Archrock, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Archrock provides U.S. natural-gas compression through contract operations and aftermarket services. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $195.2 million | $205.6 million | $586.2 million | $675.6 million |
| Gross margin | $103.2 million (52.9%) | $119.5 million (58.1%) | $318.3 million (54.3%) | $383.8 million (56.8%) |
| Net income (loss) | $9.3 million | $18.3 million | $22.2 million | $(73.2) million |
| Diluted earnings (loss) per share | $0.06 | $0.12 | $0.14 | $(0.49) |
- Revenue and margins: Q3 revenue fell 5% year over year; contract operations revenue declined 9%, partly offset by 19% growth in aftermarket services. Nine-month revenue fell 13%. Contract operations gross margin percentage was 61% in Q3 versus 66% a year earlier; aftermarket services remained 15%.
- Cash flow: Nine-month operating cash flow was $208.7 million, down from $266.8 million. Capital expenditures were $70.9 million, implying operating cash flow less capital expenditures of approximately $137.8 million. Investing activities provided $37.9 million, including disposition proceeds; financing activities used $244.2 million, principally reflecting net debt repayments and dividends.
- Debt and liquidity: Long-term debt carrying value was $1.516 billion at September 30, down from $1.689 billion at year-end 2020. Cash was $3.5 million; current assets were $186.7 million and current liabilities $153.4 million. The amended $750 million revolving facility had $517.5 million available, with $12.5 million of letters of credit outstanding. Archrock reported compliance with all facility covenants.
- Capital returns: Dividends paid in the first nine months totaled $67.0 million. The board declared a further $0.145 per-share dividend on October 28, 2021. Archrock also sold 357,148 shares through its ATM program for $3.4 million net proceeds during the nine-month period.
Material changes and unusual items
- Q3 net income decreased by about half, primarily due to lower contract operations gross margin and higher SG&A. The nine-month comparison improved from a loss to profit largely because 2020 included $99.8 million of goodwill impairment, higher asset impairment, and a debt-extinguishment loss.
- Q3 gains on asset sales totaled $15.4 million, including $13.0 million from July 2021 dispositions. The July sales covered customer agreements and approximately 575 compressors representing 100,000 horsepower; proceeds were $60.3 million and were used to repay facility borrowings. February 2021 dispositions generated a further $6.0 million gain for the nine-month period.
- Long-lived asset impairment was $5.1 million in Q3 and $15.2 million for nine months, mainly from retiring idle compressors. Nine-month depreciation and amortization was $135.2 million.
- Hurricane Ida disrupted Louisiana operations and damaged compressors and facilities. Archrock recorded $2.0 million of depreciation on damaged assets in Q3 and filed an insurance claim; recovery was not estimable at quarter-end, and the estimated deductible was $0.9 million.
Outlook, commentary, and risks
- Management said customer activity and demand had begun improving, particularly in aftermarket services, but expected horsepower, utilization, and revenue to remain below early-2020 and prior-period levels during 2021. It expected rising U.S. onshore activity to support gradually higher demand in 2022.
- The filing cited EIA October 2021 forecasts for 2021 production growth of 1% for dry natural gas and a 2% decline for crude oil, followed by expected 2022 increases of 4% and 6%, respectively.
- Planned 2021 capital expenditures were approximately $80–$106 million, including $30–$50 million for growth and $40–$45 million for maintenance.
- Key uncertainties include COVID-19 effects on customers and energy production, commodity-driven customer spending, compressor utilization and impairment estimates, hurricane-related losses and uncertain insurance recovery, and the ability to sustain cash flows and dividends. Management reported no material change to previously disclosed risk factors. It expected approximately $0.8 million of facility-exit costs in Q4 2021.
- Other items to note: the company recorded a $4.9 million write-off of deferred financing costs related to the February 2021 credit-facility amendment during the nine-month period. It also disclosed $2.8 million of unrecognized tax benefits that could be reduced within 12 months, while noting final resolution could differ materially from estimates.
Most important facts for investors to verify
- Whether operating horsepower and utilization recover after dispositions and customer returns; Q3 average utilization was 82%, versus 85% a year earlier.
- Whether operating cash flow can support planned capital spending, debt service, and the quarterly dividend as market conditions evolve.
- Facility availability, covenant headroom, and refinancing or repayment plans, given $1.516 billion of reported long-term debt and the amended leverage limits.
- The ultimate proceeds, deductible impact, and timing of recovery for the Hurricane Ida insurance claim.
- How much future earnings rely on asset-sale gains, and whether contract operations margins stabilize while aftermarket demand improves.