Good day, and welcome to the USA Compression Partners Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the presentation over to Mr. Chris Porter. Please go ahead, sir.

Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter ended December 31, 2020. You can find our earnings release as well as the recording of this call in the Investor Relations section of our website at usacompression.com. The recording will be available through February 26, 2021. During this call, our management will discuss certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures in the earnings release. As a reminder, our conference call will include forward-looking statements. These statements include projections and expectations of our performance and represent our current beliefs. Actual results may differ materially. Please review the statements of risk included in this morning's release and in our SEC filings. Please note that information provided on this call speaks only to management's views as of today, February 16th, and may no longer be accurate at the time of a replay. I'll now turn the call over to Eric Long, President and CEO of USA Compression.

Thank you Chris. Good morning, everyone, and thanks for joining our call. Also with me is Matt Liuzzi, our CFO. This morning, we released our financial and operational results for the fourth quarter of 2020, which wrapped up a year marked by unprecedented volatility in the energy markets and considerable uncertainty throughout the broader economy. Almost 11 months ago, when the world was seemingly turned on its head overnight, none of us knew what the rest of the year would look like, let alone the next few days or weeks. As we worked through the summer and into the fall, we started to see more stability in our marketplace. I'm pleased to report the USA Compression business model focused on large horsepower natural gas compression services fared well as the natural gas demand in the US showed resilience throughout the year and as exports rebounded toward the end of the year. This demonstrated the critical role of natural gas plays in our economy. With some of the uncertainty from 2020 behind us, including COVID vaccine development and the US Presidential Election, we are cautiously optimistic that the worst is behind us as the country and the world gets back to work and what we all hope are more normal times ahead. The relatively attractive macro environment for natural gas that started in the back half of 2020 has continued into the start of 2021, and sentiment from our customers is positive. While there's still work to do to gradually get our business back to where it was pre-pandemic, we are encouraged by signs of activity and the overall resilience of natural gas demand in this country and abroad. While the current cycle is unlike any other, with multiple macro factors affecting our industry and volatility in commodity prices that have never been seen before, we approach it with a similar mindset as previous cycles. Over the course of our 20 plus year existence, we've never changed our primary focus on large horsepower compression used in large regional infrastructure-oriented facilities. Our business model has powered through previous cycles. And as we start to see the green shoots of this cycle, we have again relied on the stability of natural gas demand, our customers, and the demand-driven critical applications which our assets serve. We believe our business is differentiated from other service providers, whether compression, oilfield service providers, or even some midstream operators. And while we have seen a modest decrease in utilization because of our focus on the large horsepower segment, we have fortunately been spared much of the pain that others have suffered over the past year. As we get closer to what we all hope is the end of the COVID public health pandemic, I'd like to recognize our dedicated and hardworking employees, as well as those across the energy industry who have worked nonstop to ensure that our country has the energy it needs to get back going and prosper. While COVID has presented some unique challenges to most businesses throughout the country, I am proud of the dedication by our entire team to do their job safely and efficiently. Recently, the Office of Management and Budget released a statement that indicated it expected the economy to grow at record levels, and by mid-2021, to be at levels of growth greater than pre-pandemic. In order to make that happen, natural gas will be required to generate power, fuel industrial feedstock and manufacturing, as well as serve as a critical source of fuel in many parts of the world. Our view is that the importance of natural gas is often understated and misunderstood by many, and we believe the years to come will prove that out. Turning to the fourth quarter, we experienced a modest quarter-over-quarter decline in both revenue and average horsepower utilization. As we worked through some unit returns for the quarter, our active horsepower out in the field fell a mere 1% from third quarter levels. While on an absolute dollar basis, adjusted gross margin and adjusted EBITDA reflected a decrease from the third quarter’s levels, both adjusted gross margin percentage and adjusted EBITDA percentage remained at levels consistent with our historical performance. Keeping both adjusted gross margin and adjusted EBITDA percentages at our same historical levels in this environment is not to be overlooked. Total revenues were $158 million, approximately 2% below Q3. And keeping a close eye on costs, we achieved adjusted EBITDA for the fourth quarter of approximately $98 million. As I mentioned, we delivered attractive operating margins in line with historical USA Compression averages, with adjusted gross margin and adjusted EBITDA margin of 68.4% and 62.1%, respectively. Average utilization throughout the quarter was 83%, down just slightly from the Q3 level of 83.9%. After living through the middle part of 2020, seeing utilization essentially stay flat for the quarter was a positive sign. And we're cautiously optimistic that the worst is behind us. During the quarter, with some continued uncertainty, certain of our customers continued to evaluate their overall compression needs, especially as they worked through the primary budget season and looked ahead to 2021. We ended the fourth quarter with approximately 3 million active horsepower, which was off less than 1% from the previous quarter end, while the total fleet remained consistent at about 3.7 million horsepower. To compare where we sit today versus 12 months ago, utilization is down about 11 percentage points, only slightly larger in magnitude than in the 2014, 2016 downturn. You have to remember and appreciate the condensed timeframe in which 2020’s downturn played out. We have chosen a different strategy than some of our peers who have opted to maintain utilization while suffering margin degradation. Our view, which is consistent with what we communicated in past downturns, is that in a capital constrained and leveraged limit environment, equipment will be in for supply when commodity prices improve and customer activity picks up, which will allow USA Compression to deploy our idle assets with improved economics. Average pricing across the fleet decreased about half of 1% during the fourth quarter, limited by very modest unit returns and working off the impact of temporary service rate adjustments. We only have a few contracts still operating under those reduced temporary service rate adjustments. Average monthly revenue of $16.55 per horsepower was down slightly from $16.62 in the third quarter. The end of the year is usually a slower time for capital expenditures, and during the quarter, our gross spending decreased approximately 30% from third quarter levels to $10.9 million. Maintenance CapEx of $5.4 million was slightly above the third quarter. But as you can all appreciate, maintenance capital tends to be ratable throughout the year and is important to keeping our fleet running. The small amount of growth CapEx for the quarter primarily consisted of the delivery of three new large horsepower units, which were contracted for and began service in West Texas upon completion. Based on the fourth quarter's results, the board decided to keep the distribution consistent at $0.525 per unit, which resulted in a distributable cash flow coverage ratio of 0.99 times. Our bank covenant leverage ratio was 5.03 times for the quarter. Consistent with prior quarters, our Board of Directors determines a quarterly distribution on a quarterly basis, and the board can often maintain, reduce, or suspend the distribution as it deems most appropriate. Turning now to the broader energy markets. I think 2020 demonstrated not only the potential volatility of the energy markets but also the importance of energy for our daily lives. While the price of crude oil averaged about $40 for the entire year, in between, we hit highs of about $63 a barrel and unprecedented lows of negative $37 a barrel. In between, we heard dire predictions of tremendous global and domestic demand disruption, both regarding crude oil as well as natural gas. The industry took quick action to reduce CapEx budgets and recalibrated business models for the environment potentially marked by low demand, excess supply, and uncertain recovery timing and duration. Drilling was slowed or stopped. In some cases, existing production was curtailed, and the industry waited to see what was going to happen. There's an old saying in our industry that the best year for low prices is low prices. And what we witnessed throughout the back half of 2020 shows exactly how tightly wound supply and demand in the global energy industry is. Demand came back much more quickly than many expected, driven by the reopening of economies but also the baseload demand, particularly for natural gas, which never went away. With some inventories back on track, we pretty soon saw stabilization in commodity prices, which we experienced over the course of the last few quarters. As the impact of the slowdown and drilling activity began to show, we saw commodity prices climb higher. At the end of 2020, crude was nearing $50 a barrel, and natural gas was around $2.40 per MMBTU. Since that time, NYMEX crude is up right around $60 a barrel, and natural gas has reached $3 per MMBTU. The latest numbers from the EIA estimate total US production of natural gas in 2020 was down less than 2% from 2019 levels. The resiliency of demand for natural gas in this country for power generation and industrial manufacturing, not to mention the demand for exports to other areas of the globe, has proven USA Compression’s business throughout its existence. In 2020, we were no different. With a recent polar vortex and frigid temperatures across the central US and the East Coast, 2021 demand for natural gas is starting off strong. We clearly experienced the impact of commodity volatility and demand uncertainty on our business, and you'll see that in our modest utilization impact. As we keep a close eye on the activity levels in the various areas in which we operate, we are seeing positive signs, which we expect will bode well for our business. For example, take associated gas production in the Permian Basin. Last spring, as E&P laid down rigs, there was a lot of uncertainty over what the impact on gas volumes in the region would look like. Well, the EIA reported that between December 2019 and December 2020, natural gas volumes out of that region were actually up 1.6%. May represented the low point, which was off 10% versus December 2019 before volumes ticked back up to pre-pandemic levels. You are seeing resilient demand drive these volumes, and ample takeaway and processing capacity in the Permian and Delaware basins has allowed producers to sell into a functioning natural gas market. No longer are you entirely dependent on crude oil economics, which helped many operators work through 2020 and be in a decent position as 2021 has begun. On last quarter's call, I spoke about global crude oil inventories and the ever-changing dynamics. My point was that the US is an important region for crude oil storage. Statistics prove tightening supply and demand and that inventories were close to getting back to pre-COVID levels. Remember, it was the perceived glut of oil supply and lack of storage that, in part, led to negative crude oil prices. We continue to see draws of crude oil from storage and are approaching more normalized storage levels. For January, global oil storage actually declined by nearly 29 million barrels, the sixth consecutive month in a row that storages have fallen. To put this inventory decline in perspective, we usually see a storage build in January of about 31 million barrels. Supply and demand fundamentals appear to be coming into equilibrium and setting up a much-improved scenario in the future. With demand coming back on, OPEC+ showing restraint, and shale well production declining, this should all add up to a positive environment for crude oil, which should have positive effects on the associated natural gas markets. While we expect capital budgets to continue to impact production growth across all the basins in which we operate, the steady move upward in commodity prices has spurred some additional activity, as I noted. Another important market dynamic to watch as we move through 2021 will be the evolution of the decline curves in these shale wells. As we've discussed previously, after the flush production in the initial years, these wells move into a more steady-state environment as it occurs flat now. This lends stability to the need for compression in situations where our equipment is required to keep those gas volumes moving. With the rig count down significantly from recent highs and producers seemingly more focused on maintaining production levels rather than growing them meaningfully, we would expect to see a higher proportion of overall production in that flat, steady-state part of the curve where decline has meaningfully slowed. For USA Compression, this plays right into our business strategy because we are focused on infrastructure applications that support these steady-state operations. As the wells age, the natural gas volumes exhibit a very stable profile. We are also seeing that several of our customers are opting to maintain a flat production profile by installing additional compressors rather than drilling additional wells or completing the usage. The main driver is to reduce capital expenditures and overall leverage that comes from additional drilling, and compression is a low-cost way for them to maintain production and offset decline. As the nature of the production is expected to exhibit much more stable characteristics, another critical dynamic in our business is the relationship between compression horsepower and declining reservoir pressure, as well as age. As pressures decline to move the same volume of gas requires an exponential increase in compression horsepower. So you can see that in order to maintain production, we will likely require more work, i.e., horsepower, to move the gas. So in all types of applications, even though gas volumes may be declining, the compression required may actually increase as pressures also decline. As we look ahead to a phase in the industry marked by less capital spending, we think our business models are the one easily adaptable to the changes going on in the industry. We don't require large capital commitments or multiyear projects but instead, equipment that we already have in our fleet will be used to help our customers keep their gas volumes moving. We can easily shift from periods of growth to periods of stability, all while managing our balance sheet and maintaining strong operating margins. So turning to customer activity. As I've discussed in the past, we are a lagging indicator concerning activity levels. Our overall activity pickup will typically lag activity further upstream by one or two quarters. Well, the rig count in the US bottomed out in August of last year and has begun to tick up since that time. In August, the total rig count in the US was off about 70% from its highs at the beginning of the year. By the end of 2020, it had rebounded more than 40% from the lows, and currently, the count has recovered about 60% off of the lows. So while we are still at about half of the pre-pandemic high in early 2020, where we stand today represents a solid improvement. Out of the total rig count, more than half is in the Permian, which is clearly supporting those gas volume numbers I mentioned earlier. The Arkansas, Louisiana, East Texas area is second in rig count, followed closely by the Appalachia region. These three areas account for almost 80% of the Lower 48 rig count, and we have a presence in all of these areas. During the quarter, we saw a very slight decrease in utilization, driven by some unit returns from customers. As we've discussed the last few quarters, customers continue to evaluate their compression needs and try to anticipate what their 2021 needs might be. As such, some units will return. But overall, we considered utilization to be fairly flat quarter-over-quarter, which is what we expected. Looking forward, we are optimistic that because of the nature of the applications for our assets, dry gas activities, and natural gas handling activities, like those at gas processing plants and our large volume centralized gas lift applications, our assets are likely to stay out in the field. Adding to the stability, our contract portfolio continues to lend stability to our operations, with month-to-month contracts comprising only about 30% of the fleet. So to summarize, while we are by no means out of the woods, things are looking better. The business has stabilized with unit returns significantly slowing and customer dialog picking up. The cost-cutting actions we took in early 2020 and restraint on capital spending have held throughout the year. We feel very well-positioned as we enter 2021 and certainly not playing catch-up in any way. That said, we successfully powered through what frankly is the worst downturn I have seen in my over 40 years in the energy industry. We have emerged stronger, leaner, and poised to ramp revenues by deploying our idle fleet over the upcoming quarters. While we wait for the market to turn upward again, we will continue to manage what we can control. We believe our focus on large horsepower, multiunit, centralized compressor stations over the recent years will further bolster the stability that we have seen. As natural gas demand stays resilient, as it is expected to be, we expect the demand to require continued investment and, along with it, continued natural gas compression services. I will now turn the call over to Matt to walk through some of the financial highlights of the quarter.

Thanks, Eric, and good morning, everyone. Today, USA Compression reported fourth-quarter results, including quarterly revenue of $158 million, adjusted EBITDA of $98 million, and DCF to limited partners of $50 million. While down from last quarter, recall that during the third quarter, we had approximately $5 million of nonrecurring benefit, which positively impacted that period's reported adjusted gross margin and adjusted EBITDA. In January, we announced a cash distribution to our unitholders of $0.525 per LP common unit, consistent with the previous quarter, which resulted in coverage of 0.99 times. Our total fleet horsepower at the end of the quarter was largely consistent with the previous quarter at approximately 3.7 million horsepower. Our revenue-generating horsepower at period end was essentially flat at just under 3 million horsepower. Our average horsepower utilization for the fourth quarter was 83%, less than 1 percentage point down from the third quarter. Pricing, as measured by average revenue per revenue-generating horsepower per month was $16.55 for the fourth quarter, which was a slight decrease from the previous quarter's level of $16.62. Of the total revenue for the fourth quarter of $158 million, approximately $155 million reflected our core contract operations revenues, while parts and service revenue was $3 million. Adjusted gross margin as a percentage of revenue was 68.4% in Q4, in line with USA Compression's historical levels. Net loss for the quarter was $1.5 million, and operating income was $31.2 million. Net cash provided by operating activities was $97.5 million for the quarter. Maintenance capital totaled $5.4 million in the quarter and for the year, we spent $23.3 million in maintenance capital in line with our guidance. Lastly, cash interest expense was $30 million. With the release of our fourth-quarter earnings, we are also releasing initial guidance for 2021. We currently expect 2021 adjusted EBITDA to be between $385 million and $405 million, and DCF between $193 million and $213 million. Lastly, we expect to file our Form 10-K with the SEC as early as this afternoon. And with that, we'll open the call up to questions.

And we will take our first question from Vinay Chitteti with JPMorgan.

I would like to ask about utilization trends. Can you provide a breakdown of utilization for large horsepower and small horsepower units, as well as information about unit returns? Additionally, any insights you can share regarding potential bottoms in this area would be appreciated.

I will start with the first question about utilization. While we don't publicly share the specific division details, I can say that our current observations align with our historical business model. Large horsepower units typically remain operational in the field, primarily in applications like processing plants, large gathering systems, and central delivery points. This trend has been consistent since March of last year when circumstances began to shift. The utilization of large horsepower units has remained significantly higher than that of small horsepower units, a trend that has persisted through 2020 and into the current year. Regarding the second question about unit returns, we've noticed a significant slowdown in returns during this quarter compared to the mid-year period. For example, while there was an assumption that the Permian region experienced a drastic downturn, it’s interesting to note that volumes in the Permian actually increased from December 2019 to December 2020. This area has shown stabilization, and similarly, the Mid-Con region, which had previously experienced substantial weakness, has also begun to stabilize, especially in the last few days. Much of the adjustment occurred in the second and third quarters, and now we see a stabilized landscape. Moving forward, our priority is to ramp up operations. Customer sentiment and the volume of quotes we are receiving each month are on the rise, indicating that we have reached a stabilization point. Considering macroeconomic factors and resilient demand in the gas markets, we anticipate an increase in utilization across all regions as we progress through the year.

Yes. I mean, that's definitely helpful, especially with respect to the slowdown we have seen in the fourth quarter versus the previous quarter. Just a quick follow-up on M&A appetite for the compression asset here. We did a recent small transaction. I just want to understand, would GSA be looking for opportunistic asset sales to deleverage and maintain distribution, or do you think the market is still attractive, and will be open for?

I think, generally, we publicly stated, we don't generally comment on M&A opportunities. What we have said in the past is that we're highly selective. We focus on large horsepower applications. We look at things which would be accretive to our cash flows and leverage neutral. So I think it's a fair way to say, when we look at M&A opportunities, and there have been some things that have been marketed extensively in our industry that are continuing to come back. They've been shopped three, four, five times. We didn't like it the first time. We don't like it in the second, third, fourth, or even the fifth time. So our view of the world is that from an M&A perspective, in the history of the company in 20 years, we've made two acquisitions. Both were leverage neutral, both were accretive. The most recent one was the acquisition of CDM assets, which was highly complementary to USA Compression, very similar type of mix of equipment, a different customer mix, and different geographic coverage. There were some significant synergies by combining the two companies together. So if those opportunities were to exist, we would take a look at those. But the kind of the routine things that are being circulated around the bread-and-butter things, it's not down our fairway.

We will now take our next question from Shneur Gershuni with UBS.

Maybe to start off, your prepared remarks were pretty extensive, and you sort of talked about the build-up in the optimism. I just wanted to focus on the beginning part. You sort of remain cautiously optimistic that the bottom is kind of behind us at this stage right now. Is it fair to say that your fourth-quarter results with respect to both utilization and margin-wise is likely the cycle's bottom for this cycle at this stage right now, and the temporary price contracts are set to expire soon and so forth? And I'm just wondering if you can sort of set the stage for us as to where is the bottom, and when we could look forward to the positive outlook that you outlined in the second half of your prepared remarks.

I mean, if you think about my comments where I indicated historically, today, we've been a lagging indicator a couple of quarters from what we see with the activities of the E&P guys. You can see that crude prices have firmed significantly. You've had a couple of major pipelines built coming out of the Permian Basin, which have provided for gas markets that didn't exist three or four quarters ago. You had negative basis with literally zero-price natural gas out of the Permian. Fast forward to today, and today, clearly is an anomaly with the core vortex going on where you're seeing natural gas prices in the mid-Continent, north of $300 in MMBTU. You're seeing spot gas prices extremely high and spot electric prices high. You've got crude oil pushing $60. So I think it's fair to say, Shneur, that being a two-quarter lag regarding the fourth quarter, your observation is probably correct that it is the bottom. Pricing has continued to firm up. You've seen additional takeaway capacity. And I think now with the blizzard that we're seeing here, it highlights the perils of attempting to electrify everything. So this probably bodes well for activity tick ups in all of our geographic regions. This blizzard highlights some of the problems that you have and just how critical natural gas is to the infrastructure here in the United States. So yes, I think the worst is behind us. And with the idle fleet that we have been selectively deploying rather than buying market share, we've seen this before. We've got some competitors with extremely high leverage who need every form of cash flow. They deploy the equipment just to get it out at all costs. And then suddenly, they don't have a balance sheet where they can afford to buy new equipment. Here's USA sitting with assets that can be readily redeployed. I think your observations are spot on.

Just to add one thing to what Eric mentioned. I know you had mentioned the gross margin, and obviously, the numerical amount versus the percentage. I'd just point out, we have hung on a percentage basis sort of level really consistent with where USA has operated for the 20 plus years. I think that we obviously took actions early last year to deal with what was going on. As Eric mentioned, as things pick up, our expectation is those margins, which are in line with everything we've done in years past, should all flow through, which is obviously positive for the company.

And I really do appreciate and do understand the historical lag nature; it is not lost on me as well. I guess I was wondering if you can sort of square the circle for me here. When I look at your fourth-quarter numbers coming in just under $100 million in EBITDA, and then I look at your guidance, it sort of suggests that you're going to either maintain the fourth quarter level for the entire '21 or there will be another dip and then a recovery. I'm just trying to understand the sensitivities around your guidance or if there's an extreme amount of conservatism baked into this. I'm just wondering if you could sort of help us understand that because if that's the bottom, then you would expect that your guidance would be higher than where you're shaking out.

I want to clarify that we do not share quarter-by-quarter figures. As we approach the fourth quarter, there are factors that need to be addressed. You might notice a difference between utilization at any given moment and how revenues increase from that point. We usually take a conservative stance on this, based on our budget for the year and acknowledging that we are already a month and a half into it. Admittedly, we are uncertain about when we will see an uptick and what that growth trajectory might be. However, as utilization becomes more stable and begins to rise, we anticipate that revenues will also increase accordingly.

So to clarify, this was presented to the Board a month and a half ago, basically, versus where we sit today?

October, November, I think.

Yes, that would have been with our budget teeth. We obviously had a few things that have passed now. Generally speaking, there was still a bit of uncertainty. Obviously, we don't want to go out with an extremely aggressive number because I think there is still a lot of uncertainty that seems to pop up every week these days.

I just wanted to understand the context; it wasn't a challenge, per se. And maybe just a quick follow-up question. As companies are pivoting on the ESG side, looking to reduce methane emissions and so forth, electric compression has been cited as an opportunity for some companies. How do you respond to it? Does that present an opportunity for USA Compression to help some of your customers achieve those goals? When you do reenter the market to buy equipment, do you start looking at electric compression as something that could present an opportunity for you in that respect, or is that something more for them?

That's a really good question and a good observation. I'd say, first, I think with the focus of the new administration and our major oil and large independent company customers on environmental issues, clearly USA Compression is exploring multiple technologies and the opportunity to reduce our carbon footprint. Right now, we're waiting to get a little more clarity on both the regulatory and legislative fronts in the upcoming months, and we'll be able to share some of these potential advancements and the benefits to customers with you. As it pertains particularly to electric compression, and I think again, focusing on this polar vortex, when you started a very large electric motor, there is a lot of what we call inrush current, a huge amount of surge capacity. You can envision a scenario where you have a bunch of electric compression running, the grid goes down, and all of a sudden you have to turn these electric motors back on, there is a big, big, big inrush current demand early on. So electrification makes some sense. As you think about where compression assets are deployed further and further upstream, away from areas where you have a reliable electric grid, a combination of electric and/or gas-driven compression in some form of combination might make some sense. We see that there are some opportunities involving electrification. But again, I think we need to have a little bit better clarity on both the regulatory and legislative fronts to get some better delineation and definition of what the economic footprint and regulatory environment will look like. We also have some things up our sleeves that we'll be able to talk to you about in the future.

And there are no further telephone questions. I'd like to turn the conference back over to Mr. Long for any additional or closing remarks.

I think everybody is glad that we've now turned the page on 2020. As the world began to get back to work during the second half of 2020, we saw relative stability in our business, stability driven by our focus on large horsepower and the resilient natural gas demand, both in the US and abroad. The commodity rebound both in natural gas and crude oil happened more quickly than many expected, and the outlook is positive for both. If there is still work to be done and we're not out of the woods yet, we continue to be encouraged by the discussions we're having with our customers. Our business remains the same. It's built on a solid foundation of natural gas demand, whose long-term importance to this country and the world was proven out over the last 12 months. We believe the underlying stability of our large horsepower, infrastructure-focused contract compression services business model and the science behind the need for compression and the interplay between pressures and volumes will be a key point of positive differentiation for USA Compression. 2020 represented a year when we focused on what we could control: cost, capital spending, and excellent customer service. As the market has begun to rebound, we are well positioned to benefit as that recovery takes place. Thanks for joining us, and please be safe. We look forward to speaking with everyone on the next call.

And once again, that does conclude today's conference, and we thank you all for your participation. You may now disconnect.