Good morning. Welcome to USA Compression Partners Third Quarter 2023 Earnings Conference Call. During today’s call, all parties will be in a listen-only mode. At the conclusion of management’s prepared remarks, the call will be opened for Q&A. [Operator Instructions] This conference is being recorded today, October 31, 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 September 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, October 31, 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. This morning, we released our third quarter 2023 results, which highlight the continued improvement in our financial and operational results, as we continue to focus on capital discipline and maximizing return on our assets. Eric Scheller will provide more detail on our results, but I would like to highlight our third quarter distribution coverage, which grew to 1.39 times continuing our trend of increasing distribution coverage is here. In addition, our leverage ratio was 4.21 times continuing progress towards our previously mentioned goal of 4.0 times, a welcome improvement in both metrics. Methodical de-levering of our balance sheet over the coming quarters positions us well for when our senior notes mature, which is not until Q2 2026 and Q3 2027. Our unit price this past year has trended up from the $18 range to recently over $26 levels last seen in 2014. We attribute this to the recent addition of compression as a qualifying activity in the VettaFi Alerian MLP Infrastructure Index, AMZI, as well as what we believe is a show of confidence by investors in the historical stability and sustainability of USA Compression’s revenues, EBITDA, DCF, and distributions. Long-term investors have seen that since we became a public company over 10 years ago in 2013, we have provided stability and growth across numerous energy, macroeconomic, and interest rate cycles and have never reduced our quarterly distribution. In fact, we have proactively returned over $1.6 billion to our unitholders through distributions reflecting a history of capital discipline that returns value to unitholders that extends well before that concept became a core focus for our industry by the investment community. Switching gears, I would like to…

Thanks, Eric, and good morning all. As Eric noted, the strong results we reported this morning once again reflect our employees continued commitment to creating value for USA Compression and its stakeholders. In addition to our increased utilization and pricing Eric mentioned, we also continued to capture extended contract tenors for both new unit contract activity and renewal contracts for existing fleet assets. Given the durability, these extended contract tenors provide and the continued market tightness, we believe the underlying fundamentals of our business will remain supported for the foreseeable future. Our third quarter 2023 results revealed the 5% increase in sequential quarter revenues and a 21% increase in revenues compared to the year ago period. While revenue growth was driven by continued utilization and pricing improvements, margins remained relatively steady on a sequential quarter basis as we continue to offset our increased inflationary costs through both productivity improvements and contractual inflation and CPI passed through adjustments. Although we continue to experience inflation in parts, supplies and labor, we believe the continued demand driven pricing discovery occurring for our services along with the CPI-U rate adjustments provided for in the bulk of our customer contracts will continue to support adjusted gross margins in line with our historical averages closer to 67%. Third quarter 2023 net income was $20.9 million. Operating income was $61 million. Net cash provided by operating activities was $50.1 million. And cash interest expense net was $41.4 million. Cash interest expense increased by approximately $1.2 million on a sequential quarter basis due to higher average outstanding borrowings and higher interest rates applicable to outstanding borrowings on our floating rate credit facility. However, this increase was more than offset by $2.5 million of cash payments received under our $700 million notional principal fixed rate interest rate swap. Turning…

Thank you, Eric. Our third quarter reflects our employee’s ability to continue to deliver meaningful value to our stakeholders. Given the continued tightness in crude oil markets, the increasing use of natural gas globally, and the shrinking supply of available large horsepower natural gas compression domestically. We firmly believe that USA Compression is well positioned to improve our financial metrics in the future. Continue the 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 third quarter results highlighted again by record quarterly revenues, adjusted EBITDA, distributable cash flow, and distribution coverage in which also featured continued improvements to utilization and contract pricing. 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 Instructions] Our first question comes from Selman Akyol from Stifel. Please go ahead. Your line is open.

Thank you. Good morning. I guess first of all, can you just talk about lead times for new equipment? Is it still about a year out or is it getting longer?

Selman, this is Eric. Really good question. In light of the market environment we’re living in, things have actually lengthened on the delivery of major components from our largest manufacturer Caterpillar. They’ve got a pretty nice order book, but they continue to have rolling supply chain issues. And it’s not any one thing as multiple things that are occurring. So we’re substantially in excess of a year for orders that would be placed today.

Got it. And then in terms of just when you’re speaking with your customers, are you seeing any changes in the tenor of contracting or are you being able to do longer than three to five years, or is it still sort of in that period?

Yes. So I’m going to get that two ways. The first thing would be kind of the original primary term. We’re routinely seeing five-year contracts. We really don’t go much beyond five. We have a few instances throughout the history of the company where we’d see some things longer than that. At the end of the primary term when things do revert to a 30-day, month-to-month, either party can terminate evergreen. The only thing that changes literally would be the ability to terminate a contract. It’s those renegotiated reextended tenors that we’re seeing clients are signing up these renewal contracts sooner than normal. They’re extending the term for longer than normal. Historically, a five-year primary term contract, you might see folks going with a one or two or two or three year contract extension. We’re now routinely seeing kind of two to five years, so the tenor is getting longer. All of our contracts have CPI escalators on the things we enter into today. The vast majority of even our older MSAs provide for CPI escalators. So if you think about it, we have a natural inflation hedge. You look at new builds versus repricing of our existing book. We will have substantially more uplift on repricing the existing asset book over the coming years than we will from the incremental organic growth CapEx, even if it was mash the accelerator and go back to the go-go days deploy excessive amounts of growth CapEx. So what really is going to move our dial going forward is to continue to reprice our book. We have significantly extended our tenor. We have reduced the number of month-to-month contracts by terming up with these five-year type terms. And I think we’re setting ourselves very well up for a very durable and sustainable focus over the coming years on from the bottom left of the page to the top of the right of the page on revenue growth.

Yes. It sounds like a really strong outlook. Can you maybe just talk about the price increases you’re seeing in, I guess I’m thinking in terms of maybe spot two, where your book is or maybe what you ended up contracting over the last quarter or two?

Selman, this is Scheller. The book has been really strong growing up, pretty stout rate since we started to see the return to the market all the way back in 2022. The tightness that Eric just talked about and as people are trying to figure out how to manage the greater than 12-month deliveries is bringing people to the table at a very regular rate. People aren’t letting stuff get to the end of the term. People are coming to our regional Vice Presidents early to discuss their position. So we continue to see the growth in the existing revenue for renewals as well as for the new units that are coming on now and into the first quarter of 2022.

Got it.

And Selman, it’s Eric. One other comment on that too. We mentioned in our comments that we’re seeing rate increase. We’re seeing CapEx cost increase, substantial CapEx cost increase, and we’re not about growth for the sake of growth. We’ve had some competitors in the past who were private, didn’t live in the public world scrutiny and they were willing to take a dive on gross margins and utilization and other things. And we looked at it and said, our job is to maintain return on capital that we invest and capital we deploy. So we look at the contracts we entered into to source new equipment two, three years ago, what those things were deployed at. We look at maintaining those margins and looking then at 2025, 2026, when equipment costs go up 30% or 40%, you’ve got to have a commensurate increase in your monthly service fees. So my comment of, hey, we’ve got our customers are trying to wrap their head around just what this means. Our assets are must run assets. People can’t drill, can’t produce natural gas, oil production, et cetera, without compression. So when they’re looking at $80 oil, $90 oil, whatever it is in excess of $30 or $40 a barrel, it’s highly profitable. And you’re starting to see some pushup in natural gas prices. You’re starting to see some LNG facilities that’ll be coming on screen [ph] in the next 18, 24, 36 months. Exactly at a point in time where there’s not a lot of available equipment and cost of the equipment are going up. So that’s why we look at it. We’ve always been a story of stability and growth. Right now it’s a time for us to focus on stability. There’s a lot of uncertainty in turmoil in the…

Got it. And then just one last one for me, as I think about the model and SG&A uptick and I’m pretty confident that’s driven by the unit based comp expense, but can you just give any thought on that? Is that – was that just like something that occurred this quarter or is it due to the higher unit price or how maybe we – should we be thinking about that going forward?

Yes. That was – you hit the nail on the head that basically was stock based comp and that was a quarterly operation. And I think you’ll see that on a once a year basis as things vest over time and do some things along that line, so.

Got it. All right. Thank you very much.

[Operator Instructions] Our next question comes from Robert Mosca from Mizuho. Please go ahead. Your line is open.

Hi, good morning, everyone. I’m wondering if you could maybe expand on how you plan to go about high grading your customer base, just what those conversations look like and is that more of an area of focus than it had been the past just given the tightness and compression that you’re seeing?

Yes. Robert, this is Eric. And we’ve been in business 25 years and we’ve been through ups and down cycles and we’ve seen customers that we add and grow with, and we’ve seen customers who over time have retrenched with. What the book of business that we have in our broad geographic footprint, we have concentrations of assets with key customers in certain geographic areas, and then we have fringe geographic areas or smaller customers. And as things come off of those primary term for the type of equipment that some of our larger customers see in demand, a discussion would go like this, hey, you’ve had a machine for three years, your rate is X, it’s time for you to sign up a new five-year contract at a rate of substantially higher than X. Well, we don’t want to do that. We’d like to sign a one year contract. And we’re like, well, here’s kind of what the rate is, take it or leave it. And we’re not being cavalier about it. We’re working with our customers, but I think observation number one, some of the smaller customers and fringe areas, we are repatriating those assets to redeploy. There’s certain geographic areas where you’ve had a little bit slower activity. So the – when you think of the Permian and Delaware basins, which are really, really hot, the Eagle Ford can remains fairly active. Then you think about North Louisiana, the Haynesville, it’s slowed down a little bit. You think about Appalachia, it’s also slowed down a little bit. The Mid-Continent area and the Rockies are kind of Steady Eddy, but again, within any particular basin, you’ll see some areas where assets are underutilized and will rationalize and take a bigger machine. That five smaller machines could do the job of one big machine, but if conditions of change maybe only need two or three intermediate sized machines. So we’re always looking to optimize our book geographically on a customer by customer and then kind of subsets within the region. And it’s just kind of part of the customer high grading and asset geographical high grading, so to speak.

Got it. That's all really helpful. And maybe following up on some of the earlier questions, just – I'm wondering if you have a sense of then – and I understand that some of these compression contracts, they have the inflation escalators, but as far as the proportion of your fleet that you deemed to still be below market in terms of rates. Is that – is still a decent chunk to work through? I know you referred to having perhaps more torque – upside torque just from the repricing than the organic CapEx, and I was hoping you could expand on that.

Yes. And I think obviously you're trying to fine tune your model a little bit. I would – from a modeling perspective, just kind of focus on CPI type escalation. It's not as if we have half of our units that are a third below market rate or 25% below market rate. Scheller and his team have done an excellent job over the last few years, as we've worked off primary term, terming things back up. So I would wager an estimate that not that much of our current book would be at rates that were back in the kind of middle of COVID arena three, four years ago type. I think we didn't chase the market down. We maintained our pricing during that time, which is why our utilization dribbled down. So I think commensurately with where we are in the world today, looking at kind of that 3% to 5% to 7% escalation range over the coming years, our book is not lumpy. It's not like we bought five LNG tankers and deployed them all at one given point in time, and we've got 4,500 some odd assets that all of those assets have staggered initial terms, staggered primary terms. So in any given month, any given quarter, any given year, we're continually having things come off a primary term. And then we look at the market at that point in time, we look at who the customer is, what the rates are, if they're – here's what the current rate is and what the spot rate at that point in time is. So to the extent, spot rates continue to increase at excess of inflationary environments, then we'll take that into consideration over the course of the coming months and quarters and year as we reprice things. So I think to be conservative, look at CPI and then assume that we'll probably do a little better than CPI.

Understood. Thanks for that, Eric. And maybe just a quick last one from me. I know in your prepared remarks, you referenced just your increased valuation. And would there be any interest in perhaps seeing if there's been an equity market, if you guys were to do an issuance, or is that just – can you get to those leverage targets just with the strength of your operational tailwinds?

From USA's perspective, we're happy with where we are, we're continuing to delever the balance sheet. We look at our debt cost, now we've done a great job of locking in our floating rate debt with some swaps. We've locked in substantially below market rates over the 2024, 2025 range to make sure that we've got certainty of pricing to match our budget estimates. I don't know, I look at it and going forward, I don't think anything materially changing, company doesn't need to issue equity, energy transfer seems to be pretty happy with where they sit on things. So from the company's perspective, I don't see any need to accelerate issuing equity that historically has had a little bit higher cost than our cost of debt or equity. And if we can continue to methodically delever to our target of 4x or drop below 4x, don't think we need to really worry about issuing any equity and going down that trail.

Got it. Appreciate it and thanks for the time everyone.

Thanks everybody.

We have no further questions in queue. This will conclude today's conference call. Thank you for your participation. You may now disconnect.