Archrock Q2 2024 Earnings Report

Archrock EPS Results

• Actual EPS: $0.25
• Consensus EPS: $0.24
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: N/A

Archrock Revenue Results

• Actual Revenue: $270.53 million
• Expected Revenue: $270.61 million
• Beat/Miss: Missed by -$80.00 thousand
• YoY Revenue Growth: N/A

Archrock Announcement Details

• Quarter: Q2 2024
• Date: 7/30/2024
• Time: N/A
• Conference Call Date: Wednesday, July 31, 2024
• Conference Call Time: 10:00AM ET

Archrock (NYSE:AROC) is a Houston‐based provider of natural gas compression services and equipment to the oil and gas industry in North America. Founded in 2004, the company supplies both short‐term rentals and long‐term contracts for compression solutions, serving upstream and midstream producers. Archrock’s offerings include engineered compression systems, aftermarket parts, maintenance and field services designed to optimize wellhead and pipeline operations.

The company’s core business activities focus on the design, manufacture, rental and sale of gas compression equipment. Archrock’s fleet encompasses reciprocating and rotary compressor packages tailored to specific field requirements. In addition to equipment deployment, the company provides turnkey project management and technical support, including installation, calibration and ongoing preventative maintenance to ensure continuous, reliable performance.

Archrock’s operations span key shale basins and pipeline networks across the United States and Canada. The company leverages regional service centers and field technicians to respond rapidly to client needs and to minimize downtime. Archrock maintains strategic relationships with exploration and production companies, midstream operators and energy infrastructure firms, positioning itself as a critical partner in gas gathering, transmission and processing.

Archrock Q2 2024 Earnings Call Transcript

Key Takeaways

• Archrock reported Q2 net income of $34 million (vs. $25 million YOY) and adjusted EBITDA of $130 million, up 15% on higher pricing and tight cost management, driving a 65% adjusted gross margin (up 300 bps YOY).
• The company’s fleet remained 95% utilized and marked its 11th consecutive quarter of sequential revenue-per-horsepower increases (to $20.85), with pricing prerogative intact and 80–90% of the fleet eligible for further rate resets over the next 18 months.
• Announced acquisition of TOPS adds 580,000 hp of young, 95% utilized assets with a contracted backlog, boosting Permian capacity by 30% and electric compression to 15% of pro forma fleet, expected to be >10% EPS accretive and >20% cash-available-for-dividend accretive in 2025.
• Maintains a strong balance sheet with a 3.2× leverage ratio, raised $256 million in equity at $21/share, declared a 6% higher quarterly dividend with 2.6× coverage, and reaffirmed full-year 2024 guidance of $510–540 million adjusted EBITDA and $190 million growth CapEx.

Presentation

[Operator]

Good morning. Welcome to the Archrock second quarter 2024 conference call. Your host for today's call is Megan Rapine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Rapine. You may begin.

[Megan Repine, VP of Investor Relations at Archrock]

Thank you, JL. 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 Aaron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the second quarter of 2024. 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 Exchange Act of 1934, based on our current beliefs and expectations, as well as assumptions made by and 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.

[Megan Repine, VP of Investor Relations at Archrock]

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, adjusted gross margin, adjusted gross margin percentage, free cash flow, free cash flow after dividend, 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 to provide an update of our business.

[Brad Childers, President and CEO at Archrock]

Thank you, Megan, and good morning, everyone. Archrock's second quarter performance reflects the earnings power we've built through our investment in high-quality assets, exceptional customer service, and efficient execution. The long-term and year-over-year strength and durability we see in our overall performance, and as reflected in our second quarter results, is also supported by the affordability and abundance of U.S. natural gas, which will continue to fuel growth in its demand, use, and production. This strong performance, as well as its strength and durability, are both further bolstered structurally by the continued capital discipline being employed across the energy cycle. Now, with that backdrop, let me start today's call with a summary of key highlights from the second quarter. Our net income of $34 million was up from $25 million in the second quarter of 2023.

[Brad Childers, President and CEO at Archrock]

Adjusted EBITDA of $130 million was up 15% versus the prior year period. The increase was driven primarily by higher pricing, combined with a sharp focus on cost management, leading to strong profitability. We maintained our sector-leading financial position, including a leverage ratio of 3.2 times. We continued to deliver meaningful returns to our shareholders. Our quarterly dividend per share was up 6% compared to a year ago, all while maintaining robust dividend coverage of 2.6 times for the quarter. This was a great quarter for Archrock, thanks to a fantastic team of dedicated employees who work hard every day to deliver safe and excellent service to our customers and attractive returns to our shareholders.

[Brad Childers, President and CEO at Archrock]

Now, with the acquisition of TOPS that we announced last week, we will further enhance our position as the premier contract compression services company in the U.S., and I'll expand on that in a bit. Turning to Archrock operations, market conditions for compression remain highly constructive, predominantly in oil plays with associated gas production, like the Permian Basin. The robust market is reflected in our Q2 contract operations operating and financial results. Our fleet remained fully utilized, with utilization exiting the quarter at a rate of 95%. Booking activity increased sequentially as we continue to build an order book into 2025. We expect to see sustained compression booking demand well into the future as our customers plan for the call on natural gas production to support LNG export capacity growth and incremental electric generation demand from AI and data centers.

[Brad Childers, President and CEO at Archrock]

On pricing, with utilization at historic highs and continued strong booking activity, we're maintaining the pricing prerogative in capturing additional rate increments. The second quarter marks our 11th consecutive quarter of sequential increases in our monthly revenue per horsepower, which increased to $20.85. Continued price increases and strong cost control drove adjusted gross margin percentage to 65%, up 300 basis points year-over-year and consistent with the prior quarter. The aftermarket service segment had another solid quarter. Revenues totaling $45 million remained elevated as great service is driving repeat business with customers. Second quarter adjusted gross margin of 22% exceeded our full year guidance expectation as we continue to focus on high quality and high-margin work.

[Brad Childers, President and CEO at Archrock]

From our first-rate customer base, to our highly standardized fleet and excellent customer service we are known for in the field, to our most recent digitization and emission reduction efforts, the actions we've taken to enhance our business should benefit our performance for years to come... The acquisition of TOPS aligns with this strategic focus and is an exceptional opportunity to expand our contract compression operations, earnings, and cash available for dividends. With TOPS, we're adding 580,000 horsepower of young assets, including approximately 500,000 operating horsepower and a substantial and contracted backlog of new equipment. As we've previously discussed, this strategic and immediately accretive acquisition carries four main benefits. First, the acquisition of high-quality assets with contracted cash flows adds meaningful low-risk growth.

[Brad Childers, President and CEO at Archrock]

The TOPS fleet has an average age of 3 years, is 95% utilized, and backed by fee-based contracts with blue-chip customers. Second, the acquisition enhances our scale and complements our existing Permian Basin compression capacity. The addition of TOPS is expected to increase Archrock's Permian Basin compression capacity by 30% to approximately 2.2 million operating horsepower. Third, this acquisition accelerates the growth of our electric motor drive fleet and augments our internal electrical expertise. TOPS is the leading provider of electric motor drive compression. With this acquisition, we expect our electric compression fleet to increase to 648,000 horsepower or 15% of our pro forma fleet. And fourth, this transaction is consistent with our financial and capital allocation priorities, and we expect it will facilitate the accelerated return of capital to shareholders.

[Brad Childers, President and CEO at Archrock]

We're buying a rapidly growing business with a substantial and contracted backlog, and we expect the acquisition to be more than 10% accretive to earnings per share and at least 20% accretive to cash available for dividend per share in 2025. TOPS has both high-caliber equipment and a talented team that we're excited to welcome to Archrock. The transaction is expected to close by the end of 2024, and we're confident in our ability to effectively integrate the acquired assets into our existing business. In summary, with today's robust market of growing natural gas production and compression demand, one of our top priorities has been investing in high quality and high return compression assets.

[Brad Childers, President and CEO at Archrock]

Equally as important, we've been funding these investments within our cash flow so that we've been able to deliver on our commitments to increasing cash returns to investors while maintaining a strong balance sheet. The acquisition of TOPS aligns with this strategic focus and is an exciting milestone for Archrock that builds on the meaningful progress we've made orienting our business for the future and for long-term success. With that, I'd like to turn the call over to Doug for a review of our second quarter performance, 2024 standalone guidance, and financing strategy for the TOPS acquisition.

[Doug Aron, CFO at Archrock]

Thanks, Brad, and good morning, everyone. Archrock delivered another strong quarter of financial results. Net income for the second quarter of 2024 was $34 million. This included a non-cash $4.4 million long-lived and other asset impairment, as well as transaction-related expenses of approximately $1.8 million. We reported adjusted EBITDA of $130 million for the second quarter of 2024. Underlying business performance was strong in the second quarter as we delivered higher total adjusted gross margin on a sequential basis. For the second quarter, growth capital expenditures totaled $62 million, bringing year-to-date growth CapEx to $140 million. We expect our 2024 growth capital will be first-half weighted.

[Doug Aron, CFO at Archrock]

Maintenance and other CapEx for the second quarter of 2024 was $29 million, bringing the total for the first half of 2024 to $51 million. Turning to the balance sheet, we exited the quarter with long-term debt of $1.6 billion. Our leverage ratio at the end of the quarter was 3.2 times, calculated as total debt divided by our trailing twelve-month adjusted EBITDA. As Brad mentioned earlier, we are acquiring TOPS for total consideration of $983 million, which will be funded with a combination of $826 million in cash and 6.87 million newly issued common Archrock shares to the seller. Archrock intends to fund the $826 million cash portion of the total consideration with a combination of equity and debt.

[Doug Aron, CFO at Archrock]

On the equity portion, last week, we announced the pricing of a common stock offering, raising net proceeds of $256 million at an offering price of $21 per share. The funding structure keeps us on track to achieve our financial targets, including maintaining a consistent leverage ratio of between 3 and 3.5 times. Post-transaction announcement and equity raise, all three rating agencies reaffirmed their Archrock credit ratings and outlook. The strong financial flexibility I just described continued to support increased capital returns to our shareholders. We recently declared a second quarter dividend of $0.165 per share, or $0.66 on an annualized basis. This is consistent with the first quarter of 2024 dividend level and up 6% versus the year-ago period.

[Doug Aron, CFO at Archrock]

... Cash available for dividend for the second quarter of 2024 totaled $72 million, leading to an impressive quarterly dividend coverage of 2.6 times. Importantly, we believe the increase in pro forma discretionary cash flow from the addition of TOPS will further enhance our financial flexibility and capacity to increase dividends to our shareholders over time. As you saw in our earnings release issued yesterday, Archrock reaffirmed its full year 2024 annual EBITDA and capital expenditure guidance. Our guidance excludes the pending acquisition of TOPS. We plan to announce our expectations for the combined company once the transaction closes by the end of 2024.

[Doug Aron, CFO at Archrock]

Excluding TOPS, our 2024 Adjusted EBITDA is expected to range from $510 million-$540 million, which represents an increase of 17% compared to $450 million in 2023. 2024 Growth CapEx is expected to total approximately $190 million. This is flat compared to the Growth CapEx of $190 million in 2023. Our full year 2024 Maintenance CapEx forecast of $80 million-$85 million and other CapEx forecast of $20 million-$25 million both remain unchanged. In closing, the market remains as strong as we've ever seen it, and Archrock is in the strongest position in the company's seventy-year history.

[Doug Aron, CFO at Archrock]

We have an opportunities-rich market and expect to invest in high return opportunities, profitably grow our business while prioritizing and growing shareholder returns, and maintaining an industry-leading balance sheet. We are excited to welcome the TOPS team, and we look forward to building an even stronger Archrock together for the benefit of our employees, our customers, and our investors. J.L., with that, we are now ready to open the line for questions.

[Operator]

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. And again, it is star one to join the queue. Your first question comes from the line of Jim Rollyson of Raymond James. Your line is open.

[Jim Rollyson, Analyst at Raymond James]

Hey, good morning, guys.

[Brad Childers, President and CEO at Archrock]

Good morning.

[Jim Rollyson, Analyst at Raymond James]

Brad, so year to date, you've obviously spent, well more than half of your growth CapEx, which implies a softer second half, on that front, but just curious, your horsepower totals haven't moved that much in the active category so far. Just maybe, and I know you've also realized some proceeds from selling some stuff still, but maybe just a little color on kind of fleet dynamics, like how much horsepower you've delivered, how much has been put in the field, how much have you sold? Just kind of some color around that, if you don't mind.

[Brad Childers, President and CEO at Archrock]

Sure. Thanks, Jim. Yeah, on the overall position of the horsepower in the business, we're super excited to just maintain the 95% utilization rate that we've achieved. One of the impacts of that, as you can imagine, it does mean that we've put to work a ton of the idle fleet horsepower that we previously had, maintaining it at a high rate. And that also means there's less horsepower in the fleet to go back to work. So the trade-off is, we get to book less of that, but it's because it's active, working, and highly profitable. So that's one dynamic that you're seeing on the relatively flat horsepower quarter-over-quarter. The second thing we'll note is that the market has definitely cooled a bit as we've seen a little bit of give back in some of the dry gas plays.

[Brad Childers, President and CEO at Archrock]

Fortunately, as you can see in the numbers, it's completely immaterial into our overall fleet position as the vast bulk of our horsepower is going to work in the liquids-rich plays. 60% of it goes to work in the Permian on a bookings basis right now. So those are a couple of the dynamics we've seen in what I think is a relatively flat period of time. But finally, on a really good news front, bookings has continued to remain robust. And so even though the horsepower activity itself is a little bit flattish for us in this current period, what 2025 offers is still a very robust bookings set from our customers as they prepare for future natural gas production growth, starting in 2025 as the LNG projects come online. That's a lot of what you're seeing.

[Brad Childers, President and CEO at Archrock]

And then finally, I'd point out that factually, you're right, the CapEx budget for the year 2024 was definitely front-end loaded.

[Jim Rollyson, Analyst at Raymond James]

Yep, I appreciate that color. And just kind of, since you brought up the new build part of that equation or new orders, just maybe kind of a status update on what lead times look like today. And, you know, another thing that's been helping, in addition to the tight market drive pricing, is just the fact that the cost of equipment has gone up and maybe just some color on kind of what inflation's been there, is that starting to level off, et cetera.

[Brad Childers, President and CEO at Archrock]

So factually, on the easy stuff, lead times are in the 40 weeks, you know, plus or minus, depending upon the category of equipment, but we would describe it as a very normalized market. Inflation has returned to more historic levels, and that is for equipment coming into the system in the 3%-5% range on a per item increase basis. That's our expectation. It's what we're seeing, and it's our expectation. So that's the easy stuff to point out. But what we also see then is just robust bookings continuing going forward with that. What's exciting about the market today, though, is that it's not about lead times that's constraining the market. Equipment costs are definitely up, and that means the price of bets has gotten bigger and further reinforce a lot of discipline in the market.

[Brad Childers, President and CEO at Archrock]

Capital still remains at elevated levels, so that cost has enforced discipline in the market. But what all of this goes to is the thing we think is really driving a lot of discipline in the market is the investors' demand and focus on free cash flow generation, strong balance sheets, and continued growth in returns to investors. That level of discipline means that no one's going to borrow expensive money to place expensive bets without the security of a commitment and a booking with a contract in place with a customer already. That's what's really driving the market. We think it's about capital discipline. We don't think it's about supply chain constraints.

[Jim Rollyson, Analyst at Raymond James]

Got it. Yeah, it's certainly nice to see, and I'll let somebody else ask questions. Appreciate the time.

[Brad Childers, President and CEO at Archrock]

Thanks, Jim.

[Operator]

Your next question comes from the line of Steve Ferazani of Sidoti. Your line is open.

[Steve Ferazani, Analyst at Sidoti]

Morning, Brad, morning, Doug. Appreciate all the detail on the call. Obviously, impressive continued growth on the revenue per horsepower. I'm just trying to get a sense now, are we getting closer to spot? Is there still a lot of room to go as you reset pricing on previous contracts, and with the new capacity coming online?

[Brad Childers, President and CEO at Archrock]

At these levels of high utilization, we still believe we have pricing prerogative. Spot pricing remains elevated compared to where the entire fleet is, and we will continue to opportunistically bring the fleet up to market pricing, as our contracts permit us to do so over time. And on the good news front, when we evaluate our ability to either increase pricing because the contract is eligible for it, because it has a renegotiation in it, or it has an automatic price increase in it, or we have the ability to drive pricing under the contract terms, we estimate that over the next 18 months, we'll still be able to increase pricing on eligible to increase pricing on 80%-90% of the horsepower in the fleet. So over time, we expect to continue to work on bringing that gap, narrowing that gap.

[Steve Ferazani, Analyst at Sidoti]

Excellent. You talked about you have less idle capacity to bring back. The only number that surprised me on the quarter was the higher maintenance CapEx, yet your guidance didn't change, which implies this is by far the highest quarter. Usually, that's 'cause of higher make ready. Is that what happened? Did you just happen to have more idle capacity coming back this quarter, or was there something else in that higher maintenance CapEx?

[Doug Aron, CFO at Archrock]

Yeah, no, Steve, I, I definitely would not read anything into that. I think we had some-

[Steve Ferazani, Analyst at Sidoti]

Okay

[Doug Aron, CFO at Archrock]

... some parts expense, some timing in the quarter. You know, some of that can vary just depending on when the work gets done. So, as you said, we think our current guidance is absolutely good, and I wouldn't read into anything beyond that.

[Steve Ferazani, Analyst at Sidoti]

Okay, that's helpful. And last one for me, just on the continued strength with the aftermarket business. Is this a new reasonable run rate for your aftermarket, and can you maintain these above 20% margins? Or what's your outlook? Any changes?

[Brad Childers, President and CEO at Archrock]

With the market as tight as it is, not just in contract operations, but also in the fleets of our customers, our customers are very focused on maintaining their horsepower candidly better than they have in the past. There's less idle capacity, and so that's driving a lot of really good service activity, which is higher margin and higher profit work to Archrock. Our team's doing an excellent job both capturing it and executing on it. I believe that as the market remains at these elevated levels of utilization, that translates into strength and continued profitability, both on the revenue line as well as in the profit we can obtain in our aftermarket service business.

[Steve Ferazani, Analyst at Sidoti]

All right. Thanks, Brad. Thanks, Doug.

[Brad Childers, President and CEO at Archrock]

Thank you.

[Operator]

Your next question comes from the line of Selman Akyol of Stifel. Your line is open.

[Selman Akyol, Analyst at Stifel]

Thank you. I wanted to follow up on a couple of comments. In your prepared remarks, I think you talked about the market has cooled, some giveback in dry gas plays, and you're repositioning those assets into liquid plays. Can you maybe quantify how long that takes, and, you know, how much horsepower are we looking at? And should we see some sort of bump from redeploying those assets in the third or fourth quarter?

[Brad Childers, President and CEO at Archrock]

Thanks, Selman. We should not expect to see a bump. You should not expect to see any real impact to the redeployment of those assets. What I was suggesting, however, is that with the small amount of horsepower in the dry gas plays that was reduced in the quarter, and we're talking about a fractional percentage of our fleet, it still has an impact in marginal growth at a period of time when equipment is not going back to work as aggressively in 2024 as it did in 2023. So I don't think you should expect to see any negative impact on that at all, other than that equipment will go back to work, probably in some of the dry gas plays.

[Brad Childers, President and CEO at Archrock]

Some of it will be redeployed elsewhere over time, but it's so marginal that it will not be transparent from a financial perspective or from a cost perspective, is what I really should say.

[Selman Akyol, Analyst at Stifel]

Understood. Just following up sort of on the last questioning in terms about getting closer to spot. I think you said over the next 18 months, you get price increases on 80%-90% of the eligible fleet, and I was wondering, if I could push you and just ask how much of the fleet is eligible over the next 18 months to be repriced?

[Brad Childers, President and CEO at Archrock]

That was, that was the number. Between 80% and 90% of the fleet should be eligible for repricing in that period of time.

[Selman Akyol, Analyst at Stifel]

Okay, understood. Thank you very much.

[Brad Childers, President and CEO at Archrock]

Thanks.

[Operator]

There are no more questions. Now, I'd like to turn the call back over to Mr. Childers for final remarks.

[Brad Childers, President and CEO at Archrock]

Great. Thank you, everyone, for participating in our Q2 review call. Archrock's underlying business performance is outstanding, and we're excited about the TOPS scale, which we believe will create substantial shareholder value. I look forward to updating you on our progress in the future. Thanks, everyone.

[Operator]

This concludes today's conference call. You may now disconnect.

Participants

Executives

• Brad Childers, President and CEO
• Doug Aron, CFO
• Megan Repine, VP of Investor Relations

Analysts

• Jim Rollyson, Analyst at Raymond James
• Selman Akyol, Analyst at Stifel
• Steve Ferazani, Analyst at Sidoti