Like so many other oil and gas services companies, Archrock Partners' (NASDAQ: APLP) results in 2016 weren't great. Declining production volumes for natural gas meant that the company's fleet of compression equipment wasn't in as much demand. However, it ended the fourth quarter of 2016 on a slightly promising note.
Here's a look at fourth-quarter results as well as what investors should be looking for in 2017 from Archrock Partners as it tries to recover from a less-than-awesome 2016.
By the numbers
|Results*||Q4 2016||Q3 2016||Q4 2015|
|Net income per share||($0.22)||($0.01)||($2.34)|
|Distributable cash flow||$41.3||$43.7||$46.2|
*in millions, except per-share data. Data source: Archrock Partners earnings release.
For the most part, Archrock Partners' results for the quarter were more or less steady from the prior quarter. Revenues were flat, adjusted EBITDA was about flat, and there was little change in distributable cash flow. The big difference in net income compared to the third quarter was a larger asset impairment charge. If we were to strip out that additional $14 million in charges, net income would also have been flat.
There were some things that were promising in this result, though. One is that operational costs are on the decline, and the company is generating enough excess cash to pay down its debt load. Gross margins for fiscal year 2016 fell 16% compared to the year prior, which helped to offset the decreases in revenue.
Another thing worth noting is that the company's distributable cash flow is much higher than its current payout. Its distribution coverage ratio for the year was 2.45 times, which gave the company about $100 million in excess cash that was mostly used to pay down debt. Management has said that it intends to lower its leverage ratio (measured as covenant debt divided by EBITDA) to 3.5 times. At the end of the fourth quarter, this leverage ratio stood at 4.8 times.
On the operations side of things, we saw a modest uptick in operating horsepower (its measure for total compression assets in use) as well as an increase in horsepower utilization to 86%. The addition of compression horsepower typically comes after wells are drilled and completed, so this business is expected to lag behind the uptick in other oil and gas equipment and services businesses. The next few quarters will be more telling of the rebound in oil and gas activity for Archrock Partners than this most recent one.
What management had to say
As CEO Brad Childers said about Archrock Partners' most recent operational improvements and how he sees 2017 and beyond shaping up for the company:
The work we accomplished in 2016, including improvements in field operating efficiencies, a 22% reduction in run-rate SG&A from the first quarter of 2016, and over $65 million in debt reduction, has positioned us to take advantage of growth opportunities in 2017 and beyond. We believe the market is showing signs of a cyclical recovery in our business. Industry conditions are improving and we expect to leverage higher customer activity levels to drive increased orders in 2017. As a later cycle participant, we believe 2017 will be a transition year and we expect that our earnings will stabilize in the first part of the year and begin to recover in the later part of the year.
We continue to expect to benefit from the increasing demand for natural gas from LNG and pipeline exports, petrochemical feedstock and power generation. Our existing idle capacity as well as investment in our compression fleet will enable us to capitalize on opportunities as the predicted growth in U.S. natural gas production occurs.
What a Fool believes
Archrock Partners kind of painted itself into a corner as it ambitiously tried to acquire assets from its parent back in 2015, a move that proved troublesome as oil and gas production declined and the need for compression horsepower in gathering and transportation systems dried up. Now with drilling activity back on the rise, we should start to see Archrock Partners rebound. The question isn't whether its prospects will improve since that seems like an inevitability. The better question is whether those improvements will be enough to get its debt levels back in line quickly.
If it can do so, then it will free up some excess cash that can be reinvested in more horsepower to meet growing demand in places like the Marcellus and Utica shale formations, and potentially give management enough leeway to start raising its payout again. A lot of this will depend on the next few quarters. So investors who are interested in Archrock should keep an eye on the rest of the year.
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