Company Overview
Archrock Inc. (AROC) is a leading provider of natural gas compression services in the United States, serving customers in the energy industry. The company has a long and storied history, celebrating its 70th anniversary in 2024, and has established itself as a premier player in the natural gas compression market through its unwavering commitment to operational excellence, technological innovation, and strategic acquisitions.
History and Evolution
Founded in 1954 as Hanover Compression Company, Archrock began as a provider of compression services for natural gas producers and processors. Over the decades, the company has undergone significant transformations, adapting to the evolving needs of the energy sector and positioning itself as a trusted partner for natural gas producers, gatherers, and transporters. In 2001, the company changed its name to Exterran Holdings, Inc. to reflect its expanded business operations beyond compression services. Exterran Holdings continued to grow through strategic acquisitions, including the purchases of Elite Compression Services in 2019 and Mid-Con Compression in 2014.
A significant milestone in the company's history occurred in 2015 when Exterran Holdings, Inc. spun off its international business into a separate public company called Exterran Corporation. The remaining U.S. operations were renamed Archrock, Inc., allowing the company to focus solely on its core natural gas compression services business in the United States. This strategic move helped streamline operations and sharpen the company's focus on its primary market.
Business Segments
Archrock operates in two main business segments: Contract Operations and Aftermarket Services.
The Contract Operations segment primarily provides natural gas compression services to meet specific customer requirements. This includes designing, sourcing, owning, installing, operating, servicing, repairing and maintaining Archrock's owned fleet of natural gas compression equipment to provide compression services to customers. For the first nine months of 2024, this segment generated revenue of $693.94 million, up 16% from the prior year period, primarily due to higher contract rates and the addition of compression units acquired in the TOPS Acquisition. The segment's adjusted gross margin for the same period was $457.11 million, up 25% year-over-year.
The Aftermarket Services segment provides a full range of services to support the compression needs of customers, including parts sales, normal maintenance services, and full operation of a customer's owned compression assets. Key products and services in this segment include OTC (over-the-counter) parts and components sales, operations and maintenance services, overhaul and reconfiguration services. For the first nine months of 2024, this segment generated revenue of $137.24 million, up 2% from the prior year period, driven by higher service activities and maintenance service contracts, partially offset by lower parts sales. The segment's adjusted gross margin for the same period was $32.68 million, up 15% year-over-year.
Financials
In 2023, Archrock reported annual revenue of $990.34 million and a net income of $105.00 million. The company's cash flow from operations for the year was $310.19 million, with a free cash flow of $11.55 million. Archrock's balance sheet remains strong, with a debt-to-equity ratio of 1.74 as of the end of 2023.
For the third quarter of 2024, Archrock reported revenue of $292.16 million, a 15% increase year-over-year, driven by higher revenue from the contract operations business due to increased rates, additional horsepower from the TOPS Acquisition, and higher average operating horsepower. Net income for the quarter was $37.52 million, a 22% increase year-over-year, primarily due to higher adjusted gross margin from both the contract operations and aftermarket services businesses, partially offset by increases in transaction-related costs, depreciation and amortization, SG&A, provision for income taxes, debt extinguishment loss, and interest expense. Operating cash flow for the quarter was $96.90 million, with free cash flow of $26.88 million.
As of September 30, 2024, Archrock's liquidity position remained strong. The company had $3.75 million in cash on hand and a $1.10 billion asset-based revolving credit facility, of which $4.10 million in letters of credit were outstanding. The company's current ratio stood at 1.257, and its quick ratio was 0.824.
Operational Excellence and Technology
One of the key drivers of Archrock's success has been its focus on operational efficiency and technological advancements. The company has invested heavily in developing and implementing cutting-edge compression technologies, including telemetry and communication systems, to enhance the performance and reliability of its equipment. This has enabled Archrock to provide its customers with industry-leading uptime and cost-effective solutions, strengthening its competitive position in the market.
Strategic Acquisitions
In addition to organic growth, Archrock has strategically expanded its footprint through a series of acquisitions. The most recent example is the 2024 acquisition of TOPS, a leading provider of electric motor drive compression services in the Permian Basin. This transaction, which closed in August 2024, has significantly bolstered Archrock's presence in the high-growth Permian region and expanded its capabilities in the electric motor drive compression market, a rapidly growing segment within the natural gas compression industry.
Financial Performance and Guidance
Archrock's financial performance has been impressive, with the company reporting strong results in the third quarter of 2024. The company's adjusted net income for the quarter was $47 million, a 53% increase year-over-year, while adjusted EBITDA reached $151 million, up more than 25% from the prior year period. Archrock's adjusted gross margin percentage also improved significantly, reaching 67%, up 300 basis points year-over-year.
Based on this strong performance, Archrock has raised its full-year 2024 guidance. The revised guidance projects adjusted EBITDA in the range of $575 million to $585 million, up from the previous range of $550 million to $560 million. The company expects contract operations revenue of $970 million to $980 million with an adjusted gross margin of 66% to 67%, and aftermarket services revenue of $180 million to $185 million with an adjusted gross margin of 22% to 23%. Growth capital expenditures are projected to be approximately $260 million, up from the previous estimate of $190 million, while maintenance capital expenditures are expected to be around $85 million.
Looking ahead to 2025, Archrock anticipates that the TOPS acquisition will be accretive, projecting a 10% increase to earnings per share and at least a 20% increase to cash available for dividend per share.
Shareholder Returns
The company's success has been further reflected in its shareholder returns. Archrock recently announced a 13% increase in its quarterly dividend compared to the same period a year ago, demonstrating its commitment to returning capital to its investors. Additionally, the company has an active share repurchase program, which it has utilized to enhance shareholder value.
Market Outlook
Looking ahead, Archrock remains optimistic about the future of the natural gas compression market. The company is well-positioned to capitalize on the increasing demand for natural gas, driven by the ongoing expansion of the LNG export industry and the growing need for natural gas in the power generation sector. Archrock's strategic investments in electric motor drive compression and its strong presence in the Permian Basin position the company to benefit from these favorable market trends.
The natural gas compression industry is expected to grow at a compound annual growth rate (CAGR) of approximately 5-7% over the next 5 years, driven by increasing demand for natural gas and the need to transport it from production areas to consumption centers. As a leading player in this market, Archrock is well-positioned to capitalize on this growth trend.
Resilience and Adaptability
Despite the challenges posed by the COVID-19 pandemic and global economic uncertainties, Archrock has demonstrated its resilience and ability to navigate through difficult times. The company responded to the industry downturn in 2020 by cutting costs, optimizing its fleet, and streamlining its operations. Furthermore, Archrock successfully navigated the transition away from LIBOR to SOFR for its credit facility in 2023, showcasing its adaptability to changing financial landscapes.
Commitment to Excellence
The company's commitment to operational excellence, technological innovation, and strategic growth initiatives has enabled it to consistently deliver strong financial results and create value for its shareholders. Archrock's longevity in the industry, as evidenced by its 70th anniversary celebration in 2024, is a testament to its ability to adapt and thrive in the ever-changing energy sector.
Conclusion
In conclusion, Archrock Inc. is a well-established and respected player in the natural gas compression market, with a proven track record of operational and financial success. The company's focus on technological advancements, strategic acquisitions, and shareholder-friendly initiatives have positioned it for continued growth and success in the years to come. With its strong market position, robust financial performance, and favorable industry outlook, Archrock appears well-equipped to capitalize on the growing demand for natural gas compression services and deliver value to its stakeholders in the foreseeable future.