USA Compression Partners, LP (NYSE: USAC) is one of the largest independent providers of natural gas compression services in the United States. The company operates a fleet of compression equipment that is primarily used to facilitate the production, processing, transportation, and storage of natural gas. With a focus on large-horsepower applications, USAC serves customers across key shale plays, including the Permian Basin, Marcellus/Utica, and Eagle Ford, among others.

Business Overview

Established in 1998, USAC has grown to become a leading player in the natural gas compression services industry. The company's compression equipment is essential for maintaining the pressure and flow of natural gas through pipelines, enabling the efficient transportation and processing of this vital energy resource. USAC's fleet consists of over 3.8 million horsepower of compression capacity, with a focus on large-horsepower units (greater than 1,000 horsepower) that are well-suited for the demands of the company's diverse customer base.

USAC's business model is centered on providing compression services under long-term, fixed-rate contracts. This strategy helps to ensure a stable and predictable revenue stream, as the company's customers rely on its compression equipment to maintain the integrity of their natural gas infrastructure. The company's customer base includes a mix of exploration and production companies, midstream operators, and other energy industry participants, providing diversification and reducing reliance on any single customer or sector.

Financials

USAC's financial performance has been strong, with the company reporting annual revenue of $846.2 million and net income of $204.9 million in 2023. The company's operating cash flow for the year was $271.9 million, while free cash flow totaled $33.4 million. These results reflect USAC's ability to generate consistent and reliable cash flows from its compression services business.

In the first quarter of 2024, USAC continued to deliver impressive results, reporting revenue of $229.3 million and net income of $23.6 million. The company's operating cash flow for the quarter was $65.9 million, while free cash flow was $86.6 million. These quarterly figures demonstrate the resilience and stability of USAC's business model, even in the face of broader economic and industry challenges.

Operational Highlights

USAC's operational performance has been equally impressive, with the company reporting record levels of revenue-generating horsepower and utilization rates. As of the end of the first quarter of 2024, USAC's revenue-generating horsepower stood at 3.5 million, up 7.3% from the same period in the prior year. The company's utilization rate, a key metric for the compression services industry, reached 94.8% at the end of the quarter, up from 92.7% a year earlier.

These operational achievements are a testament to USAC's ability to deploy its compression equipment effectively and maintain high levels of customer demand. The company's focus on large-horsepower applications and its strong relationships with customers in key shale plays have been instrumental in driving this performance.

Liquidity

USAC has a well-structured capital base that provides financial flexibility and supports its long-term growth. As of March 31, 2024, the company had $2.5 billion in total debt, with a weighted average interest rate of 6.86%. This debt is primarily comprised of senior notes, including $750 million in 6.875% notes due in 2027 and $1 billion in 7.125% notes due in 2029.

In addition to its debt financing, USAC maintains a $1.6 billion revolving credit facility, which provides ample liquidity to fund the company's capital expenditures and working capital needs. As of the end of the first quarter, USAC had $863.4 million in available borrowing capacity under this facility, with $736.1 million drawn.

The company's leverage ratio, as calculated under its credit facility, stood at 4.27x as of March 31, 2024, slightly higher than the prior quarter's 4.1x due to the front-loaded purchase of new compression equipment. USAC expects this ratio to trend back towards its target range of 4.0x over time.

Outlook

USAC remains optimistic about the long-term prospects for the natural gas industry, driven by growing demand for natural gas both domestically and globally. The company sees significant opportunities in the continued expansion of liquefied natural gas (LNG) export facilities, as well as the increasing electrification and decarbonization efforts that are expected to drive greater natural gas consumption.

However, in the near term, USAC is taking a more cautious approach, focusing on internal operational efficiency, pricing improvements, and the opportunistic deployment of its existing fleet. The company cites ongoing economic and political uncertainties, including inflationary pressures, the Russia-Ukraine conflict, and the potential for regulatory changes, as factors that warrant a more prudent stance on growth.

Despite this near-term caution, USAC remains well-positioned to capitalize on the long-term trends in the natural gas industry. The company's strong customer relationships, operational expertise, and financial flexibility provide a solid foundation for continued success. As USAC addresses its capital structure and simplifies its balance sheet, the company may be in a better position to consider future distribution policy changes and growth initiatives.

Risks and Challenges

While USAC's business model and financial performance have been impressive, the company is not without its risks and challenges. The natural gas compression services industry is highly competitive, and USAC faces competition from both larger, integrated energy companies and smaller, regional players. The company's success is also dependent on the continued demand for natural gas and the overall health of the energy industry, which can be subject to significant volatility and regulatory changes.

Additionally, USAC's capital-intensive business model requires ongoing investment in new compression equipment and maintenance of its existing fleet. The company's ability to source and deploy this equipment in a timely and cost-effective manner is critical to its long-term success. Disruptions in the supply chain or delays in equipment deliveries could impact USAC's ability to meet customer demand and maintain its competitive edge.

Conclusion

USA Compression Partners, LP is a well-established and financially sound provider of natural gas compression services. The company's focus on large-horsepower applications, long-term customer contracts, and operational excellence have enabled it to deliver consistent financial and operational performance, even in the face of industry challenges.

While USAC is taking a more cautious approach in the near term due to economic and political uncertainties, the company's long-term growth prospects remain promising. As the natural gas industry continues to evolve, driven by the expansion of LNG exports and the increasing demand for cleaner energy sources, USAC is well-positioned to capitalize on these trends and deliver value for its unitholders.