Good day, and welcome to the USA Compression Partners Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the presentation over to Mr. Chris Porter. Please go ahead, sir.

Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter ended December 31, 2020. You can find our earnings release as well as recording of this call in the Investor Relations section of our Web site at usacompression.com. The recording will be available through February 26, 2021. 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 February 16th 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 fourth quarter of 2020 which wrapped up a year marked by unprecedented volatility in the energy markets and considerable uncertainty throughout the broader economy. Almost 11 months ago, when the world was seemingly turned on its head overnight, none of us knew what the rest of the year would look like. Let alone the next few days or weeks. As we worked through the summer and into the fall, we started to see more stability in our marketplace. And I'm pleased to report the USA Compression business model focused on large horsepower natural gas compression services fared well as the natural gas demand in the US showed resilience throughout the year and as exports rebounded toward the end of the year. This demonstrated the critical role of natural gas plays in our economy. With some of the uncertainty from 2020 behind us, including the COVID vaccine development and the US Presidential Election, we are cautiously optimistic that the worst is behind us as the country in the world gets back to work and what we all hope our more normal times ahead. The relative attractive macro environment for natural gas that started in the back half of 2020 has continued into the start of 2021, and sentiment from our customers is positive. While there's still work to do to gradually get our business back to where it was pre pandemic, we are encouraged by signs of activity and the overall resilience of natural gas demand in this country and abroad. While the current cycle is unlike any other with multiple macro factors affecting our industry and volatility in commodity…

Thanks, Eric, and good morning, everyone. Today, USA Compression reported fourth quarter results, including quarterly revenue of $158 million, adjusted EBITDA of $98 million and DCF to limited partners of $50 million. While down from last quarter, recall that during the third quarter, we had approximately $5 million of nonrecurring benefit, which positively impacted that period's reported adjusted gross margin and adjusted EBITDA. In January, 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 0.99 times. Our total fleet horsepower at the end of the quarter was largely consistent with the previous quarter at approximately 3.7 million horsepower. Our revenue generating horsepower at period end was essentially flat at a hair under 3 million horsepower. Our average horsepower utilization for the fourth quarter was 83%, less than 1 percentage point down from the third quarter. Pricing, as measured by average revenue per revenue generating horsepower per month was $16.55 from fourth quarter, which was a slight decrease from the previous quarter's level of $16.62. Of the total revenue for the fourth quarter of $158 million, approximately $155 million reflected our core contract operations revenues, while parts and service revenue was $3 million. Adjusted gross margin as a percentage of revenue was 68.4% in Q4, in line with USA Compression's historical levels. Net loss for the quarter was $1.5 million and operating income was $31.2 million. Net cash provided by operating activities was $97.5 million for the quarter. Maintenance capital totaled $5.4 million in the quarter and for the year, we spent $23.3 million in maintenance capital in line with our guidance. And lastly, cash interest expense net was $30 million. With the release of our fourth quarter earnings, we are also releasing initial guidance for 2021. We currently expect 2021 adjusted EBITDA of between $385 million and $405 million. In DCF, between $193 million and $213 million. Last, we expect to file our Form 10-K with the SEC as early as this afternoon. And with that, we'll open the call up to questions.

[Operator Instructions] And we will take our first question from Vinay Chitteti with JPMorgan.

Just want to quickly ask on utilization here. Would it be possible for you to break down how utilization is trending for large horsepower and small horsepower units, and also like where you're seeing unit returns? And any commentary you could share about how potential bottom -- where we will see a potential bottom panning here?

Why don't I kick off on -- I think the first one was regarding utilization. Obviously, we don't break down and release publicly the division. But I would say, I think what we've seen and where we see things now is consistent with kind of how we've described the business model historically, which is the large horsepower units tend to be, obviously, stay out in the field. The applications they're used in processing plants, big gathering systems, central delivery points, things like that are continue to be used. And that's really kind of been the story even going back into March of last year, if you will, when things kind of took a turn. So I think the business model of the large horsepower, obviously, utilization staying well up north of where we would typically see the small horsepower stuff operate. I think that's continued really throughout 2020 and into the beginning of this year. And I think as it regards the second question, I believe, was where unit returns are coming from. Obviously, in the quarter, I think you probably noticed those returns really, really slowed down meaningfully from kind of where we had been in the middle part of the year. And I think we mentioned the Permian volumes, for instance, and obviously, the reason we talked about that was just I think people assume that everything kind of took a huge dip downwards. And the interesting fact is that actually volumes were up in the Permian from December '19 to December '20. And so we continue -- that has very much stabilized. I think even in the Mid-Con, where I think you've seen a lot of weakness, at least up until the last few days, that has also stabilized. And so we're seeing, I think a lot of that took place in the second, third quarters and everything has kind of stabilized. So now, really, as we think about the business and going forward is, our focus is on getting that stuff back out. And I think the customer sentiment, the level of quotes that we're seeing out there month in, month out, all of that stuff is increasing. So I think our view is that we've absolutely hit this sort of stabilization point. And if you believe the macros, if you believe what's going on in the gas markets and the resilient demand, we'd expect to see that utilization in all the regions really start to tick back up throughout the year.

Yes. I mean, that's definitely helpful, especially with respect of slowdown we have seen in fourth quarter versus the previous quarter. Just a quick follow up on M&A appetite for the compression asset here. We did recently a small transaction. I just want to understand, would GSA be looking for opportunistic asset sales to delever and maintain distribution, or do you think the market is still attractive, will be open for [Technical Difficulty].

I think, generally, we publicly stated, we don't generally comment on M&A opportunities. What we have said in the past is that we're highly selective. We focus on large horsepower applications. We look at things which would be accretive to our cash flows and leverage neutral. So I think it's a fair way to say, when we look at M&A opportunities, and there have been some things that have been marketed extensively in our industry that are continuing to come back. They've been shop three, four, five times. We didn't like it the first time. We don't like in the second, third or fourth or even the fifth time. So our view of the world is that from an M&A perspective, in the history of the company in '20 years, we've made two acquisitions. Both were leverage neutral, both were accretive. The most recent one was the acquisition of CDM assets, which was highly complementary to USA Compression, very similar type of mix of equipment, a different customer mix and different geographic coverage. There were some significant synergies by combining the two companies together. So if those opportunities were to exist, we would take a look at those. But the kind of the routine things that are being circulated around the bread and butter things, it's not down our fairway.

We will now take our next question from Shneur Gershuni with UBS.

Maybe to start off, your prepared remarks were pretty extensive, and you sort of talked about sort of the build up in the optimism. I just wanted to focus on the beginning part. You sort of remain cautiously optimistic that the bottom is kind of behind us at this stage right now. Is it fair to say that your fourth quarter results with respect to both utilization and margins wise is likely the cycle bottom for this cycle at this stage right now, and the temporary price contracts are set to expire soon and so forth? And I'm just wondering if you can sort of set the stage for us as to where is the bottom, and when we could look forward to the positive outlook that you outlined in the second half of your prepared remarks.

I mean, if you think about my comments where I indicated historically and today have been a lagging indicator a couple of quarters from what we see with the activities of the E&P guys. So you can see that crude prices have firmed significantly. You've had a couple of major pipelines built coming out of the Permian Basin, which is provided for gas markets. It didn't exist three or four quarters ago. You had negative basis. You had literally zero price natural gas out of the Permian. Fast forward to today, and today, clearly is an anomaly with the core vortex going on where you're seeing natural gas prices in the mid-Continent, north of $300 in MMBTU. You're seeing spot gas prices extremely high and spot electric price is high. You've got crude oil pushing $60. So I think it's fair to say, Shneur, that being a two quarter lag the fourth quarter, your observation, probably the bottom. Pricing has continued to firm up. You've seen additional takeaway capacity. And I think now with the blizzard that we're seeing here, I think it is highlighting the perils of attending to electrify everything. So this probably bodes well for activity tick ups in all of our geographic regions. This blizzard highlights some of the problems that you have and just how critical natural gas is to the infrastructure here in the United States. So yes, I think the worst is behind us. And with the idle fleet that we have been selectively deploying rather than buying market share, we've seen this maybe before. We've got some competitors with extremely high leverage who need every form of cash flow. They deploy the equipment just to get it out at all cost. And then all of a sudden, they don't have a balance sheet where they have the ability to build new equipment. And here's USA sitting with assets that can be readily redeployed. So I think your observations are spot on.

Just to add on one thing to what Eric mentioned. I know you had mentioned the gross margin, and obviously, the numerical amount versus the percentage. I'd just point out, we have hung on a percentage basis sort of level really consistent with where USA has operated for the 20 plus years. And so I think that we obviously took actions early last year to kind of deal with what was going on. And I think, as Eric mentioned, as things pick up, our expectation is those margins, which are about in line with everything we've done in years past, that should all flow through, which is obviously positive for the company.

And I really do appreciate and do understand the historical lag nature, not lost on me as well. But I guess, I was wondering if you can sort of square the circle for me here. When I sort of look at your fourth quarter numbers coming in just under $100 million in EBITDA, and then I look at your guidance, it sort of suggests that you're going to either maintain the fourth quarter level for the entire '21 or there is another dip and then a recovery. I'm just trying to understand the sensitivities around your guidance, or is there an extreme amount of conservatism baked into this? Just wondering if you could sort of help us understand that, because if that's the bottom, then you would expect that your guidance would be higher than where you're shaking out.

I would say, obviously, we don't provide quarter byquarter numbers. But I think as we got into -- Eric mentioned the lag as we kind of get into the fourth quarter, some stuff does obviously need to kind of work its way through. And I think what you'll see is, obviously, there can be a difference between utilization at a moment in time, and then as those revenues kind of ramp up from there. So I think as we look at it, I think we have typically taken a conservative look. This is based on kind of our budget for the year, obviously, coming into the year, we're a month and a half in. So I think we purposely wanted to -- admittedly, we don't know exactly when things expect to tick up and exactly kind of what that trajectory looks like. So I think as utilization stabilizes and picks up, I think you're going to -- you will see the revenues follow at that point.

So to clarify, this was presented to the Board a month and half ago basically versus where we sit today.

October, November, Matt?

Yes, that would have been with our budget teeth. And I think we obviously -- a few things are passed now, but I think generally speaking, there was still a bit of uncertainty. And obviously, we don't want to go out with an extremely aggressive number, because I think there is still a lot of uncertainty that seems to pop up every week these days.

I just wanted to understand the context wasn't a challenge, per se. And maybe just a quick follow up question. As companies are pivoting on the ESG side, looking to reduce methane emissions and so forth, electric compression has been cited as an opportunity for some companies. How do you respond to it? Does that present an opportunity for USA Compression to help some of your customers achieve those goals? When you do reenter the market to buy equipment, do you start looking at electric compression as something that could present an opportunity for you in that respect or is that something more for them?

That's a really good question and a good observation. And I'll say, first, I think with the focus of the new administration and our major oil and large independent company customers on environmental issues, clearly, USA Compression is exploring multiple technologies and the opportunity to reduce our carbon footprint. So I'd say right now, we're waiting to get a little more clarity on both the regulatory and legislative fronts in the upcoming months, and we'll be able to in a position to share some of these potential advancements and the benefits to customers with you. As it pertains particularly to electric compression, and I think again, focusing on this polar vortex, when you started a very large electric motor, there is a lot of what we call in rush current, huge amount of surge capacity. So you can envision a scenario where you got a bunch of electric compression running, the grid goes down, all of a sudden you have to turn these electric motors back on, there is this big, big, big in rush and current demand early on. So electrification makes some sense. I think that as you think about where compression assets are deployed further and further upstream, away from areas where you have the reliable electric grid, a combination of electric and/or gas driven compression in some form of combination might make some sense. So we see that there are some opportunities involving electrification. But again, I think we need to have a little bit better clarity on both the regulatory and legislative fronts to get some better delineation and definition of what the economic footprint is going to look like, what the regulatory environment is going to look like. And then we've got some things up our sleeves that we'll be able to talk to you about in the future.

And there are no further telephone questions. I'd like to turn the conference back over to Mr. Long for any additional or closing remarks.

I think everybody is glad that we've now turned the page on 2020. As the world began to get back to work during the second half of 2020, we saw relative stability in our business, stability driven by our focus on large horsepower and the resilient natural gas demand, both in the US and abroad. The commodity rebound both in natural gas and crude oil happened more quickly than many expected, and the outlook is positive for both. If there is still work to be done and we're not out of the woods yet, but we continue to be encouraged by the discussions we're having with our customers. Our business remains the same. It's built on a solid foundation of natural gas demand, whose long term importance to this country and the world was proven out over the last 12 months. 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. 2020 represented a year when we focused on what we could control, cost, capital spending and excellent customer service. As the market has begun to rebound, we are well positioned to benefit as that recovery takes place. Thanks for joining us and please be safe. We look forward to speaking with everyone on the next call.

And once again, that does conclude today's conference and we thank you all for your participation. You may now disconnect.