UPDATE: Lockin Near 40% Yield or $2.10 Annual Dividend for $5 or better
Dear Subscriber,
UPDATE: BUY USAC under $5 immediately to lock in a $2.10 1.2X covered distribution nearly 40%!!!
Here is a copy of the e-mail conversation I have with USAC investor relations manager on their exposure to natural gas producer bankruptcies.
Short version--on nearly $3 BILLION in billings, they lost $1.5 million from one customer--and then got repaid by BK trustee because, without 1000 horsepower compression, there simply is NO GAS PRODUCED.
USA Compression Partners, LP
Dear Matthew,
Both I and my newsletter subscribers hold USAC units.
My question is with the wave of bankruptcies in the energy patch--e.g., Whiting and Hornbeck today--can you update us as to
1) Are they lessors in your portfolio?
2) What is your procedure for reclaiming compressors from BK lessors?
3) What is USAC doing to protect yourself from BK exposure?
4) I am sure you had BKs in 2014-2016 downturn--yet you kept your dividend and actually grew it
Can you explain how that magic happened (other than the companies kept operating during BK and the banks required they keep producing oil/gas/liquids that required compressors
PS--5) Is USAC or ET authorized by the Board to buy back stock?
Matt Liuzzi <MLiuzzi@usacompression.co
Tobin, thanks for the note and for reaching out. First off yes USAC is authorized by the BOD to repurchase units.
Hopefully, I can draw some distinction for you between our business and operations/drivers and that of other service providers in the oil field.
We are not your typical “Oil Field Service” entity, with business prospects tied to commodity prices/throughput levels and whose financial results tend to exhibit much more volatility. A lot of OFS guys are very transactional – show up, drill a well, leave and send a bill. When the price of oil is high, business is active, and vice versa. We are much more of a midstream, infrastructure-focused entity, with long-term customer relationships and assets that work 24 hours/day, 365-days a year for our customers.
We charge a monthly fee for the service we provide – and that monthly fee doesn’t change depending on how much gas a customer flows through our units (or the price of that gas). It’s the “take-or-pay” concept that we are built around. And as a general rule, natural gas production needs compression for the life of production.
So, to your questions - due to customer confidentiality restrictions, we don’t publicly disclose customer names or specific business relationships. But, let me give you a little color on what we’ve seen in the past around distressed customer situations and see if this helps you gain a better understanding.
As I’m sure you appreciate, our assets are critical to the movement of gas through pipelines. Our CEO likes to say “compression is like the heart of the human body”. As part of a bankruptcy, our claims and contracts would likely be evaluated just like everyone other vendors.
The creditors and court will likely look to see how important it is to the estate to continue having our assets working and whether the rates we charge are “market –based”.
Hypothetically, the court could throw out our service agreements. We could then opt to renegotiate a new contract or alternatively, remove our assets from the customer’s site and wash our hands of the situation.
Keep in mind, the moment you shut off/remove a compressor, the gas essentially stops flowing. And so that decision can have an enormous impact on the operations of a company and its ability to continue as a going concern, pay its bills, etc.
Our past experience would indicate that courts tend to view our services as critical to maintaining the value of a business, and historically, we have been confirmed, paid, etc
Also, we typically invoice customers 30 days in advance of the service month (e.g., we invoiced today for services in the month of May), and so are able to spot changes in payment behavior over time. But, by and large, I would say the potential to shut off a compressor (and basically stop the cash flows of the customer) is enough leverage to make sure we get our bills paid.
Over 15+ years, we’ve written off less than $2mm in bad debt expense on over $3bn of billings! Back in 2014-2016, we only had 1 bankruptcy of note and came out of that one in a great position (and continued on to provide services to the restructured business).
Let me know if that helps-
Regards
Matt
QUICK REVIEW ON OUR $5 or better recommendation
1) USAC has grown and maintained its now $2.10 annual dividend for 4 years including the energy meltdown in 2014-2015
2) Their cash flow is 1.25X higher than their dividend because
3) You cannot operate an energy collection and transport system without HUGE air compressors
4) These leases are long term with major nat gas and gas pipeline companies
5) The leases are paid or the compressors turned off
6) Even if you have reduced nat gas product, you still need the compressors--especially in nat gas that comes as a by-product of shale because the drilling pressure is so low in shale
7) In 15 years they have written off only $1.5 million in bad depts
8) They have not laid off ONE worker in 2020--as I said--with structural natural gas consumption fixed (for power production, for chemical production, for LNG exportation and home use) there IS NOT a natural gas business without 1,000+ horsepower air compression.
9) $20 billion Energy Transfer (ET) owns 48% of the shares--you know THEY are not selling
10) USAC debt and preferred stock is fixed rate
Here are the basic business facts
USAC provides compression services across a geographically–diversified operating area
20+ year history with a primary focus on large horsepower (1,000 HP+) applications
“Southwest Airlines” standardized business model
Focus areas: Permian/Delaware; Marcellus/Utica; Mid‐Continent/SCOOP/STACK; S. Texas; E. Texas; Louisiana; Rockies
Active Fleet: 3.3mm Horsepower
– >70% of equipment is greater than 1,000 HP
Average Utilization ~94%
~880 employees
2020 Guidance given March 6, 2020
Provided initial full‐year 2020 guidance:
– Adjusted EBITDA: $415mm – $435mm
– DCF: $210mm – $230mm
Supportive Macro: Gas Isn’t Going Anywhere Bullish on natural gas production & demand, both in US and globally< >LNG exports, petrochemical feedstock and power gen driving continued gas usage.
Natural gas demand/production expected to increase through 2050
High-Quality Assets in Right Places with Strong Customers
New vintage fleet focused on high quality CAT/Ariel machines< >Geographic diversity, but significant density where the gas is: Permian/Delaware & NortheastStrong counterparties – active customers (major oil & gas, large independent E&Ps, midstream)
Established Company with History of Stability
Providing large horsepower compression services for >20 years< >Performance throughout price cycles; no direct commodity exposure stable distribution history: >$ billon billed and $880 million returned since IPO
Compression is a “must‐have” part of the natural gas value chain: with increasing natural gas usage as a transition fuel to the future will come increasing requirements for compression
Slowing Rig Count / Production in Face of Strong Demand Should Bode Well for Nat Gas
Overall domestic rig counts are down (~60% off recent highs) (1)
– Gas‐directed rigs are down >90% off 2008 highs, aided by the economics of gassy oil plays (i.e., Permian/Delaware)
However, both dry and associated gas production is expected to increase over time to meet increasing demand (2)
Given steep decline nature of shale well production, rig activity will need to continue to meet expected production/demand
Increasing gas‐oil ratios (GORs) in domestic oil basins is occurring
Rising Baseload Natural Gas Demand 2020-2025
■ Natural gas domestic consumption is up 10.5 Bcf/day (~14%) since 2014 to 83.3 Bcf/d in 2018 (1)
Majority of the demand ncrease (~6.4 Bcf/d) took place in 2018
1H 2019 increased over 1H 2018 by 2.2 Bcf/d to 84.2 Bcf/d (1)
The largest driver has been the domestic power generation sector, where natural gas surpassed coal as a fuel source in 2016 (1)
Has significantly eroded coal’s baseload share along the way
Exports to Mexico:
Growing power needs to be met by US shale gas
~6 Bcf/d to Mexico in 2020
LNG Exports:
− ~7 Bcf/d by 2020; 14 Bcf/d by 2030
Power:
− ~30 Bcf/d in 2020
Clean fuel; coal plant retirements continue
Industrial Demand:
− ~35 Bcf/d by 2040
Petrochemical plants (Gulf Coast, NE) driving demand
Customers finalizing 2020 budgets; anticipate spending reductions – which is POSITIVE for compression outsourcing
USAC high‐grading customers – longer-term contracts with strong counterparties
Highest‐return customer projects will get completed, requiring must‐run compression
Large horsepower units in demand: large HP utilization remains high throughout the sector
Lease price increases expected to moderate vs. last 12‐18 months
My bet is the company is going to buy back units very soon at this insane valuation
Here is their early March investor update https://seekingalpha.com/article/4329484-usa-compression-partners-usac-presents-credit-suisse-energy-summit-slideshow
PS YOu can even buy PUT OPTIONS to protect your investment out to Dec 20202--but at these prices the risk vs. reward is insane and as US economy recovers nat gas demand will increase.