Good morning. Welcome to the Archrock Second Quarter 2024 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Rapine. You may begin.

Thank you, JL. Hello, everyone, and thanks for joining us on today's call. With me today are Bradley 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 of 2024. If you have not received a copy, you can find the information on the company's website at www.archrock.com. During this 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 beliefs 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, adjusted gross margin, adjusted 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. Archrock's second quarter performance reflects the earnings power we've built through our investment in high-quality assets, exceptional customer service, and efficient execution. The long-term and year-over-year strength and durability we see in our overall performance and as reflected in our second quarter results is also supported by the affordability and abundance of U.S. natural gas, which will continue to fuel growth in its demand, use and production. This strong performance as well as the strength and durability are both further bolstered structurally by the continued capital discipline being employed across the energy sector. Now with that backdrop, let me start today's call with a summary of key highlights from the second quarter. Our net income of $34 million was up from $25 million in the second quarter of 2023. Adjusted EBITDA of $130 million was up 15% versus the prior year period. The increase was driven primarily by higher pricing, combined with a sharp focus on cost management leading to strong profitability. We maintained our sector-leading financial position including a leverage ratio of 3.2x. We continue to deliver meaningful returns to our shareholders. Our quarterly dividend per share was up 6%, compared to a year ago, all while maintaining robust dividend coverage of 2.6x for the quarter. This was a great quarter for Archrock, thanks to a fantastic team of dedicated employees, who work hard every day to deliver safe and excellent service to our customers and attractive returns to our shareholders. Now with the acquisition of TOPS that we announced last week, we will further enhance our position as the premier contract compression services company in the U.S. and I'll expand on that in a bit. Turning to Archrock operations. Market conditions for compression remain highly constructive, predominantly in oil plays with…

Thanks, Brad, and good morning, everyone. Archrock delivered another strong quarter of financial results. Net income for the second quarter of 2024 was $34 million. This included a non-cash $4.4 million long-lived and other asset impairment, as well as transaction related expenses of approximately $1.8 million. We reported adjusted EBITDA of $130 million for the second quarter 2024. Underlying business performance was strong in the second quarter, as we delivered higher total adjusted gross margin on a sequential basis. For the second quarter, growth capital expenditures totaled $62 million, bringing year to date growth CapEx to $140 million. We expect our 2024 growth capital will be first half weighted. Maintenance and other CapEx for the second quarter of 2024 was $29 million, bringing the total for the first half of 2024 to $51 million. Turning to the balance sheet. We exited the quarter with long-term debt of $1.6 billion. Our leverage ratio at the end of the quarter was 3.2x, calculated as total debt divided by our trailing 12 month adjusted EBITDA. As Brad mentioned earlier, we are acquiring TOPS for total consideration of $983 million, which will be funded with a combination of $826 million in cash and 6.87 million newly issued common Archrock shares to the seller. Archrock intends to fund the $826 million cash portion of the total consideration with a combination of equity and debt. On the equity portion, last week, we announced the pricing of a common stock offering, raising net proceeds of $256 million at an offering price of $21 per share. The funding structure keeps us on track to achieve our financial targets, including maintaining a consistent leverage ratio of between 3x and 3.5x. Post-transaction announcement and equity raise, all three rating agencies reaffirmed their Archrock credit ratings and outlook. The strong financial…

Thank you. [Operator Instructions] Your first question comes from the line of James Rollyson of Raymond James. Your line is open.

Good morning. Brad, year-to-date, you've obviously spent well more than half of your growth CapEx, which implies a softer second half on that front. Just curious, your horsepower totals haven't moved that much in the active category so far. I know you've also realized some proceeds from selling some stuff still, but maybe just a little color on kind of fleet dynamics like how much horsepower you've delivered? How much has been put in the field? How much have you sold? Just kind of some color on that if you don't mind.

Thanks, Jim. On the overall position of the horsepower in the business, we're super excited to just maintain the 95% utilization rate that we've achieved. One of the impacts of that is you can imagine, it does mean that, we've put to work a ton of the idle fleet horsepower that we previously had maintaining it at a high rate. That also means, there's less horsepower in the fleet to go back to work. The trade-off is, we get to book less of that, but it's because it's active, working and highly profitable. That's one dynamic that you're seeing on the relatively flat horsepower quarter-over-quarter. The second thing we'll note is that, the market has definitely cooled a bit as we've seen a little bit of give back in some of the dry gas plays. Fortunately, as you can see in the numbers, it's completely immaterial into our overall fleet position as the vast bulk of our horsepower is going to work in the liquids-rich place, 60% of it goes to work in the Permian on a bookings basis right now. Those are a couple of the dynamics we've seen, in what I think is a relatively flat period of time. Finally on a really good news front, bookings has continued to remain robust. Even though the horsepower activity itself is a little bit flattish for us in this current period, what 2025 offers is still a very robust bookings set from our customers, as they prepare for future natural gas production growth starting in 2025 as LNG projects come online. That's a lot of what you're seeing. Finally, I'd point out that actually you're right the CapEx budget for the year 2024 was definitely front end loaded.

Yes. I appreciate that color. Just kind of since you brought up the new-build part of that equation or new orders, just maybe kind of a status update on what lead times look like today and another thing that's been helping in addition to the tight market drive pricing is just the fact that, the cost of equipment has gone up and maybe just some color on kind of what inflation has been there, is that starting to level off, et cetera?

Actually, on the easy stuff, lead times are in the 40 weeks, plus or minus depending upon the category equipment. But we would describe it as a very normalized market. Inflation has returned to more historic levels. That is for equipment coming into the system in the 3% to 5% range on a per item increase basis. That's our expectation. That's the easy stuff to point out. What we also see then is just robust bookings continuing going forward with that. What's exciting about the market today though is that, it's not about lead times, it's constraining the market. Equipment costs are definitely up and that means the price of bets has gotten bigger and further reinforced a lot of discipline in the market. Capital still remains at elevated levels. That cost has enforced discipline in the market. But, what all of this goes to is the thing we think is really driving a lot of discipline in the market is the investors demand and focus on free cash flow generation, strong balance sheets and continued growth in returns to investors. That level of discipline means that, no one's going to borrow expensive money to place expensive bets without the security of a commitment and a booking with a contract in place with a customer already. That's what's really driving the market. We think it's about capital discipline. We don't think it's about supply chain constraints.

Your next question comes from the line of Steve Ferazani of Sidoti. Your line is open.

Good morning, Brad and Doug. Appreciate all the detail on the call. Obviously, impressive continued growth on the revenue per horsepower. Just trying to get a sense now, are we getting closer to spot? Is there still a lot of room to go, as you reset pricing on previous contracts and with the new capacity coming online?

At these levels of high utilization, we still believe we have pricing prerogative. Spot pricing remains elevated, compared to where the entire fleet is and we will continue to opportunistically bring the fleet up to market pricing as our contracts permit us to do so over time. On the good news front, when we evaluate our ability to either increase pricing, because the contract is eligible for it, because it has a renegotiation in it, or it has an automatic price increase in it, or we have the ability to drive pricing under the contract terms, we estimate that over the next 18 months we'll still be able to eligible to increase pricing on 80% to 90% of the horsepower in the fleet. Over time, we expect to continue to work on bringing that gap, narrowing that gap.

Excellent. You talked about, you have less idle capacity to bring back. The only number that surprised me on the quarter was the higher maintenance CapEx yet. Your guidance didn't changed, which implies, this is by far the highest quarter. Usually, that's because of higher make ready. Is that what happened? Did you just happen to have more idle capacity coming back this quarter? Or, was there something else in that higher maintenance CapEx?

No, Steve, I definitely would not read anything into that. I think we had some parts expense, some timing in the quarter, some of that can vary just depending on when the work gets done. As you said, we think our current guidance is absolutely good, and I wouldn't read into anything beyond that.

Last one for me just on the continued strength with the aftermarket business. Is this a new reasonable run rate for your aftermarket? Can you maintain these above 20% margins? What's your outlook? Any changes?

With the market as tight as it is, not just in contract operations, but also in the fleets of our customers, our customers are very focused on maintaining their horsepower candidly better than they have in the past. There's less idle capacity. That's driving a lot of really good service activity, which is higher margin and higher profit work to our truck. Our team is doing an excellent job with, both capturing it and executing on it. I believe that as the market remains at these elevated levels of utilization that translates into strength and continued profitability both on the revenue line as well as in the profit, we can obtain in our aftermarket service business.

Your next question comes from the line of Selman Akyol of Stifel. Your line is open.

Thank you. I wanted to follow-up on a couple of comments. In your prepared remarks, I think you talked about the market is cooled, some give back in dry gas plays, and you're repositioning those assets into liquid plays. Can you maybe quantify how long that takes and how much horsepower are we looking at and should we see some sort of bump from redeploying those assets in the third or fourth quarter?

Thanks, Akyol. We should not expect to see a bump. You should not expect to see any real impact to the redeployment of those assets. What I was suggesting, however, is that with the small amount of horsepower in the dry gas plays that was reduced in the quarter, and we're talking about a fractional percentage of our fleet. It still has an impact in marginal growth at a period of time, when equipment is not going back to work as aggressively in 2024, as it did in 2023. I don't think you should expect to see any negative impact on that at all, other than that equipment will go back to work probably in some of the dry gas plays, some of it will be redeployed elsewhere over time. It's so marginal that it will not be transparent from a financial perspective or from a cost perspective is what I really should say.

Just following up sort of on the last questioning in terms about getting closer to spot. I think you said, over the next 18 months, you get price increases on 80% to 90% of the eligible fleet. I was wondering, if I could push you and just ask how much of the fleet is eligible over the next 18 months to be repriced?

That was the number between 80% and 90% of the fleet should be eligible for repricing in that period of time.

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

Great. Thank you everyone for participating in our Q2 review call. Archrock's underlying business performance is outstanding and we're excited about the top scale, which we believe will create substantial shareholder value. I look forward to updating you on our progress in the future. Thanks everyone.

This concludes today's conference call. You may now disconnect.