Good morning and welcome to the USA Compression Partners, LP’s Second Quarter 2021 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, August 3, 2021. I would now like to turn the conference 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, 2021. 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 August 13, 2021. 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 3rd, 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 second quarter of 2021, reflecting continued stability in our infrastructure-driven business with results that were largely consistent with the prior quarter and in line with what we expected. I would categorize this quarter as one of foundation building, with continuing overall improvement in our base business fundamentals. While commodity prices for both oil and natural gas have dramatically improved over the past year, and worldwide storage levels have declined dramatically, setting the stage for supply-demand equilibrium, the specter of short-term pressure on demand due to the emerging COVID-19 Delta variant exists. With continued discipline by OPEC+, the ultimate reopening and strengthening of global economies, continued reduction of oil and gas and storage worldwide, and insufficient additions to new sources of supplies due to low levels of capital expenditures for drilling, the stage is being set for expanding activities in the back half of 2021 and 2022. We are seeing the tension, the yin and yang between managing to free cash flow and ESP drivers, coupled with potential emerging COVID-19 demand implications and OPEC+ discipline, all of which are gaining better clarity in the coming quarters. Before I get into the specifics of the quarter, I want to highlight a special achievement by USA Compression’s operating team. We recently achieved a significant milestone, having worked over 3 million hours without a lost time injury, which represents a multiyear safe working time frame. Our HSE vision is zero incidents in all we do, and I am proud of the working and safety culture that the men and women of USA Compression embrace each and every day. Turning to the second quarter…

Thanks, Eric, and good morning, everyone. Today, USA Compression reported second quarter results, including quarterly revenue of $157 million, adjusted EBITDA of $100 million, and DCF to limited partners of $53 million, all of which were consistent from last quarter. In July, we announced a cash distribution to our unitholders of $0.525 per LTE common unit, consistent with the previous quarter, which resulted in consistent coverage of 1.03 times. To avoid any confusion, that distribution level has been consistent for 25 straight quarters, not the 34 quarters in Eric’s comments earlier. That related to our total quarters of distributions since our IPO. Our total fleet horsepower at approximately 3.7 million horsepower at the end of the quarter was down slightly, as Eric mentioned, due primarily to the sale of certain compression units to a customer. Our revenue-generating horsepower at period-end was also down slightly due in part to the same reason. Our average horsepower utilization for the second quarter was 82.4%, slightly down from the first quarter. Pricing, as measured by average revenue per revenue generating horsepower per month was $16.55 for second quarter, which was also a slight decrease from the previous quarter’s level of $16.60. Of the total revenue for the second quarter of $157 million, approximately $155 million reflected our core contract operations revenues, while parts and service revenue contributed roughly $2 million. Adjusted gross margin as a percentage of revenue was 70.9% in the second quarter, slightly above the Q1 number and consistent with USA Compression’s historical levels. Net income for the quarter was $3 million and operating income was $35 million. Net cash provided by operating activities was $99 million in the quarter. Maintenance capital totaled $5 million for the quarter. And lastly, cash interest expense net was $30 million. At this point, we’re not making any revisions to our previously communicated guidance for 2021. And 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.

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

Hi. Good morning, guys. Maybe to start off, Matt, you just sort of said at the end that your guidance is unchanged. But, I just was wondering if you guys can sort of square a couple things for me here. It sort of seems like the midpoint of your guidance was basically based on kind of the annualized, which you did in 4Q. 1Q has been better; 2Q is pretty much the same. You’re kind of analyzing towards the top end of your guidance. And then, when I sort of listen to the discussion in your prepared remarks, you certainly signaled a more optimistic tone as well, too. Is there a seasonal issue in 3Q or 4Q that we should be aware of that sort of brings you squarely into your guidance range? Is there a sense of conservatism? Especially, when you talk about how equipments disappearing and that you’ve held some back and you’re maintaining even better contracts and being disciplined. I’m just trying to sort of square that whole conversation there with respect to your outliner and guidance?

Hey. Shneur, it’s Matt. I think it’s probably more the latter than the former in terms of the conservativeness. I think, as Eric mentioned, we’re starting to see a lot of positive signs and kind of the market seems like it’s setting up for that for a good back half, which I think is consistent with what other folks in the space more broadly are pointing to as well. But, I think at this point in time, we felt the prudent thing to do was, keep it where it was. We didn’t decrease it and we didn’t increase it. We just kind of kept it where it was. And as things play out over the course of the rest of the summer and the fall, we should be in a position to update that if appropriate.

Okay. That makes perfect sense. Maybe to pivot a little bit. Eric, in your remarks, you sort of talked about the dual fuel compressors and kind of more to come; Energy Transfers, talked about them as well too in terms of its patented technology. And then I think, last week Trans Canada -- or sorry, TC Energy, I guess, is what they’re called now, talked about they were adding it to their system. Can you sort of talk about the opportunity set that you see? Is this an advantaged compression unit that you have? Are you potentially selling them to or leasing them out to TC Energy and others that are starting to talk about this? What’s the discussion with potential customers? And how does this all work with your relationship with Energy Transfer and how that could be deployed?

Yes. Shneur, you’ve got multiple questions there. I think, for competitive reasons, we’re not going to get into any specifics on today’s call. It’s clear that Energy Transfer and USA Compression both believe that dual drive technology offers a competitive advantage, both for midstream players as well as USA Compression vis-à-vis our peers. I think simplistically, the dual drive concept offers some redundancy that a straight electric compressor would not. Electric compression is viewed as I mentioned, where the puck may be going. But, you’ve got substantial grid limitations; you’ve got lack of infrastructure. We saw in Texas during the polar vortex what happened when electricity gets shut off, the major processing facilities and no electricity, no electric compression would be able to drive -- would be able to work. So, I think there’s some unique aspects of dual drive in our preliminary discussions that we’re having with different targeted customers. They also see the benefits in the form of reduced CO2 emissions, substantial improvement in redundancy. There’s a lot of efficiencies that can be brought to the table. So, there’s a lot of features and benefits that this has. So, I think, we just wanted to mention on the investor call today that this is something that is right down the fairway for us. We’re not planning, as I mentioned, to add any new equipment in the back half of 2021. We’ve made no commitments for new equipment into 2022. The dual drive will become a greater and greater focus as we move into 2022 and beyond, with our core fleet as something that we can retrofit cost effectively and economically and something that we think provides us with significant opportunity sets, as well as significant alternatives to any offerings that our competitors may be able to bring to the table.

Yes. I appreciate the color. Just to clarify, just to respond a little bit there. So, you said there’s no plans to order new equipment now or into next year, at this stage. Does that mean your existing assets could be upgraded to the dual fuel, or once you make a decision, then you’ll be making some acquisitions or placing some orders?

Our view, Shneur, is that we can cost effectively retrofit our equipment. And accordingly, there’s no need for us to go out and additional, as an example, either new conventional compression type of equipment or to add just standalone electric equipment. Brand new electric equipment doesn’t give you the dual fuel capacity where you can run on electricity or can run on natural gas. So, we believe that the cost effective retrofit of our existing fleet indeed is the way to go.

Our next question comes from Vinay Chitteti with JP Morgan.

Hi. Good morning, guys. I just wanted to look on -- wanted some clarification on the EBITDA outlook here. So, it does appear you are doing better than what was budgeted early this year. But, when you think about it, it feels like it you’re getting more benefits from the cost side versus on the utilization side. I just want to understand your thoughts how the current activities trending versus what you budgeted earlier this year. And then, given there is an improved production outlook, how that could translate to utilization recovery over the next few quarters or 2022?

Vinay, this is Eric. And I think, a fair way to say it, you notice that we’ve had margin improvement, while we’ve had a little bit of degradation in utilization, predominantly driven by that capital lease, which was -- we knew that was going to occur for a long period of time. Our approach, and we’ve done this in the past, when we’ve seen downturns in the cycle, as I mentioned earlier, we see a four to six-quarter lag between new activity and then when demand for compression starts to tick up. So, since we have opted not to add any new equipment to the fleet, we will be focusing on utilizing our existing idle assets to redeploy. Rather than redeploy those assets when pricing is soft or contract tenures are somewhat shortened, we have chosen to maintain and improve our operating margins, our gross margins, rather than I think our quote was in our prepared remarks to dump equipment on the marketplace. So, as we see, demand continue to tick up, we see no new equipment being built or limited new equipment being built. We see competitors dumping equipment into the marketplace, just to grab any kind of incremental revenues, our sense is that some of their balance sheets are strained and some banks covenants that they may be dealing with, so got to create revenue at any and all costs. So, we’re maintaining some discipline out there associated with it. So, our view is that in the upcoming quarters, we will be one of the last men standing, so to speak, have high-quality, larger horsepower assets that we can readily redeploy, and lock in longer-term contracts at premium pricing.

Got it. That makes sense. I guess -- so that also talks that you are very comfortable to where you are in terms of leverage and also bank covenant. But, you are also talking about distribution will be looked at quarter-to-quarter. Maybe if you can share any thoughts on what do you think about leverage near-term and the long-term, and what factors could weigh in your distribution outlook? I mean, EBITDA is doing well, and you are saying operating leverage would pick up later this year. So, I just want to understand that.

Yes. Vinay, it’s Matt. Yes, in terms of leverage, I think you’ve probably noted, it’s basically from the first quarter, where we are, we’re still under kind of 5 times and sort of well within our covenant levels on the bank deal. So, overall, I would say, it’s not too much of a concern. As Eric mentioned, as things pick up, if this is the kind of the trough of things, as you know, we do have a lot of operating leverage. And so, as things pick up, we should be able to generate cash flow that falls to the bottom line and then impacts on a positive way that leverage. So, the Board looks at it, like we mentioned, on a quarterly basis. And obviously, we’ve had strong quarterly results this year so far with sort of an improving positive outlook. And so, again, they look at that every quarter. So, we’ll revisit it with the Board next quarter. But, it would certainly seem like we’re kind of through the -- at or through the trough and positive that things are looking up for the rest of the year and into next year.

Got it. That’s it for me. Thanks a lot.

Okay. Thanks, Vinay.

And that does conclude today’s question-and-answer session. I’d like to turn the conference back to Eric Long for any additional or closing remarks.

We were pleased with our results during Q2 and believe that the balance of 2021 and on into 2022 will show continued improvement in our overall business. We continue to experience the stability in our business that we have become accustomed over USA Compression’s history, stability driven by our focus on large horsepower and the resilient global demand for natural gas. Natural gas prices have moved to recent record highs and the outlook for production is positive, which bodes well for the demand for compression and for our business. The fundamentals of our business remain the same, driven by the demand for natural gas, which we see increasing in the U.S. and throughout the world. We have a great asset base from which to be involved in the longer term transition to cleaner energy, which natural gas will clearly play an important part. We believe that the underlying stability of our large horsepower infrastructure-focused contract compression services business model, coupled with the science behind the need for compression, driven by the interplay between pressures and volumes will be a key point of positive differentiation for USA Compression. We continue to be well-positioned to benefit as the domestic and global recovery takes place. Thanks for joining us. And please be safe. We look forward to speaking with everyone on our next call.

That does conclude today’s conference. We thank you for your participation. You may now disconnect.