USA Compression Partners, LP (USAC) Earnings Call Transcript & Summary

Good morning. Welcome to USA Compression Partners Second Quarter 2026 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, August 4, 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 Paulsen, Senior Vice President and CFO; Chris Wauson, Senior Vice President and COO; and other members of our leadership team. This morning, we released our operational and financial results for the 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-W. 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 our ability to maintain market share, but 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 a specific multiyear 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 4 years, customers want to know that their compression provider is both committed and capitalized to deliver. Chris Wauson 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 J-W integration, and it's obvious to me that we are building a fundamentally stronger company. The sophistication of our new ERP system and the enhanced data reporting we have access to is allowing us to better manage our activity, both in the field and at home office. With J-W, 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, J-W's specialized facilities gives us the ability to package our own compression and 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 Wauson 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 for multiple levels of our operations field leadership. Our goal is to accelerate development to 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 2 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 reflects their confidence in USA Compression as their partner of choice. New large horsepower 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 recontracting efforts. In that way, we expect incremental lube oil cost of approximately $1 million per month in the second half of the year as our contracts are updated to reflect higher oil prices. Additionally, J-W 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 Paulsen 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 J-W's horsepower and average revenue per revenue-generating horsepower. Parts and service revenue was $22.1 million, reflecting the manufacturing and aftermarket services activity that J-W 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 3.72x. 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 0.5% increase in sequential quarters and a 7% 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% and continues to reflect the blended impact of incorporating J-W's fleet. Second quarter 2026 expansion capital expenditures were $46.8 million and our maintenance capital expenditures were $16.9 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 million to $800 million, distributable cash flow range of $480 million to $510 million, maintenance capital range of $60 million to $70 million and expansion capital range of $230 million to $250 million. Leverage maintained consistency in Q2 even as we ramped up on capital spending, remaining just below our near-term target of 3.75x debt to EBITDA. While debt markets have pulled back, we will continue to opportunistically explore accessing later this year in order to add consistency to our tranche 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 3 core capital allocation priorities simultaneously, growing the fleet, sustaining and ultimately growing the distribution and maintaining a prudent leverage profile. We believe 2% to 3% annual new horsepower growth, a distribution yield approaching 8% and an improving sub-4x 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 will 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 Instructions] And your first question comes from the line of Doug Irwin with Citi.

Chris, you mentioned potential distribution growth in your remarks there at the close. You obviously have the balance sheet in a much better position today than it has been in the 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?

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 has really been material, and we've seen a change in coverage and in turn, have reduced debt. 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 multiyear growth, strong returns and commitments required to meet our customer needs, the current priority for excess cash flow is to prioritize that 2.5% 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 opportunities. And finally, as you noted, our current yield is competitively positioned with the broader Alerian index and should be considered an attractive entry point for any prospective unitholder given the aforementioned growth. It also clearly differentiates us from our peers. 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 clearly enumerates the underlying value of the business. Today, we see that being the case, and we'll continue to evaluate that in the future.

Got it. That's helpful color. And maybe as a follow-up, I just wanted to touch on the lube oil costs that you also mentioned in the prepared remarks, helpful detail on the expected kind of monthly impact. Just curious how you're thinking about your ability to potentially pass those costs on within your contracts 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 is today?

So in regards to lube oil, as contracts expire and renew, we're doing our best to cover the increased cost inputs, but we do -- we don't have a direct pass-through in our contract related to increases or decreases in lube oil 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, our new units, we're still contracting units at a healthy rate of return. In regards to more of an idle unit set, we're seeing -- we're not seeing the price increases 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 of '26.

Doug, this is Clint, also want to add that we still have CPIU escalators to offset the inflation piece of it going forward as well.

Your next question comes from the line of Jim Rollyson with Raymond James.

Clint or Chris or whoever, if you kind of look at margins and the relative decline, obviously, you stepped down in 1Q, just kind of mix related to J-W and you came down a bit in 2Q. Maybe help me understand a little bit the drivers of the sequential margin degradation between lube oil, you talked about, between the ERP system implementation and just kind of integration of J-W and how we should think about that kind of progression going forward?

It's Chris Wauson. We expected margins to drop with the J-W acquisition. We had a full operating quarter combined now. So manufacturing and AMS do lower contract services historical average. But 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 and 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 1 year to 4-plus years. And I imagine those guys aren't accustomed to formally planning that far out. But I'd just love to kind of hear how that all goes for you and your ability to serve those customers.

And one of the reasons we've committed to a portion of the cost of 500,000 horsepower. And when I say that a portion of that cost, I want to explain it by having the J-W facility, that gives us flexibility that we wouldn't have elsewhere because we only have to commit to the engine cost in the out years. But when you get back to the conversation about -- we've all had to adapt 40 we ran 40- to 60-week delivery lead time on equipment for years and years and years. And then in the last few years with the generator market growing like it has, it has driven out to 200 weeks. And it caught a lot of us by surprise. It caught us by surprise earlier this year for orders for '27. That's the main reason we jumped on it and we're able to order equipment for '28 and '29, and we'll be looking at 30 here pretty quick. Everyone is learning how to operate in that market. Customers, hopefully, they have a good line of sight on demand, and they have a good line of sight on the compression that we can provide them. And so we seem to all be getting along pretty well right now, Jim.

Your next question comes from the line of Nate Pendleton with Texas Capital.

Clint, in your prepared remarks, you talked about advancing through integration this year. As you're going through that process, are there any additional efficiencies you're uncovering with the combined business? And perhaps any thoughts on any fleet optimization or high-grading potential?