Good morning, and welcome to the USA Compression Partners L. P. Third Quarter 2018 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.
Conference is being recorded today, November 6, 2018. I would now like to turn the call over to Chris Porter, Vice President and General Counsel and Secretary. Please go ahead.
Good morning, everyone, and thank you for joining us. This morning, we released our financial results for the quarter ended September 30, 2018. You can find our earnings release as well as a recording of this call in the Investor Relations section of our website at usacompression.com. The recording will be available through November 16, 2018. 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 management's views as of today, November 6, 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 excuse me, and thanks for joining our call. Also with me is Matt Lluzzi, our CFO. This morning, we released our financial and operational results for the Q3 of 2018. The overall market for compression services remains very strong, driven by solid natural gas fundamentals and the continuing midstream infrastructure build out, which is not just combined to one region, but rather is taking place across the country in areas which we operate.
We continue to take advantage of the strong market to push through rate increases, while prudently investing capital in the business. Our utilization metrics demonstrate the current strength of the market and we expect continued strength throughout 2019 based on the current visibility for compression services demand. This is the 2nd full quarter we've owned the CDM assets. We are extremely pleased with the substantial progress we've made on integrating the CDM business, while continuing to manage our day to day base business and drive top line revenue growth in a strong market environment. We have already identified and are in various stages of implementing on a bunch of opportunities, low hanging fruit so to speak involving synergies that are lining up to be even better than we expected.
As we've discussed previously, the integration of these two businesses is a significant undertaking. While we experienced some expected integration noise that impacted the 3rd quarter results, this was temporary in nature and we don't expect it going forward. One example that Matt will touch on in more depth later was the impact of the accounting treatment for the CDM acquisition. Since it was treated as a reverse merger, USA Compression's reported 1st quarter financials now reflect the historical Q1 for CDM Resources instead of USACs, which reduced adjusted EBITDA by almost $10,000,000 Even with this impact, you'll note our 2018 adjusted EBITDA guidance is essentially unchanged. So as you can see, we continue to be bullish on the ongoing marketplace.
We continue to believe that the large horsepower strategy is well positioned to benefit from the broader macro trends in the energy sector. Our focus on that part of the market along with the full integration of the newly acquired CDM assets and people will prove to be a strong combination that we believe will continue to differentiate USA Compression from our peers. We believe our size, scale, geographic footprint, quality and young age of our fleet assets and enviable customer mix is a winning combination for the future. So a little more on the integration. We continue to make great progress on the integration of the 2 very similar yet different businesses into one cohesive machine.
Since closing, we've been operating the business as a single entity in the marketplace, but behind the scenes we've been doing all the grinding, blocking and tackling associated with an acquisition of this sort. As of early November, we have now migrated substantially all customer, contract and asset data in the USA Compression systems, providing us the ability to manage the fleet as a single entity. The finance and accounting functions have all been integrated into USA Compression's scalable operational and financial platforms with granularity down to the discrete asset level. This is a big deal. When you consider the many thousands of individual assets in the combined fleet and what could have been a daunting task, this extensive conversion process went according to plan on time and on budget.
One of the most beneficial aspects of this is that substantially all of our 900 plus employees across the country are now accessing and working from the same systems. This improves efficiency, communication and reporting, reduces redundant inventory and working capital and helps us to monitor, evaluate and manage the business as a combined entity. At this point in the year, we are on track to achieve the initial targeted synergies we indicated to you. As planned and as we finalize the back office transition, we will see the impact of additional synergies kick in at the beginning of 2019. As I mentioned earlier, we have some negative cost items directly related to the integration that impacted our margins in the quarter.
For example, we had a higher than normal number of legacy CDM field service technicians up to the park post closing. In the interim, we used outside parties to perform routine maintenance on some of our units. These 3rd parties were considerably more expensive than using internal personnel. With the strong energy market we've been experiencing, it took a while to fill those spots with the USAC caliber technicians. We have now remediated that situation and frankly we were able to improve the area employee talent pool.
We also continue to monitor and make changes in various regions cost structures, particularly with regards to labor and duplicative inventory as well as begin to instill the USAC commercial approach to revenue generation. We are applying the same historical USA Compression discipline across the combined company and quite frankly this takes some time to implement. We are already seeing results and are confident that we will successfully make the necessary adjustments and manage the business consistent with the way USA Compression has done in the past. Now to the quarterly results. In the 3rd quarter, the strong business environment for our compression services continued.
We had average utilization during the quarter of 92.8% compared to Q2 average utilization of 91.5%. We have been able to redeploy a lot of the legacy CDM assets out to our customers and that has helped drive the utilization metric higher. As we stand here today, we are effectively sold out of the larger horsepower assets. We have new units being delivered through the end of the year and well into 2019, but those contracts are by and large already committed to customers under long term contracts. Our utilization speaks to the dynamics of the marketplace.
The market for large horsepower equipment has remained very tight as we've experienced throughout the entire year. Demand continues to be especially strong for the very largest horsepower categories in which USA Compression specializes. As we will discuss, this is where our focus in capital spending has been and will continue to be on large horsepower infrastructure based equipment. On the operations side, our total fleet horsepower at period end was over 3,600,000 horsepower, an increase of over 53,000 horsepower over Q2. Active horsepower at period end increased 61,000 to over 3,200,000 horsepower, an increase of about 2% over Q2 2018.
One interesting tidbit regarding the combined CDM USAC idle fleet. Since the trough of the cycle, we have redeployed approximately 350,000 horsepower from the combined idle fleets at nominal additional CapEx cost. We view this as a low cost alternative to pricey acquisitions and the end result is that the expansion of our active fleet from idle over the past several years is comparable to the entire fleet size of all but a few of the largest in the industry at a far lower cost creating value for our unitholders. Like in previous quarters, most of our truly idle horsepower consists now of the predominantly smaller horsepower. While this wellhead oriented segment of the market is 1, less predictable than large horsepower infrastructure applications 2, prone to swings in demand and 3, as more utilization sensitivity tied to commodity prices, we are seeing increasing demand for smaller horsepower gas leak oriented units.
The stability and overall strength in crude oil has benefited this part of our business. Pricing continued to tick upwards during the Q3, reflecting the market dynamics for new delivery units as well as our efforts at selectively raising service rates on equipment out of the field. Average monthly revenue was $16.17 per horsepower for Q3, which was an increase of about 2.5% over the 2nd quarter. Keep in mind that this metric reflects the blended rate we are receiving across the entire USA Compression fleet. The upward movement is due in part to our efforts to raise prices on units currently on a month to month contract basis.
We believe we still have room to enhance prices in certain areas and for certain equipment types and that will continue to happen over time. Midstream infrastructure activity levels and the tight supply demand dynamics for both new and used large horsepower equipment are positive for both utilization and pricing in the contract compression sector. I'd like to address the topic of capital allocation for USA Compression as there is much discussion by investors relating to living within your means in the energy sector. Now that USA Compression has doubled our fleet, a fleet that is both one of the youngest in the industry and largest average horsepower, part of our job is to maximize the financial returns on this premium pool of assets. We continue to work through the active CDM legacy fleet and believe there is additional horsepower that we can redeploy to provide for more efficient operations and improve monthly service fees.
While this will take some time to implement, this type of opportunity, low hanging fruit as we like to call it, can provide revenue, adjusted EBITDA and DCF improvements at nominal cost to us. This will be a major part of our focus during 2019. In addition, we plan to continue to selectively add growth CapEx. Our limited expansion capital is focused on only the very largest of horsepower with select key long term customers under longer term contracts that generate attractive returns to USA Compression. In Q3, our growth capital was approximately $73,000,000 consisting primarily of large horsepower units.
During the quarter, we took delivery of approximately 60,000 total horsepower. For the remainder of 2018, we have scheduled about 38 horsepower for delivery consisting of substantially all large horsepower units, which have already been fully committed to customers and the long term contracts, generating attractive financial returns for USA Compression. As of September 30, we had commitments for the delivery of 120,000 horsepower of the largest horsepower class during 2019. Given the lead times for new equipment, we went ahead and placed orders with our packagers so that we would have units available for select key customers well into the back half of twenty nineteen. Lead times for the large horsepower equipment, while they have improved slightly are still right around a year.
This has kept the supply demand dynamics largely unchanged as it has been the case for the entire year. We don't see this changing meaningfully for the foreseeable future and so we took actions to make sure we're prepared for next year. The Q3 financial performance reflected continued strong top line revenue performance as USA Compression reported increased active horsepower, improved pricing and revenue growth. Adjusted EBITDA of $90,100,000 was impacted by an increase of approximately $2,600,000 in third party labor compared to the 2nd quarter, which as we mentioned was transitory in nature and we do not expect to be significant in the future. In addition, at the end of the quarter, we made some changes to the cost structure in certain operating areas that impacted the quarter by about $500,000 Likewise, overall gross operating margin of 62% and adjusted EBITDA margin of 53% were also impacted by the same one time type items.
As I mentioned, fully integrating the assets and people and USA Compression culture takes time and we are well on our way to completing it successfully. Ultimately, we believe we will drive the legacy CDM business to margins more in line with USA's past performance. The quarterly results led to bank covenant leverage of 4.9x, up slightly from the 2nd quarter and a distributable cash flow coverage ratio of 1.01x. Now turning to the market and some of the demand drivers. We continue to work to optimize our assets and pricing across our geographically diverse operating footprint, taking into account region specific activity levels, market dynamics and future outlooks.
Not all regions are experiencing the same market trends. Each has its own set of drivers and long term benefits. The Permian and Delaware basins and the SCOOPSTACK merge plays have recently seen the highest activity levels driven by increased levels of associated gas production, while the Marcellus and Utica shales in the Northeast are continuing their steady levels of growth, especially as more takeaway capacity comes online. South Texas and the Eagle Ford Shale, which has historically experienced cyclical periods of activity has become more active again, due in part to the availability of takeaway capacity, proximity to markets and better basis differentials than other bottleneck regions. In the Rockies, we see pockets of activity where operators are expanding their activity.
With the Colorado election today that has investors focused on Initiative 97 of the 2,500 foot setback requirement and Initiative 112, which has compensation for property devaluation, we have been asked about the possible impact on USA's business in the state of Colorado. First, it is important to remember that very few of our assets are located there, less than 5% and regardless of what happens today, those assets will still be required by our customers as existing production will be grandfathered. And unlike the buried pipeline, our compression assets are skid mounted and able to be picked up and relocated with that cost paid for by USA's customers. So unlike E and Ps or midstream players in Colorado, we are not concerned about the election outcome as it regards our business. The final area of operations for us, Louisiana is also gaining more interest by producers also due to favorable location and pipeline and export access.
So, while each region is different, you'll note that they all have some attractive qualities and market dynamics, which we believe will help drive not only our stability, but our growth over time. The big four demand drivers LNG exports, petrochemical feedstock demand, clean burning domestic power generation and exports to Mexico continue to move in a positive direction for our business and all indications are they should continue. As we would like to point out, more gas moving around the country requires more gas infrastructure and increased demand for compression. Large horsepower has continued to be in high demand and as our customers begin finalizing their plans for 2019, we are seeing strong indications of demand for those units, which we have on order. With growth on the top line, we will continue to wring out costs from the organization with a goal to once again return to higher margins.
I will 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 3rd quarter results. Just a quick reminder as individuals review our financial statements, because of the accounting treatment for the CDM acquisition as a reverse merger, USA Compression's financials now reflect the historical Q1 of CDM Resources.
As an example, the 9 months financial and operational data included in our earnings release and 10 Q reflects the Q1 of CDM and the 2nd and third quarters of the combined business. The updated guidance we are providing today reflects the inclusion of CDM's Q1 results, which were approximately $10,000,000 lower on an adjusted EBITDA basis than the USA Compression standalone results for that same quarter. Turning to the results, the 3rd quarter achieved revenue of $169,000,000 adjusted EBITDA of $90,100,000 and DCF to limited partners of $47,500,000 In October, we announced the cash distribution to our unitholders of $0.525 per common unit consistent with the previous quarter, which resulted in coverage of 1.01 times. Our total fleet horsepower as of the end of Q3 was over 3,600,000 horsepower. Our revenue generating horsepower at period end was approximately 3,200,000 horsepower.
On a net basis, we added over 61,000 of active horsepower to the fleet during the quarter. Our average horsepower utilization for the 3rd quarter was 92.8%. Pricing as measured by average revenue per revenue generating horsepower per month was $16.17 for the quarter. We continue to benefit from attractive pricing on new unit deliveries as well as selective price increases on the existing fleet. Total revenue for the Q3 was $169,000,000 of which approximately $163,000,000 reflected our core contract operations revenues, an increase of about $3,100,000 over Q2.
Parts and service revenue was down around $1,000,000 from Q2. Gross operating margin as a percentage of revenue was 62% in the 3rd quarter. Net loss for the quarter was $563,000 Net cash provided by operating activities was $38,800,000 in the quarter and operating income was $23,900,000 for the quarter. Maintenance capital totaled $6,400,000 in the quarter and cash interest expense net was $23,900,000 We currently expect 2018 adjusted EBITDA of between $310,000,000 320,000,000 dollars and DCF between $170,000,000 $180,000,000 In addition, we expect a net loss of between $8,000,000 $18,000,000 Last, we expect to file our Form 10 Q with the SEC as early as this afternoon. And with that, we'll open the call to questions.
First question comes from Shneur Gershuni, UBS.
Hi, good morning guys. I just wanted to start off on kind of the pricing cycle that we're in right now. We've seen a tremendous increase in rigs over the last couple of years. Obviously, more wells have been drilled, starting to decline and so forth. And kind of my thought process would be that this should sort of be the sweet spot of the pricing cycle for USA Compression.
What kind of trends are you seeing? I mean, I do recognize that you did talk about the ability to see higher prices, but shouldn't we see sort of exponential type of increases at this point of the cycle?
Yes, Shneur, this is Eric. Exponential connotates 3x and 4x price increases and that's not the nature of our business. What we do see is pricing increasing in excess of kind of typical rates of inflation. What we look at is over a longer term cycle peak to trough assets in trough of cycle returns for newly deployed downturn. And when you look at peak of cycle, which we're not quite at peak of cycle yet, we see things that are in the upper teens to low 20s unlevered returns.
So I think what we're looking to do is to take assets that we have as part of our fleet, particularly the legacy CDM assets that were deployed 2, 3, 4, 5 years ago at rates that are significantly below the current spot rates and redeploy them and drive our average price book across the overall fleet up significantly where it is today. When we look at the spot pricing on the new units that we'll deploy the 120 some odd 1,000 horsepower for next year, these are extremely attractive new unit economics, effectively 5 year or less cash on cash type of payouts, low 20s IRR on an unlevered type of basis. So hopefully that gives you a little bit of feel and color and flavor of kind of how we're looking at the market.
No, no, it definitely gives me a flavor. I was just wondering if we can unpack it a little bit more. I would assume that kind of the stealing is kind of a rent versus own type of process from your customers' perspective and that's why it should be somewhat of a limiting factor. How much capacity is it out there for someone to go and buy assets at this point right now or new build assets? Is that a limiting factor at all also?
I was just wondering if you can sort of talk about that dynamic?
Yes. There was multiple limiting factors. 1st is access to building new units. It's a XYZ Energy Company or XYGMidstream company wants to acquire something today. It's a year lead time to source that equipment today.
There are significant bottlenecks in the manufacturing supply chain. There's not a lot of these types of assets that exist. And I think in addition to having asset bottlenecks, you've got people limitations and you've got capital limitations. You've got E and P companies that are under the scrutiny of living within their capital means, living within free cash flow. And I think compression, the wave toward continuing to outsource is actually trending to accelerate.
So I think you're actually in a very unique time right now that you've got limitations on access to capital, you've got limitations on access to people, And you have limitations on access to new equipment. So all of those three things together kind of provide for a perfect storm, which we think plays well to our strength of large horsepower infrastructure equipment and will allow us to reprice our book upward over time.
Okay. Fair enough. Just moving on two more questions. Just with respect to costs or cost of sales, I should say, is that a function of the accounting convention you were talking about in your prepared remarks? Or is there some underlying trend that we need to be thinking about?
Yes. Shneur, it's Matt. When you're looking at the Q3 specifically, I think in terms of the margin, What it really reflected this quarter was really 2 things and I think Eric touched on both. But one, we had some temporary issues where we had to hire some 3rd party services. We had lost a handful of our people or people that we had acquired as part of the CDM acquisition and needed to basically outsource a bunch of maintenance services that normally we would do internally.
And so that drove up that was a couple of $1,000,000 more than we would have normally spent, for instance, back in the Q2 or even last year. So that was a temporary phenomenon if you will. I think if you were to add kind of normalize that line item, you're probably picking up a couple percentage points overall on margin. And then the other item that Eric also touched on was operating cost structure. And really we just as we've kind of gotten into this and gotten our arms around every single region and that we're operating in.
Some regions just had a little bit too much cost in it, if you will. So we've remedied that during the quarter. And so I think going forward that was about the 0.5 $1,000,000 impact that Eric mentioned. So going forward that $500,000 should no longer be in there as well. So we think it's really those two items and then the other item which is a when you think about where USA was historically versus the combined business now again, it's this retail service line kind of on the revenue side.
And again, that has that is a business where we take care of or we'll perform maintenance work on customer owned items and that is a lower margin business. We do that really as a courtesy to customers. The CDM legacy business had a bit more of that activity in it than we as USA standalone did. So as we're combining that and kind of working through that, you're seeing a little bit of impact from that. But if you were to strip out just solely the retail, you're probably adding another 2 to 3 percentage points on margin as well.
Great. And one final question. You sort of talked about lower leverage, higher coverage as kind of goals. Do you have specific goals and timelines as to when you would like to achieve certain both of those types of metrics?
Sure. Not specifically. As we've talked about it internally and with our Board, getting our hands around this and doing the integration work is kind of priority number 1. As we look forward, hitting on some of the stuff Eric talked about, pricing increases, restrained capital spending, things like that. We expect the leverage to come down and the coverage to go up over time.
But we still have some work to do to kind of get this thing integrated. So I think it might be a little premature to set exact timelines and targets out at this point. But certainly, I think the trend lines would be in to areas where in the low to mid four times leverage over time and coverage at a level where I know this quarter dipped down to kind of that 101. But again, if you were to add back, I think some of those kind of one time type expenses, I think you'd see it probably 0.05 or so higher. And so I think when we look at that, we're headed in the right direction for sure.
And it will we'll have to evaluate that quarter by quarter. Great.
No, I really appreciate the color guys. Thank you
very much.
Thanks, Our next question comes from Jeremy Tonet, JPMorgan.
Good morning. This is Charlie in for Jeremy. Just following up a little bit there on the leverage and coverage side. Just wondering if you can talk a little bit more about your 2019 financing strategy, taking into consideration your current spend and kind of where coverage sits today. But also wanted to add in, I mean, you talked about it last quarter, but you've got the increased pricing pressures from suppliers.
And I understand you're going to pass that on through higher monthly service rates. I'm curious if there's a timing lag between passing it on and how that may impact I think you kind of alluded to the second half of twenty nineteen is when you'd really see those increased pricing pressures flow through. So just curious on those dynamics and how that might impact
2019? Let's break it into a couple of components. On the growth CapEx side, the 120,000 horsepower to be delivered over the course of 2019, we were able to lock in commitments from our suppliers prior to any rate increases. So when you start to hear about tariffs and increased cost of steel and some of those types of things, we were able to mitigate that for the balance of 2018 and on into the back half of twenty nineteen. We've seen lube oil and antifreeze prices basically kind of be flat to come down slightly.
The combined CDM USA fleet has doubled in size, which has given us some pricing power. We're actually working with multiples of our larger suppliers in looking at bringing some additional cost containment to the table on parts and pieces that go into our business. So I think what we've seen is our largest driver on our cost of operations have been labor costs. You can envision when you're out of the Permian and the Delaware basins, particularly the Delaware basin, you've got counties that prior to these boom starting up had larger than the state of Rhode Island with 20 or 25 people living there. So it's not like you've got a giant labor pool to draw from.
You've got to rotate people in and out. And some of those costs are obviously are somewhat higher and we've got some inflationary pressure on that. So I think Matt and I feel pretty good about what we're seeing for the back half of twenty eighteen on O and M cost control and frankly on into 2019 with the caveat being what the some of the labor costs look like.
And Charlie, it's Matt. Back to your first point on the leverage and coverage for next year. As we look out, we don't need any equity in order to execute on the plan we have right now. We obviously gave some color about the horsepower on order for 2019. But again, I think it's a relatively reasonable amount of CapEx, especially when you look at the more recent past in terms of how much we spent.
We've certainly reined it in a little bit, I think, for just the units and the customers that we're really wanting to deal with. And we expect to be able to finance that under the current revolver, but also with free cash flow as that coverage ratio increases over time.
Great. That's good color. Thank you. Other questions are largely answered. I guess one other would be, you spoke about Permian, Scoop Stack obviously continue to be pretty good growth areas there from a macro standpoint.
Curious on your thoughts and you alluded to it a little bit, but their price realizations have improved quite a bit in the Northeast, obviously, with a lot of the takeaway projects coming online. Just curious on optimism there in the Northeast down the road?
Yes. We've said this on calls in the past as well that right now the Permian Delaware and the SCOOPSTACK merger in the Mid Continent for 2018 early part of 2019 are larger growth areas. We've had a footprint in Appalachia from the formation of the company over 20 years ago. And that's an area that we have seen lots of growth over the years. And to your point due to basis differential and lack of takeaway capacity the last couple of years, we've seen methodical growth, but it's been tempered somewhat from the rates of growth that we saw in past years.
We envision that in the back half of twenty nineteen and on into 2020, 2021 that you'll start to see kind of a tick up again in activity in that area, which bodes well for our broad footprint that we can balance our CapEx spend in new unit deploy or repatriation of equipment based on the best economics that we see across multiple basins.
Great. Thank you.
The next question comes from Barrett Blask, MUFG Securities.
Hey, guys. Just really a lot of mine have been answered, but it's kind of down to housekeeping items. The SG and A number dropped off pretty sharply from the Q2. Is this kind of the new run rate we should expect at this level?
Yes. Barrett, it's Matt. In the Q2, we had some expenses directly related to the transaction in there. And so I think you're much better kind of looking at the current rate.
So this is more of the normalized rate we're looking at now?
Yes.
Okay. That's right.
And again, you brought up the free cash flow piece, sort of how it trickles down to compression. Can you give us any more color around that? Are you hearing that people are wanting to do more outsourcing just consistently now from producers? Or is there still kind of a balance between owned versus leased with you guys?
Again, I think it's customer specific. What we find interesting is that some of the folks that have the largest and strongest balance sheets have made the strategic decision to outsource. So I've said in the past, people don't own their drilling rigs, they don't own their fracking crews, they don't own their logging trucks, they don't own their data centers and a lot of them have made the decision not to outsource. And what we're seeing particularly in the Permian and the Delaware and I think our some of our competitors and peers are seeing the same things that folks who have very sizable acreage positions, who've been in the area for 10, 20, 30, 40, 50 years with very large footprints haven't been the 1st movers in the area. And as they start to now increase their activity and developmental plans, we see kind of a shift from the early adopters, the private equity base, smaller private independents, that is some of the larger multinational integrated oil companies who are starting to gear up with their activities in different areas and different basins.
So interestingly, we see more of a push from some of those folks to outsource. And obviously, the undercapitalized or those living on a diet right now continue to look to outsourcing. So we see the trend accelerating at a point in time where again there's not enough equipment to meet all the demand that's going to be imposed on the system.
Thank you.
Thanks, Barrett.
Our next question comes from TJ Schultz, RBC Capital Markets.
Hey guys, good morning. I think just first, Eric, you mentioned better demand for smaller horsepower gas lift. Do you have these types of units sitting idle or do you need to or plan to order those to meet demand? And then where is that demand coming from primarily? Yes, great question,
TJ. We've got stuff sitting around idle, a fairly large tranche of that came along with the CDM acquisition as well as some of the assets that we have had in the past in the USA legacy fleet. So no, we don't intend to purchase any more of that stuff. And we see really it's in 2 geographic areas. We see it in the PermianDelaware as well as in the Central Basin uplift, the Mid Continent area of the SCOOPSTACK merge.
And that's another one that kind of depends on who the player is and where they are in the economic life. You've got some companies who initially will free flow then move to electric sub pumps, will move to gas lift, will move to rod pump. So they kind of cycle things over the life of their hyperbolic decline curve that they have in the area. So two biggest areas would be Permian, Delaware and then followed by the SCOOPSTACK merge up in the Mid Continent.
Okay, great. And I think just following up on something you guys have been discussing here on the rent versus own. Maybe if you could talk a little bit about contract terms for new compression. And the reason I ask all this commentary on kind of accelerated outsource demand and in the past you've talked about the stickiness of these larger horsepower units just as they get placed into the field. So if a producer puts one of your units out there, is it still what I would consider producers kind of been sitting and wait while they've ordered their own compression.
Is that kind of still the case as these contracts roll over?
Yes. The contracts roll over, TJ, you have to look again area by area. If there's been new developmental activity going on, you might see a production profile, which is flat or even actually increasing. This is an area where people have said, look, I've developed my area. I have what I have and I've gone 2 years worth of hyperbolic decline, then they start to go into a little more steady state shallower decline rates that you see.
Keep in mind, you've got pressures that decline and then you have increasing GORs in some of these casing at gas wells. So you've got a lot of dynamics that move on. I think what we historically see is we go out with our larger units typically kind of a 3 to 7 year initial primary term contract. At the end of the primary term, that's now where it gets interesting. If you have a few units here and a few units there with a smaller undercapitalized producer who doesn't have a lot of growth and developmental plans.
We've been known to pro offer a new contract. Here's a new rate. Here's a new term in tenor. What do you mean you're going to raise my rate 50%. Wow, that's kind of expensive.
Well, send it home. We'll redeploy it to somebody who's willing to pay that with a piece of equipment that's in high demand. So I think these units are very sticky. And in the environment that we're living in, you think about real estate, is it a buyer's market or is it a seller's market? We're in the equivalent of a seller's market right now where there's a lot of demand and not a heck of a lot of supply with a 3,600,000 horsepower active fleet and a total fleet of 3,800,000, 3,900,000 horsepower.
So it gives us the opportunity in this perfect storm to selectively push through the rate increases and high grade our book, improve our customer mix, improve our operating efficiencies. So it's a combination of increasing rates, improving margins with productivity and hydrating our customer mix all at the same time.
Okay, perfect. Thank you.
Thank you, TJ.
Our final question comes from Mike Gir, Janney.
Yes. Good morning, guys. Thanks. I think most of my questions have been answered. But maybe can you talk about, I guess, the what you're seeing maybe as an early outlook for 2020?
It looks like 2019 pretty much your horsepower scheduled for delivery is pretty much sold out. I guess what's your view on sort of the early look for 2020? Do you think that potentially is an extension of 2019 or it's too early to tell?
I think it looks a lot like 2019. We're definitely in the rinse and repeat mode.
Great. Thanks. That's all I had guys.
Thanks, Mike.
At this time, I would like to turn the call back over to Mr. Eric Long. Go ahead, sir.
Thank you, operator, and thank you all for joining us on the call today. The 3rd quarter represented a strong quarter for compression demand, utilization and pricing. The work to integrate CDM continues and we are focused on driving productivity, improving monthly service fees and getting margins back to where we expect them to be. The benefits we expected from the combination will come over time and a lot of work has been done to get to this point. We believe our strategy is the right one for the marketplace and should result in a leading large horsepower infrastructure oriented compression services provider with stability in cash flows and multiple areas for continued growth.
In these volatile times, USA Compression continues to be a long term story of stability and growth. We look forward to updating you on the next quarterly call. Thank you for your continued interest in and support of USA Compression.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.