Archrock Is Set To Ride A Strong Compression Market

Company Profile - AROC is an outsourced provider of natural gas compression services in the U S with a fleet of 3 773 000 available horsepower HP at the end of September mostly consisting of large compressors with 1 000 or more horsepower [2] - The company operates in various basins across the U S with a heavier concentration in oil driven shale plays such as the Permian Eagle Ford Scoop Stack and Niobrara as well as other basins like the Marcellus Utica and Bakken [2] - AROC serves both midstream and upstream operators with its top 10 customers representing over 50 of its revenue including companies like Enterprise Products Partners Williams Companies Enlink Chevron and Devon [2] - The company has fixed fee contracts with initial terms of 12 48 months and an aftermarket service business that accounts for nearly 20 of its revenue [2] - AROC owns a 25 stake in Ecotec International Holders which manages and monitors ethane emissions [2] Market Trends and Opportunities - AROC is benefiting from strong natural gas production particularly in oil producing regions like the Permian where associated gas production is driven by oil prices rather than natural gas prices [3] - The company has seen an increase in monthly revenue per horsepower for eight straight quarters with a 17 increase in Q3 [3] - AROC is experiencing unprecedented tightness in the compression market due to structural and industry wide changes to capital allocation practices [3] - The company s utilization rate based on horsepower reached a record 96 at the end of Q3 compared to 89 a year ago [3] - AROC is more willing to add new compression units even at elevated prices which are up about 40 since the pandemic and has raised 55 million through the sale of nonstrategic equipment to fund new build investments [3] - The company s 2024 new build capacity is already committed with growth capex expected to be about 160 million in 2024 [3] - AROC s aftermarket service business is expected to benefit from the current industry dynamics as older units stay in the field requiring more maintenance and overhauls [3] - The company has long term opportunities in carbon capture with a 25 stake in ECOTEC and a partnership with Ionada for post combustion carbon capture technology [3] Valuation and Financials - AROC trades at 8 5x the 2024 EBITDA consensus of 494 6 million and 8 0x the 2025 EBITDA consensus of 526 9 million [4] - The stock has a distributable cash flow yield of about 8 5 based on 2023 conservative projections of 225 million and pays a dividend yield of about 4 after a 6 5 increase in late January [4] - The company s dividend was covered 2 6x in Q3 and it was leveraged 3 8x at the end of Q3 [4] - AROC is less expensive than USAC despite having a similar business and historically trading at a discount to USAC [4] Conclusion - The Biden administration s pause on new LNG facility permitting adds some risk but is not expected to have a big impact over the next two years [6] - The compression market is expected to remain tight with prices continuing to rise gradually [6] - AROC is anticipated to report a solid Q4 with high utilization and sequential price increases benefiting its top and bottom lines [6] - The company is less expensive and has a better balance sheet than USAC riding many of the same market trends [6]