Operator
Welcome to USA Compression Partners' 2nd Quarter 2026 Earnings Conference Call. During today's call, all parties will be in a listen-only mode. At the conclusion of management's prepared remarks, the call will be open for Q&A. If you would like to ask a question during this time, simply press star followed by the number 1 in your telephone keypad to raise your hand and enter the queue. if you would like to withdraw your question press star one again thank you this conference is being recorded today august 4th 2026 i now would like to turn the call over to clint green president and chief executive officer good morning everyone and thank you for joining us with me today is chris paulson senior vice president and cfo chris watson senior Vice President and COO, and other members of our leadership team.
This morning we released our operational and financial results for quarter ending June 30, 2026. Today's call will contain forward-looking statements based on our current beliefs and certain non-GAAP measures. Please refer to our earnings release and SEC filings for reconciliations and definitions of non-GAAP measures and related risk factors. I am excited about the progress we continue to make as a leading contract compression provider across the U.S. In the second quarter, we strengthened our foundation as a larger combined company and hit several key milestones that position us to take advantage of the expected demand growth over the next several years. This outlook supports the deliberate investments we accelerated in Q2 in horsepower, in the combined organization, and the technology that will redefine how we operate. Most notable are the horsepower investments. Building on what we announced during the Q1 call, we have continued to engage in long-term business planning and in addition to the approximately 850,000 active horsepower we acquired from J-Do. We currently expect approximately 2.5% average annual new horsepower growth through 2029. This plan to add over 500,000 horsepower by 2030 highlights our internal confidence in natural gas demand growth and in our ability to maintain market share. It's also a key pillar of our capital allocation framework and long-term DCF growth formula. Importantly, this investment changes the nature of the conversations we are having with customers. When you show up with specific multi-year deployment plan, customers can grow with you. In an environment where certain new engine lead times continue to be as high as 200 weeks or nearly four years, customers want to know that their compression provider is both committed and capitalized to deliver. Chris Watson will share more on these commercial results. Second, we're investing in the combined USA compression growth platform. We went live with SAP in February and are in the middle innings of the JW integration, and it's obvious to me that we're building a fundamentally stronger company. The sophistication of our new ERP system and the enhanced data reporting we have access S2 is allowing us to better manage our activity both in the field and at home office. With JW, the activity is happening across multiple levels. Operationally, we are capturing labor and cost synergies as we standardize how we run the combined fleet. Commercially, we are integrating best practices across both organizations, how we price, how we contract, and how we serve a customer base that is now significantly broader than it was a year ago. And through the manufacturing business, JW's specialized facilities gives us the ability to package our own compression, an optionality that is particularly valuable in an extended lead time environment, and one that differentiates us from peers. As a reminder, to the extent the compression market changes, we can be nimble and reduce our capital exposure in the out years. Finally, we are investing in enhanced telemetry and real-time data capabilities across our fleet, including AI. Our goal is to get the right information to the right people faster so we can make better decisions on maintenance, deployment, and efficiency. We expect to reach a critical mass of connected assets with telemetry in 2027, at which point we can begin to meaningfully change how we operate. Better predictive maintenance, more efficient field service routing, and fewer unplanned downtime events. The investments are happening now, and it's positioning us for a more efficient future. I will now turn the call over to Chris Watson to walk through our operational and commercial results in more detail.
Good morning everyone. To start, I am proud of the resilience of our safety culture during a period of rapid organizational growth. Our total incident rate has remained low despite a large influx of new personnel demonstrating both the strength of our safety management processes and the buy-in from our operations team. In addition to our safety programs, we have recently launched new leadership training programs from multiple levels of our operations field leadership. Our goal is to accelerate development, help enhance business processes, and empower our team to better serve our customers. These continued investments in safety, training, and development will ensure we continue to attract and retain the talent needed to execute our future growth plans. As Clint mentioned, our growth plans now include low single-digit new horsepower growth through 2029. This has unlocked a different kind of customer conversation, one that is not only about what we can deliver this year but also about how we can support in the future years. We have made excellent progress in new customer discussions and already contracted approximately 50% of new units scheduled for delivery in 2027 and mid-teens percentage of new units planned for 2028. To put that in broader context, contracting capacity two years out is not typical and has rarely been seen in my career. It reflects the level of customer conviction and long-term production growth that we share and it reflects their confidence in USA compression as their partner of choice. New large horse fire lead times remain extended and that reality is driving customers to make compression decisions further out than they historically have. While we did see elevated stops in Q2, RFP activity remains healthy and our pipeline of customer contracts heading into the back half of the year gives us confidence in continued forward progress. While we remain focused on the long-term earnings potential of our business, we also want to highlight short-term cost movements and re-contracting efforts. In that way, we expect incremental lube oil costs of approximately $1 million per month in the second half of the year as our contracts are updated to reflect higher oil prices. Additionally, J2B contract migration is underway and progressing, with a focus on standardized terms, tenure, and pricing, all while assessing unit optimization. I will now turn it over to Chris Paulson to discuss our financial results in detail.
Thanks, Chris. For the second quarter, total revenues were $342.1 million compared to $250.1 million in the prior year period, an increase of 37%. Contract operations revenue was $304.9 million, up 34% year-over-year. Driven primarily by the addition of JW's horsepower and average revenue per revenue-generating horsepower. Parks and service revenue was $22.1 million, reflecting the manufacturing and aftermarket services activity that JW brought to the platform. Our second quarter 2026 net income was $45.7 million. Operating income was $100.4 million. Net cash provided by operating activities was $145.7 million. and cash interest expense net was $47.4 million. Our second quarter adjusted gross margin percentage came in at 63.5%. Our leverage ratio at the end of the second quarter was 3.72 times. Turning to operational results, our total fleet horsepower at the end of the quarter was approximately 4.95 million horsepower. Average revenue per revenue generating horsepower per month was $22.84 for the quarter, a half a percent increase in sequential quarters, and a seven percent increase compared to a year ago period. Average active horsepower for the second quarter was approximately $4.45 million. Our average utilization for the second quarter was 92 percent and continues to reflect the blended impact of incorporating JW's fleet. Second quarter 2026 expansion capital expenditures were $46.8 million and our maintenance capital expenditures were sixteen point nine million expansion capital spending in q2 primarily consisted of new units while maintenance capital activity accelerated versus q1 as we ramped up activity for the remainder of the year we expect most growth capital will be focused on new horsepower and reconfigurations while maintenance capital is expected to trend towards our full-year projections we continue to maintain our full-year adjusted EBITDA range of $770 to $800 million, distributable cash flow range of $480 to $510 million, maintenance capital range of $60 to $70 million, and expansion capital range of $230 to $250 million. Leverage maintained consistency in Q2 even as we ramped up on capital spending, remaining just below our near-term target of 3.75 times. While debt markets have pulled back, we will continue to opportunistically explore accessing later this year in order to add consistency to our trunk sizing and duration we have ample liquidity under our ABL at a low interest rate and therefore remain patient as we enter what we believe will be a period of sustained natural gas demand growth we have deliberately positioned the business to deliver against our three core capital allocation priorities simultaneously continuously, growing the fleet, sustaining, and ultimately growing the distribution, and maintaining a prudent leverage profile. We believe 2-3% annual new horsepower growth, a distribution yield approaching 8%, and an improving sub-four times leverage ratio represent a compelling and differentiated value proposition, one that we believe positions USA compression competitively in the MLP valuation landscape, And we anticipate we'll continue to improve as we move through the back half of 2026 and into 2027. And with that, I'll turn it back over to Clint Green.
Thank you, Chris. We are making deliberate investments in the business because we are bullish on the future demand. And we want to be positioned to capture it when it arrives. The work happening inside the organization right now, in the field, in our commercial organization, and across our integration teams is what makes this possible. I am proud of what our people are building, and I'm excited about the progress we continue to make. With that, I will open up the call for questions.
Operator
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and enter the queue. If you would like to withdraw your question, simply press star 1 again. for today's event we kindly request everyone to please limit yourself to one question and one follow-up only thank you and your first question comes from the line off dog erwin with city your line is now open hey team thanks for the question chris you uh you mentioned potential distribution growth and your remarks there at the close um you obviously have a have the balance sheet in a much better position today than it has been in past and you just outlined some pretty strong line of sight to growth here.
So just trying to get your thoughts on kind of how you're thinking about that distribution, what the right yields you're thinking about might be, and what kind of potential timing could look like for a decision.
Good morning, Doug. I appreciate the question. The question highlights the transformative change we've seen in cash flow through a very accretive transaction. So the year-over-year change is has really been material and in turn, as I've noted before, any change in distribution policy would be in consultation with and approved by our board of directors. That being said, given the unprecedented visibility for multi-year growth, strong returns, and commitments required to meet our customer needs, the current priority for excess cash flow is to prioritize that two and a half percent of growth per annum in new horsepower. Balanced long-term growth should continue to elevate underlying value of the units and positions the company to have more flexibility as it relates to distribution discussions in the future additionally we intend to maintain a competitive and prudent leverage profile that sustains us through distribution cycles and provides flexibility for future growth opportunity finally as you noted our current yield is competitively position with the broader Lerian index and should be considered attractive entry point for any prospective unit holder given the aforementioned growth. It also clearly differentiates us from our so that's how we're thinking about it right now, Doug. We ultimately want to see a distribution that is supportive of the underlying value of the business and and and clearly enumerates the underlying value of the business. Today, we see that being the case and we'll continue.
Yeah, that's helpful color. And maybe as a follow-up just wanted to touch on the the lube oil costs that you also mentioned in the prepared remarks um helpful detail on unexpected kind of monthly impact just just curious how you're thinking about your ability to potentially pass those costs on within your contracts if they if they prove to be more durable and then just in general kind of what your latest pricing expectations are here over the medium term just given what lead times are and how tight the market it is today.
Hey, Doug. Great question. Thank you. So, in regards to Louisville, you know, as contracts expire and renew, we're doing our best to cover the increased cost inputs, but we don't have a direct pass-through in our contract related to increases or decreases in Louisville prices. So, as those contracts renew, we're doing our best to renegotiate terms and try to cover those costs as we renew. In regards to pricing trends, you know, our new units, contracting units at a healthy rate of return. In regards to more of an idle unit set, you know, we're seeing, we're not seeing the price increases on that we once have experienced. So, but RFPs are high. There's a lot of demand. We're super excited about the future. We've got a healthy backlog of contracted units. So, we're really excited about the back half.
Hey, Doug, this is Clint. Also want to add in that, we still have CPIU escalators to offset the inflation piece of it going forward as well.
Understood. Thanks for the time.
Operator
Your next question comes from the line of Jim Rolison with Raymond James. Your line is now open.
Hey, good morning, everyone. Clint or Chris, whoever, if you kind of look at margins and the relative decline, obviously you stepped down in 1Q, just kind of mixed related to JW, and you came down a bit in 2Q. Maybe help me understand a little bit the drivers of the sequential margin degradation between Lou Boyle that you talked about, between the ERP system implementation and just kind of integration of JW and how we should think about that kind of progression going forward.
Hey, good morning. Thanks for the question. It's Chris Walson. We expected margins to drop with the JW acquisition. We had a full operating quarter combined now, so manufacturing and AMS do lower contract services historical average. But, you know, the next part of that is where do margins go from here? So with our investment in telemetry, remote monitoring, and driving efficiencies, I expect to see the results later this year into 27 and beyond. So this will enable us to get super efficient in regards to route management, predictive failures. In all, we'll see margins improve slightly quarter over quarter.
Got it. Appreciate that color. And Clint, when you talk to customers with where lead times have stretched out to now, how are they adapting to planning horizons that have changed dramatically? I mean, just a couple of years ago, that was starting to kind of normalize at about a year. and then i mean it's literally gone from one year to four plus years and and i imagine those guys aren't accustomed to normally planning that far out but i just love to kind of hear how how that all goes for you and you know your ability to serve those customers that's uh that's a great question and one of the reasons we've we've committed to to to force a portion of the of the cost of 500 000 horsepower um and when i say the port a portion of that cost i want to explain that by having the jw facility and that gives us flexibility that that we wouldn't have elsewhere
because we only have to commit to the engine cost in the out years uh but but when you get back to the the the conversation about we've all had to adapt um 40 to we ran 40 to 60 week delivery lead time on on equipment for years and years and years and then and then the last few years with with the generator market uh growing like it has it has driven out to 200 weeks and and it caught a lot of us by surprise it caught us by surprise earlier this year uh for for orders for 27 uh that's the main reason we jumped on it and and we're we're able to order equipment for 28 and 29 and we'll be looking at 30 here pretty quick uh everyone's learning how to operate in that in that market customers hopefully you know they have a good line of sight on demand and they have they have a good line of sight on on the compression that we can provide them and so we seem to all be getting along pretty well right now jim nice to be wanted uh for a change thank you your next question comes from the line of nate pendleton with texas capital your line is now open good morning Thanks for taking my question.
Clint, in your prepared remarks, you talked about advancing through integration this year. As you're going through that process, are there any additional deficiencies you're uncovering with the combined business and perhaps any thoughts on any fleet optimization or high grading potential?
So as far as deficiencies, no. I think we're really happy with what we were able to acquire. It fits really well with us. the footprint puts us where we want to be in all the basins with all the different horsepower ranges like we've talked about before we're we're extremely happy with where we are we are continuing to evaluate that the idle horsepower that came over we knew some of it wouldn't wouldn't be uh may not be redeployable immediately uh we'll we'll continue to evaluate that through the rest of this year we've also talked about looking at at a third third mark or secondary markets maybe outside the country to deploy some of this some of this equipment but we're we're extremely happy with uh with the with the jw acquisition and and like i said on the on the announcement call back
in december we liked the whole enchilada when when it came to that acquisition got it i appreciate that and then uh perhaps just staying on the integration of jw um with that well underway and the leverage already below target. How is your team thinking about potential M&A going forward? Is that really something you guys could do in the near term? And if so, what are the key considerations right now, given the environment we're in?
We're absolutely always looking at M&A. We evaluate those. We're going to remain disciplined, focused. It has to be accretive. it has to make sense for us to be able to do it but we are definitely in the M&A market and looking for opportunities to make that work.
One other thing I would note Nate is the energy high yield market has really remained resilient. The midstream portion of that in particular has remained resilient. I know that to the extent we can be opportunistic we will be. Yields have moved away from us here recently at 10 years around 4.7 so we continue to watch we continue to look for opportunities to add consistency to our debt trunk sizing to the duration and so to the extent we find an M&A opportunity got it I appreciate the detail you're playing Chris thank you your next I'm sorry.
Operator
Your next question comes from the line of Ellie Jocin from JPMorgan. Your line is now open.
I just wanted to think about JW's manufacturing or fabrication capabilities in the context of the guidance you provided today.
So can you remind us what JW offers you as you look to add half a million horsepower through the decade and you know how critical that is to meeting that order book absolutely uh so the the manufacturing facility today the way it sits can build about 100 to 125 000 horsepower in that facility and then we'll supplement that the additional um you know 20 to 60 000 horsepower a year over through up through other facilities or other shops but the flexibility that it provides is that we can order the engine and then we can wait until 30 to 40 weeks to order the compressor or the or the package all the other parts and components and and we can build it right in-house and then if you know we always have to think about what could happen if things changed and if things changed we uh we wouldn't be on the hook for the entire package it cost from now until 29. So we really like that flexibility that it provides.
Got it. And then maybe building on the prior question regarding M&A, you guys obviously have a pretty diversified footprint across different basins. You know, recognize that compression is tight. I would imagine that, you know, ask price on asset packages are pretty high, but how would you think about sort of geographic preference for any type of M&A? You know, do you feel that other basins might have more realistic price tags on them, and how should we think about that?
It's a great question. There's certainly, you know, some standout basins overall in terms of the growth profile for the U.S., or at least as it stands today. The Permian and associated gas basins, but certainly the Permian lead that way. Through 2031, those associated gas basins BCF a day of growth, the Permian's about that. The drier gas basins like the Northeast and the Hainesville will make up about 12 BCF of growth, both of those about six BCF. So you go where the growth is, there's no doubt that's. And then additionally, there's opportunities in basins that are underserved. I'd say the Rockies overall has been an underserved from a lot of the larger competitors out there. And we saw that with the JW deal. We saw the underlying value. We saw the amount of long-term gas growth certainly come out. So without giving away all of our cards, you go towards growth, you go towards underserved basins, and you make sure that they're durable in the long term. And when we see 140 plus BCF a day of growth by early 2030 and G demand that's out there, there's excellent opportunities out there in the compression.
Got it. All right. Really appreciate the caller. Thanks.
Operator
Again, if you would like to ask a question, press star one in your telephone keypad. And your next question comes from the line of Gabe Maureen with Measle Hall. Your line is now open.
Hi, this is Ryan on the line for Gabe. So my first question is around, how are you thinking about refinancing or terming out the amounts currently drawn on the revolver, particularly given the current interest rate environment?
It relates to re-terming. Presently, our rate for ABL is sub six percent. So the SOFR rate really has remained relatively unchanged over the past six months at around 3.65 percent and our number comes underutilized capacity on top of that. So we're still well below six percent. When you look at the ability to go out longer term at eight, eight and a half years, the numbers are, so those are the things that you ultimately weigh in terms of that decision but we also want to have the flexibility longer term for our business and so to the degree we can get that 50 basis points to tighten and we see the opportunity set then we'll strongly look at that got it thank you for that so for my follow-up um how are customers
thinking about compression demand and capital requirements in 2027 and 2028 and also is growth more likely to be constrained by available compression equipment or by the level of customer demands a great question it's Chris Watson so in regards to how customers are thinking to their growth you know as I mentioned earlier it's a different way of business right when you have to think out not only next year but two years and three years and even beyond that because that's four years is right around the corner with lead times doing what they're doing. But our customers, our tier one customers are definitely planning well in advance. You know, their demand and their growth projectories are definitely out there and we're working with them hand in hand. We're having conversations with them every week. You know, we're working hand in hand to meet their needs. so it is a challenge right and the challenging part for us is is what the world's going to do in three and four years but uh it's actually quite promising how everybody's working together so looking forward to that and uh just see where see where the future goes great thank you so much guys thanks ron that concludes our question and answer session i will now turn the conference back over to Mr. Clint Green for closing remarks thank you all for joining the call this afternoon
I want to touch on a few more points and reiterate the amount of RFQs we're seeing is very strong the the stage seems to be set for large amounts of demand growth over the next four to five years the demand is expected to be about 140 BCF by the end of 2031 that's up over 30 BCF from 2025 averages you know the more the majority of that is LNG demand growth between 18 to 20 BCF a day of growth there we uh we sit just below our target leverage ratio of 3.75 times we have equipment secured through 2029 our in-house manufacturing capabilities tied with demand growth gives us huge flexibility we believe we're in well positioned to grow in the future with great flexibility but we really appreciate y'all joining our call thank you very much and have a good day ladies and gentlemen that concludes today's call thank you all for joining you may now
