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.

Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter ended March 31, 2018. You can find our earnings release as well as a recording of this call in the Investor Relations section of our website at usacompression.com. The recording will be available through May 20, 2018. 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, May 9, 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. The first quarter was a great start to the year for USA Compression in many ways. In addition to continued strength in the compression services market, which resulted in continued demand for our compression services and a strong quarter financially, we also announced the acquisition of CDM Resources in conjunction with a series of transactions with the Energy Transfer family. We successfully closed the transactions on April 2, and so far, the first quarter of 2018 will be the last for USA Compression as a stand-alone business. Starting with Q2, the reported results will reflect those of the combined business. I will discuss the acquisition and what we are seeing so far in a moment, but let me touch first on some highlights from Q1. At the time of our fourth quarter earnings call, I noted the positive momentum we were seeing in the sector, including strong commercial, operational and financial performance in our business. This morning, USA Compression released its first quarter 2018 financial and operational results, which reflected the strong market conditions we've been experiencing for a while now. With the strong foundation of 2017, the first quarter of 2018 continued that performance. The build-out of midstream infrastructure across the country continues, and the stability in commodity prices has benefited our E&P customers, which helped provide some much needed visibility in order to move ahead with projects. This translated into continued demand for our compression services, keeping utilization at the very high levels we saw towards the end of last year. For Q1, our average utilization was just below 95%, essentially unchanged from Q4 last year and up almost 7% from the year ago period. Similar to…

Thanks, Eric, and good morning, everyone. Today, USA Compression reported another strong quarter with first quarter revenue of $77.7 million, adjusted EBITDA of $44.1 million and DCF of $33.7 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 almost 1.85 million horsepower, up about 48,000 horsepower from Q4, reflecting delivery of new units with about $50 million in growth capital during the quarter. Our revenue-generating horsepower at period end was up about 52,000 horsepower, about 4% from Q4 to just under 1.7 million horsepower. Our average horsepower utilization for the first quarter was 94.9%, essentially unchanged from the 94.7% in Q4. Pricing, as measured by average revenue per revenue generating horsepower per month, also increased in Q1 to $15.50, up from $15.21 in Q4. As Eric mentioned, this was due in part to new unit delivery as well as selective price increases on the existing fleet. Total revenue for the first quarter was $77.7 million, up about 3% as compared to the fourth quarter. Our core contract operations revenues increased about $4.5 million or 6%, reflective of the increase in active horsepower. Gross operating margin as a percentage of revenue was 67.1% in Q1, up slightly from 66.8% in the fourth quarter. In Q1, our parts and service revenue line item was more in line with historical levels, and so our core gross operating margins continued to be largely consistent with prior quarters. Walking through a few of the specific line items. Adjusted EBITDA increased almost 5% to $44.1 million in the first quarter as compared to $42.1 million in the prior quarter and up from $36 million in the year ago period. DCF in the first…

[Operator Instructions]. We'll go first to TJ Schultz with RBC Capital Markets.

I think just first to - one comment in the press release and just on terming up some of the month-to-month contracts. What percent of your combined fleet now is on month-to-month? How much are you terming up? And just any color on tenor for new contracts right now.

Sure, TJ. It's Matt. So at the end of the year, we have stated in the K that we had about 50% of the fleet on month-to-month. The CDM fleet is roughly in the same position. We don't actually give out that percentage of termed-up number kind of throughout the year, but we continue to kind of work through the process, I would say, of looking at each region customer-by-customer and going out with price increases and also terming up those contracts where appropriate. So it's hard to give you an exact number, but I think, needless to say, we are working through that process and expect to see that continue through the rest of the year.

Okay. And what kind of terms on new contracts right now?

It depends. I mean, it's going to depend on regions, the type of unit each customer has. Obviously, with things as tight as they are kind of overall in the sector, what we're doing is literately looking at it across the board and seeing where we can get, number one, price increases; number two, it's term. With pricing increasing and continuing to kind of tick upwards, there's part of us that says, "Hey, it doesn't make sense necessarily to term everything up because you kind of - you can kind of hold out a little bit and, as the general pricing trends tick up, take advantage of that over time." So it's a mix in any given area with the customer base and depending on their units. But I would say it's - in the Northeast, those contracts have always tended to be a little bit longer. West Texas, Mid-Continent tend to be a little bit shorter. But what we are seeing overall is that units are not coming home, and people are willing to pay the higher rates to keep the equipment out there.

Okay, got it. And then you have orders announced now for second quarter of 2019, still some relatively long lead times to get equipment. Just with the current market outlook stronger as it is, just any color directionally for growth CapEx or horsepower additions for 2019 for the full year versus what we expect this year?

Yes, TJ. This is Eric. And I think the way we're approaching this is we don't make one giant order once a year and lock in, for example, the entire 2019 build program. I think, as we've mentioned, the lead times right now for large horsepower is still about a year or so. Our demand signals coming from our customer base are actually, frankly, even stronger than what we saw back in 2017 leading on into 2018. So with the current strip price for crude oil and even for Henry Hub natural gas prices, we're seeing $70 oil, and we're seeing $2.50 to $3 gas right now. So it's kind of the perfect storm from a commodity price perspective. We're starting to see some of the Permian and Delaware major oil players who have extensive acreage holdings significantly ramp up activity. So as you start to see interest - continued build-out of gathering systems and processing plants, and as these guys increase their rig activity, the guys that have been busy for the last 2 or 3 years in the Permian and Delaware, SCOOP/STACK merge are becoming even busier with some additional activities by some of the biggest of the big guys who are expressing needs for this type of equipment. So I think we will be opportunistic. We are in the process of working with our historical and even some very large new prospective customers on what their 2019 activities are looking like. And there's an acknowledgment by our customer base that the equipment is in short supply. There's willingness to enter into contracts substantially in advance of when units are going to be delivered. And I think we'll be balancing, as we always have, the need for capital to grow our business, the growth opportunities that are out there, and we will be selective and focus on those opportunities that make the most economic sense with the most strategic types of our core customers.

Okay, good. Just lastly, I guess, to that point on kind of financing growth. Is the view that just the market outlook and cash flow growth that you expect in your balance sheet, is that enough to handle the growth and still get you where you want to be just relative to debt leverage?

Yes, TJ, it is. And I think we - when we announced the CDM deal, we talked about kind of structuring it in a way that allowed us to kind of operate and do our organic growth without having to tap into the equity markets, so the increasing EBITDA, the room capacity size of the new ABL as well as room under the covenant and then also just the increase in coverage. I mean, obviously, this quarter, we were up above 1x, which generates a little bit of additional kind of equity dollars, if you will, to help finance that stuff. So I think that the combination of those going forward puts us in a pretty good spot over the next couple of years.

And we'll go next to Marshall Adkins with Raymond James.

I want to come back to the pricing thing. So we know that leading-edge pricing continues to ramp sharply higher because you and everyone else is sold out, and your results express that as well. What I'm curious about is the push and pull between, okay, you're starting to lock in some of these short-term contracts. But I guess - I'm guessing some of the longer-term contracts you have out there are at below market pricing right now. So help us understand on whole what we should think about pricing doing over the next year or so. Is - should we expect it to continue to ramp up as these older, presumably lower-priced contracts roll off?

Yes, Marshall, it's a great question. I think if you look at the balance of our fleet over time where we've had some 5-year contracts and 7-year contracts, some two and three and four year-type contracts, our average book would tend to be around the 3, 3.5 year kind of average life. So you think here we are in the middle of 2018, what did 2015 look like on some of those contracts that were deployed? USA has never been known for being the cheapest guy in town. We've provided very high quality of service, and you can kind of get what you paid for. Now that said, I think you hit the nail on the head that in the environment we're living in, pricing is increasing. The spot rates are increasing. The current spot rates by horsepower category for our largest types of equipment, the above 1,000 horsepower range, the spot rates are in excess of our average book. So I think it is logical to assume that over the course of the next multiple quarters, in the next 1, 2, 3 years, as units come off a primary term, to the extent our customers have need for that equipment in place, they will be receptive to accepting some of the rate increases that are coming. To the extent that their conditions and needs have changed, we'll selectively pick up pieces of equipment and relocate them to others in a similar geographic area inside of a basin who have those needs, and frankly, they're willing to pay what the current spot rates are. So I think it is logical to assume that for our entire industry, that you will see upward movement on pricing with a caveat, of course, that's going to vary by horsepower class. The largest horsepower is in very short supply. The needs of the E&Ps and midstream customers are gravitating toward larger and larger equipment. So those of us who have that type of equipment in our fleet are well positioned. Those folks who have kind of dry gas-oriented, intermediate pressure-oriented types of horsepower, not a lot of demand for that. So a lot of the real small head - or the real small horsepower wellhead-oriented, historically dry gas-oriented compression fleets, they're going to continue to see a lot of idle fleet and not firming in the market. So large horsepower gas lift type of equipment will be in demand, and we expect upward pricing opportunities for the foreseeable future.

Perfect. And I'm reading into that at a relative - at a similar gradual pace that you've seen in the last two quarters, given that you do have a three-plus-year kind of cadence there, so perfect. Was there any - go ahead.

I was going to say it's a fair way to look at it, Marshall.

Perfect. Just out of - was there any kind of favorable pricing contracts between CDM and Energy Transfer that's kind of in that, just out of curiosity?

Yes. And I think a lot of people have made assumptions that CDM provided all sorts of goods and services to their parent company, Energy Transfer. There was virtually zero activity between CDM and Energy Transfer. CDM provides compression services to third parties, so there were no intercompany relationships. There's no special treatment. There's no favorable pricing because, frankly, there was no activity. There were some shared services, which those services aren't being shared any longer, more on the IT side and legal services and some of the backroom processing site. But we've got the backroom in USA Compression that can handle and integrate those and scale accordingly on a highly efficient basis. So no benefit one way or the other from the relationship between CDM and Energy Transfer.

Perfect. Helpful. Last quick one for me. A lot of your competitors saw increased costs and - associated with freeze-offs and the weather last quarter. You didn't mention that in your commentary. Was there any weather impact we should be aware of that may be deemed in the quarter a little bit?

Really not, Marshall. And again, being bigger horsepower, more infrastructure-oriented types of folks, we're in the real big major facilities where, even though there might be freeze-offs at the wellhead that could affect smaller horsepower guys, big horsepower guys like us even in weather downturns and when those two-day, three-day, four-day nasty weather scenarios hit, our assets tend to keep running, and we're compensated accordingly. So we didn't have extra expenses, onetime expenses associated with that. So it's pretty linear, pretty stable.

And we'll go next to Robert Balsamo with B. Riley FBR.

Just wanted to harp on pricing just for a second more. Again, you did have a nice uptick versus 4Q, kind of a larger change than you've seen in recent quarters. Could you elaborate a little bit more on just the cadence moving forward? I know that you have a lot of month-to-month, but like the previous speaker talked about the long-term contracts rolling off could have a bigger impact. I assume 1Q maybe saw a little bit more of that. And basically, how do we think about that moving forward through 2018 as far as timing of contract roll over?

Yes. Robert, it's Matt. And I mean, as you think Marshall's comment about sort of gradual uptick, I think, is what you're going to see. When you think about kind of the process that we go through when we do - when rates do go up, it's - unfortunately, it's not. I sent a letter out to everyone, and everything happens on June 1. So what we're doing is look in kind of region by region, and then we evaluate within the region what's - what units are appropriate, what that market was below market, and then we make the call. And generally, historically, what has happened is you make that decision. You have a conversation with a customer, and we do bill a month in advance. And so we kind of give them a little bit of lead time. So I think what we're going to be doing, again, at the end of the year, we have about half the fleet on month-to-month stuff. We're - we are getting our hands kind of around the CDM side of things, too. So they had a bunch of stuff that was on month-to-month as well. And as we get our hands through that, I think we're going to be able to go through and - go through the fleet with that action and take some price action. So I mean, I think it's going to be gradual. I think it's hard to say it's going to be x percent in Q2 and x percent in Q3 because it's kind of a very fluid situation when you go through that process. But obviously, as we can, we'll update you with developments.

It looks like rates are almost at historical levels, I think, $14, $15, or I imagine maybe for large horsepower have now surpassed some of those prior market highs?

Yes. Yes, I mean, when you think about the really, really big stuff, that's been sort of the last several years phenomenon. And so the dollars for horsepower that we're getting on that, Eric kind of alluded to it, but the dollars per horsepower that we're getting on a 3608 unit are meaningfully above kind of that average of the fleet. And remember, the smaller horsepower, which is obviously a small part of our fleet, gets a higher dollar for horsepower amount. So even - I think, historically, to your point, the rates have kind of ticked up where they were - from where they were several years ago. So now, you're seeing that the impact of those large horsepower unit come up because those rates are, again, meaningfully above that $15, $15, $20, et cetera, level.

Great. That's helpful. And then just kind of a housekeeping question. For SG&A, if I back out the quarter, the transaction-related expense and unit base comp, it looks like you're closer to $7 million for the quarter, which seems to be a decent decrease. Could you talk about SG&A, how to think about that moving forward?

Yes. I mean, you definitely - I think it's consistent. We were consistent with it overall. The transaction expense is obviously onetime you do need to cut out. But I - our sense was that it was very consistent with previous quarters. But maybe I can follow up with you separately, Robert, and make sure we'll kind of look in SG&A numbers.

So 2018 is going to be similar run rate to what we've seen?

Yes. Yes, absolutely.

And we'll go next to Andrew Burd with JPMorgan.

Just two questions. First, is it fair to assume that the difference in EBITDA guidance is just the contribution of three quarters of CDM and some synergies? Were there any changes in the legacy USA that...

No. No, no changes at all, Andy. It's exactly just the three quarters of CDM with kind of layered in synergies.

Okay, cool. And then the only other question, it's kind of big picture and is longer-dated. But thinking about the Northeast footprint and the unique situation where production outlook is very robust, but the price outlook, I think, for most people is pretty [indiscernible], how do you think about your margins and profitability and pricing in that type of environment over the next few years? If gas netbacks don't improve for producers, but we still have a really robust contract growth or - excuse me, production growth. And then, I guess, the logical follow-on is, typically, as you stated, they're longer contract duration. So if we have a four-year contract that's entering service today, and it rolls over a number of years from now and a subdued pricing environment, what does that mean? So if you just kind of walk through that idea, that'd be great.

Yes. Sure, Andy. So the way we looked at it - and you make an observation that production is going to increase. So by definition, to move that production to the marketplace, compression is going to be required. When you look at the cost of compression, you look somewhere between $0.05 to $0.10 an Mcf, depending on the configuration. So even in the - in a relatively depressed marketplace, those folks who have access to firm transportation and can take advantage of their commitments into the marketplace, they're still receiving attractive margins. I think what - a lot on the margin when you look at folks who don't have firm transportation capacity were looking at spot pricing. They're looking at the interruptible transportation and huge basis differentials. And those guys tend to get squeezed, and frankly, they slow the rate of development. But some of the more major players on the E&P side who have access to firm transportation and gathering systems and then as well as takeaway capacity on the long lines are situated pretty well. So the way we look at it is commodity price affects some of the rate of new growth, but commodity price really does not affect our installed base, nor does it affect our relationship with the folks who have the true FT and the ability to move gas out of the basin at attractive rates. So we've seen, and I think we've told the market that over the last couple of years, the growth has slowed in the Northeast. It's been accelerated in the Permian, Delaware, the SCOOP/STACK merge. Our view is that you'll see a lot of associated gas development over the next 3 to 5 years. And then in the out-years, once kind of the core of the core of the oil-oriented shales have been developed, these - the areas where you've seen lack of activity and some of the dry gas areas, of which Appalachia is going to fall in the middle of that, will start to pick up the slack and continue to grow. So our view is a lot of growth for associated gas in the next 3 to 5 years. Once you get the long line takeaway capacity being built and expanded out of the Northeast, that will create some opportunities. But longer term, we think the future is extremely rosy for the compression business due to associated gas short term and then dry gas intermediate and longer term in the future.

And we'll go next to Mike Gyure with Janney.

Can you guys talk a little bit about the synergies you're expecting for the CDM acquisition, maybe how long do you think? And maybe any update you have from your initial guidance you gave when you initially talked about the transaction?

Sure, Mike. It's Matt. When we first announced that we used the number of about $20 million that we expected almost entirely on the cost side of things, that - so the guidance number that we gave today includes sort of partial realization of the synergies, I'd say 2/3 to 3/4 of that amount. As we kind of integrate the businesses, we are - a lot of that happened on day one, and we made - kind of rightsized the organization. And then really kind of between now and sort of the fall and Q4, we're going to be working on fully integrating all the back-office stuff, the IT systems, the financial and accounting systems, et cetera. So that's where we'll get the rest of that. But I would estimate about maybe up to 3/4 of that by the end of the year, and then obviously, the rest of that probably comes in early next year.

At this time, I will turn the call back over to Eric Long for any additional or closing remarks.

Thank you, Vicki, and thank you all for joining us on the call today. The first quarter was a great start to the year for USA Compression, both from a commercial standpoint with continued strong activity in our regions and high utilization as well as strategically with the CDM Resources acquisition and what that means for our company moving forward. This combination will result in an industry-leading market participant with broadened geographic and customer presence yet built on the same values and priorities, which have helped build the company over the last 20 years. With this acquisition, we have stayed consistent with our standardized fleet, large horsepower strategy, which we believe has proven its strength over the last several years and positions USA Compression now for continued and profitable growth. The transaction structure, including the elimination of the IDRs and economic general partner interest, sets us up to be a stronger company for years to come. We are seeing the activity levels of our customers remain at very high levels, and our field operations are running at full speed. We've worked hard the last few years to position the company for the industry upturn that we believe was poised to occur, and we are now seeing that take place. With CDM now part of USA Compression, we will now deliver outstanding service to a broader customer base across an expended geography with some of the very best employees in the business. We're excited for what's in store throughout 2018 and beyond. We look forward to updating you on the next quarterly call. Thank you for your continued interest in and support of USA Compression.

That does conclude today's conference. We thank you for your participation.