Good morning, welcome to the Archrock Second Quarter 2022 Conference Call. Your host for today is Megan Repine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Repine. You may begin.

Thank you, Brent. Hello, everyone, and thanks for joining us on today’s call. With me today are Brad Childers, President and Chief Executive Officer of Archrock; and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the second quarter 2022. If you have not received a copy, you can find the information on the company’s website at www.archrock.com. During the call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 based on our current lease and expectations as well as assumptions made by and information currently available to Archrock’s management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, gross margin, gross margin percentage, free cash flow, free cash flow after dividend, and cash available for dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday’s press release 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 and to provide an update of our business.

Thank you, Megan, and good morning, everyone. During the second quarter, we continued to see a significant acceleration of customer activity and a strengthening of supply-demand dynamics for large midstream compression. Our focus in the quarter was converting this growing customer demand into high-return bookings, delivering profitable growth and maintaining capital discipline. Second quarter highlights include that we generated adjusted EBITDA of $99 million, reflecting solid underlying business performance that was generally in line with our internal expectations. In addition, quarterly results benefited from a net gain on the sale of assets as we continue to advance our fleet high-grading strategy. Strong customer demand and are well positioned and configured fleet of large horsepower compression equipment drove an increase in operating horsepower of 100,000 horsepower, excluding asset sales. and an increase in our exit utilization of 300 basis points to 87%. This improving utilization of our fleet and the extremely limited supply of available horsepower in the market are also allowing us to drive spot prices to record levels broadly across asset classes. Year-to-date bookings have doubled compared to the first half of 2021. This is providing us great visibility into new starts for the remainder of the year and into 2023. Last, AMS revenue increased nearly 50% on a sequential basis due to a welcome resurgence in overhaul and maintenance activity by our customers after years of deferrals. Moving on to the market backdrop. U.S. oil and gas production continued to tick higher and for both 2022 and 2023 the EIA projects solid annual increases of 3% to 4% for natural gas and 6% to 7% for oil. More recently, uncertainties around a potential for recession have emerged, sending oil and gas prices lower, albeit to levels that continue to stimulate increased investment by producers. Although impossible to handicap…

Thanks, Brad, and good morning. Let’s look at a summary of our second quarter results and then cover our financial outlook. Net income for the second quarter of 2022 was $17 million and included a noncash $5 million long-lived asset impairment. We reported adjusted EBITDA of $99 million for the second quarter of 2022. Compared to the first quarter, we increased our total gross margin by $2 million, largely consistent with our internal expectations. We also held our SG&A flat sequentially and benefited from a previously disclosed net gain on asset sales of $19 million. Turning to our business segments, contract operations revenue came in at $166 million in the second quarter, up $3 million or 2% compared to the first quarter. Operating horsepower and pricing both increased sequentially. Our second quarter contract operations gross margin percentage was 59%. This reflects incremental costs associated with the increased revenue and operating horsepower growth that we delivered in the quarter as well as higher parts, labor and lube oil prices. In our aftermarket services segment, we reported second quarter 2022 revenue of $50 million, up $16 million from last quarter and $18 million compared to the year ago period. Second quarter AMS gross margin of 16% was up 100 basis points from the first quarter and was 300 basis points higher year-over-year as revenue drove better cost absorption. Growth capital expenditures in the second quarter totaled $38 million, up from $29 million last quarter as we invested in new equipment to meet customer demand. Maintenance and other CapEx was $23 million and was up from the $16 million last quarter due to higher overhaul and make-ready activity. This brought total capital spend for the quarter to $61 million. We exited the quarter with total debt of $1.5 billion and had available liquidity…

[Operator Instructions] Your first question is from the line of TJ Schultz with RBC Capital Markets.

On the price increases on the installed base, how quickly can you implement those? Is that a situation where you need to reach full utilization first? Or is there any guidance to quantify maybe how contracts on the installed base may phase out over time.

This is Brad. We actually started increasing pricing this year at the end of 2021, and the process where we get to reclaim pricing overall really is driven by utilization being much more in the mid-80% range, that it is full utilization. So as we’ve been with our large horsepower and that higher level of utilization, we’ve been increasing pricing and stepping it up, I think, issue we encountered is the steepness of this inflation curve in the immediate environment is one that we need to continue to raise pricing to compensate for. We expect that takes typically 12 to 24 months with utilization in the mid-80s. And since we’ve been at this now throughout the year, give us 12 months, 4 quarters, plus or minus to reclaim the amount of inflation and cost increases that we’ve seen hit our margin. The only other thing I’d add is we’re a little bit more ambitious than that potentially because utilization is picking up so sharply. And this reinvestment reactivation phase that we’re in is also part of the cost environment so the impact and improvement in gross margin could accelerate from that. We expect to test new highs, both in utilization and in the future as well as continue to drive new highs in profitability, with the upgraded fleet that we operate today, the upgraded systems we’ve put in place as well as the extremely I’d say, robust and strong market we see for compression equipment ahead.

Okay. That all makes sense. And then you also mentioned you’re effectively pulled out of several horsepower categories. Can you just provide some more color on that? What categories are structurally in higher demand? Can you fill those needs for customers with other configurations and maybe what horsepower categories are you actively looking to spend on and kind of what’s the lead time there?

The primary categories, but the market has depleted and it’s across the market, not just at Archrock is the largest horsepower categories are what is really super tight today. And that is the only place where we’re effectively spending capital for large, which is for large horsepower gas-driven engines. So that’s the area of the market to replace that and replenish that where we’re investing today and where we expect that to continue to invest. Lead times are out to 52-plus weeks with the engines being the primary driver on those lead times. For completeness, the other area where we are investing, and it does include some smaller horsepower is an electric motor drive as the industry is focused on managing and reducing greenhouse gas emissions, we are seeing slowly upticking in developing market for more electric motor drive horsepower across horsepower classes. And in that category, we will spend for more midsized and smaller horsepower.

[Operator Instructions] Your next question comes from the line of Tim O’Toole with Stifel. Tim O’Toole: Thank you. Little bit of follow-up. You talked about your gross margin at 59% and going to step down and then you think it rebuilds into 2023. And I’m just wondering what do you think you can get those margins back to? Should we anticipate it getting back to the mid-60s in 2023?

Well, thank you, Tim. We’re certainly not providing a forecast for guidance on gross margin for 2023 on this call. What I would share with you is that we have experienced this level of cyclical impact where we move through a redeployment and investment phase, and that includes spending more even while pricing is tight and tough because we haven’t yet seen utilization tick up to give us enough pricing prerogative. And then after utilization moves past the mid-80% like 85% pricing is reclaimed and margins improved to recapture that. So because we have experienced this in the past with such great clarity, by the way, I’m ambitious that, yes, over the long term, we expect to continue to drive profitability improvement in this business as we have in the past. And we’re ambitious about the gross margin levels we can achieve in this business.

Tim, let me, this is Doug. Sorry to interrupt. But let me add to that a little bit of the grid -- as Brad’s right, obviously, we’re not ready to give guidance for next year. But as we think about that, there’s part of this equation that’s gross margin dollars, which we absolutely see is growing, price is rising. But all things equal, if lube oil, labor and parts costs are all increasing, if we have revenue to offset that dollar for dollar, your gross margin percentage still comes down, right? Just the math of that equation. So to answer the question, what I would say to you is, of course, we’d love to get back into the mid-60s and we’d like to see that as a result of both higher price and lower costs, it will be a bit dependent on both and really what our focus on is managing the costs, of course, the very best we can and also trying to be effective in forecasting what we think those cost increases can be so that we can set that in our rates going forward. Tim O’Toole: Also, you referenced the sale of 97,000 horsepower. Can you just remind us how much EBITDA was associated with that, was it totally --

Yes. Maybe we’ll follow up with Megan on that one afterwards. I want to make sure that’s something we’ve disclosed publicly. To be honest, I can’t remember if we have or we haven’t. Tim O’Toole: Okay. And then also as it relates to ECOTEC and I understand you got your first installation, it sounds like it’s a demonstration. What should we be thinking about in terms of potentially sort of, I guess, the sales cycle for this? Is this something where you’re going to have to deploy and demonstrate for 3 or 6 months before you can get some decent results or show the customer and go forward. Maybe you could just talk a little bit about that.

Well, let me talk first about where we’re at in the business, and Doug will talk a little bit about the accounting on what the expectations might be for this. But on the business itself, we do expect that in 2022, we’re going to spend the year converting this proven technology into an oil and gas application demonstrating it with our customers. And we’re not looking to the sell cycle picking up to be robust in the short term. What we’re trying to do is make sure we can have a broad market introduction of this company’s technology of ECOTEC technology so that we can set the stage for acceleration in that in the 2023 time frame. So that’s where we’re at in the business right now.

And look, we -- as you’ll see in our 10-Q or perhaps have last quarter, this is accounted for under the fair value method for us. And so in terms of seeing profit and loss of that business, we really won’t be until there’s a meaningful transaction or a change in the fair value of the overall company level of ECOTEC for that to flow through. But again, as we outlined, we believe we’re going to be providing a really strategic service to our customers that’s ancillary to what we already do as our customers look for methane emission reduction strategies and look forward to this as -- be thinking about it more as a longer-term investment and one where we’ll create value in a variety of different ways. Tim O’Toole: Okay. And then have you seen any inquiries, anything in terms of carbon capture or hydrogen, people looking for compression at all? Is there any conversations out there along those lines?

Yes. So number one, on both, there are certainly individual projects that are in the market that take the application of our compression units. On the hydrogen side, I think that’s a little further out. We have not actively engaged in the projects in carbon capture. I think that’s a more active discussion right now, for the industry, and there are compression applications is a small amount for CO2 compression. A lot of that is owned. Some of it is outsourced, that’s likely to be a growing market, but we do not see that as either of those as substantial demands or substantial markets of high demand for compression at this time.

There are no more questions. Now I’d like to turn the call back over to Mr. Childers for final remarks.

Thank you, everyone, for participating in our call today. As we noted, we continue to drive strong customer activity and believe we are well positioned operationally and financially to capitalize on opportunities in our business as the demand for our services increases. I look forward to updating you on our progress next quarter. Thank you.

Ladies and gentlemen, this concludes today’s conference.