aroc q1 2019 investor presentation final - seeking alpha

ARCHROCK, INC. (NYSE:AROC)

MAY 2019

ARCHROCK, INC.INVESTOR PRESENTATION

ARCHROCK, INC. (NYSE:AROC)2

Forward Looking StatementsAll statements in this presentation (and oral statements made regarding the subjects of this presentation) other than historicalfacts are forward‐looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward‐looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertaintiesand factors that could cause actual results to differ materially from such statements, many of which are outside the control ofArchrock, Inc. (“Archrock” or “AROC”). Forward‐looking information includes, but are not limited to: the industry fundamentals,including the attractiveness of returns and valuation, stability of cash flows, demand dynamics and overall outlook, andArchrock’s ability to realize the benefits thereof; Archrock’s expectations regarding future economic and market conditions andtrends; Archrock’s operational and financial strategies, including planned capital expenditures and growth activities, Archrock’sability to successfully effect those strategies and the expected results therefrom; Archrock’s financial and operational outlook,and ability to fulfill that outlook; demand and growth opportunities for Archrock’s services; statements related to performance,profitability, structural and process improvement initiatives, the expected timing thereof, Archrock’s ability to successfullyeffect those initiatives and the expected results therefrom; the operational and financial synergies provided by Archrock’s size;and statements regarding Archrock, Inc.’s dividend policy.

While Archrock believes that the assumptions concerning future events are reasonable, it cautions that there are inherentdifficulties in predicting certain important factors that could impact the future performance or results of their businesses. Thefactors that could cause results to differ materially from those indicated by such forward‐looking statements include, but arenot limited to: changes in customer, employee or supplier relationships; local, regional and national economic and financialmarket conditions and the impact they may have on Archrock and its customers; changes in tax laws; conditions in the oil andgas industry, including a sustained decrease in the level of supply or demand for oil or natural gas or a sustained decrease in theprice of oil or natural gas; changes in economic conditions in key operating markets; the financial condition of Archrock’scustomers; the failure of any customer to perform its contractual obligations; changes in safety, health, environmental andother regulations; the effectiveness of our control environment, including the identification of control deficiencies.

These forward‐looking statements are also affected by the risk factors, forward‐looking statements and challenges anduncertainties described in Archrock’s Annual Report on Form 10‐K for the year ended December 31, 2018, Archrock Partners’Annual Report on Form 10‐K for the year ended December 31, 2018, and those set forth from time to time in Archrock’s andArchrock Partners’ filings with the Securities and Exchange Commission, which are currently available at www.archrock.com.Except as required by law, Archrock and Archrock Partners expressly disclaim any intention or obligation to revise or update anyforward‐looking statements whether as a result of new information, future events or otherwise.


Archrock – Company Overview

Natural gas compression C‐Corp based in Houston, Texas

Largest outsourced compression provider in U.S.(1)

Compression is a must‐run service for gas transportation

Specialize in large HP servicing midstream gathering systems

Fee‐based contracts with high‐quality, long‐term customers

Strong geographic diversity across all major U.S. gas & oil basins

• NYSE: AROC

• Market Cap: $1.3 billion(2)(3)

• Enterprise Value: $2.9 billion(2)(3)

• Dividend: $0.132/quarter(4)

• Yield: 5.3%(2)

• Shares Outstanding: 130.4 million(3)

Growth and returns oriented energy infrastructure company

Our vision is to provide superior compression services, unmatched technical expertise and an unwavering commitment to safety

(1) Based on total horsepower as of March 31, 2019. (2) Stock price as of May 8, 2019. (3) Debt balance and shares outstanding as of March 31, 2019. (4) To be paid on May 15, 2019.


The Leader in U.S. Natural Gas CompressionLeading contract compression position supplemented by AMS capabilities

3,561

3,294

1,100

1,017

850

450

450

400

239

0 1,000 2,000 3,000 4,000

AROC

Category 2

Category 3

Category 4

Other

Our Aftermarket Services business expands our addressable market

Allows us to service the customer base that owns their compression

Provides attractive diversification to customer and service base

Total Compression Market

Outsourced Owned~30% of market ~70% of market

Contract Operations(1) Aftermarket Services (AMS)

(1) Chart represents operating HP for outsourced compression (in thousands). All data as of March 31, 2019. Based on SEC filings and management estimates.


Our Rich Company LegacySuccessful 60+ year company history with proven success over time

South Coast Gas

Hanover Compressor founded (1990) / IPO (1997). Acquisitions included:– Dresser Rand (2000)– Schlumberger (2001)

Universal Compression IPO (2000). Acquisitions included:– Halliburton (1994)– Tidewater (1998)– Weatherford (2001)

Universal Compression forms first publicly‐traded compression MLP –Universal Compression Partners (2006)

Exterran formed by merger of Hanover Compressor and Universal Compression (2007) Exterran Partners LP is renamed due to merger with Universal / Hanover (2007)

Exterran Partners LP acquires ~550,000 horsepower from MidCon Compression for ~$495 million (2014)

Archrock is the renamed U.S. Contract Operations and Aftermarket Services business following spin‐off of Exterran’s International Services and Global Fabrication businesses (2015)

Archrock acquires Archrock Partners and eliminates IDRs in simplification transaction (2018)

South Coast Gas Compression established – legacy entity of Universal Compression (1954)

1990 – 2006 2007 – 2014 2015 – Current1950’s


An Attractive Energy Infrastructure InvestmentArchrock Investment Highlights

Midstream / Large HP Focus

Resilience Through Cycles

Visible, Long‐Term Growth

Solid Financial Position

Proactive Leadership

• Gathering focus; a leading provider of large HP, 72% of fleet(1)

• Compression is a must‐run service for gas transportation• Attractive, long‐term & diversified customer relationships

• Business driven by oil and gas production• Multi‐year, fee‐based contracts• Positive EBITDA generated through cycles

• Tied to structural growth in U.S. natural gas markets• Diversified asset footprint in leading growth basins• Multiple avenues of growth – organic and M&A

• Improving leverage position; self‐funding• Annual dividend growth of 10‐15% through 2020• Dividend coverage of greater than 2.0x

• Track record of managing capex to market conditions• Ongoing fleet standardization & profit growth initiatives• Cost of capital and liquidity improved from C‐Corp

simplification

(1) Based on total operating horsepower as of March 31, 2019.


OPERATIONS


Compression 101 – What Do we Do?

What Does it Look Like?

Large horsepower unit (1,400 HP)

Compression increases pressure within a pipeline to transport natural gas

Equipment that moves natural gas through infrastructure systems to consuming markets

Compression also used to provide enhanced oil recovery through gas lift

24 hours a day, 7 days a week, 365 days a year operation

Compression needed across the energy value chain, from the wellhead to distribution

Can be owned or outsourced to a compression specialist such as Archrock

A Must‐Run Service

Reduces capital expenditures

Leverages Archrock’s compression expertise

Utilizes Archrock’s operational footprint & execution capability

Limits risk of idle customer assets after initial application

Benefits to customer of outsourcing


Archrock’s Focus on MidstreamOur midstream focus results in greater stability

Drilling

MIDSTREAM

Characteristic The Midstream Benefit The Result to Archrock

Production Focused Relatively stable compression demand • Average utilization of 86% (1)

Longer Contracts Longer‐term, fee‐based assignments • Average time on‐site of approximately 3 years

Earnings Stability Relative EBITDA stability through cycles • 10‐15% annual dividend growth through 2020

Financial Flexibility Strong cash flow generation • >2x dividend coverage• No external equity requirements

Completions Gathering Processing Large Pipeline/ Storage Refining Marketing

DOWNSTREAMUPSTREAM

Archrock’s Compression Focus

We provide compression services for midstream applications

(1) Average end of period utilization for 2012‐2018.


A Market Leader in Large Horsepower

Gas Associated with Oil Production

Lower initial pressure vs. dry gas wells; requires more compression Almost 50% of growth in natural gas production forecasted from

associated gas plays (i.e., Permian & SCOOP/STACK)(2)

Compressors economically advantaged in gas lift

Leveraging the growing industry trend towards larger HP units

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Fleet Allocation(1)28% Small HP 72% Large HP

Drilling Efficiency & Predictability

High probability drilling programs allow for efficient infrastructure planning Large HP is more cost effective than a series of smaller HP units

Increasing Lateral Lengths

Longer lateral lengths increase flow to the wellhead Higher volumes require more compression

Pad Drilling from Shale Wells

Pad drilling brings multiple wells to a single wellsite, increasing volumes and compression demand

Drivers of Large HP Demand

Note: Small compressors are 1,000 horsepower and less and large compressors are greater than 1,000 horsepower. (1) Based on total operating horsepower as of March 31, 2019. (2) Source: Drilling Info, Fundamental Edge January 2019.


Diversified Platform Across Key Shale BasinsStability and growth opportunity across U.S. production basins

Marcellus / UticaNiobrara

SCOOP / STACK

Permian

Eagle Ford

Barnett

Haynesville

Material presence and scale in all major U.S. shale production basins

Largest U.S. provider of compression services by fleet size

Regional diversification provides protection against basin‐specific headwinds

Mobile units capable of re‐deployment to meet changing customer demand or market pressure

Gas associated with oil production is expected to drive significant compression demand across the U.S.

Indicates active horsepower unit as of March 31, 2019.


Contract Operations Customer BaseStrong relationships with top‐tier energy companies

(1) Total Contract Operations revenue for three months ended March 31, 2019. (2) As of March 31, 2019. (3) S&P credit ratings.

Major Customers~38%% of total revenue from top 10 customers(1)

Revenue Diversification

Long‐term Relationships

High Quality

~550Total customers

Deep Base

~15 yearsAvg. relationship length with top 10 customers(2)

7 of 10Top 10 customers with investment grade credit(3)


Aftermarket Services CapabilitiesGrowing opportunities to service customer‐owned compressors

Ability to serve the entire U.S. compression market Margin contribution from customers with their own compression solutions Leverages existing infrastructure and contract compression business customer network Revenues up 26% in 2018 compared to 2017 Significant opportunity as newer compression in shale sector approaches major maintenance cycle

• Sale of compressor components (engines, compressors, other parts)

• Used for maintenance and repair of compression equipment

• Scheduled on‐site maintenance

• Major on‐site maintenance• Unscheduled on‐site call‐outs

Field Services Parts Shop Services

• Parts remanufacturing, valve repair and machining

• Re‐design of existing assets to meet new operating requirements

• Performed in Archrock shops across the U.S.

13


FUNDAMENTALS


Source: EIA, January 2019. (1) Based on 2023 estimates vs. 2018 actual production.

0.0

20.0

40.0

60.0

80.0

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Shale / Tight Gas Other Gas

2.2

50.4

2.8

48.2

7.5

47.7

28.3

37.6

52.6 50.9 55.2 65.8

Other gas

Shale gas

Total gas

50.4

30.3

2000 2004 2008 2012 2018

80.7

The U.S. has experienced significant growth in U.S. natural gas production over the last 20+ years

Advancements in horizontal drilling and fracking have unlocked previously inaccessible or uneconomic resources

The shale revolution has been a game‐changer for the industry

Shale gas accounts for ~60% of total U.S. natural gas production, up from virtually no production in the early 2000’s

~30% growth in shale gas production expected by 2023(1)

The Shale Revolution

Bcf/d

67.0

29.8

2023E

96.8

The shale revolution has transformed natural gas supply

Abundant U.S. Natural Gas Supply


Structural Shift in Demand SourcesThe shale revolution has structurally shifted & revolutionized natural gas demand

Abundant U.S. Natural Gas Supply

Stable Pricing Long‐Term Projects Significant Exports

Significant growth in U.S. production resulted in stable current and forecasted pricing

Supply growth has led to a significant reduction in natural gas price volatility vs. history

Natural gas prices have averaged approximately $3/mmbtu since 2010

Stability of current and forecasted gas prices supports confidence and economics needed for long‐term investment

Long‐term, capital intensive infrastructure projects include LNG exports, petchem plants, Mexico exports, etc.

Current U.S. supply & demand largely balanced, resulting in marginal net export position

Growth in supply expected to outpace growth in U.S. demand

Gas exports (primarily LNG) will help balance the market

(10)

0

10

20

30

2016 2033 2050

Net Exports (Forecasted)

>23 Bcf/dNet exports by 2050

Henry Hub ($/mmbtu)

Bcf/d

0

5

10

15

Jun‐98 May‐05 Apr‐12 Mar‐19

Source: EIA as of April 2019.


Key Natural Gas Demand DriversRobust demand drivers led by natural gas export opportunities

(1) Source: Drilling Info, Fundamental Edge April 2019. (2) Source: EIA Annual Energy Outlook 2019 (January 2019).

Residential & Commercial

Industrial

Electric Power

LNG Exports85.3

94.15.2 1.7 0.7 0.7 0.5

707580859095

100

2018 LNG Exports Industrial MX Exports Power Gen Other (incl.Pipeline)

2023

Forecast

LNG Exports

Mexico Exports

Canada Exports

Bcf/d

Bcf/d

U.S. Natural Gas Demand Growth(1)

U.S. Imports / Exports(2)

(15)(10)(5)05

101520253035

2000 2010 2020 2030 2040 2050LNG Imports Canada (Pipeline) Imports LNG Exports

Mexico (Pipeline) Exports Canada (Pipeline) Exports

LNG Exports

Mexico ExportsCanada Exports


FINANCIALS


Prudent Stewards of Capital

Leverage Reduction

Capital Investment

Capital Return

1

2

3

<4.0xDebt‐to‐EBITDA

in 2020

~$250‐$300MM2019 organic growth capex

10‐15%Annual dividend

growth

• 2018 simplification accelerates path to target leverage

• Natural de‐leveraging expected from EBITDA growth

• Focused on high‐return organic investments in growth plays

• M&A opportunities

• Attractive targeted dividend growth rate of 10‐15% through 2020

• Delivered 10% growth in 1Q19 dividend as compared to 1Q18

Capital policy based on balancing three objectives


203 233 302 339 383 328 280 352

2011 2012 2013 2014 2015 2016 2017 2018$0

$1

$2

$3

$4

$5

$6

$0

$20

$40

$60

$80

$100

$120

Crude oil prices Natural gas prices

20

Solid Profitability Through CycleA resilient business model tied to production, not commodity prices

26%

Track record of generating attractive EBITDA margins

Financial performance tied to production

Proactive operational enhancements through cycles drive steady margin improvement

Realize positive EBITDA through cycles

Adjusted EBITDA

Adjusted EBITDA margin (%)(1)

28% 35% 35% 38% 41% 35% 39%Oil $/bbl

Gas $/MMBtu

Source for oil and gas prices: EIA as of April 30, 2019. (1) See Addendum I regarding non‐GAAP measures for information on adjusted EBITDA and adjusted EBITDA margin. We revised our definition of adjusted EBITDA to exclude the impact of non‐cash stock‐based compensation. Historical periods for the years ended December 31, 2011 and 2012 have not been updated to conform to the current definition.


Financial & Operational MomentumImproving profitability trend and fleet utilization benefiting the company

Revenue ($MM) Gross Margin %

Adjusted EBITDA(1) ($MM)

151 154 156 161 166 169 176 183

47 44 53 51 61 63 57 54198 198209 212

227 232 233 236

2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19

Contract Operations Aftermarket Services

Total Operating HP (period end)

74 64 74 81 85 89 98 91

37%33%

36% 38% 37% 39%42%

39%

0

0

0

0

0

0

0

0

0

0

0

20

40

60

80

100

2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19

Adjusted EBITDA Adjusted EBITDA Margin

3,1183,204 3,253

3,314 3,3543,465

3,530 3,56181% 83% 85% 86% 86% 88% 89% 88%

30%

40%

50%

60%

70%

80%

90%

2,500

2,700

2,900

3,100

3,300

3,500

3,700

2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19

Operating HP (000s) Utilization (%)

(1) See Addendum I regarding non‐GAAP measures for information on gross margin, adjusted EBITDA and adjusted EBITDA margin.

59%53%

59% 60% 59% 59% 59% 59%

15% 13% 16% 17% 17% 20%15% 18%

49%44%

48% 50% 48% 49% 49% 50%

2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19

Contract Operations AMS Total


Recent Financial Highlights (1Q 2019)Solid financial and operational performance in 1Q 2019

(1) See Addendum I regarding non‐GAAP measures for information on adjusted EBITDA, cash available for dividend and cash available for dividend coverage.

Significant increase in year‐over‐year net income

13% year‐over‐year increase in adjusted EBITDA

Strong dividend coverage of 2.81x

Strong fleet utilization at 88% with 31,000 of horsepower growth in 1Q19

Strong customer commitments for compression throughout 2019

In 000s, unless noted(1) 1Q 2018 4Q 2018 1Q 2019

Revenue $212,040 $233,159 $236,159

Net income $2,069 $12,968 $19,456

Adjusted EBITDA $80,539 $97,557 $91,196

Cash available for dividend $45,137 $58,647 $48,412

Dividend coverage 2.90x 3.40x 2.81x

Total operating horsepower (at period end) 3,314 3,530 3,561

Horsepower utilization (at period end) 86% 89% 88%


Solid Balance Sheet PositionAchieving balance sheet targets while self‐funding growth

No near‐term debt maturities

Completed successful offering of $500mm Senior Notes maturing 2027; extended maturity profile and grew liquidity

2018 simplification transaction accelerated leverage reduction; 4.4x as of 1Q19

Self‐funding growth capex from strong dividend coverage position; 3.0x in 2018 and 2.8x in 1Q19

$MM March 31, 2019Revolver credit facility capacity $1,250.0Borrowings under facility $750.5Letters of Credit $15.2Revolving credit facility unavailable due to covenant constraints $2.2Liquidity at Archrock $482.1

350 500

751

500

2019 2020 2021 2022 2023 2024 2025 2026 2027Archrock RCF (undrawn)

Debt Maturity Schedule(1) ($MM)

Archrock Liquidity Summary(1)

6.875% senior notes due March 2027

6% senior notes due October 2022

A

B

A

B Revolving credit facility due March 2022

C

C

Balance Sheet & Funding Overview

(1) As of March 31, 2019, pro forma for the closing of $500 million of 6.875% senior notes due 2027 and subsequent extinguishment of $350 million of 6.0% senior notes due 2021. The Archrock credit agreement limits the Total Debt to EBITDA ratio (as defined in the credit agreement) to not greater than 5.75 to 1.0 and the Senior Secured Debt to EBITDA ratio (as defined in the credit agreement) to not greater than 3.50 to 1.00. As a result of this limitation, $2.2 million of undrawn capacity under our revolving credit facility was unavailable for additional borrowings as of March 31, 2019.


5.2x5.0x 4.9x

4.7x

4.4x 4.4x

<4.0x

4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 in 2020

Executing on Balance Sheet GoalsOn target to achieve <4.0x leverage target in 2020

Note: 4Q17 and 1Q18 are presented pro forma for the merger of APLP.

Achieving leverage reduction via consistent growth in Adjusted EBITDA

On target to achieve target leverage of <4.0x in 2020

A

B

A B


(1) See Addendum I regarding non‐GAAP measures for information on adjusted EBITDA and cash available for dividend.

Robust market backdrop supports attractive 2019 forecast

Financial Guidance

Net Income:

Adjusted EBITDA: (1)

Cash Available for Dividend: (1)

Total Capital Expenditures:

Growth Capital Expenditures:

$73 – $103

2019 Guidance

$370 – $400

$174 – $194

$350 – $410

$250 – $300

10‐15%Annual dividend growth

through 2020

< 4.0xLeverage in 2020

> 2.0xDividend coverage

through 2020

Long‐term Targets


Key TakeawaysWe are the leader in U.S. natural gas compression

Midstream / Large HP Focus

Resilience Through Cycles

Visible, Long‐Term Growth

Solid Financial Position

Proactive Leadership


APPENDIX


Simplification Overview & Rationale

(1) Archrock acquired 41 million outstanding units of Archrock Partners that it did not already own at a fixed exchange ratio of 1.40 shares of Archrock common stock for each Archrock Partners common unit.

CompellingDeal Economics

Long‐Term Financial Stability

Improved Cost of Capital

Simplified C‐Corp Structure

FavorableTax Position

• Accretive to AROC shareholders• Increased retained cash flow• Targeted annual dividend growth rate of 10‐15% through 2020

• Accelerates achieving target leverage below 4.0x in 2020• Expected dividend coverage of greater than 2.0x through 2020

• Eliminated incentive distribution rights (IDRs)• Broader universe of investors; increased float & trading liquidity

• Single public entity with simplified governance• Improved position to participate in industry consolidation

• Cash federal income tax deferral from tax basis step‐up• No cash federal income taxes expected through at least 2023

Merger transaction positions Archrock for the future

On April 26, 2018, AROC completed a merger in which it acquired all outstanding common units of Archrock Partners (APLP) it did not already own for AROC common stock valued at ~$625 million(1)


Management Overview

D. Bradley Childers, President and Chief Executive OfficerBrad Childers is President, Chief Executive Officer and a director of Archrock, Inc. Previously, he served as Chairman of the Board of Archrock GPLLC, the managing general partner of Archrock Partners, L.P., as Senior Vice President and as President, North America Operations, of ExterranEnergy Solutions, L.P. and as Senior Vice President, Corporate Development. Prior to the 2007 merger of Hanover Compressor Company andUniversal Compression Holdings, Inc. ("Universal"), Childers joined Universal in 2002 and served in a number of management positions, includingas President of the International Division of Universal Compression, Inc. (Universal's wholly owned subsidiary), and as Senior Vice President,Business Development of Universal. Childers also is an officer of certain Archrock majority‐owned subsidiaries.

Doug S. Aron, Senior Vice President and Chief Financial OfficerDoug Aron is Senior Vice President and Chief Financial Officer of Archrock, Inc., and he is also an officer and director of certain Archrock majority‐owned subsidiaries. Mr. Aron previously served as Executive Vice President and Chief Financial Officer of HollyFrontier Corporation from 2011 to2017, having served in the same capacity for Frontier Oil Corporation from 2009. He also served as Frontier’s Vice President of CorporateFinance from 2005 to 2009 and as Director of Investor Relations from 2001 to 2005. During 2017, he served as Executive Vice President andChief Financial Officer of Nine Energy Service.

Stephanie C. Hildebrandt, Senior Vice President, General Counsel and SecretaryStephanie Hildebrandt is Senior Vice President, General Counsel and Secretary of Archrock, Inc. Prior to joining Archrock in August 2017,Hildebrandt was a partner with the Houston law firm of Norton Rose Fulbright, with a practice focused on corporate governance, energytransactions and mergers and acquisitions. Previously, she was Senior Vice President, General Counsel and Secretary of Enterprise ProductsPartners L.P., a publicly traded pipeline partnership and a provider of midstream energy service, from 2010 to 2014, and held various other rolesat Enterprise from 2004, including Vice President, Deputy General Counsel and Assistant Secretary. Hildebrandt was an attorney for El PasoCorporation / GulfTerra Energy Partners from 2001 until its merger with Enterprise in 2004 and an attorney for Texaco, Inc. from 1989 to 2001.

Jason G. Ingersoll, Senior Vice President, Marketing and SalesJason Ingersoll is Senior Vice President of Marketing & Sales of Archrock Inc., where he is responsible for sales teams and processes, includingdirect sales, strategic accounts, business development and sales support infrastructure. He also serves as Senior Vice President of Marketing &Sales of Archrock GP LLC. Previously, he held positions of increasing responsibility with Exterran Energy Solutions, L.P., including Vice President,Sales, Regional Vice President of the West Region of North America, Business Unit Director of the Northern Rockies and Business Unit Director ofthe Southern Rockies. He joined a predecessor of Archrock, Universal Compression in 1998 where he held several positions of increasingresponsibility including Country Manager of China located in Beijing, China.

Highly qualified and experienced management team


Archrock Addendum I-AArchrock, Inc.

Gross margin, a non‐GAAP measure, is defined as total revenue less cost of sales (excluding depreciation and amortization).Gross margin percentage is defined as gross margin divided by revenue.

Cash available for dividend, a non‐GAAP measure, is defined as net income (loss) excluding loss from discontinued operations,net of tax, income taxes, interest expense, depreciation and amortization, long‐lived asset impairment, restatement and othercharges, debt extinguishment loss, merger‐related costs, non‐cash stock‐based compensation expense, and indemnification(income) expense, net, less maintenance capital expenditures, other capital expenditures, cash taxes and cash interestexpense. Cash available for dividend coverage is defined as cash available for dividend divided by dividends declared.

Adjusted EBITDA, a non‐GAAP measure, is defined as net income (loss) excluding income (loss) from discontinued operations,net of tax, income taxes, interest expense, depreciation and amortization, long‐lived asset impairment, restatement and othercharges, debt extinguishment loss, merger‐related costs, non‐cash stock‐based compensation expense, indemnification(income) expense, net, and other items. Adjusted EBITDA margin is defined as adjusted EBITDA divided by revenue.


Archrock Addendum I-B

(1) See Addendum I‐A for more information on gross margin and gross margin percentage and addendum I‐C for a reconciliation to net income (loss).

($ in thousands) Q1‐17 Q2‐17 Q3‐17 Q4‐17 Q1‐18 Q2‐18 Q3‐18 Q4‐18 Q1‐19RevenueContract Operations $149,984 $151,114 $153,524 $156,299 $161,197 $165,450 $169,509 $176,380 $182,507 Aftermarket Services 39,901 46,868 44,329 52,636 50,843 61,420 62,863 56,779 53,652Total Revenue 189,885 197,982 197,853 208,935 212,040 226,870 232,372 233,159 236,159

ExpenseContract Operations 64,097 62,243 71,951 64,714 64,595 67,809 69,056 71,553 74,735Aftermarket Services 33,732 39,609 38,486 44,090 42,337 50,793 50,043 48,181 43,902Total Expense 97,829 101,852 110,437 108,804 106,932 118,602 119,099 119,734 118,637

Gross Margin(1)

Contract Operations 85,887 88,871 81,573 91,585 96,602 97,641 100,453 104,827 107,772Aftermarket Services 6,169 7,259 5,843 8,546 8,506 10,627 12,820 8,598 9,750Total Gross Margin 92,056 96,130 87,416 100,131 105,108 108,268 113,273 113,425 117,522

Gross Margin Percentage(1)

Contract Operations 57% 59% 53% 59% 60% 59% 59% 59% 59%Aftermarket Services 16% 15% 13% 16% 17% 17% 20% 15% 18%Total Gross Margin Percentage 49% 49% 44% 48% 50% 48% 49% 49% 50%


Archrock Addendum I-C

(1) See Addendum I‐A for more information on gross margin.

(in thousands) Q1‐17 Q2‐17 Q3‐17 Q4‐17 Q1‐18 Q2‐18 Q3‐18 Q4‐18 Q1‐19Net income (loss) ($14,013) ($4,036) ($12,683) $49,142 $2,069 $4,149 $9,974 $12,968 $19,456 Loss from discontinued operations, net of tax ‐ ‐ 54 ‐ ‐ ‐ ‐ ‐ 273 Selling, general and administrative 27,553 25,162 29,108 29,660 27,508 26,649 26,298 21,108 28,989 Depreciation and amortization 47,772 47,248 47,463 46,080 44,455 43,331 43,779 43,381 44,106 Long‐lived asset impairment 8,245 5,508 7,105 8,284 4,710 6,953 6,660 9,804 3,092 Restatement and other charges 801 1,920 566 1,083 485 (1,076) 396 214 421 Restructuring and other charges 457 366 422 141 ‐ ‐ ‐ ‐ ‐ Interest expense 21,421 22,504 22,892 21,943 22,547 23,337 23,518 23,926 23,617 Debt extinguishment loss 291 ‐ ‐ ‐ ‐ 2,450 ‐ ‐ ‐Merger‐related costs ‐ ‐ ‐ 275 4,125 5,686 182 169 180 Other income, net (794) (962) (2,716) (1,446) (1,145) (1,644) (660) (2,382) (205)Provision for (benefit from) income taxes 323 (1,580) (4,795) (55,031) 354 (1,567) 3,126 4,237 (2,407)Gross margin(1) $92,056 $96,130 $87,416 $100,131 $105,108 $108,268 $113,273 $113,425 $117,522

Reconciliation of Net Income (Loss) to Gross Margin


Archrock Addendum I-D

(1) See Addendum I‐A for more information on Adjusted EBITDA and Adjusted EBITDA margin.

Q1‐17 Q2‐17 Q3‐17 Q4‐17 Q1‐18 Q2‐18 Q3‐18 Q4‐18 Q1‐19($14,013) ($4,036) ($12,683) $49,142 $2,069 $4,149 $9,974 $12,968 $19,456 ‐ ‐ 54 ‐ ‐ ‐ ‐ ‐ 273

47,772 47,248 47,463 46,080 44,455 43,331 43,779 43,381 44,106 8,245 5,508 7,105 8,284 4,710 6,953 6,660 9,804 3,092 801 1,920 566 1,083 485 (1,076) 396 214 421 457 366 422 141 ‐ ‐ ‐ ‐ ‐

‐ ‐ 1,318 ‐ ‐ ‐ ‐ ‐ ‐ 21,421 22,504 22,892 21,943 22,547 23,337 23,518 23,926 23,617

291 ‐ ‐ ‐ ‐ 2,450 ‐ ‐ ‐ ‐ ‐ ‐ 275 4,125 5,686 182 169 180

2,153 1,922 2,042 2,344 1,794 1,969 1,804 1,821 2,357 59 330 23 17 ‐ (538) 27 1,037 101

323 (1,580) (4,795) (55,031) 354 (1,567) 3,126 4,237 (2,407)$67,509 $74,182 $64,407 $74,278 $80,539 $84,694 $89,466 $97,557 $91,196

149,984 151,114 153,524 156,299 161,197 165,450 169,509 176,380 182,50739,901 46,868 44,329 52,636 50,843 61,420 62,863 56,779 53,652

Total Revenue $189,885 $197,982 $197,853 $208,935 $212,040 $226,870 $232,372 $233,159 $236,159

36% 37% 33% 36% 38% 37% 39% 42% 39%

Merger‐related costs

($ in thousands)Net income (loss)Loss from discontinued operations, net of taxDepreciation and amortizationLong‐lived asset impairment

Restructuring and other chargesRestatement and other charges

Corporate office relocation costs

Debt extinguishment lossInterest expense

Indemnification (income) expense, net

Adjusted EBITDA margin(1)

Stock‐based compensation expense

Provision for (benefit from) income taxesAdjusted EBITDA(1)

RevenueContract Operations Aftermarket Services

Reconciliation of Net Income (Loss) to Adjusted EBITDA


Archrock Addendum I-EReconciliation of Net Income (Loss) to Adjusted EBITDA

(1) We revised our definition of Adjusted EBITDA to exclude the impact of non‐cash stock‐based compensation expense. Historical periods for the years ended December 31, 2011 and 2012 have not been updated to conform to the current definition.

(2) See Addendum I‐A for more information on Adjusted EBITDA and Adjusted EBITDA margin.

($ in thousands) 2011 2012 2013 2014 2015 2016 2017 2018Net income (loss) ($355,308) ($37,696) $126,606 $88,661 ($125,697) ($65,243) $18,410 $29,160 (Income) loss from discontinued operations, net 242,605 (96,966) (129,654) (105,774) (33,677) 426 54 ‐Depreciation and amortization 178,492 181,678 187,476 212,268 229,127 208,986 188,563 174,946 Long‐lived asset impairment 5,716 131,417 16,696 42,828 124,979 87,435 29,142 28,127 Restructuring and other charges 4,463 2,579 ‐ 5,394 4,745 16,901 1,386 ‐Restatement and other charges ‐ ‐ ‐ ‐ ‐ 13,470 4,370 19 Corporate office relocation costs ‐ ‐ ‐ ‐ ‐ ‐ 1,318 ‐Goodwill impairment 31,994 ‐ ‐ ‐ 3,738 ‐ ‐ ‐Debt extinguishment loss ‐ ‐ ‐ ‐ 9,201 ‐ 291 2,450 Interest expense 145,100 129,058 112,194 112,273 107,617 83,899 88,760 93,328 Indemnification (income) expense, net ‐ ‐ ‐ ‐ ‐ (2,593) 430 526 Expensed acquisition and merger‐related costs ‐ ‐ 246 2,471 ‐ 172 275 10,162 Stock‐based compensation expense(1) N/A N/A 6,418 8,998 10,029 8,969 8,461 7,388 Provision for (benefit from) income taxes (50,379) (77,034) (17,840) (28,066) 53,189 (24,604) (61,083) 6,150 Adjusted EBITDA(1) (2) $202,683 $233,036 $302,142 $339,053 $383,251 $327,818 $280,377 $352,256

RevenuesContract Operations 570,780 596,011 627,844 729,103 781,166 647,828 610,921 672,536Aftermarket Services 209,076 240,813 234,928 230,050 216,942 159,241 183,734 231,905Total $779,856 $836,824 $862,772 $959,153 $998,108 $807,069 $794,655 $904,441

Adjusted EBITDA margin(2) 26% 28% 35% 35% 38% 41% 35% 39%


(1) See Addendum I‐A for information on adjusted EBITDA, cash available for dividend and cash available for dividend coverage.

Archrock Addendum I-F

($ in thousands) Q1‐18 Q2‐18 Q3‐18 Q4‐18 2018 Q1‐19

Net income $2,069 $4,149 $9,974 $12,968 $29,160 $19,456 Loss from discontinued operations, net of tax ‐ ‐ ‐ ‐ ‐ 273 Depreciation and amortization 44,455 43,331 43,779 43,381 174,946 44,106 Long‐lived asset impairment 4,710 6,953 6,660 9,804 28,127 3,092 Restatement and other charges 485 (1,076) 396 214 19 421 Interest expense 22,547 23,337 23,518 23,926 93,328 23,617 Debt extinguishment loss ‐ 2,450 ‐ ‐ 2,450 ‐Merger‐related costs 4,125 5,686 182 169 10,162 180 Stock‐based compensation expense 1,794 1,969 1,804 1,821 7,388 2,357 Indemnification (income) expense, net ‐ (538) 27 1,037 526 101 Provision for (benefit from) income taxes 354 (1,567) 3,126 4,237 6,150 (2,407)

Adjusted EBITDA (1) $80,539 $84,694 $89,466 $97,557 $352,256 $91,196 Less: Maintenance capital expenditures (11,135) (13,121) (12,553) (12,924) (49,733) (14,524)Less: Other capital expenditures (4,564) (4,479) (4,797) (3,975) (17,815) (7,124)Less: Cash tax (payment) refund 679 1,439 (78) 91 2,131 623 Less: Cash interest expense (20,382) (21,303) (21,668) (22,102) (85,455) (21,759)

Cash available for dividend (1) $45,137 $47,230 $50,370 $58,647 $201,384 $48,412

Dividend declared for the period per share 0.12 0.132 0.132 0.132 0.516 0.132Dividend declared for the period to all shareholders 15,553 17,116 17,094 17,261 67,024 17,242Cash available for dividend coverage (1) 2.90x 2.76x 2.95 3.40x 3.00x 2.81x

Reconciliation of Net Income to Adjusted EBITDA and Cash Available for Dividend


Archrock Addendum I-F (cont.)

(1) See Addendum I‐A for information on cash available for dividend.

($ in thousands) Q1‐18 Q2‐18 Q3‐18 Q4‐18 2018 Q1‐19Cash flows from operating activities $62,455 $42,760 $65,490 $55,242 $225,947 $81,400 Inventory write‐downs (465) (553) (167) (429) (1,614) (222)Provision for doubtful accounts (620) (288) (636) (133) (1,677) (428)Gain (loss) on sale of assets 1,195 993 706 2,780 5,674 (16)Current income tax provision 59 55 285 513 912 476 Cash tax (payment) refund 679 1,439 (78) 91 2,131 623 Amortization of operating lease ROU assets ‐ ‐ ‐ ‐ ‐ (712)Amortization of contract costs (2,884) (3,397) (4,051) (4,607) (14,939) (5,117)Deferred revenue recognized in earnings 5,171 6,104 6,146 11,008 28,428 12,749 Restatement and other charges 485 (1,076) 396 214 19 421 Merger‐related costs 4,125 5,686 182 169 10,162 180 Indemnification (income) expense, net ‐ (538) 27 1,037 526 101 Changes in assets and liabilities (9,159) 13,647 (726) 9,410 13,173 (19,788)Maintenance capital expenditures (11,135) (13,121) (12,553) (12,924) (49,733) (14,524)Other capital expenditures (4,564) (4,479) (4,797) (3,975) (17,815) (7,124)(Payments for) proceeds from settlement of interest rate swaps that include financing elements (205) (2) 146 251 190 393

Cash available for dividend (1) $45,137 $47,230 $50,370 $58,647 $201,384 $48,412

Reconciliation of Cash Flows from Operating Activities to Cash Available for Dividend


Archrock Addendum I-G

(1) 2019 annual guidance for net income does not include the impact of long‐lived asset impairment because due to its nature it cannot be accurately forecasted. Long‐lived asset impairment does not impact adjusted EBITDA or cash available for dividend, however it is a reconciling item between these measures and net income. Long‐lived asset impairment for the years ended 2018 and 2017 was $28.1 million and $29.1 million, respectively.

(2) Management believes adjusted EBITDA provides useful information to investors because this non‐GAAP measure, when viewed with our GAAP results and accompanying reconciliations, provides a more complete understanding of our performance than GAAP results alone. Management uses this non‐GAAP measure as a supplemental measure to review current period operating performance, comparability measure and performance measure for period‐to‐period comparisons.

(3) See Addendum I‐A for information on adjusted EBITDA and cash available for dividend.(4) Management uses cash available for dividend as a supplemental performance measure. Using this metric, management can quickly compute the

coverage ratio of estimated cash flows to planned dividends.(5) A forward‐looking estimate of cash provided by operating activities is not provided because certain items necessary to estimate cash provided by

operating activities, including changes in assets and liabilities, are not estimable at this time. Changes in assets and liabilities were $(13.2) million and $2.6 million for the years ended 2018 and 2017, respectively.

($ in thousands)

Net income (1) $73,000 $103,000Depreciation and amortization 180,000 180,000Interest expense 103,000 103,000Stock‐based compensation expense 9,000 9,000Provision for (benefit from) income taxes 5,000 5,000

Adjusted EBITDA (2) (3) $370,000 $400,000Less: Maintenance capital expenditures (57,000) (63,000)Less: Other capital expenditures (43,000) (47,000)Less: Cash tax (payment) refund (1,000) (1,000)Less: Cash interest expense (95,000) (95,000)

Cash available for dividend (3) (4) (5) $174,000 $194,000

Full‐Year 2019 Guidance2019

Low High


2019 Guidance

(1) 2019 annual guidance for net income does not include the impact of long‐lived asset impairment because due to its nature it cannot be accurately forecasted. Long‐lived asset impairment does not impact adjusted EBITDA or cash available for dividend, however it is a reconciling item between these measures and net income. Long‐lived asset impairment for the years ended 2018 and 2017 was $28.1 million and $29.1 million, respectively.

(2) Management believes adjusted EBITDA provides useful information to investors because this non‐GAAP measure, when viewed with our GAAP results and accompanying reconciliations, provides a more complete understanding of our performance than GAAP results alone. Management uses this non‐GAAP measure as a supplemental measure to review current period operating performance, comparability measure and performance measure for period‐to‐period comparisons.

(3) See Addendum I‐A for information on adjusted EBITDA, cash available for dividend and cash available for dividend coverage. (4) Management uses cash available for dividend as a supplemental performance measure. Using this metric, management can quickly compute the coverage ratio of estimated cash flows to planned dividends.(5) A forward‐looking estimate of cash provided by operating activities is not provided because certain items necessary to estimate cash provided by operating activities, including changes in assets and liabilities,

are not estimable at this time. Changes in assets and liabilities were $(13.2) million and $2.6 million for the years ended 2018 and 2017, respectively.

$ in thousands Low High

Net income (1) $73,000 $103,000Adjusted EBITDA (2) (3) 370,000 400,000Cash available for dividend (3) (4) (5) 174,000 194,000

Segment Contract operations revenue $730,000 $760,000Contract operations gross margin percentage 60% 62%Aftermarket services revenue $225,000 $255,000Aftermarket services gross margin percentage 17% 19%

Selling, general and administrative $118,000 $124,000

Capital expendituresGrowth capital expenditures $250,000 $300,000Maintenance capital expenditures 57,000 63,000 Other capital expenditures 43,000 47,000 Total capital expenditures $350,000 $410,000

Dividend growthLeverageCash available for dividend coverage (3)

Full‐Year 2019 Guidance

10‐15% annually through 2020Below 4.0x in 2020

Above 2.0x through 2020


CONTACT US

Investor RelationsPaul Burkhart (Treasurer & VP of Investor Relations)(281) 836‐8688 [email protected]/aroc

Corporate Headquarters9807 Katy FreewaySuite 100Houston, TX 77024

aroc q1 2019 investor presentation final - seeking alpha

Documents