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Edited Transcript of USAC earnings conference call or presentation 18-Feb-20 4:00pm GMT

·35 mins read

Q4 2019 USA Compression Partners LP Earnings Call Austin Feb 26, 2020 (Thomson StreetEvents) -- Edited Transcript of USA Compression Partners LP earnings conference call or presentation Tuesday, February 18, 2020 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christopher W. Porter USA Compression Partners, LP - VP, General Counsel & Secretary of USA Compression GP, LLC * Eric D. Long USA Compression Partners, LP - President, CEO & Director of USA Compression GP, LLC * Matthew C. Liuzzi USA Compression Partners, LP - VP, CFO & Treasurer USA Compression GP, LLC ================================================================================ Conference Call Participants ================================================================================ * Jeremy Bryan Tonet JP Morgan Chase & Co, Research Division - Senior Analyst * Praveen Narra Raymond James & Associates, Inc., Research Division - Analyst * Thomas Patrick Curran B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst * Torrey Joseph Schultz RBC Capital Markets, Research Division - Co-Head & MD of Master Limited Partnership Franchise ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning. Welcome to the USA Compression Partners LP's Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) The conference is being recorded today, February 18, 2020. I would now like to turn the conference over to Chris Porter, Vice President, General Counsel and Secretary. -------------------------------------------------------------------------------- Christopher W. Porter, USA Compression Partners, LP - VP, General Counsel & Secretary of USA Compression GP, LLC [2] -------------------------------------------------------------------------------- Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter ended December 31, 2019. 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 February 28, 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, February 18, 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. -------------------------------------------------------------------------------- Eric D. Long, USA Compression Partners, LP - President, CEO & Director of USA Compression GP, LLC [3] -------------------------------------------------------------------------------- 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 2019. And with it, wrapped up a solid year of performance for USA Compression. We are proud of the results our team has achieved, results which highlight the continued stability of the large horsepower infrastructure-focused compression services business even in an environment of commodity price volatility, economic uncertainty and the continually-evolving energy industry landscape. Unlike our small horsepower-focused peers, whose higher beta, more volatile business model is more directly tied to commodity prices, we believe USA Compression's continued strong performance operational, financial and utilization statistics, all point to the stability and strength of our large horsepower demand-driven business model. Our results demonstrate the critical nature of our assets in moving clean burning natural gas around the country to ultimate end user. Operational excellence in the field, combined with prudent financial management, help drive revenues, adjusted EBITDA and fleet utilization across our operating regions. And most importantly, we achieved these results while prioritizing safety and operations across the company. In fact, in 2019, and we reduced both our vehicle incident rate and our injury incident rate by 10% compared to 2018. Historically, our safety metrics have been among the best in our industry. Safety is of the utmost importance to our customers, our industry and our broader workforce. And in 2019, we demonstrated our ability to achieve great results for our unitholders while staying focused on safety as our #1 priority. Now to touch on some of the key metrics -- now to touch on some of the key achievements during the quarter. Revenues of $178 million were up almost 4% over the fourth quarter of 2018 and adjusted EBITDA of $109 million was up almost 6% over the year ago period. We saw modest improvement in overall gross operating margin to 68.2% and continued attractive adjusted EBITDA margin of 61.3%, consistent with our reduced capital plan for 2019, which will continue into 2020. In the fourth quarter, we took delivery of 8,750 horsepower, all large horsepower units and deployed them to strong counterparties under long-term, fee-based contracts at attractive service rates. Our revenue-generating horsepower at period end was just above 3.3 million horsepower, and our average horsepower utilization for the fourth quarter was 93.9%, consistent with both the third quarter 2019 as well as the year ago period. In January, we continued our long history of stable distributions and announcing a distribution to our unitholders of $0.525 per common unit. This distribution is USA Compression's 28 distribution since our IPO, and we have now returned over $880 million in distribution value to our unitholders since going public. Finally, with the strong financial results during the quarter, we reduced our bank covenant leverage to below 4.4x for the quarter. As I mentioned, we achieved a strong year of results in 2019 in the face of commodity price volatility, economic uncertainty and continued questions over the evolving energy sector in general and the midstream sector, in particular. Just a few broader industry stats for the year. Natural gas spot prices were generally range-bound throughout the year in that $2 to $3 per MMBTU range and recently brought below $1.75 per MMBTU. Crude oil saw similar fluctuations, gaining over 30% during the year, although we've obviously seen some pullback more recently. Rig count saw a steady decline throughout the year with the total rig count down 25% with certain basins showing even greater reductions in activity. The volatility noted above has impacted companies across the industry, although some more than others. The mantra throughout the broader industry is to spend less capital, better balance supply with demand and focus on increasing the economic returns for stakeholders. At USA Compression, our business model fits well with these goals. And then 2019 demonstrated that we are not directly exposed to commodity prices. And in fact, our services, which are a critical part of the natural gas value chain, continued to show strength throughout some of the broader temporary dislocations. Since the IPO, we have shown that the demand-driven nature of contract compression services provides for greater cash flow stability than other energy-related businesses that have exposure to commodity prices. Our assets are critical to the operation of natural gas pipelines. And as natural gas continues to expand its role as a clean burning fuel of choice, we expect continued development of natural gas infrastructure, and with it, the need for our compression services. We have long recognized that the large horsepower compression on which we are focused is often installed and stays in place in a producing region for long periods of time throughout multiple commodity price and contract cycles. We are seeing this play out in real-time in the marketplace. In fact, as a general rule, older a given producing area becomes and the more reservoir pressures decline, more compression horsepower is required to move the same volume of gas into and through pipelines. 2019 was a strong year for domestic natural gas production with an increase of approximately 10% above 2018 levels. Various regional takeaway capacity issues have generally been resolved and with projected 2020 production increases, much more modest, the supply-demand situations to see more in balance for the near future. The general feeling as we have begun 2020 is one of moderation in activity combined with caution in spending. While the budgeting and capital allocation process is still going on throughout the energy industry, the overarching theme continues to be capital disciplined. And it's no different for us. Our current commitment for delivery of new horsepower in 2020 remains at just over 56,000 horsepower, a significant decrease from last several years. With our reduction in new unit orders, we plan to focus our attention inward, making sure the rest of our fleet is being utilized at attractive rates. With the reduced capital spending by some of our customers and the industry as a whole, we expect the critical nature of our assets to take on a more important role. That said, certain of our largest and longest term customers continue to be actively growing their oil and gas production, utilizing large volume facilities, the type that is our specialty and core competency. Our customers are laser-focused on optimizing every single molecule flowing through their plants and pipelines. Our high run-time history and commitment to providing exemplary levels of mission-critical service means that our assets will play a big part in helping them achieve their goals. I would now like to briefly mention some achievements for the fourth quarter. Our fleet utilization remained consistent with the prior quarter and the full year, demonstrating the stability and strength of the large horsepower installed market. Pricing increased slightly from third quarter levels, reflecting our focus on achieving attractive returns for our services. Strong operating margins, consistent with historical levels. Growth capital during the quarter was reduced by about 37% to approximately $33 million and strong cash flow generation led to acceptable leverage and distribution coverage levels, both of which we expect to continue to improve. Last month, we declared our quarterly distribution of $0.525 per unit, which equates to a current yield of above 13%. At these levels, issuing equity to help fund organic growth is expensive, and so we continue to plan for a future where we can fund our modest organic growth CapEx program without the need for additional equity. Our current orders for 2020 reflect modest organic growth and are focused on accretive, high-return investment opportunities, which we believe is an appropriate balance between generating attractive incremental financial returns for USA Compression's unitholders and adequately managing our balance sheet. We believe that our focus on financial discipline is a far more prudent course of action than growing simply for the sake of growth, and that our unitholders will be rewarded over the long run. It is no secret that the energy industry as a whole is currently facing some strong headwinds, including uncertain global demand due in part to the coronavirus, continued trade friction and overall weakness in commodity prices. While this may ultimately impact the rate of growth, none of the above factors will grind the energy industry to a complete halt. And in times of slowdown, having reliable and safe operations are critical for our customers. We are in constant communication with our customers to ensure that we are meeting their needs for large horsepower equipment. And while we think 2020 will reflect a more moderated level of industry activity, we still have great [homes] with attractive and accretive financial returns for the units we have on order. Consistent with past energy industry slowdowns, we expect that our stable, long-term book of infrastructure focused, large horsepower will allow USA Compression to maintain stable cash flows and sustainable distributions. Let's turn to the fourth quarter. The fourth quarter continued the run of strong quarters for compression services we witnessed throughout 2019, with average utilization during the quarter of 93.9%, which was identical to the third quarter. During the quarter, we had 8,750 new horsepower delivered. Those units were contracted with 2 investment-grade customers and deployed in the Delaware Basin under long-term fee-based contracts. From an operating perspective, our total fleet horsepower at period end was up modestly at approximately 3.7 million horsepower. Active horsepower increased slightly to just over 3.3 million horsepower. Average pricing across the fleet increased during the fourth quarter, which given the relatively minimal new unit deliveries, primarily reflected the impact of selective service rate increases on equipment already deployed and working in the field. Also for the fourth quarter, we saw average monthly revenue increase to $16.82 per horsepower, up from $16.73 in the third quarter. As I have mentioned before, given the overall moderation in the industry, we expect pricing on new delivery units to moderate as we move through 2020. Total growth capital spending for 2020 is expected to be in the $110 million to $120 million range, about half of which is earmarked for new unit deliveries. The remainder is expected to be used for make-ready and reconfiguration activities on existing assets as they are redeployed into the field and certain other capital investments such as vehicles. The new unit deliveries are predominantly large horsepower units, focused on the 2,500-horsepower class and above. As we move through 2019, we saw new equipment lead times for the larger horsepower equipment decrease and ultimately stabilize at levels around 30 weeks for the largest engine classes. This has benefited our operations and our customers as we are able to be more responsive to the ever-changing landscape. We continue to see prudent capital discipline within the industry. The absence of overbuilding on equipment is a positive for all participants. The fourth quarter financial performance wrapped up a really solid year for USA Compression with the first full year of combined operations from the acquired CDM assets under our belt. While we temper the growth in the fleet to better match with the demand that we experienced for our compression services, we, nevertheless, modestly grew the fleet size, primarily through the addition of select large horsepower units while maintaining attractive pricing and utilization. This resulted in strong financial performance with recurring contract operations and related party revenues up approximately 2.5% over the third quarter. Continued focus on expenses helped increase gross margin percentage over 68%, and ultimately drove adjusted EBITDA to $109 million and a margin of 61.3%. Our bank covenant leverage was below 4.4x for the quarter, continuing our efforts to maintain manageable leverage and our distributable cash flow coverage ratio improved to 1.14x for the quarter, up from 1.08x in the third quarter. For the entire year, we achieved a distributable cash flow coverage ratio of 1.13x. So a little color on the marketplace. Putting aside some of the headlines around the broader energy sector, and the market for compression services in the fourth quarter behaved much as I described in the third quarter, marked by continued general economic uncertainty, the presidential election kicking into full gear and the continued focus by the energy sector as a whole on prudent capital allocation. During the quarter, the annual budgeting process for the sector began in earnest. And while that process is continuing even as we sit here today, in February 2020, the overarching theme we hear from our customers for the year remains capital allocation, Tier 1 focus and boosting economic returns and free cash flow generation. We believe these things are beneficial for the continued outsourcing of compression services to USA Compression. Domestic natural gas production has recently hit some record levels with the increase in volumes, primarily coming out of the Delaware Basin in West Texas, combined with some warmer weather and the uncertain impact of the coronavirus on Chinese LNG imports, that has caused the commodity price to drop to levels not seen in a long while. While the commodity price is getting all the attention, the counterintuitive side to the story is that low natural gas prices drive demand for gas as a fuel, especially for power generation, which is still expected to make up a significant portion of the end-use for natural gas in the U.S. The natural gas reserves in this country holds significant potential for the end-user demand, and we believe that natural gas will continue to be a very important fuel for the world for the foreseeable future. Investment is still taking place. Petrochemical companies, LNG exporters, power generators and others continue to invest in growth. These facilities are expected to continue to drive demand. That means more gas moving through the system, and ultimately, requiring more compression from companies like USA Compression. Our business is a demand-driven business, and we do not see this dynamic changing meaningfully in the marketplace. The physical restraint that we are seeing on the part of our midstream and E&P customers continues. As we mentioned on our previous call, the moderation in general activity levels is highlighting the increased focus on prudent capital spending and economic returns. We continue to believe this moderation should better balance the broader energy market. Here at USA Compression, we have pared back our capital spending plans for 2020, really pursuing a very select number of highly attractive projects with a few major customers. We continue to believe that the underlying thesis of our business, our expectation that demand for domestically produced natural gas will continue to increase over time, driving infrastructure investment and requiring increasing amounts of compression is intact and positioned well for a future where natural gas is a critical piece of the equation and helping increase living standards across the world, whether it is residential power, electric transportation or clean burning [ocean] vessels. The Permian and Delaware basins continued to be the center of industry activity, and that is where we currently expect to allocate the majority of our capital in 2020. It is no surprise that the majors and large independents who have spent the last several years working to consolidate the region are now taking advantage of attractive economics and producing oil and gas with more of an assembly plant mindset. As I mentioned, this is where we expect to deploy most of our new capital in 2020. The mid-Continent has been a story of haves and have nots. Some operators are continuing to have success and are moving the volumes from healthy producers to areas of demand. Others are adjusting to the changing market conditions, and we have selectively moved equipment out of the region for redeployment elsewhere. We have actively managed these underutilized assets in the Mid-Continent, working to redeploy those assets elsewhere and to continue to generate strong and stable cash flows. Appalachia has recently received some attention with questions regarding the sustainability of some operators and the prospects of meaningful volume curtailment based on the commodity price. We continue to believe that Appalachia, which is the largest gas-producing region in the country by far, from both the Marcellus and Utica shales, will continue to serve an important role in meeting domestic and global demand long into the future. For some of the regional operators, as the price of gas has suffered recently, we have seen them actually boost their compression horsepower in order to get more volumes out, and thereby, increase our cash flow generation. Overall, 2020 has started pretty much as we entered 2019. We've lived through cycles before and we know how to manage through the ups and downs. Moderating activity levels have led to a much reduced capital budget for 2020. We are focused on strong operational performance, keeping utilization high and continuing expense controls. I will now turn the call over to Matt to walk through some of the financial highlights of the quarter. Matt? -------------------------------------------------------------------------------- Matthew C. Liuzzi, USA Compression Partners, LP - VP, CFO & Treasurer USA Compression GP, LLC [4] -------------------------------------------------------------------------------- Thanks, Eric, and good morning, everyone. Today, USA Compression reported a strong fourth quarter to wrap up 2019, including quarterly revenue of $178 million, adjusted EBITDA of $109 million and DCF to limited partners of $58 million. Those cash flow numbers did benefit from certain nonrecurring items, about $1.2 million of property tax refunds along with other items that collectively added about $2.5 million to adjusted EBITDA in DCF. 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 1.14x. Our total fleet horsepower as of the end of Q4 was largely consistent with Q3 at just under 3.7 million horsepower, and our revenue-generating horsepower at period-end increased slightly to just over 3.3 million horsepower. Our average horsepower utilization for the fourth quarter was 93.9%. Pricing, as measured by average revenue per revenue-generating horsepower per month, was $16.82 for Q4, which, again, was a slight increase from the previous quarter's levels. Total revenue for the fourth quarter was $178 million, of which, approximately $174 million reflected our core contract operations revenues. Parts and service revenue was approximately $4 million. Both those amounts include a portion of related party amounts. Gross operating margin as a percentage of revenue was 68% in Q4. Net income for the quarter was $9.3 million. Operating income was $43.8 million. Net cash provided by operating activities was $91.7 million in the quarter. Maintenance capital totaled $7.8 million in the quarter, and cash interest expense net was $31 million. As we have traditionally done concurrent with the fourth quarter earnings release, we are providing initial full year guidance for 2020. We currently expect 2020 adjusted EBITDA of between $415 million and $435 million and DCF of between $210 million and $230 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 to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Praveen Narra, Raymond James. -------------------------------------------------------------------------------- Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [2] -------------------------------------------------------------------------------- I guess when I look at your guidance, it kind of implies that we should see utilization being relatively stable for today's levels or near today's levels for 2020. And you talked a lot about what's going on in the basins. But can you talk about kind of how you see the kind of redeployment of assets into the Permian on a fleet percentage basis? Is it material? And then also, can you talk about kind of how much of your equipment is actually seeing returns of some sort of required redeployment? -------------------------------------------------------------------------------- Eric D. Long, USA Compression Partners, LP - President, CEO & Director of USA Compression GP, LLC [3] -------------------------------------------------------------------------------- Yes. Praveen, this is Eric. First, I would say, as an overall percentage of our fleet, the redeployment is not material. We're talking a few pieces of equipment here, a few pieces of equipment there. We're talking 8 or 10 type machines. So we've got 4,500 units or so in our fleet, 3.3 million active horsepower. So talking extremely small percentages being redeployed. So yes, I think your commentary about looking at our EBITDA, looking at our DCF implies stable utilization. And that's what we've always consistently done when we see periods of slowdown in growth CapEx that we focus on making sure that we're able to maintain a high utilization of our existing fleet. So since we're not seeing wholesale returns, there's a nominal decline -- nominal returns here, nominal returns there. We're pretty comfortable that we'll be able to maintain that utilization throughout the year. -------------------------------------------------------------------------------- Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [4] -------------------------------------------------------------------------------- Right. Then as we think about it from a pricing standpoint, you talked about pricing moderating. We've talked about that for a few quarters now at least, so that shouldn't come as a surprise. But can you talk about whether that's stabilizing, whether that's heading down slightly? And then also kind of what percentage of your fleet rests on either month-to-month or contracts that are due up within the year? -------------------------------------------------------------------------------- Matthew C. Liuzzi, USA Compression Partners, LP - VP, CFO & Treasurer USA Compression GP, LLC [5] -------------------------------------------------------------------------------- Yes, Praveen, it's Matt. Yes, I think on the pricing side, you're right. The last couple of quarters, we've talked about sort of moderating pricing. As we have signed contracts for some of the few units that we're bringing on this year, on the large horsepower stuff, that pricing has remained, I would say, very stable. Again, I think we found the top, but it's certainly not going the other way. And again, I think part of that is a factor of us and others with sort of the capital discipline, there's just not an overabundance of especially the large horsepower equipment out there in the market. So I think that's primarily the reason that pricing has stayed stable. And then... -------------------------------------------------------------------------------- Eric D. Long, USA Compression Partners, LP - President, CEO & Director of USA Compression GP, LLC [6] -------------------------------------------------------------------------------- I think the other area that you touched on is looking at our mix of month-to-month contracts versus assets that we've termed up. I mean we're running about 60-ish percent of contracts under extended term. That's up significantly from a couple of quarters ago. And one of the things that we've been able to do as we placed either new contracts or renegotiated contracts with extended term in place, we do put in place some annual upward pricing adjustments in those contracts. So when you start to look at a fleet that's our size, growth CapEx is one thing, but being able to continue to adjust upward the fees we charge on a monthly basis for our compression services starts to become a fairly meaningful number going forward. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- The next question comes from Jeremy Tonet, JPMorgan. -------------------------------------------------------------------------------- Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [8] -------------------------------------------------------------------------------- Just starting off operationally. Gross margin was a bit better than expected this quarter, appears driven by kind of more on the operating cost side. Can you provide any color there? And then as we think about this quarter's margin, is that a good run rate to apply for 2020? -------------------------------------------------------------------------------- Matthew C. Liuzzi, USA Compression Partners, LP - VP, CFO & Treasurer USA Compression GP, LLC [9] -------------------------------------------------------------------------------- Yes. Jeremy, it's Matt. I would say, I think you have to take into account those -- the add-backs, the onetime stuff that I mentioned that was about $2.5 million for the quarter. So I think if you take that out, you get to levels that are probably much more indicative of kind of go-forward margin levels. Obviously, not huge amounts, but it will tick it down just a little bit, I think to -- basically, you'll end up at levels that are very, I think, consistent with past levels. So -- but yes, in terms of, generally speaking, the margin, a lot of it was just continued operating cost efficiencies, watching labor, hiring and OpEx, like that, and just really adjusting, making sure that we were adjusting to any changes in the market. So again, we're -- we've been in with the CDM stuff now for almost 2 full years, and so all that stuff has been completely integrated. And I think the business, as a whole, we're able to kind of make those changes throughout as we need to through the year. -------------------------------------------------------------------------------- Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [10] -------------------------------------------------------------------------------- Great. And secondly, just going back to price increases here. You mentioned selective rate increases for customers. Can you provide a little more context to that? -------------------------------------------------------------------------------- Matthew C. Liuzzi, USA Compression Partners, LP - VP, CFO & Treasurer USA Compression GP, LLC [11] -------------------------------------------------------------------------------- In terms of -- you're talking about going forward or just throughout the year? -------------------------------------------------------------------------------- Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [12] -------------------------------------------------------------------------------- For the quarter and then for -- into 2020. -------------------------------------------------------------------------------- Matthew C. Liuzzi, USA Compression Partners, LP - VP, CFO & Treasurer USA Compression GP, LLC [13] -------------------------------------------------------------------------------- Yes. Again, I think it was more just continued what Eric had mentioned, as we've termed up contracts bringing current, deployed equipment up to what we consider market rates. And when you look at it, they're really -- we deployed a total of 8,000, 9,000 horsepower during the quarter. So there wasn't a whole lot of new horsepower going out at those real high kind of premium-type rate. So basically, what drove that was existing assets out in the field. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Our next question comes from TJ Schultz, RBC Capital Markets. -------------------------------------------------------------------------------- Torrey Joseph Schultz, RBC Capital Markets, Research Division - Co-Head & MD of Master Limited Partnership Franchise [15] -------------------------------------------------------------------------------- As E&Ps here go through budgeting for 2020, and as you said, increasingly focused on free cash flow, any change in view on whether E&Ps that have historically owned their own compression may look to sell assets? Or is it just more simply turning to more outsourcing of compression going forward? -------------------------------------------------------------------------------- Eric D. Long, USA Compression Partners, LP - President, CEO & Director of USA Compression GP, LLC [16] -------------------------------------------------------------------------------- Yes. TJ, really good question. Clearly, you've got the go-forward capital avoidance question, and we see probably an acceleration in that trend. As it pertains to folks that have existing fleets, surprisingly, a large component of that -- of those assets really are not outright owned by the companies. Many of those are covered by structured operating leases. So the ability to monetize some of those assets is probably less than what folks might anticipate. That said, there have been some M&A transactions recently that, as we've gotten closer to some of those companies, we've been surprised at the magnitude of some of their internally-owned compression assets that they truly do have. So I think there's some select opportunities out there with some very attractive type of players to have the potential to potentially bust loose of some of that internal equipment. So it's not the wholesale throughout the industry. I think there's some unique special situations to do that. I'd say it's honestly kind of a greater opportunity to probably focus on the avoided capital going forward rather than extract big packets of assets industry-wide. -------------------------------------------------------------------------------- Torrey Joseph Schultz, RBC Capital Markets, Research Division - Co-Head & MD of Master Limited Partnership Franchise [17] -------------------------------------------------------------------------------- Okay. Makes sense. Just next, gas flaring in the Permian's been an issue, clearly. I think the Railroad Commission's coming out with the report this week. So is there any view, from your seat, just on how more regulations around flaring could impact your business? -------------------------------------------------------------------------------- Eric D. Long, USA Compression Partners, LP - President, CEO & Director of USA Compression GP, LLC [18] -------------------------------------------------------------------------------- It's interesting, TJ, when gas is being flared, obviously, it's not being compressed to be put into and through a pipeline or a processing plant. I think some of this has to do with the timing of some of the large diameter, large-scale takeaway capacity, which is coming on stream. So yes, I think the Railroad Commission is going to start to come down a little harder on operators who have flared in the past. You've seen a couple of midstream companies who have kind of raised their hand and say, Railroad Commission, we've got pipe in the area, these guys need to be hooked up and they need to be moving gas into and through our pipe system. So that will benefit a company like USA, so instead of flaring 1 or 2 Bcf, put it into and through pipelines, which clearly has a positive implication for the amount of compression horsepower that's needed. -------------------------------------------------------------------------------- Torrey Joseph Schultz, RBC Capital Markets, Research Division - Co-Head & MD of Master Limited Partnership Franchise [19] -------------------------------------------------------------------------------- Great. Just last one from me. You guys have a slide in your most recent presentation just on balancing distribution stability and leverage. Is there anything in the cycle going forward just on gas pricing and demand utilization or pricing that you would be looking at that may make you decide that a lower payout and faster delevering is a better path forward? -------------------------------------------------------------------------------- Matthew C. Liuzzi, USA Compression Partners, LP - VP, CFO & Treasurer USA Compression GP, LLC [20] -------------------------------------------------------------------------------- TJ, it's Matt. That sounds like a hidden question about a distribution cut. But no, I mean, I think when you look, historically, there's another page in our presentation, where we go back 10, 15 years and look at the cycles, including the Henry Hub price, et cetera. And we've overlaid that with the utilization of the fleet overall. And so I think if you look at that page, you'd say, hey, this business, and we obviously believe it that this business has the stability and the staying power to kind of -- to manage and run through throughout commodity cycles. So we've had multiple commodity cycles, multiple contract cycles over the 20-plus year history of the company and haven't felt the need to change it in that regard. -------------------------------------------------------------------------------- Torrey Joseph Schultz, RBC Capital Markets, Research Division - Co-Head & MD of Master Limited Partnership Franchise [21] -------------------------------------------------------------------------------- Yes. No, that makes good sense. I think -- so your view is, even if you see some -- like you've seen and I've seen those slides as well. If you see some decline in utilization, your mix of assets and customers still gives you comfort that you can kind of maintain consistent cash flow going forward? Is that fair? -------------------------------------------------------------------------------- Eric D. Long, USA Compression Partners, LP - President, CEO & Director of USA Compression GP, LLC [22] -------------------------------------------------------------------------------- We look at our contract book and there is vast majority -- big majority are investment-grade credits. We've got customers that have diversified footprints. We've got customers that our major oil producers with associated gas. We've got some major producers that indeed are dry gas players or midstream players in dry gas areas. So we've got a very diversified portfolio across all the geologic basins, geographic basins. We've got customer diversity and very, very strong counterparties. So when we look at that, we see an environment where some areas grow, some areas slow. And the areas that are slow, frankly, people just kind of maintain their existing level of production. And when you have a flat producing profile as we all know with compression, as reservoir pressures decline, you got to suck harder to keep the volume the same. So we're not just a volume game, we're a pressure and volume game. So in a -- you've heard me say the mantra for years. We -- when the capital markets tell us it's time to grow or the physical markets tell us it's time to grow, we grow. And when the capital markets or the physical markets say, hey, guys, slow the growth down, maintain stability, then we stop the growth CapEx, and we keep a very high utilization of our assets because the volumes are flat, the pressure's come down, more horsepower is needed. So it's -- times are good either way. So I think we're in the environment right now where you've got some people who are active and you've got some people that are less inactive. And even those folks that are struggling financially, we get paid, we're a mission-critical supplier. We've had a couple of customers go into bankruptcy, we're able to recoup our prepetition billings and confirm coming out of bankruptcy. And gosh, then we're dealing with the customer who has no debt and converted all the equity and they're pretty stable player. So TJ, it's kind of the best of all time, it's perfect storm. Things are really good when times are good, and things for us are really good when times are not so good for everybody else. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question comes from Thomas Curran, B. Riley FBR. -------------------------------------------------------------------------------- Thomas Patrick Curran, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [24] -------------------------------------------------------------------------------- Question on a macro topic here. So when it comes to the U.S. queue of approved and expected future incremental LNG liquefaction capacity, both greenfield terminals and expansion trains, which signs, if any, have you detected of potential FID deferrals, construction time line changes or any other forms of project delays in response to how China's apparent demand is evolving? -------------------------------------------------------------------------------- Matthew C. Liuzzi, USA Compression Partners, LP - VP, CFO & Treasurer USA Compression GP, LLC [25] -------------------------------------------------------------------------------- Tom, it's Matt. I mean, we obviously watch and keep an eye on that stuff, maybe not as granular as some of the stuff you've imagined. I mean, I think the truth of it is, everything that we read, which is probably the same stuff you see is, we're still kind of trying to figure out exactly what everything means for China and how that affects things. There are definitely people out there that say, it's peaked or it's about to peak. There are others who take a different view. So I think it may be a little early to really know exactly what that impact is like. But you got to remember, in terms of LNG, that the existing LNG export from this country is still a very, very small portion of the total gas that gets produced. We were over 100 Bcf a day back in the beginning of this year, end of last year. And so the exports of LNG are not even below 10% of that. So again, I think it's still maybe a little early to tell, but you also, I think, have to keep it all in perspective and look at how much of that gas is going there. There's obviously a lot of other positive demand factors going on domestically. -------------------------------------------------------------------------------- Thomas Patrick Curran, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [26] -------------------------------------------------------------------------------- Right. I was just looking out more over the next 2 to 3 years as you have that expected surge in U.S. LNG exports as a component of total U.S. natural gas demand. Not concerned about the truly longer-term structural driver. But if nothing else, maybe just emerging signs that the trajectory over the next 2 to 3 years might get reshaped and become a bit slower. -------------------------------------------------------------------------------- Matthew C. Liuzzi, USA Compression Partners, LP - VP, CFO & Treasurer USA Compression GP, LLC [27] -------------------------------------------------------------------------------- Yes. I think -- I mean, that's a fair point. So I think the timing of that build-out may shift outward a little bit. But I think everything we see, it's -- seems like it's still a little early. But I think the beauty about our business and others in our little sector, is that we've been able to really kind of ramp back CapEx. And if we saw things in 2021, 2022 meaningfully changing from kind of what we expected in this country. We haven't -- we can go to 0 CapEx. We can easily kind of put the reins on the spending as can other people. So I think that will -- I think that the benefit of not having these big capital commitment projects that run 2, 3, 4, 5 years, plays into our favor in that sense. -------------------------------------------------------------------------------- Thomas Patrick Curran, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [28] -------------------------------------------------------------------------------- Right, good. Okay. And then Eric or Matt or for both of you, would you please update us on your technology strategy? As you look beyond telematics, which fleet technologies have you already decided to adopt? And what is the time line for the implementation? And then could you update us on how much of the other CapEx was allocated to such initiatives last year and then are planned for 2020? -------------------------------------------------------------------------------- Eric D. Long, USA Compression Partners, LP - President, CEO & Director of USA Compression GP, LLC [29] -------------------------------------------------------------------------------- This is Eric. We're working on some pretty creative technology, and it's not just on the remote monitoring side. We're coming into some major overhaul cycles. We've been in business 20 years. We've ratably added to our fleet. And as we come into assets that are in the 10- to 12-year-old range, there are some opportunities when we go through some major overhauls to upgrade and upsize some of the types of equipment that we have. So I'm not going to get into too many details other than to say, think about if you're doing an overhaul on race car, you can pour it, you can stroke it, you can blueprint it, you can increase your horsepower rating. So we're looking at some creative things to how do we take our existing fleet and supersize it, so to speak, with some nominal CapEx to allow us to have somewhat of a competitive advantage versus our peer group. So let me just leave it at that. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- This time, I would like to turn the call back over to Eric Long, President and CEO, for some closing comments. -------------------------------------------------------------------------------- Eric D. Long, USA Compression Partners, LP - President, CEO & Director of USA Compression GP, LLC [31] -------------------------------------------------------------------------------- Well, thank you, operator, and thank you all for joining us on the call today. Our fourth quarter performance was a great wrap up to 2019 and positions USA Compression well heading into 2020, for what we expect will be a more restrained year for the broader industry as well as USA Compression. Achieving these results for the fourth quarter as well as the full year 2019 highlights the strength and stability of our large horsepower infrastructure-focused contract compression services business model. For 2020, we are focused on driving utilization, optimizing pricing and controlling expenses, all while operating in a safe manner and providing our customers with a high level of service to which they are accustomed. You can expect to see continued prudent capital spending in the coming year to help drive attractive economic returns as we seek to provide a long-term attractive investment opportunity for our unitholders. We look forward to updating you on the next quarterly call. Thank you for your continued interest in and support of USA Compression. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.