Q1 2024 USA Compression Partners LP Earnings Call
Participants
Christopher Porter; Vice President, General Counsel, Secretary; USA Compression Partners LP
Eric Long; President, Chief Executive Officer, Director of General Partner; USA Compression Partners LP
Eric Scheller; Chief Operating Officer, Vice President; USA Compression Partners LP
Jim Rollyson; Analyst; Raymond James
Brian DiRubbio; Analyst; Baird
Presentation
Operator
Welcome to the USA Compression Partners First Quarter 2024 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 open for Q&A. If you have any question during that time, please press star one on your telephone keypad. The conference is being recorded today, May seventh 2024.
I now would like to turn the call over to Kris Porter, Vice President, General Counsel and Secretary. Please go ahead.
Christopher Porter
Good morning, everyone, and thank you for joining us this morning, we released our operational and financial results for the quarter ending March 31, 2024. You can find a copy of our earnings release as well as a recording of this call and the Investor Relations section of our website at USA Compression.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 US 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 other public filings. Please note that information provided on this call speaks only to management's views as of today, May 7, 2024, 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.
Eric Long
Thank you, Chris. Good morning, everyone, and thanks for joining our call. I am joined on the call by Eric Scheller, our COO. This morning, we released our first quarter 2024 results, which reflected another quarter of record results. Our first quarter results were driven by our strategy laid out during previous calls, focusing on prudent deployment of capital through return based decision making and demand-driven pricing with extended contract tenors. By staying disciplined, we have continued to drive financial and operational performance to our record levels, which we believe enhances and sustains unitholder value. Of note, we saw another quarter of record revenues, adjusted gross margin, adjusted EBITDA, distributable cash flow, average revenue generating horsepower and average revenue per revenue-generating horsepower. Our utilization on both an average and period end basis were also at record highs.
Consistent with my commentary during our last call, we addressed several important components of our capital stack during the first quarter in March 2024 the Partnership opportunistically issued $1 billion of 7.125 % senior notes due 2029 and redeem all of our $725 million, 6.875% senior notes due 2026, we use the remaining net proceeds to reduce the revolving credit facility.
Our timing in the high-yield marketplace was virtually perfect with the spread to benchmark treasuries of 291 basis points close to the recent lows. Last seen in January 2022, the issue was substantially oversubscribed, and our notes have performed well. Even in light of the recent pressure on interest rates. Additionally, this issuance received a credit rating upgrade from Moody's further on April 1, 2024 the holders of the partnership's Series A. preferred units elected to convert an aggregate of 280,000 preferred units into 13,991,954 common units which were issued effective as of April 2, 2024.
2024 guidance for distributable cash flow has been updated to reflect the impact of this conversion. The completion of these two activities sets us up well over the coming quarters to continue simplifying our capital structure, increase our public float of common units, as well as opportunistically work on the refinancing of our $750 million of senior notes due in 2027. You may have noticed that our distributable cash flow coverage ratio, which was 1.41 times was slightly lower than our prior quarter's 1.48 times coverage. Additionally, our leverage ratio of 4.27 times as calculated under our credit facility was slightly higher than our prior quarter's 4.1 times. Both of these changes were due to onetime events that we believe will potentially enhance unitholder returns over the long run.
Regarding our leverage ratio. As we mentioned during our last call, we were expecting 52,500 horsepower of new large horsepower units to be delivered during the first half of 2024. These units represented the remainder of our late 2022 order. We are happy to report that 47,500 of the 52,500 horsepower was delivered during the first quarter, and the remaining 5,000 horsepower was delivered in April also been deployed into the field under long-term contracts. The front-loaded purchase of the units led to the slightly higher leverage ratio for this quarter, but we believe our leverage ratio will begin to trend back towards 4.0 times.
Regarding our distributable cash flow coverage ratio. As I mentioned, our Series A. preferred unit holders began converting their preferred units to common units in January than in early April. They converted another 280 million of preferred units to common units prior to our record date attributable to the first quarter results.
This resulted in approximately 14 million common units being issued at least half of which we believe have been sold into the open markets as of today. While the conversion of the preferred units has a very small impact on our distributable cash flow coverage ratio the enhanced public float brought to our common units should be a positive. We believe that we will continue to increase our distributable cash flow coverage ratio and reduce our leverage ratio over time.
During the coming quarters, we will continue to focus on opportunistically improving and simplifying our capital structure through the first four months of the year. 320 million out of 500 million of Series A. preferred units have been converted to common units. We have refinanced our 2026 senior notes at an attractive financing rate and firmed up the fixed interest rate for almost all of our debt through 2025.
As I mentioned, we use the proceeds from our March 2024 issuance of $1 billion of 7.18% senior notes due 2029 to redeem all of our 2026 senior notes and used the remainder of the proceeds to pay down our credit facility, resulting in $736 million borrowed under our credit facility at the end of the quarter.
If you recall, the notional amount of our floating to fixed interest rate swap is $700 million and extended through December 2025 at about 125 basis points below the current sulphur rate. As such we essentially locked in $2.45 billion of our $2.49 billion of indebtedness as of March 31, 2024 at a weighted average interest rate of 6.86%.
We were extremely pleased with this offering and believe that our ability to refinance our existing indebtedness at attractive rates in the current market reflects investors' support for our underlying core business. While we still have work to do, we think we have made strong progress so far and will continue to be opportunistic in regards to maximizing our capital structure. As a reminder, we believe focusing on our capital structure, including the eventual refinancing of our senior notes due 2027, renewing our credit facility and fully exiting our Series A. preferred units is the prudent course of action before we consider changes to our distribution policy.
As we look forward to the rest of the year, we still believe the approach we laid out a few months ago during our previous earnings call remains the prudent path. We remain bullish on the long-term prospects of the natural gas industry, but also see near-term uncertainty, which has only grown since our last call, inflation is turning out to be stickier than experts thought a mere three months ago. The Russia Ukraine conflict is still ongoing and new tensions have arisen in the Middle East. We also have the upcoming election and interest rates that will be higher for longer, including the potential for stagflation according to the ever insightful, Jamie Dimon. As such, we believe 2024 is a year that we focus internally with reduced growth, enabling us to produce stable cash flows, reduce leverage and position USA Compression for long-term success. We will continue to improve internal operational efficiency, convert idle units to active status at attractive returns, pursue pricing improvements and strive to maximize return on growth capital through opportunistic purchasing of equipment. As we said last quarter, we believe this strategy will allow us to maintain operational and financial flexibility to weather any storms created by current geopolitical or economic headwinds.
Before turning the call over to Eric Scheller to discuss first quarter results, I would like to make a few comments regarding safety. The most important thing we do is to ensure that our employees, contractors and customers return home safely each day. We are extremely proud of our tireless focus on safety that has resulted in a total recordable incident rate of zero during the first quarter. I'm very proud of this accomplishment and thank every USA Compression employee for their commitment and strict adherence to our safety policies and procedures.
With that, I will turn the call over to Erik Miller, our COO, to discuss our first quarter highlights.
Eric Scheller
Thanks, Eric, and good morning all. As Eric noted, we were pleased to deliver our unit holders another excellent quarter of strong results. In addition to the record results, Eric mentioned we deployed approximately 63,000 additional horsepower during the quarter as we continue to deploy large horsepower units into the field. As we mentioned last quarter, we are securing contracts with extended tenor and enhanced pricing that we think generates strong, stable baseload cash flows while providing opportunistic upside as market conditions evolve.
Our revenue growth trend continued and was driven primarily by increasing utilization exiting the quarter at an all-time high of 95% and pricing improvements also at an all-time high averaging $19.96. For the first quarter, our revenue increased 2% in sequential quarters and 16% compared to the year ago period. The first quarter also saw our sector-leading margins over 67%, in line with historical averages since our initial public offering, reflecting the stability of our steady determination to offset increased inflationary costs through both productivity improvements and contractual pass through pricing adjustments, which we expect to continue supporting our margins in line with our current levels.
Should inflation remain high or increase in the near term. Regarding financial results, our first quarter 2024 net income was $23.6 million. Operating income was $66.9 million net cash provided by operating activities was $65.9 million and cash interest expense net was $44.7 million. Cash interest expense increased by approximately $1.7 million on a sequential quarter basis, primarily due to higher average outstanding borrowings.
However, higher cash interest expense was mitigated by $2.4 million of cash payments received under our $700 million notional principle fixed rate interest rate swap, which locks in 30 days, so for until December 2025 at [3.9725%] compared to current 30 days so far that exceed 5.25% under our current leverage ratio. This results in an interest rate of 6.47% on $700 million of our credit facility borrowings.
Turning to operational results, our total fleet horsepower at the end of the quarter increased by 2% to approximately 3.8 million horsepower as we accepted delivery of 47,500 horsepower of new large horsepower units during the quarter. Our revenue-generating horsepower increased by 2% on a sequential quarter basis, primarily due to the addition of these new large horsepower units as we had secured customer contracts prior to the delivery of the new units.
First Quarter 2024 expansion capital expenditures were $104.8 million and our maintenance capital expenditures were $5.8 million. Expansion. Capital spending continues to consist of reconfiguration and make-ready of idle units, along with the aforementioned delivery of 47,500 horsepower of new large horsepower units and the opportunistic acquisition of other large horsepower units in the market, we accepted delivery of an additional 5,000 horsepower of new large horsepower units during April, which completed the remainder of our late 2022 order.
We also expect additional and ongoing conversion of current fleet idle units to active status and throughout the remainder of 2024, we anticipate the deployment of between 85,000 and 115,000 horsepower of existing uncontracted fleet assets at capital cost substantially below those of new organic growth equipment builds.
Finally, I'm pleased to share that on May third, we made our 45th consecutive quarterly distribution payment the $0.525 per unit distribution was flat the previous quarter's distribution.
And with that, I'll turn the call back to Eric Long for concluding remarks.
Eric Long
Thank you where we are extremely proud of our first quarter results and the progress we have made in a mere four months on the optimization of our capital structure. While we remain bullish on the long-term prospects of the natural gas industry. We are all facing some general economic and political uncertainty in the near term. We believe we are well positioned to weather this uncertainty continuing improving our financial metrics and opportunistically address our capital structure over time. Once we have addressed our capital structure, we will then be in a better position to consider future potential distribution policy changes.
To conclude, we are extremely pleased with our first quarter 2024 results, highlighted again by record quarterly revenues, adjusted EBITDA, distributable cash flow and utilization. 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.
Question and Answer Session
Operator
We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one. Again, if you are called upon to ask your question and listening via speaker on your device, please pick up your handset and ensure that your phone is not on mute. When asking your question again, please press star one to join the queue. Your first question comes from the line of Jim Rollyson of Raymond James. Please go ahead.
Jim Rollyson
Hey, good morning, Eric and Eric.
Eric Long
Good morning
Jim Rollyson
I'm doing. All right. 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 a eye on impact there on electric demand and gas bodes well for this cycle to play out over a period of time. And I'm curious, given the planning cycles that you all need with lead times and all that realized this year, you've taken a step back from just new units and focusing on some of the internal fleet upgrades and bringing back. But curious just how your conversations with customers are going in play and how far out are they planning and just maybe how you're thinking about visibility going out here over the next handful of years.
Eric Long
You have all great questions. Obviously, PushGate, you're digging into our industry and 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 a little over 50 Bcf of gas a day. And today we're north of 100 Bcf with permitted and under construction LNG facilities feel we're going to see a substantial increase in the next two or three, three or four years related to demand increases for natural gas.
The electrification drive the decarbonization drive. It has legs, and 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.
Our backup batteries are extremely expensive at the industrial and the utility scale up weeks 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 I'm using battery backups for some of the renewables, the renewables with batteries are 10 times the cost of a conventional gas peaking type unit. So when the label 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 now you're at the point in time of starting to bring on AI data centers, which have massive more electrical requirements and 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 feeding gas into the funds to get into LNG facilities, feeding gas into pipelines that will end up getting into well 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 risks? There's a lot of things are going on.
So we want to be cautious and not commit hundreds of millions of dollars to equipment that with the stroke of a pen could have significant regulatory risk. We 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 the case into the to be case when we have regulatory certainty and we've got some clarity of the economy and the markets, etc. So simplistically get back on your question. I think the fundamentals of compression, as I 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's 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 of Exxon and Pioneer just got their their deal approved by the DOJ last week. So as these things are promulgated and process, people will start to get better clarity. And until these things clear regulatory oversight. You know that it's a little bit of a jump ball right now.
So a little bit of caution, I would say we are industry has tailwinds, but and we've always been believers that 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, you know, we've got a firm hand on the tiller and got a little bit of choppy seas. We're just trying to weather through a little bit of storm, but we see clear see very clear sailing ahead of us.
That's very helpful. And thank you for the detailed 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 good print on the on the coupon on it from a going forward perspective, we think about obviously, you mentioned at some point you tackled the 2027 , which I presume is just 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, you know, behalf routinely, Bob, keep in mind that USA never cut our distribution.
If you look at the now pushing $2 billion that we have distributed back to our unitholders since going public in 2013. And we're one of the few who have who chose not to cut the distribution. I still believe that if you're going to be an MLP of distribution is one of it should be sacrosanct. And before you cutting distribution, you need to have exhausted each and every other alternative that you had.
So before we induce that 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 an increased level of distribution over time. So you can see we're building our distribution coverage to the one four one five range coming up. We think that that will continue to improve. If you look at our leverage, which right now is running in the four times or so range, we do have a different somewhat different definition for our ABL purpose versus the way some other people look at it, you're all in balance sheet.
And I think that this conversion of our preferred to common units over time continues to simplify and get the convergence of kind of how people look at the balance sheet with and without the pref is total leverage coming down. So we're going to get the leverage down this conversion of the prefs to come and goes a long way to getting that accomplished on slowing. The growth like we've been doing, allows us to continue to reduce our leverage ratio.
Yes, the absolute leverage has picked up a little bit, but I think, again, to what we pointed to on our cost of capital, our debt capital blended basis, it was 684, 686, something along that line work constructing and deploying new assets or rebuilding used assets. It costs that in returns that give us upper double digits, low 20% unlevered IRRs. So to the extent we can borrow money for sub-7percent and deploy it into returns in the 20% and make 1,300 basis point type of returns seems like that is a pretty good way to create shareholder value.
So it's the balancing act, Jim, between absolute level of leverage we as a private company ran substantially higher levels of debt and leverage. I am a believer that this industry and USA Compression in particular can readily support leverage in that 4.0 times ZIP Code range. Do we see ourselves wandering down a little bit below that? Potentially do we see at certain points of the cycle when things are a little bit tighter and utilization declines, particularly with folks are industry focused on smaller wellhead equipment and a little more volatility, a little bit higher beta, your leverage ticks up.
So I think a good range long term is to look somewhere between 3.75 and 4.25 or so across different types of cycles. We're never going to be a two times levered company. We're never going to be a one X levered company, but we don't need to be because we are much more stable than industries that have lower leverage like an oilfield service company or like an upstream company who have different financial drivers and economic drivers that we do as a midstream company with a take-or-pay demand type of contracts with de minimus commodity risk.
Jim Rollyson
Got it. That's helpful back in the queue.
Appreciate it.
Eric Long
Thank you much.
Operator
Your next question comes from the line of Brian DiRubbio of Baird. Please go ahead.
Brian DiRubbio
Good morning. Just to Sobi, a couple of follow-up questions. Can you let us know what you think CapEx is spend is going to be this year in full?
Eric Long
Yes, I spoke about CapEx being growth, CapEx being growth and maintenance CapEx both.
Brian DiRubbio
Growth and maintenance.
Eric Long
Growth and maintenance combined CapEx?
Eric Scheller
Yes, I think what we're going to see is somewhere that we're going to be around 1$15 million under $125 million in expansion capital and probably somewhere between, call it the $25 million and $35 million in maintenance CapEx.
Brian DiRubbio
Yes, for the remainder Got it. And just as we think about you deploying some of the existing fleet back into the field as opposed to buying new equipment, is that including the expansion? Or is that, including the maintenance CapEx.
Eric Scheller
That's included in the expansion capital.
Brian DiRubbio
Okay. And I know you're not looking to add more new equipment right now, but any thoughts on, you know, how long it would take if you ordered a new piece of equipment, how long that would take to get delivered, particularly with the CAP 3,600 Series.
Eric Long
Or has brought in there. Their construction period was running as much as over a year a quarter or two ago.
It's been rain back into, I'd say roughly nine months or so ago. And it's not just CAT engines on the 3,600 series. You've got fabrication capacity limitations and you've got other components that go into manufacturing a compressor package from compressor frames and compressor cylinders. One of the things I think people haven't quite picked up on yet is that Caterpillar also uses these types of engines to supply backup generation of equipment for data centers.
So you can envision that if you're Microsoft or Google or Facebook or Amazon, let alone before you move into the AI. expansions that some of these folks are getting into all of those data centers end up with a backup electric generation equipment because they can ill afford at any form of downtime. So as the number of data facilities are increased and you're spending billions and billions and billions of dollars to increase new capacity.
These places all have gas driven or some diesel, some natural gas type of backup generation equipment. And so I look at it as these facilities continue to be brought online, there's going to be continued tension and pressure on not just USA and our peers to access also equipment, but we'll be competing with sourcing this equipment from Caterpillar with the likes of the Amazons, Googles and Facebooks and Microsoft to backup their expansions into a continued forays with data centers.
Brian DiRubbio
Understood. That's helpful there. Just as you think about the distribution policy post the simplification of the capital structure, how are you thinking about the distribution policy in context of the cycle.
Eric Long
So again, that's something that our Board makes that decision. The management team will sit down and look at and say jets here, we are early stage of cycle mid stage of cycle, late stage of cycle. What's the outlook for interest rates? What's the outlook for demand for our equipment going forward? What's a real regulatory environment? All of these things go into our gone to later. So I think it's fair to say that once we do get these 2027 refinanced maturity extended out with our ABL facility, we're able to on both of these, we have several years of runway left, but at the point in time that we have some good clarity and just what our cost of capital is going to be our cost of interest is going to be with the regulatory environment, not denied what's going on politically worldwide, what's going on with OPEC? I did want to have a little bit better sense of what we need to recommend to the board as far as distribution policy. So I'm not prepared today to commit to next quarter or two quarters or a year from now because there's a lot of stuff coming into one an election year with basically two wars going on throughout the world. There's a lot of US to instability right now. And I'm not prepared today to comment further on what the policies might look like in the future because today, sitting here, it's pretty uncertain.
Brian DiRubbio
I understood. And then final question for me unless I missed this on. Are you still in an active CFO search at this point in time? And where does that stand?
Eric Long
So as we've indicated to multiple people, multiple times of CFOs come in two categories. Those who raise capital, i.e., you're actively the equity markets, growing your balance sheet or bigger CFOs come in the form of more on the technical accounting compliance and support and optimization or running your day-to-day business.
Tracey Owens, our Chief Accounting Officer, comes from a long and stable background in the latter category so we have made the conscious decision to not add a CFO at this stance. As you are aware, our board is controlled by Energy Transfer. We do have our financials are consolidated underneath, etc. And we do have adult supervision in the room are Tom Long. My boss, who's become CEO. of Energy Transfer is the former CFO of BT. Still on Brad Hall, who is the current CFO of Energy Transfer, sits on our Board. And to the extent Tracy and his team need any further support or quote adult supervision, they're more than willing and able to roll up their sleeves if it's needed at any point in the future. So no, we do not intend to add a CFO currently, we're not actively entertaining M&A. We're not actively growing our balance sheet with the form of equity capital. We haven't raised any equity capital in over a decade, and we don't contemplating needing to anytime in the foreseeable future.
Brian DiRubbio
Understood. Appreciate all the color.
Thank you.
Eric Long
Thank you, sir.
Operator
As there are no further questions at this time, that concludes today's call, and thank you, everyone.
For joining. You may now disconnect.