Good morning and welcome to USA Compression Partners LP Second Quarter 2022 Earnings Conference Call. During today's call, all parties will be in a listen-only mode and following the call, the conference will be open for questions. Additional question -- Q&A instructions will be given at that time. [Operator Instructions] This conference is being recorded today, August 2nd, 2022. 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, 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 August 12th, 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 future 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 2nd, 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. Over the past few years, multiple investors have suggested to me that early on in our earnings call, I get head on two topics that folks want to hear about, how is business? And is our distribution safe? First, our business is strong, as you would expect right now. I will spend a large part of this call talking about how we see USA Compression faring over the upcoming years in light of the spotlight being shown on the critical shortage of energy worldwide. And second, on July 14th and based on the second quarter results, our Board decided to keep this quarter's distribution consistent at $0.525 per unit, which will be paid this Friday, August 5th. This resulted in a distributable cash flow coverage ratio of 1.08 times, a nice improvement of over 10% from last quarter. This will be our 38th quarter of consecutive distribution payments and we will return over $1.4 billion to our unitholders since our IPO in January of 2013. As always, our Board determines the distribution on a quarterly basis and they can opt to maintain, increase, reduce or suspended distribution as it deems most appropriate. Our bank covenant leverage ratio was 4.9 times, a healthy reduction of over 5% from last quarter. So, now on to how we see our business stacking up and where does USA Compression go from here? The second quarter continued the demand-driven improvements in our business that we saw towards the end of the first quarter and reflects the shortage of energy of all types in which the world now finds itself. The macro environment, driven by a growing need for natural gas and constrained supply, continues to…

Thanks, Eric, and good morning, everyone. Today, USA Compression reported second quarter results, including quarterly revenue of $171 million, adjusted EBITDA of $105 million and DCF to limited partners of $56 million, each of which represented an increase over last quarter's performance. Pricing continued to increase during the quarter, up to $17.20 per horsepower per month. The increase reflects a combination of a strengthening of the overall market for our compression services, as well as contractual price escalators designed to keep pace with CPI. Our adjusted gross margin, as a percentage of revenue, was 67.8% in the second quarter, which represented an increase from the previous quarter and is approaching our historical averages. In the quarter, we achieved adjusted EBITDA of approximately $105 million and an adjusted EBITDA margin of 61.5%. Both these were also improvements from the previous quarter and demonstrate the ability of the business to generate meaningful cash flow as utilization tightness. Our total fleet horsepower at the end of the quarter was flat from the previous quarter at approximately 3.7 million horsepower. As Eric mentioned, average utilization for the second quarter was up 3 percentage points from the first quarter to just shy of 88%. For the quarter, we had total expansion capital spending of $32 million, which was in line with our budget, consisting primarily of reconfiguration and make-ready of idle units, with the remainder consisting of the delivery of four large horsepower units for deployment in a compressor station in the Delaware Basin and some associated additional station components. Our maintenance capital was approximately $6 million, consistent with the previous quarter. Net income for the quarter was $9 million and operating income was $42 million. Net cash provided by operating activities was $94 million in the quarter. And lastly, cash interest expense net was…

Thank you. Good morning. First question -- and I think you've referred to this prior as utilization continues to tick higher, you're going to get more and more pricing power, and it really sort of kicks-in in that low 90%, high-80s. So, it seems like we're about there. And I'm just wondering how much more do you think you can push gross margins up?

Yes. Selman, it's Matt. Good question. I think the way I would look at it is, historically, this business is -- has always generated gross margins, kind of in and around that high-60s to 70% range and that would be true if you were to look at the USA Compression stand-alone financials back to 2013 at the time of the IPO. There was a bit of noise when we did the CDM acquisition because of the accounting. So, if you look kind of in the 2018, 2019, those margins would go a little lower. But, the USA Compression core kind of legacy business has always kind of been able to operate around that 68% to 70% range. And so, I mean -- I think it's hard to go and say, you're going to get another 5 percentage points of gross margin impact. I mean, I think if we're running kind of in that 69% range, it's pretty strong and consistent with where we've been historically. So, the -- obviously, the pricing -- a lot of the pricing increases, we have done are both related to kind of the overall tightness of the market, but also working to manage any sort of inflationary pressures. So we'll continue to do that and hopefully keep run ahead of any cost inflation. But at some point, we found it back in '18, you do tend to hit a bit of a ceiling on pricing where you just can't push it any further. And obviously, the customers ultimately have the decision to either buy or lease or buy or get services from a third party like us?

Understood. And so, in this better environment, are you also seeing any change at all to tenor at all, are you able to extend the contracts for a lock-in a period of time?

Yes, Helen, this is Eric. We have historically been able to lock in longer-term tenor on contracts in periods when the market is a little softer, there's really no incentive for USA Compression to be locking in longer-term contracts at lower rates. So, in an environment where we are today, where you're seeing increasing rates, a willingness by producers to lock in for a longer term because of lack of available equipment, we're actually taking advantage of that opportunity. So, I would say -- on a percentage basis, we're seeing longer-term contracts at higher rates than we've seen for in recent years. And we can continue to expect that to occur on into the future.

Got it. Its good news. You've also talked about in the past using existing equipment, idle equipment, refurbishing and putting it back out there. Can you say how much of that you still have to go?

Well, with our utilization being in the upper 80s, you can mathematically take a look at our total fleet of around 3.8 million, 3.9 million horsepower, so if you do the math, 12% of $4 million round number, that's still a lot of horsepower that we have to play with. Not all of that, of course, is bigger horsepower, not all of that is readily deployable, but a large percentage of that is.

Got it. And then I guess, lead time for large horsepower, how is that trending?

It's getting longer and longer as we speak. It of course depends on, which are the elements because you've got the engines from Caterpillar, you've got the compressor and cylinders that would come from Aerial, you've got coolers that come from a different – couple of different providers, you've got electronic controls, etcetera, etcetera. So, depending on the size of the equipment, it varies. But we're seeing quotes from certain types of Caterpillar equipment, the stuff that we specialize in or a year or, in certain cases, substantially longer than a year. So, you're 60-weeks on the type of equipment that we typically add to our fleet. So, it's way out there.

Got it. And then I guess last question for me and maybe a two-parter, but you opened with saying the first question, you always get is around the dividend and I was really rather surprised on that because you guys have seen worst times and you didn't cut the dividend, and now you're certainly in a strengthening environment and it seems like things are continuing to be up into the right. So, if you haven't cut it previously, I'm wondering why people would be concerned about it now? When I look out to your debt, you don't have any maturities until '26. And you mentioned your leverage ratio at 4.9x. So, I'm wondering, does the Board think -- just looking that far out and going, we need to get our debt lower and this is the easiest lever to think about or can you just maybe help me understand, I guess, where the concerns for the distributions coming from?

Yes. And again, I talked to a lot of people all the time. A lot of people looked at us and frankly, don't understand our business. They look at it and go, wow, your yield is low double-digits, depending on the day, it's 11% to 13% or 14% distribution yield people go, why is this so high? This must be a risky business to which we respond just like you did, Salmon, "Hey, we've been through worse. Things are going from the bottom left of the page to the top right of the page, if we could power through like we did a couple of years ago and we powered through multiple down cycles, why would you be concerned today?" So I'm just kind of trying to connect some dots for people there's two ways to look at it. Either the yield is too high or our stock price is too low or a combination of the two, we've got to make the disclaimer. Our Board makes the decision on a quarter-by-quarter basis. We've been through a lot worse times in the past than we are today, and we're pretty happy with how we're performing and what the future holds in store for us. So I think we're just trying to connect some dots for some people who really don't understand our business. This isn't a drilling company, a mud company, a fracking company, a simulation company tied to the drilling side. We're the heart of the human body that pumps gas into and through the pipelines. Without us, there is no cash flow. So in times like we are today with extremely high oil prices, extremely high natural gas prices, compression is just a very small component of the cost of the value-added chain. So people look at us and go, what matters today is getting access to compression, having compression, having high utilization run times and making sure that were safe, but more importantly, that we're pumping gas into and through the pipelines, times like these, the cash register got to ring and we're the guys that help ring the cash register. So it's a stable business. It's a great time to be in our business. And we think that we're not being properly rewarded for the performance of the company and how we're performing versus other components of the energy sector.

Thanks very much.

Thank you, sir.

And we'll go ahead and take our next question from Gabe Moreen with Mizuho. Please go ahead.

Good morning, guys. Just a couple of quick follow-ups. I don't know if I caught it, but is there -- was there any change since last quarter kind of the order backlog overall, particularly on large compression units?

In the form of contract activity I think they were a little different than somebody with -- who's a fabricator that might say I've got a $400 million backlog of somebody gaming order a year from now, we're going to commit to build an order. We don't really monitor and measure our business that way. We look at our utilization rate. So as we indicated, we deployed 60,000 horsepower in net quarter or additional horsepower for the quarter, our utilization is ticking up. That's probably the best way to look at it. We're not -- a lot of our contracts typically folks enter into for deliveries. We'll sign a contract today for deliveries 90 days from now, deliveries 180 days from now. We've got a couple of projects that will involve some brand-new equipment that have a greater than a year lead-time. But generally, we're not looking at backlog like a fabricator like one of our competitors might look to that's an important metric is, again, we're not a one-time sale guy that when that backlog evaporates, all of a sudden, you've got no revenues and no cash flow, we're signing these multiyear long-term contracts that even after the primary term expires, a lot of these units stay out in the field on a month-to-month basis generating cash flow.

Thanks Eric. I was just really referencing, I think, Matt's comments last quarter about the commitments to 30 new units and placing orders for 20 new units for 2022 and 2023, yes.

Yes, sorry about that. We were thinking kind of the flip side of that coin. No, no change. I think what you will see is, as Eric mentioned, these lead-times on the new equipment continue to kind of move around, typically moving out, not in. And so our CapEx -- you'll see the CapEx expectations in the Q reflect that reality. So, I think we'll still get some more units here -- previously ordered units showing up towards the end of the year, and then there'll be a number of things that get kicked into 2023.

Got it. Thanks. And I think, Eric, you had mentioned about deploying some compression for a carbon capture project or being in discussions to. So, I appreciate that there's a lot of discussion around carbon capture and some of them are more just blueprints than actual real plans at this point. But can you just talk about that project for your customer may be there, is anything different about the unit? And do you see more of that in the future?

So, I think you hit the nail on the head, Gabe, is there's a lot of people looking at various types of CCUS from ranging from air capture to stack capture, to almost things dealing with some conventional recycling of tertiary recovery type of project. So, it's kind of across the map. It's very early in the project development. We remain somewhat guarded as to the feasibility of this. To compress CO2, requires some technical changes. Typically, you're looking at some higher pressures instead of a three-stage unit. You might need a five-stage unit because you're injecting gas at a significantly higher discharge pressure, you need single steel on a lot of the piping. You can't have any what we call yellow metal or red metal -- brass and bronze and things like that because the CO2 will unbridle and the equipment will fail. CO2, with any kind of water vapor, formed carbonic acid, which is highly corrosive. So, you have to take all of that in your design consideration. So, we're starting to see more and more interest, but have they actually moved forward to FID, Final Investment Decision. Jury is still out yet. It's very early. I mean, we're kind of in the beginning of the first inning, not even mid-innings, as to the -- is this really going to occur? So, like everything ESG-driven, we think a lot of it is going to be regulatory driven, and obviously, here, over the last year or so, there have been some significant alteration in the current regime's outlook on carbon and CO2 and carbon taxes and incentives or disincentive. So, economics aren't quite there yet. And I think that's what people are waiting to see is, let's test the waters, let's be ready to move, if it makes sense. And until it makes economic sense, there probably will be some continued can taking, so to speak.

Great. Thanks, Eric. Appreciate it.

Thanks Gabe.

And with that, that does conclude our question-and-answer session. I would now like to hand the call back over to Eric for any additional closing remarks.

A mere 15 months ago, many market watchers stopped at sustained oil prices above $60 a barrel, was an impossibility. But the recent softness in oil prices, much noise is centered around possible demand destruction and economic headwinds and that we are entering a period of lower oil and refined products prices, benefiting consumers and that inflation is being tamed. We do not hold the same belief. The economy, especially in the US and in China will improve. Once it does, the imbalance between an adequate supplies of all types of energy and the increasing levels of demand will surface again. Our sense is that we are in the early innings of an ongoing global energy crisis and that natural gas and compression will serve an ever-increasing role in helping to solve. The situation in Europe, clearly shows that natural gas is going to be the bridge to renewables and for reasons, I pointed out earlier, will take far longer and be far more expensive than most people fab them. Alternatively, if an expanded role for US natural gas in the form of LNG being shipped worldwide occurs, demand for US natural gas skyrockets. Either way, USA Compression is well positioned for the rest of the year and far into the future, which should benefit our utilization, revenues and cash flow. We believe that the underlying stability of our large horsepower infrastructure-focused contract compression services business model that has served our stakeholders well for the nearly 25 years we have been in business will continue well into the future. Thanks for joining us, and please be safe. We look forward to speaking with everyone on our next call.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.