Archrock, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are included. Unless noted, comparisons are with FY 2015. The company reports U.S. natural gas compression contract operations and aftermarket services; results exclude businesses spun off to Exterran Corporation in November 2015, which are presented as discontinued operations.
Financial and operating performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $807.1 million | $998.1 million | Down 19% |
| Gross margin (non-GAAP) | $427.2 million; 52.9% of revenue | $503.1 million; 50.4% | Down 15%; margin improved |
| Net loss attributable to Archrock stockholders | $54.6 million | $132.5 million | Loss narrowed |
| Loss per share attributable to common stockholders | $0.80 | $1.94 | Loss narrowed |
| Cash from continuing operations | $274.1 million operating cash flow | $322.5 million | Down $48.4 million |
| Cash and working capital at year-end | $3.1 million; $109.2 million | $1.6 million; $150.2 million | Working capital decreased |
| Long-term debt, net of discounts and financing costs | $1.442 billion | $1.577 billion | Down $135.2 million |
- Contract operations revenue was $647.8 million, down 17%; gross margin was $400.8 million, down 13%, while segment margin improved to 62% from 59%.
- Aftermarket services revenue fell 27% to $159.2 million; gross margin fell 36% to $26.4 million, and segment margin declined to 17% from 19%.
- Average operating horsepower fell 11% to 3.234 million; year-end utilization declined to 82% from 87%. The fleet totaled 7,364 units and 3.819 million available horsepower.
- Capital expenditures were $117.6 million, including $78.6 million of growth and $33.6 million of maintenance spending. Cash dividends declared and paid totaled $0.4975 per common share for the year.
- At year-end, debt included $99.0 million under Archrock’s revolver and Partnership debt of $509.5 million under its revolver, $150.0 million under its term loan, and $700 million face value of 6% notes. Archrock reported $195.3 million available for additional borrowing under its revolver after covenant limits; the Partnership reported $315.5 million undrawn revolver capacity.
Material changes and unusual items
- Lower customer spending and drilling activity drove reduced operating horsepower, pricing pressure, and weaker aftermarket demand. Cost reductions and lower operating costs helped improve contract-operations gross-margin percentage and reduce SG&A.
- Long-lived asset impairment charges were $87.4 million, including $76.6 million related to retiring approximately 655 idle compressor units (262,000 horsepower) and $10.8 million on previously culled units. FY 2015 impairment was $125.0 million.
- FY 2016 included $13.5 million of restatement-related charges and $16.9 million of restructuring and other charges. The cost-reduction program included workforce reductions and shop closures and was completed in Q4.
- Q4 revenue was $193.8 million and net loss attributable to Archrock stockholders was $38.6 million. Q4 included $47.1 million of long-lived asset impairments and $12.6 million of restatement charges.
- In November 2016, Archrock transferred customer agreements and 262 compressor units (about 147,000 horsepower) to its consolidated Partnership for $85.0 million of consideration, received in Partnership units. The Partnership also acquired customer agreements and 19 units in March 2016 for $18.8 million.
Outlook, liquidity, risks, and contingencies
- Management expected North American upstream spending to improve in 2017, but anticipated contract-operations revenue to decline year over year because of 2016 horsepower declines and pricing pressure; any meaningful compression demand recovery could lag drilling activity. It expected horsepower returns to moderate and planned higher fleet investment.
- Planned 2017 net capital expenditures were approximately $185–$205 million, including $125–$145 million growth capex and $40–$45 million maintenance capex. Management expected operating cash flow and credit-facility borrowings to meet liquidity needs through December 31, 2017, subject to market and financing conditions.
- Archrock depends heavily on Partnership distributions to fund its obligations and dividends. The company paid a $0.12-per-share quarterly dividend in Q4 2016; the board declared the same quarterly amount in January 2017, paid in February. Future dividends are discretionary and depend on financial performance, debt restrictions, and Partnership distributions.
- Total debt was approximately $1.4 billion. Both Archrock and the Partnership reported compliance with financial covenants at year-end. Partnership leverage was 4.7x debt/EBITDA against a 5.95x maximum through Q4 2017; its interest-coverage ratio was 3.9x against a 2.75x minimum. Archrock’s debt/EBITDA was 1.4x against a 4.25x maximum.
- Texas ad valorem tax litigation challenges the company’s tax treatment of compressor equipment. Archrock had recorded cumulative benefits of $60.7 million since 2012; $47.0 million remained disputed. An adverse outcome could require repayment, penalties and interest, and increase future tax expense.
- Archrock restated prior-period financial statements after accounting errors involving percentage-of-completion accounting for Belleli EPC contracts in the former international business. The company reported material weaknesses in controls for periods before the November 2015 spin-off, but management and the auditor concluded controls were effective as of December 31, 2016. Archrock was assisting Exterran in an SEC investigation, with information also provided to the Department of Justice at the SEC’s request.
- Other notable exposures include Williams Partners, which represented 13% of 2016 revenue; dependence on Exterran-related proceeds, including a $25 million payment conditional on a qualified capital raise; and collection risk on PDVSA-related installments. Exterran paid Archrock $19.7 million in January 2017; approximately $37.5 million of principal remained due to Exterran at year-end 2016.
- Environmental and emissions rules may increase compliance costs or constrain customers’ operations. Archrock also identifies customer credit, competition, short contract terms, supply dependence on Exterran, interest rates, and the Partnership’s ability to maintain distributions as material risks.
Investor verification priorities
- Review the restatement disclosures and audit/control findings, including the nature of prior-period errors and the status of any regulatory or shareholder proceedings.
- Track the Texas tax cases and assess potential repayment exposure against the $47.0 million disputed benefit, plus possible penalties and interest.
- Confirm Partnership distribution capacity, covenant headroom, and how debt maturities and 2017 capital spending affect Archrock’s liquidity and dividend coverage.
- Monitor 2017 horsepower utilization, pricing, contract-operations revenue, aftermarket demand, and execution of planned capital expenditures.
- Verify Williams Partners’ contract renewals and payments, and the timing and collectability of remaining PDVSA-related proceeds and the conditional $25 million Exterran payment.