Good morning. Welcome to the Archrock Inc. and Archrock Partners LP Second Quarter 2017 Conference Call. Your host for this morning’s call is David Skipper, Director, Investor Relations and Treasurer of Archrock. I will now turn the call over to Mr. Skipper. You may begin.

Thank you, operator. Good morning, everyone. With me today are Brad Childers, President and CEO of Archrock; and David Miller,. CFO of Archrock. Today Archrock and Archrock Partners released their results for the second quarter of 2017. If you have not received a copy, you can find the information on the company’s website at www.archrock.com. During today’s call, Archrock Inc. may be referred to as Archrock or AROC and Archrock Partners as either Archrock Partners or APLP. Because APLP’s financial results and position are consolidated into Archrock, any discussion of Archrock’s financial results will include Archrock Partners unless otherwise noted. I want to remind listeners that the news releases issued today by Archrock and Archrock Partners, the company’s prepared remarks on this conference call and the related question-and-answer session include forward-looking statements. These forward-looking statements include projections and expectations of the company’s performance and represent the company’s current beliefs. Various factors could cause results to differ materially from those projected in the forward-looking statements. Information concerning the risk factors, challenges, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements can be found in the company’s press releases, as well as in Archrock’s Annual Report on Form 10-K for the year-ended December 31, 2016 and Archrock Partners Annual Report on Form 10-K for the year-ended December 31, 2016, and those set forth from time to time in Archrock and Archrock Partners filings with the Securities and Exchange Commission, which are currently available at www.archrock.com. Except as otherwise required by law, the companies expressly disclaim any intention or obligation to revise or update any forward-looking statements. In addition, our discussion today will include non-GAAP financial measures including EBITDA as adjusted, gross margin, gross margin percentage, cash available for dividend, distributable cash flow and net loss from continuing operations attributable to Archrock’s stockholders, excluding items. For reconciliations of our non-GAAP financial measures to our GAAP financial results, please see today’s press releases and our Form 8-K furnished to the SEC. I’ll now turn the call over to Brad to discuss Archrock’s second quarter results.

Thank you, David. Archrock delivered excellent performance in the second quarter, as we executed at a high-level on multiple fronts. We’re now seeing the positive results of the actions we took in 2016 to set up the company for growth. Over the past nine months, we’ve communicated that 2017 will be a transition year with a prior cyclical downturn giving way to the expansion we expected in the second-half of 2017. We’re confident that expansion is now underway and we expect our financial performance to improve starting in the back-half of 2017 and carrying into 2018. Let me touch on some of the highlights of our Q2 performance. In the quarter, we generated EBITDA as adjusted of $72 million, up $7 million, sequentially. We increased our operating horsepower by 40,000, and I was pleased to see this returned operating horsepower growth and expect this trend to continue. Our total revenue increased by 4% sequentially to $198 million. New horsepower order levels exceeded even a robust first quarter levels. We’re driving new horsepower orders at levels similar to 2014, providing us greater visibility into new starts through the remainder of 2017 and into 2018. Contract operations cost of sales was down $2 million, sequentially, resulting in about 200 basis point increase in gross margin percentage to 59%. SG&A expenses were down about $2 million, sequentially, primarily due to lower compensation and legal expenses. And our distributable cash flow coverage ratio at Archrock Partners was robust at two times and allowed us to invest additional cash flow into high demand large horsepower units. Turning to our operations. New orders during the quarter continue to be impressive. Our sales team capitalized on surging customer activity levels and delivered a strong book of orders that should enable us to drive top line growth for…

Thank Brad. Let’s look at second quarter results and then cover guidance for the third quarter. Archrock generated EBITDA as adjusted of $72 million for the quarter, up $7 million compared to $65 million in the first quarter. Revenues were $198 million for the second quarter up from $190 million in the first quarter. We also reported net loss from continuing operations attributable to Archrock’s stockholders excluding the items of $0.03 per share in the second quarter compared to a loss of $0.11 per share in the first quarter. Turning to our segments, in contract operations, revenue came in at $151 million in the second quarter, up from $150 million in the first quarter, primarily due to an increase in freight revenue. Gross margin percentage increased to 59% from 57% in the first quarter as our cost of sales was down $2 million quarter-over-quarter. As Brad discussed, about half of this decrease was due to lower make-ready and mobilization costs and half due to lower maintenance expenses. We also had a small contribution from lube oil consumption in the quarter. In aftermarket services, revenues of $47 million for the second quarter increased $7 million sequentially from $40 million in the first quarter. AMS benefited from both customers catching up on some deferred maintenance work and an uptick due to seasonal demand. Gross margin percentage was flat sequentially at 15%. SG&A expenses were $25 million in the second quarter, down about $2 million compared to first quarter 2017 levels, primarily due to lower compensation and legal expenses. About $1 million of the decrease was non-recurring in nature. During second quarter, on a consolidated basis, we determine that approximately 60 idle compressor units totaling about 23,000 horsepower would be retired from the active fleet. As a result of the retirement of these…

Thank you. We’ll now begin the question-and-answer session [Operator Instructions] And we do have our first question from Andrew Burd from JPMorgan.

Hi, good morning, nice quarter. It seems clear from you and others that backlogs are long and growing for large compression equipment. It’s good to hear that that’s boosting pricing for those units. But at what point does the availability of those large units maybe prompt the redeployment of smaller units – the two or three smaller units that may add up to one of the larger units? Are you seeing any of this happening, or do you expect some of this could happen if market tightness continues?

Thanks, Andy. Actually, yes. We see that already. But availability in the hot larger horsepower ranges is already putting pressure on what would be maybe an incremental – incrementally lower horsepower capability and I think in businesses and across the industry already. But it’s not going to deploy from changing up close to 2,000 horsepower unit down to several 200 horsepower units. It’s really just on the incremental, but we’re seeing that pressure already and that is causing the redeployment of the fleets, I think, across the industry. I know for us, for example, when we think about our start activity in the quarter, about 20% to 25% only of our starts was from newbuild horsepower by far the book 75%, say, almost 80% of our start activity was from our existing equipment. And so, we’re seeing a good deployment of the existing fleet where we can. And some of that is due to tightness from large horsepower.

Great. And second final question just on AMS, good to hear that revenues were poised to grow into year-end. And I think, Brad, you had mentioned that that’s a deferred maintenance by some customers and getting units ready to redeploy. Do you see the higher revenues at year-end as kind of temporary phenomenon, or is it a readjustment and step up and then we may operate it at those levels going forward, just trying to get a sense of the impact and timing?

Yes. So I do think that as the focus of the business of our customers is turning back to growth and running their operations on a more normalized basis without deferring as much activity as everybody trying to defer just based upon cost management that some of the revenue gains we are seeing are improvements to the market in AMS and I expect that to continue. And as that continues, we’ll also expect margin to follow at some point. And so pressure – we’re putting pressure there where we can. On the other hand, I will point out that we do have a bunch of seasonality for that business and we see some upturns, primarily Q2 and Q3 our busiest quarters and Q4 and Q1 tend to be a bit lower for weather-related reasons and budget reasons and just the way the business operates. And so, I believe that the market is recovering. I do know that there would be a chance of a step down in revenue in some of the later quarters ahead of us.

Great. Thank you very much.

You bet. Thanks.

And we have our next question from TJ Schultz from RBC Capital Markets.

Great, thanks. Good morning.

Good morning.

The $50 million increase in CapEx, is there a specific operating region that you get into demand to drive that? And then what’s your line of sight on contracts for that additional horsepower, just given some of tightness on the large horsepower’s tenure on contracts lengthening?

Sure. So on the regional, we see the biggest demand like many others in the space. The biggest demand right now is for growth in the Permian. Although, we are seeing growth in other regions too, that’s followed by the Eagle Ford and SCOOP/STACK Midcontinent area, as well as some as well as some in the Northern Rockies. So we see growth across multiple areas. But admittedly, like everybody else, half of the focus right now for our investment is more directed towards Permian. So that’s the growth play and that’s the one that’s getting all the attention. As far as contracting, I’ll point out that, ours is a business where our horsepower has gone to work very rapidly following completion and adding into the fleet. But we’re also at a point without talking on a percentage basis our numbers, where we see more longer – more commitments earlier from our customers, because they need horsepower than we’ve seen in a while due to that tightness. So we believe we have good visibility into that horsepower going to work, whether it’s firmly contract or whether it’s not good Intel and good flow of information and commitments with long-term customers.

Okay, thanks. What are your current thoughts on dropping the apparent level contracted horsepower into the MLP?

Well, as you know, we’ve dropped down assets kind of one per year for the past, since we started the MLP pretty much with the exception of a few years, where we’ve had other things going on. And we don’t give specific guidance, but we don’t see that changing dramatically going forward.

Okay. And then when you think about the distribution optimally, where do you want your business to operate from a coverage standpoint longer-term?

Well, right now what we’ve said is, we’re focused on the leverage down to partnership and we want to see that our leverage is moving towards four times. And then once we see that happening then we’ll start to focus on coverage and where we want that to be. We’ve said in the past, we want coverage to be in the 1.2 times range. And we’re looking at whether or not that’s the right level or whether it needs to be a little bit higher, but we’re still looking at. We want to see leverage starts to go up down.

Okay, thanks. Just lastly, can you just provide a little more color on what’s driving the decrease in your maintenance CapEx guidance?

Yes, so it’s guidance. For the most part, it’s very disciplined activity in the field. While we’re focused on providing excellent customer service to our customers and keeping our length times and reducing it. We’ve also put in place very good controls and management systems on how we manage our major equipment maintenance schedules and the CapEx associated with it. So for the most part, the short answer is, it’s from very disciplined management of what we spend and how we overall maintain our equipment with the overall objective of making sure we deliver excellent customer service.

Okay. Thank you.

Yes.

And we have our next question from Blake Hutchinson from Howard Weil. Please go ahead.

Good morning.

Hey, good morning.

Just a quick question on your opening comments, Brad, did – will see increase in growth CapEx part and parcel to finding an opportunity to actually pull forward kind of purchase system unit, it sound like you might have ran into an opportunity to do so, which might help you front load deployment a bit. Was that already mischaracterizing your commentary?

Let me rephrase and see if I get it, like it’s okay. I think – what we are seeing is, what we expected was a recovery in the back-half of 2017. And that’s turned out to be as accurate as we really could have hoped based upon how we approach the business. But we are seeing an acceleration of demand. So we’re seeing a higher demand move forward from the overall growth curve we’ve projected for natural gas demand, as well as for compression needed to support it. That’s really pulled forward, and so we’re seeing an increase in demand earlier and higher in the end of 2017 and into the early parts of 2018 than we’d expected. Coupling that with the longer lead times coming out of the manufacturers has really driven us to go ahead and get more CapEx in the system, so that we have units that when they’re needed.

Yes, I guess, maybe the way you’re characterizing it, or if we take it as a continuum from the last reporting period, maybe perhaps you were buying – had or a little bit in terms of compressor units three months ago into a markets you have analyzed as improving, but maybe your confidence level holds up a bit up, you’ll move from purchase to placement a little more seamlessly?

I think, that’s fair. I really do. I also just think that demand is higher than we – we’ve seen higher demand over the last three months than we saw up to that first, maybe in the first quarter when we last spoke.

Sure. And then I guess, your pricing commentary around what you have put in backlog, I guess, is that apply similarly to what you’re redeploying within your incumbent fleet as that what’s your pricing for newbuild?

Yes, that comment was driven to bookings we saw in the quarter overall, some 75% to 80% of which were from the existing fleet, only a little over 20% was newbuild in that period.

Okay. So that sticks to that commentary. I appreciate it. And then just I want to make sure, David, I caught the – maybe the most important part for most other. What was the gross margin guidance for 3Q for North American contract ops?

57% to 60%.

Okay, 57% to 60%. Okay, thank you. Sorry, I I didn’t catch that. Thanks. I’ll turn it back.

Yes, thank you.

Thanks.

And we have our next question from John Watson from Simmons & Company.

Good morning.

Good morning.

Good morning, John.

Brad, regarding the elongating lead times, do you think that’s primarily due to engine availability, or is it something else?

No, it’s primarily engine availability and more specifically it’s for large horsepower coming out of Caterpillar.

Right. Okay, great. And what do you think those will lead times might mean for percentage utilization of larger horsepower units industry-wide in the near-term, if demand improves like you think it might could we be above 85% for that process horsepower at some point next year?

Short answer is, yes, and we’re already there. For the largest horsepower units, I believe the industry utilization is already in excess of – I don’t have this for – the data flow for this is not clear. But I believe based on what we’re seeing in our own business and what we’re seeing in other businesses that utilization for the largest high-demand units in the space is already above that 85% level and moving higher. So it’s a market that has gotten tighter more rapidly, I think, than sort of we expected clearly more quickly than the manufacturing teams expected, because we’re seeing these lead times stretch out very, pretty far. The good news front on that, I just want to emphasize it, for us, what I feel good about in this is number one, we got ahead of the curve from an order perspective already in Q1 and we’re stepping it up in Q2, because we see that demand being solid and continuing. And as the the provider with the largest – large fleets of these units – large horsepower units, we believe we’re going to be a good position to capture that market.

Right, that makes sense. And one last one for me, could you share any color regarding the term of some of the contracts for the new units that you’re putting to work? Our customers trying to walk you in for longer contract, and I’m speaking specifically to the larger horsepower unit?

Yes, the answer is, yes, it’s interesting, it’s a tug-of-war. And so, typically, in the past, it’s better to enter into very long-term contracts for that large horsepower. But in the current market environment, there’s a little bit of reluctance on the service provider side and our side to do so. So we’re entering contract terms that range from right now two to five years on the largest horsepower units. It’s all going to be in that kind of a range subject to us being able to be satisfied with pricing in those contracts overall. But the more important part of this is, remember, for those large horsepower units when they go out, they typically stay on location longer, because they’re needed in a more centralized gathering in midstream location longer than small horsepower units. So more than contract term what we’re looking at is putting out our large horsepower into locations that are with – in growth place, with growth customers that are going to be there.

Right, makes sense. Well, congrats on a good quarter and I’ll turn it back. Thanks.

And our last question comes from James West from Evercore.

Hey, thanks for taking my question. This is actually Samantha. Brad, thanks for that color about half of your growth CapEx going into the Permian. Is there anyway that you can breakout maybe just the distribution of your fleet actually right now as in the Permian and then maybe rank them for me in terms of like where the next largest markets are?

Well, for us, we don’t really provide that level of detail. And I will tell you that that may be a good follow-up discussion if you want to follow-up with the finance team. But we don’t typically breakout by a horsepower range in a basin, or by basin exactly what all of the – where our horsepower side. So – but you may be able to talk to the team to get a little bit more. What I would tell you is that, what we’re seeing that growth in the Permian, it’s not a large horsepower location. We have substantial presence in the Eagle Ford, in the Barnett, as well as in the Permian to pick out, what I think are the top three locations for our overall fleet locations.

Okay, great. And then there was actually a transaction recently at the end of June, and I was kind of surprise that pricing kind of the equivalent was pretty high on an horsepower basis, I think, it was all cash deal kind of translates to about $950 per horsepower. I was wondering if, for example, like you guys are looking at – you’re seeing similar types of pricing for some of these private companies are looking to maybe monetize their assets, and just how competitive the market is for a potential M&A?

Yes. Well, a couple of thoughts. I do think this is a market that, as I’ve said in the past, is right for some consolidation. However, that consolidation occurs, I think, it’s better for the market and imposes more discipline. So I’d like to see the consolidation whether we do it or others do it, it’s a good thing. We’ve been a primary consolidator in the past. We’re definitely going to be looking for strategic opportunities to do more of that in the future. And the transaction you’re referring to those pretty one-off in and of a smaller business. And so, I can’t speak to the dynamics of how that got priced overall. But we haven’t seen another deal consummated in a while, which means that there are either pricing expectations that may be very high in the space, maybe a lot of debt in the space, which competes some of the consolidation activity. But I do think it’s a space that’s going to be right for some consolidation and we intend to make sure we’re also working on those opportunities. And we have seen an uptick in a few opportunities, including customer fleets that or location, where they want to have us come in and take over and provide full service. But as I said in the past, even if we see an increase in those opportunities, they’re very challenging deals to get across the finished line given the overall operating dynamics that we see in the field.

Okay. Thanks for that. And David, just since I’m waiting fora transcript, but as – can you go over the information on the impairments that you had in your prepared remarks?

Sure. What – is there anyinformation specifically you like?

Just in terms of the number of units in horsepower…?

So we impaired – as a partnership or as?

Both would be great.

And so we impaired 60 units for about 23,000 horsepower overall at Archrock. And of that, 40 units and about 13,000 horsepower were at the partnership.

Great. Thank you so much.

Yes.

And we have no further questions at this time. I would now like to turn the call over to Bradley Childers for closing remarks.

Great. Thanks, operator. Thank you, everyone, for participating in our second quarter call. As we noted, we continue to drive strong new order levels in the second quarter and expect to grow into 2017 operating horsepower. I look forward to updating everyone in our third quarter call later this year. Thanks very much, guys.

Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.