Sometimes the best business decisions are those that weren’t planned in advance but came about fortuitously. Such was the case with USA Compression Partners LP’s decision to focus on new, large-horsepower (hp) machines just before shale play development exploded.
This strategy ran against the grain of what much of the compression industry was focused on when USA Compression was formed in 1998. At that time, the industry was mainly focused on lower hp compressors with a variety of operations, including fabrication and retail work.
“When we were formed, we didn’t foresee the shales coming on, but we did see that conditions were changing with equipment that worked offshore not being able to work in the new environments of tight oil production. Pretty early on after we started up, we saw shales developing in East Texas and took the ball and ran with it,” Eric Long, president and CEO of USA Compression, told Midstream Business.
Three periods
The compression sector had been through three different periods before USA Compression’s formation. The first period ran from the 1950s to the 1970s and saw the major oil companies maintain most of their compression operations and staff in-house. By the oil bust of the 1980s, the majors divested a lot of properties with independents filling the gap. These independents didn’t maintain their own compression operations, which led to more than 80 operators providing compression services throughout the country.
Eventually these operators were acquired and consolidated into two larger operators: Hanover Compression and Global Compression. Long had been involved in the formation of both of these companies and realized there was an underserved market in the sector.
There was a limit on high-horsepower compression due to the lifespan of these machines. “Compressors are readily rebuildable and hold their value over time with a lifespan of up to 50 years. We consider machines from the mid-’80s and up to be relatively new equipment today,” Long said.
Created with $20 million in equity, USA Compression has largely been built through organic greenfield development while focusing solely on compression services.
“Our belief was other folks were spread too thin with disparate operations. We also wanted to focus on the big regional gathering systems and processing plants with large horsepower needs rather than smaller horsepower compressors, which are focused more on wellhead operations and driven more by commodity prices,” Long said.
Fee-based revenues
This focus has helped the company to build more of a fee-based revenue stream with contract terms that run on average between two and seven years with a high renewal rate. “As an MLP, we focus on fee-based oriented type of contracts. We charge a flat monthly fee and don’t take commodity risks with contracts unique to a particular compressor,” Long said. These contracts include turnkey services along with the maintenance and repair services for these assets, which allow customers to fix compression costs.
“It’s a very stable business from the perspective of our investors and shareholders as well as our clients and customers,” Long added.
Many producers and operators choose to fully or partially outsource their compression services in order to maximize their budgets or because it is not viewed as a core competency. Long said that part of this mixture of outsourcing helps producers and operators enter new areas.
“We frequently grow in a new or step-out area with companies we’ve had a long relationship with where we years. Once they build bigger facilities, they tend to own the associated compression. Some companies prefer the flexibility of having their equipment work alongside our machines,” he said, while adding that a lot of this mixture goes back to the long lifespans of both compressors as well as shale plays.
“Companies tend to look at the next 40 years of a project and determine they’ll need two to three machines through its lifespan. They own those machines and contract for our assets to supplement those compressors,” he added.
Private vs. public
Private, equity-backed midstream companies also tend to contract for compression services since they have shorter lifespans of five to seven years before being sold. By comparison, public midstream companies tend to stay in business longer, and it may be more economical for them to own their compression.
Though the company wasn’t created with a focus on shale, the development of shale has helped to accelerate its growth. USA Compression was able to enter plays such as the Marcellus, Fayetteville, Woodford and Barnett early on since its assets are flexible and multistaged.
USA Compression started with operations in Appalachia, Oklahoma and Texas with a vision to eventually grow from these regions into the offshore and Rockies, but the advent of shales changed the company’s direction.
“There was so much business for us and so much growth that was driven by the horsepower needed for compression that we have been able to focus on shale for more than a decade,” he said, while adding that the company decided not to focus on other sectors such as offshore, California and international. USA Compression expanded into the Permian and Delaware basins in the last few years and is still planning on entering the Rockies.
Private equity supports public move
USA Compression was acquired by the energy-focused private equity firm Riverstone Holdings LLC in December 2010, which wanted to enter the compression business. “They liked the compression business and were looking for a platform they could take public as an MLP and grow. We had a demand for new equipment and looked at the deal as the best option for our customers and company to continue to grow,” Long said.
Shortly after the acquisition, the company filed in July 2011 and went public as an MLP in January 2013. Long said this process was able to move so swiftly because of Riverstone’s credibility in the financial community.
“The acquisition allowed us to move up in the banking sector. We started meeting with senior officials at banks, increased our lending capacity, and we were able to work with the top echelon of investment banks when we went public,” he added.
While speaking at the recent National Association of Publicly Traded Partnerships’ MLP Investor Conference in Orlando, Fla., Long noted that the company’s fundamentals drive stable cash flows. These fundamentals include the long life of its assets that complement the gathering systems and processing plants it serves with a majority of the capital cost of each compression unit that never wears out. In addition, the average age of USA Compression’s fleet is about four years old, considered “brand new” in the industry and drives the fuel and emissions efficiency.
These benefits have been supported by the company’s major shareholders—Riverstone and Argonaut Private Equity, and other affiliates of George B. Kaiser, which have elected to participate in USA Compression’s distribution reinvestment plan (DRIP).
This program provides all unitholders with the option to convert their distributions into newly issued common units. This helps USA Compression with its growth strategy as it is able to retain capital to add new horsepower to its fleet.
“Riverstone and Kaiser are DRIP’ing all of their units, which allows us to redeploy roughly 60% of our distributable cash back into growing the business,” Long said.
New fleet provides lift
Most of the company’s growth has occurred through greenfield development, aside from the August 2013 acquisition of S&R Compression for $182 million, which owned a fleet of gas-lift compressors that was less than two years old. This acquisition, which represents about 15% of USA Compression’s portfolio, came about from the company’s relationship with Riverstone.
“We weren’t actively looking to get into gas-lift compression, but we had inquiries from customers regarding this technology and the opportunity presented itself through Riverstone’s relationship with S&R,” Long said.
The acquisition has been fully integrated into USA Compression, but is operated as a standalone business since the fleet is lower hp and focused on oil unlike the rest of its fleet. “We staff and maintain the gas-lift fleet differently, but with the same commitments to safety and excellence,” he said.
The fact that only one acquisition has been made in its lifetime is more impressive when considering USA Compression’s 25% annual growth rate for the past 10 years. The company’s growth in 2014 was especially large as it grew by 350,000 hp.
Solid outlook
Due to decreased drilling activity, USA Compression has cut back its fleet additions in 2015 from this steep level of growth with most new large HP fleet additions coming on in the first three quarters with no gas-lift fleet additions planned in the second half of this fiscal year. While growth is a bit slower this year, Long stated that there should still be growth in 2015.
“Our business hasn’t really been affected by the downturn in prices. When you look across the compression space, all of our fleets are highly utilized. USA Compression is demand driven, and demand for gas is poised to increase in the future from utilities, petrochemical companies and residential consumption in the Northeast and exports to Mexico. All of this gas needs compression. We’ve seen some select infrastructure projects deferred, but there has been some pick up in drilling activity, and we’re continuing to grow,” he said.
Growth this year will focus on the Marcellus and Utica shales where the company has more than 500,000 hp, the Permian and Delaware basins and to a lesser extent, the Midcontinent. “Despite the continued headlines focused on depressed crude oil prices and the impact they are having across the economy, we remain optimistic on the outlook for natural gas demand growth,” Long said during a recent conference call to discuss first-quarter earnings.
“We continue to differentiate USA Compression in the marketplace by moving up the ladder in the size of our iron by ordering even larger horsepower units. In the second half of 2015, we will take delivery of and deploy in Appalachia under long-term contracts the largest equipment in the history of the company, driven by the continued buildout of the domestic natural gas gathering and transportation infrastructure,” he said during the call.
According to Long, the company’s growth profile will continue even with incremental demand growth as production and midstream buildout will continue to grow to meet this demand. “We remain bullish on the long-term outlook for natural gas. We see that the global marketplace and domestic drivers of the natural gas market are favorable for our business over the near to longer term,” he added.

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