Good morning. Welcome to the USA Compression Partners LP's Second Quarter 2019 Earnings Conference Call. During today's call, all parties will be in a listen-only mode and following the call, the conference will be opened for questions. [Operator Instructions] This conference is being recorded today, August 6th, 2019. I would like to now turn the call over to Chris Porter, Vice President, General Counsel and Secretary.

Good morning everyone and thank you for joining us. This morning we released our financial results for the quarter ended June 30, 2019. You can find our earnings release as well as recording of this call in the Investor Relations section of our website at usacompression.com. The recording will be available through August 16, 2019. During this call, our management will discuss certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures in the earnings release. As a reminder, our conference call will include forward-looking statements. These statements include projections and expectations of our performance and represent our current beliefs. Actual results may differ materially. Please review the statements of risk included in this morning's release and in our SEC filings. Please note that information provided on this call speaks only to management's views as of today August 6 and may no longer be accurate at the time of a replay. I'll now turn the call over to Eric Long, President and CEO of USA Compression.

Thank you, Chris. Good morning everyone and thanks for joining our call today. Also with me is Matt Liuzzi, our CFO. This morning we released our financial and operational results for the second quarter of 2019. The second quarter represented another solid quarter for USA Compression both from an operational as well as our financial standpoint. Our results point to the strength of our business model with both stability in revenues, fleet utilization, margins, as well as continued modest, yet highly accretive organic growth. First, some highlights for the quarter. Net income of $9.9 million was up substantially compared to the second quarter of 2018. Adjusted EBITDA of $104.7 million was up over 9% from a year ago. In Q2, our overall gross operating margin was 67.6%, in line with historical USA Compression standalone levels. We added 47,000 horsepower to our fleet, predominantly, large horsepower units focused on the 2,500 horsepower class and above. Our revenue generating horsepower at period end was approximately 3.3 million horsepower and our average horsepower utilization for the second quarter was 94.6%. In July, we announced a cash distribution to our unitholders at $0.525 per LP common unit consistent with the previous quarter which resulted in coverage of 1.14x, in line with Q1. This distribution is USA Compression's 26 distribution since our IPO in January 2013 and everyone has been at a consistent or increased level from the previous quarter. Including the distribution being paid Friday, we have now returned over $780 million in distribution value to our common unitholders since going public. Finally, our bank covenant leverage continues to improve and was 4.46x for the quarter down from 4.54x in Q1. The stability of our contract compression services in business model demonstrates the demand-driven nature of our business rather than dependency on cyclical commodity…

Thanks, Eric and good morning, everyone. Today, USA Compression reported a solid second quarter, including quarterly revenue of $174 million, adjusted EBITDA of about $105 million and DCF to limited partners of $54.1 million. In July, we announced the cash distribution to our unitholders of $0.525 per LP common unit, consistent with the previous quarter, which resulted in coverage of 1.14 times. Our total fleet horsepower as of the end of Q2 was just under 3.7 million horsepower. Our revenue generating horsepower at period end was approximately 3.3 million horsepower. The slight decrease in active horsepower during the quarter was primarily due to the removal for redeployment of certain smaller horsepower units, predominantly from one customer. Our average horsepower utilization for the second quarter was 94.6%. Pricing is measured by average revenue per revenue generating horsepower per month, was $16.60 for Q2. This represented about 1% increase from quarter one level. Total revenue for the second quarter was $174 million, of which approximately $169 million reflected our core contract operation revenues, consistent with recent quarters. Parts and service revenue was $4.4 million. Gross operating margin as a percentage of revenue was 68% in the quarter. Net income for the quarter was $9.9 million and operating income was $42.9 million in the quarter. Net cash provided by operating activities was $99.8 million in the quarter, maintenance capital totaled $7.9 million in the quarter, and cash interest expense net was $30.7 million. Earlier, Eric mentioned certain non-recurring items that benefited adjusted EBITDA and DCF. During the quarter, we received approximately $4.7 million in property tax refunds related to prior years and those were credited against our property tax expense during the quarter. While some refunds due are still outstanding, we don't expect future quarters to benefit to the degree that Q2 did. And now that we are halfway through the year, we are updating our guidance for 2019. Please note that the midpoints of the ranges remain the same as previously provided, we are merely narrowing on the ranges. We currently expect 2019 adjusted EBITDA between $390 million and $410 million, and DCF between $190 million and $210 million. And last, we expect to file our Form 10-Q with the SEC as early as this afternoon. And with that, we'll open up the call to questions.

Thank you. [Operator Instructions] And our first question comes from Praveen Narra with Raymond James.

Thanks. Good morning, guys.

Hi, Praveen.

Hi. I just want to touch on the pricing trends and what you guys are saying given the headwinds in the industry has been facing. So, obviously you guys have sold out equipment the industry is still very tight. Are you seeing any pushback or anything from your customer base in terms of pushing pricing? And then also if you can talk through how you kind of think of how the revenue per horsepower will trend to the remainder of the year?

Yeah. This is Eric. I think the fair way to say it is the trajectory is starting to flat a little bit. If you look back the last two or three years, you'll -- we had consistently push through high single-digit, low double-digit increases in our monthly service fees. We've been fortunate that we've been able to pull some of our -- some cost out of our packaging costs helping to improve our margins. So I think a fair way to say it is, we've locked in the back half of 2019. We've locked in the first part of our 2020 or organic growth CapEx programs that will assure us very attractive rates in returns on the capital deploy. And I think going forward, you'll see the rate of change that second derivatives starting to kind of rollover a little bit and flatten.

That's very helpful. And then so as we think about the 2020 CapEx budget and the idea that that we'll wait, can you give us a sense of what you need to see in order to deploy more CapEx? Or how you think about making the decision on either stopping it or kind of increasing it from here?

Great question. As you've heard us on this call and on other calls here, we're starting to see more and more interest by the major oil companies particularly in the Permian and the Delaware basin, the most active drillers of the U.S. some of the major oil companies. So I think what we're waiting to look and see to make additional commitments on equipment is commitments from one or two or three of those type of players. If you look at their needs, if you look at our capabilities large volume big horsepower infrastructure-oriented equipment, there is just a few of us in the industry capable of taking on these kind of projects. I think it's fair to say that all of us in our peer group are laser-focused on looking at return on capital deployed. So to the extent that we can live within our means, make sure that our customers needs were met, while also assuring adequate returns on the capital that we deploy, staying within our balance sheet, living within our commitments to our unitholders not to go out and require equity issuance then we'll weigh that together. So I think it's -- who is our counterparty? How long are the contracts? Do we have the equipment that they need and at what kind of service fee? And we triangulate all those things together. So with the right customer, for the right fee, at the right time, with the right amount of capital then we'll make some commitments to the extent, they don't make sense then we'll obviously slow that growth down.

Perfect. Thank you very much.

Thank you.

[Operator Instructions] And our next question comes from Jeremy Tonet with JPMorgan.

Hi. Good morning.

Hi, Jeremy.

Just wondering if you might be able to expand a bit more or provide some reference as far as kind of how your conversations with customers are now? And just how they -- the demand that you see now versus what you saw six months or a year ago is there any way to kind of frame that the context or just to get a sense for how this trajectory is looking at this point?

Again, when you see the customer mix moving from private equity backed independence to major oil companies with multi-decade developmental plans. They're looking for strength from their service providers, people with strong safety programs, people with strong balance sheet, people who have a big base of operations. So, from a demand perspective, the signals that we see remain very, very strong. I don't think that's the case for participants, in smaller horsepower. Folks that are focused explicitly on the wellhead, rather than kind of on the midstream infrastructure, that goes to support that. I think, we've said it before, I'll say it again. We frankly have more demand signals, than we have balance sheet and operational wherewithal, at this juncture. So, we continue to pick and choose on high grade, our CapEx plans with the biggest of the biggest. So we're -- Matt chime in. I don't think, we're seeing much change in our customer book and demand signals, from our core customer base.

Yeah. And Jeremy, I would just add, Eric mentioned, kind of the bigger and bigger guys who are active. And I mean again these guys are taking -- they're not on 6, 9, 12 months kind of investment horizons. They're out there, literally mining the commodities out of the ground. And so they're looking at it the next, 5, 10-plus years. And so, those are the kind of conversations that we're having. And people are literally talking about their infrastructure build out plans for the next couple of years. So, I think, it still remains strong. And I think, we kind of touched on -- everyone's kind of aware of the, geopolitical events and everything in the volatility. But the big guys continue to be active, because you go back to our core business model, which is moving natural gas around. And that seems to be certainly high end demand, both for kind of domestic use, and export.

That's helpful. Thanks. And I just want to turn over the guide real quick here. And it seems kind of, what you guys have accomplished here. If I just annualize the quarter, looks like you'd hit kind of like the high-end or above the guidance range here. So, just wondering if there is anything we should be thinking about as far as, a little slowdown in the back half of the year or seasonality or anything else that would kind of preclude the back half of the year, from matching what you did in the first half of the year?

No. Jeremy, I mean the one thing I would not annualize this quarter. But I did mention we had that kind of onetime benefit to tune of about $4.5 million. That was property tax related. That basically expenses that we had paid in previous years, and had gotten refund. So that benefited it. So I think, truthfully, when you kind of kick that out, you basically have results that are sort of, I would say very much in line with, I think where you and a lot of your peers were in terms of estimates. And if you were to annualize that amount, you are much more kind of I think, in line with sort of where the full year guidance, rests.

Got you and just to confirm there, those taxes show up in, EBITDA?

Yes. Okay, you're right. Thanks.

And our next question comes from Selman Akyol with Stifel.

Hi. This is Tim on for Selman. Thanks for taking my question. Could you guys just update us on, what you're seeing in here in the Northeast? I think that basin is in the process of slowing down. And interested if any producers are seeking rate relief and maybe your expectation on utilization over the next kind of, 12 to 18 months up there? Thanks.

The Northeast is an area that we have been active literally since the formation of the company. We compress the very first Marcellus shale well for Range Resources back a gazillion years ago. What we're seeing is some lag time with several of the larger takeaway pipelines being developed. There's like some litigation involved, which has now caused two particular large lines to be delayed from implementation. There are some very large volume wells that are being drilled. The good news for U.S.A. is we are in the midst of the core of the core of both the Marcellus and the Utica. Our customers are some of the largest in the area and we see continued modest growth. Our utilization in the Northeast has remained strong. And as part our new organic growth units, we will deploy some additional growth units to the Northeast next year. That said, the Northeast, three or four years ago, started to slow down a little bit. In fact, if you look at some of the EIA projections, what we saw what the EIA projects was, a slowdown in dry gas development at about this point in time, starting a couple of years ago, slow growth and even some declines on dry gas development due to the volumes of associated gas that were coming on stream. So, I think, your assessment is accurate that the Northeast will see somewhat of a slowdown, particularly on the E&P side. But with guys like us, working with the largest of the largest guys, the throughput remains relatively constant. So the needs for existing compression are high. The rate of change for deployment of growth CapEx has moderated a little bit. And our belief is that the Northeast and, for example, the North Louisiana, Haynesville area with big volumes and large supplies of dry gas, will hold a lot of future growth -- a lot of growth in the future 5, 7, 10, 15, 20 years on down the road. The deal du jour today is developing the Permian or the Delaware for the oil side of the equation. We're not up in North Dakota, so we're -- we don't have any exposure to that area. But associated gas coming from the Permian and Delaware is kind of the growth driver and the rest of the stuff, what we see is what we get, it stays deployed and just a little bit slower growth.

And Tim, it's Matt. One thing I would also just note. I mean, think about what's going on in the Northeast and the Mid-Atlantic, that over time, I think, you're going to continue to have strong demand. I mean, first of all, that area produces a ton of gas, kind of, a lion's share for the country. But it's this -- as the Shell chemical plant comes online in the next couple of years, you're getting a lot of more power generation in the Mid-Atlantic that's turning from coal into gas and that gas is being fed from kind of Marcellus, Utica. So I mean, yes, I think, some of the industrial factors there kind of underpin what Eric was going through, which is, yes, the growth is not through the roof. But it's an important source of gas for the country and certainly as export facilities continue to get built out, I think, you're going to continue to see flows from that area.

That's helpful. Thanks. And then pivoting to owner operated compression. Have those conversations increased, decreased over the last kind of, call it, three to six months? And just any major sticking points that you'd highlight of kind of getting deals done where you'd require those units.

Yes. I would say that there's a lot of interest right now on the outsourcing, call it, monetization of some existing fleets or even monetization of prospectively going forward assets. The sticking point in the discussions are always cost of capital. So we're talking to folks who have a lot of assets that they'd like to monetize. The debt markets are constrained. The equity markets are constrained. So when we have the ability to deploy our capital into organic growth projects with the type of returns that we're able to create, the EBITDA multiples that we're deploying these assets at. When we look at some of the expectations of the “sellers” there's a disconnect between the bid ask so to speak. So right now the world we're living in there are far more opportunities for organic growth. And frankly for monetization to say leasebacks or moving forward alternatives to company owned machines that are gaining some traction. But our industry and our -- couple of our peers who can handle this large horsepower equipment are looking at the market just like we are. Way too many opportunities, not enough capital, our return expectations are high and to consummate transactions with prospective outsourcing sellers of equipment got to get a little more realistic as to what these return expectations and hurdles are. Too many deals not enough capital.

Makes a lot of sense. Thanks guys.

Thank you.

[Operator Instructions] And at this time, I'm currently showing no questions in the queue. I will now turn the call back over to CEO, Eric Long.

Thank you operator. And thank you all for joining us on the call today. The second quarter was a solid quarter and demonstrates the stability of our contract compression services business model. The market for compression services continues to be strong and our focus hasn't changed. Driving utilization and pricing, watching the expenses while operating in a safe manner and providing our customers the high level of service. We are focused on driving attractive economic returns for our unitholders over the long term and doing so through prudent capital spending and aligning with our core financially strong customers under long term fee-based contracts. We look forward to continuing to deliver results for our unitholders and we look forward to updating you on the next quarterly call. Thank you for your continued interest in and support of USA Compression.

Thank you, ladies and gentlemen. That concludes today's teleconference. You may now disconnect.