Good morning. Welcome to the Archrock, Inc. and Archrock Partners L.P. Fourth 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. Sir, you may begin.

Thank you, operator. Good morning, everyone. With me today are Brad Childers, President and CEO of Archrock; and Randy Guba, Interim CFO of Archrock. Today, Archrock and Archrock Partners released their results for the fourth 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 L.P. 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 statement 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. In 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 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 certain items. For reconciliations of our non-GAAP financial measures to our GAAP results, please see today's press releases and our Form 8-Ks furnished to the SEC. I will now turn the call over to Brad to discuss Archrock's fourth quarter results.

Thank you, David. I'm pleased to report that Archrock posted solid operating performance in the fourth quarter as both revenue and profitability improved nicely compared to the third quarter. In addition, we entered in the new year with the largest backlog of new orders on record, which has positioned us well for a strong start to 2018. Forecasted increases in U.S. natural gas production, our large backlog of new orders, our continued progress in delivering excellent customer service and improving overall market conditions reinforce our outlook for growth in our business and improved portability ahead. In the fourth quarter, our contract operations revenue increased by 2% sequentially to $156 million. And we posted a strong contract operations gross margin percentage of 59%. For the third consecutive quarter, we drove higher operating horsepower, adding 49,000 horsepower in the quarter. And for the full year of 2017, we grew operating horsepower by 138,000. We continued to book new orders at elevated rates, positioning us well into 2018. Our aftermarket services business, revenue increased by 19% as we finished the year with strong momentum in this business line. And we announced the merger of Archrock and Archrock Partners, further strengthening our financial platform to propel our next leg of growth. Turning to our operations. Our sales team continues to capitalize on elevated customer activity levels and delivered a strong book of new orders throughout 2017. In addition, in the first quarter of 2018, we implemented a price increase on the eligible portion of our installed base of operating horsepower. And we continue to benefit from recovering spot prices for new orders. Year-over-year spot prices are up as much as 20% for highly utilized equipment. This pricing dynamic has created a strong tailwind for Archrock as our financial performance continues to improve into 2018.…

Thanks, Brad. Let's look at a summary of the fourth quarter and the full year of 2017 results and then cover our guidance for the first quarter of 2018. Archrock delivered solid fourth quarter results. We generated EBITDA as adjusted of $72 million for the fourth quarter, including other income of $1 million compared to $62 million in the third quarter, which included $3 million of other income. Revenues were $209 million for the fourth quarter, up about 6% compared to third quarter levels as we drove higher revenue in both our contract operations and aftermarket service businesses. For the full year of 2017, Archrock generated EBITDA as adjusted of $272 million, including $6 million of other income, down 15% from 2016 EBITDA as adjusted of $319 million, which includes about $9 million of other income. Full year 2017 results reflect the full year impact of horsepower declines and pricing pressure Archrock experienced throughout 2016 and into the first part of 2017. Turning to our segments. In contract operations, revenue came in strong at $156 million in the fourth quarter, up from $154 million in the third quarter due to higher operating horsepower. Gross margin percentage in the fourth quarter increased to 59% from 53% in the third quarter as our cost of sales was down $7 million sequentially. As Brad discussed, about half of the decrease was due to lower parts, labor and make-ready expenses, while the other half was primarily items incurred in the third quarter that did not repeat in the fourth quarter as well as lower freight expense. For the full year of 2017, contract operations revenues were $611 million, a decline of 6% compared to 2016. Again, this was primarily due to the full year effect of horsepower declines and pricing pressure we experienced in…

[Operator Instructions] And we have our first question from Andrew Burd with JPMorgan.

The aftermarket services segment did well in the fourth quarter. I realized you just outlined some temporary benefits from fuel. But what are the chances that this business can get back to the historic level of earnings power? I forget if it was $30 million or $40 million, something like that. Certainly, the first quarter guidance implies a run rate that's still lower than that. But just -- speaking about the medium-term view on that business what the potential could be?

Sure. Thanks, Andy. Look, I think that this business will benefit from the recovery. And we expect to see it grow. I'll point out, however, this business has been lumpy in the past. And Q1 is historically a slower time for it, and so it's hard to see that trajectory in the recovery. But I'm still ambitious about what we can do with this business, both from a size, growing the top line as well as continuing to work and improve the margin to get back to what looked like more historic levels, as you referred to.

Great. And my final question. Archrock filed a proxy a couple of weeks ago and EBIT outlook for 2018, it seems fairly in line, I think, with the street in most people's expectation. But then there was a really nice ramp of EBITDA in 2019 and '20, that I think beat a lot of people's expectation, which is obviously good to see. And now clearly, you have better visibility than we do. But how much of that kind of out-year assumption is based on higher pricing versus fleet growth? And of the fleet growth, what type of annual CapEx underlies that assumption?

Sure. Thanks, Andy. But let me just caution that the projections that we used in the S-4 were prepared at the end of 2017. And they were prepared in the context of the valuation negotiation and analysis of the merger. And they were based on our outlook for a business in market at that time. And we are not prepared to comment on, affirm or update the projections that are in the S-4 at this time. And we don't expect to in the future.

And our next question comes from Blake Hutchinson with Howard Weil.

Brad, I think, you noted that spot pricing is up as much as 20% in some cases, year-over-year. Before we get too excited, I guess, do you have a relative order of magnitude, I guess, from where you are on average pricing? And then as we think about the eligible base of the fleet that may be open. How do we need to think about potential to increase prices? It may be on 1/3 of active horsepower over a 6- to 9-month time frame? Or how much you couch that?

Sure. So when I talked about the fact that we implemented a price increase on the eligible portion of our operating horsepower effective January 1. That price increase applied to roughly 50% of our operating horsepower. So that was a pretty good portion of our operating horsepower, it was eligible for a price increase at that time. So pretty strong and I think that's the main question. From a magnitude perspective, the price increases were anywhere from the low single digits to up to candidly, the high -- mid- to high teens depending upon how that service location compared to current market pricing, but it's spread throughout. It's not -- we can't really translate that into an average pricing for you, Blake. But what I can share with you is that the impact, on a quarterly basis of that increase is certainly in our guidance for the quarter.

Got you. That's great. That's excellent. And then I guess, on the flip side of that, Brad. I mean, over the course of '17, some road bumps in terms of make-ready parts deployment. Given the kind of aggressive ramp, what measures have you taken that were obviously, successful in 4Q and can be applied going forward to kind of -- just so we can have a confidence level here that those costs are under control, maybe the processes are under control. Just to give us a little more confidence -- better confidence in or around the margins?

Yes, look, totally fair question. The first thing I'll remind you of is that part of that bump that we experienced, especially in Q3 of 2017, included items that we did not expect to repeat. And they did not in Q4. And of that cost miss in Q1, that was just around $4 million of it. And so we absolutely believe we have processes in place to address the level of that cost overage that was stuff we did not expect to repeat. That's well managed so it's not going to... The second part of it, however, an incremental amount that was close to that same $4 million was based upon the increasing investment in make-ready and start-up. Now I won't -- while we have excellent process in place to manage those costs and expenses, I will tell you that, that was still a very good investment in starting up horsepower going forward. Since it's inactive or idle fleet, making it ready and putting it in the field, it hits the OpEx line. Had that been new starts, it would've hit the CapEx line and the market would've viewed it very differently. What I want to share is that we look at the total returns, and some of our best returns on our business come from the operating leverage we get by putting that horsepower to work even if it's from idle and it comes through an OpEx instead of CapEx. We saw those as still very good investments. Since we still retain a good amount of idle equipment to put to work, we still will expect some of those expenses to be a little bit lumpier than if we're putting all new horsepower to work. And we have a lot of confidence in our processes to manage them well.

And I apologize, I was going to get off but you opened the door there a little bit. So in terms of -- I take it though that the opportunity on the idle equipment is maybe much smaller in comparison to the kind of 250,000 horsepower of newbuild that outlaid or laid out here on the CapEx basis?

Yes, interesting. It's true. The way to think about it is that a lot of the net growth we expect in the future is definitely attributed -- will be attributed to the new horsepower we're bringing in. But note that we are still a business that churns. And so we still have to meet demand in existing areas with existing horsepower. So notwithstanding the net growth you see will likely be driven much more by the new horsepower we add to the fleet. Approximately 2/3 of our start activity in any period is net with an existing fleet unit. And only 1/3 really is attributed to the new horsepower that we're bringing into the fleet. So while it's critical from a net growth perspective, it's equally critical from a maintenance perspective that we continue to put that existing fleet back to work. Finally, we've seen some nice tightening up on the utilization over the last 3 quarters and we expect that to continue. So we still expect to use that idle fleet to be a portion of that growth as well.

And our next question comes from John Watson with Simmons & Company.

Brad, for the growth capital in 2018, is there a way for us to think about the cadence of that being spent? I'm trying to think through the timing of when that horsepower will be added to the fleet?

Sure. So yes, I would think that you should think of it as coming in fairly ratably, although it ramps up in quarter 2 and quarter 3. So what -- I think a less of that would hit in Q1. So as that horsepower comes in, I think it's close to ratable and maybe a little heavier in Q2, Q3.

That's perfect. And then you divested some horsepower during Q4. Can you help us think about plans for future divestitures and how the net growth might play out over the course of '18?

So the amount of horsepower we divested in the year for '17 including the fourth quarter, comes in -- it was relatively modest and comes in 2 buckets. The first bucket is, we have customers that have purchase options and that accounted for a small amount, a very small amount of the horsepower that was purchased in the quarter. And then we disposed of some of our idle equipment that had been pulled and culled from the fleet that we no longer wish to invest in. And that was a part of it as well. So we don't typically forecast it. But what I would suggest is, that it was relatively modest in all of '17 including in Q4. We expect future divestitures at this point to be modest as well.

Great. And you gave really helpful, commentary on pricing and I wanted to ask a quick follow-up. For the new units being deployed, is it fair to think that pricing for those is similar to pricing for your units in the field that just received a price increase. Is that the right way to think about things?

Actually, I think I gave you a different way to think about it, tied to a comment I made previously, and that is that what we see in our new starts and especially in the very large horsepower categories, that pricing is up as much as 20% compared to where it was a year ago. The new start activity that we're seeing is mostly in the very large horsepower. So by way of building on that. For the horsepower that is expected to be delivered in 2018, more than half of that is the very large horsepower category of 3600, so that's 3606s, 3608s by engine class, coming out of Caterpillar. So extremely large horsepower, the vast bulk of what we're spending on. And 90% is in the 1300 horsepower or greater. So that 250,000 horsepower we expect to be delivered in the year, some 90% of it is in the 1300 horsepower or larger. So very large and then greater than 50% of it is in the 3600 category and very large. We're finding the market for that horsepower category, those horsepower categories to be exceptionally strong in pricing and returns to be excellent.

Our final question comes from Kyle May with Capital One Securities.

Just wondering [indiscernible] housekeeping things, if you could maybe give us some context on the percentage of the fleet that's currently getting that spot pricing increase that you talked about?

I have to think -- let me think about that question. We typically are starting approximately -- I'm trying to figure out monthly and quarterly, 150,000 horsepower a quarter. So that's the type of start activity that's attracting spot pricing.

Okay. And one more for me, as you're looking at your leverage targets of 3.5 to 4x, can you give us any context on maybe your goals or targets of actually driving down to those levels?

Well, the level is clear. We're not really giving guidance to the time frame to do it. But we will point out that we begin to see that our -- that trailing 12-month EBITDA number increased starting this first quarter of 2018. And we see that as a natural ramp from 2018 out for the next few years. So we think it's in those sites. But it's going to be based upon that EBITDA growth. And we're not giving specific guidance on timing.

I will now turn the call over to Mr. Brad Childers for closing remarks.

Thanks, operator. Thank you, everyone, for participating in our fourth quarter call today. As we noted, we believe there's a favorable macro backdrop for our business right now. The expected significant growth in U.S. natural gas production as well as the efficient execution of our business will drive and continue to drive returns for our stockholders. I'm very enthusiastic about our opportunity set and growth outlook. I look forward to talking to you guys again and updating you on our first quarter earnings call. Thank you.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.