Dear Subscriber,

Action to Take: BUY USAC under $5 immediately to lock in a $2.10 1.2X covered distribution nearly 40%!!!

I texted my Goldman trading desk buddy this moring with the question "Did an energy hedge bund go belly up this morning?"

I asked because of one of the most stable dividend payers in the energy patch USA Compression Partners LP--a company that leases and services one of the most important parts of the natural gas pipeline industry--sold off 15% in a matter of minutes. USAC is on both my "blown up" stock list and my "Rock Solid Dividend/Distribution lists because

1) USAC has grown and maintained its now $2.10 annual dividend for 4 years including the energy meltdown in 2014-2015
2) Their cash flow is 1.25X higher than their dividend because
3) You cannot operate an energy collection and transport system without HUGE air compressors
4) These leases are long term with major nat gas/oil and pipeline companies 
5) The leases are paid or the compressors turned off
6) Even if you have reduced nat gas product, you still need the compressors--especially in nat gas that comes as a by-product of shale because the drilling pressure is so low in shale
7) In 15 years they have written off only $1.5 million in bad depts
8) They have not laid off ONE worker in 2020--as I said--with structural natural gas consumption fixed (for power production, for chemical production, for LNG exportation and home use) there IS NOT a natural gas business without 1,000+ horsepower air compression. 
9)  $20 billion Energy Transfer (ET) owns 48% of the shares--you know THEY are not selling
10) USAC debt and preferred stock is fixed rate and 

He texted back "Yes--at least two energy-focused leveraged hedge funds blew up today on margin calls". That makes sense as the stock tanked starting a few minutes after the bell--THAT is the footprint of stock being liquidated. And trust me, when your prime broker is liquidating shares, the margin clerk is NOT trying to get the best price--he or she has one job--sell the stock at any bid until it is sold. 

Here are the basic business facts 

• USAC provides compression services across a geographically–diversified operating area

• 20+ year history with a primary focus on large horsepower (1,000 HP+) applications

• “Southwest Airlines” standardized business model

• Focus areas: Permian/Delaware; Marcellus/Utica; Mid‐Continent/SCOOP/STACK; S. Texas; E. Texas; Louisiana; Rockies

• Active Fleet: 3.3mm Horsepower

–  >70% of equipment is greater than 1,000 HP

• Average Utilization ~94%

• ~880 employees

2020 Guidance given March 6, 2020
Provided initial full‐year 2020 guidance:
– Adjusted EBITDA: $415mm – $435mm
– DCF: $210mm – $230mm
 

Supportive Macro: Gas Isn’t Going Anywhere Bullish on natural gas production & demand, both in US and globally< >LNG exports, petrochemical feedstock and power gen driving continued gas usage. 

Natural gas demand/production expected to increase through 2050 

High-Quality Assets in Right Places with Strong Customers

New vintage fleet focused on high quality CAT/Ariel machines< >Geographic diversity, but significant density where the gas is: Permian/Delaware & NortheastStrong counterparties – active customers (major oil & gas, large independent E&Ps, midstream)

Established Company with History of Stability

Providing large horsepower compression services for >20 years< >Performance throughout price cycles; no direct commodity exposure stable distribution history: >$880 million returned since IPO 
 
Compression is a “must‐have” part of the natural gas value chain: with increasing natural gas usage as a transition fuel to the future will come increasing requirements for compression
 

Slowing Rig Count / Production in Face of Strong Demand Should Bode Well for Nat Gas

• Overall domestic rig counts are down (~60% off recent highs) (1)

–     Gas‐directed rigs are down >90% off 2008 highs, aided by the economics of gassy oil plays (i.e., Permian/Delaware)

• However, both dry and associated gas production is expected to increase over time to meet increasing demand (2)

• Given steep decline nature of shale well production, rig activity will need to continue to meet expected production/demand

• Increasing gas‐oil ratios (GORs) in domestic oil basins is occurring

Rising Baseload Natural Gas Demand 2020-2025

■ Natural gas domestic consumption is up 10.5 Bcf/day (~14%) since 2014 to 83.3 Bcf/d in 2018 (1)

• Majority of  the demand ncrease (~6.4 Bcf/d) took place in 2018

• 1H 2019 increased over 1H 2018 by 2.2 Bcf/d to 84.2 Bcf/d (1)

• The largest driver has been the domestic power generation sector, where natural gas surpassed coal as a fuel source in 2016 (1)

  • Has significantly eroded coal’s baseload share along the way

Exports to Mexico:

• Growing power needs to be met by US shale gas

• ~6 Bcf/d to Mexico in 2020

LNG Exports:
−   ~7 Bcf/d by 2020; 14 Bcf/d by 2030
Power:
−   ~30 Bcf/d in 2020

• Clean fuel; coal plant retirements continue

Industrial Demand:
−   ~35 Bcf/d by 2040

• Petrochemical plants (Gulf Coast, NE) driving demand

Customers finalizing 2020 budgets; anticipate spending reductions – which is POSITIVE for compression outsourcing

• USAC high‐grading customers – longer-term contracts with strong counterparties

• Highest‐return customer projects will get completed, requiring must‐run compression

• Large horsepower units in demand: large HP utilization remains high throughout the sector

• Lease price increases expected to moderate vs. last 12‐18 months

• My bet is the company is going to buy back units very soon at this insane valuation
   

Here is their early March investor update https://seekingalpha.com/article/4329484-usa-compression-partners-usac-presents-credit-suisse-energy-summit-slideshow

PS You can even buy PUT OPTIONS to protect your investment out to Dec 20202--but at these prices the risk vs. reward is insane and as US economy recovers nat gas demand will increase.  

Toby