Archrock, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter earnings report. Archrock provides U.S. natural gas compression through Contract Operations and Aftermarket Services.
Financial and operating results
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $875.0 million | $965.5 million |
| Gross margin (non-GAAP) | $497.8 million; 56.9% of revenue | $509.2 million; 52.7% of revenue |
| Net income (loss) attributable to Archrock stockholders | $(68.4) million; $(0.46) per share | $97.3 million; $0.70 per share |
| Cash from operating activities | $335.3 million | $290.1 million |
| Capital expenditures | $140.3 million | $385.2 million |
| Interest expense | $105.7 million | $104.7 million |
| Long-term debt, carrying value | $1.689 billion | $1.843 billion |
| Cash and cash equivalents at year-end | $1.1 million | $3.7 million |
Operating cash flow less capital expenditures was approximately $195.0 million in 2020, versus approximately $(95.1) million in 2019; this simple comparison is not a company-defined free-cash-flow measure. At year-end, $444.1 million of $844.6 million in undrawn Credit Facility capacity was available for borrowing under then-applicable limits. The company reported covenant compliance.
Contract Operations generated $738.9 million of revenue, down 4%, and $477.8 million of gross margin, up 1%. Aftermarket Services revenue fell 30% to $136.1 million and gross margin fell 43% to $19.9 million. Total horsepower operating at year-end was 3.388 million, down from 3.926 million; average utilization was 86%, compared with 88%.
Changes and unusual items
- Revenue declined approximately 9.4% as COVID-19, lower customer activity, returned horsepower and dispositions affected both segments. Aftermarket revenue was also pressured by customers deferring maintenance.
- The net loss included a $99.8 million goodwill impairment, $79.6 million of long-lived and other asset impairment, and $8.5 million of restructuring charges. Most fleet impairment reflected retirement of idle compressors.
- Asset-sale gains were $10.6 million net. The company also recorded a $12.4 million net benefit from settling a sales and use tax audit, including a $17.3 million cash refund received in the fourth quarter.
- Operating cash flow increased despite lower revenue, helped by lower cash costs and working-capital movements. Capital expenditures fell sharply, including growth spending of $79.1 million versus $300.5 million in 2019.
Debt, liquidity, outlook and risks
- Archrock issued $300 million of 6.25% senior notes due 2028 in December 2020; proceeds repaid Credit Facility borrowings. It redeemed $350 million of 2022 Notes in April 2020 using facility borrowings. Year-end debt comprised $393 million drawn under the facility and $1.3 billion face value of 2027 and 2028 Notes.
- In February 2021, after year-end, the Credit Facility commitment was reduced from $1.25 billion to $750 million and covenant ratios were amended. The filing does not give the resulting post-amendment borrowing availability.
- Management expected 2021 capital expenditures of approximately $80–$106 million, including $30–$50 million for growth and $40–$45 million for maintenance. It anticipated subdued demand into 2021, with possible improvement later in 2021 and into 2022. EIA forecasts cited by the company projected U.S. dry gas production down 1% and crude oil production down 3% in 2021.
- Management targeted $75–$85 million in annual operating, corporate and capital cost reductions in response to lower activity. Its technology transformation project was expected to require significant resources and increase SG&A and capital expenditures in 2021.
- The quarterly dividend was $0.145 per share throughout 2020; a further $0.145 dividend was declared in January 2021. Future dividends are discretionary and subject to financial results, debt restrictions and other factors.
- Key risks include the continuing pandemic and energy-market volatility, customer financial health and contract renewals, substantial debt and covenant constraints, access to capital, competition, staffing and supply-chain constraints, and potential environmental, climate and ESG-related costs or reduced demand. The company is substantially self-insured for certain employee claims and offshore property damage.
- Ordinary-course legal matters were disclosed; management did not expect them to have a material adverse effect, while noting litigation outcomes are uncertain. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Post-amendment Credit Facility availability, covenant headroom and compliance under the reduced $750 million commitment.
- Whether operating horsepower, utilization and customer demand recover as projected, and whether deferred aftermarket maintenance resumes.
- Cash generation after maintenance and growth investment, debt service and dividends, including the sustainability of the dividend.
- Assumptions behind the significant fleet impairments and whether further compressor retirements or impairments are likely.
- Execution, remaining cost and expected benefits of the technology transformation and cost-reduction plans.