Archrock, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. Archrock provides U.S. natural gas compression contract operations and aftermarket services. It consolidates Archrock Partners, in which it held an approximately 45% interest at quarter-end.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $189.9 million | $213.3 million; down 11% |
| Contract operations revenue | $150.0 million | $176.2 million; down 15% |
| Aftermarket services revenue | $39.9 million | $37.1 million; up 8% |
| Gross margin (non-GAAP) | $92.1 million; 48.5% of revenue | $114.8 million; 53.8% of revenue |
| Net loss | $14.0 million | $6.7 million |
| Net loss attributable to Archrock stockholders | $11.7 million; $0.17 per diluted share | $1.8 million; $0.03 per diluted share |
| Operating cash flow | $54.8 million | $71.3 million |
| Capital expenditures | $30.9 million | $50.6 million |
| Cash at quarter-end | $10.8 million | $3.1 million at December 31, 2016 |
| Long-term debt | $1.436 billion | $1.442 billion at December 31, 2016 |
Working capital was $86.7 million, down from $109.2 million at year-end. The company reported $54.7 million of cash provided by continuing operations, used $25.1 million in investing activities, and used $22.0 million in financing activities. The quarterly common dividend paid was $0.12 per share, versus $0.1875 a year earlier.
Material changes and operating drivers
- Contract operations gross margin fell 21% to $85.9 million, with margin declining from 61% to 57%. Average operating horsepower decreased 9% to 3.112 million; management cited lower customer demand and rates, partly offset by lower repair, maintenance, and lubricant costs.
- Aftermarket services gross margin decreased 8% to $6.2 million, and its margin fell from 18% to 15%, despite higher parts-sales revenue.
- Lower SG&A, depreciation and amortization, impairment, and restructuring charges partially offset weaker gross margin. Interest expense rose 6% to $21.4 million. Q1 2017 also included $0.8 million of restatement and other charges and $0.3 million of debt-extinguishment costs.
- Archrock recorded an $8.2 million impairment on 80 idle compressor units (28,000 horsepower), compared with $9.9 million on 80 units in Q1 2016.
Outlook, financing, and risks
- Management expects full-year 2017 contract operations revenue to decline versus 2016, despite anticipating improved market conditions and more moderate horsepower returns. It expects increased demand for compression services to lag a recovery in drilling activity.
- Management planned 2017 net capital expenditures of approximately $185 million to $205 million, including $125 million to $145 million for growth and $40 million to $45 million for equipment maintenance. The filing states expected net cash from operations and credit-facility borrowings should meet liquidity needs through December 31, 2017; additional financing may be sought if needed.
- On March 30, the Partnership refinanced its former revolving credit facility and term loan with a five-year, $1.1 billion asset-based facility. At quarter-end, $663 million was drawn and $293.2 million of capacity was available for additional borrowing after covenant limitations. Archrock’s separate facility had $142.3 million of borrowing capacity available. Both entities reported compliance with financial covenants.
- Archrock received a $25 million payment from Exterran Corporation on April 11, 2017, following Exterran’s qualified capital raise. Exterran or its subsidiaries were also due approximately $20.9 million from PDVSA Gas; Archrock expects a corresponding contribution as those proceeds are collected.
- Significant contingency: Archrock had recorded aggregate ad valorem tax benefits of $64.9 million under its interpretation of Texas Heavy Equipment Statutes; $51.2 million was disputed in litigation. An adverse outcome could require repayment, potentially with substantial penalties and interest, and could increase future tax expense.
- Other risks include volatile oil and gas activity, customer demand and pricing, high indebtedness and covenant restrictions, interest-rate exposure, and the possibility of reduced Partnership distributions. A 1 percentage-point increase in rates on debt effectively subject to floating rates was estimated to increase annual interest expense by $2.5 million.
- The filing describes ongoing restatement-related expenses and Archrock’s assistance to Exterran in responding to an SEC investigation that also involves the U.S. Department of Justice. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress and potential financial exposure in the Texas compressor-property tax litigation, including the status of the disputed $51.2 million benefit.
- Actual contract operating horsepower, utilization, pricing, and segment margins relative to management’s full-year revenue outlook.
- Cash generation, planned capital spending, debt levels, covenant headroom, and the Partnership’s ability to maintain distributions.
- Receipt of remaining PDVSA-related proceeds and any further payments or obligations under the Exterran separation agreements.
- Additional costs or developments related to the restatement, SEC and DOJ matters, and related proceedings.