Executive Summary / Key Takeaways

• Core Investment Thesis: USA Compression Partners (USAC) offers a compelling investment proposition as a critical infrastructure provider in a burgeoning natural gas demand market, driven by AI, cloud services, and LNG exports. Its disciplined growth strategy, high utilization rates, and long-term contracts underpin stable, predictable cash flows.
• Robust Financial Performance: USAC delivered record revenues of $250.1 million in Q2 2025, with average revenue per horsepower reaching an all-time high of $21.31, reflecting strong market-based pricing and operational efficiency. Adjusted EBITDA and Distributable Cash Flow remain robust, supporting a consistent distribution.
• Strategic Operational & Financial Management: The company is actively realizing benefits from its Energy Transfer Shared Services model, anticipating at least $5 million in annualized G&A savings by January 2026. Proactive debt management, including an upsized $1.75 billion credit facility extended to 2030 and plans to refinance 2027 notes, strengthens its financial flexibility.
• Technological Edge & Market Positioning: USAC's focus on large, high-horsepower compression units and its dual-drive technology provide a competitive advantage, offering flexibility and efficiency. The company is well-positioned to capitalize on increasing natural gas demand, particularly in dry gas basins and the Permian, while remaining adaptable to future energy shifts like electrification.
• Outlook and Value Creation: With 2025 guidance reaffirmed and strong RFQ activity for 2026, USAC is poised for continued growth. Its commitment to a "sacrosanct" distribution, coupled with efforts to reduce leverage to below 4x debt-to-EBITDA, aims to enhance long-term unitholder value.

The Unseen Engine of America's Energy Future

USA Compression Partners, LP (USAC), founded in 1998, stands as a foundational pillar in the U.S. energy landscape. The company specializes in providing mission-critical natural gas compression services under fixed-term contracts, encompassing the entire lifecycle from design and engineering to ownership, operation, and maintenance of its compression packages. This core business is complemented by natural gas treating services, including the removal of carbon dioxide and hydrogen sulfide, cooling, and dehydration. USAC's operational footprint spans the most prolific unconventional resource plays across the U.S., including the Permian, Marcellus, and Haynesville, making it an indispensable partner for oil companies, independent producers, processors, gatherers, and transporters.

The overarching investment thesis for USAC is anchored in its role as a stable, high-yield infrastructure provider benefiting from an undeniable, long-term surge in natural gas demand. This demand is increasingly driven by the insatiable energy requirements of artificial intelligence (AI) and cloud services, alongside robust growth in liquefied natural gas (LNG) exports. Management notes that major tech firms are projected to spend over $265 billion in capital this year to expand infrastructure for AI and cloud services, with utilities investing an additional $200 billion to meet this power demand. This creates a powerful tailwind for natural gas, which USAC believes is the only suitable, consistent, and clean energy source to power these needs.

A Differentiated Fleet in a Competitive Arena

USAC operates in a competitive landscape, primarily contending with other specialized compression service providers like Archrock, Inc. (AROC) and Kodiak Gas Services (KGS), as well as larger, more diversified midstream entities such as its General Partner's parent, Energy Transfer LP (ET). USAC's strategic positioning emphasizes its large, high-horsepower compression units and its operational expertise, which are critical for the demanding infrastructure applications it serves. This focus allows USAC to offer enhanced reliability and tailored solutions, fostering strong customer loyalty and recurring revenue streams.

While competitors like AROC may boast a broader asset base and ET an integrated energy infrastructure, USAC differentiates itself through its dedicated focus on compression and its proprietary dual-drive technology. This technology, developed by Energy Transfer, offers the flexibility to operate compression units using either natural gas engines or electric motors. This capability provides significant operational advantages, including the ability to unload the power grid by switching to natural gas, or to leverage electric power where infrastructure permits. While current customer needs largely favor natural gas engines due to existing infrastructure limitations, USAC's dual-drive technology positions it strategically for future shifts towards electrification, offering adaptability that some pure-play natural gas compression providers may lack.

The company's long-term fixed-fee contracts, a hallmark of its business model, act as a significant competitive moat. These contracts provide a high degree of revenue stability, insulating USAC from short-term commodity price volatility more effectively than exploration and production (E&P) companies. This contractual stability, combined with high barriers to exit for customers, contributes to USAC's remarkably low five-year beta of 0.4, indicating significantly less volatility than the broader market.

Financial Strength and Operational Excellence

USAC's financial performance in the second quarter of 2025 underscores its operational effectiveness and strategic execution. The company reported record total revenues of $250.1 million, a 6.3% increase compared to Q2 2024. This growth was primarily driven by a 5.0% increase in average revenue per revenue-generating horsepower per month, reaching an all-time high of $21.31. This pricing power reflects higher market-based rates on newly deployed and redeployed units, coupled with CPI-based and other market-based price increases on existing contracts.

Operating income for Q2 2025 stood at $76.6 million, contributing to a net income of $28.6 million. For the six months ended June 30, 2025, net cash provided by operating activities was $178.9 million, demonstrating robust cash generation.

Adjusted gross margins for Q2 2025 were 65.4%, consistent with the company's historical range of 65% to 67%. While cost of operations, exclusive of depreciation and amortization, increased by $8.3 million due to higher parts costs and increased labor expenses, management anticipates these costs will normalize as the year progresses through enhanced recruiting and new vendor agreements for lube oil.

The company's disciplined capital allocation is evident in its expansion capital expenditures of $18.1 million in Q2 2025 and maintenance capital expenditures of $11.7 million. USAC acquired approximately 48,000 new horsepower in 2025, with the majority slated for year-end delivery, and anticipates Q4 active horsepower to exceed 3.6 million, a new company record. This growth is strategically focused on large horsepower units for existing upstream and midstream customers, particularly in the Permian, Northeast, and Haynesville basins, where demand for natural gas compression is projected to grow significantly.

Fortifying the Balance Sheet and Unitholder Returns

USAC maintains a strong focus on its capital structure and unitholder returns. The company's leverage ratio stood at 4.08x as of Q2 2025, with a stated target of "at or below 4x debt to EBITDA." This commitment to deleveraging, alongside increasing distribution coverage, is a key strategic priority. The distribution, consistently described as "sacrosanct," has been maintained at $0.53 per common unit quarterly, yielding approximately 8.95% (TTM). Management aims to further increase distribution coverage, which has recently been in the 1.4x to 1.5x range, by growing underlying Distributable Cash Flow.

In a significant move to enhance liquidity and financial flexibility, USAC announced an upsized Eighth Amended and Restated Credit Agreement on August 27, 2025, extending the maturity of its senior secured asset-backed loan facility to August 2030. This $1.75 billion facility, led by J.P. Morgan and involving 20 financial institutions, represents a $150 million increase in commitment. This refinancing, coupled with plans to revisit the refinancing of its September 2027 Senior Notes in Q4 2025 as market conditions improve, positions USAC to optimize its borrowing costs and capital structure for future growth.

The company's shared services model with Energy Transfer is already yielding benefits, with licensing savings and enhanced IT functionality observed in Q2 2025. This integration, along with a planned Q1 2026 ERP implementation, is expected to drive meaningful improvements in operational efficiency and digitalization, contributing to the targeted $5 million in annualized G&A savings.

Risks and Forward Outlook

Despite a compelling investment thesis, USAC faces inherent risks. The demand for compression services, while underpinned by long-term trends, remains indirectly exposed to fluctuations in natural gas and crude oil prices. A sustained downturn could reduce demand, as evidenced by some E&P customers pausing activity in Q2 2025 when WTI dipped below $60. A 1% decrease in average revenue-generating horsepower could lead to an annual decrease of approximately $9.0 million in revenue and $6.0 million in Adjusted gross margin.

Interest rate risk also remains a factor, with $770.6 million of variable-rate indebtedness outstanding as of June 30, 2025. A 1% increase in the effective interest rate would result in an annual increase of approximately $7.7 million in interest expense. While tariffs have had minimal impact to date due to U.S.-sourced components and a 6-month parts inventory buffer, future changes could affect costs. Additionally, the IRS examination of 2019 and 2020 tax returns, with a potential $29.2 million imputed underpayment, presents a tax contingency.

Looking ahead, USAC has reaffirmed its 2025 guidance, projecting Adjusted EBITDA between $590 million and $610 million, and Distributable Cash Flow between $350 million and $370 million. Expansion capital is guided at $120 million to $140 million, with some deliveries expected to shift into Q1 2026, and maintenance capital at $38 million to $42 million. The company expresses significant optimism for 2026, citing a robust pipeline of Requests for Quotes (RFQs) and the broader market shift from a supply-based to a demand-based natural gas market. This outlook is supported by strong growth projections for natural gas from the EIA, particularly a 6% annualized increase in the Permian, and growth in the Northeast and Haynesville.

Conclusion

USA Compression Partners stands as a resilient and strategically positioned entity within the vital natural gas compression sector. Its history of disciplined growth, coupled with a robust business model centered on long-term contracts and high-horsepower units, provides a strong foundation. The company's proactive management of operational costs, strategic financial maneuvers, and a clear vision for capitalizing on the burgeoning demand for natural gas—driven by AI, data centers, and LNG exports—underscore its potential for sustained value creation.

USAC's commitment to maintaining its distribution while diligently working towards a lower leverage ratio, supported by its enhanced credit facility and anticipated operational efficiencies from the Energy Transfer shared services model, paints a picture of a company focused on both stability and growth. As the U.S. natural gas market continues its fundamental shift towards demand-driven expansion, USAC's specialized expertise and adaptable technology position it as a critical enabler, making it a compelling consideration for discerning investors seeking a stable, high-yield investment with a clear trajectory for the future.