in equipment returns, both during Q3 and projected through the end of the year. We believe the third quarter results demonstrate the continued relative stability of our compression services business model which is focused on infrastructure applications and that we're well-positioned as the market rebounds in activity levels from both upstream and midstream operators begin to increase. As we have done since the beginning of this secular downturn in the energy sector eight or so quarters ago, we continued to proactively manage our balance sheet to reward our stakeholders over the long term by balancing our growth CapEx demand needs with the potential for future distribution growth. Given our continued focus on operational excellence and cost controls, during the third quarter we were still able to generate strong gross margins, pushing 70% which resulted in adjusted EBITDA of $34.6 million and distributed cash flow or DCF of $27.2 million for the quarter. We still saw some softness during the quarter, but we believe those trends are beginning to reverse with utilization of smaller horsepowered gas lift-oriented equipment stabilizing and improving…

Thanks, Eric. Good morning, everyone. As Eric mentioned, U.S.A Compression reported another solid quarter of results against a tough but improving market backdrop. For the third quarter of 2016, U.S.A compression reported revenue of $61.1 million, adjusted EBITDA of $34.6 million and DCF of $27.2 million. In October 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 0.91 times. Taking into account the impact of the DRIP program, our cash coverage ratio for the quarter was 1.06 times. This quarter, Riverstone elected to reduce its DRIP participation by taking 30% of its distributions in cash. Our total fleet horsepower as of the end of Q3 of 1.7 million horsepower was similar to where we ended Q2, adding only a few large horsepower units to the fleet during the quarter. Our revenue-generating horsepower at period end was up slightly relative to Q2 at 1.4 million horsepower. We invested expansion capital of roughly $11 million in the quarter. We have taken delivery of the 15,000 horsepower discussed on past earnings calls and we now expect to take delivery of three additional large units totaling roughly 7,000 horsepower in December of this year. We still expect total expansion capital spend this year to remain between $40 million and $50 million and we continue to execute on our strategy of working off the backlog of existing in-demand large horsepower units in our fleet as incremental compression demand arises. That said, we have seen incremental demand for the very large horsepower equipment in our fleet. And as Eric mentioned, we have pulled the trigger on some fleet addition orders for delivery in early 2017, comprised only of the very large 3,600 series units. Our average horsepower utilization for the third…

[Operator Instructions]. We will take our first question from Shneur Gershuni from UBS. Please go ahead. Your line is open.

Just a couple of questions -- typically, USAC is more of a lagging indicator which I think you highlighted in the beginning of the call, with respect to drilling activity. I was wondering if you can talk about your cadence of EBITDA and cash flow as the recovery unfolds. With utilization of equipment coming up, will there be any timing delays in the benefits hitting the bottom line? Are there some contracts you are getting paid on that are not being utilized? Or should we really see a direct correlation between utilization and revenue increases?

I think the bottom-line answer is that there will be a lag. And I think we hit on some of the utilization upticks. But obviously, not all of that stuff will go out at the beginning of quarters or the beginning of months. So, since there is a little bit of a lag, I think when we -- obviously, the midpoint on the EBITDA guidance really hasn't changed all year. So I think what I'd point out is that I think we saw it coming, what we're seeing now. And so, the third quarter was right in line with what we thought it would be, based on low activity levels in the second quarter and in the beginning of the third quarter. So I think, again, as things have picked up our expectation would be to see that manifest itself in the bottom line. But again, there will be a lag time as we work off, work into the fleet some of our idle equipment and take delivery of some of the new big stuff that we mentioned and get that out there serving customers.

Okay. And secondly, do you have a sense for what you think your operating leverage is, let's say for a 1% increase in utilization? Should we expect a linear increase in earnings and cash flow? What would you expect somewhat of an exponential increase? Or, said differently, will revenues rate go -- move higher than expenses, effectively?

Yes. I don't know if I want to get into the details of exactly what percentage that lever is, but certainly when we look at our cost structure, our guys have done an outstanding job of really rationalizing everything out there. And so a lot of the softness, again, we noted was due to the small horsepower, the revenue side of the small horsepower business. Right? Gross margin held up, EBITDA margin has held up. And so I think that indicates to us that the cost structure of the business is working well and what we need to do is, once we see an uptick in that gas flip side of the business -- Eric mentioned that the midstream side rates on that part of the business have continued to be very stable and certainly on the large stuff we're getting pretty attractive rates. So I think as we see the trend of the smaller-horsepower equipment getting back out there into the field, as people become more confident as oil prices continue to hopefully stay at a level that encourages production, we would expect that to really hit on the top line. And then obviously, being able to maintain the margins that we did during this quarter and really throughout the entire year, you would expect that to filter through.

Okay. And finally, as you think about how you have maintained your full-year guidance, you talked about customer indications with respect to deliveries in the first half and so forth. How do you expect to see your capacity utilization move over the next 3 to 6 months, from where we're today? What would be a target that you would think would make sense, based on the indications that you have thus far?

I don't know if we can give you an exact target for utilization. But I think what I would point out is that our plan -- obviously, this year we cut back on the CapEx. And based on what we have in the fleet right now on an idle basis, what we see demand coming from customers, we're going to basically balance how much new units do we have to buy into next year with what can we use in the current fleet. When you think about it, if you are sitting on a couple hundred thousand horsepower of idle units, that's all upside that really takes very minimal capital to put out. And so I think, as we look into next year, that's going to be a major part of our plan. And our strategy is, as demand comes and we do think that demand is moving in the right direction, as that demand continues to move in that direction and gain steam we're going to be able to work off units in the fleet first. There will always be a couple of the bigger horsepower units that we have to purchase just because there's not any of that stuff laying around, whether it's in our yard or others'. And so we will always have to buy some of that stuff but we've got a good fleet of quality idle stuff that's ready and willing to go out, once the demand picks up.

So if I can paraphrase all of your answers, basically you would expect there to be nice operating leverage at least initially for the next couple of quarters. And it will flow with the demand that's out there which you are indicating you are already seeing some customer indications. Is that fair to say?

Yes. I think that's fair. Obviously, we made a point of mentioning -- you know, the midstream part of the business continues to, I think, be quite healthy. And the softness in the gas lift is where -- that's the part that has really suffered a little bit. So I think, as that turns, we like where the midstream business is right now and continues to be headed. I think we need that smaller horsepower stuff to pick up a little bit. But again, that has not been a big part of -- it's not a big part of the fleet, it's not a large part of capital spending. And so I think as that stuff recovers you are going to have both parts of the business, I think, working nicely over the next 3 to 12 months as demand returns.

And we will take our next question from Robert Balsamo from FBR. Please go ahead. Your line is open.

I was wondering if you could just confirm the 2017 number you had for expansion. I think you said -- was that 20,000 horsepower in 1Q 2017? Did I hear that correctly?

So, 2017 number? Yes, Bob, we haven't given out the CapEx number for 2017 yet. We basically said the 7,000 horsepower coming in December of this year and that keeps us in line with the 40 million to 50 million this year. And then we got a 20,000 horsepower that has been ordered for delivery next year. So that will obviously be in the CapEx number, but that may not be the full extent of the CapEx number.

Okay, great. And just to elaborate a little bit on the demand dynamics, it sounds like there's two issues in play, one being a recovery in activity as well as a shift of operators who may have previously utilized their own compression assets. Could you talk a little bit about what is being driven by cost savings versus increased activities as far as the new contracting?

That's a really good question. When you think about when folks on the upstream side have had their balance sheets somewhat constrained, the lending community has frankly pulled their horns and to some degree, you've seen some cuts in borrowing bases and an adjustment to the new world we're living in by even the big guys. And what we're seeing are folks who used to purchase some of their large-horsepower equipment, have now made the strategic decision, you know, maybe it's time for me to outsource this and focus on drilling additional wells, deploying the CapEx to things that enhance value rather than into something that has a different return profile than drilling a new well that's creating a 40%, 50%, 60% unlevered return type of thing. So there's various drivers. Some are safety-driven. Some are core competency-driven. And there's a lot being driven by, frankly, capital limitations by the large independents, some of the majors and then even on into the midstream side. So I think we're uniquely positioned to capitalize on the tick up in the rig count. You've got lateral links in the Permian and the Delaware which have lengthened 1,000 to 2,000 foot over a year or two ago. You've seen proppant densities increase from 1,000 foot per pound to 2,000 feet a pound or 2,000 pounds of foot. You are seeing frac jobs that used to be 3 million, 4 million pounds routinely be at 10 million pounds plus. So what all that means is you move the type curves up, you are drilling more wells from a pad site so you can get higher initial production rates, you have a higher rate where the decline curves tend to stabilize and ultimately higher recoveries for the wells that are being drilled. So all that fits extremely well with our bigger horsepower infrastructure-related equipment. And that's what we're spending a lot of time and attention focusing on our customers who are saying, you know, you guys are really good at this. We've used you in the past and let's continue to expand the relationship and let them focus on their core competencies and we really have forged extremely strong working partnerships with them.

Quickly, you mentioned updating optimizing maintenance CapEx throughout the year. How do we think about maintenance CapEx going into 2017? Are these improvements that can be sustained or should we expect costs to increase?

Yes, Bob. I do think the improvements generally can be sustained. We will obviously talk about that when we give guidance next year. I think overall what you saw this year was when we talked about optimizing was as the level of activity went down, we made the right decisions to not spend money on stuff that was just going to sit around in the yard. So I think next year, to the extent activity does pick up which certainly the indications are that it would, I think you would see a corresponding increase in maintenance capital to make sure that that equipment, when we get the demand, that that's ready to go out. So I think a lot of that -- again, you are not going to spend money on something if you don't think it's going to go out for six months. But given what we're seeing, I think next year that will be a different story.

And Bob, there's a second component of that. When you think about a big industrial engine which is designed to run fully loaded 24/7/365 and as some of our customers have dialed back their drilling and development activity, machines that were running at 100% a load now might be running at 85% or 90% a load. They still need the machines. But think about it as if you are driving up the hill in first gear and your car tends to strangle a little bit. Well, you crest the hill, you start to come down, you are coasting down -- it's lightly loaded. So we incurred less maintenance on that. So what we have been doing here when we talk about optimizing -- we're really not deferring maintenance. Just the conditions have allowed us to lengthen the time between some of the overhauls and maintenance frequency that you would typically do. So this is part of -- when things are running wide open you spend a little bit more on maintenance CapEx. When you are running a little bit less loaded and not straining the machines, you are able to lengthen out the frequency for some of the maintenance work that you do.

And we will take our next question from Andrew Burd from JPMorgan. Please go ahead. Your line is open.

First question, on pricing -- how aggressive is it out there? And more importantly, how aggressive is U.S.A willing to be?

We made some comments. I think when you look at the midstream part of the business, the large-horsepower part, that pricing has been very stable. Again, you think about the price of the compression versus the overall value of the hydrocarbons going through that unit and it just -- it really is not a significant part of the cost. And so what we've seen is customers are willing to pay our rates because they want the service and excellence in operations that we can bring. Where you see on the gas left side -- again, that has been the softness. And as oil touched $26 earlier this year and it's steadily come back, you've seen the rates, I think, follow in order. And so that part of the business -- there's still a lot of equipment laying around everywhere in the field, for us and others. And so I think that's the softness. And so I think others are being very -- we have seen, definitely, people being very aggressive. We want to make sure that -- we think we provide a premium service offering. And so our view is that we expect to be paid for that.

And moving on to on a regional basis, clearly Marcellus and Permian are two of the key areas for you guys. With regard to the emerging Delaware basin, both for the contract compression industry as a whole and for U.S.A specifically, is there a lot of new customers to be had and a lot of greenfield opportunity for compression? And how fierce is the competition or do you see the competition potentially getting to sign up some of these new customers and grow alongside of them as they grow in the Delaware?

If you think about it, we do not have a presence in the Permian and Delaware just a few years ago. And today we have a pretty significant presence there. A lot of growth opportunities and, frankly, a fair number of these folks that we're growing with are folks that have been core customers of ours in different basins for an extended period of time. We're also seeing some folks out there, independent midstream companies, regional gathering companies, P/E backed E&P companies. And as you move that E into P [ph], then the larger independents and even some of the majors, there is a complete development going on in the Delaware and repowering of pipelines in the Permian proper. So it's a really big universe and a really big growth opportunity. So I think people are focusing on their niche and their opportunity sets. If you are a small horsepower guy, one set of operators; if you are a big horsepower guy, with mega volumes and stringent operating requirements and safety requirements, that narrows down the playing field a little bit. So my sense is there's a bigger shift away from owner operators viewing compression as a core competency, looking at the likes of a U.S.A Compression and saying, we will let you guys partner with us and let you take the reins and run with it. So plenty to go around.

And then last question, moving towards the balance sheet -- clearly, coverage is well within covenants today. And clearly, based on the call, it sounds like conditions are improving and some of the headwinds could turn to tailwinds. But if recovery is somewhat slower to materialize and reflected in your EBITDA due to some of that lagging -- that compression has versus the rest of the space, what levers does U.S.A have over the course of 2017, if needed, to manage leverage as some of those covenants are coming in, if the recovery doesn't happen as anticipated or hoped for?

I don't know that the levers are any different than they have been since we have been public, really. But obviously, we've got a very supportive sponsor in Riverstone who has been supportive in the past through the DRIP participation and other things. We can obviously hit the capital markets if we deem that to be an attractive source of capital. Our bank group has also been very, very supportive over the last 15-plus years, truthfully. And they were supportive earlier this year. When we did the amendment earlier this year, we sculpted the covenants in a way that we thought things would play out. And I think, even though the leverage is where it is right now for the quarter, that's why we set the covenant where we did. And so we had a pretty good idea of what the back half of this year was going to look like. So the bank group was supportive in that. So I think we still continue to have a lot of levers at our disposal, whether it's external bank group, capital markets or more internal with Riverstone, to make sure that we work through that all right. We obviously keep a very close eye on spending. We slashed the capital spending this year and obviously as we go into next year that will all be part of the equation that we consider. So I think that's important. And we obviously monitor it on a daily basis. So I think we will have a better idea -- we will do guidance early part of next year, in February, when we do full-year earnings. By that point I think we will have an even better idea of what the spending will look like and what the balance sheet will handle.

[Operator Instructions]. We will take our next question from John Woodiel of Raymond James. Please go ahead. Your line is open.

My first question was on the demand side within the redeployments that you have been seeing -- are those mostly coming from oil basins, gas basins? You noted the Permian had some strong increases. But just looking at some of the other regions as well.

A fair way to say it would be we see continued pockets of strength in the Marsalis and Utica, tend to be a little bit dryer in the areas that we're seeing some of that activity, the [scoop stack] which tends to be oily, associated gas, a fair amount of activity there. And then, of course, the Permian in the Delaware which -- oily-oriented but pretty high gas rate to go along with it. We have seen some rigs added in some of the dry gas areas, but I think the majority of the new activity has been relatively focused on the oil with the associated gas at this stage.

And then going back to the pricing side, you spoke a lot about how the pricing within individual horsepower classes. But as we think about the mix shift, where your large horsepower units would usually get a little bit lower revenue per horsepower, as they become a little bit more active, do you think we could see average pricing continue to trickle down for the next couple of quarters until gas lift really begins to turn the corner?

Yes. I think we obviously make a big deal, I think, when we talk to people about not being solely focused on that dollar-per-horsepower number because it does have the mix of large and small horsepower data in there. And so certainly I think the decrease that you saw in this quarter, quarter over quarter, was due to the revenue side of the gas lift coming down from where it had been. So certainly, if that picks up, we continue to get good pricing on the large horsepower stuff. So it's going to be a mix of those two. But again, the small horsepower is a small part of the fleet. But the amount that that business has come off this year is really what's driving that decrease. So to the extent that that stabilizes, the indoor ticks up, I think things would be in the same general ballpark.

All right, thanks. That's helpful and it's definitely promising to see the increases in demand that you are seeing and increased pricing in the large horsepower segment.

It appears we have no further questions at this time. I will turn it back over to Eric for any additional or closing remarks.

Thank you, Operator. The entire U.S.A Compression team thanks everyone on the call today for your continued support of and interest in our Company. We continue to believe that we have a differentiated and superior business model. We will continue to prove out our story to you, our investors. When we went public nearly 4 years ago, the top question we received was, how do we know you are going to be able to grow? Well, from the IPO to year-end 2015 we added over 800,000 horsepower to our fleet, almost doubling the size of the partnership. As the commodity prices plunged and activity slowed to a grinding halt through the back half of 2015 and into 2016, the top question we received was, how do we know you guys are going to weather the storm? As we've discussed, the infrastructure nature of our assets results in largely stable and predictable cash flows. Through the downturn, our utilization has dropped less than 10% from peak to trough, with pricing off slightly, but we have maintained extremely high gross margins, given our ability to maximize operational efficiencies, resulting in relatively stable adjusted EBITDA and DCF. Now, as commodity prices have improved from early 2016 and activity levels are expected to pick up again, we're cautiously optimistic that we're well-positioned to capitalize on the growth opportunities ahead and there are many trends that bode well for our strategy and our focus on large horsepower equipment. We will continue to prove our business model to the market and hopefully and eventually the market takes notice. I look forward to our fourth quarter and full-year update calls sometime in February next year. Thanks. Have a great day and be safe.

This does conclude today's U.S.A Compression Partners third quarter earnings conference call. Thank you for your participation. You may disconnect at any time. And have a great day.