Archrock, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Archrock provides U.S. natural-gas compression services through contract operations and sells parts and services through its aftermarket segment. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $195.6 | $220.3 | $391.0 | $470.0 |
| Gross margin | $106.7 | $128.2 | $215.0 | $264.3 |
| Net income (loss) | $8.8 | $(30.4) | $12.9 | $(91.6) |
| Diluted EPS | $0.06 | $(0.20) | $0.08 | $(0.61) |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $126.6 | $167.1 |
| Capital expenditures | Not presented for quarter | Not presented for quarter | $38.7 | $113.3 |
- Q2 revenue declined 11% year over year; six-month revenue declined 17%. Contract operations accounted for $163.9 million of Q2 revenue and aftermarket services $31.8 million.
- Gross margin as a share of revenue was approximately 54.6% in Q2 2021 versus 58.2% in Q2 2020, and 55.0% for the first half versus 56.2% a year earlier. These percentages are calculated from reported figures.
- Six-month net cash used in investing activities was $0.9 million, while financing activities used $123.5 million. Cash increased $2.2 million to $3.3 million.
- At June 30, long-term debt carrying value was $1.612 billion, down from $1.689 billion at year-end 2020. The Credit Facility balance was $316.5 million; $421.0 million was available to borrow, after considering letters of credit and covenant capacity. The company reported covenant compliance.
- Current assets were $187.9 million and current liabilities $125.6 million. Total assets were $2.696 billion and equity $913.8 million.
Changes versus the prior comparable period
- Revenue and gross margin fell in both segments. Contract operations’ Q2 revenue decreased 13% and gross margin 18%; six-month revenue decreased 16% and gross margin 18%.
- Aftermarket services’ Q2 revenue declined 2%, but gross margin rose 16% to $4.3 million as costs fell more than revenue. For the first half, revenue decreased 19% and gross margin 31%, reflecting weaker service and parts demand and the 2020 turbocharger-business sale.
- Operating horsepower at quarter-end fell to 3.295 million from 3.613 million, and average utilization was 82% versus 86% in Q2 2020. Management attributed lower contract operations revenue to horsepower returns, lower rates, and asset dispositions.
- Profitability improved chiefly because 2020 included substantial noncash impairments: first-half 2020 goodwill impairment of $99.8 million and long-lived asset impairment of $61.4 million, compared with no goodwill impairment and $10.0 million of long-lived asset impairment in first-half 2021. Lower depreciation, SG&A and restructuring charges also helped.
Outlook, management commentary, and notable items
- Management said U.S. onshore activity was rising and could support business growth beginning as early as the second half of 2021. It nevertheless expected horsepower, utilization and revenue to remain below first-quarter 2020 and earlier levels during 2021. The company cited continuing uncertainty around COVID-19, including potential surges and variants.
- Management planned 2021 capital expenditures of approximately $80 million to $106 million, including $30 million to $50 million for growth and $40 million to $45 million for maintenance.
- The filing cites an EIA July 2021 outlook expecting 2021 U.S. dry gas production to rise 1% and crude oil production to fall 2%, with increases of 2% and 7%, respectively, in 2022. These are external forecasts cited by the company, not company guidance.
- In February, Archrock sold customer agreements and about 300 compressors (approximately 40,000 horsepower), recognizing a $6.0 million gain. In July, after quarter-end, it sold agreements and about 575 compressors (approximately 100,000 horsepower) for approximately $61.0 million, expecting a $13.5 million gain; proceeds were used to repay Credit Facility borrowings.
- The Credit Facility amendment reduced revolving commitments from $1.25 billion to $750 million and revised leverage covenant limits. A $4.9 million write-off of deferred financing costs related to the amendment contributed to higher first-half interest expense.
- Archrock paid $44.5 million in dividends during the first half. The board declared a further $0.145-per-share quarterly dividend for payment in August 2021; future dividends remain subject to board discretion and financial and credit conditions.
- The company had $300 million notional of interest-rate swaps at June 30, expiring in March 2022. It expected $3.9 million of deferred pretax swap losses to be reclassified to interest expense over the following 12 months.
- Risks and contingencies include sensitivity to customer spending and oil and gas production, COVID-19 uncertainty, customer credit exposure, litigation and tax audits, and self-insured workers’ compensation, health and offshore property risks. Management said litigation outcomes were not expected to have a material adverse effect, while noting outcomes cannot be assured. No material risk-factor changes from the 2020 Form 10-K were reported.
Important facts for investors to verify
- Whether operating horsepower, utilization, contract rates and customer demand recover as management anticipated, and the resulting effect on segment margins.
- Whether the $80 million–$106 million capital-spending plan and forecast liquidity remain consistent with operating cash generation and the dividend.
- Debt, covenant headroom and refinancing exposure, including the 2022–2028 senior notes and the amended Credit Facility terms.
- The realized proceeds, gain and debt repayment from the July 2021 compressor dispositions, and any effect of further fleet reductions on future revenue.
- Potential changes in deferred tax asset realizability, tax audit exposures, and the stated $7.9 million discontinued-operations tax indemnification balances.