Good morning. Welcome to USA Compression Partners Second Quarter 2023 Earnings Conference Call. During today's call, all parties will be in a listen-only mode. [Operator Instructions] This conference is being recorded today, August 1, 2023. 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 operational and financial results for the quarter ending June 30, 2023. You can find a copy of our earnings release as well as a recording of this call in the Investor Relations section of our website at usacompression.com. During this call, our management will reference certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures to the most comparable U.S. GAAP measures in our earnings release. As a reminder, our conference call will include forward-looking statements. These statements are based on management's current beliefs and include projections and expectations regarding our future performance and other forward-looking matters. Actual results may differ materially from these statements. Please review the risk factors included in this morning's earnings release and in our other public filings. Please note that information provided on this call speaks only to management views as of today, August 1, 2023, 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. I am joined on the call today by Eric Scheller, our COO; and Mike Pearl, our CFO. This morning, we released exceptional second quarter 2023 results that were attributable to our ability to opportunistically procure and deploy new compression units, convert idle units to active status and secure attractive pricing for new and legacy units in an extremely tight compression market. Our directed efforts in each of these areas have allowed us to create meaningful stakeholder value through the delivery of our best-in-class compression service offering under our disciplined capital management and organic growth compression-as-a-service business model. We continue to exercise capital discipline to returns-based capital allocations that direct capital expenditures to optimize returns, resulting in continued improvements to our balance sheet and progressing us closer to a state of financial optionality that affords us greater flexibility to deploy free cash flow to further reduce debt, make changes to our distribution policy, or pursue other strategic long-term investments and initiatives. Our second quarter 2023 results again featured consecutive quarterly record revenues, adjusted EBITDA and distributable cash flow. Demand driven pricing for our services in an extremely tight compression market continues to underpin our up into the right operational and financial performance. During the second quarter, we continue to place units under contract for extended tenors and at attractive pricing compared to prior market cycles, while increasing the size of our active fleet through new unit additions and continued conversions of legacy units from idle to active status. A revenue generating horsepower exit rate for the second quarter came in at approximately 3.35 million horsepower, a record for USA Compression. Our second quarter growth in active horsepower was achieved alongside further quarter-over-quarter improvements in utilization, which averaged over 93%…

Thanks, Eric, and good morning all. As Eric noted, the strong results we reported this morning once again reflect our exceptional customer service, our high-quality compression assets, and our demonstrated ability to enhance the performance and profitability of the business. At the same time, we will continue balancing our opportunity set from commitments to pursue capital discipline, reduce leverage and improve distribution coverage. We continue to message our positive industry outlook for 2023 and beyond, and focus on expanding the size of our active fleet to meet the demands of what continues to be a hungry compression market. During the second quarter and throughout 2023, we have been successful in growing our active fleet to all-time highs in terms of revenue generating horsepower with approximately 3.35 million of currently deployed horsepower generating revenue at quarter end. Likewise, our utilization statistics continue to improve with our second quarter exit rate utilization clocking in at 93.7%, a 4 percentage point improvement over the prior quarter. As our active fleet size utilization continue to improve, we also continue to capture extended contract tenors across the entire portfolio, which is the direct result of an extremely tight market for natural gas compression and the quality of service that we deliver to our customers. We expect our active fleet and company-wide utilization to continue increasing as market tightness persists. We believe that existing and pronounced tightness in the compression market will continue for years to come, as forecasted commodity prices support continued domestic drilling, new unit orders slow as new unit construction costs escalate significantly, lead times for new unit deliveries for past 70 weeks, and available component manufacturing capacity is consumed by numerous companies seeking gas-driven backup power solutions for data centers. Our capital investment strategy has evolved over the last few years in…

Thanks, Eric Scheller, and good morning. As Eric Long mentioned, our second quarter results featured consecutive quarter record revenue, adjusted EBITDA, and distributable cash flow. Our second quarter distribution coverage of 1.3x represents an all-time high for USA Compression, and is directly attributable to pronounced and continued demand for our services, which play a pivotal long-term role in delivering hydrocarbons to market centers. Our operations and commercial teams continue to manage our fleet efficiently so that we remain positioned to grow our active fleet's compression capacity, while capitalizing on attractive contract pricing that we continue securing under long-term take or pay styled contracts. Our quarterly utilization exit rate continued to improve, and was complimented by further increases to our quarterly average revenue per revenue generating horsepower, which came in at another all-time high of $18.65. Our second quarter 2023 results revealed a 5% increase in sequential quarter revenues, and a 21% increase in revenues compared to the year ago period. This revenue growth was driven by improved utilization and pricing with margins largely remaining intact despite pronounced and persistent input cost inflation. We continue to experience comparatively higher prices for parts, supplies, and labor in all regions. The bulk of our customer contracts allow for CPI-U rate adjustments at contract anniversary dates, and these rate adjustments can help to mitigate the adverse economic impact of input cost inflation. However, there is a lag effect associated with realizing the economic benefit of CPI-U rate adjustments as the immediacy of input cost inflation tends to front run the dates at which CPI-U rate adjustments can be applied. Furthermore, inflation related to some of our significant input costs such as labor remains sticky and elevated compared to the CPI-U, which is affected by a broader market basket of consumer goods and services that…

The second quarter of 2023 provided us with further confirmation regarding our optimism regarding the long-term demand for our services and our ability to further cement our status as the premier third-party compression service provider in the industry. For the balance of 2023, we will continue focusing on maintaining capital discipline as we satisfy market demands for our services, increasing our durable and predictable cash flow stream by opportunistically contracting our services under longer termed contracts that feature attractive and demand-driven market rates and deploying new large horsepower units, and transitioning legacy units from idle to active status. We look forward to sharing the results from of ongoing operations and investments strategy in the periods to come and firmly believe that USA Compression is positioned to improve its financial positioning, as we continue to realize the benefits of our commercial and operational efforts. On August 4th, we will make our 42nd consecutive quarterly distribution payment. The $0.525 per unit distribution is flat to the previous quarter's distribution. Continued improvements to our active fleet size, utilization, contract tenors and contract pricing will increase our financial optionality for further capital investment, leverage reductions and distribution policy changes. To conclude, we are extremely pleased with our second quarter results, highlighted again by record quarterly revenues, adjusted EBITDA, distributable cash flow and distribution coverage, in which also is featured continued improvements to utilization and leverage. Finally, I would like to recognize USA Compression's 25th anniversary, which we celebrated in July. On behalf of our Board of Directors and senior management, I emphatically thank each member of the USA Compression family for their respective contributions to making USA Compression the industry's premier provider of natural gas compression services. Your commitment to delivering first class service to our customers, while safely pursuing operational excellence has enabled USA Compression to deliver exceptional value to all stakeholders for more than 25 years. Reflecting on the last 25 years, I can't help but be amazed that USA Compression has distributed more than $1.5 billion over the past decade to its equity holders, while growing its business exponentially. We have enjoyed many successes throughout our journey and look forward to the opportunities that lie ahead. In closing, we would like to thank our employees, customers, suppliers, investors, and founders for contributing to USA Compression's pronounced success, and we look forward to discussing our third quarter 2023 results with you in a few months' time. And with that, we will open the call to questions.

[Operator Instructions] Our first question comes from the line of Gabe Moreen from Mizuho. Please go ahead.

Good morning, everyone. I just wanted to ask about, I guess, the shift and pivot back to trying to bring idle units back into service versus ordering new units. Can you just talk about the dynamics, I guess, out there with your customer relationships? The market is still really tight. I assume some of your customers are still clamoring for incremental horsepower. Is there a risk that I guess maybe you seed market share if you are not out there ordering despite these really, really long lead times and inflated costs for new compression?

Yes. Great question. This is Eric. I mean, what we are seeing is that there is more demand than there is goods and services and mechanics to go around for all of us in the industry. So I think the way we look at it is, we control, we can control, the incremental cost of redeploying some of our idle equipment is significantly less than building brand new. So to the extent we've got decent equipment that has useful life remaining, we'd rather spend a little bit of make-ready capital rather than spending and some incremental additional capital at costs that we see that if -- as we pointed out, cost of organic assets are up 20% year-over-year. So, we're less concerned about market share than we are about optimizing our own financial health, our own balance sheet, our own leverage and coverage profiles. But again, there's more than enough business for all of us to go around.

Thanks, Eric. And maybe as a follow up, can I ask about sort of the decent equipment as I guess you termed it, it's still idle out there. Can you help us kind of frame up how much of the unutilized stuff out there can be refurbished and redeployed, sort of what your timing is on that? And then maybe sort of framing up, I think you had $250 million-ish in CapEx this year, framing up sort of what '24 CapEx can look like?

Hey, this is Scheller, Gabe. So the vast majority of the idle equipment that remains is in really good condition. We've done a hard review of all of the assets. We're starting to refurbish the component, and it's begun to assemble units to start going out here for the back half of the year, and especially more so in the first half, first three quarters of next year. I think, the capital burn on that is going to be substantially less than it is going to be this year. But nonetheless, we'll be able to supply units for all of the customers who've already expressed an interest as they're doing their forecast for 2024.

Thanks, Eric. And then I guess just hypothetically, you're approaching 94% utilization right now. Do you think you could get another 1% or 2% next year as you redeploy all that stuff?

I do. I think the stuff that's what's left, and what it looks like is in good condition, it -- we're very confident we can get utilization higher.

Our next question comes from a line of Selman Akyol from Stifel.

So first question, just on gross margins, improved very nicely sequentially, and I think all times high has been around 65%. So is this sustainable? Can it go higher? What is your thought on gross margins on a go forward basis?

Selman, this is Scheller. Gross margins, we've been always hard focused on it. Good times, bad times, always been able to make margin to the right number. I think, there's not going to be degradation. There's always upside as we're managing the cost. So, given all the components that go into it, I think that the numbers are still good, and I'm not worried about making those numbers going forward.

Okay. And then are you guys having discussions on 2025 yet, given how tight the marketplace is?

We've had some preliminary discussions with folks. If you think about the norm in our industry, the contracting points tend to have historically been kind of six months to nine months in advance. And I think it's caught some of our customers somewhat by surprise when they hear 2024 as an industry is basically spoken for, and now it's time to start thinking about 2025. That tends to be longer than the normal planning cycles, when you think about our independent and large independent, and even the major oil guys tend to look at things about a year in advance. That said, we are working with some of this corp dev and strategic planning folks who have a little bit longer time perspective to inform and educate, “Hey, gang, if you want to get into the queue, so to speak, for equipment, it is time to start thinking about 2025.” And I think people are starting to noodle on that and recognize that with the supply chain bottlenecks, Jim Umpleby was on Squawk Box this morning from Caterpillar talking about how they're hitting on 8 cylinders out of 8 on all of their business fronts, but they've got some continued supply chain issues, in particular, related to the large engine manufacturing, which obviously is compression in prime power and standby power. So I think people are starting to acknowledge and recognize that it's a longer term and longer time cycle than things have historically been in the past.

Got it. And then if I can just squeeze one more in here. I thought I heard you mention something about gas-driven power for backup to data centers, which kind of sounds like a new market to me. Is there any color you could provide on that?

No, I think the concept was made that, that's a competitive source to compression engines that Caterpillar is allocating equipment to standby data centers. And that was, again, one of the things Umpleby spoke to this morning, big demand for standby units going into data centers for backup electrical purposes. As we bring more and more renewables online, wind and solar, which tend to be intermittent in their ability to provide power to the grid, it makes some of these must-run [Five9's] mission-critical applications require additional backup power to assure that the data centers don't go down during a ground out or a blackout.

And so that's what's really leading to sort of the 70-week lead time out there.

Among other things, we've got a combination of demand for compression and data centers and prime power and standby power and marine and all these large industrial engine applications, coupled with the point where you've got some continued supply chain bottlenecks, wiring harnesses that come from the Ukraine, aren't coming from the Ukraine anymore. We still have some continued issues with parts and pieces, not clearing ports in a timely manner. So there's a whole bunch of drivers that impact Caterpillar, impact, fabricators, impact parts and component pieces throughout the supply chain. So yes, it's 70 months and hopefully, there's some improvement, but we're in pretty close contact with Caterpillar. It appears that the 70 weeks rather is not really coming back in on itself. It's continuing to expand.

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.