To USA Compression Partners, Fourth Quarter 2024 Earnings Conference Call. During today's call, all parties will be in listen-only mode. At the conclusion of management's prepared remarks, the call will be open for Q&A. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star one again. This conference is being recorded today, February 11, 2025. I now would 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 and year ending December 31, 2024. 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's views as of today, February 11, 2025, and may no longer be accurate at the time of a replay. I'll now turn the call over to Clint Green, President and CEO of USA Compression. Thank you, Chris. Good morning, everyone, and thank you for joining our call. Chris Porter and I are joined on the call by Chris Paulsen, our CFO, who is joining for the first USA Compression earnings call, but has already been quite active with investor conferences in December and January. First, I want to commend our team for their unwavering commitment to safety in all that they do, ensuring the safety of our employees, contractors, and customers. Employees remain our top priority. Second, we released our fourth quarter and year-end 2024 results this morning. We are extremely pleased that we were able to deliver record revenues, adjusted gross margin, adjusted EBITDA, distributable cash flow, distributable cash flow coverage, average revenue-generating horsepower, and average revenue per revenue-generating horsepower results for the quarter and full year. These results enable us to improve distribution coverage and decrease leverage, which is approaching four times. On the operational front, we benefit from a focus on converting idle units to active status. This results in a 94.6 average horsepower utilization for the full year, a record for the company and something we are dedicated to maintaining and hopefully improving from here. In 2025, we expect the majority of our growth capital will be spent on new unit deliveries and the remainder on fleet enhancements. On the personnel front, we embarked upon several organizational changes and are quickly adopting a shared service model with Energy Transfer involving various support functions. This will enable us to review the way in which we have worked in the past, optimize processes, and improve overall digitalization of the business as we begin the first phase of an ERP implementation this year. While the field staff will remain unchanged by this integration, we anticipate their digital resources and real-time management of the business will be improved and will benefit from economies of scale and processes that are found in larger enterprises. As part of these organizational changes, we have also moved our headquarters from Austin to Dallas. We anticipate the company will see significant savings over time as a result of these shared services, and we expect a minimum of $5 million in annualized savings with full implementation anticipated in January of 2026. While 2025 will yield an enhancement in our day-to-day business processes, it is also expected to reestablish a platform for growth in new compression units. While early 2024 benefited from the delivery of new compression ordered in prior years, the increase in utilization of existing units through idle to active conversions largely enabled an average year-over-year revenue-generating increase in horsepower by approximately 200,000. The emphasis on internal utilization forced a lean inventory of new horsepower going into 2025. As a result, our new horsepower and capital spend is largely back-end loaded in 2025, but we anticipate it will provide a nice cash flow increase for 2026. And as it relates to 2026, we are already starting to discuss our new order book. While we are always looking to grow and diversify our customer base, our disciplined rate of growth means that our new horsepower is primarily focused on existing large upstream and midstream customers. We remain bullish on the crude oil and natural gas macro backdrop and believe that the new administration will continue to support our country's development of crude oil and natural gas for the foreseeable future. In particular, continued crude oil and associated gas growth in the Permian will continue to support our near-term growth and business plans, as most of our new horsepower additions have come in this region over the years. Looking forward, we are excited to see the anticipated change in trajectory for natural gas demand, which is expected to grow by 15 Bcf/d or approximately 15% in overall U.S. natural gas demand over the next five years. As you may have seen, the new administration has lifted the freeze on LNG export permit applications implemented this time last year, and we believe LNG growth, as well as increased power demand, will comprise the majority of the natural gas growth in the country. While associated Permian gas will contribute to this growth, we think areas in the Mid-Continent and the Gulf Coast are also poised to increase gas production growth at prices higher than average in 2024. And USA Compression is well positioned in these markets to benefit, given our large market share in these areas. Additionally, growing natural gas demand is driving further infrastructure build-out and the construction of incremental 4.5 Bcf/d of transportation capacity out of the Permian Basin, like the recently announced Hugh Brinson Pipeline. These projects and the associated compression necessary will help feed current and future natural gas demand. Finally, just a word about electrification of oilfield compression, as it is a widely debated topic among our peer group. We remain very constructive and supportive of electric compression. Nonetheless, we also are mindful of our current customer needs, which remain largely focused on natural gas. Some of our largest customers have begun to set forth ambitious targets for electrification, but currently lack adequate infrastructure in many areas of the Permian and certainly elsewhere. Large and variable power needs present challenges for uptime, but it is not something that the industry cannot overcome. In short, we will focus our capital deployment on the equipment that our customers need, whether that compression is driven by natural gas engines, an electric motor, or a Dual Drive product that has been developed by Energy Transfer over the last 15 years. With that, I will turn the call over to Chris Paulsen, our Chief Financial Officer, to discuss our fourth quarter highlights and 2025 guidance in more detail. Thanks, Clint. I'm pleased to join our unit holders in my first call since joining the company in late November. It is an outstanding privilege to discuss record levels of operating and financial performance in many areas. In the quarter, our sales teams continued to build upon pricing improvements up to an all-time high averaging $20.85 per horsepower for the fourth quarter, which drove a revenue increase of 2% in sequential quarters and 9% compared to a year ago. These revenue increases were also driven by an all-time high in average active horsepower of 3.56 million. Our fourth quarter adjusted gross margins were over 68%. Regarding the financial results, our fourth quarter 2024 net income was $25.4 million. Operating income was $74.5 million. Net cash provided by operating activities was $130.2 million, and cash interest expense net was $46.4 million. Cash interest expenses decreased by approximately $700,000 on sequential quarter basis, primarily due to lower average interest rates under our floating rate credit facility. Our leverage ratio declined to a record low of 4.02 times. Turning to operational results, our total fleet horsepower at the end of the quarter was approximately 3.9 million horsepower, essentially flat to the prior quarter. Our revenue-generating horsepower also was flat on a sequential quarter basis, but up 4% from a year ago. Our average utilization for the fourth quarter was 94.5%, in line with the prior quarter. Fourth quarter 2024 expansion capital expenditures were $37.6 million, and our maintenance capital expenditures were $8.2 million. Expansion capital spending primarily consisted of reconfiguration and make-ready of idle units. We expect additional and ongoing conversion of current idle fleet units to active status. Regarding full year 2024 financial results, net income was $99.6 million. Adjusted EBITDA was $584.3 million, and distributable cash flow was $355.3 million. Finally, expansion and maintenance capital were $243.5 million and $31.9 million, respectively. Looking ahead to 2025 guidance, our adjusted EBITDA range is $590 million-$610 million, with a distributable cash flow range of $350 million-$370 million. Regarding the 2025 budget, we anticipate an expansion capital range of $120 million-$140 million, with new horsepower additions largely back-end loaded for the year, but some additional idle to active, regulatory, and major overhaul activity throughout the year. New horsepower growth should increase active horsepower by approximately 1.5%. We anticipate the majority of this new incremental horsepower will be placed in the Permian. Finally, maintenance capital is anticipated to be between $38 million-$42 million. The company will continue to be strategic as it relates to new growth opportunities outside of current expectations and adjacent to business activities in the field. Opportunities to acquire existing horsepower tied to immediate revenue generation will be considered on an individual basis and would provide incremental uplift to the guidance outlined on this call. The company made great progress in steadily reducing its leverage ratios over the last several years. Our new compression returns continue to substantially exceed our cost to capital and are anticipated to pay back within the contract term. This will enable us to remain well-positioned with our ABL as we evaluate next steps in the latter half of the year. Finally, I want to reiterate my excitement for this new role. As Clint intimated, the company is amid several changes that will set a positive trajectory for the future. I look forward to being a part of it. And with that, I will turn the call back to Clint for concluding remarks. Thanks, Chris. With a full quarter under my belt and having reconnected with long-standing relationships both internally and externally, I am confident this company is well-positioned to lead the way in supporting U.S. natural gas growth into the next decade. And with that, I will open the call to questions. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, one again. And your first question comes from the line of Jim Rollyson with Raymond James. Jim, please go ahead. Hey, good morning, guys. Clint, maybe the first question would be around the CapEx. Obviously, you just came aboard not that long ago, and as I look at growth CapEx for 2025 in the budget, it's obviously down a bit from where you guys spent in 2024, but with the back half weighting of deliveries, I'm assuming part of that was maybe you kind of took some time to evaluate how things looked before you proceeded with spending a bunch of money, so I'm just kind of curious with your generally bullish outlook, which we agree with, how you're thinking about kind of growth in 2025, what's driving the lower CapEx, and maybe beyond 2025. Yeah, well, thank you very much for that question. You're exactly right with what you said, but we're also wanting to maintain our leverage ratio down. We don't want to watch that walk up too much. Now, we will see it tick up a little bit, but we expect it to start coming down as soon as EBITDA comes online. So that's really our driver. We want to maintain our discipline and then sustain some growth as well. Perfect. Appreciate that answer. And maybe as a follow-up, Clint, as you guys look forward at kind of where things take you from a pricing standpoint and a capacity addition standpoint and your leverage, if you kind of continue to tick away at bringing that down into the range where you guys are hoping to get, notice that your distribution coverage also has gone up. And maybe curious how you think in the longer term about potential distribution growth after you've been pretty much steady for the last several years, as long as I can remember. Yeah, thanks for that, Jim. This is Chris Paulsen. Every CFO would, of course, like to grow that distribution coverage and, in turn, grow the underlying distribution price. I mean, we remain mindful of that. As we undertake this additional growth capital, I do think our coverage will continue to improve. Ultimately, we need to decide what is the right coverage level to withstand cycles and given our capital structure and our debt structure at the time. So at this point, I'm not prepared to give you what that number is, but that's something that we'll continue to be mindful of as we continue to grow both our underlying DCF and, hopefully, the underlying unit price at the same time. Gotcha. Appreciate that. Thank you, guys. Thank you. Your next question comes from the line of Gabe Moreen with Mizuho Securities. Gabe, please go ahead. Hey, good morning, everyone. A couple of questions, if I might, just in terms of the 2025 guidance. I think if you take your fourth quarter results and kind of annualize them, it looks like maybe just expecting a flattish for 2025. So I'm just wondering if you can contextualize that a little bit. Are you expecting a little bit of diminishment in gross margins? Maybe what you're looking at in costs? So I'm just wondering if you can contextualize 2025 guidance in the context of fourth quarter results. Yeah, Gabe, Chris Paulsen again. Great question. So just I will note that Q4 benefited from a net sales tax credit of approximately $3 million. That being said, we are optimistic that the margin and utilization trends that we've seen in Q4 will carry into 2025. Our full year guidance reflects the price increases we've seen in Q1, modest increases tied to CPI-U for the remainder of the year, and new horsepower that will be delivered in Q4. To the extent we see that horsepower delivery early, or we see larger price increases through the remainder of the year, or, frankly, less turnaround time than budgeted, it likely presents some upside to this range. If that occurs, we will update the range accordingly later in the year, but that's what's factored into our guidance today. Great. Thank you. And then maybe if I could also ask on kind of the CapEx cadence. I think 2024 saw you raise growth CapEx a couple of times, and I realize that maybe it wasn't you specifically in terms of the management team at the time. But can you just talk about not getting to, I think, the growth CapEx number in 2024 that you had put out there? Did you not end up redeploying some of that idle horsepower? Just curious how that played out. So as it relates to 2025 in particular, we know how much new horsepower we're bringing to bear, and we certainly have additional growth capital tied to make-ready and idle units. That proportion in 2025 is a higher proportion on contracted new contract units that I think we have a much better handle on the relative cost and potential inflationary measures of that. We have that as soon as we ink that contract. And so going into this year and that growth capital, I think we have a very good handle on what that would be. And we certainly understand the implications of having to raise capital ranges and have to do that several times through a given year. And it's our intent not to do that this year. Thanks, Chris. And if I could just squeeze one more in. I think there was a mention of adjacent business opportunities. I wonder if you could maybe elaborate on what you guys maybe mean by that. Yeah. So we're talking about our third-party service division where we work on customer-owned equipment. We expect to see that business grow this year and take on a larger role. So mainly just servicing third-party customers' equipment, okay? Got it. Thanks, Clint. Appreciate that. Yep. Your next question comes from the line of Jeremy Tonet with JP Morgan. Jeremy, please go ahead. Hi, good morning. Good morning, Jeremy. Just want to dive into gross margin a little bit more if we could. Had a nice expansion there and just wondering what you could share with us with regards to, I guess, pricing in general for your services and any other inputs to gross margin. Do steel tariffs, would that impact you in any sense? Just looking to see what you're seeing there. Yeah, great question. So historically, we've really not commented on price increases. We try to keep that close to the vest as it relates to our customer discussions. I can note that customers are still favoring contracts as opposed to remaining on month-to-month, where we tend to push for near-term escalators that are much greater necessarily than contract terms. We've seen greater interest in longer renewals than we've seen in the past, which is also interesting. So customers recognize that there could be additional pricing pressures down the line if they were to wait on renewals. As it relates to steel tariffs, that's a tough one. It's a brand new factor that we're thinking through. Obviously, I've been hearing about the potential of oil tariffs in the market, and that got pushed or at least punted a few months. But steel tariffs and the implications for both compression and compression manufacturing, even though a lot of our specific components are U.S.-born, they still do have steel associated with it. And then the implications for the broader industry upstream and midstream, I just think it's too early to make a determination on that. Does that help with that question, or was there something more? Yeah, no, makes sense. Certainly, a lot of uncertainty out there at this juncture. So maybe I don't know if there's any other comments you could provide with regards to leading-edge new build pricing trends right now, even if I don't have clarity to what tariff impacts might be? On our new build compression, we are laser-focused on payback periods and payback periods that don't have negative implications on our current leverage. So we want that product to pay back within term. And so that's one of our significant items that we look at. Obviously, internal rate of return on a standalone unit basis, but also the rate of return as it relates to supporting our yield and as it relates to supporting our capital structure from a corporate standpoint as a whole is also very important. But those are the things that all go into the calculus as it relates to new unit orders. And obviously, that was supportive of increasing the amount of new unit orders going into this year. And I think it will continue into 2026. Just as a matter of course, we're already having those discussions for 2026, given lead times and starting to factor that into our models and forecasts and thinking about what that growth capital should look like into 2026. Got it. Makes sense. Is there any way to help us kind of quantify what that might look like for payback periods or any other way to quantify the question in general? In general, I don't want to tip my hand, but as mentioned, we anticipate that payback will occur within the contract term. Got it. That's helpful. And then just the last one, if I could. We've been fielding a lot of inbounds recently from investors with regards to potential other applications for your units. And I know that your units are all being applied to your current customers, and that's your first and foremost focus. But just wanted to see, is it even possible at all for compression units to be used in other services such as electric power, behind-the-meter, what have you? Is that even physically possible or any thoughts on the topic in general? Yeah. Well, for compression, no, not really. I mean, those compressors, they're there for one purpose: to take low-pressure gas or a lower-pressure gas and compress it and make it a higher pressure to move down the pipeline or to the front end of a cryo or what have you. Now, we have our Dual Drive technology. In theory, you could take that equipment and run the gas engine and use the motor to distribute electricity. We don't see that market really opening up. We like our Dual Drive for the ability to unload the power grid and take the electric motor off, put it on electric drive. That's the same as generating back to the grid if you're not taking the load. So that's where we see the opportunity for another market with a different compressor or with our compressors. Got it. So certain arbitrage possible with existing units, but not bespoke power solutions. Is that a fair way to think about it? I agree. Yes, sir. Wonderful. Thank you so much. And your last question comes from the line of Brian DiRubbio with Baird. Brian, please go ahead. Good morning, gentlemen. Just a couple of questions for me. Chris, I think you mentioned that you're going to address the ABL in the second half of this year. I mean, sort of in an ideal world, what are you guys thinking about having your debt in terms of fixed terms and rates versus having the ABL? Yeah. I like where we stand presently. Obviously, I inherited the current structure in terms of our fixed versus variable component on the ABL. We need to think about sizing of the ABL and make sure that we size it according to what we think our long-term growth budget is and our long-term targets in terms of leverage. We sit around four times. I think that is an area that is a reasonable place to be. We obviously would like to be lower, and it would be my plan to be lower in time. But that will go into the calculus in terms of fixed versus variable. As it relates to the fixed component on that, I mean, the first lever that we can push would be as it relates to our $750 million 2027 notes. Those, at least the premium, call premium on those go away in September of this year, and so we plan to progress our evaluation of that in Q2. We haven't been in a hurry to accelerate evaluation efforts given where rates stand today, but I think we'll be opportunistic as it relates to rate and tenure by following Fed commentary alongside of our bankers with the hope that maybe we'll get more than a rate cut later this year. Understood. That's helpful there. And just as you're thinking about capital allocation, the company has been borrowing to fund the distributions for a number of years. Am I hearing you right? You're looking to sort of stop that sort of need to borrow to fund the distributions going forward, and you want to start paying down some gross debt? I think we just need to look at relative debt measures and relative capacity of the business as it relates to our debt measures and look at that as it relates to the cycle that we're in. I'm not prepared just yet to address whether or not that means more aggressive pay down of debt or kind of continued relative financing capacity of the business. Right now, that's the focus, at least as it relates to our growth capital in 2025, is to make sure that the relative standing and relative measures and debt measures of the business are not impacted in a significant way, especially as it relates to the ability to go out and refinance some of our fixed notes, so that's the near-term view for me in managing the business. Longer term, I think I'll be better apt to be able to answer that question in the future. Fair enough. And just final question for me as we just think about the CapEx program and the spend for new build equipment. Just has the prices for new builds increased materially over the last couple of years when you made your last big order? Just trying to get a scope of, with the growth CapEx, how much horsepower that you're potentially adding. Really, year over year, we haven't seen a significant increase. In fact, at least the last several quarters as we've looked towards the new build, I should point to. So pricing that we saw in Q4 versus the pricing we've seen in Q1 in terms of the new build compression has not moved. As it relates to looking year- over- year, Q4 to Q3, I would have to do some research to see relatively how significantly that has moved. Yeah. To add, I mean, over the last few years, we have seen significant price increasing on engines, compressors, and the manufacturing itself or the fabrication. It seems like every year, Caterpillar or Waukesha, they give us a price increase that is passed along, but we have seen, thankfully, we've seen the market carry that pricing as far as contract rates to be able to buy new equipment. You know, 3600 engine still the preferred engine by customers? Yeah. Everybody likes them a lot. They run well. And yeah, I mean, Waukesha seems to be taking a foothold, but Caterpillar is still by far the lion's share. Understood. Appreciate the time. Thank you, gentlemen. Thank you. That concludes our question and answer session. Also concludes our today's call. Thank you all for joining. You may now disconnect.