USA Compression Partners, LP — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The Partnership provides natural-gas compression and treating services under customer contracts. Comparisons below are to the corresponding 2020 periods.
Financial and operating performance
- Revenue: Q2 revenue was $156.6 million, down 7.2%; first-half revenue was $314.1 million, down 9.7%. Contract operations revenue fell 6.9% in Q2 and 9.4% in the first half.
- Profit: Q2 net income was $2.7 million, broadly unchanged; the common-unit loss was $9.5 million, or $0.10 per unit, after preferred distributions. First-half net income was $3.1 million versus a $599.8 million loss in 2020, which included a $619.4 million goodwill impairment. First-half loss attributable to common unitholders was $21.3 million, or $0.22 per unit.
- Margins and cash generation: Q2 gross margin was $51.7 million versus $58.3 million; Adjusted EBITDA was $100.0 million, down 5.2%, and DCF was $52.5 million, down 10.5%. First-half Adjusted EBITDA was $199.5 million, down 5.7%, and DCF was $105.1 million, down 7.3%. These EBITDA and DCF figures are non-GAAP measures.
- Distribution coverage: DCF coverage was 1.03x for Q2 and the first half, compared with 1.15x and 1.12x, respectively, in 2020. The common-unit distribution remained $0.525 per quarter; a further $0.525 distribution was declared July 15 for payment August 6.
- Cash flow and capital spending: First-half operating cash flow was $139.1 million, down from $147.4 million. Investing used $10.3 million, including $15.4 million of net capital expenditures; financing used $128.8 million, mainly distributions. Cash remained $2,000.
- Debt and liquidity: June 30 long-term debt, net, was $1.928 billion, including $1.475 billion of senior notes and $473.4 million drawn on the revolving facility. The revolver had $217.4 million of available borrowing capacity, subject to financial covenants; borrowing-base availability was approximately $1.1 billion. The Partnership reported covenant compliance. Senior notes bear 6.875% interest; the revolver’s weighted-average rate was 2.91% at quarter-end.
- Operating indicators: Average revenue-generating horsepower fell 7.7% in Q2 and 8.8% in the first half year over year. Average utilization declined to 82.4% and 82.7%, respectively. Average revenue per revenue-generating horsepower per month decreased 1.4% in Q2 to $16.55.
Material changes and management commentary
- Management attributed lower compression revenue and utilization mainly to customer capital discipline, optimization of existing service needs, returned equipment and, for the first half, lower U.S. oil and gas activity. Pricing pressure was concentrated in the small-horsepower fleet.
- Lower operating costs and SG&A partly offset revenue declines. Cost reductions included lower labor and taxes; the tax decrease partly reflected sales-tax refunds. First-half SG&A also included higher unit-based compensation expense.
- The Partnership retired 22 compressor units totaling approximately 9,600 horsepower in the first half and recorded $5.0 million of compression-equipment impairment charges. It recorded no goodwill impairment in 2021; the prior-year first-half comparison included the substantial goodwill charge noted above.
- First-half capital expenditures were materially below 2020 levels. Management’s 2021 plan was approximately $22 million of maintenance capital expenditures and $30–$40 million of expansion capital expenditures, excluding acquisitions.
- The credit agreement’s temporary covenant-relief terms run through December 31, 2021. The maximum funded-debt-to-EBITDA covenant was 5.50x for Q2 2021 and is 5.25x for the remaining 2021 quarters; the agreement also raises the availability threshold for distributions during the relief period.
Risks, contingencies and unusual items
- Demand is indirectly exposed to oil and gas prices, production levels and customer financial health; COVID-19-related disruption, contract renegotiations, competition and capital availability are among the stated risks. The Partnership does not take title to commodities and does not hedge this indirect exposure.
- A 1% change in variable-rate interest on the $473.4 million revolver balance would change annual interest expense by approximately $4.7 million. A 1% decrease in average revenue-generating horsepower is estimated to reduce annual revenue by approximately $5.9 million and Adjusted gross margin by $4.2 million.
- The Partnership recorded a $44.9 million accrued liability for Texas sales-tax audits and an equal receivable from Energy Transfer related to indemnification. Separately, it disclosed reasonably possible Oklahoma assessment losses ranging from $0 to approximately $23.1 million, including penalties and interest; management said the high-end assumption was remote.
- Preferred units carry cumulative quarterly distributions of $24.375 per unit and rank senior to common units. They have staged conversion rights beginning April 2021; the Partnership may redeem them beginning April 2023, subject to agreement terms.
- Management concluded disclosure controls were effective as of June 30, 2021. It reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower utilization, returned equipment and customer capital discipline persist, and how they affect revenue and cash generation.
- Whether DCF coverage near 1.03x is sufficient to sustain common distributions after capital needs, preferred distributions and debt service.
- Revolver availability and covenant headroom, particularly as temporary covenant relief expires after 2021.
- Resolution and collectability of the Texas indemnification receivable, and outcome of the Oklahoma sales-tax assessment.
- Execution of the 2021 maintenance and expansion capital-spending plans, and whether further idle-equipment retirements or impairments are required.