Release Date: May 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- USA Compression Partners LP reported another quarter of record results, including record revenues, adjusted gross margin, adjusted EBITDA, distributable cash flow, average revenue generating horsepower, and average revenue per revenue generating horsepower.
- The company successfully issued $1 billion of 7.125% senior notes due 2029, which was substantially oversubscribed, indicating strong market confidence.
- USA Compression Partners LP managed to opportunistically refinance debt, redeeming $725 million of senior notes due 2026, which is expected to simplify the capital structure and reduce future financial risk.
- The conversion of Series A preferred units to common units is anticipated to enhance the public float and potentially improve the stock's liquidity and marketability.
- Operational efficiency remains a focus, with the company deploying new large horsepower units under long-term contracts, which should support stable future cash flows.
Negative Points
- The distributable cash flow coverage ratio slightly decreased to 1.41 times from the previous quarter's 1.48 times, primarily due to one-time events.
- The leverage ratio increased to 4.27 times, up from the previous quarter's 4.1 times, due to the front-loaded purchase of new units, although it is expected to trend back towards 4.0 times.
- USA Compression Partners LP faces ongoing economic and geopolitical uncertainties, including inflation concerns and international conflicts, which could impact the business environment.
- The company has adopted a cautious approach for 2024, focusing on internal improvements and reduced growth, which may limit its ability to capitalize on external opportunities in the short term.
- Despite the refinancing achievements, there remains a significant amount of debt on the balance sheet, with $2.49 billion of indebtedness as of the end of the quarter.
Q & A Highlights
Q: Eric, just if you kind of take a step back from the kind of short-term caution you provided, it seems like the outlook as we go into next year and frankly the next few years on the gas side driven by LNG that we've all read about in some of the data center growth from AI and impact there on electric demand and gas, bodes well for this cycle to play out over a period of time.
A: Eric Long - USA Compression Partners LP - President, Chief Executive Officer, Director of General Partner: Jim, all great questions. Obviously, I appreciate you're digging into our industry. You've recently published some research which by the way I think some of the best I've seen in a long time with the deep dive that you've done. The fundamentals of the compression industry are probably the best they've been in the last two decades. If you think about when we formed USA Compression 25 years ago, domestically, we produced and consumed little over 50 Bcf of gas a day and today, we're north of 100 Bcf. With permitted and under construction LNG facilities, we're going to see a substantial increase in the next two or three or four years related to demand increases for natural gas. The electrification drive, the decarbonization drive has legs. I don't think people fully appreciate the magnitude of how far behind the electric grid is, what has to happen to stabilize the grid and expand the grid. As we all know, when the wind doesn't blow and the sun doesn't shine at night, the renewable sources of electric generation don't make electricity. Backup batteries are extremely expensive at the industrial and the utility scale. We've had a meeting with the Chairman of the Public Utility Commission recently in Texas, who indicated that looking at peaking gas plants versus looking at using battery backups for some of the renewables that the renewables with batteries are 10 times the cost of a conventional gas peaking type of unit. So when the light bulb comes on to the people of the State of Texas as an example or other states across the US, this is going to be an extremely costly effort to expand the grid, stabilize the grid. And that's -- now you're at the point in time of starting to bring on AI data centers, which have massive more electrical requirements than a conventional file server type data center or even Bitcoin mining or whatever it may be, continued population growth, warming of the environment, meaning more air conditioning load, it just goes on and on and on and on. So natural gas compression will fit in the middle of feeding gas in the pipelines to get into LNG facilities, feeding gas in the pipelines that will end up getting into facilities to provide and create electricity, we're getting a lot of legs. The reason we're a little on the conservative side right now cautious is more the uncertainty coming out of Washington right now. We have two very, very different approaches to how you deal with the electrification that's required in the grid. We've got very different approaches between the two dominant parties in Congress right now relating environmental cleanup and environmental perspective going forward. The US is a large provider of energy. Are we going to provide energy to our allies to help deal with geopolitical risk? There's a lot of things that are going on. So we want to be cautious and not commit hundreds of millions of dollars to equipment with the stroke of a pen, could have significant regulatory risk. We'd rather let kind of the decks clear a little bit, continue to focus on our internal efforts on long-term modification of our fleet assets to dual drive, to looking at distributed generation opportunities, utilizing our existing assets. So we're trying to optimize our as is case into the 2b case when we have regulatory certainty and we've got some clarity of the economy and the markets, et cetera. So simplistically, to get back on your question, I think the fundamentals of compression, as I noted, are probably the best I've seen them in two decades. There are ancillary activities that will come off of that. As far as forward visibility with our customers, we're already talking about 2025 activities. As we all know, there is a lot of integration going on with major acquisitions and consolidations of the upstream industry. So people are starting to rationalize their acreage holdings, rationalize their drilling and developmental plans over the coming year or two or three. Exxon and Pioneer just got their deal approved by the DoJ last week. So as these things are promulgated and processed, people will start to get better clarity. And until these things clear regulatory oversight, that's a little bit of a jump ball right now. So a little bit of caution. I'd say, our industry has tailwinds, but in -- we have always been believers and unless there's a very clear-cut path and course of action, let's wait a quarter or two or three and just see what the marketplace holds in store for us. So I think right now, we've got firm hand on the tiller. You got a little bit of choppy seas. We're just trying to weather through a little bit of a storm, but we see very clear sailing ahead of us.
Q: That's very helpful and thank you for the detail commentary. And maybe circling just back to the balance sheet. You said a lot of things. Obviously, you guys made the move on refi-ing and congrats on that. It was certainly a good print on the coupon.
A: Eric Long - USA Compression Partners LP - President, Chief Executive Officer, Director of General Partner: From a going-forward perspective, we think about -- obviously, you mentioned -- at some point, you tackle the 2027, which I presume is going to be opportunistically driven based on the markets. But kind of bigger picture with where the balance sheet is today, the leverage is today, maybe remind us just where you want leverage to go? And kind of where does that need to be, either leverage or distribution coverage or maybe a combination of both, before you would actually think about doing something on distributions here down the road? Again, great questions, Jim. And these are things we have discussions with our Board with routinely. Keep in mind that USA never cut our distribution. You look at the -- now, pushing $2 billion that we have distributed back to our unitholders since going public in 2013, we're one of the few who chose not to cut the distribution. I still believe that if you're going to be an MLP, distribution is one of the -- should be sacrosanct. And before you cut a distribution, you need to have exhausted each and every other alternative that you had. So before we induce then an increase in distribution, we want to make sure that going forward regardless of volatility in the cycle that we will be able to maintain and the increased level of distribution over time. So you can see we're building our distribution coverage to the lower 1.4, 1.5 range coming up. We think that that will continue to improve. You look at our leverage which right now is running in the 4x or so range, we do have a different -- somewhat different definition for our ABL
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
