USA Compression Partners, LP — Q1 2020 Form 10-Q
Business and period. Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. The partnership provides natural-gas and crude-oil compression and treating services, primarily under customer contracts. Results reflect the early effects of COVID-19 and sharp oil-market disruption.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $179.0 million | $170.7 million | Up 4.8% |
| Gross operating margin | $119.8 million (66.9%) | $113.7 million (66.6%) | Up 5.4%; non-GAAP |
| Adjusted EBITDA | $106.2 million (59.3%) | $101.4 million (59.4%) | Up 4.7%; non-GAAP |
| Operating income (loss) | $(569.7) million | $35.5 million | Includes $619.4 million goodwill impairment |
| Net income (loss) | $(602.5) million | $6.6 million | Net loss attributable to common units: $(614.6) million |
| Distributable cash flow | $54.7 million | $54.9 million | Down 0.3%; non-GAAP |
| Operating cash flow | $50.1 million | $47.8 million | Up $2.3 million |
| Capital expenditures, net cash-flow presentation | $45.3 million | $36.3 million | Investing cash outflow; maintenance capex was $8.8 million |
Contract operations revenue rose 5.4%, supported by a 2.7% increase in average revenue per revenue-generating horsepower per month to $16.89. Average horsepower utilization declined to 92.5% from 94.2%; utilization based on revenue-generating horsepower and fleet horsepower fell to 89.8% from 90.8%. The company attributed weaker utilization mainly to delayed customer projects and returned units. Interest expense increased 12.5% to $32.5 million, partly reflecting a full quarter of interest on the 2027 notes.
Financial position and distributions
- At March 31, cash was $2,000. Long-term debt, net of financing costs, was $1.910 billion, versus $1.852 billion at year-end; principal included $459.3 million under the revolver and $1.475 billion of senior notes.
- Revolver borrowing capacity available, subject to financial covenants, was $185.9 million; borrowing-base availability was approximately $1.1 billion. The partnership reported covenant compliance at quarter-end. Revolver maturity is April 2023.
- At April 30, revolver borrowings were $432.9 million. The 2026 and 2027 senior notes each bear 6.875% interest.
- Common-unit distributions remained $0.525 per unit for the quarter; preferred-unit distributions were $24.375 per unit. DCF coverage was 1.08x, down from 1.16x. The partnership declared the next quarterly distributions on April 16.
- Common-unit partners’ capital declined substantially, largely reflecting the goodwill impairment and distributions. Preferred units totaled $477.3 million on the balance sheet.
Material changes, outlook, and risks
- The $619.4 million goodwill impairment followed declines in the unit price and commodity prices and the COVID-19 pandemic, which indicated reporting-unit fair value below carrying value. Management used income and market valuation approaches and noted that changes in assumptions could materially affect the estimate. No impairment was recorded for property, equipment, or identifiable intangibles at quarter-end.
- Management described near-term demand as uncertain amid COVID-19, oil oversupply, low prices, and customer spending cuts. It anticipated pressure on activity in oil- and associated-gas-linked regions, especially for smaller horsepower and gas-lift equipment, while citing potentially more resilient demand in natural-gas-focused basins and longer-term infrastructure needs. The company stated it could not reliably estimate the overall impact or timing of recovery.
- In response, management said it cut its already reduced 2020 growth-capital budget by 25% and operating expenses by 10%, and was prepared to cut further. It also reported a 2020 maintenance-capex plan of approximately $30 million and an expansion-capex budget of $80–$90 million, while noting planned spending reductions. No specific revenue or earnings guidance was provided.
- Field operations had continued largely uninterrupted as of the filing, and remote work had not significantly affected operations or caused significant added costs. The company warned that prolonged market disruption could reduce operating cash flow, raise leverage, pressure covenants, weaken customer collections, and threaten distributions or access to capital. It could defer discretionary spending, seek covenant amendments, or reduce or suspend distributions if necessary.
- Trade receivable credit-loss allowance increased to $3.5 million from $2.5 million; the filing linked the increase to oil-price declines and uncertainty about customers’ ability to pay. A 1% reduction in average revenue-generating horsepower was estimated to reduce annual revenue by about $6.7 million and gross operating margin by $4.5 million.
- The company recorded a $44.9 million sales-tax contingency liability for open Texas audits and a matching related-party receivable from ETO for indemnification. Management disputed the tax treatment; a separate 2006–2007 audit was settled for $4.0 million, paid by the predecessor’s former owner.
- Equipment purchase commitments were $33.5 million, expected to be settled during the remainder of 2020. Management said ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were judged effective at quarter-end.
Important facts for investors to verify
- How COVID-19, oil-market conditions, customer capital-spending cuts, and returned equipment affected utilization, contract renewals, and collections after March 31.
- Whether cash generation and covenant headroom remain adequate given very low cash balances, debt levels, and the dependence of available revolver capacity on covenant compliance.
- Whether planned capital-spending cuts, including the stated 2020 expansion budget, were implemented and whether the $33.5 million equipment commitments were completed.
- The assumptions behind the goodwill impairment and whether subsequent market or operating changes indicate further impairment risk.
- The status and recoverability of the $44.9 million ETO indemnification receivable and the open sales-tax audits.
- Whether common and preferred distributions remain sustainable; Q1 DCF coverage was 1.08x, and management expressly identified distribution reductions or suspension as a possible response to worsening conditions.