Good morning, and welcome to the USA Compression Partners, LP Third Quarter 2018 Earnings Conference Call. During today’s call, all parties will be in a listen-only mode. And following the call, the conference will open for questions. This conference is being recorded today, November 6, 2018. I would now like to turn the call over to Chris Porter, Vice President and 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, 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 November 16, 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, November 6, 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 is Matt Liuzzi, our CFO. This morning, we released our financial and operational results for the third quarter of 2018. The overall market for compression services remains very strong, driven by solid natural gas fundamentals and the continually midstream infrastructure buildup, which does not just combine to one region, but rather it’s taking place across the country in areas which we operate. We continue to take advantage of the strong market to push through rate increases while prudently investing capital in the business. Our utilization metrics demonstrate the current strength of the market and we expect continued strength throughout 2019, based on the current visibility for compression services demand. This is the second full quarter we’ve owned the CDM assets. We are extremely pleased with the substantial progress we’ve made on integrating the CDM business while continuing to manage our day-to-day base business and drive top line revenue growth in a strong market environment. We have already identified and in our various stages of implementing on a bunch of opportunities. Low hanging fruit, so to speak, involving synergies that are lining up to be even better than we expected. As we’ve discussed previously, the integration of these two businesses is a significant undertaking. While we experienced some expected integration noise that impacted the third quarter results, this was temporary in nature and we don’t expect it going forward. One example that Matt will touch on in more depth later, was the impact of the accounting treatment for the CDM acquisition. Since it was treated as a reverse merger, USA Compression’s reported first quarter financials now reflect a historical first quarter for CDM Resources instead of USAC, which reduced adjusted EBITDA by almost $10 million. Even…

Thanks, Eric, and good morning, everyone. Today, USA Compression reported third quarter results. Just a quick reminder as individuals review our financial statement, because of the accounting treatment for the CDM acquisition as a reverse merger, USA Compression’s financials now reflect the historical first quarter of CDM resources. As an example, the nine months financial and operational data included in our earnings release and 10-Q, reflect the first quarter CDM in the second quarter and third quarter of the combined business. The updated guidance we are providing today reflects the inclusion of CDM’s first quarter results which were approximately $10 million lower on an adjusted EBITDA basis than the USA Compression standalone results for that same quarter. Turning to the results. The third quarter achieved revenue of $169 million, adjusted EBITDA of $90.1 million, and DCF to limited partners of $47.5 million. In October, we announced the cash distribution to our unitholders of $52.05 per common unit, consistent with the previous quarter, which resulted in coverage of 1.01 times. Our total fleet horsepower as of the end of Q3 was over 3.6 million horsepower. Our revenue generating horsepower at period end was approximately 3.2 million horsepower. On a net basis, we added over 61,000 of active horsepower to the fleet during the quarter. Our average horsepower utilization for the third quarter was 92.8%. Pricing, as measured by average revenue, per revenue generating horsepower per month, was $16.17 for the quarter. We continue to benefit from attractive pricing on new unit delivery as well as selective price increases on the existing fleet. Total revenue for the third quarter was $169 million of which approximately $163 million reflected our core contract operations revenues, an increase of about $3.1 over Q2. Parts and service revenue was down around a $1 million from Q2. Gross operating margin as a percentage of revenue was 62% in the third quarter. Net loss for the quarter was $563000. Net cash provided by operating activities was $38.8 million in the quarter and operating income was $23.9 million for the quarter. Maintenance capital totaled $6.4 million in the quarter and cash interest expense net was $23.9 million. We currently expect 2018 adjusted EBITDA of between 310 and $320 million; and DCF between 170 and $180 million. In addition, we expect the net loss of between $8 million and $18 million. Last, we expect to file our Form 10-Q with the SEC as early as this afternoon. And with that, we’ll open the call to questions.

Thank you. [Operator instructions] Our first question comes from Shneur Gershuni, UBS.

Good morning, guys. I just wanted to start off on kind of the pricing cycle that we’re in right now. We’ve seen a tremendous increase in rigs over the last couple of years. Obviously, more wells have been drilled, starting to decline and so forth. Kind of my thought process would be that this should sort of be the sweet spot of the pricing cycle for USA Compression. What kind of trends are you seeing? I mean, I do recognize that you did talk about the ability to see higher prices. But, shouldn’t we see sort of exponential type of increases at this point of the cycle?

Shneur, this is Eric. Exponential kind of takes 3x and 4x price increases, and that’s not the nature of our business. What we do see is pricing increasing in excess of typical rates of inflation. What we look at is over a longer term cycle, peak to trough, assets -- trough cycle returns, newly deployed capital tend to be in the low to mid single-digits which is why guys I can’t still build any new assets in the downturn. And when you look at peak of cycle which we’re not quite at peak of cycle yet, we see things that are in the upper teens to low 20s on levered returns. So, I think what we’re looking to do is to take assets that we have as part of our fleet, particularly the legacy CDM assets that were deployed two, three, four, five years ago at rates that are significantly below the current spot rates and redeploy them and drive our average price book across the overall fleet, up significantly where it is today. When we look at the spot pricing on the new units we’re deploying, 120,000 some odd horsepower for next year, these are extremely attractive new unit economics, effectively five-year or less cash on cash type of payouts, low 20s, IRR on an levered type of basis. So, hopefully, that gives you a little bit of feel and color and flavor on how we’re looking at the market.

Yeah. It definitely gives me a flavor. Just wondering if we can unpack it a little bit more. I would assume that kind of the feeling is kind of a rent versus owned type of process from your customers’ perspective and that’s why that it should be somewhat of a limiting factor. How much capacity is it out there for someone to go and buy assets at this point right now or new build assets? Is that a limiting factor at all also? I was just wondering if you can sort of talk about that dynamic.

Yes. There were multiple limiting factors. First, access to building new units. If XYZ energy company or XYZ midstream company wants to acquire something today, it’s a year, lead time to source that equipment today. There is significant bottlenecks of the manufacturing supply chain, there is not a lot of these types of assets that exist. And I think in addition to having asset bottlenecks, you’ve got people limitations and you’ve got capital limitations. You’ve got E&P companies that are under the scrutiny of living within their capital means, living within free cash flow. I think compression -- the way forward continuing to outsource is actually trending to accelerate. So, I think you’re actually in a very unique time right now that you’ve got limitations on access to capital, you’ve got limitations on access to people and you have limitations on access to new equipment. So, all of those three things together can provide for a perfect storm which we think plays well to our strength of large horsepower infrastructure equipment and will allow us to re-price our book upward over time.

Okay. Fair enough. Just moving on, two more questions. Just with respect to costs -- or cost of sales, I should say. Is that a function of the accounting convention you were talking in your prepared remarks or is there some underlying trend that we need to be thinking about?

Yes. Shneur, it’s Matt. When you’re looking at third quarter specifically, I think in terms of the margins, what it really reflected this quarter was really two things, and I think Eric touched on both. But, one, we had some temporary issues where we had to hire some third-party services. We have lost a handful of our people, our people that we had acquired as part of the CDM acquisition and needed to basically outsource a bunch of maintenance services that normally we would do internally. And so that drove -- that was a couple of million dollars more than we would have normally spent, for instance, back in the second quarter or even last year. So, that was a temporary phenomenon, if you will. I think if you were to add kind of normalize that line item, you’re probably picking up a couple percentage points overall on margin. And then, the other item that Eric also touched on was the operating cost structure. And really we just -- as we’ve kind of gotten into this and gotten our arms around every single region and that we’re operating in, some regions just had a little bit -- a little bit too much cost in it, if you will. So, we’ve remedied that during the quarter. So, I think going forward that was about $0.5 million impact that Eric mentioned. So, going forward, that $0.5 million should no longer be in there as well. So, we think it’s really those two items and then the other item which is a -- when you think about where USA was historically versus the combined business now, again it’s this retail service line kind of on the revenue side. And again, that is a business where we take care of it, will perform maintenance work on customer owned items, and that is a lower margin business. We do that really as a courtesy to customers. The CDM legacy business had a bit more of that activity in it than we as USA standalone did. So, as we’re combining that and kind of working through that, you’re seeing a little bit of impact from that. But, if you were to strip out just solely the retail, you’re probably adding another 2 to 3 percentage points on margin as well.

Great. And one final question. You sort of talked about lower leverage, higher coverage kind of goals. Do you have specific goals and timelines as to when you would like to achieve certain -- both of those types of metrics?

Sure. Not specifically. As we’ve talked about it internally and with our Board, getting our hands around this and doing the integration work is kind of priority number one. As we look forward, hitting on some of the stuff, Eric talked about pricing increases, restrain capital spending, things like that. We expect the leverage to come down and the coverage to go up over time. But, we still have some work to do to kind of get this thing integrated. So, I think it might be a little premature to set exact timeline to targets out at this point. But certainly, the I think the trend lines would be in to areas where -- in the low to mid-4 times leverage over time and coverage at a level where -- I know this quarter’s bit down to kind of that 1.01. But again, if you were to add back, I think some of those kind of onetime type expenses, I think you see it probably 0.05 or so higher. So, I think when we look at that, we’re in the right -- we’re headed in the right direction for sure. And we’ll have to evaluate that quarter by quarter.

[Operator instructions] The next question comes from Jeremy Tonet, J.P. Morgan.

Good morning. This is Charlie in for Jeremy. Just following up a little bit there on the leveraging coverage side. Just wondering if you can talk a little bit more about your 2019 financing strategy, taking into consideration your current spend and kind of where coverage sits today. But also, I wanted to add in -- I mean, you talked about it last quarter, but you’ve got the increased pricing pressures from suppliers. And I understand you’re going to pass that on through higher monthly service rates. I’m curious if there is a timing lag between half now and how that may impact -- I think you kind of alluded to the second half of 2019 is when you’d really see those increased pricing pressures flow through. So, just curious on those dynamics and how that might impact 2019?

Let’s break it into a couple of components. So, on the growth CapEx side, the 120,000 horsepower to be delivered over the course of 2019, we were able to lock in commitments from our suppliers prior to any rate increases. So, when you start to hear about tariffs and increased cost of steel, some of those types of things, we’re able to mitigate that for the balance of 2018 and on into the back half of 2019. We’ve seen lube oil and [indiscernible] prices basically kind of be flat to come down slightly. The combined CDM USA fleet has doubled in size which has gives us some pricing power. We’re actually working with multiples of our larger suppliers and looking at bringing some additional cost containment to the table on parts and parts and in pieces that go into our business. So, I think what we’ve seen is our largest driver on our cost of operations have been labor costs. You can envision when you add on the Permian and the Delaware Basins, particularly the Delaware Basin, you got counties that prior to the boon starting up had larger than the State of Road Island with 20 or 25 people living there. So, it’s not like you’ve got a giant labor pool to draw. You’ve got to rotate people in and out. And some of those costs are obviously -- are somewhat higher and we’ve got some inflationary pressure on that. So, I think Matt, might feel pretty good about what we’re seeing for the back half of 2018, on O&M cost control, and frankly on into 2019 with the caveat being what do some of the labor costs look like.

And Charlie, it’s Matt. Back to your first point on the leverage and coverage for next year. As we look out, we don’t need any equity in order to execute on the plan we have right now. We obviously gave some color about the horsepower on order for 2019. But again, I think, it’s a relatively reasonable amount of CapEx, especially when you look at the more recent path in terms of how much we spent. We have certainly ranged in and a little bit I think for just the units and the customers that we really want to deal with. And we expect to be able to finance that under the current revolver, but also with free cash flow as that coverage ratio increases over time.

Great. That’s good color. Thank you. Other questions are largely answered. I guess, one other would be, you spoke about Permian and SCOOP/STACK, obviously pretty good growth areas there from a macro standpoint. Curious on your thoughts and you alluded to it a little bit, but there price realizations have improved quite a bit in Northeast, obviously with a lot of the takeaway projects coming online, just curious on optimism there in the Northeast, down the road?

Yes. We’ve said this on calls in the past as well, but right now, the Permian, Delaware and the SCOOP/STACK merge and the Mid Continent for 2018 and early part of 2019 are larger growth areas. We’ve had a footprint in Appalachia from the formation where company took over 40 years ago. And that’s an area that we have seen lots of growth over the years. And to your point, due to basis differential and lack of takeaway capacity, the last couple of years, we’ve seen methodical growth but it’s been tempered somewhat from the rates of growth that we saw in past years. We envision that in the back half of ‘19 and on into 2020, 2021 that you’ll start to see kind of a tick up again in activity in that area, which bodes well for our broad footprint that we can balance our CapEx expand and new units deployed or repatriation of equipment based on the best economics that we see across multiple basins.

Your next question comes from Barrett Blaschke MUFG Securities.

Hey, guys. Just really a lot of mine have been answered, but just kind of down to housekeeping items. The SG&A number dropped off pretty sharply from the second quarter. Is this kind of the new run rate we should expect this level?

Yes. Barrett, it’s Matt. In the second quarter, we had some expenses directly related to the transaction in there. And so, I think you’re much better kind of looking at the current rate.

So, this is more of the normalized rate we’re looking at now?

Yes.

Again, you brought up the free cash flow piece sort of how it trickles down to compression. Can you give us any more color around that -- are you hearing that people are waiting to do more outsourcing just consistently now from producers or is there still kind of a balance between owned versus lease of you guys?

Well, I think it’s customer specific. What we find interesting is that some of the folks that have the largest and strongest balance sheets have made the strategic decision to outsource. So, I’ve said in the past, people don’t own their drilling rigs, they don’t own their fracking crews, they don’t own their logging trucks, they don’t know their data centers and a lot of them have made the decision not to outsource. And what we’re seeing particularly in the Permian and the Delaware, and I think some of our competitors and peers are seeing the same things that folks who have very sizable acreage positions, who’ve been in the area for 10, 20, 30, 40, 50 years with very large footprints haven’t been the first movers in the area. And as they start to now increase their activity and developmental plans, we see kind of a shift from the early adopters, the private equity based smaller private independents that some of the larger multi-national integrated oil companies who are starting to gear up for their activities in different areas and different basins. So, interestingly, we see more of a push from some of those folks to outsource. And obviously, undercapitalized for those living on a diet right now, continue to look to outsourcing. So we see the trend accelerating at a point in time where again there’s not enough equipment to meet all the demand that’s going to be imposed on the system.

Our next question comes from TJ Schultz, RBC Capital Markets.

Hey, guys. Good morning. I think just first, Eric, you mentioned better demand for smaller horsepower gas lift. Do you have these types of units sitting idle or do you need to or plan to order those to meet demand? And then, where is that demand coming from, primarily?

Yes. Great question, TJ. We’ve got stuff sitting around idle, a fairly large tranche of that came -- came along with the CDM acquisition as well as some of the assets that we have had in the past in the USA legacy fleet. So, no, we don’t intend to purchase any more of that stuff. And we see really it’s in two geographic areas. We see it in the Permian/Delaware as well as in the Central Basin uplift, the Midcontinent area, the SCOOP/STACK merge, and it’s -- that’s another one that kind of depends on who the player is and where they are in the economic life. You’ve got some companies who initially will free flow float and move to the electric sub pumps, will move to gas lift, will move to rock pump. So, the kind of cycle things over the life of their hyperbolic decline curve that they have in the area. So that should be those areas would be Permian/Delaware and then followed by the SCOOP/STACK merge up in the Midcontinent.

Okay, great. And I think just following up on something you guys have been discussing here on the rent versus own. Maybe if you could talk a little bit about contract terms for new compression. And the reason I ask all this commentary on kind of the accelerated outsourced demand and then in the past you’ve talked about the stickiness of these larger horsepower units, just as they get placed into the field. So, if a producer puts one of your units out there, is it still what I would consider unlikely that even if that contract terms end, there isn’t really a likelihood that the producer is kind of in a way while they got their own compression, is that kind of still the case as these contracts roll over?

The contracts roll over, TJ, you have to look again area-by-area. There has been new developmental activity going on. You might see a production profile, which is flat or even actually increasing. So, it’s an the area where people would say, look, I’ve developed my area, I have what I have and I have gone two years worth of hyperbolic decline and they start to get a little more steady state, the shallower decline rates that you see. Keep in mind, you’ve got pressures of decline, and then you have increase in GORs in some of these casing I guess. So, you’ve got a lot of dynamics that move on. I think we historically see is, we go out with our larger units typically kind of a three to seven-year initial primary term contract. At the end of the primary term, that’s now where it gets interesting. If you have a few units here and a few units there with the smaller undercapitalized producer who doesn’t have a lot of growth and developmental plans, we’ve been known to pro offer a new contract, here is a new rate, here is a new term and tenure, we think you’re going to raise my rate 50%. That’s kind of expensive. Well, send it home, we’ll redeploy it to somebody who is willing to pay that with the piece of equipment that’s in high demand. So, I think these are very sticky. And in the environment that we’re living in you think about real estate, is it a buyer’s market or is it seller’s market, we’re in the equivalent of a seller’s market right now where there is a lot of demand and not hack a lot of supply with deal 3.6 million horsepower active fleet and a total fleet of 3.8 million, 3.9 million horsepower. So, it gives us the opportunity in this perfect storm to selectively push through the rate increases and high grade our book, improve our customer mix, improve our operating efficiencies. So, it’s a combination of increasing rates, improving margins with productivity and high grading our customer mix, all at the same time.

Now, our final question comes from Mike Gyure, Janney.

Good morning, guys. Thanks. I think most of my questions have been answered. But maybe could you talk about I guess the -- what you’re seeing maybe as an early outlook for 2020. It looks like 2019 pretty much your horsepower scheduled for delivery is pretty much sold out. I guess, what’s your view on sort of the early look for 2020? Do you think that potentially is an extension to 2019, or it’s too early to tell?

I think it looks a lot like 2019. We are definitely in the rinse and repeat mode.

At this time, I’d like to turn the call back over to Mr. Eric Long. Go ahead, sir.

Thank you, operator, and thank you all for joining us on the call today. The third quarter represented a strong quarter for compression demand, utilization and pricing. The work to integrate CDM continues, and we are focused on driving productivity, improving monthly service fees and getting margins back to where we expect them to be. The benefits we expected from the combination will come over time, and a lot of work has been done to get to this point. We believe our strategy is a right one for the market place and should result in a leading, large horsepower, infrastructure-oriented compression services provider with stability in cash flows and multiple areas for continued growth. In these volatile times, USA Compression continues to be a long-term story of stability and growth. We look forward to updating you on the next quarterly call. Thank you for your continued interest in and support of USA Compression.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may now disconnect.