Archrock, Inc. quarterly report, Q3 FY2019

Archrock, Inc. — Q3 2019 Form 10-Q

Reporting period: Three and nine months ended September 30, 2019. Archrock provides U.S. natural-gas compression through contract operations and aftermarket services. Results include Elite Compression assets from their August 1 acquisition date.

Financial performance

MetricQ3 2019Q3 2018Nine months 2019Nine months 2018
Revenue$244.9 million$232.4 million$719.5 million$671.3 million
Gross margin$131.4 million (53.6%)$113.3 million (48.7%)$374.6 million (52.1%)$326.6 million (48.7%)
Net income attributable to Archrock stockholders$20.4 million$10.0 million$51.3 million$8.1 million
Diluted earnings per share$0.14$0.08$0.38$0.07
Operating cash flowNot separately providedNot separately provided$223.6 million$170.7 million

Q3 contract-operations revenue rose 17% to $198.3 million, with segment gross margin up 22% to $122.4 million and margin improving to 62% from 59%. Aftermarket-services revenue fell 26% to $46.6 million; segment gross margin declined 30% to $9.0 million. Management attributed the weakness to customers delaying maintenance and lower parts sales.

At September 30, cash was $3.4 million and long-term debt was $1.825 billion, compared with $1.530 billion at year-end 2018. The $1.25 billion revolving Credit Facility had $246.3 million of available capacity after letters of credit; Archrock reported covenant compliance. Nine-month capital expenditures were $303.5 million, so operating cash flow less capital expenditures was negative $79.8 million (calculated). Dividends paid in the first nine months totaled $56.5 million.

Material changes and transactions

  • Revenue increased 5% in Q3 and 7% for the first nine months. Higher contract-operations rates, customer demand and operating horsepower drove growth; aftermarket-services declines partly offset it.
  • On August 1, Archrock acquired substantially all Elite Compression assets, including about 430,000 horsepower, for $209.2 million cash and 21.7 million shares valued at $225.9 million. The cash portion was funded through the Credit Facility. Acquired assets contributed $13.1 million of revenue through September 30; acquired earnings were not separately available. Purchase-price allocation remained preliminary.
  • Also on August 1, Archrock sold about 80,000 horsepower and related assets to Harvest for $30.0 million cash, recording a $6.6 million gain.
  • Archrock issued $500 million of 6.875% notes due 2027 and redeemed $350 million of 6% notes due 2021, recording a $3.7 million extinguishment loss. Interest expense rose 17% in Q3, principally due to higher average debt.
  • Q3 other income included the Harvest-sale gain. The nine-month effective tax rate was near zero, primarily reflecting a valuation-allowance reduction and release of an unrecognized tax benefit following a tax-audit settlement.

Outlook, risks and contingencies

  • Management expected operating cash flows and Credit Facility borrowings to meet liquidity needs through at least September 30, 2020. It planned 2019 capital expenditures of $375–$400 million, including $285–$300 million for growth and $60–$65 million for maintenance.
  • Average horsepower utilization was 88% in Q3 2019 versus 87% a year earlier; period-end utilization was 88% in both periods. Contract-operations remaining performance obligations were $453.2 million, expected to be recognized through 2024.
  • The board declared a $0.145-per-share quarterly dividend for payment November 14, 2019. Future dividends remain subject to board discretion, financial condition and credit-agreement restrictions.
  • Newly emphasized risks include integration costs and execution for Elite, uncertain realization of expected acquisition benefits, and increased reliance on Hilcorp. Hilcorp-affiliated JDH Capital held 14.3% of shares and had board-designation rights while ownership remained at least 7.5%; Hilcorp revenue was $9.7 million in Q3 and $20.1 million year to date.
  • Variable-rate exposure remained significant: $588.5 million of debt was effectively variable after swaps. A 1-percentage-point rate increase would add an estimated $5.9 million to annual interest expense. The company also cited ordinary-course litigation, tax audits, self-insured claims and uninsured business hazards; management did not expect pending litigation to have a material effect, while noting outcomes are uncertain.

Important facts for investors to verify

  1. Whether Elite integration delivers expected operating benefits and how final asset valuations affect depreciation, amortization and taxes.
  2. Hilcorp’s post-acquisition contribution to revenue, customer concentration and payment exposure.
  3. Debt and liquidity trends, covenant headroom, interest-rate sensitivity and the ability to fund capital spending and dividends.
  4. Whether aftermarket-services demand recovers after customer maintenance delays, and whether contract-operations utilization and pricing remain strong.
  5. Final 2019 capital expenditures compared with the $375–$400 million plan, alongside operating cash generation and cash needs.