Good day, everyone, and thank you for standing by. Welcome to the USA Compression Partners LP's First Quarter 2020 Earnings Conference Call. [Operator Instructions]. This conference is being recorded today, May 5, 2020. I would now like to turn the call over to Chris Porter, Vice President, General Counsel and Secretary.

Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter ended March 31, 2020. 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 15, 2020. 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 5, 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 today. Also with me is Matt Liuzzi, our CFO; and Bill Manias, our COO. This morning, we released our financial and operational results for the first quarter of 2020, achieving a solid quarter of operational and financial results. I plan to briefly highlight the quarterly results and then spend more time discussing our business model, what we are seeing out in the field, how we are managing the business in this uncertainty, and ultimately, how we expect the rest of the year to play out. The first quarter went very much as we had expected. Revenues were $179 million, up approximately 5% over the first quarter of 2019. And likewise, adjusted EBITDA of $106 million was up about 5% over the year ago period. We achieved a gross operating margin of 66.9% and an adjusted EBITDA margin of 59.3%, both metrics consistent with year ago periods. Average utilization throughout the quarter was 92.5%, down slightly from the year ago period, and reflecting a modest amount of returns, in particular, as we move towards the end of the quarter. We ended the quarter with approximately 3.3 million active horsepower, consistent with the year ago period at about 3.7 million total horsepower in the fleet. Average pricing across the fleet increased modestly during the first quarter, reflecting some new unit deliveries as well as the impact of selective service rate increases previously negotiated. We saw average monthly revenue increase to $16.89 per horsepower, up from $16.82 in the fourth quarter. This reflects our previously discussed expectation that pricing gains would moderate as we move into and through 2020. Our capital spending during the quarter consisted of $46.5 million of expansion CapEx, which included the delivery of 27,500 new horsepower, primarily…

Thanks, Eric, and good morning, everyone. Today, USA Compression reported a solid first quarter to start off the year, including quarterly revenue of $179 million, adjusted EBITDA of $106 million and DCF to limited partners of $55 million. In April, we announced a cash distribution to our unitholders of $0.525 per LP common unit consistent with the previous quarter, which resulted in coverage of 1.08x. Our total fleet horsepower as of the end of Q1 was largely consistent with where we ended 2019, right about 3.7 million horsepower. Our revenue-generating horsepower at period end increased slightly to a little bit over 3.3 million horsepower. Our average horsepower utilization for the first quarter was 92.5%. Pricing, as measured by average revenue per revenue-generating horsepower per month, was $16.89 for Q1, which again was a slight increase from the previous quarter's level. Of the total revenue for the first quarter of $179 million, approximately $176 million reflected our core contract operations revenues. Parts and service revenue was $3 million. Gross operating margin as a percentage of revenue was 67% in Q1. Net loss for the quarter was $602 million, inclusive of a $619 million noncash goodwill impairment charge, which I'll cover in a minute. Operating loss was $570 million in the quarter, also inclusive of the $619 million noncash goodwill impairment charge. Net cash provided by operating activities was $50 million in the quarter. Maintenance capital totaled $8.8 million in the quarter and cash interest expense net was $31 million. To add a little more color on the goodwill impairment charge, based on our unit price at the end of the period, we performed an evaluation of the fair value of the business and the carrying value. The impairment charge reduces the amount of goodwill on our balance sheet to 0. I'd note that the goodwill was created more than 2 years ago, about $250 million was already on CDM's books at the time of the transaction. And the balance, about $366 million, was created as a result of the reverse merger accounting method used to account for the CDM transaction, whereby we were required to revalue the USAC balance sheet as CDM was considered the acquirer for accounting purposes. Given the recent events affecting the energy markets in general and the ongoing uncertainty, we are providing revised full year guidance for 2020. We currently expect 2020 adjusted EBITDA of between $395 million and $415 million, and DCF of between $195 million and $215 million. At the midpoints of these ranges, these estimates reflect decreases of approximately 5% and 7%, respectively, from our previously communicated guidance ranges. There are obviously a lot of unknowns in the marketplace right now, and as things progress, we will continue to assess guidance throughout the year. Last, we expect to file our Form 10-Q with the SEC as early as this afternoon. With that, we'll open the call to questions.

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

I think, first, so the comparison to the downturn in 2014 through 2016, I think was characterized into the mid-80s on utilization. So has this initial rush from some customers to return assets kind of taking you to that level right now? And just trying to think about a few of the differences between now and then and your fleet, meaning, on one hand, do you have maybe a higher mix of larger horsepower units now? And if you're 25% Permian now, what was your mix to associated gas in 2014?

Yes. TJ, it's Eric. So maybe a couple of things. When you look 2014, characterize it as putting a lobster in a pot and you bring the heat up slowly and then the lobster wakes up a year later and he's bright red and then boiled to death. This suffer happened very, very quickly. In 45 days, we had the initial round. The first wave of stuff we saw was predominantly the gas lift equipment. So a lot in the Mid-Continent and, to a far lesser degree, some things coming out of the Permian. I think in our commentary, we made a comment about we have some owner operators which have returned some equipment to us. One customer, in particular, had purchased a bunch of equipment, anticipating using that as baseload equipment and then using USA Compression to be the variabilized compression fellows as -- to kind of meet their ongoing growth demand. Also Mid-Continent based, they've seen their end users drop out, their customers drop out. So since they have taken delivery of north of 10 or 15 machines, our units were on short-term contracts. When they went off the contract term, they approached us and sent those 10 or 15 machines home. So I think the way we're categorizing on this first wave is it feels a lot like what we saw in the early phases of 2014 and 2015. What remains to be seen is what happens kind of after, call it, the third quarter of this year. We're now in the June, July, August range, where the major production cuts are occurring. We've seen a lot of research reports that are suggesting that you're going to see continuing shut-ins, but in curtailments between now and the end of the year. But I think what we're hearing…

And TJ, it's Matt. The only other thing I'd add is it's interesting when you look at the gas prices, Eric talked about kind of the futures a little bit. You go back to '14, in the middle of '14, gas was over $4. And over that '14 to '16 period, it decreased to under $2 by that time sort of that downturn was over. So I think the interesting dynamic we have going here that we touched on in the comments is kind of sort of the opposite outlook right now, at least on the gas price. So back then, people were dealing with sort of gas tumbling down in half. Now you're looking forward seeing it increase over the next 12 to 18 months, which is, I think, a positive.

Okay. All makes sense. And then on pricing, it sounds like your kind of waiting on some decisions for whether or not to make rate concessions to certain customers and you may be balancing that about taking back some assets and moving to different basins. But maybe you can just expand on kind of what you're looking for and making the decision on some of those rate concessions? And then if you would give standby rates, what are those typically relative to working or contracted rates?

TJ, maybe a fair way to say it is to the extent we do anything, it will be temporary in nature. Very, very short term. We have not had a wholesale request across the board from all of our customers or even a large number of customers. I would say it tends to be a little more basin-specific and asset-specific. And again, when you look at the large horsepower, large gas-handling central facilities that we have, we've not had people approaching us saying, shut it in, curtail it back. We touched before on just how small of a component the compression fee is as a percentage of gas sales price or the movement of hydrocarbons, LOE expenses, et cetera. It's a relatively small percentage. So the people that get hurt in a downturn like this tend to be the E&P focused, the commodity price guys, the drillers, the frackers, the pressure pumping guys, the small wellhead compression guys. And we tend to be a little more pricing elastic with the types and duration of the contracts that we see. When we do talk about pricing concession, if you think about -- we've got fixed component and amortization component. We've got some variable cost components. Typically, what we try to do is to offset if the units do go on a standby for a short period of time, a month or two months or three months, that we try to just basically offset the loss of the variable costs that we would cease to incur by change in the lube oil and change in spark plugs and having people have to go out and fix and repair and operate the equipment. So it's not hugely material and, again, would tend to be relatively short cycle.

We'll go next to Praveen Narra with Raymond James.

And I apologize if I missed this. But I guess, first, thank you very much for providing guidance. But can you guys give us a sense for embedded in that guidance what kind of utilization you're looking for and how that compares to today?

Yes. Kevin, we don't -- I mean, I would say we don't give out utilization guidance per se. How we went about that guidance and sort of that revision was looking at basically what we had learned over the last 2 months in terms of stop notices and some of the standby action, et cetera. So that was kind of our -- more so from an assumed utilization, that was kind of an actual almost unit-by-unit evaluation, if you will. So I would think, overall, I think, adding on TJ's question last time, we kind of were kind of top to bottom, probably 7% to 8-ish percent of utilization degradation. So we hadn't gotten there yet, but that's why we took the approach we did kind of on an actual basis -- actual unit basis with the thought of, as things progress through the year, as we get a little bit of this more uncertainty behind us, we'll be able to obviously revise that as needed.

Right. Okay. And then if I could understand the standby process a little bit more. It doesn't sound like your contracts -- it doesn't sound to me like your contracts have defined standby terms in them, and that is more of a negotiation. Is that the correct way to interpret it? Or are these largely happening on the month-to-month contracts or month-to-month units that are out there?

Yes, Praveen, it's Matt. I would say, typically, our contracts have a standard -- our standard standby is around 75% of the base rate. And so in that -- at that level, to Eric's point earlier, at that level, you're sort of earning -- without all the expense that goes along with it, you're sort of earning your gross margin or even better in a lot of cases at that level. So that's kind of how we've structured it, I would say, typically.

No, that's super helpful. And if I could just squeeze one more in. You mentioned the number of units that are contracted on a month-to-month basis. Can you give us a sense of how much of your units come up within the next year and how we should think about that?

Over the next year in terms of rolling off? I think -- I don't know that we give out that exact number, Praveen. The way that we have historically thought about it, though, is if you go back the last 7 years plus, 10 years or more, we've always been kind of in that 40% to 50% month-to-month range. We've termed up -- really since the CDM acquisition, made a big effort to term up as much as we could. That kind of got us up to or down to a -- we were below 30% month-to-month. Now we're kind of 35%. I think you're going to kind of stay -- I wouldn't be surprised if that drifted up a little bit just given the current market, which, again, people aren't knocking down our doors to term up contracts. But again, in 6 months, we may be in a different marketplace where all of a sudden, things swing again. So it's hard to see it going to 50% month-to-month over the next couple of quarters.

Yes, Praveen, this is Eric. And the reason I went off of my physics discussion in the middle of the discussion was to really further illustrate the stability of this big horsepower business because these machines are designed to be -- have 6 to 10 machines on a location. We may be moving 100 million to 200 million cubic feet a day. And when you start to look at where these facilities are installed, these are kind of regional hubs where there's lots of production that's feeding into these areas. It's not just a well or a pad site, it's a major gas handling facilities. And even in the Permian and the Delaware Basin, these facilities have been installed 4, 5, 6 years ago. We're beyond the flush production stage. These are guys now that are kind of on cycle projects. They're relatively stable volumes. So to the extent that there's no new drilling activity or declining drilling activity or reduced drilling activity, what you're going to see are the volumes continue to kind of slowly, methodically decline, but you're also going to see reservoir pressure slowly, methodically decline, and that's going to require more and more horsepower. So I think we tend to get caught up with, oh my gosh, you've got short-term contracts, commodity price is down, volumes are declining, no new drilling activity. Yes, that's great. But that really drives our growth model, not our stability model. In the world we're living in today where new activity has slowed back down, volumes might start to decline, pressures decline, holy mackerel, to keep the same volumes moving or even declining volumes as pressures decline, the horsepower stays the same or maybe even ticks up a little bit. So that's why we're much more optimistic about our model versus the small wellhead guys or even guys with big horsepower. A couple of our peers have migrated into big horsepower recently, but they've got 8 units here or 2 units here. They don't have these mega facilities with the extra super big horsepower like we've got which really are major gas-handling projects, major cycling projects, major infrastructure projects that are installed for the long-term duration. People that have commodity hedges in place. People that have firm transportation agreements in place. Major oil companies that, yes, they're backing off on new growth CapEx, but they're still spending some growth CapEx, and they're continuing to promulgate and continue to move base hydrocarbons.

And there are no further questions in queue. I'd like to turn the conference back over to Mr. Eric Long for any additional or closing remarks.

Well, thanks, operator. With the solid first quarter behind us, we are navigating through some uncharted waters right now. There are many things we do not yet know regarding how exactly things will shape up, but the industry and our customers have always been able to adapt to changing environments. Our business is built on natural gas demand, and we believe that positions us well for an eventual recovery. We believe that both the underlying stability of our large horsepower infrastructure-focused contract compression services business model and the science behind the need for compression and the interplay between pressures and volumes will be a key point of positive differentiation as we work through this downturn. We will continue to keep our focus on the things within our control, including prudent capital spending and cost controls throughout the organization. And while we are hopeful for a recovery sooner rather than later, we have taken the necessary actions to weather the storm and come out on the other side. From past downturns, we have learned that we have lots of levers that we can throw if and when we need to depending on how this downturn plays out. Thanks for joining us, and please be safe. We look forward to speaking with everyone on our next call.

And that concludes today's conference. Thank you for your participation.