USA Compression Partners (USAC) Q2 2026 earnings call transcript

Good morning, everyone. Thank you for joining us. With me today is Chris Paulson, senior vice president and CFO, Chris Walson, senior vice president and COO and other members of our leadership team. This morning we released our operational and financial results for quarter ending June 30th, 2026. Today's call will contain forward-looking statements based on our current beliefs and certain non-GAP measures. Please refer to our earnings release and SEC filings for reconciliations and definitions of non-GAP measures and related risk factors. I am excited about the progress we continue to make as a leading contract compression provider across the US. 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 delivered investments we accelerated in Q2 in horsepower, in the combined organization and the technology that will redefine how we operate. Most notable are their 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 JDO. We currently expect approximately two and a half percent 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 in our ability to maintain market share. 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 with specific multi-year 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 four years, customers want to know that their compression provider is both committed and capitalized to deliver. Chris Watson 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 JW integration. And it's obvious to me that we're 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 JW, the activity is happening across multiple levels.

Offerationally, 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, JW specialized facilities gives us the ability to package our own compression, an 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 down time 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 Watson 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 an operations team. In addition to our safety programs, we have recently launched new leadership training programs for multiple levels over operations field leadership. Our goal is to accelerate development, 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 percent 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 two years out is not typical and has rarely been seen in my career. It reflects a level of customer conviction and long-term production growth that we share and it 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 and 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 re-contracting efforts.

In that way, we expect incremental, lubile cost of approximately 1 million per month in the second half of the years our contracts are updated to reflect our old prices. Additionally, J2B 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 Paulson 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 JW horsepower and average revenue per revenue generating horsepower. Parks and service revenue was 22.1 million, reflecting the manufacturing and aftermarket services activity that JW 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, just to gross margin percentage, came in at 63.5%. Our leverage ratio at the end of the second quarter was 3.72 times.

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 half a percent 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 JW'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 just in the EBITDA range of 77800 million, distributable cash flow range of 480 to 510 million, maintenance capital range of 60 to 70 million, expansion capital range of 230 to 250 million.

Leverage maintain consistent C&Q2 even as we ramped up on capital spending, remaining just below our near-term target of 3.75 times 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 trunk 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 three core capital allocation priorities simultaneously, growing the fleet, sustaining, and ultimately growing the distribution, and maintaining a prudent leverage profile. We believe 2-3% annual new horsepower growth, a distribution yield approaching 8%, and an improving sub-four times leverage ratio representing compelling and differentiated value propositions.

One that we believe positions USA compression competitively in the NLP evaluation 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.

Good morning, Doug. I appreciate the question. The question highlights the transformative change we've seen in cash flow through a very creative transaction. So the year over year changes has really been material and we've seen a change in coverage and our and intern have reduced that. 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, give the unprecedented visibility for multi-year growth, strong returns, and commitments required to meet our customer needs.

The current priority for excess cash flows to prioritize that two and a half percent of growth per annum in new horsepower. Balance long-term growth should continue to elevate underlying value of the units and positions that come 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 a distribution cycle and provides flexibility for future growth opportunities. And finally, as you noted, our current yield is competitively positioned with a broader allerian index and should be considered an attractive entry point frame perspective unit holder 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.

Hey, Doug. Great question. Thank you. 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 not seeing the price increases on that we want to have experience. But RFPs are high. There's a lot of demand. We're super excited about the future.

We got a healthy backlog of contracted units. So we're really excited about the back half of 26.

Hey, hey, Doug. Also when I had an edit, we still have that we still have CCIU escalators to offset the inflation piece of it going forward as well.

Hey, good morning. Thanks for the question. It's Chris Walsen. We expected margins to drop with the JW 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 into limitary, 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. In all, we'll see margins improve slightly quarter over quarter.

That's a great question. And one of the reasons we've committed to portion of the cost of 500,000 horsepower, and when I say that portion of that cost, I want to explain it by having the JW 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. 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's 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.

So as far as deficiencies, no, I think we're really happy with what we were able to acquire. It fits really well with us. The footprint puts us where we want to be in all the basins, with all the different horsepower ranges like we've talked about before. We're extremely happy with where we are. We are continuing to evaluate that the idle horsepower that came over. We knew some of it wouldn't be, may not be redeployable immediately. We'll continue to evaluate that through the rest of this year.

We've also talked about looking at our secondary markets, maybe outside the country to deploy some of this equipment. But we're extremely happy with the JW acquisition. And like I said, on the announcement call back in December, we like to whole launch a lot of when it came to that acquisition.

We're absolutely always looking at M&A. We evaluate those. We're going to remain disciplined, focused. It has to be accretive. It has to make sense for us to be able to do it. But we are definitely in the M&A market and looking for opportunities to make that work.

One other thing I would note, Nate, is the energy high yield market has really remained resilient. The midstream portion of that in particular is remain resilient. I noticed to the extent we can be opportunistic, we will be yield to move away from us here recently at 10 years, around 4.7. But we continue to watch. We continue to look for opportunities to act insistency, to your debt, troncizing to the duration or tenor, if you will, for that.

And so, to the extent we find an M&A opportunity, that makes sense. I think the capital markets are available for that.

Thank you, Nate.

Absolutely. So, the manufacturing facility today, the way it sits, can build about 100 to 125,000 horsepower in that facility. And then we'll supplement the additional 20 to 60,000 horsepower a year through other facilities or other shops. But the flexibility that it provides is that we can order the engine and then we can wait until 30 to 40 weeks to order the compressor or the package, all the other parts and components. And we can build it right in-house. And then if, you know, we always have to think about what could happen if things changed. And if things changed until 29. So, we really like that flexibility that it provides.

It's a great question. There's certainly, you know, some standout basins overall, in terms of the growth profile for the U. S. or at least as it stands today. The Permian and associate gas basins, but certainly the Permian lead that way. Through 2031, those associate gas basins are probably 11 B. C. F. today of growth. The Permians about eight of that. Then the drier gas basins, like the northeast and the Haynesville, will make up about 12 B. C. F. of growth, both of those about six B. C. F. respectively. So, you go where the growth is. There's no doubt that's probably the first place that you look. And then additionally, there's opportunities in basins that are underserved.

I'd say the Rockies overall has been an underserved basin from a lot of the larger competitors out there. And we saw that with the JW deal. We saw the underlying value. We saw the amount of long-term gas growth that could come out of the Rockies and certainly come out of the Rockies at a four and a quarter profile. So, without giving away all of our cards, you go towards growth, you go towards underserved basins, and you make sure that they're durable in the long-term. And we see 140 plus B. C. F. a day of growth by early 2030 in the U. S. to serve the LNG demand that's out there, to serve the burgeoning growth in terms of data centers and the four to six B. C. F. a day plus associated data centers coming on in the next several years.

There's excellent opportunities out there in the compression space.

Ryan, it relates to re-terming. Presently, our rate for ABL is sub-six percent. So, the sofa rate really has remained relatively unchanged over the past six months. It's around 3.65%. And our number comes in a little north of 200 basis points when you factor in the underutilized capacity on top of that. So, we're still well below 6%. When you look at the ability to go out longer term at 8 and a half years, the numbers are probably 50 basis points in the north of that today. So, those are the things that you ultimately weigh in terms of that decision. But we also want to have the flexibility longer term for our business.

And so, to the degree, we can get that 50 basis points to Titan, and we see the longer out in tenor to an eight to ten year opportunity set, then we'll strongly look at the public market opportunities in the near future.

Hey, great question. It's Chris Walton. So, in regards to how customers are thinking to their growth, you know, as I mentioned earlier, it's a different way of business, right? When you have to think out not only next year, but two years and three years. And even beyond that, because that's four years is right around the corner with lead times doing what they're doing. But our customers, our tier one customers, are definitely planning well in advance, you know, their demand and their growth trajectories are definitely out there. And we're working with them hand in hand, we're having conversations with them every week, you know, we're working hand in hand to meet their needs. So it is a challenge, right?

And the challenging part for us is what the world is going to do in three and four years. But it's actually quite promising how everybody's working together. So looking forward to that and just see where the future goes.

Thanks, Ron.

Thank you all for joining the call this afternoon. I want to touch on a few more points and reiterate. The amount of RFQs we're seeing is very strong. The state seems to be set for large amounts of demand growth over the next four to five years. The demand is expected to be about 140 BCF by the end of 2031. That's over 30 BCF from 2025 averages. You know, the majority of that is LNG demand growth between 18 to 20 BCF a day of growth there. We we set just below our target leverage ratio at 3.75 times. We have equipment secured through 2029. Our in-house manufacturing capabilities tied with demand growth gives us huge flexibility. We believe we're in well positioned to grow in the future with great flexibility.

But we really appreciate you all joining our call. Thank you very much and have a good day.