Welcome to USA Compression Partners LP's First Quarter '22 Earnings Conference Call. [Operator Instructions]. 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, 2022. 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 13, 2022. 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 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. As usual, today, I'll first briefly cover the operational results for the first quarter, which was a solid start to the year. But given the ever-changing world in which we find ourselves, especially within the energy industry, I plan to spend more of my time talking about the current state of the market and where we see our business going for the remainder of the year. So to give you a glimpse, I think the tailwinds that we've cautiously talked about over the last few quarters have finally arrived and begun to blow in earnest. We have a very supportive macro environment, under guarded by tight supply/demand dynamics and a growing need for natural gas, leading to attractive commodity pricing. And while the first quarter was a good start, we are excited about the remainder of 2022, and we believe we will continue to see opportunities to increase the utilization and pricing of our fleet, driving returns for our unitholders. USA Compression is above all an operation-centric business focused on providing the best possible compression services to our customers. To maintain the high service level to which our customers have grown accustomed, our employees are on call 24 hours a day, driving over 1 million miles every month, day and night, maintaining and repairing the large industrial equipment that makes up our fleet. As such, we have a relentless focus on safety throughout the organization. And I'm proud to say we have recently achieved another milestone, 4.5 million man-hours worked without a lost-time injury. As activity continues to pick up, our employees are going to be even busier. But with it, our commitment to safety will not waver. Safety is…

Thanks, Eric, and good morning, everyone. Today, USA Compression reported first quarter results including quarterly revenue of $163 million, adjusted EBITDA of $98 million, and DCF to limited partners of $50 million, all of which were in line with the quarter. As Eric mentioned, we saw pricing for the fleet as a whole increase during the first quarter, up to $16.87 per horsepower per month, reflecting the strengthening market for our compression services and contractual price escalators. Our adjusted gross margin as a percentage of revenue was 67% in the first quarter, a slight decrease from the previous quarter, which had benefited from some one-time offsets to expense. We achieved adjusted EBITDA for the first quarter of approximately $98 million, consistent with previous quarters. Adjusted EBITDA margin of 60% was again consistent with our total averages. Our total fleet horsepower at the end of the quarter of approximately 3.7 million horsepower was flat with the fourth quarter. Average utilization for the first quarter was up 2 percentage points from the fourth quarter to just under 85%, illustrating the strengthening market mentioned earlier. Utilization at the end of the first quarter, though, was up almost 3.5% from the end of Q4. For the quarter, we had total expansion capital spending of $20 million, consisting of some new unit payments and reconfiguration of idle units. Our maintenance CapEx was approximately $6 million. As Eric mentioned, during the first quarter, we did place orders for an additional 20 new large horsepower units for delivery in late 2022 and early 2023, which brings the total commitment for new units to 30 new large horsepower units. These new units will go to specific customer editions and the remainder of our expansion capital for the year will be focused on redeployment of existing idle units. Net…

[Operator Instructions]. Our first question comes from TJ Schultz of RBC Capital Markets.

So there's a lot of discussion about takeaway constraints from different basins with natural gas, particularly in the Permian. And then we've seen a few announcements about increasing compression going through various compression expansions to address those bottlenecks. So I guess the question is how you think about those constraints, the impact on your view on gas volumes and producer activity and growth outlook? And then also, I guess, the competition and tightness for new compression from suppliers as you're spending to order new horsepower this year?

Yes, TJ, this is Eric. Great question. I think one of the things that we are clearly seeing with the bottlenecks and supply chain issues for access to new equipment, those of us who during the last couple of years downturn had some new vintage modern assets returned and went idle. We have assets that can be deployed extremely quickly and at relatively low CapEx incremental cost to deploy. As we mentioned in our prepared thoughts there, topics that utilization for the first quarter averaged 2 percentage points higher run rate at 3% higher Q-over-Q. April was up. May is also up. So I think one of the reasons we saw a little bit light or we were a little light on coverage and our leverage was a little up was that we kind of pre-funded some of this conversion CapEx, make ready CapEx to deploy the equipment. So lead times for new equipment are a year-plus out. We have been working with our core suppliers, people we've had long relationships with to make sure that we've got access to parts and pieces, major components. We got in the queue ahead of some of the others. So it's a problem. Some of the larger -- particularly when you look at big volume projects coming out of the Permian, some of the bigger diameter lines, the lead times for this mega equipment have lengthened excessively. So I think what we're going to be seeing and will be the beneficiary is field gathering guys will be supplying incremental volumes into pipes at higher pressures. So I think from a competitive perspective, those of us who have equipment, there's just a couple of us are going to be the beneficiaries of that. We're executing significantly longer-term contracts. We're pushing through significantly higher monthly service fees. We're increasing the rates on units that come off a primary term and go month-to-month to the extent that a little bit of equipment is being returned to us, we quickly redeploy it to other places at significantly higher rates. So it's kind of the perfect storm. -- lead times for equipment of lengthen. Inflation is hitting us all. We're fortunate that we can offset inflation with some operating efficiencies. So this is exactly as we expected when we come out of the downturn. We focus on redeploying idle fleet. We focus on repricing our existing assets. And I think we will be the beneficiaries of a rising tide that not -- that just a couple of us are able to capitalize upon.

And TJ, it's Matt. Just one thing to add is when you think back to the last few downturns, kind of the '08, '09 downturn and then the '14, '15, '16 time frame, in both of those, and I'll just draw the difference between where we are now, both of those previous ones, you had more of a buildup of equipment kind of leading into those downturns, both in '08, '09 as well as kind of the '14, '15. What we've seen in the industry over the last, call it, 6, 7, 8 years now is there's been a lot more discipline on the capital spending. So I think that's in part what's caused what Eric was talking about, which is this longer lead time. And versus coming out of kind of the '08, '09 and '14, '15, there just isn't a whole lot of extra equipment out there. And so the lead times are pushing but also sort of the idle equipment inventory of especially the large horsepower stuff just isn't there like it was before.

Our next question comes from Selman Akyol of Stifel.

So just starting off with your last comment there on inflation. Could you maybe bifurcate that and maybe discuss it between what you're seeing on -- for people and then also for consumables, should we think of one as being great weighted than the other?

Yes, Selman. Great question. When you look at the components that drive our OpEx costs, labor is a large component. We pointed out we drive over 1 million miles a month. So diesel fuel, gasoline is a major component. Lubricating oil that we use for both our Caterpillar engines and aerial compressors has gone up significantly. We're fortunate that a lot of the contract mechanisms we have, for example, lube oil, we're able to pass through increases. So as we've seen oil prices go from $30 a barrel to $100 a barrel, you've seen refined lube oil prices increase proportionately, 2.5, 3x, we're able to pass that along to our customers. People are in short supply in any and all the industries right now. We're fortunate that USA Compression is viewed as a place that people want to be. We are seeing some competitive tension out in the field with some of our frontline service technicians. We're trying to get ahead of that with some constructive things. But as we point out to our folks, the grass isn't always greener on the other side. We've actually had some folks that have left over the last couple of years chasing a higher wage and a higher rate. And interestingly, we've had a large -- a significant percentage of those folks come back. It's one thing to say, I can make x number of dollars more and that could work over time. But when folks end up working 80, 90, 100 hours a week, for 6 months in a row with literally 7 days a week with no downtime in a period of 6 months that catches up in quality of life. So I think we try to balance work -- have a good work-life balance. Our men and women out in…

Got it. Very helpful. And then you referred to significantly longer contracts and increasing rates. But when I think about your new large units that you have on order, are you able to contract those for 5 years or so on those new units? How is that tendered?

Generally the terms that we're talking about, our industry with big horsepower, typically somewhere in the 2 to 5, every now and then we'll see a 7-plus-year contract. But yes, the -- when we're looking at these new bigger horsepower units, 5 years is kind of down the fairway.

And Selman, remember, a lot of that new stuff is going to big stations. So they're not kind of onesie, twosie units out there. They're actually part of 6, 8, 10-unit installations with all the associated other infrastructure, piping controls, et cetera. So it tends to be a lot more of a kind of an infrastructure application than just a unit out in the field.

Yes. Let me further the comments, Matt, that's a great concept. At the end of the 5-year primary term, these units don't automatically get repriced and come home. Either party can reopen the contract at that point in time. During this 5-year initial primary term, we generally build in price escalations, summertime CPI, some are price specific. But at the end of the 5-year term, it just doesn't automatically come home. Things evergreen, things going up 30-day notice or either party can say, "Hey, I do want to send it home or I want to renegotiate." With this really big horsepower, as Matt points out, it rarely comes home. So we typically either coming into the -- prior to the exploration of the 5 years or right afterwards, we enter into another term contract that are in the kind of the 3- to 5-year horizon again and extend the operational deployment time of those assets. These -- we have always talked about barriers to entry, but our industry with big horsepower has very large barriers to exit. The freight costs are borne by our customers. So there's cranes, there's trucking costs. You may be looking at multiple hundreds of thousands of dollars to send one of these and individual piece of equipment home. And as Matt points out, there's 4 to 8 of these units on a given pad site and these pads may be moving anywhere between 30,000 barrels of oil and 100 million cubic feet of gas a day. So you can envision what the downtime and loss of revenues would look like if this equipment were to be sent home. They don't just take our stuff, send it home, then you got to build a duplicate facility with somebody else to have the piping, the vessels, the separation, dehydration, treating all the stuff that goes with it. So once we're in, we're in. And it's really only when there's a significant change in these big central facilities that a unit might get sent home or 2 units won't -- might get set home. So you can envision with a major oil or a large independent having multiple hundreds of thousands of acres in a geographic area. They've developed these big central facilities on a hub-and-spoke basis where they'll develop pad site 1, drill, develop, move to another pad site to and then interconnect that new pad site or multiple pad sites with gathering lines to provide the oil and the gas back to the central facilities. So we're literally involved in the regional infrastructure for an extended period of time.

Got it. Very helpful. And then you talked about reconfiguration of units. And I'm just kind of curious how much of that is left. And so as we roll into 2023, should we be thinking about everything you do would be -- presumably have to be new order?

We do reconfigure a little bit. As we think about dual drive going forward, there will be some reconfiguration capital associated with it. The bulk of our equipment generally stays in the basin where it was originally deployed. So if you think about Permian Basin, you think about Mid-Continent, you think about Appalachia, generally, the assets stay in those basins. They may have come home. They were underutilized during the downturn. They were set home. So we'll spend some make-ready capital. You got to paint the thing, you got to do some control valves, and do a little bit of work, site vessels and electronic gizmos and stuff to get it ready to go out in the field, but it's a small percentage of CapEx costs versus buying a brand new unit or even reconfiguring a unit. So I would say predominantly the bulk of the reconfiguration dollars are going to be spent on dual drive. There will be some incremental make-ready capital costs to take idle equipment and get it moved out into the field. And that will continue on into 2023. And it depends on the trajectory, how quickly we redeploy the idle fleet. We're honestly ahead of what we modeled coming into 2022 as far as redeploy of idle assets. And just a question of how long it takes to redeploy in the field. And with the lack of access to new equipment, obviously, that trend is going to tend to accelerate.

As there are no further questions, I'll hand the call over to Eric Long for any additional or closing remarks.

Thank you. The first quarter of 2022 kicked off a year in which we expect continued growth in activity across the energy industry, starting with the upstream producers. The quarter reflected solid operations with some positive trends as we move through the quarter, including utilization and pricing gains and increased quoting activity. In order to be ready for demand that we see coming, we will continue to prepare our idle fleet for redeployment to the field as well as selectively make capital investments in new units earmarked for specific customers and infrastructure applications. Natural gas prices and production continue onward and upward for now, and the ever-important need for natural gas has only become more so, given the global political events currently taking place. We expect these factors to continue to drive the demand for compression and demand for our business during 2022 and beyond. One thing has not changed, the fundamental driver of our business is the demand for and the production of natural gas. We see natural gas usage increasing in the U.S. and throughout the world. We believe that the underlying stability of our large horsepower infrastructure-focused contract compression services business model has served our unitholders well over the last few years and for the nearly 25 years we have been in business. We have a great asset base from which to be involved in the longer-term transition to cleaner energy in which natural gas will clearly play an important part. Thanks for joining us, and please be safe. We look forward to speaking with everyone on our next call.

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect.