USA Compression Partners, LP (NYSE:USAC) Q4 2023 Earnings Call Transcript February 13, 2024
USA Compression Partners, LP misses on earnings expectations. Reported EPS is $0.02 EPS, expectations were $0.12. USAC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. Welcome to USA Compression Partners’ Fourth 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, February 13, 2024. I would now like to turn the call over to Chris Porter, Vice President, General Counsel and Secretary.
Chris Porter: 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, 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 definition and reconciliation 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 other public filings. Please note that information provided on this call speaks only to management’s views as of today, February 13, 2024, and may no longer be accurate at the time of a replay. I will 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’m joined on the call today by Eric Scheller, our COO. This morning we released our fourth quarter and year end 2023 results. We are extremely pleased that we were able to deliver another quarter and full year of outstanding results. We continue to increase distribution coverage and decrease leverage. Our results reflect our continued and incremental movement towards our previously mentioned leverage ratio goal of 4.0 times, providing us increased financial flexibility and positioning us well for when our senior notes mature, which is not until Q2 of 2026 and Q3 2027. Of note, for both the full-year and quarterly results, we achieved many record results including revenues, adjusted gross margin, adjusted EBITDA, distributable cash flow, distributable cash flow coverage, average revenue generating horsepower and average revenue generating horsepower.
We also reduced our leverage ratio to 4.1 times, and saw common unit prices over $26 during the fourth quarter, nearing all-time highs. Finally, we were added to the VettaFi Alerian MLP Infrastructure Index, the AMZI, resulting in approximately 8.8 million common units added to index funds. I feel comfortable saying we had a great year. As we look forward, we are continuing to position USAC as a resilient player in the natural gas compression service industry as we have always done. 2024 will be a year that we focus on improving internal operational efficiency, the continuation of converting idle units to active status, continuing price improvements, and maximizing returns on growth capital through opportunistic purchasing of equipment that enables USAC to capture margins in line with our fourth quarter results.
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Q&A Session
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As we mentioned in last quarter’s call, our customers and others in the industry have not yet begun to accept the pricing required for USAC to purchase new compression units. That statement continues to be true. We are also mindful of the near-term geopolitical and economic uncertainty ahead. The most recent reports from the Federal Reserve indicate that rates will be terminally higher than what we have experienced over the last decade. The worldwide economy, including China, has slowed. We are continuing to see escalating geopolitical tension in the Middle East and in the ongoing Russia-Ukraine conflict. And finally, there is the never-ending U.S. Federal government budget fight and 2024 election cycle. We believe these factors suggest the prudent course of action is to remain financially and operationally flexible.
With that in mind, we believe one strength we have proven over time is our management’s ability to weather the storm. If you review USAC’s history, you will notice a common theme that has been core to our stable historical growth. USAC grows when the industry and geopolitical environment are supportive of that growth. In times of uncertainty, however, you will notice that USAC has reined in growth, battened down the hatches and focused internally on efficiency and productivity. It’s easy to show high utilization and growth when you are the new fresh face to the compression space that is yet to experience significant lasting downturns. USAC’s management has a proven track record during those times such as 2008 to 2010, 2015 to 2017 and most recently during the COVID downturn.
Throughout those cycles, USAC continued to maintain utilization, revenue and adjusted EBITDA at levels strong enough to maintain our distribution while sustaining manageable levels of leverage. While we do not expect the near term to be as dramatic as those prior cycles, we do see general uncertainty ahead and believe our current 2024 plans match the USAC story that you have all become accustomed to, one of cash flow and financial stability through prudent capital spending at the right times. The uncertainty is not without some clarity specific to our industry. We still maintain a very bullish view of the long-term prospects of the natural gas compression industry. As we have said before, our business is not directly tied to commodity prices, but rather production and demand.
The future looks bright on both fronts. The EIA expects U.S. production of natural gas to likely continue growing to meet rising global demand through the end of their forecast period, which is 2050. U.S. natural gas exports are expected to continue growing in 2024, 2025 and beyond, especially as new LNG facilities already approved and scheduled to come on stream in the U.S. increase current capacity from about 15 Bcf a day to more than 40 Bcf a day. To be clear, that is incremental capacity not impacted by the recent announcement from the Biden administration to pause further approval of LNG export terminals. We believe these long-term dynamics will dovetail well with our current 2024 plans to focus on maximizing unitholder value through internal process optimization and efficiency, and less through capital expenditures, which we currently believe will be significantly reduced in comparison to 2023.
We believe this will allow us to continue improving our balance sheet, provide us the financial flexibility to opportunistically improve our capital structure over time, including potentially refinancing indebtedness at attractive rates, allowing us to further pursue capital cost improvement, leverage reductions and distribution policy changes. One point I would like to mention in regards to our capital structure, in January, we had $40 million of the preferred units convert into common units. When combined with the common units issued pursuant to previous warrant exercises by the preferred unitholders, this resulted in an additional 4.9 million common units outstanding in the aggregate, at least 80% of which have been absorbed into the open market to date.
The good news is that this increases our public liquidity with a de minimis impact on our distributable cash flow coverage, which we have highlighted in a recently published investor presentation you could find on our website. As always, we will continue to look for ways to maximize the capital structure and the value that can be derived there from, 2024 will be no different. Switching gears, I would like to recognize our hardworking field employees. During the recent winter storm that swept across the country in mid-January, our employees were called upon to battle ice and sleet, keeping our compression units at the ready as our customers’ natural gas compression needs changed in response to the storm. As always here at USA Compression, we are all about serving our customers and our communities, helping to keep the lights and heat on when it mattered the most.
Our field employees’ actions during this recent storm is just another proud example of our dedication to a high level of service. I am very proud of this company and our employees’ commitment to serving the baseload power generation that we all need during those times. One more point before I turn the call over to Mr. Scheller. I’m pleased that our 2023 safety performance continue to outperform the industry average. As always, the safety of our employees, our contractors and our customers and employees remain the number one priority of our organization. We are extremely proud of our employees’ continued focus on being safe in all we do each and every day. With that, I will turn the call over to Eric Scheller, our COO, to discuss our fourth quarter highlights.
Eric Scheller: Thanks Eric and good morning all. As Eric noted, we are extremely pleased with our full-year and fourth quarter results, and I am extremely proud of our employees. In addition to the record results Eric mentioned, we continue to increase utilization during the fourth quarter to a near all-time high, all while continuing to capture contracts with extended tenure and enhanced pricing that we think generates strong, stable baseload cash flows, while providing opportunistic upside as market condition evolve. During the fourth quarter, our revenue growth trend continued and was driven primarily by continued utilization and pricing improvements. Our revenue increased 4% in sequential quarters and 18% compared to the year-ago period.
