Recent Bullish Momentum with Archrock Partners’ Stock Price May Not Last for Long

Summary

Since February 11, 2016, APLP’s Stock Price Has increased by 145.7%

APLP’s Q1 2016 revenue came out $151.42 million, which is 7.84% lower compared to the same quarter last year

Natural gas prices are currently too low to a point that drilling activity is going down

Moody’s has downgraded APLP from Ba3 to B1 that signifies the company has a high credit risk

According to Financial Times, the low end price target for APLP in the next 12-month period is currently at $8 per share, which represents a 44.64% downside risk to secondary investors

Company Overview

Archrock Partners, L.P. (NASDAQ:APLP) offers gas compression services and they operate throughout the United States. They are primarily involved in contract operations service and their range of services span over providing contract workers, equipment, and fringe supplies requires to complete their customer’s gas compression requirements.

Archrock Partners, L.P. currently operates one of the largest natural gas compressor fleets in the United States that has an aggregate horsepower of around 3,320,000. The number of operational independent compressor unit is over 6,490.

Besides providing natural gas contract compression service, Archrock Partners, L.P. also offers aftermarket parts & services covering all major brands in the industry.

As of May 21, Archrock Partners, L.P. had a market capitalization of $837.81 million.

Review of Q1 2016 Financials

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Figure 1: Archrock Partners, L.P. Revenue Has Continued to Decline Over the Past Year

On May 2, Archrock Partners, L.P. announced their Q1 2016 financial results, which showed that their quarterly revenue has fallen to $151.42 million during the first three months of the year. Compared to the $164.3 million revenue they generated in Q1 2015, this year’s Q1 revenue is almost 7.84% lower. In fact, this is the third consecutive quarter where Archrock Partners, L.P.’s quarterly revenue has declined compared to the previous quarter.

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Figure 2: Since February 11, Archrock Partners, L.P.’s Stock Price Has Climbed 145.7%

However, regardless of this downturn in the revenue curve, since February 11, Archrock Partners, L.P.’s stock price has climbed from $5.88 per share and currently trading at $14.45 per share, representing a 145.7% increase over the last few months.

The main reason behind this bullish price momentum seems to be the improving net earnings, which came out at $0.45 million in Q1 2016. Although, the $0.45 million figure would not be any improvement compared to $15.83 million in Q1 2015, any positive net earnings are a huge improvement paralleled to Q4 2015, when Archrock Partners, L.P. posted a -$139.9 million loss.

Archrock Partners, L.P. Got Downgraded by Moody’s

The 145.7% increase in Archrock Partners, L.P.’s stock price happened during a time when credits and secondary investors were getting increasingly concerned about the company’s declining cash flow.

On March 14, one of the major credit rating agencies, Moody’s downgraded Archrock Partners, L.P. from Ba3 to B1, which signifies that the company has a “high credit risk.”

Commenting on the downgrading of Archrock Partners, L.P., Terry Marshall, Moody’s Senior Vice President, noted that “Archrock Partners’ distribution coverage could fall below 1x this year, resulting in debt-funded distributions.”

“The downgrade reflects declining cash flow and weakening leverage resulting from lower fleet utilization and pricing pressure for natural gas compression units,” he added.

Conclusion

With a possibility of debt funded distributions, Archrock declared a $0.2850 dividend per share on May 02, where the yield came out at 9.02% based on May 2, 2016’s stock price.

While analysts were downgrading and expressing concerns regarding the company’s immediate future, the issuance of the dividend may have helped boost the stock price momentarily, but it also revealed to the market that the management is trying to portray an artificial “everything is fine” mien of the company.

Although Capital Cube concluded that “the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable,” the low gas prices would certainly make things uncertain for a E&P company like Archrock Partners, L.P.

During Q1 2016, Archrock Partners, L.P.’s cash and equivalents came out at $0.753 million against

May 17, Bank of America said that they have downgraded rating of Archrock Partners LP to “Neutral.” According to Financial Times, the low end price target for the company in the next 12-month period is currently at $8 per share, which represents a 44.64% downside risk to secondary investors.

Right now, the natural gas prices aren’t high enough to justify drilling in most locations. The industry is reducing drilling activity and that would likely create a shortage in the next six to twelve months, when we would likely see gas prices go up again. Meanwhile, we believe that secondary investors should consider reducing their exposure to Archrock Partners, L.P. and wait for a suitable time get back in.