Archrock Posts Its First Positive Income Result in Years: Time to Buy?

Gas compression equipment

Oil and gas infrastructure specialist Archrock (NYSE: AROC) and its former subsidiary Archrock Partners were once a textbook case of an overaggressive business that got rocked by crashing oil and gas prices. The company bet heavily on the need for compression horsepower to force oil and gas from wells to pipelines, and took on considerable leverage to do so. When demand dried up from lower production volumes, Archrock was stuck with a fleet of inactive compression equipment and a massive debt load.

Thanks to a rebound in commodity prices and a restructuring to get rid of the parent/public subsidiary corporate structure , the company is starting to show signs of life. So let's look at the company's most recent earnings report and see whether Archrock has made enough progress to be considered an investment today.

Archrock: By the numbers

Data source: Archrock Partners' earnings release. EPS = earnings per share.

This was the first quarter since 2015 that Archrock was able to post a positive net income result (not including the one-time tax adjustment gain at the end of last year). The gain wasn't large by any means. But it showed the slow and steady progress that Archrock has made signing up customers for well and pipeline compression services as well as servicing aftermarket sales. In the quarter, contract operations and aftermarket services revenue increased 9.2% and 30%, respectively, while gross margins for both segments remained the same at 59% for contracts and 17% for services.

In the first quarter, management noted that it was increasing its capital spending rate for the year in order to increase its fleet of available horsepower. While total available horsepower did tick up in the quarter, its fleet utilization rate remained rather healthy at 86%.

Management has said in its conference calls and investor presentations that its core goals right now are to expand its horsepower fleet to satisfy growing demand and to lower its debt leverage. Achieving these two goals simultaneously isn't exactly easy, since they both require cash. But so far, Archrock has been able to do that. It added a modest 40,000 horsepower this past quarter, and its debt-to-EBITDA ratio declined to 5.6 times for the quarter (management says it's 4.9 times, but it reports on adjusted EBITDA).

In fact, the progress it has made on these two fronts has been enough that Archrock was able to increase its dividend by 10%. While Archrock no longer has a master limited partnership subsidiary, it still reports its dividend similar to MLPs with a dividend coverage ratio. For the quarter, Archrock's dividend coverage ratio was 2.76 times.

What management had to say

On the company's conference call, CEO Brad Childers highlighted management's plans to keep raising its dividend and how it will be able to do so while also reducing its leverage:

It appears that pretty much all of its leverage reduction in the coming years will come from growing its EBITDA rather than actually paying down debt. That can work as long as demand for compression remains high, which means that natural gas demand will be high. According to Childers, that won't be too much of an issue because natural gas production is going to grow significantly in the coming quarters:

What is most surprising is that all of the shale basins he mentioned here are known for oil production rather than gas. However, just about every oil well has some percentage of its production in natural gas. It would appear that management thinks oil producers will look to monetize this ancillary revenue stream.

You can read a full transcript of Archrock's conference call here .

AROC data by YCharts.

Slow steps forward

I think it's pretty clear that Archrock's decision to acquire its subsidiary was the right one, even though it wasn't well received by the market on the day of the announcement. Doing so has certainly simplified its corporate structure and is helping it to tackle debt issues. There are also a lot of very favorable industry tailwinds benefiting the company, which should enable it to meet its goals of growing its dividend and reducing its debt leverage over the next couple of years.

All of the things that Archrock accomplished this past quarter were signs that the business is on the right track. Revenue and earnings growth is a litttle slower than expected, but increased investments in pipelines and other oil and gas infrastructure are going to lead to greater demand. Personally, I would like to see some more progress on its debt reduction before making an investment decision, but at least Archrock appears headed in the right direction.

10 stocks we like better than Archrock

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Archrock wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.