AROC - Earnings call transcript Q3 2018

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Operator

Good morning. Welcome to the Archrock, Inc.

Third Quarter 2018 Conference Call.

Your host for this morning’s call is Paul Burkhart, Vice President of Finance at Archrock. I will now turn the call over to Mr. Burkhart.

begin. may You

Paul Burkhart

released Good Childers, Jenny. and With today of Yesterday, me Aron, for operating Thank third the and morning, Chief Brad quarter Archrock Archrock. of President Financial Archrock financial Executive are and Chief results you, XXXX. Officer everyone. its Officer Doug of

copy, If at www.archrock.com. a find information you have you received on the can not the website company’s

XXXX of based make and Section we Archrock’s our assumptions During will forward-looking Exchange statements Act the as and this team. management and of of XXE information beliefs meaning on the current to well expectations Securities call, within currently as available by made

be reflected it latest our Please with Although differ management assurance cause refer the expectations no filings expectations those list a to made SEC results may forward-looking materially to during statements the such that in from can the of in correct. give this actual statements call. are factors reasonable, believes to that that for prove such forward-looking will

addition, available In margin, and will percentage financial non-GAAP margin gross EBITDA, certain cash including reference adjusted dividend. measures, gross discussion for our today

I call For business. X-K yesterday’s discuss please to now our press and our results an to these Form financial Archrock’s over the and will to SEC. quarter GAAP Brad see of financial third release the turn non-GAAP reconciliations our provide update of results, furnished measures to to

Brad Childers

Paul morning good everyone. and you, Thank

want heights with Officer. strong welcoming that our team, driving experienced our to make leadership meaningful provider. Doug highly August. rest drive new him results Before as we record Doug in with onboard. and is have in by get team Chief quarter of the excited CFO leading we compression a I into the to our U.S. Doug to start contribution the am a Archrock will energy I confident efforts are together Aron performance, of joined as our Doug and Archrock’s track Financial a to

XX%. with and customer how the we the our our results am horsepower growth by started from our strong Simply team. XXXX. strong performance extremely as The quarter, we the demand these quarter our the for revenue hit in and have execution. that good period was aftermarket for net achieving of results, mind, our fundamentals all latest pleased ahead same multiyear demand XXX,XXX third same execution in Adjusted highlights outstanding months horsepowers, our XX% let by business supported our in in With reflects this year. by up ago. the growth was our horsepower over XX% year XX million ago services higher bringing utilization than nearly few horsepower to by a higher Contract XXX,XXX the to marking to quarter. operations EBITDA a was year period compared strongest the our years higher in and bookings, services and well for utilization, and business last X last by highs into nearly is market dynamics and XX% in than to said, to operating about We the Turning I me ever of growth delivered positioned $XX.X and we year and increased and is performed benefit period driven further quarterly revenue from fleet our remainder of of as are the expectations, seen

even a growing for for on of XXXX flows our firm improve contract into and cash base service of levels be that leverage strong commitments to our beyond further by out and are base placed ever generated position, remain And seen providing at to higher than commitments have building our XXXX. horsepower the We we further customer visibility operations by in business. our stable continued business, reducing financial

operations segment contract our review Let’s performance.

majority year invested horsepower, within exiting this units operating Pricing quarterly field XX% Our high in of units units. fleet pricing remained equipment growing team is marked continues of quarter did are operating approximately service XXXX. large to across deployed with business horsepower we capital, The quarter to excellent contract Of is into XX% growth investing our million the large the horsepower Higher a all prior XXXX since for over a spot utilization Large horsepower a The fleet a midstream XXX,XXX that XX%. total increase of operations strong, horsepower horsepower utilization newbuild of utilization the ago horsepower. ago. be operating XX% demand quarter our replacing in and was and from is our largest X.X from in to job continues now XX% horsepower and up up which our high to tremendous over on year stable ranges. in demand with up vast XX% be activity. the

demand horsepower been growth customer for multi-well several the and spread of has across basin, with quarter meeting Ford. compressors and half move in locations. within growth SCOOP/STACK, horsepower diversified bigger pad The Niobrara Archrock’s are balance growth the in Eagle the the footprint. We efficiently roughly by operate Permian on plays large our that Year-to-date, was can volumes driven

market margin. to were above focus highest levels on improving to continues as Moving XXXX and reported dynamics, our aftermarket efficiency. our results third and business services increasing our we our at guidance both segment, gross since for Revenues pricing from operational revenue benefit quarter AMS the

customer-owned last including policy capital and AMS the to in In increasing quarter sale. and we outsized capital consistent above parts addition this From to three objectives. catch range. on the were compressors realized maintenance from we our business remain customers we up a high-end contributors projects focuses This allocation large pushed hard of on key drivers their our committed to deferred which on is solid activity are These maintenance. execution us installation base of and quarter, helping standpoint, balancing forecast. Strength with benefits strategy, an quarter, our the during our guidance cited

high-return in grow meet needs. capital-efficient, invest to assets and customers’ business is the increasing that First our

support focused on that tied units is stable oil natural Our to midstream applications horsepower large and gas production. growth

second reiterate dividends. achieving reduce our XXXX. and objective leverage the reduced our record Our track capital of third our below to our further in of the quarter to in is of form Xx leverage. to And quarterly leverage goal third returning is to objective in We shareholders continue X.Xx

For increasing the XX% XXXX. third a through is XX% we will and pay to the quarter, dividend dividend than remain quarter that to year by annually prior higher committed XX% we our

further Finally, capital year our maintaining simplified transaction structure, our consistent with with our ample and its dividend Partners our company, this lowered strategy. completed merger while earlier capital was cost de-levered coverage. of It corporate Archrock

our gas to a in is on and oil for is The of tremendous our key no activity the XXXX. strong forecasting market. the we have you slowdown percentage double-digit and EIA business see production, near which are of perspective compression compression like the each Next, XXXX future. I drivers would This increases in increases will market share U.S. and with in natural in

volumes and closely is such operating do since focused an of shorter liquids pumping and Eagle As Ford, facilitating the activity gathering produce to of plays is needed the is critically, which is aligned market. crude most move never with substantial that. association energy volatility applications infrastructure in just company a deployed and businesses. In And midstream growing, a growth oil. SCOOP/STACK, much and we on busier. to pressure the facing our gather to exposed not production by cycle the the oil is and And to oil critical like focused gas, XX% production, Compression, plays with are is associated gas our of pipeline, gas gas dedicated These completions that Permian, been as to gas. level fleet piece natural Niobrara of business natural driven we our and that’s have produced drilling, about of natural infrastructure

the gas with oil next fact, natural of In gas growth to over produced is expected X account years. the in associated for XX% over

fleet XX% is transportation of moves to and gas the for artificial Gas method XX% is lift a an Lift to is of well. gathering our the other Gas Lift surface deployed applications, liquids oil production. While for that enhance deployed

the demand gas up at the Gas horsepower are to compression has of a XXXX. strong end directed operating compression support for transportation fleet natural Gas also increases. into to of XX% contract compressors our of the and currently placed for at production the oil, for in As With and market at into the piece this to be of levels. is XXXX growing incredibly XXXX commitments and more even business, increase service Lift is oil been bookings our customer from and of produced, Lift XX% record

XX% Our contract last for firm compression compared the as customer are period commitments up year. same to

XXXX even our and commitments greater for a XXXX growth, this horsepower increase EBITDA growth and already into us been While level provides year on visibility with has beyond. of customer strong

of I’d financial Now provide call a over and performance to our Doug quarter turn like for latest third our to to the outlook. review

Doug Aron

pleased team our by for Revenues Archrock of quarter year, am excited a time to part strong delivering dynamic our in better-than-expected period. was contract quarter pricing to The operations the horsepower, increased in year third totaled results. increase growth prior to continued at for Thanks such started and the million, the driven far Brad. be an reflecting the operating and revenue another this I of on results in am achieved compared company. Archrock AMS. $XXX and really XX% so operating momentum of have financial business I better

XX%, XX% we midpoint improved last over quarter, of pricing. third quarter, basis up an revenue This Gross third prior XX% a increase in by improved of horsepower $XX.X generated XXX driven EBITDA the from was remains points we the at operating $XXX of the of the up year. In for an XXXX. to the operations, increase at year ago. million, million For and the third contract percentage quarter adjusted margin and range strong from increase provided quarter

up the we a parts for came largely growth $X oil and recorded the prior for year the managing versus perspective, quarterly delivered lower remains our last team on inflation, largest XX% and $XX business for execution since up This were quarter. period quarter, SG&A expenses third focused quarter margins unchanged third labor, XX% expenses. XXXX. of especially the services despite XX%, increased to as last our than the marks the this revenue million strong intensely AMS prior revenue margin lube XXXX. $XX significantly and from cost the quarter million gross million from ongoing in segment and our nearly year From Our quarter. of Aftermarket XX%

from of $XXX resulted leverage us, would reduction flow $XXX basis, the million over This the quarter sub-Xx focus $XX exited be trailing $XX million we’re end payment the billion, and quarter demand headcount position per in ratio XXXX. the leverage and available of a XX-month third $X.XXX leverage in guidance more share CapEx seeing representing improvement expectation and prior end cash CapEx prior $XXX third totaled in was several second leverage below yesterday’s growth have third the our we declared our consistent on We to is third Further a to basins. EBITDA. was reiterate yield similar the up this with dividend expenditures Our $XX SG&A compensation for $XX at of total year. achieve totaled closing the In reducing expense. third for meet and second in the of million improving Maintenance to of of recently million. third for of across in million. investment timing Strong from customer liquidity additions to million, Through annualized the quarter key capital the by liquidity up the in quarter X.Xx quarter down in year a end guidance quarter. by or approximately compared third weighted. previous capital came that Debt the third of driven our further million, range growth of with million our second-half driven $X.X to X.Xx $XX dividend $XX quarter, million to deployed We $X.XXX the quarter. just projects improving on $XX generation of quarter, the quarter. an approximately This our million position, a X% the we the our was high-return price quarter remains which strong at quarter, for

on November November with position, performance. Our annual of shareholders maintained an we’re continued our through on third third we extremely coverage quarter by dividend during XXXX. record XX%, X.XXx XX% from business We committed the quarter, of second We an basis reported prior dividend reflecting X.XXx, coverage quarter the dividend and experiencing strong by up our increased on remain to will be paid all increasing our quarter to to XX XX% X. dividend in growth

Let’s of look the set to ahead combined booked to continue our higher of in $XXX fourth operation expect we In $XXX million benefit growth the as realize at in increases we contract our range price outlook quarter of as million at XXXX. the horsepower, horsepower revenue for with into operating rates. we operations,

with expect with In quarter margin to to million, a fourth consistent be revenue in we our AMS to million our gross business, XX%. quarter. XX%, of margin $XX performance XX% We XX% the and third gross $XX expect between of

As a first generally see AMS in to reminder, and second third quarters the fourth business slowdown some and compared quarters. seasonal our our

million is million $XXX for and expect the capital to Of for to interest $XX range and to expected amortization be approximately be the to XXXX, basis, fourth million. expected SG&A for approximately range. expenditures expect be Depreciation $XX CapEx we CapEx $XX expense that, We million in and newbuild be million. quarter to expect mid-$XX mid-$XX maintenance fourth of the approximately be the year a quarter expense $XXX in million. On we to full total million is

Our large newbuild horsepower CapEx ongoing units. program in to opportunities reflects deploy high-demand, additional the horsepower

to investment proceeds in we’ve To our through the million raised during of supporting $XX expect program. sales. newbuild raise million a date, approximately continue equipment equipment We approximately $XX to sale year,

open its expect you a we guidance a to predecessors year. basis. for Before I’d update in we change the have that next Historically, like guidance on our early and line Archrock implement quarterly practice to Q&A, provided on

Jenny, This in consistent earnings in way open We our practice with of with there our and see is which to quarter infrastructure business. you to our held we energy expect be performance will to invest peers if is on to monitor in XXXX. annual better aligned the our questions. February transition please guidance fourth now questions? are we’d call line that, and like With for the

Operator

from Securities. [Operator we Kyle have question a One May Instructions] Capital And from

Kyle May

team. morning to guys. welcome Doug, Hi, good the

Doug Aron

Thank you. Glad to here. be

Kyle May

your longer if it we Wondering longer-term the have if of can top we so a start into a because revenue growth of about, and preliminary maybe about view us XX% thoughts any revenue next how year-over-year good can off going year? wondering ‘XX pretty you if a you’re like looks give see look backlog it like line with generate you your guidance, ’XX take preliminary changing sounds XQ to directionally, you midpoint

Brad Childers

are. we This is Brad. Yes,

time. are at meaning and this we’ve as our to our look in today time time we’re if call from don’t reducing guidance call giving February apparent with our [indiscernible] XXXX, this XXXX that this we share the So into going that higher a definitely and that not do year I ‘XX, will let is look a market past in XXXX that or to forward year, numbers, in change that’s compared look what guidance Kyle, last I’ve we up pretty we’re perspective said and is commitments that you I’ll not for here in we that the call the see but a shared that into plus but XXXX this at this like on is to so

Kyle May

guys. the service or growth horsepower you press mentioned Okay, of in that other talk seeing? about can in like next you year those helpful. growth about release, the could plays And you one things that you are placing several talked opportunities anymore other any into what plays look That’s

Brad Childers

certainly bookings activity we us the really to are and think plays expansion largely people the from customer of that customer those sure focus Rockies as generate Permian mid-continent expect plays increasing SCOOP/STACK and the in starting in a on that continue to bulk base the in I of that’s customers activity that are in with a on going where the command our market. completed that of touch hot see Marcellus for the gets in some play lot and activity going be activity to so Northeast, lot a is of in investment talking the and probably of includes as consistent Utica some in seeing I of will as see we and vast Northern and activity are some plays we also be are the plays have the and I can discussions so growth, activity see transportation the still, a for the Ford, Niobrara still Eagle a both to the activity plays couple also as that’s in for believe, generated so and in Well, other however, the we’re River the base going of addition the the about, Powder well on there monetizing de-bottlenecking and we dominance that

Kyle May

in I the some business about are quarter improvement this in if just in as the to XX%. it. that growing you maybe any going and And that anymore Got third more talk margin could AMS the saw part had nice you segment, you one trends sneak you change forward? Can seeing of

Brad Childers

execution revenue executing we as this we of it’s in of is in we every top and which I that don’t but quarter, those as have we all of improved quarter for AMS both improvement, in the a really go revamps as outsized that Yes, pricing because seeing to every margin execution, the doesn’t show in in across see put lot up maintenance made facility a customer year, of parts so driven we’re up to did market nicely margins so note revenue an AMS a of improved also we it is also our business outperformance activity sales see led the activity on we customer installation that was and by that comments showed we’ll we see it combination that we well equipment, services on see uptick our some improved provide, nice mix. about moves part and in but and my well some have, work line then has business is every nice improve lumpier, the pretty growth, the all of that pricing, quarter the see that as of that existing activity generates includes higher-margin quarter overhauls, a see where excited has together is well

Kyle May

Got me. helpful. Alright, for it. that’s all very Thanks That’s guys.

Brad Childers

Yes.

Operator

Instructions] a Watson from question Company. Simmons [Operator John have & we And from

John Watson

Good morning.

Brad Childers

Hi, John.

John Watson

of I next strength but CapEx for and in in agree on Hi, should in completely market, that down we’ve try compression we Brad. specific of XXXX year on to you and about fleet I a number the be the comments your growth the conceptually, similar thus XXXX? pin thinking far year-to-date won’t seen terms

Brad Childers

that expressing seem customer backlog, that to in customer and of so Gas to I ‘XX all continue and of a it’s Yes, saying, as indicate John, higher gas. activity gas out XXXX oil the see like lot infrastructure a as and looks this are is level going quantitatively production is ‘XX the growth forecasts Lift end look the we customer projected commitments add end fair this production on at compression, that critical the keep we’re we’re tried outlook for this bullishness if increase gas thing infrastructure both firm see put increasing piece exciting what’s to up we to did to a we support is in continued in we on share the both the XXXX what putting expect well higher marketplace, that in seeing I to think based of to but quarter that’s we’re compared and for should activities, as are are about in our that we levels our to is even about and market fact oil the us this again, commitments talking which for of like

John Watson

that’s great. Perfect,

of how any units think commitment evolved? getting the from Speaking to might now? there just of you year firm customers, change curious hear to your those to also has And be change or is Lift duration regard relationship with either from type commitments, of a the I’d Gas you’re related percentage how

Brad Childers

expand and trading-off it’s point we’ll customers at for trying in out are pressures going I so the pricing are and think more the I balance to a to future The we flexibility how to in the customers horsepower’s gathering would concerned costs our part getting the Lift everyone’s out as in large growth business our it’s years, a of units, market with looking the we’re that contracts of can’t so we to tenure between going seeking commitments about the we future there a are with seeing we’re we there Gas more doing small tenure so for category in change horsepower the X we the lock some our a and bit growing so conclude costs wouldn’t are cost some X because having shift transportation. has for see pass-through do same to pushed changed remains the so or experiencing, materially so to describe of tenure in more inflationary in last versus with pretty all contract pricing longer the how management business about over a terms the lot the I it’s just a forward out it’s larger the people outpace predict horsepower that I management and and of trade-off of are a us some seeing our X term years contracts material are positioning of contracts of customers revenue installations in that point can’t overall that our in get longer-term activity the right I see mix being

John Watson

Okay, understood.

but where to we is answer leading-edge think a to yes, would higher? I confirm? just ago from you front, inch has materially pricing were pricing I wanted pricing see the are moved On continuing clearly, year higher the

Brad Childers

a and manage idea a that very balancing great service in great can up also are so our we’ve generate so business to leading lube now investments, are and returns materials, with costs, but a generating keeps we’re moving rate. pressure spot we of equation this providing and incrementally the lot labor, at seeing the thinking do are is right of You right oil we’re in costs that we part pricing thing share, on parts customers the to edge however, in got cost the pricing aggressively and our incrementally so happy we are also competitive that returns I’d on

John Watson

helpful Yes, that, Very congrats looking working joining team with forward for thanks the on Brad. and you. Doug to

Doug Aron

much. Thanks likewise. Yes, very

Operator

Thomas And Curran our comes next question from B. from Riley.

Thomas Curran

guys. morning Good

Doug Aron

morning. Good

Thomas Curran

Doug, forward echo the luck let I me you. look sentiments welcome aboard and best also with working of to

Doug Aron

as Yes. Thanks, Tom well.

Thomas Curran

as secured at horsepower commitments And you so point? are you you’ve long-term now for X,XXX the sort that, type units, horsepower newbuild locking firm newbuilds on curious, are I’m in on of payback? of latest time these as at returns of cash this larger what customer cash frame part the what

Brad Childers

just a payback returns in X-year in an our converts targeting we’re IR, plus into second and the on So, if increment that math mid-teens, that solidly do the that the period part’s are you math. mid-teens and just that

Thomas Curran

And Are Right. compare cycle it just that what or relative where norm been historically? that’s does to average how Brad, at full or to history? of a you as above the curious has to sort

Brad Childers

that in the returns growing so been first on higher and today are end yes now. that going made that reminded investments above of is that where are the has we room infrastructure investing it historically, and generate XX-year and the that these are those we is the and demanded in few a assets candidly are business expresses answer we we’ve things in The market on are that

the returns. the from an know lock investment just way you good we think about those life ability of really to As early boosts in returns, in investment the returns

this And what in marketplace. that’s are so we seeing

end the driven. this the where it’s So operates of of caveat, cost historically. business of on yes, one we are But high largely also capital

very the They times capital solid. we higher the higher, and – really we seen the are now real costs getting to have And that, but of net are right returns that’s I been so good think have at are they been reflect the a higher not business historically. are in returns end have what yes, in when

Thomas Curran

Great.

I’d then love Archrock’s of an M&A, pipeline in on evolved and of where how has update the to at of this number prospects opportunities terms Turning at, hear to is point? appetite attractiveness,

Brad Childers

the the The are position we the be past. right investments amount and news market And with their we been we is know of and our opportunity market the to to a us acquisitive consolidation or work by have see the of out are Those us. and in are and high-value and market market good there in to others. for thrilled remain There about today available consolidation to encounter customer and get organically. tremendous definitely our as the we our right the our assets see and in organic it’s number we of base the if that with you any good growth our some continue businesses competitors and could grow the we are do is at to in I the future. price, convinced invest business whether marketplace busy growing support as will fleet best by we

Thomas Curran

am if you sorry on one But if they Brad. touched I and have might missed out any have you in this had I your basins have so, opening customers relocate Permian for assets then gone? where and And remarks, me already to it, other of last the

Brad Childers

which what plays we a profile, a a of in other than assets basin changed haven’t movement building out the is see of seen Permian. More investment question. backlog relocating outside a do in, of we Interesting lot

in a Permian, already other move, really a – way than are the in of the are so investments mind the they production would some assets. we you level. And shifted our the or the the not the of have of works and reduction contracted assets really is I it keep in see growth not business that the level move to assets out more that but it’s plays our Permian funding to in have referenced So, put see current production in more reduction shifting to customers much for that of they the have expectation

in that Permian. the seeing not are We

gas In capacity get fact, our their and customers appear oil to have to out.

the we really it so of our slowdown some the we on business hear challenges not that to. is from others don’t expect impacting And Permian and

that we same as So degree others. to haven’t the experienced

Thomas Curran

helpful the appreciate time. answers. Very I

Brad Childers

Sure.

Operator

There are no more questions.

Now, turn for to I call would final remarks. like to Childers Mr. over back the

Brad Childers

call performance everyone the excited outlook Great. this our equally about our The for Archrock. is Thank future morning. bright you for this I am quarter. for joining

service to team their company to and us. thank deliver capture I entire to results early are market execution forward work excellent of our shareholders. want excellent of you updating safe that working Thank hard is continue improving quarter Our our performance on fourth next at year. especially opportunities customers, employees hard the for to our for everyone. look the to ahead you our and our I while all

Archrock (AROC) 2 Nov 182018 Q3 Earnings call transcript