USA Compression Partners, LP — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The partnership provides natural-gas and crude-oil compression services across U.S. shale plays. Financial amounts below are in millions unless stated otherwise; interim results are unaudited.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $66.0 | $63.5 | $132.0 | $129.9 |
| Operating income | $6.7 | $8.5 | $14.0 | $22.3 |
| Net income | $0.6 | $3.3 | $2.1 | $11.8 |
| Adjusted EBITDA (non-GAAP) | $36.7 | $37.1 | $72.7 | $75.6 |
| Distributable cash flow (DCF, non-GAAP) | $27.1 | $30.5 | $54.3 | $62.4 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $52.3 | $58.5 |
Q2 gross operating margin was $44.4 million, or 67.3% of revenue, versus $44.9 million, or 70.6%, a year earlier. Adjusted EBITDA margin was 55.7% versus 58.5%. For the first half, gross operating margin was $87.9 million (66.6% of revenue) and Adjusted EBITDA was $72.7 million (55.1%).
- Revenue mix: Q2 contract operations revenue rose 0.9% to $63.3 million, while parts and service revenue increased to $2.7 million from $0.7 million. For the first half, contract operations revenue fell 2.6% to $123.8 million, offset by parts and service revenue of $8.3 million versus $2.8 million.
- Cash generation and investment: First-half investing cash outflow was $32.6 million, including $33.0 million of net capital expenditures. Maintenance and expansion capital expenditures were $6.9 million and $39.6 million, respectively.
- Debt and liquidity: Long-term revolving-credit borrowings were $725.0 million at June 30, up from $685.4 million at year-end. The facility had $317.8 million of borrowing-base availability and, subject to financial covenants, $82.0 million of available borrowing capacity. Cash was $0.3 million. The partnership reported compliance with all covenants.
- Distributions: The declared distribution remained $0.525 per unit. First-half DCF coverage was 0.82x; cash coverage was 1.03x, with the latter reflecting distributions reinvested through the DRIP.
Changes versus the prior comparable period
- Q2 revenue grew 3.9%, but operating income fell 21.4% and net income fell 83.1%. For the first half, revenue rose 1.7%, while operating income declined 37.1% and net income declined 82.2%.
- Higher average revenue-generating horsepower and improved utilization supported activity, but average revenue per revenue-generating horsepower per month fell 3.7% in Q2 and 4.2% for the first half. Management cited lower small-unit pricing and a larger mix of higher-horsepower units, which generally earn less per horsepower.
- Operating costs, depreciation and impairment charges increased. First-half impairment of compression equipment was $3.7 million versus $0.7 million, relating to units management considered unmarketable or excessively costly to maintain.
- First-half operating cash flow fell $6.2 million, DCF fell 13.0%, and Adjusted EBITDA fell 3.7%. Maintenance capital expenditures increased to $6.9 million from $3.0 million.
Outlook, risks and unusual items
- Management expected operating cash flow and, if needed, revolver borrowings to cover debt service, working capital, planned 2017 capital spending and distributions through the rest of 2017. It budgeted $95–$105 million of 2017 expansion capital expenditures and approximately $12.5 million of maintenance capital expenditures.
- At June 30, binding equipment and parts purchase commitments were $106.1 million, expected to be settled during 2017 and 2018. After quarter-end, the partnership ordered another 75,000 horsepower for 2018 delivery at an additional cost of $63.6 million.
- The revolving facility’s maximum leverage covenant tightens from 5.50x for Q2 2017 to 5.25x for Q3 and Q4 2017, then 5.00x thereafter, subject to specified acquisition-related adjustments. Borrowings were $731.1 million as of August 2, 2017.
- All debt was variable-rate. The filing estimates that a 1 percentage-point rate change would alter annual interest expense by approximately $7.3 million. The partnership did not hedge its variable-rate debt.
- Although the partnership has no direct commodity-price exposure because it does not take title to oil or gas, prolonged low prices could reduce production and demand for compression. Customer credit deterioration and industry competition are also identified risks.
- A sales-tax dispute carries a recorded $0.1 million liability; management estimated a possible loss range of $0.1–$3.0 million and considered the high end remote. Management did not expect ordinary-course litigation to materially affect results.
- Management expected adoption of the new revenue standard in 2018 to have no material effect on revenue timing or amounts. The financial impact of the new leasing standard, expected to be adopted in 2019, was still under evaluation.
Important facts for investors to verify
- Whether improved utilization translates into stronger contract revenue and pricing, given the decline in revenue per horsepower.
- Whether DCF continues to cover declared distributions: reported first-half DCF coverage was below 1.0x, while cash coverage was slightly above 1.0x partly because of DRIP participation.
- Capital-spending execution, equipment commitments and the resulting need for additional borrowing or equity financing.
- Leverage-covenant headroom, borrowing capacity and sensitivity to higher floating interest rates.
- Possible additional impairment, sales-tax exposure and the eventual effect of lease-accounting changes.