Good morning and welcome to Archrock Second Quarter 2020 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I would now like to turn the call over to Mrs. Repine. You may begin.

Thank you, Devon. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of Archrock; and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the second quarter of 2020. If you have not received a copy, you can find the information on the company's website at www.archrock.com. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by and the information currently available to Archrock's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, gross margin, gross margin percentage, and cash available for dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release and our Form 8-K furnished to the SEC. I'll now turn the call over to Brad to discuss Archrock's second quarter results and provide an update of our business.

Thank you, Megan, and good morning. I appreciate everyone joining our conference call today. Last night, we posted solid second quarter results in the context of one of the most difficult environments the industry and Archrock have ever faced. As we've highlighted for some time, Archrock provides critical U.S. natural gas infrastructure. And the company is built by design to endure market cycles. Against the backdrop of a global pandemic, economic slowdown, and precipitous decline in commodity prices, the resilience of our business was tested and demonstrated during the second quarter. Our impressive performance was driven by outstanding execution in the field and significant progress on our cost and capital savings efforts. Among the accomplishments in the quarter, we generated EBITDA of $101 million, flat compared to the prior year period. We improved contract operations gross margin percentage by 400 basis points sequentially and annually to 66%. We reduced SG&A expense by more than 6% from $31 million in Q1 to $29 million in the second quarter. Our second quarter CapEx was down meaningfully year-over-year but remained somewhat elevated as we took delivery of units to meet orders that were placed by customers in 2019. Aside from these units, which are already out earning revenue, we put the brakes on additional 2020 new equipment CapEx. This will drive substantially less spend in the second half of the year, and we've reflected this lower investment in the updated guidance that Doug will cover later in the call. We generated free cash flow in the quarter and thereby demonstrated our differentiated financial flexibility. Our adjusted EBITDA is holding up well, and we paid down a small amount of debt in the quarter, which kept our leverage ratio largely unchanged from the first quarter at 4.1x. As a result of our lower CapEx spending, we expect our second half free cash flow generation and debt repayment to accelerate significantly. And we continue to pay an attractive dividend complemented by peer-leading dividend coverage. As discussed last quarter, in light of market conditions and in order to maximize profitability, cash flow, and our financial position, we proactively initiated an aggressive cost and capital reduction effort. Our push to rightsize the organization for activity levels cut across all business segments and our corporate overhead. Today, I'm pleased to share that we are well on our way to deliver the annualized cash savings of between $75 million and $85 million promised in May. We expect these savings will accelerate in the second half of the year as planned. We anticipate no new equipment CapEx for the remainder of the year and have slashed our full year 2020 CapEx budget compared to 2019 by more than $240 million at the midpoint of our revised guidance. We're already seeing substantial declines in maintenance capital with maintenance CapEx down 40% compared to the first quarter. We expect continued benefits from lower make-ready capital and have optimized maintenance practices while maintaining our excellent customer service and safety standards. On our SG&A spend, we implemented several actions to reduce discretionary spending and compensation expense. We continued to manage overtime hours tightly and the previously announced salary reductions for certain employees, the executive leadership team as well as reductions to Board retainer fees went into effect in June. While the entire management team is focused on retaining our great talent through this downturn, as business softened further during the quarter, we made a difficult decision to take deeper action; this included furloughs and layoffs in several business units and segments. We remain steadfast in our drive to maximize our free cash flow and maintain our differentiated financial position. We continuously evaluate additional savings initiatives and are committed to a rigorous and ongoing analysis of our costs as the market evolves. Beyond our cost reduction efforts, we continue to transform our fleet, streamline our business, and invest in technology to extend our runway for efficiency gains. Building on our success in 2019, we continue to manage and prune our compression fleet, accelerating EBITDA recognition from less strategic and uneconomic horsepower and bringing in additional cash to redeploy toward debt reduction. During the quarter, we sold 24,000 horsepower that had an average age of nearly 30 years. And just after quarter-end, we sold a portion of our AMS business, which will result in gain-on-sale income during the third quarter of about $9 million. As we do every quarter, we also conducted an extensive review of our fleet and identified compression units that were either not likely to go back to work or did not warrant additional investment to put back in the field. From this review, we retired 184,000 operating horsepower that resulted in a noncash impairment of $55 million. This number was larger than in past quarters due primarily to the sharpness of the downturn and customers determining that portions of their production operations were no longer economic. Unsurprisingly, some of our equipment that has serviced those locations is also no longer economic for redeployment based on its age or configuration. On our technology upgrading work, we're making good progress on expanding our communications and remote monitoring capabilities throughout our field operations. That investment is proceeding nicely, and we expect to start seeing benefits from this investment in the 2021 timeframe. Now I'd like to turn to the market and outlook for our businesses. At the time of our first quarter earnings call, it was clear the COVID-19 pandemic would cause severe commodity demand and price impacts as well as widespread capital reductions by our customers. We took quick action to prepare for the inevitable downturn without knowing the exact timing and magnitude of the pending change in demand for our compression services. The market deteriorated quickly and sharply during the second quarter as a result of the COVID-19 pandemic. The rig count fell over 60% during the second quarter, and U.S. dried gas production fell from over 94 Bcf a day to as low as 86 Bcf a day. While we will not try to predict the timing of a recovery, we began to see signs of stabilization in the overall market and in our compression operations entering the third quarter. Oil prices have improved off of April lows, the pace of rig count declines is slowing, and we've seen modest growth in natural gas production in recent weeks as shut-in wells have resumed production. Should current oil prices hold up, we could also see some producers look to allocate capital to the large backlog of drilled but uncompleted wells in the second half of this year. While all of these improvements are encouraging and we're hopeful we've seen the worst of the downturn, visibility remains limited. As we closely monitor market developments, we will continue to control what we can to position Archrock for success. Turning to our operations. In contract compression, our strong execution in cost-savings initiatives drove an increase in gross margin percentage versus the first quarter despite lower horsepower. I'll first touch on the challenges during the second quarter. With a sharp drop in commodity prices, producers and midstreamers quickly rationalized costs, and in some cases, this resulted in the return of our compression equipment from the field. Our long-term contracts, standby strategy, and focus on large horsepower midstream applications certainly helped mitigate the impact. However, our second quarter operating horsepower and exit utilization still declined. We continue to work closely with our customers to support their businesses, maximize our operating horsepower, and maintain revenue and pricing as best we can. On a strongly positive note, we drove an increase in contract operations gross margin to 66% in the second quarter, up 400 basis points on both a sequential and annual basis. As a reminder, a significant portion of our operating costs are variable, a key advantage as we made adjustments to align our business with market conditions. I also want to highlight that in the midst of a global pandemic and severe energy downturn, we had record safety performance and continue to provide excellent customer service and equipment uptime. This speaks to our strong safety culture and to the result of the great talent of our employees. Moving on to our Aftermarket Services business. With the effects of COVID-19 and decreased commodity prices, customers are preserving capital and still delaying maintenance activity on their equipment. This resulted in a revenue and gross margin decline off an already low base. As we've yet to see any changes in AMS customer behavior, we remain focused on optimizing our cost structure. Turning to our capital allocation strategy. Our message is consistent with last quarter, and our focus remains on balancing appropriate levels of investment, debt reduction, and shareholder return. With the infrastructure already in place to support U.S. natural gas production and meet the needs of our customers for the next few years, our priorities are, first, shareholder returns even during this downturn. We believe having a reliable and attractive dividend is important to our investors and to the value of our company, and we will continue to work with our Board each quarter to assess our forward views of future cash flows and the dividend. Our second but equally important priority at this point of the cycle is to execute all available measures to reduce our debt and protect our financial position. Ultimately, we believe somewhere between 3.5 and 4x is the optimal leverage level for our stable compression business. Before turning the call over to Doug, I'll leave you with a few thoughts on what I believe is Archrock's compelling value proposition, one that stands out when you look not only at the realm of energy investments but across other income-oriented sectors as well. We continue to demonstrate predictable cash flows and attractive free cash flow yield as well as a durable, well-funded distribution. And while the coming quarters won't be free of challenges, I'm excited to prove out what our differentiated business model and financial framework can deliver today and well into the future. With that, I'd like to turn the call over to Doug for a review of our second quarter performance and 2020 outlook.

Great. Thank you, Brad. Let's look at a summary of our second quarter results and then cover our financial outlook. We maintained flat adjusted EBITDA of $101 million compared to the second quarter of 2019. Lower revenues were more than offset by intense cost management. Our second quarter adjusted EBITDA included $2 million in net losses related to the sale of assets. We recorded a net loss for the second quarter of 2020 of $30 million, which included several one-time charges, the majority of which were noncash. As Brad mentioned, we retired 184,000 operating horsepower and recorded a $55 million long-lived asset impairment during the quarter. We also took a $2 million restructuring charge related to severance benefits and had a $4 million noncash loss associated with the early retirement of debt. Finally, we had an $8 million noncash income tax benefit during the second quarter. Excluding these items, we reported net income of approximately $25 million. Turning to our business segments. Contract operations revenue came in at $188 million in the second quarter, down from $207 million in the first quarter due to lower operating horsepower, pricing pressure, and horsepower on standby. However, gross margin improved to 66% due to solid cost management. In our Aftermarket Services segment, we reported second quarter 2020 revenue of $32 million, down from $43 million in the first quarter. Customer activity remained low given cost constraints and market uncertainty. We had a few cost items come in above our forecast for the quarter, including higher warranty expenses. We also experienced lower labor utilization during the quarter given the often-lumpy nature of our AMS work and as we continue to balance retaining our high-quality technicians with rightsizing the business for activity levels, both resulted in second quarter AMS gross margin that was below our mid-teens target. SG&A was down nearly $2 million compared to the prior quarter's $31 million as we saw the initial benefits of discretionary spending reductions and other cost savings. For the second quarter, growth capital expenditures totaled $23 million, down more than 50% from $49 million during the first quarter. We also reduced maintenance and other CapEx during the second quarter of 2020 to $18 million from $23 million in the prior quarter. Our total debt of $1.8 billion reflected $8 million in net debt repayments during the second quarter. Our credit facility doesn't mature until 2024, and we currently have over $400 million in available liquidity. Our leverage ratio of 4.1x was essentially flat compared to the prior quarter but down from 4.4x from the second quarter of 2019. We expect debt repayment to accelerate in the second half of the year, which will mitigate the expansion of our go-forward leverage ratio until the market recovers and we can deliver on our goal of 3.5 to 4x. We recently declared a second quarter dividend of $0.145 per share or $0.58 on an annualized basis, unchanged on a quarterly and annual basis. Our dividend payout is supported by our internal cash generation, strong balance sheet, and robust dividend coverage. Cash available for dividend for the second quarter totaled $58 million, representing peer-leading dividend coverage of 2.6x. Our existing dividend represents a compelling yield of 8% based on yesterday's closing price. We remain committed to returning cash to shareholders and to reducing our debt from available free cash flow. I'll end with some commentary on our 2020 outlook. As you know, the relative resilience of our business allowed us to provide an updated 2020 outlook in May, as many companies were pulling guidance due to the COVID-19 pandemic and commodity price declines. Based on solid second quarter execution and our current view of the market, we still expect to deliver between $380 million and $420 million in full year 2020 adjusted EBITDA. And with our cost and capital reductions, we've enhanced our outlook for free cash flow and cash available for distribution for the year. We've provided some adjustments to segment forecasts in the press release issued last night. We are maintaining a wider adjusted EBITDA guidance range given continued market volatility. In contract operations, we're largely on track for the year as lower horsepower and revenue are being mitigated by aggressive cost management. In AMS, we're trending below expectations provided in May as our customers have further delayed releasing their budgets for maintenance work. Turning to capital. On a full year basis, we've lowered our total capital expenditure range to $130 million to $155 million or down about 8% at the midpoint compared to previous guidance. This is largely being driven by maintenance CapEx savings as we continue to optimize our maintenance practices. Our updated growth CapEx range of $70 million to $85 million adjusts the high end of our prior range down by $5 million. To sum it up, our expected operating performance combined with a reduced CapEx profile in the second half of the year will drive an acceleration of free cash flow generation. We expect full year free cash flow generation, after dividends, to be substantial, approaching $100 million, which we expect to use to repay debt. With that, Devon, we'd now like to open up the lines for questions.

Our first question comes from Kyle May with Capital One Securities.

Brad, you mentioned that compression operations started to stabilize entering the third quarter. Can you talk more about what you're hearing from your customers and also what you're seeing in the field?

Sure. So when we look at the timing of this, we had an amazing May. I mean it really hit so quickly. And what we saw for the quarter was a sharp increase in stop activity as customers rightsized for production levels and for economics. Bookings and starts basically came to a strong stop and standby activity hit a record pace, that is the number of units we put on standby, in which we still collect revenue but at a lower rate. What we saw already coming into Q3 is that stop activity is already moving to a more normalized level. I'll remind you that that's a normal part of our business. And standby horsepower, about half of what went on standby initially has already come back off standby. And so those are the positives that we've seen. Bookings, however, continue to lag as would be expected given production expectations. But the normalization of stop activity and the return of horsepower of those previous ones on standby to full operations are some of the indications we've seen. Look, on a bright spot, I'd point out that despite the market and the timing we had, we did see incremental growth in a couple of markets, including the Northeast and the Haynesville, as some dry gas production was brought back on, I think, to offset some of the decreases that we saw at least partially in the shelf plays. So it wasn't all bad. And those were the highlights and the way I think about what we are seeing currently in the market.

Got it. Okay. That's helpful. And as my follow-up, you highlighted that the gross margin percentage really strengthened in the second quarter. And it sounds like maybe that's partially due to some of the equipment being on standby. But I guess as that equipment returns and you look at the back half of the year, can you go into more detail about how you're thinking about cost management? And then maybe if that better margin is sustainable beyond 2020?

Sure. So first off, the field team did an outstanding job managing what we have as a highly variable cost structure, and they just did a great job managing it to both rightsize the business and obviously based on our results to get ahead of the market declines. We saw savings in all of the components of our cost structure, labor, parts, as well as lube oil. There was, as you pointed out, Kyle, a contribution from the standby revenue, which has almost 0 operating costs associated with it. But our guidance range moved up for contract operations gross margin to 63% to 65%, which indicates the amount of that improved profitability we expect to hang on to, certainly in 2020. We're not going to really comment beyond that, but we're going to be very ambitious about how well we can continue to drive profitability into this business. And in 2021, we're looking forward to getting more of the results from our technology investments into our profitability as well. So we're pretty ambitious about how well we can drive this.

Our next question comes from Daniel Burke with Johnson Rice.

Brad, just trying to think about the trajectory of the business in the second half of the year in terms of contracted horsepower. Maybe one way to ask this, I don't know if it will work, but would be to ask you what sort of a normal run rate of stop activity, if that's what's going to prevail in the second half of the year? Any way to think about that? I mean, there won't be a lot of net adds, but I was wondering how to think about stops.

Yes. First, I want to mention that our visibility into the market isn't strong. Currently, our communications with customers indicate that gas production is expected to remain flat or decline slightly throughout the year. Therefore, we don't anticipate significant bookings or growth opportunities in the market. However, we are observing stabilization in the horsepower levels required for ongoing gas production. Lastly, our guidance reflects our expectations for revenue in contract operations, which we believe is the best indicator for forecasting horsepower changes for the remainder of the year.

Okay. Yes. Clear enough. With just 2 quarters, it gets a little easier to box that in. All right. Maybe a smaller one then on the AMS side. I think you or Doug highlighted there was a sale. It didn't sound like it was particularly sizable. But I was wondering if it did have any impact on gross margin for the full year as we kind of look at the scale and try to balance where in that guidance range you'll fall out for the year.

Yes. Not really. The business we sold was a small portion of that business. By the way, it has a great team. It has good business. It just so happened, however, that given some changes in that subsection, subset of the market, we had a buyer that was able to value it well and accelerate for us a lot of the value that we saw in that business too, but at a time when our capital allocation priorities and debt reduction would be well served by monetizing some of that future value, which is what we did in that transaction. So we're really pleased with that transaction as one of the incremental steps in the context of we're doing all we can do to figure out where we can monetize and reduce debt.

And I just would add, Daniel, that from a modeling perspective because it was, as Brad pointed out, relatively small in the grand scheme that it shouldn't have an impact. And our guidance, again, our range there really more reflects even less visibility in the AMS business for the back half of the year, but we're hopeful we've captured the right range for that in what we put out in updated guidance.

Our next question comes from the line of Ryan Pfingst with B. Riley FBR.

Doug, you mentioned you are maintaining a wider EBITDA guidance spend, understandable with the uncertainty. But what do you think are some of the factors that would get you to the higher end of that range? Is it just activity levels? Or is there more room to actually save on the cost side?

I believe that activity levels significantly influence our performance, and we remain optimistic that our sales team will address ongoing needs. Ultimately, it hinges on commodity prices. As highlighted by Brad, we want to see an increase in the activity of drilled but uncompleted wells in the latter half of the year. Your projections are likely more accurate than ours in this regard. As we discussed with Daniel, we recorded a $9 million gain from selling part of the AMS business. I understand that opinions on this may vary among you, but we have included it in our adjusted EBITDA. With that, we anticipate being above the previously mentioned midpoint. Excluding that gain will make it more difficult to reach our target, at least based on current knowledge. All these factors contribute to our relatively broader guidance range at this time of year. Nonetheless, we recognize the challenges faced by the energy sector as well as other industries, apart from Apple and Amazon, and we feel confident about Archrock's outlook for 2020.

That's helpful. And then on M&A, certainly this entered in terms of capital allocation priority right now. Just wondering what you're seeing out in the market with perhaps some of your competitors struggling right now? And if you would potentially have any appetite at the right price?

Our view on mergers and acquisitions and industry consolidation remains unchanged. We are looking favorably at consolidation wherever it happens, as it tends to bring discipline to the capital side of the industry. As with other sectors, there are costs that can be reduced through consolidation. We are eager to engage in opportunities where we can find both value and quality. This approach typically leads to incremental growth. Reflecting on last year's acquisition of Elite Compression, we are very satisfied with that decision, as it involved excellent equipment and a skilled team. The integration process went smoothly. However, we recognize that often, stress does not correlate with quality in operations, so we must adhere to our disciplined fleet strategy, focusing on continuous growth and upgrades in our operating locations. This includes attention to the quality, age, and standardization of our fleet. Notably, our fleet upgrading efforts have resulted in an average fleet age of approximately 10 to 11 years. We now operate the most competitive and youngest fleet we've ever had, and any future consolidation or acquisition must align with this strategy.

Since there are no further questions, I would like to turn the call back over to Mr. Childers for any final remarks.

Thank you, everyone, for participating in our Q2 call. We believe we have taken and continue to take the right steps to position Archrock to navigate this current cycle and plan to continue to focus on cost and capital management for the remainder of 2020. I look forward to updating you in our third quarter call later in the year. Thanks very much.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.