Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Archrock Inc (AROC, Financial) reported a net income of $34 million for Q2 2024, up from $25 million in Q2 2023.
- Adjusted EBITDA increased by 15% year-over-year to $130 million, driven by higher pricing and cost management.
- The company maintained a strong financial position with a leverage ratio of 3.2 times.
- Quarterly dividend per share increased by 6% compared to the previous year, with robust dividend coverage of 2.6 times.
- The acquisition of TOPS is expected to be immediately accretive, enhancing Archrock Inc (AROC)'s position in the contract compression services market.
Negative Points
- Higher maintenance CapEx was reported for Q2 2024, which could indicate increased operational costs.
- The market for dry gas plays has cooled, potentially impacting future growth in those areas.
- The company has less idle capacity to bring back into operation, limiting potential for rapid expansion.
- The acquisition of TOPS involves a significant financial commitment of $983 million, which will be funded through a combination of equity and debt.
- Inflation in equipment costs remains a concern, with increases expected to be in the 3% to 5% range annually.
Q & A Highlights
Q: Brad, year to date, you've spent more than half of your growth CapEx, but your horsepower totals haven't moved much. Can you provide some color on fleet dynamics, including how much horsepower you've delivered, put in the field, and sold?
A: We've maintained a 95% utilization rate, meaning we've put a lot of idle fleet horsepower to work. The market has cooled a bit in dry gas plays, but this is immaterial to our overall fleet position. Most of our horsepower is working in liquids-rich plays like the Permian Basin. Bookings remain robust, and we expect strong demand into 2025 as LNG projects come online.
Q: Can you provide a status update on lead times for new orders and the impact of equipment cost inflation?
A: Lead times are around 40 weeks for funded equipment, and inflation has returned to historical levels of 3% to 5% per annum. The market is driven by capital discipline rather than supply chain constraints. Investors' focus on free cash flow, strong balance sheets, and returns is enforcing discipline in the market.
Q: Are we getting closer to spot pricing for revenue per horsepower, and is there still room to go as you reset pricing on previous contracts?
A: At high utilization levels, we still have pricing prerogative. Spot pricing remains elevated, and we will continue to bring the fleet up to market pricing as contracts permit. Over the next 18 months, we expect to increase pricing on 80% to 90% of the horsepower fleet.
Q: The higher maintenance CapEx this quarter was surprising. Was this due to higher make-ready costs or something else?
A: The higher maintenance CapEx was due to timing and parts expenses. Our current guidance remains unchanged, and there's no need to read into it beyond that.
Q: Can you maintain the above 20% margins for the aftermarket business, and what's your outlook?
A: With high utilization levels, customers are focused on maintaining their horsepower, driving high-margin service activity. Our team is capturing and executing this well, and we expect continued profitability in the aftermarket service business.
Q: You mentioned the market has cooled in dry gas plays, and you're repositioning assets into liquid plays. Can you quantify how long this takes and how much horsepower is involved?
A: The impact is marginal and won't be transparent from a financial perspective. The redeployment of assets is ongoing, but it won't significantly affect our overall fleet or costs.
Q: Over the next 18 months, you mentioned price increases on 80% to 90% of the eligible fleet. How much of the fleet is eligible for repricing?
A: Between 80% and 90% of the fleet should be eligible for repricing over the next 18 months.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
