USA pression Partners(US:USAC)2023-05-02 20:06Financial Data and Key Metrics Changes - The company reported record revenues, adjusted EBITDA, and distributable cash flow for Q1 2023, with a distribution coverage ratio of 1.21 times, the highest since the 2018 acquisition of CDM [25][26][29] - Average revenue per revenue-generating horsepower reached $18.19, marking the fifth consecutive quarterly improvement [7][26] - Adjusted gross margin percentage improved by nearly 1% due to better pricing and moderating inflation for vehicle fuel and compressor fleet lubrication fluids [26][22] Business Line Data and Key Metrics Changes - Fleet utilization averaged just under 93%, with a sequential increase in adjusted gross margin percentage [7][15] - The company achieved a 1.9% increase in revenue-generating horsepower on a sequential basis [27] - Expansion capital expenditures for Q1 2023 were $51.2 million, primarily for reconfiguring idle units and delivering new large horsepower units [27] Market Data and Key Metrics Changes - The demand for natural gas compression services is expected to grow due to sustained oil prices above breakeven levels for existing and newly drilled wells [9][10] - The market for compression assets is tightening, leading to increased demand for the company's compression-as-a-service delivery model [10][12] - Month-to-month service revenues as a percentage of total revenues declined to 23%, down from 33% in the previous year, indicating a shift towards longer-term contracts [21][11] Company Strategy and Development Direction - The company is focused on capital discipline to enhance returns and improve balance sheet strength, aiming for financial optionality to reduce debt or pursue strategic investments [5][8] - The strategy includes increasing fleet utilization and securing long-term contracts to generate predictable cash flows [13][24] - The company plans to slow down organic growth in 2024 to focus on stability and leverage coverage [49][50] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the ongoing demand for compression services, driven by the energy industry's initial stages of a commodity price super cycle [8][9] - The company anticipates inflationary pressures to eventually abate, with adjusted gross margins expected to normalize around 68% [22][26] - Management highlighted the importance of maintaining strong relationships with suppliers to navigate challenges affecting new unit deliveries [22] Other Important Information - The company achieved a recordable incident rate of zero in 2023 to date, significantly below the industry average [14] - The company is on track to deploy all new large horsepower unit orders in 2023, adding approximately 165,000 horsepower under multi-year contracts [23] Q&A Session Summary Question: Growth CapEx tracking and 2024 capital allocation flexibility - Management confirmed that the growth CapEx for 2023 is fully contracted under long-term agreements, with a focus on capital discipline for 2024 [32][33] Question: Expected mix of month-to-month contracts by year-end - Management indicated that the mix of month-to-month contracts is expected to decline to low-single-digits or mid-single-digits percentage [36] Question: Convergence of actual operating utilization rate with projected rates - Management acknowledged the difficulty in forecasting the convergence of utilization rates but indicated that the gap is due to units under contract that are not yet generating revenue [40][41] Question: Impact of labor costs and skilled tradesmen availability - Management noted that while labor costs remain a pressure, they have successfully increased their labor force and retained employees [51] Question: Electric adoption and electrification trends - Management discussed the challenges of electrification, noting that many customers are recognizing the inadequacies of the electric grid for larger horsepower equipment [52][53]