Good morning. Welcome to the USA Compression Partners LP’s Second Quarter 2020 Earnings Conference Call. During today’s call, all parties will be in a listen-only mode and following the call, the conference will be opened for questions. This conference is being recorded, today, August 4, 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 June 30, 2020. You can find our earnings release as well as recording of this call in the Investor Relations section of our website at usacompression.com. The recording will be available through August 14, 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, August 4, 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. This morning, we released our financial and operational results for the second quarter of 2020, achieving a solid quarter of operational and financial results, especially when you consider the market environment, in which we found ourselves. Similar to last quarter, today, I plan to briefly highlight the quarterly results and then spend more time discussing our business model, what we’ve seen happening out in the marketplace and what we’re doing to manage the business and this uncertainty. The second quarter, not surprisingly, saw decreased revenues as a result of customers returning equipment and slowdown and unit redeployments out in the field. Total revenues were $169 million, approximately 6% below Q1. However, due in large part to cost cutting measures taken in late Q1 and early Q2, adjusted EBITDA for the second quarter was approximately $105 million representing less than a 1% decrease from Q1. Reflecting this focus on costs, both adjusted gross margin and adjusted EBITDA margin were very strong at 70.4% and 62.5% respectively. Average utilization throughout the quarter was 88.0%, down from the Q1 levels of 92.5% reflecting continued returns of units throughout the quarter. We ended the quarter with approximately 3.1 million active horsepower, which is of about 6% from the end of Q1 while the total fleet remained consistent at about 3.7 million horsepower. Average pricing across the fleet decreased slightly during the second quarter, which reflected the return of a fair amount of small horsepower, which typically earns a higher dollar per horsepower rate as well as the impact of selected temporary service rate decreases. Average monthly revenues of $16.79 per horsepower, was down slightly from $16.89 in the first quarter. Last quarter, we…

Thanks, Eric, and good morning, everyone. today, USA compression reported a solid second quarter of results, including quarterly revenue of $169 million, adjusted EBITDA of $105 million in DCF to limited partners of $59 million. In July, 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 1.15 times. Our total fleet horsepower, as of the end of Q2 was largely consistent with where we ended the first quarter at approximately 3.7 million horsepower. Our revenue generating horsepower at period-end decreased approximately 6% to a little over 3.1 million horsepower as we saw the effects of the return of units that began following the events of March. Our average horsepower utilization for the second quarter was 88% pricing as measured by average revenue per revenue generating horsepower per month was $16.79 for Q2, which was a slight decrease from the previous quarter’s levels. Of the total revenue for the second quarter of $169 million, approximately $166 million reflected our core contract operations revenues while parts and service revenue was $3 million. adjusted gross margin as a percentage of revenue was 70.4% in Q2, helped by the early cost cutting actions we took. net income for the quarter was $2.7 million and operating income was $34.9 million. net cash provided by operating activities was $97.4 million in the quarter. maintenance capital totaled $4.4 million in the quarter as we cut back on activities with the decreased utilization. cash interest expense net was $29.9 million. and last, with our quarterly EBITDA in current borrowings, our bank leverage was 4.64 times. as it regards full-year guidance for 2020, we’ve made a few minor revisions, which don’t affect either adjusted EBITDA or distributable cash flow. So, we still currently expect 2020 adjusted EBITDA of between $395 million and $415 million and DCF of between $195 million and $215 million. Last, we expect to file our form 10-Q with the SEC as early as this afternoon. And with that, we will open the call to questions. Operator, are there any questions currently?

[Operator Instructions] Our first question comes from Charlie Barber [JPMorgan Chase and Co.].

Hey, good morning. The first question just on the margin side, you cited cost cutting action. Just wondering if you’d give maybe, a bit more color there on this cost controls and kind of what we can expect to show up in future quarters.

Sure, Charlie, it’s Matt. thanks for the question. back at the time of the first quarter earnings, we talked a little bit about it as well. Going back when we started seeing what was coming kind of in that mid-March area timeframe, we went through really the entire business. We did a fair amount of kind of rightsizing the labor force. I think we probably cut about 10% of labor costs out of the business, as well as kind of going through the other parts of the business to kind of pull out some SG&A. So, I think what you saw in the second quarter was the impact we did most of that really before the end of March. And so what we did, we got ahead of it. And so I think you’re seeing probably margins just a hair, obviously, a hair higher than they were historically, because we had taken out a whole bunch of that cost really at the – as of the beginning of the second quarter. So, as the quarter went on, we got the benefit of that. I think going forward, we continue to believe that with the asset base that we have in terms of operating the assets. the margin should be very similar to where they were historically at USA compression. So again, I think we were a tad higher this quarter then than you’ve seen in the recent past, because of the timing of those costs. And I think as we kind of go through the rest of the year, we’ll get back to probably what – what would be a more normalized level of margin.

And Matt, is it fair to say that when we looked at some of the cost cutting elements that we did, when we look at some of our peers, who came into this with a bloated G&A structure and are scrambling to kind of rationalize their P&Ls, some of the peers have taken some one-time short-term adjustments, they’re – they’ve alleviated their 401(k) match, which we have not done. They’ve reduced benefits. They’ve reduced a lot of things that once a quarter or two is passed, they’re going to kind of revert back to the role of waves and they’re not going to be able to ring some of those costs permanently out of the organization. So, the costs that we have rung out of things are actually sustainable. They’re not one-time hits and we opted to focus on things that makes sense for the long-term rather than induce some short-term pain and suffering on our employees and then wait a couple of quarters of bringing it back in. So, I’d say it’s much more sustainable than maybe, some of the folks in the OFS or even some of our peers have been doing.

Okay. So, some permanent reductions, but looking at margins down the road, should probably revert to what we’ve seen historically.

Yes.

Yes. I think that’s correct.

Okay. Secondly, just on a costumer activity, we’re about a month now into the third quarter, appreciate the color that you gave in the opening remarks. Just kind of curious if you could go through some of the – your key basins and what you’re seeing in this latest month activity trends versus what you saw on 2Q?

Yes. So, when you look at the most recent month, we’re seeing a fairly substantial tick up in quote activity, a new set activity, and a slowdown in unit level returns. Like we saw in past cycles, we had a fairly major hit from the smaller horsepower gas lift equipment, which was predominantly based up in the mid-continent region. So, we had some significant curtailments. We have some significant shut-ins. So, we worked with our customers to put in place some short-term standby rates or we actually in certain cases, just allow them the units to stay on location contemplating that there was going to be a rebound coming in the future. Thank goodness for the industry, our customers on the E&P side and then, for us at USA compression, commodity prices have come back very, very quickly. So, the standbys and the curtailments and the rate abatements, we’re working through very, very quickly. So, some of the pricing concessions will continue for another month or two in certain cases, the few that are remaining, but very dramatic increase in startups, again, of the smaller horsepower gas lift that have been curtailed. One phenomenon that hit this time that we hadn’t seen in the past was, with some of our larger customers, folks tend to use third-party compression provider for services like USA compression and then they actually own some equipment that might be base load oriented. So, we tend to be the variabilized guys, where they’re – when they’re moving into a new area and they’re ramping up and growing, or as activities of paint and they’ve kind of played out the area when you’ve got an installation of 10 machines and perhaps they own three or four, and then USA compression with – own the other six or…

Great. That was a great response. Really, appreciate all the color. And sorry, I don’t mean to monopolize the call here, but just really quickly, the last question, just the 8-K that you put out yesterday, I just wanted to confirm if that gives you full access to the revolver.

Charlie, it’s Matt. We wouldn’t have full access. It would ultimately be governed by the leverage ratio, but it gives us cushion throughout kind of the remainder of this year, in case anything sort of unexpected happens and then kind of ratchets down over the course of next year. So, we would never get up to the full borrowing capacity of that facility, but it does give us a little bit of extra cushion to manage the business through.

Great. Thank you.

Yes. Thanks, Charlie.

Our next question comes from Shneur Gershuni of UBS.

Hi, good morning, everyone. Glad to everyone as well. Eric, I was wondering if we can go back to your prepared remarks on the call, just with respect to how the compression works. Just kind of wanted to clarify one of the comments that you had made, you talked about how as well as depressurize, the need for compression continues to increase. try to clarify, I guess, one point is, were you saying that like that’s just kind of the natural flow and that’s something that would have happened, whether we had this issue with COVID and OPEC, kind of regardless? Or are you saying that because there’s not a lot of new drilling activity that pressure slows in trunk lines. And so it actually increases the need for more compression as well, too, as a result of the slowdown in drilling activity.

Yes, Shneur. This is Eric. Our focus is not on the slowdown or changing conditions in trunk lines. It’s actually looking at the wells, looking at the major path sites, looking at the regional application. So, as Matt pointed out and in the prepared remarks, when you have these steep shale declines from when new drilling activity ceases, you’ll see an 18 to 24 to 30-month period of significant decline and then wells that have been up and operational for three years, four years, five years; maybe, they’re not making 5,000 barrels of oil and 20 million cubic feet a day anymore. Maybe, they’re making 500 barrels a day and they’re making about 1 million or 1.5 million cubic feet of gas. And you’ve seen the decline rates on those types of wells change from 70%, 80%, 90% to 15%, 20%. So, what we see going on is as new activity – new drilling activity ceases, demand for new compression will slow. So that’s where historically a lot of the growth in our industry has come, are in periods where you’ve seen dramatic increases in rig counts. If you go back post Katrina and Rita in the 2005, 2006, 2007 range, and you go back after the financial meltdown of 2008, and you saw broken activities in 2010, 2011 and 2012 on into 2013 and in part of the way through 2014, a lot of growth, a lot of demand. And then in times like we’re having now, the new activity slows down, people need cash flow, people try to maintain production as much as they can, but for that short period of curtailment. and now, what you’re seeing is the flush production drops quickly. And then that other component in relative steady-state continues. So, there’s two phenomenon that go on, you see a decline in volume, but you also see decline in pressure. So that’s where the compression of horsepower comes in, where as the pressures decline, you got to suck harder to get that gas out of the spare tire of the bicycle, so to speak. So, when volumes decline and pressures decline, you might actually see flat to slightly increasing levels of compression of horsepower. Pressures decline, volumes up, any more, volumes up pressures down. Can’t really, you may need some more. And then when pressures are down and volumes are down, you may stay flat, you may slightly increase. So that’s really what we’re trying to speak to is just the fundamentals of when new activity slows down is that you’ve got to suck harder to maintain the existing level of production throughput as the pressures start to decline.

That makes perfect sense. But I’m saying that was kind of my understanding prior to all of this year. So, I think you’re – what’s the point really just more to really educate the listeners as to this is how our business works and that nothing has really changed in terms of our understandings of everything. But in theory, you just have a lost opportunity with the slowdown in rigs, probably 30 months to 40 months out when you would have captured that compression as kind of a growth thing. Is that kind of the right way to think about it?

Yes. And I think that’s a great way to think about it. We’ve been in business for 22 plus years. People focus on the growth mode of the environment, and then when the declines come, for some reason, people look to compression is behaving similar to the oil field service guys, who are tied to the drilling cycle and that’s when we start to get the noise about guys, you need to go into preservation mode. You need to cut your distribution. You can’t afford to do these things, because your business is volatile. And I think what we’re trying to draw attention to Shneur just as you pointed out is a lot of our production or our compression assets are installed in this very stable production profile. So, yes, we just slow the growth, we power through the downturn, we maintain our distributions and then when the market conditions improve and a year or two years or whatever it takes, like they’ve done many, many cycles since we formed the business since back in 1998, you go back and you resume some growth again. So, we grow when it makes sense to grow. We don’t grow and we go down into the hunker down mode and power through a downturn. And our view has always been, if we maintain the proper right size corporate G&A. We maintain the right type of assets, the right kind of contract mix, the right kind of customers that when these inevitable downturns occur we’re extremely well positioned. We can power through and we can reward our long-term with shareholders with maintaining a decent level of distribution. So, nothing’s really changed.

Okay, fair enough. Just two more questions if I may. I guess you sort of talked about in a prior back and forth about the term back of some assets. Just to clarify, that was more of a function of somebody over ordered or a few had over ordered based on some expectations. And they were obviously, using their own assets, but there’s not a trend – this is not a trend where operators are looking to reduce their variable costs by taking compression in-house kind of on a go-forward basis, which would seem counterintuitive, because that would involve capital outlays. Is – am I thinking about it correctly?

Yes, you are. I think you come into a downturn like this and if you go back to that, I mentioned, 2005, 2006 post Katrina, Rita, capital was massively available for anybody in the energy business, upstream, midstream, downstream, you picked it. Banks were flooding capital. When the collapse in 2008 hit, banks kind of pulled their horns in a little bit and loosened their purse strings again, back in the 2010 to 2014 range. And when the 2014, 2015, 2016 collapse occurred, banks started to get a little more skiddish, hey guys, focus on your core competency. We’ve got enough exposure to pick a name of XYZ E&P, or XYZ midstream. So, the bank started kind of timing the capital spigots a little bit. And now, you fast forward to today, where you’ve seen a lot of flush out in the industry. You’re seeing some bankruptcies occur; capital’s really constrained and throttled back. It’s our belief that this trend that has occurred over the last three waves that I’ve mentioned will continue into the future. And then when we come out of this downturn and the E&P guys start to put the bit back on the ground. They’re going to focus on their core competency, which is drilling and producing. They’re not going to be building pipelines. They’re not going to be purchasing compression. They’re going to focus on that core competency. So, I think it’s the trend toward outsourcing will continue. There’s just a few of us – very few of us, who have the capabilities of backing the play of the major oil companies and the large independents, both from a capital perspective, as well as from an operational expertise, as well as the ability to focus and maintain a level of safety standards and proficiency that are required by the big guy. So, the trend is going to continue. And I think that bodes well for companies like USA Compression, who have the size of scale and the operational excellence to be able to do the sophisticated type of operations, that’s going to be required more and more by the majors going forward.

Great. And one final question, if I may. Just with respect to seeking out a waiver on your covenant, was it more about being operated the business as is, or was it more to give flexibility around paying the distribution at these elevated levels versus potentially decreasing and not meeting to seek a waiver? I was just wondering if you can give us the board’s thoughts and discussion, is how you weigh the different options between a waiver versus a distribution reset.

Yes. Shneur, it’s Matt. I think on the distribution, obviously that’s a decision. The board makes quarterly as we kind of noted. I think they looked at the quarter – second quarter results. And in part based on that, made that decision to kind of keep it where it was. The – in terms of the bank covenant, what you may recall, as we came into this year, we had – when we did the deal initially with CDM back two and a half years ago, we had it, the covenant levels were higher as we sort of integrated the business. As we came into the first quarter of 2020, it ratcheted down, and it was five times and it was basically set at five times for the remainder of the facility. So, when we looked at our initial budget, obviously, everything worked just fine, and then you had kind of March and April hit. So, when that stuff happened, and given just – there’s just obviously a lot more, I think uncertainty lingering out there now than, than there – in the past, we thought the prudent thing to do was to go ahead, talk to the banks, explain the situation and basically, get a little bit of cushion, so that we could kind of operate the business. And again, not – you’re not – we were not talking, hey, we think, we’re going to have enormous breaches, but I think just the increased uncertainty, that’s kind of out there in the market right now. We didn’t want to be in a situation, where down the road something happened and kind of caught us off guard. So, we went ahead and sort of did it ahead of time if you will.

Perfect. Really appreciate the color, guys. Thank you for taking the time with me today and have a safe day.

You bet.

Thanks, Shneur.

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

Hey, good morning. Most of my stuff’s been answered. Just one quick one. On the $10 million GP contribution agreement, are there any time milestones that revert control that option for you all to buy that, or is that always an energy transfer decision as long as their ownership hold for it is?

Yes. TJ, it’s Matt. Yes, it works really two ways. The ability of energy transfer had a time one year after closing. So, April of 2019, any time starting at that point, they can elect unilaterally, to put that the GP interest back to the partnership for that $10 million. So that’s on their side. So, they’re kind of right now free to go. The other side is, when their ownership, which is roughly 46.5 million units right now, when that gets – LP units, when that gets down to 12.5 million units, which is about a 75% decrease. At that point, it automatically triggers the repurchase by the partnership from energy transfer for that same amount.

Okay, got it. Thanks, guys.

Yes. Thanks, TJ.

At this time, we have no further questions in queue and I would like to turn it back over to Eric Long.

Thanks, operator. We expect 2020 to be a tale of two halves. The first half of the year saw solid results. But during the second quarter, we saw the impact of commodity price volatility, and that’s what the global pandemic. There continues to be a good amount of uncertainty on the extended duration of the current weakness and therefore, the timing and magnitude of the recovery. The good news is that we have continued to manage USA Compression with the same business model that has held up over 22 years. A business built on natural gas demand, whose long-term importance to this country and the world we continue to be optimistic about. We believe 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 the rest of the year. We took action early into the downturn on both cost and capital spending, that have served us well in the second quarter. And we will continue to focus on things within our control. Like in pass downturns, we expect to weather the storm and come out on the other side with a business model built for stability. Thanks for joining us today and please be safe. We look forward to speaking with everyone on our next call. Thanks for your continued support at USA Compression.

Thank you, ladies and gentlemen. This concludes today’s teleconference. You may now disconnect.