Good morning. Welcome to USA Compression Partners LP's Second Quarter 2020 Earnings Conference Call. During today's call, all parties will be in a listen only mode. And following the call, the conference will be open for questions. This conference is being recorded today, August 4, 2020.
I would now like to turn the call over to Chris Porter, Vice President, General Counsel and Secretary.
Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter ended June 30, 2020. You can find our earnings release as well as recording of this call in the Investor Relations section of our website at usacompression.com. The recording will be available through August 14, 2020. During this call, our management will discuss certain non GAAP measures.
You will find definitions and reconciliations of these non GAAP measures to the most comparable GAAP measures in the earnings release. As a reminder, our conference call will include forward looking statements. These statements include projections and expectations of our performance and represent our current beliefs. Actual results may differ materially. Please review the statements of risk included in this morning's release and in our SEC filings.
Please note that information provided on this call speaks only to managed views as of today, August 4th, and may no longer be accurate at the time of a replay. I'll now turn the call over to Eric Long, President and CEO of USA Compression.
Thank you, Chris. Good morning, everyone, and thanks for joining our call. Also with me is Matt Liuzzi, our CFO. This morning, we released our financial and operational results for the Q2 of 2020, achieving a solid quarter of operational and financial results, especially when you consider the market environment in which we found ourselves. Similar to last quarter, today I plan to briefly highlight the quarterly results and then spend more time discussing our business model, what we have seen happening out in the marketplace and what we are doing to manage the business in this uncertainty.
The 2nd quarter, not surprisingly, saw decreased revenues as a result of customers returning equipment and a slowdown in unit redeployments out in the field. Total revenues were $169,000,000 approximately 6% below Q1. However, due in large part to cost cutting measures taken in late Q1 early Q2, adjusted EBITDA for the Q2 was approximately $105,000,000 representing less than a 1% decrease from Q1. Reflecting this focus on cost, both adjusted gross margin and adjusted EBITDA margin were very strong at 70.4% and 62.5% respectively. Average utilization throughout the quarter was 88.0 percent, down from the Q1 levels of 92.5%, reflecting continued returns of units throughout the quarter.
We ended the quarter with approximately 3,100,000,000 active horsepower, which is off about 6% from the end of Q1, while the total fleet remained consistent at about 3,700,000 horsepower. Average pricing across the fleet decreased slightly during the 2nd quarter, which reflected the return of a fair amount of small horsepower, which typically earns a higher dollar per horsepower rate as well as the impact of selective temporary service rate decreases. Average monthly revenues of $16.79 per horsepower was down slightly from $16.89 in the Q1. Last quarter, we discussed revising the capital spending plan and we saw some impact of that decision in the Q2 where growth CapEx consisted of $22,800,000 and maintenance CapEx was $4,400,000 The growth CapEx included delivery of 16,700 new horsepower, of which about 75% consisted of large horsepower units. This growth CapEx had largely already been locked in by the time we had the events of early March.
We do plan to see a meaningful reduction in growth CapEx for the balance of the year, which is unchanged from the previous quarter's commentary. Maintenance capital was also down versus Q1 as we limited spending given the slowdown in activity. At this point in time, we expect expansion capital spending to total between $80,000,000 $90,000,000 consistent with our guidance from the last call, which is compared to initial guidance of $110,000,000 to $120,000,000 Based on the 2nd quarter's results, the Board decided to keep the distribution consistent at $0.525 per unit, which resulted in a distributable cash flow coverage ratio of 1.1xx, which was up slightly from Q1 primarily due to a reduction in maintenance capital spending in Q2. Our bank covenant leverage ratio was 6.4x for the quarter. Just as a reminder, the quarterly distribution is a decision that our Board of Directors makes on a quarterly basis.
As has always been the case since our IPO, the Board can opt to maintain, reduce or suspend the distribution as it deems most appropriate on a quarterly basis. I continue to be proud of the dedicated men and women of USA Compression who worked hard throughout the second quarter to deliver to our customers the services they rely on to successfully operate their businesses. Obviously, day to day life has changed a lot during this past quarter and how the future plays out is anything but certain. But in the face of all this uncertainty, our dedicated field technicians and everyone else who supports them figured out how to make it work and continue to do so every day in a safe operating manner. Let's talk a little bit about natural gas and crude oil.
Last quarter, I spent some time on the different market dynamics between crude and natural gas and why we felt that USA Compression was well positioned to be somewhat insulated from the dramatic price volatility and uncertainty around crude oil as our business is driven by the demand for natural gas. At the time of our last call, crude was trading around $20 a barrel. Since then, it has seen a bit of a rally to the $40 a barrel range and has shown relative stability. Even with that rebound, many E and P companies are being cautious on capital budget. That makes for a challenging environment for companies that depend on new crude drilling oil activity and you're seeing the fallout in bankruptcy filings.
We are fortunate that our business is driven by the demand for natural gas. While we continue to take a long term view of the overall need for and production of natural gas, even the near term outlook has shown signs of relative stability during the industry weakness and strength in the medium to longer term. We continue to believe that natural gas will play a more
and more important role as
a clean fuel of choice. Now to the energy markets. It has been quite a ride since we announced Q1 earnings in early May. As the pandemic has continued to play out around the world, demand has been impacted both on the oil and natural gas side. However, as economies began to open back up, in May and since, oil demand has started to rebound.
June saw global consumption of petroleum and liquid fuels up 10,000,000 barrels per day versus May. Right now, the EIA is forecasting 2020 consumption to be about 93,000,000 barrels a day, which is only about an 8% decrease from 2019 levels. The demand destruction, which was previously forecast to be much more severe, seems to have moderated, and we've seen crude prices hold relatively steady above $40 per barrel. As previously mentioned, even with the strengthening of crude oil prices, in crude oil prices, many of the E and P companies have held the line on reduced capital budgets, showing a level of discipline that we haven't necessarily seen in past downturns. The total rig count is down approximately 70% since the beginning of the year.
While just in the last week or so, you've seen a rig or 2 get added in the Permian, many expect the reduced count to last for considerable while longer. That should help support crude oil prices as economies recover and the demand continues to tick upwards. While it is too early to know what capital budgets will look like for 2021, I think it's a fair assumption that overall production growth will be less than we've seen in the past years. And over the coming quarters, we will see even more evidence of steep shale well declines in the early years of wells life. I've discussed before, shale type curves while steep at first after a few years tend to flatten out significantly when a given well moves into more of a steady state existence.
So if the CapEx cuts hold, producers will simply not be drilling enough new wells to offset the decline of their existing flush production wells. And then over time, you'll have a large amount of wells in that flat steady state part of the curve where decline has also meaningfully slowed. While impacting production growth for the E and Ps, this is a favorable situation for USA Compression, A significant component of USA's larger horsepower fleet is deployed in infrastructure applications exhibiting the flat steady state shallow decline profile. So even without new drilling activity, compression is continually needed to continue to move these stable volumes of natural gas. But as you all are aware, USA Compression doesn't move crude oil.
We deal 100% with natural gas. The overall prospects for crude oil impact many of our customers, particularly in regions with significant associated gas. Because of the reduction in crude oil production, you're seeing a related decline in associated gas production, although generally not quite as severe as previously expected. Earlier, I mentioned how natural gas demand destruction wasn't nearly as bad as that for crude oil. In fact, while the demand was projected to be lower, we have what we've seen so far is even more positive than most have predicted.
We've always believed that the resiliency of natural gas demand was one of the primary factors underpinning USA Compression's business model. Natural gas simply is a preferred fuel for its 2 largest end uses, residential and commercial power generation and industrial manufacturing. While there is expected to be some short term demand disruption, the EIA is currently projecting natural gas consumption to decline by about 3% in 2020. The underlying demand for natural gas remains strong. While generally things have stabilized for the midstream sector, the capital budgets of the E and P companies remain dramatically reduced from where they were at the beginning of the year.
So what does that dynamic mean for USA Compression? I often discuss the relationship between compression horsepower and declining reservoir pressure. Simply described as pressures decline to move the same volume of gas requires an exponential increase in compression horsepower. As an analogy, think about a fully inflated bike tire. When you take off the valve cap, air whooshes out of the tire very quickly at first, but then slows quickly.
Wells are not that different. This concept underlies the reason why compression is not transactional like a typical oilfield service company, drill the well, complete it, then move on. Instead, compression stays around for a long, long time, but that whoosh of oil and gas slows down and ultimately needs more effort, I. E. Horsepower to get it out.
For both associated gas and dry gas applications, even though gas volumes may be declining, the compression required may actually increase as pressure also declines. You've also heard a lot about gas oil ratios, which in many cases have increased as producers have moved beyond core areas as increasing gas oil ratios have led to more associated gas production per barrel of oil produced, you will need additional compression to move those volumes. These concepts underpin the compression services model that USA Compression is based on. When markets are great, we grow with our customers. Over our 22 years in business, we've been through multiple cycles.
During periods of reduced activity and even production declines, we have not historically experienced material declines in the need for our large horsepower compression services or required horsepower. The dynamics I mentioned above, along with relatively resilient demand, have historically made large horsepower compression a less volatile business. As we mentioned on last quarter's call, the natural gas markets are expected to experience a fairly unique dynamic in the near term future as the relatively resilient demand outlook intersects production declines, notably from associated gas regions. You are already seeing consumption tick back upwards while supply begins to decrease. For example, Mexican exports in July are at record levels, averaging about 6.1 Bcf per day, up some 13% from year ago levels of about 5.4 Bcf a day.
LNG exports, however, have been a little soft and for July averaged about 3.2 Bcf per day, down about 24% from year ago levels of about 4.1 Bcf per day. In the near term, that oversupply has led to higher than expected underground storage levels. But as we get through the summer and into the natural gas withdrawal season, we may very well may see a more strained supply demand balance because of the decrease in new well drilling and the dynamics of the shale type curves really adding some pressure to the supply side of the equation. Natural gas futures prices for calendar 2021 are averaging around $2.50 per Mcf. As with regards to markets, obviously the sooner than expected rebound in crude oil prices and relative stability in both crude oil and natural gas bodes well for the broader energy industry.
And the resilient demand on the natural gas side bodes well for critical service providers like USA Compression. As natural gas continues to play a very important role in this country's energy future, we are optimistic about the future outlook for the compression business. So let's talk about our large horsepower focus. Over the 22 years of USA Compression's existence, our business model has not changed. We have always focused on larger horsepower compression used in large regional infrastructure oriented facilities.
The rationale behind this strategy has been proven out during previous downturns and simply comes down to the fact that these facilities move very large amounts of natural gas and are demand oriented. We have purposely pursued the large horsepower and because these facilities are not easily shut down and the cost of demobilization, which are borne by our customers to send home our assets tend to be extremely expensive. This creates a barrier to exit, which lends stability to the business that other service providers, both in compression as well as activities closer to the wellhead, do not possess. We have always pointed to the stability of this business model and as we work through the remainder of 2020, we expect to experience that relative stability. A little bit on our customers.
Based on customer activity and indications, we are currently expecting utilization to bottom out in the Q3. At June 30, our utilization stood at 86.2%, which was similar to where fleet utilization declined back in the 2014 to 2016 timeframe. Remember that crude got as low as $27 per barrel back then. While it went lower back in March of this year, it rebounded much more quickly and has stabilized. And so while the recent quarter or so was somewhat different from the 2014 cycle, our customers have behaved in a similar fashion.
We have seen the rate of return of underutilized assets decrease meaningfully. We have seen recent quote activity pick up substantially and have had equipment starts begin to once again outnumber equipment stops. We continue to see the large horsepower equipment classes remain utilized, proving the strategy of pursuing larger infrastructure based applications. Overall, our customers are working to figure out what the future holds for their particular operations as well as the overall industry and that creates different motivations for different customers in different basins. The vast majority of our assets serve either dry gas activities and natural gas handling activities such as those connected to gas processing plants, our large volume centralized gas With the With the geographical diversity of our asset base, we have exposure to different producing regions and as such have a balance throughout the fleet.
Events in one particular area like associated gas declines in the Permian and Delaware basins, while they affect us, are partially mitigated by activity in other regions like Appalachia. I mentioned before our contract mix and how historically we had anywhere between 40% 50% of our assets out on a month to month basis. As a result of re contracting activities over the last year or so, we have reduced our month to month exposure to approximately 26%, which puts us in a good position as we work through the rest of the year. We have new starts of equipment scheduled for the back half of the year, so that will add some additional term contracts to help mitigate some of the month to month units that have come home. While the industry as a whole is by no means out of the woods and on to recovery, we believe you are beginning to see signs of a bottom and indications of recovery.
While we saw a fair amount of unit returns during the Q2, the rate of unit returns has slowed appreciably and as a result of our cost cutting and capital spending decisions, we believe the company is positioned to weather any additional market softness and emerge and emerge in a position to benefit from what we believe will be an eventual recovery. As many appreciate, our focus over the years has purposely been away from activities that introduce commodity price risk and oriented toward larger installations serving demand driven natural gas infrastructure applications. We have deployed significant amounts of capital excuse me, significant amounts of horsepower in large multiunit centralized compressor stations over the recent years. These installations are critical to serving the resilient demand that I discussed earlier. The production in many cases has moved into the steady state phase with shallow decline rates, thereby reducing relatively more stable volumes and pressures.
As these wells age and the reservoir pressures naturally continue to decline, more horsepower may be required to accomplish customers' operational needs. I'll now turn the call over to Matt to walk through some of the financial highlights of the quarter. Matt?
Thanks, Eric, and good morning, everyone. Today USA Compression reported a solid second quarter of results, including quarterly revenue of 100 and $69,000,000 adjusted EBITDA of $105,000,000 and DCF to limited partners of $59,000,000 In July, we announced a cash distribution to our unitholders of $0.525 per LP common unit consistent with the previous quarter, which resulted in coverage of 1.15 times. Our total fleet horsepower as of the end of Q2 was largely consistent with where we ended the Q1 at approximately 3,700,000 horsepower. Our revenue generating horsepower at period end decreased approximately 6% to a little over 3,100,000 horsepower as we saw the effects of the return of units that began following the events of March. Our average horsepower utilization for the 2nd quarter was 88%.
Pricing as measured by average revenue per revenue generating horsepower per month was $16.79 for Q2, which was a slight decrease from the previous quarter's levels. Of the total revenue for the Q2 of $169,000,000 approximately $166,000,000 reflected our core contract operations revenues, while parts and service revenue was $3,000,000 Adjusted gross margin as a percentage of revenue was 70.4 percent in Q2 helped by the early cost cutting actions we took. Net income for the quarter was $2,700,000 and operating income was $34,900,000 dollars Net cash provided by operating activities was $97,400,000 in the quarter. Maintenance capital totaled $4,400,000 in the quarter as we cut back on activities with the decreased utilization. Cash interest expense net was $29,900,000 And last, with our quarterly EBITDA and current borrowings, our bank leverage was 4.64 times.
As it regards full year guidance for 2020, we've made a few minor revisions which don't affect either adjusted EBITDA or distributable cash flow. So we still currently expect 2020 adjusted EBITDA of between 395,000,000 $415,000,000 and DCF of between $195,000,000 $215,000,000 Last, we expect to file our Form 10 Q with the SEC as early as this afternoon. And with that, we will open the call to questions. Operator, are there any questions currently?
Our first question comes from Charlie Parker.
Hey, good morning. So first question just on the margin side, you cited cost cutting action. Just wondering if you could give maybe a bit more color there on those cost controls and kind of what we can expect to show up in future quarters?
Sure. Charlie, it's Matt. Thanks for the question. Yes, back at the time of the Q1 earnings, we talked a little bit about it as well. Going back when we started seeing what was coming kind of in that mid March area timeframe, we went through really the entire business.
We did a fair amount of kind of rightsizing the labor force. I think we probably cut about 10% of labor costs out of the business as well as kind of going through the other parts of the business to kind of pull out some SG and A. So I think what you saw in the Q2 was the impact. We did most of that really before the end of March. And so what we did, we got ahead of it.
And so I think you're seeing probably margins just a hair obviously a hair higher than they were historically because we had taken out a whole bunch of that cost really as of the beginning of Q2. So, as the quarter went on, we got the benefit of that. I think going forward, we continue to believe that with the asset base that we have in terms of operating the assets that the margin should be very similar to where they were historically at USA Compression. So again, I think we were a tad higher this quarter than you've seen in the recent past because of the the timing of those costs. And I think as we kind of go through the rest of the year, we'll get back to probably what would be a more normalized level of margin.
And Matt, is it fair to say that when we looked at some of the cost cutting elements that we did, when we look at some of our peers came into this with a bloated G and A structure and are scrambling to kind of rationalize their P and Ls, Some of the peers have taken some one time short term adjustments. They've alleviated their 401 match, which we have not done. They've reduced benefits. They've reduced a lot of things that once a quarter or 2 has passed, they're going to kind of revert back to their old ways and they're not going to be able to ring some of those costs permanently out of the organization. So the costs that we have rung out of things are actually sustainable.
They're not one time hits and we opted to focus on things that make sense for the long term rather than induce some short term pain and suffering on our employees and then wait a couple of quarters and bring it back in. So I'd say it's much more sustainable than maybe what some of the folks in the OFS or even some of our peers have been
doing. Okay. So some permanent reductions, but looking at margins down the road should probably revert to what we've seen historically?
Yes, I think that's it.
Okay. Secondly, just on customer activity, we're about a month now into the Q3. Appreciate the color that you gave in the opening remarks. Just kind of curious if you could go through some of your key basins and what you're seeing in this latest month activity trends versus what you saw on 2Q?
Yes. So when you look at the most recent month, we're seeing a fairly substantial tick up in quote activity, new set activity and a slowdown in unit level returns. Like we saw in past cycles, we had a fairly major hit from the smaller horsepower gas lift equipment, which was predominantly based up in the Mid Continent region. We had some significant curtailments. We have some significant shut ins.
So we work with our customers to put in place some short term standby rates or we actually in certain cases just allow them the units to stay on location contemplating that there was going to be a rebound coming in the future. Thank goodness for the industry, our customers on the E and P side and then for us at USA Compression, commodity prices have come back very, very quickly. So the standbys and the curtailments and the rate abatements, we're working through very, very quickly. So some of the pricing concessions will continue for another month or 2 in certain cases, the few that are remaining, but very dramatic increase in start ups again of the smaller horsepower gas lift that had been curtailed. One phenomenon that hit this time that we hadn't seen in the past was we with some of our larger customers, folks tend to use 3rd party compression providers for services like USA Compression and then they actually own some equipment that might be baseload oriented.
So we tend to be the variableized guys where they're when they're moving into a new area and they're ramping up and growing or as activities have peaked and they've kind of played out the area, when you've got an installation of 10 machines and perhaps they own 3 or 4 and then USA Compression would own the other 6 or 7. As things start to slow down and their production starts to decline a little bit, over time they might send 1 or 2 units home. What happened in this Q1 when activity was going and blowing, some of our customers had committed to purchase large horsepower compression assets. And when the bottom dropped out in March, these folks continue to take delivery of assets into the March, April on into the May type timeframe. So we had some instances where some of our larger horsepower units were installed and have been out for a period of time and were out on month to month contracts and we saw fairly meaningful slug of that equipment come home.
Some of that was in the Permian Basin and some of that tended to be up in the Mid Continent. So those activities have been worked through. The backlog of customer purchases is slow. They've taken delivery. So now folks are at the point in time where they're starting to rationalize their assets, our large horsepower that is installed is staying installed.
And what we're now doing is as additional activity starts to tick up, for example, in the Eagle Ford, in the Haynesville and on into Appalachia, we've got assets that are in the fleet being redeployed in those areas and then we've got folks inside the Permian and Delaware Basins as an example and on into the Mid Continent. Different customers have different demand needs and we're seeing it tick up there. So I would say that if this thing dropped off the cliff, it hit very quickly. Our customers reacted quickly. And I think all of us were envisioning that we were potentially looking at an 18 to 24 month sub-twenty dollars environment on the crude oil side and sub-two dollars natural gas environment and that has been mitigated.
So I think activity is quickly ticking up and we will be the beneficiaries of that. So I think as we pointed out in our commentary, the Q3 to us appears to be the bottom of the cycle and things are ticking up as evidenced by new contracting activity and the cessation of returns for equipment, small and large horsepower bike.
Great. That was a great response. Really appreciate all the color. And sorry, I don't mean to monopolize the call here, but just really quickly, the last question, just the 8 ks that you put out yesterday, I just wanted to confirm if that gives you full access to the revolver?
Charlie, it's Matt. We wouldn't have full access. It would ultimately be governed by the leverage ratio, but it gives us cushion throughout kind of the remainder of this year in case anything sort of unexpected happens and then kind of ratchets down over the course of next year. So we would never get up to the full borrowing capacity of that facility, but it does give us a little bit of extra cushion to manage the business through.
Great. Thank you.
Our next comes from Shneur Gershuni of UBS.
Hi, good morning, everyone. Glad to see everyone as well. Eric, I was wondering if you can go back to your prepared remarks on the call just with respect to how the compress works. Just kind of wanted to clarify one of the comments that you had made. You talked about how as well depressurize the need for compression continues to increase.
Trying to clarify, I guess, one point is, were you saying that like that's just kind of the natural flow and that's something that would have happened whether we had this issue with COVID and OPEC kind of irregardless? Or are you saying that because there's not a lot of new drilling activity that pressure slows in trunk lines and so it actually increases is the need for more compression as well too as a result of the slowdown in drilling activity.
Yes, Shneur, this is Eric. And our focus is not on the slowdown or changing conditions in trunk lines. It's actually looking at the wells, looking at the major pad sites, looking at the regional applications. So as Matt pointed out and in the prepared remarks, when you have these steep shale declines from when new drilling activity ceases, you'll see an 18 to 24 to 30 month period of significant decline. And then wells that have been up and operational for 3 years, 4 years, 5 years, Maybe they're not making 5,000 barrels of oil and 20,000,000 cubic feet a day anymore.
Maybe they're making 500 barrels a day and they're making about 1,000,000 or 1,500,000 cubic feet of gas. And you've seen the decline rates on those types of wells change from 70%, 80%, 90% to 15%, 20%. So what we see going on is as new activity new drilling activity ceases, demand for new compression will slow. So that's where historically a lot of the growth in our industry has come are in periods where you've seen dramatic increases in rig counts. You go back post Katrina and Rita in the 'five, 'six, 'seven range and you go back after the financial meltdown of 2,008 and you saw growth in activities in 2010, 2011 and 2012 on into 2013 and part of the way through 2014, a lot of growth, a lot of demand.
And then in times like we're having now, the new activity slows down, people need cash flow, people try to maintain production as much as they can, but for that short period of curtailments. And now what you're seeing is the flush production drops quickly and then that other component in relative steady state continues. So there's 2 phenomenon that go on. But you also see decline in pressure. So that's where the compression horsepower comes in where as the pressures decline, you got to suck harder to get that gas out of the spare tire of the bicycle, so to speak.
So when volumes decline and pressures decline, you might actually see flat to slightly increasing levels of compression horsepower. Pressures decline, volumes up, you need more. Volumes up, pressures down, can't really you may need some more. And then when pressures are down, and volumes are down, you may stay flat, you may slightly increase. So that's really what Shneur, we're trying to speak to is just the fundamentals of when new activity slows down is that you've got to suck harder to maintain the existing level of production throughput as the pressures start to decline.
That makes perfect sense, but
I'm saying that was kind of my understanding prior to all of this year. So I think you're was the point really just more to really educate the listeners as to this is how our business works and that nothing has really changed in terms of our understandings of everything. But in theory, you just have a lost captured that compression as kind of a growth thing. Is that kind of the right way to think about it?
Yes. I think that's a great way to think about it. We've been in business for 22 plus years. People focus on the growth mode of the environment. And then when the declines come, for some reason people look to compression as behaving similar to the oilfield service guys who are tied to the drilling cycle.
And that's when we start to get the noise about, gosh, you need to go into preservation mode, you need to cut your distribution, you can't afford to do these things because your business is volatile. And I think what we're trying to draw attention to Shneur, just as you pointed out is a lot of our production our compression assets are installed in this very stable production profile. So, yes, we just slow the growth. We power through the downturn. We maintain our distributions.
And then when the market conditions improve in a year or 2 years or whatever it takes like they've done in many, many cycles since we formed the business since back in 1998, you go back and you resume some growth again. So we grow when it makes sense to grow. We don't grow and we go down into the hunker down mode and power through a downturn. And our view has always been if we maintain the proper right size corporate G and A, we maintain the right type of assets, the right kind of contract mix, the right kind of customers, that when these inevitable downturns occur, we're extremely well positioned. We can power through and we can reward our long term shareholders with maintaining a decent level of distribution.
So nothing's really changed.
Okay. No, fair enough. Just two more questions, if I may. I guess you sort of talked about in the prior back and forth about the turn back of some assets. Just to clarify, that was more of a function of somebody over ordered or a few had over ordered based on some expectations and they were obviously using their own assets.
But there's not a trend where this is not a trend where operators are looking to reduce their variable costs by taking compression in house kind of on a go forward basis, which would seem counterintuitive because that would involve capital outlays. Am I thinking about it correctly?
Yes, you are. I think you come into a downturn like this and if you go back to that I mentioned 2005, 2006 post Katrina Rita, capital was massively available for anybody in the energy business. Upstream, midstream, downstream, you picked it, banks were flooding capital. When the collapse of 2,008 hit, banks kind of pulled their horns in a little bit and loosen their purse strings again back in the 2010 to 2014 range. And when the 'fourteen, 'fifteen, 'sixteen collapse occurred, banks started to get a little more skittish.
Hey guys, focus on your core competency. We've got enough exposure to pick a name of XYZ E and P or XYZ Midstream. So the bank started kind of tightening the capital spigots a little bit. And now you fast forward to today where you've seen a lot of flush out in the industry, you're seeing some bankruptcies occur, capital is really constrained and throttled back. It's our belief that this trend that has occurred over the last three waves that I've mentioned will continue into the future.
And then when we come out of this downturn and the E and P guys start to put the bit back in the ground, they're going to focus on their core competency, which is drilling and producing. They're not going to be building pipelines. They're not going to be purchasing compression. They're going to focus on that core competency. So I think it's the trend toward outsourcing will continue.
There's just a few of us, very few of us who have the capabilities of backing the play of the major oil companies and the large independents, both from a capital perspective as well as from an operational expertise as well as the ability to focus and maintain the level of safety standards and proficiency that are required by the big guys. So the trend is going to continue and I think that bodes well for companies like USA Compression who have the size, the scale and the operational excellence to be able to do the sophisticated type of operations that's going to be required more and more by the majors going forward.
Great. And one final question, if I may. Just with respect to seeking out a waiver on your covenant, Was it more about being able to operate the business as is? Or was it more to give flexibility around paying the distribution at these elevated levels versus potentially decreasing it and not needing the CECO waiver? I was just wondering if you can give us the Board's thoughts and discussion as how you weigh the different options between a waiver versus a
distribution reset? Yes. Shneur, it's Matt. I think on the distribution, obviously, that's a decision the Board makes quarterly as we kind of noted. I think they looked at the quarter 2nd quarter results and in part based on that made that decision to kind of keep it where it was.
In terms of the bank covenant, what you may recall as we came into this year, we had when we did the deal initially with CDM back 2.5 years ago, we had it the covenant levels were higher as we sort of integrated the business. As we came into the Q1 of 2020, it ratcheted down and it was 5 times and it was basically set at 5 times for the remainder of the facility. So, when we looked at our initial budget, obviously, everything worked just fine and then you had kind of March April hit. So when that stuff happened and given just there's just obviously a lot more I think uncertainty lingering out there now than in the past. We thought the prudent thing to do was to go ahead, talk to the banks, explain the situation, and basically get a little bit of cushion so that we could kind of operate the business.
And again, not you're not we were not talking, hey, we think we were going to have enormous breaches, But I think just the increased uncertainty that's kind of out there in the market right now, we didn't want to be in a situation where down the road something happened and kind of caught us off guard. So we went ahead and sort of did it ahead of time, if you will.
Perfect. Really appreciate the color, guys. Thank you for taking the time with me today and have a safe day.
You bet. Thanks, Shneur.
Our next question comes from TJ Schultz of RBC Capital Markets.
Hey, good morning. Most of my stuff some answered. Just one quick one. On the $10,000,000 GP contribution agreement, are there any time milestones that revert control of that option for you all to buy that or is that always an energy transfer decision as long as their ownership hold for it is?
Yes. TJ, it's Matt. Yes, it works really 2 ways. The ability of energy transfer they can elect unilaterally to put that the GP interest back to the partnership for that $10,000,000 So that's on their side. So they're kind of right now free to go.
The other side is when their ownership, which is roughly 46,500,000 units right now, when that gets LP units, when that gets down to 12,500,000 units, which is about a 75% decrease, At that point, it automatically triggers the repurchase by the partnership from Energy Transfer for that same amount.
Okay, got it. Thanks guys.
Yes. Thanks, TJ.
At this time, we have no further questions in and I would like to turn it back over to Eric Long.
Thanks, operator. We expect 2020 to be a tale of 2 halves. The first half of the year saw solid results, but during the second quarter, we saw the impact of commodity price volatility and that of the global pandemic. There continues to be a good amount of uncertainty on the extent and duration of the current weakness and therefore the timing and magnitude of the recovery. The good news is that we have continued to manage USA Compression with the same business model that has held up over 22 years, a business built a business built on natural gas demand whose long term importance to this country and the world we continue to be optimistic about.
We believe the underlying stability of our large horsepower infrastructure focused contract compression services business model and the science behind the need for compression and the interplay between pressures and volumes will be a key point of positive differentiation as we work through the rest of the year. We took action early into the downturn on both cost and capital spending that have served us well in the Q2 and we will continue to focus on things within our control. Like in past downturns, we expect to weather the storm and come out on the other side with a business model built for stability. Thanks for joining us today and please be safe. We look forward to speaking with everyone on our next call.
Thanks for your continued support at USA Compression.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.