Please stand by. Good day, and welcome to the USA Compression Partners Fourth Quarter Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Chris Porter. Please go ahead, sir.

Good morning everyone, and thank you for joining us. This morning we released our financial results for the quarter ended December 31, 2018. You can find our earnings release, as well as recording of this call in the Investor Relations section of our Web site at usacompression.com. The recording will be available through March 1 2019. 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 at risk including 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 February 19 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 fourth quarter of 2018. We wrapped up a transformative year for USA Compression with the acquisition and integration of the CDM business, which is essentially double the size of the company, broadened our geographic presence and brought together two very similar companies with great assets, people, and customers. I'll speak more on the integration in a moment. Before we get into the details, I'm going to make a few observations on the strength of our business, the positive outlook and our focus in 2019. To sum it up, the business performed very well in the fourth quarter, and we're positioned for a strong 2019. First, our business is booming as the macro drivers of the natural gas market are strong. This demand-driven growth for natural gas needs to continued demand for large horsepower compression services for the near future. Second, our business has responded as fleet utilization, pricing, operating margins, and distribution coverage are all up. Third, we are capitalizing on the current market strength to increase pricing on our existing contract book in terms of certain month-to-month contracts. Fourth, we will continue to self-fund our highly selective growth CapEx program in 2019 as we did in 2018. For 2019, we have no plans to issue equity in connection with organic growth projects. Instead, we remain laser-focused on operational excellence and financial discipline with a continued long-term goal of creating and enhancing value for our unitholders. I also want to hit head on the topic of our quarterly distribution. When USA Compression went public in January of 2013, we believe that we had a differentiated business model, one that…

Thanks, Eric, and good morning everyone. Today USA Compression reported strong fourth quarter results including revenue of $172 million adjusted EBITDA of $103.3 million in DCF to limited partners of $56.4 million. For the full year 2018, which I'll remind listeners include standalone CDM results for the first quarter of 2018 and not USA Compression due to the reverse merger accounting treatment. Adjusted EBITDA was approximately $320 million right at the top-end of our previously provided guidance. In January, we announced a cash distribution to our unitholders at $0.525 per LP common unit consistent with the previous quarter which resulted in coverage of 1.19x. Our total fleet horsepower as of the end of Q3 of Q4 was just about 3.6 million horsepower. Our revenue generating horsepower period end was approximately 3.3 million horsepower. On a net basis we added about 45,000 of active horsepower to the fleet during the quarter. Our average horsepower utilization for the fourth quarter was 95.6% and pricing as measured by average revenue per revenue generating horsepower per month was $16.42 for a quarter Q4. As discussed earlier we continued to benefit from attractive pricing on new unit deliveries as well as selective price increases on the existing fleet. Total revenue for the fourth quarter was $172 million of which approximately $167 million reflected our core contract operations revenues an increase of about $4.5 million over Q3. Parts and service revenue was down slightly from Q3. Gross operating margin as a percentage of revenue was 68% in Q4. Net income for the quarter was $10.2 million. Net cash provided by operating activities was $93 million in the quarter. Operating income was $36.6 million in the quarter and maintenance capital totaled $8.9 million in the quarter with cash interest expense net of $25.7 million. Today with the earnings release we are providing our initial 2019 guidance. We currently expect 2019 adjusted EBITDA of between $380 million and $420 million and DCF of between $180 million and $220 million. Last, we expect to file our Form 10-K with the SEC as early as this afternoon. And with that, we'll open up the call to questions.

Thank you. [Operator Instructions] We'll go first to Jeremy Tonet with JPMorgan.

Good morning. This is Charlie on for Jeremy. Congrats on the quarter. Quick one on the margins, obviously you saw that improvement this quarter, I was just curious if you could talk a little bit on the cost of operations improving quarter-over-quarter. I know that obviously a good portion of that improvement is going to be related to those one-time item showing up in 3Q, but it seemed to improve versus 2Q as well, just curious if anything else going on that you can point to?

Yes. Sure, Charlie. It's Matt. I think it's probably a combination of three things to your point we had some cost hits in Q3 that we took specific actions to address. So I think you're seeing the impact of that both with some labor -- excess labor costs that we've got rid of as well as the third-party aftermarket service costs that were incurred in the third quarter that we didn't really have as much in the fourth quarter. A little bit of timing of some expenses kind of throughout the year as we kind of gotten everything integrated. And then I think the other benefit you're seeing which was reflected in the pricing as well is just a continued march to look at all of our contracts, all of our assets out there, and increase the pricing because again to the extent that we're able to increase the pricing that's going to drop straight to the bottom.

Okay. That's helpful. And one on the synergies side, has anything changed from the $20 million that you've given on the cost synergies side, any improvement in the number? And then secondly, the revenue synergies you mentioned, can you kind of give us any idea of the magnitude of that number what that might be.

Sure. No change real on the initial synergies. We talked about that $20 million. I think Eric mentioned that we're going to -- we will be wrapping up I think the first-half of this year, we will have everything kind of done. Notably the guidance numbers do include sort of the year's impact as we see it of that synergy number. So I think that's generally stayed the same. On the revenue side, it's a little bit more difficult to quantify. I don't think we want to hazard a guess. We continue to kind of look very closely throughout the fleet and figure out where we have opportunities there, but those are going to happen throughout the year. But I don't think we want to stick a number on it.

Fair enough, thanks, that's it from me.

Thanks, Charlie.

Thank you. We'll next go to Marshall Adkins with Raymond James.

Good morning, guys. This is Marshall on for Marshall. So question on the margins, great job this quarter pulling through the cost savings of the CDM stuff, the obvious question here is, is how sustainable is that going forward? I mean was there some one-off stuff here where we shouldn't assume it's sustainable, or help me understand that was a big jump in profitability, obviously a big part of that being lower cost some of it being higher pricing. So help walk me through that.

Yes, Marshall it's Matt. I think your comments are fair, I think when you look at if you were to kind of look side-by-side Q3 and Q4 and try to work through and figure out what a good trend is I think you'd end up with probably an EBITDA number a little bit below the reported number for Q4 as a blend if you will. We did have some timing things that hit us in the in the second and third quarter is that we sort of got the benefit of here. So I think you're probably correct in assuming it's a little -- for the fourth quarter was probably a tad higher. I think if you had looked at our guidance for the full year and what that implied for Q4, you probably would be in kind of the mid to upper 90s of EBITDA range. So based on that versus kind of where we ended up, you're a few million bucks higher on the reported number, but that also -- that made up for some hits that we had taken earlier in the year. So I think when we look at the margins, gross margin for the quarter of 67% 68%, EBITDA margin of 68%, those are generally in line with where USA Compression operated historically. And so, given where the market is, given the size and scale, we think margins at those levels are ultimately achievable. We may have a little bit of fluctuation here over the -- as we kind of work through 2019 and get everything completely put together, but again, I think when you compare it to what the CDM assets were being run at, I think you're seeing the benefit of our operation volume.

Yes, Marshall, this is Eric, and maybe a little more color on that. One of the major differences between the USA historical business model and the CDM model was that CDM provided what we call first call or first call out on all of their assets. So first call is much more expansive operational approach where the customer really never touches the machine at all and the CDM folks are responsible to start the machine, stop the machine, speed it up slow it down regardless of what caused the shutdown. So it's a mechanical issue. Historically USA's mechanics would show up and fix the machine while the CDM guys ended up being involved with much more operator type driven downtime. So if there's a freezing problem no gas showed up for economic reasons so it was much more operationally intensive and that service was provided across all horsepower range, USA is typically provided first call with the larger horsepower assets, but not with the smaller gas look [indiscernible]. So I think one of the bigger philosophical shifts that we're implementing and you will continue to see implemented is the move away from first call for the smaller horsepower assets or if things that don't make economic sense to us. So, that I think if you look at it, Matt, pointed out little bit of noise and kind of little bit from modeling purposes. But keep in mind directionally going forward you'll see more and more of the migration toward the USA model, which is much more selective on first call. And I think it kind of leads to the type of margins that you saw the USA side versus the historical side on CDM.

Right. Thank. That's useful. Thank you for that color. Along those lines Matt, when I just do back of the envelope if I kind of carry these margins and utilization going forward, which were phenomenal and even haircut them a little bit, I have trouble staying within the range your guidance in a kind of above that, is that just taking some conservative posture knowing there'll be some downtime and some hiccups along the way or am I just doing my math wrong on the back of the envelope stuff?

Well, without seeing your math Marshall probably I don't want to comment…

But -- if I keep the margins like they are here for all of '19 then…

Right…

-- I end up well above your guidance.

Yes, I think what we did again we've that guidance is really predicated on our budget for the year and obviously that was done prior to the end of the year. So, the quarter's results again I think you're right we probably took more little more of a conservative bench based on where we had seen things through most of last year and certainly if you're able to hit margins like this going forward. I do think there will be some, there will be a little noise as we kind of get everything put together but I think directionally I would agree with that comment.

Yes. That's prudent, that's smart. Last one for me. Your total fleet horsepower looks like it went down in the quarter, but I know you added a lot of new stuff. Help us understand, I assume you're getting rid of some of the smaller horsepower and you're adding the larger horsepower, but can you kind of give us a cadence on our model in terms of when we should be bringing on the additional horsepower as we move through the year and then maybe if you're planning on retiring some of the old stuff, help us understand how all that math works to the extent you can just give them some broad generalizations.

Sure, and you're right. So what that that number does reflect a little bit of retirements and really that stuff it's not anything that we plan out ahead to retire, most of it is small horsepower that maybe has been on contract for a while [indiscernible] and is of a sort that just not marketable in the current market and so for that reason during the quarter we did have some stuff that we retire. So going forward we don't really project that what we're going to retire again with utilization levels where they are. I mean every, just about everything is out there running the little bit of idle equipment we have which is mostly small stuff, we've looked at that and that's still good horsepower. So the retirement stuff is kind of on a quarter-by-quarter basis. But in terms of the new horsepower we talk about kind of 132,000 throughout the year that split relatively evenly through the quarter, I would say, about half of it I mean throughout the year, about half of that total is scheduled for the third quarter and then the, the other three quarters is, is a little more evenly spread out.

Okay. So that's helpful and then maybe, so it sounds like just on a run rate we, we should model 20,000 to 30,000 of additional horsepower on per quarter with a little bump in Q3.

Yes, I think that's fair. Yes, I think that's right, Marshall.

Great. Thank you all, appreciate that.

You bet. Thank you.

We'll now take a question from T.J. Schultz with RBC Capital Markets.

Hey, guys, good morning. Just first, as I look at DCF guidance is there an assumption to turn out any debt in 2019?

We will probably look to be opportunistic on that. The numbers are in there are probably a little higher just to take into account any raise in rates or if we are able to do something like that.

Okay, got it. And then maybe just trying to understand a little more on Howard if you move horsepower around base and it should give an high utilization in the market and, and long lead times is there any general trend where you have some compression coming up per renewal and, and certain basins where there's maybe some pushback on, on pricing increases and then you're able to move that to more active basins or do discussions generally settle to keep some of the large horsepower in place just given that there are not many other options out there for, for customers to replace it?

Yes, T.J., this is Eric, that's a great question. About the only basins where we see assets being pulled out of or shipped out of would be some of the historical legacy dry gas stations. And, and I think the one that really comes to mind will be when you look at the favorable trail, Fayetteville trail. That was a active growth area kind of when steady state for a period of time. And then when you look at the finding and development costs that probably one of the least attractive areas right now in the domestic place. So, we have repatriated some type, some certain assets from the Fayetteville of the cylinder and technical configurations for the Fayetteville are virtually identical to what we see in the Permian and Delaware Basin and that equipment we shift to that direction. But generally what we see particularly with the larger horsepower assets that are installed with equipment being in such short supply right now and people continuing their development plans both on the E&P side and then same with the infrastructure developers on the gathering and processing side, our assets that are installed generally stay installed in place, we might relocate from location A to location B often times with the same existing customer in place and improve pricing terms and with some increased tender associated with it. So, but for the Fayetteville, we're really not repatriating a bunch of equipment from one basin to the other generally stays in the basin and often times many, many times with the existing operator and to the extent there's any relocation it just kind of move from location A to location B, within their existing development profile.

Got it. Thanks. That's helpful. Just lastly any general comment on the M&A market out there. What's the appetite or opportunity for you all to continue to be a consolidator here?

Look -- and I think we've stated this before. We have spent 20 some odd years since the formation of USA growing and building organically. The CDM transaction was one that I think was somewhat unique, highly complementary assets to focus on the largest of the largest horsepower, similar operating philosophy, but frankly had a different customer base with different geographic coverage. So you think about an ideal combination. It's a combination where you slam two companies together. You are able to bring significant synergies to the table both on the cost side as well as on the revenue side, the efficiencies, economies of scale with not a heck of a lot of overlap. So I think when we look at the comments that we've made that we're highly selective on our capital deployment programs. We're living within our means. We're self-funding on our organic growth CapEx programs with our yield like it is. The marketplace was telling us, "Hey guys, it's expensive, your cost of capital is high." So unless we can find some highly attractive acquisition opportunities things that frankly are accretive or things that help de-lever the balance sheet there is really no economic incentive to do that right now. So our view of the world is, let's keep doing what we're doing and we've been very successful at it for a long period of time. We've maintained our distribution and now we're building coverage. We're helping to continue to de-lever the balance sheet and you'll get the right set of tinker toys comes along at the right value. That is something we'll take a look at but that hasn't been the history of USA in the past. So, we kept double the size of the business and now integrated digested that business, now it's time to block and tackle the business as normal.

Got it. Thank you.

Thanks, T.J.

We'll now take a question from Barrett Blaschke with MUFG Securities.

Hey, guys. We've been hearing a lot about producers sort of living within free cash flow and we've seen some reductions in drilling plans. How does that impact the compression world, because it seems like it isn't all negative if you've got lower IPs and pressures coming down. Is that a business opportunity for you guys in some cases?

Great question, I mean, obviously, just because the rig count goes down does it mean IP goes down or gas order ratios go down and pressure, as you point out there's a lot of phenomenon's going here. So, what we have seen is, even if there is a slowdown in developmental activity, it doesn't mean that compression is going away. The pressures come down, gas flow ratios increase. You have to suck harder to put gas into ever increasing pipelines that have higher and higher pressures with it. So, frankly we have more than enough activity to keep us busy. If we wanted to double or even probably treble our CapEx program those opportunities exist. So, we have chosen the opposite direction which is what's high-grade the opportunity sets, what's kind of live within our means and frankly the people that we're working with both upstream companies and midstream companies, they're going to continue to be active in develop the core - the core that they're involved with and to the extent that the rig count slows down and CapEx program slowdown. There are still more than enough to fill our 2019 and frankly 2020 and beyond the CapEx program.

Okay. And then this is probably more of question for Matt. Energy Transfer owns a lot of shares in USAC, have they registered any of those yet?

They are not registered.

They are still not registered, okay. Thank you.

Correct. Yes, you bet. Thanks, Barrett.

We'll now go to Sharon Lou with Wells Fargo.

Hi, good morning. Just a question on pricing, so the revenue per horsepower had increased about 1% to 2% sequentially each quarter last year, just wondering based on your conversations with customers and I guess the balance of your fleet do you anticipate this trend to continue into 2019?

Yes, Sharon it's Matt. When you look at that you've got to I mean remember right we're talking about a fleet of 3.6 million horsepower, where we're getting the pricing increases is really a combination of two things. It's, it's the, the impact of the new horsepower going out and so for instance the a really, really large stuff that we're working on now that actually has the impact of pulling up that dollar per revenue number that you see on the page there just given, given the attractive pricing and then the other part is really about half of our fleet 40% to 50% at any given time is on month to month and so it's, it's the impact of going back to those, those units in, in increasing pricing. I mean we continue to see I think generally speaking we continue to see price increases in line with increases that we were taking, that we were putting up last year. And so again if you increase a chunk of it 10% on the whole fleet you're going to see something in that 1% to 2% range. So I would say the price increases that we're going through now are, are similar in magnitude that we did last year, now we just have a whole another couple of million horsepower of units to go chase after and do it with.

Okay. Now that makes sense. And then just in terms of maintenance CapEx, so it looks like your guidance implies that spending is flat year-over-year, but I believe that you initially had provided guidance around $30 million for the combined entity. Just wondering if that $25 million is a good number of a good run rate for the combined assets?

Yes, certainly for 2019. That's kind of our, our best estimate right now. As we got into putting the two fleets together obviously we, we've had some I think put some higher numbers out there because we thought there would be a little bit of extra dollars to spend. Going forward, we're obviously spending less on that on the growth side but also as we look through it on a unit by unit, region by region basis that's kind of our best, best estimate of the, the cost. We do get with the additional scale and size with the acquisition we're finding that we're getting some discounts on, on parts and other things that kind of would factor into that a little bit. So you're going to see some benefit from that as well.

Okay, great. Thank you.

We'll now take a question from Ryan Pfingst with B. Riley FBR.

Hey, good morning guys. Just two quick ones on the 132,000 horsepower coming on this year, if you could how does that horsepower break down by basin and then on pricing is does the customers agree to pricing when they commit to the equipment or is that more when it gets delivered more of a spot rate out once the customer start using it?

Yes, Brian, it's Matt. So in terms of where that capital is going our busy areas for new capital Permian and what Delaware Basin out in West Texas is probably getting the vast majority probably the majority of it as well as some SCOOP/STACK and some up in the Northeast is where we've kind of at least targeted that kind of stuff. In terms of pricing, about half of that or so is already signed up and contracted. So, some of the equipment you're talking about long lead time, so if you're in year out the equipment we're taking delivery of this quarter we put in those orders last, first quarter of 2018. So, generally what happens is you work off sort of indicated demand from your customers and they're aware of exactly what it's going to cost them. And they say, "Hey, go ahead and go for it and put in that order." They know that again they can't wait. And hold off and then try and re-trade it because that equipment is in high demand and it will go elsewhere. And so, I would say I think in terms of pricing the customers are very much aware of where the price level is, whether or not the actual contract that signed at the time of order is probably less important than the fact that they've indicated that they need X amount of compression in such and such area.

And maybe a fair way to give you some additional color as if you were to look at spot rates last year for the largest of equipment. And then look today at spot rates on the largest of equipment. The spot rates continue to increase. So, to the extent that we've locked in contracts a year ago for deliveries that start now this year then to the extent we haven't, actually executed the contracts and it's time to sign the contracts you tend to see an improvement in the pricing profile from what you saw a year ago. We balanced those two together. We want to make sure that we don't we're not at risk for 100% of your portfolio at any given point in time for new CapEx growth and yet we see enough the mark indicators to know that to the extent that there are some things that haven't yet been executed and we're in the spot opportunity it actually is beneficial to USA because of where the spot rates are.

Awesome. Thanks for the color, guys.

You bet. Thanks, Ryan.

And it appears there are no further questions at this time I'd like to turn the conference back to Eric Long for any additional or closing remarks.

Well, thank you Operator, and thank you all for joining us on the call today. The fourth quarter was a great way to wrap-up a tremendous year for USA Compression and I believe it gives you a glimpse of the potential of the combined USA Compression and the CDM business. The market for compression demand continues to be strong and we expect to continue our focus on driving utilization and pricing, as well as finishing up the final work to integrate CDM. While we still have some work to do the heavy lifting has been done and our financial results highlight the rationale behind the acquisition any underlying potential for continued improvement driving attractive economic returns for unitholders over the long term. USA Compression has always been a long-term story of stability and growth and with the addition of CDM nothing has changed about our strategy. The combination has led to a leading large horsepower infrastructure oriented compression services provider with stability and cash flows and multiple areas for continued sustainable and profitable growth. We look forward to updating you on the next quarterly call. Thank you for your continued interest in and support of USA Compression.

And this concludes today's call. Thank you for your participation. You may now disconnect.