Archrock, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. Archrock provides U.S. natural-gas compression through contract operations and aftermarket services.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $238.4 million | $226.9 million | $474.5 million | $438.9 million |
| Gross margin | $125.7 million | $108.3 million | $243.2 million | $213.4 million |
| Gross margin as % of revenue | 52.7% | 47.7% | 51.2% | 48.6% |
| Net income attributable to Archrock stockholders | $11.4 million | $1.9 million | $30.9 million | $(1.9) million |
| Basic and diluted EPS | $0.09 | $0.02 | $0.24 | $(0.02) |
Contract operations drove growth: Q2 revenue rose 13% year over year and gross margin rose 19%; average horsepower utilization increased to 88% from 86%. Aftermarket services revenue declined 15% in Q2 as customers deferred maintenance and parts activity, although its gross margin percentage improved to 19% from 17%.
Cash flow, debt and liquidity
- Six-month operating cash flow was $148.7 million, versus $105.2 million a year earlier. Capital expenditures were $235.0 million, versus $132.2 million, leaving operating cash flow less capital expenditures of approximately negative $86.3 million.
- Cash was $2.0 million at June 30, 2019, down from $5.6 million at year-end 2018. Long-term debt was $1.629 billion, up from $1.530 billion; total liabilities were $1.828 billion.
- The $1.25 billion revolving Credit Facility had $792.5 million outstanding, $15.2 million of letters of credit and $442.3 million of available capacity. Archrock reported compliance with covenants and said available liquidity was sufficient to meet needs through at least June 30, 2020.
- Interest expense increased 11% in Q2 to $26.0 million. The company issued $500 million of 6.875% senior notes due 2027 and redeemed $350 million of 2021 Notes, recording a $3.7 million debt-extinguishment loss.
Changes, outlook and notable items
- Management attributed contract operations growth to stronger customer demand, higher rates and increased average operating horsepower. It reported 4.096 million total available horsepower and 3.611 million operating horsepower at quarter-end.
- 2019 capital expenditure guidance was approximately $375–$400 million, including $285–$300 million for growth and $60–$65 million for maintenance.
- On June 23, Archrock agreed to acquire substantially all of Elite Compression’s assets for $205 million cash and 21,656,683 newly issued shares, including a compressor fleet of about 430,000 horsepower. The company expected closing in Q3 2019, subject to conditions and completion of the related Harvest Sale. Harvest agreed to buy about 80,000 horsepower and related assets for $30 million cash.
- The Elite shares would represent approximately 16.6% of Archrock shares outstanding as of June 30; an affiliate of Hilcorp would receive them and could nominate a director while ownership remains at least 7.5%. Archrock warned of integration and execution risks and expected Hilcorp to become a significant customer following the acquisition.
- Archrock recorded $11.7 million of impairment for the first six months, including $8.6 million in Q2, on idle compressor units. Q2 transaction costs were $2.7 million, including $2.5 million related to the proposed transactions. Six-month tax results included valuation-allowance and tax-audit effects.
- The board declared a post-quarter dividend of $0.145 per share, payable August 14, 2019. Future dividends remain subject to board discretion, financial condition and credit agreements. Management cited industry demand and commodity conditions, customer credit, competition, operating hazards, debt and acquisition integration among relevant risks.
Investor verification points
- Confirm whether the Elite acquisition and Harvest Sale closed, their final terms and funding, and the actual share dilution and integration results.
- Track post-acquisition customer concentration, particularly Hilcorp exposure, contract duration and payment performance.
- Compare actual 2019 growth and maintenance capital spending with guidance; assess returns, utilization and cash generation relative to the elevated spending.
- Monitor debt, interest expense, covenant headroom and available revolver capacity, as well as the company’s ability to fund dividends and investment needs.
- Review impairment assumptions for idle equipment and the sensitivity of results to utilization, compressor resale values and industry conditions.