Good morning and welcome to USA Compression Partners LP's Third Quarter 2020 Earnings 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. This conference will be recorded today November 3rd, 2020. I would now like to turn today's call over to Chris Porter, Vice President General Counsel and Secretary. Please go ahead.

Good morning everyone and thank you for joining us. This morning we released our financial results for the quarter ended September 30, 2020. You can find our earnings release as well as a recording of this call in the Investor Relations section of our website at usacompression.com. The recording will be available through November 13, 2020. 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 November 3rd 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. Also with me is Matt Liuzzi, our CFO. This morning we released our financial and operational results for the third quarter of 2020 which reflect a fair amount of stability both operationally and financially. Coming out of the second quarter, there was still a good deal of uncertainty in the marketplace and as we've managed through the third quarter, we are encouraged by the resiliency demonstrated by both the natural gas market as well as USA Compression's business. While we are no means out of the which just yet, we expect a relatively attractive macro environment for natural gas should continue to support our business as we get through the remainder of the year and into the beginning of 2021. Over the course of USA Compression's existence, we've experienced multiple cycles throughout all of them we've never changed our primary focus on large horsepower compression used in large regional infrastructure-oriented facilities. As we've come out of each of those previous downturns, the business model has been proven out. Our customers and the demand-driven applications which our assets serve move very large amounts of natural gas. These facilities are constantly operating 24 hours a day, seven days a week, 365 days a year and the barriers to exit to demobilize and return our equipment the cost of which is borne by our customers can be substantial. We believe this creates relative stability in our business which differentiates USA Compression from other service providers whether compression oilfield service providers are even some midstream operators. We continue to be encouraged by the relative stability of our business model and look forward to managing the business through the rest of the year into 2021 and beyond. Our employees continue to work hard…

Thanks Eric and good morning everyone. Today USA Compression reported third quarter results including quarterly revenue of $162 million, adjusted EBITDA of $104 million and DCF to limited partners of $57 million. I would note, during the quarter we had approximately $5 million of nonrecurring benefits, primarily certain tax refunds from previous periods which positively impacted adjusted gross margin and adjusted EBITDA. In October we announced a cash distribution to our unitholders of $0.525 per LP common unit consistent with the previous quarter which resulted in coverage of 1.12x. Our total fleet horsepower at the end of the quarter was largely consistent was where we ended the second quarter at approximately 3.7 million horsepower. Our revenue generating horsepower at period end decreased approximately 4% to a little over 3 million horsepower, reflecting the impact of the return of units. Although as Eric mentioned, the rate of units returned has considerably slowed since Q2. Our average horsepower utilization for the third quarter was 83.9% about 4% down from the end of Q2. Pricing as measured by average revenue per revenue generating horsepower per month was $16.62 for Q3, which was a slight decrease from the previous quarter's level of $16.79. Of the total revenue for the third quarter of $162 million, approximately $160 million reflected our core contract operations revenues, while parts and service revenue was about $2 million. Adjusted gross margin as a percentage of revenue was 71.1% in Q3 helped in part by those non-recurring benefits already mentioned. Net income for the quarter was $6.5 million and operating income was $38.8 million. Net cash provided by operating activities was $48.2 million in the quarter. Maintenance capital totaled $4.7 million in the quarter. And last cash interest expense net was $29.8 million. As it regards, full year guidance for 2020 we're increasing the midpoint for adjusted EBITDA due to the non-recurring benefits mentioned earlier. We currently expect 2020 adjusted EBITDA between $405 million and $415 million and DCF between $210 million and $220 million. Last we expect to file our Form 10-Q with the SEC as early as this afternoon. And with that, we'll open the call to questions.

Thank you. [Operator Instructions] Our first question will be from Jeremy Tonet from JPMorgan.

Hi. Good morning guys. I just wanted to quickly touch upon capital allocation here. Just thinking about DCF for this year keeping it stable for next year, it's coverage being almost stable here. I just want to understand given a shift in how the view has changed at the parent level distribution outlook want to understand how you guys think about cutting down distribution or if any potential for asset sales to deliver quickly? Or what do you think is the comfortable leverage position here? How should we think about capital allocation?

Sure. It's Matt. I'll jump in first. I think, first of all to address the question about ET, obviously, we are a separate company with a separate board. And so decisions that are made at the ET level, obviously, our Board looks at our business, and we'll make those decisions appropriately. So I don't know that I would connect the two in any way shape or form our Board will make those distribution decisions kind of in due course every quarter like they always have. But in terms of capital allocation leverage wise, we've always, obviously, pointed towards a desire to lower leverage, work on the leverage over time. Obviously, we were in a -- headed in the right direction before March of this year happened and we took some actions to make sure we didn't run into any trouble, but there's really -- I don't think there's any difference in our view of over time working down leverage. So I think just with the events of the last couple of quarters, it's obviously going to take a little bit longer. But I think as we talk about capital spending and new unit delivery, obviously, the new unit delivery this quarter was down significantly from earlier in the year. We kind of locked in a bunch of stuff earlier in the year. We spent the money that we committed for this quarter, but significantly decreased from earlier in the year. And then I think in the fourth quarter you'll see a continued much, much lower spending level. So we haven't given out anything in terms of spending for next year, but I think right now we're in a stability mode. And I'd be surprised if the capital spending on new units next year is anything super meaningful or significant. So I think with that without a whole lot of new unit spending, we'll continue to -- assuming that distribution stays where it is you'll continue to chip away at that leverage over time, because we obviously won't be borrowing as much as we have in the past to fund those new units.

Got it. Thanks. So is it fair to assume you guys are comfortable with this leverage and you're okay to go it slow versus than cut down distribution for accelerating it? Or that's the way to think about it?

Yes. I think when we look at it and we've been through this before. We saw it back in 2014, 2015, 2016 where I think a lot of folks looked at it and said your revenues are going to be cut in half and your cash flow is going to be cut in half. And our view is, obviously, the business is probably a lot more stable than a lot of people give us credit for, so we've -- obviously the Board makes that distribution decision every quarter. And so we look at the results every quarter. And you can see even this quarter, I think we were probably a little bit ahead of what most people expected. So I think the stability -- as long as the stability continues and we see in the future an ability to chip away at that leverage, I don't know that we see a burning need to either sell assets, or do something with the distribution. But like Eric said the timing and duration of the recovery is I think uncertain for all of us these days. And so I think our view is we'll take it one day at a time, one quarter at a time. And we'll cross those bridges if we get to a point where we think it's unsustainable. But for right now we've been -- I think we've been pretty pleased with how the business has held up and how we've been able to manage through the last couple of quarters.

Got it. Thanks, Matt. That's very helpful. I just wanted to quickly touch upon ESG side. I mean there's a lot of noise about in the markets right now. And some of the large midstream names have already talked about electrification of compression of fleet there and reducing emissions. I just want to understand if you guys have thought of any opportunity set for USAC?

Yes. This is Eric. And obviously having one of the newest fleets in the industry, one of the most emissions efficient fleet gives us a competitive leg up. There are lots of things that we're exploring and looking at and maybe a fair way to say it is -- it's premature for us to comment. But ESG's front and foremost on our radar screen and something that you'll hear more from us in the future going forward.

Got it. That’s it for me. Thanks.

Thank you.

Our next question will be from TJ Schultz with RBC Capital Markets.

Hi, guys. Good morning. So on utilization if that bottomed this last quarter and as you redeploy assets back into the field, is your mix just in any more to gas directed basins? Or if you can just speak a bit more geographically where you see some more opportunities? And then on the cost side I understand maybe new unit orders probably are fairly limited, but are there more maintenance capital costs or OpEx we need to consider to bring back some of those backlog units? Thanks.

Yes. TJ, let me touch on kind of what we're seeing with baseline activity then Matt can chat a little bit about some of the other goodies there. It's fair to say that the dry gas areas, the Haynesville and Appalachian in particular, we're seeing a lot of incremental demand increases. We've seen softness in mid-continent in particular kind of the SCOOP/STACK merge area has been hit pretty hard with reductions in rig count completion activity and development of the DUCs. The Permian and Delaware has slowed down, but it hasn't completely stopped. And with increasing GORs and more I think with some potential new takeaway capacity that's coming on stream here very, very quickly basis differential will start to improve in the Permian on the associated gas side. It will start to see some tick up in activity there. So I don't think you'll see in an environment where USA wholesale relocates hundreds of thousands of horsepower out of one basin into another. I think a fair way to say is that as activity has bottomed, activity starts to tick up, the combination of stability in the decline curves, if new activity moderates and the ever decreasing pressures we'll have just a natural increase in requirements for compression horsepower. So probably the best way to say it, TJ is rather than build new horsepower, we'll work off excess idle capacity out of our fleet very similar to what we and our peers did back in the 2014, '15, '16 range. And even in prior periods as a private company which we have done in the past. So I don't see wholesale relocation of equipment, but what I do see is the ability to meet improving demand and improving requirements out of our existing base fleet horsepower that has become idled over the course of the last few quarters.

TJ, it's Matt. On the capital spending question, I think you're sort of on the right track in terms of new unit deliveries for the fourth quarter. Right now, we have three of the large units scheduled for delivery during the quarter. So that's a total of 7,500 horsepower and that is it. And so I think what you will see not that maintenance capital is really going to bump up, but what you'll see towards the end of this year. But then as we think about next year is we'll have more growth capital but spent on not more growth capital than this year, but a higher proportion of the growth capital will be spent on what we would call reconfigurations, which is kind of altering a unit to put it into service in a different area, a different application et cetera. So yes, you're going to see I think the balance flipped from new units -- majority of new unit capital to the majority of it being this reconfiguration capital. And again that's to Eric's point of putting these units back out and extending the life of them maybe in a different area. So, yes, you will see that trend, I think, continue.

Okay. Makes sense. That’s all I had. Appreciate it guys.

Okay. Thanks, TJ.

Thanks, TJ.

Thank you. Our next question will be from Shneur Gershuni from UBS.

This is Brian Reynolds [ph] on for Shneur. Just following up on the previous capital allocation question. Is there an updated long-term view for leverage? Is it four times? Or is it kind of, as you said, a quarter-by-quarter basis?

Yes. Brian, its Matt. I don't know that there's a -- I don't know that we've changed our view on it. We've always said, kind of, we would like to trend down towards something in the low to 4 -- low 4s to 4 range. And so, I just think the timing of it's gotten pushed out a little bit, obviously. And so, that's why we made the -- took the amendment to the credit facility earlier in the summer, just to kind of give us a little bit of cushion as we continue to work down towards that level. But really that just allowed us a little bit of time cushion. It doesn't -- I don't think it should be interpreted as changing our view of where we want to ultimately get leverage down to. But in terms of -- it's a constant sort of chipping away at that leverage, but I think that's probably what I'd say, probably, nothing more specific than that.

Great. Thanks. And as a quick follow-on, just given ETE’s recent distribution cut. Has the long-term view and its ownership in USAC changed at all, kind of, in other words would a distribution cut support USAC's equity value in the event that they would like to divest the USAC units to support deleveraging? Just kind of any color around that would be helpful.

No. I don't think their view has changed. They will tell you that their content with the investment, I think, either they've obviously have a sense of value that they associate with the investment. And I would say probably given where the market’s been bouncing around the last several quarters, it's probably not quite there. But they've been -- they're happy with the investment. But I think like everything they've said, look, this is not a long-term holding for them. But I think for their -- it's going to come down to value, transaction structure, et cetera, in terms of whether they do anything. But I don't think they're in any rush to -- I don't think that has changed their view on their ultimate timing and I don't think they're in any rush to get rid of it just yet.

Great. Thanks. And if I could just have one quick follow-up on pricing. How should we think about that kind of going forward, typically rig pricing lags rig count by a few months? Just given the dramatic drop-off in March from OPEC in COVID, should we assume that the price bottom is in at this point or should we kind of see that in early 2021, given rig count bottomed in August?

Yes. Brian, right now, it's interesting. And, obviously, we've got the two -- kind of the two parts of the business, the small horsepower and the large horsepower. Interestingly, the large -- on the really large stuff the 3600 series, we do not have many of those units laying around. And I don't think others, who do what we do, have much laying around either. And so, I think, for those large horsepower units that we've all kind of been investing in, we have not seen any real degradation in the pricing. I think we found the top over the last couple of years. And so, I wouldn't expect it to go up a bunch. But in terms of that large, large horsepower class, I think, it's probably likely to stay stable. The middle -- what I would say is, the 3500 class, that's about 1300, 1400 horsepower unit. That's where, I think, overall the industry. There's a higher number of those units out there in the industry and there's probably a higher number of units that came home over the last couple of quarters. So, I think that has -- that part of it. Again, units weren't really -- you didn't have tons and tons of units going out over the last couple of quarters. That has started up again. And so, in terms of the pricing, it's a little hard to look at it and base it on what you've seen in the last couple of quarters because we hadn't had tons of new stuff get signed, but stuff is getting signed. And again, we've been I think, like in past -- the past downturn most recently '14 through 2016, we didn't -- we purposely didn't chase uneconomic deals. And so, while we had competitors that were out…

Great. Thanks for all the info. Have a great day guys.

Thanks, Brian

Thank you. I'm showing no further questions at this time. I'd like to turn it back over to our speakers for closing comments.

Thanks, Carrie. I think it's fair to say that, Q3 came in better than many expected especially six months ago when the world was turned upside down. We previously said that we expected to see the impact of commodity price volatility and the global pandemic really show up during the second half of this year. And while that was true in Q3, I think the commodity rebound has taken place more quickly than many had expected. While there is still a fair amount of uncertainty on the extent and duration of the current cycle, we encourage by how things have settled down, as well as the encouraging signs we began to see from our customers. We have not changed how we approach the business or the present uncertainty. This business is a business built on natural gas demand, whose long-term importance to this country and the world, we continue to be optimistic about. We believe the underlying stability of our large horsepower infrastructure-focused contract compression services business model and the science behind the need for compression and the interplay between pressures and volumes will be a key point of positive differentiation for USA Compression. We have continued to focus on what we can influence. A strong focus on cost, restraining spending and making sure our customers are receiving the excellent customer service; we have come to know from USA Compression. Thanks for joining us and please be safe. We look forward to speaking with everyone on our next call.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.