[CORRECTION] Stock Report: USA Compression Partners (USAC)

THE HEDGEYE EDGE

USA Compression Partners (USAC), LP is a ~$4B enterprise value Master Limited Partnership that provides natural gas compression services to midstream and E&P customers. The company has been one of the best performing names in the energy ecosystem for the past 3 years.

Despite high and increasing leverage, a deteriorating fundamental backdrop, and overdistributing to its partners, USAC trades at a 2.5x - 3x EV / EBITDA premium to the largest competitor in the space with a healthier balance sheet, Archrock Inc. (AROC), as well as smaller competitors CSI Compressco, LP (CCLP) and Natural Gas Services Group (NGS).

Fundamentally, the natural gas compression industry is unattractive. The market’s structure is highly competitive & fragmented, pricing is very sensitive to changes in natural gas production, and returns on invested capital are mid single-digits throughout commodity price cycles.

Add in USAC’s high, fixed distribution payout (~12% yield), 5.8x leverage including the preferred units, and significant ongoing capital needs, the result is substantial cash burn even during cyclical upswings, as in 2018. At peak margins, peak pricing, and peak utilization USAC will do ~$400MM in EBITDA and have interest, preferred distribution, and LP distribution obligations of ~$375MM, leaving little flexibility in the model.

As the natural gas production outlook decelerates after 2+ years of outsized growth, we expect USAC’s horsepower utilization and pricing to deteriorate. The more difficult operating environment will further challenge gross profit margins, leverage metrics and distribution coverage.

In 2020, we expect the company to thinly cover its distribution and burn ~$50MM after distributions, taking leverage including the preferred to ~6.0x. With USAC pushing up against its 5.0x net debt to EBITDA covenant (ex. the preferred), we expect the distribution to be under pressure.