Archrock(AROC) - 2025 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Archrock reported a net income of $71 million for Q1 2025, with adjusted net income of $74 million or $0.42 per share, reflecting a significant increase compared to the previous year [25][26] - Adjusted EBITDA for Q1 2025 was $198 million, showing strong underlying business performance [26] - The leverage ratio at the end of the quarter was 3.2 times, down from 3.3 times in the previous quarter, indicating improved financial strength [29] Business Line Data and Key Metrics Changes - Contract operations revenue reached $300 million in Q1 2025, up 5% from Q4 2024 and 35% year-over-year, driven by organic horsepower growth and higher pricing [27] - The aftermarket services segment reported revenue of $47 million, up from $40 million in the previous quarter, with an adjusted gross margin percentage of 25% [28] - Monthly revenue per horsepower increased to a record $23.54 during Q1 2025, with a consistent adjusted gross margin percentage of 70% for two consecutive quarters [19][20] Market Data and Key Metrics Changes - The compression market fundamentals remained strong, with utilization rates at 96% and a substantial contracted backlog for 2025 [11][18] - The company is closely monitoring market developments, particularly regarding OPEC's production actions and their potential impact on natural gas demand [12][13] Company Strategy and Development Direction - Archrock is focused on value-creating industry consolidation, with the integration of Total Operations and Production Services (TOPS) progressing as planned and the recent acquisition of NGCS expected to enhance scale and customer relationships [10][30] - The company plans to maintain a leverage ratio between 3 to 3.5 times while continuing to invest in growth capital expenditures between $330 million and $370 million [21][22] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to manage through macroeconomic uncertainties, citing a stable production-oriented business model and strong customer demand for natural gas [12][13] - The company anticipates continued growth in global natural gas demand, supporting infrastructure investments in the U.S. for decades to come [16][17] Other Important Information - Archrock increased its quarterly dividend per share by 15% year-over-year, with a robust dividend coverage of 3.9 times [9][29] - The company has repurchased approximately 977,000 shares at an average price of $23.22 per share, with a remaining capacity of $65 million for additional buybacks [9][29] Q&A Session Summary Question: Impact of macro headwinds on gas and oil growth - Management noted that while some producers are reducing CapEx modestly, the committed backlog for 2025 remains unaffected, ensuring continued growth [36][37] Question: Equipment pricing and tariffs - Management indicated that pricing for equipment is largely locked in for 2025 and that the impact of tariffs on costs is estimated to be in the low single digits [39][40] Question: Decisive actions in response to market conditions - Management emphasized the importance of staying close to customers and highlighted the operational flexibility to adjust CapEx and OpEx as needed [44][45] Question: Pricing assumptions and guidance for NGCS - Management confirmed that there are no changes in pricing strategy and that the acquisition of NGCS can be absorbed without increasing CapEx guidance [48][50] Question: Compression intensity in different basins - Management explained that compression intensity is highest in the Permian, but they have the ability to adjust operations based on where gas production is occurring [57][58] Question: Demand for electric compression - Management stated that about 30% of the new build CapEx budget is still dedicated to electric compression, but availability of power remains a limiting factor [70][71] Question: Positioning for potential slowdowns - Management highlighted the differentiated positioning of the company compared to past cycles, with a more balanced customer base and a younger, higher horsepower fleet [75][76] Question: Contract flexibility and outsourcing trends - Management confirmed that contracts are binding but they work with customers to accommodate changes within limits, and noted an increase in outsourcing among customers [79][81] Question: Pricing of older versus new compression assets - Management indicated that there is no significant pricing differential between new and used equipment within the first few contract applications, although older equipment may see some differences [84][85]