Archrock, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Archrock provides U.S. natural-gas compression through contract operations and aftermarket services. Results include Elite Compression assets from their August 1 acquisition date.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $244.9 million | $232.4 million | $719.5 million | $671.3 million |
| Gross margin | $131.4 million (53.6%) | $113.3 million (48.7%) | $374.6 million (52.1%) | $326.6 million (48.7%) |
| Net income attributable to Archrock stockholders | $20.4 million | $10.0 million | $51.3 million | $8.1 million |
| Diluted earnings per share | $0.14 | $0.08 | $0.38 | $0.07 |
| Operating cash flow | Not separately provided | Not separately provided | $223.6 million | $170.7 million |
Q3 contract-operations revenue rose 17% to $198.3 million, with segment gross margin up 22% to $122.4 million and margin improving to 62% from 59%. Aftermarket-services revenue fell 26% to $46.6 million; segment gross margin declined 30% to $9.0 million. Management attributed the weakness to customers delaying maintenance and lower parts sales.
At September 30, cash was $3.4 million and long-term debt was $1.825 billion, compared with $1.530 billion at year-end 2018. The $1.25 billion revolving Credit Facility had $246.3 million of available capacity after letters of credit; Archrock reported covenant compliance. Nine-month capital expenditures were $303.5 million, so operating cash flow less capital expenditures was negative $79.8 million (calculated). Dividends paid in the first nine months totaled $56.5 million.
Material changes and transactions
- Revenue increased 5% in Q3 and 7% for the first nine months. Higher contract-operations rates, customer demand and operating horsepower drove growth; aftermarket-services declines partly offset it.
- On August 1, Archrock acquired substantially all Elite Compression assets, including about 430,000 horsepower, for $209.2 million cash and 21.7 million shares valued at $225.9 million. The cash portion was funded through the Credit Facility. Acquired assets contributed $13.1 million of revenue through September 30; acquired earnings were not separately available. Purchase-price allocation remained preliminary.
- Also on August 1, Archrock sold about 80,000 horsepower and related assets to Harvest for $30.0 million cash, recording a $6.6 million gain.
- Archrock issued $500 million of 6.875% notes due 2027 and redeemed $350 million of 6% notes due 2021, recording a $3.7 million extinguishment loss. Interest expense rose 17% in Q3, principally due to higher average debt.
- Q3 other income included the Harvest-sale gain. The nine-month effective tax rate was near zero, primarily reflecting a valuation-allowance reduction and release of an unrecognized tax benefit following a tax-audit settlement.
Outlook, risks and contingencies
- Management expected operating cash flows and Credit Facility borrowings to meet liquidity needs through at least September 30, 2020. It planned 2019 capital expenditures of $375–$400 million, including $285–$300 million for growth and $60–$65 million for maintenance.
- Average horsepower utilization was 88% in Q3 2019 versus 87% a year earlier; period-end utilization was 88% in both periods. Contract-operations remaining performance obligations were $453.2 million, expected to be recognized through 2024.
- The board declared a $0.145-per-share quarterly dividend for payment November 14, 2019. Future dividends remain subject to board discretion, financial condition and credit-agreement restrictions.
- Newly emphasized risks include integration costs and execution for Elite, uncertain realization of expected acquisition benefits, and increased reliance on Hilcorp. Hilcorp-affiliated JDH Capital held 14.3% of shares and had board-designation rights while ownership remained at least 7.5%; Hilcorp revenue was $9.7 million in Q3 and $20.1 million year to date.
- Variable-rate exposure remained significant: $588.5 million of debt was effectively variable after swaps. A 1-percentage-point rate increase would add an estimated $5.9 million to annual interest expense. The company also cited ordinary-course litigation, tax audits, self-insured claims and uninsured business hazards; management did not expect pending litigation to have a material effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether Elite integration delivers expected operating benefits and how final asset valuations affect depreciation, amortization and taxes.
- Hilcorp’s post-acquisition contribution to revenue, customer concentration and payment exposure.
- Debt and liquidity trends, covenant headroom, interest-rate sensitivity and the ability to fund capital spending and dividends.
- Whether aftermarket-services demand recovers after customer maintenance delays, and whether contract-operations utilization and pricing remain strong.
- Final 2019 capital expenditures compared with the $375–$400 million plan, alongside operating cash generation and cash needs.