USA Compression Partners, LP — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. USA Compression provides natural-gas compression and treating services, primarily under fixed-term contracts. Results reflect lower energy-sector activity amid COVID-19 and crude-oil market disruption.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $161.7 million | $175.8 million | $509.3 million | $520.2 million |
| Net income (loss) | $6.5 million | $13.3 million | $(593.3) million | $29.9 million |
| Net income (loss) attributable to common and Class B unitholders | $(5.7) million | $1.1 million | $(629.8) million | $(6.7) million |
| Adjusted EBITDA (non-GAAP) | $103.9 million | $104.3 million | $315.6 million | $310.4 million |
| Distributable cash flow (non-GAAP) | $56.9 million | $54.9 million | $170.3 million | $163.8 million |
| DCF coverage ratio | 1.12x | 1.08x | 1.12x | 1.13x |
- Q3 operating income was $38.8 million, down 16.0%; gross margin was $54.9 million, down 9.8%. Adjusted gross margin was $115.0 million, down 2.9%, and its share of revenue rose to 71.1% from 67.3%.
- Nine-month operating loss included a $619.4 million goodwill impairment recorded in Q1. Goodwill fell from $619.4 million at year-end 2019 to zero. The impairment followed declines in unit price and commodity prices and the COVID-19 outlook.
- Nine-month operating cash flow was $195.7 million, versus $208.9 million; capital expenditures, net, were $97.9 million, versus $134.1 million. Cash distributions on common units were $153.5 million and on preferred units $36.6 million.
Debt, liquidity and distributions
- Long-term debt, net, was $1.949 billion at September 30, 2020, including $496.9 million drawn on the revolving facility and $1.475 billion aggregate principal of senior notes. Cash was $2,000.
- The revolver had $1.1 billion of borrowing-base availability and $411.8 million of available borrowing capacity, subject to covenants. Borrowings were $466.0 million as of October 29, 2020. The partnership reported compliance with debt covenants at quarter-end.
- An August 2020 credit agreement amendment raised permitted leverage limits and increased the minimum availability required for distributions and certain debt prepayments to $250 million during covenant relief through December 31, 2021. Eurodollar borrowing margins also increased.
- Common-unit distributions remained $0.525 per unit per quarter; preferred-unit distributions were $24.375 per unit per quarter. Both distributions were declared for payment November 6, 2020. Preferred distributions are cumulative and senior to common distributions.
Changes, outlook and risks
- Average revenue-generating horsepower declined 6.6% in Q3, and period-end horsepower utilization fell to 83.2% from 93.7%. Management attributed returned units and weaker utilization to reduced U.S. oil and gas activity. Q3 average revenue per revenue-generating horsepower per month decreased 0.7% to $16.62.
- Management expected lower associated-gas production and demand in some regions to continue through the remainder of 2020. It cited potential support from natural-gas-focused regions and a more balanced gas market toward late 2020 and 2021, while noting that recovery timing and business effects were uncertain. No formal earnings guidance was provided.
- 2020 capital-spending plans were approximately $25 million for maintenance and $90–$100 million for expansion; nine-month spending was $17.9 million and $84.6 million, respectively. The partnership said it had reduced capital spending and operating costs in response to market conditions.
- Key risks include prolonged COVID-19 effects, commodity-price and production declines, customer financial distress or contract renegotiations, lower utilization and service pricing, and potential covenant pressure. A one-percentage-point change in average revenue-generating horsepower was estimated to affect annual revenue by about $6.6 million and adjusted gross margin by $4.5 million. A one-percentage-point change in the variable debt rate was estimated to change annual interest expense by about $5.0 million.
- A $44.9 million sales-tax contingency accrual for open Texas audits is matched by a $44.9 million related-party receivable from ETO. The partnership disputes the tax claims; collection and ultimate resolution remain matters to monitor. Management did not expect ordinary-course litigation to have a material adverse effect.
Most important facts for investors to verify
- Whether utilization, returned equipment and service pricing stabilize or continue to weaken, especially for small-horsepower units.
- Whether cash generation supports distributions and planned capital spending, given very low cash on hand, substantial debt and DCF coverage near 1.1x.
- Revolver availability and covenant compliance under the amended terms, including the $250 million distribution-availability condition during the relief period.
- Customer credit quality and collection of receivables, including the allowance for credit losses, which rose to $5.2 million from $2.5 million at year-end.
- Outcome of the Texas sales-tax audits and recoverability of the matching ETO indemnification receivable.