USA Compression Partners: Uncompressed Gains In The Long Term – USA Compression Partners, LP (NYSE:USAC)

Natural gas is a better transportation fuel than gasoline, so if that’s the case, it’s cheaper, it’s cleaner and it’s a domestic resource. – T. Boone Pickens

Armed with advantages such as an average quarterly gross operating margin of 67%, financially secure & large clients, and stable revenues, USA Compression Partners (USAC) seems to be standing firm on solid ground.

Though the company faces a tough time in 2020-21, it expects not only to breeze through it with ease but even emerge stronger. Here are the reasons why:

The Adjusted Business Model

The company’s revenue-generating horsepower capacity as of Q3 2019 was 3.3 million horsepower, and its utilization was 94%. Utilization remained high because the company has learned from experience. In 2015 and 2016, the gas compression industry witnessed a downturn, which caused a shakeout and resulted in overcapacities.

Since then, USAC has been focusing on large horsepower compression assets (2500+ horsepower per asset) that are needed regularly by larger, active and financially secure midstream and E&P companies. Today, the company typically enters into long-term contracts that can ride through multiple commodity cycles. The idle capacity (6%) is because of the smaller horsepower assets.

This shift has strengthened its business model, stabilized revenues, optimized fleet utilization, and created an ecosystem that can weather a slowdown.

Reduced Capex

USAC’s management team believes that large players will reduce capital budgets in 2020, and therefore, the activity will remain subdued. This is because of an oversupply situation in the industry. There also is some uncertainty related to global trade issues (the U.S.-China trade war, trouble in the Middle East, potential trade conflicts with EU, etc.). Then, there’s the U.S. 2020 election to reckon with.

As the management team expects these factors to temper down business activity, it has reduced its capex program in 2020. This shows that the company is realistic with its projections and thinks hard before spending on capital assets.

Dividend Track Record

Source: Macro Trends

USAC’s dividend payouts have been steadily increasing since 2014, with the latest annualized payout being $2.12. The dividend yield is high at 12.93%, and the management team did indicate during the Q3 earnings call that they were satisfied with a 12% yield.

Considering that the management team plans and executes efficiently, maintaining the yield should not be a problem.

Natural Gas Demand and Supply


Source: Energy Information Administration

The EIA estimates that gas production will bump up a bit in 2020 but will remain in a flat territory in 2021. The supply will be about 19% higher than the consumption, and the prices for the residential, industrial, and commercial sectors will also loiter around in flat terrain. Actually, this is not so bad news for USAC because it signs long-term contracts with large companies that are financially secure and active. It can, therefore, sail through the tough years (2020-21) with ease and then look forward to good times.

As per Natural Gas Intel, gas will overtake coal by 2030 and become the second-largest source of energy after oil. Also, “USA will contribute 40% of global natural gas production by 2025.” However, in the very long run, electric vehicles will dominate over vehicles powered by conventional fuels. How the balance of power will shift is not known or understood now. But one thing is certain – natural gas is a clean, environment-friendly fuel, and it has a bright future.

Summing Up

In Q3 2019, USAC earned average monthly revenue of $16.73 per horsepower and expects this number to dull down a bit in 2020.

Given the oversupply situation in the gas market, E&P budgets are likely to be dramatically reduced in 2020 – in response, USAC has slashed its capex budgets and has decided to allocate growth capital to large customers/long-term projects. The company expects the demand for natural gas to increase in the coming years (beyond 2021), which will lead to a higher demand for its compression services.

The worst-case scenario for the company could play out if natural gas prices were to collapse massively, and therefore, all USAC investors must track the commodity too. Plus, the U.S. elections in 2020, any escalation in the Middle East, and a coronavirus breakout have the potential to spoil the party.

I find USAC attractive as a long-term investment. However, it would be prudent to wait for the negatives to somewhat clear up before entering.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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