Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Archrock, Inc. (NYSE:AROC)
Q3 2019 Earnings Call
Oct 29, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to the Archrock Third Quarter 2019 Conference Call. Your host this morning for this morning's call is Paul Burkhart, Treasurer and Vice President of Investor Relations at Archrock. I will now turn the call over to Mr. Burkhart. You may begin, Mr. Burkhart. Ladies and gentlemen, we're having a technical difficulty, please hold. (technical difficulty) Ladies and gentlemen, I apologize for the delay, and the conference will now begin. Mr. Burkhart, please go ahead.

Paul Burkhart -- Treasurer & Vice President of Investor Relations

Thank you, Jerry. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of Archrock and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the third quarter of 2019. If you have not received a copy, you can find the information on the company's website at www.archrock.com.

During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by and information currently available to Archrock's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call.

In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, gross margin, gross margin percentage and cash available for dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release and our Form 8-K furnished to the SEC.

I'll now turn the call over to Brad to discuss Archrock's third quarter results and to provide an update of our business.

D. Bradley Childers -- President and Chief Executive Officer

Thank you, Paul, and good morning everyone. Archrock delivered strong performance in the third quarter. I'm proud of our employees and their dedication to working safely every day, delivering great service to our customers and generating value for our investors. Let me share some of the quarter's highlights. On August 1, we closed the acquisition of Elite Compression and have successfully integrated Elite's horsepower and operating team into the Archrock platform. Our adjusted EBITDA of $112 million for the quarter represents a quarterly record for Archrock and an increase of 25% over the prior year third quarter.

Results for the third quarter of 2019 include a $7 million gain related to the sale of compression assets to an affiliate of Harvest Midstream concurrent with the closing of Elite. We increased our operating horsepower by over 300,000, bringing Archrock's total operating horsepower at quarter-end to approximately 3.9 million.

We achieved gross margins of 62% for contract operations and 19% for aftermarket services both at the high end of our guidance ranges. We recently announced our third quarter dividend of $0.145 per share. Our latest dividend reflects an increase of 10% over the third quarter of last year while at the same time delivering peer leading dividend coverage ratio of 3.1 times.

And finally, we reduced our leverage ratio from 4.4 times last quarter to 4.3 times this quarter as we continued toward our target of sub 4 times leverage by the end of 2020. Many of you will recall that we moved to providing annual guidance from our prior practice of providing quarterly guidance starting at the beginning of 2019 and I'm pleased to share that our performance for the quarter keeps us on track to achieve our annual adjusted EBITDA guidance of between $400 million and $410 million.

On the Elite acquisition, we're excited to have successfully completed this attractive and complementary consolidation opportunity, which was net income and cash flow accretive, expanded our business with two large customers and added attractive basin density, all of these benefits were acquired in the transaction that was completed on a leverage neutral basis. We continue to expect the lead assets to generate annual adjusted EBITDA of approximately $55 million in 2020 and with the deal now complete and the assets and teams incorporated into Archrock, we're confident in our ability to achieve at least the $5 million of annualized cost synergies we communicated at the time of our transaction announcement. During the quarter, we also completed the divestiture of 80,000 horsepower of compression equipment to Harvest Midstream in connection with the Elite acquisition as well as 47,000 horsepower to other customers. The equipment sold in each of these transactions typically needs one or more of our criteria for divestment, which include the equipment is located in a non-core play and is of an age type or configuration that does not compete well for redeployment in our current core growth focused areas.

In Elite, acquisition of these divestments are consistent with our strategy of maintaining a highly efficient fleet of standardized large horsepower units operating in growth basins and our strategy of continuously high grading our assets and operations and improving the performance and profitability of our business, a point I'll return to shortly.

Now turning to the market, the US energy industry delivered record natural gas production growth in 2018 and 2019, which has directly benefited our business. Since the end of 2017, we have grown our operating horsepower by about 660,000 or 20% and improved our adjusted EBITDA of $72 million in the last quarter of 2017 to $112 million for this third quarter of 2019, an improvement of 56%.

Long-term, we believe that the demand for natural gas will continue to grow. We expect that low and steady natural gas prices and the readily available and abundant volume of both associated and dry natural gas will continue to support increases in demand for US natural gas, including for LNG exports to Mexico, petrochemical plants and power generation. In the near term, however, we expect the growth rate for natural gas demand to moderate from the extreme growth we saw in 2018 and 2019 to rates in the lower single-digit range in 2020 and 2021. This reflects an expected return to a more normalized market, but still a healthy backdrop to support continued demand for our compression equipment and services.

Now as for what we're seeing currently, bidding and quoting activity levels continue to be solid in the Permian, the DJ Basin and in the Northeast, though we have seen a moderation of customer activity in some areas, in particular in dry gas plays and in the SCOOP and the STACK areas of the Mid-Continent.

Planning time frames for our customers have come in a little, but are still at a level that provide good visibility into 2020. In fact, over half of our expected 2020 newbuild capital is already under firm commitments to customers and we have active negotiations on the remaining units. Spot pricing on units placed in the service remains constructive but the rates of double-digit annual price increases that we experienced over the last few years has moderated, which is consistent with the deceleration in production growth that is expected.

Our team continues to focus on achieving market rates for all of our units as evidenced by our margin performance so far this year. Activity levels for the aftermarket services business has slowed over the past few quarters and we expect the fourth quarter to continue that trend. Several customers have elected to delay spending on compression maintenance activities, a practice that cannot endure indefinitely, but has impacted our business and our revenues in 2019.

We remain focused on maintaining a high margin AMS business and despite revenues being lower than expected, our gross margins remain relatively strong. While the activity levels have dropped in the near term, the base of owned compression in the field has increased over the past several years and will help sustain the AMS business over the long term.

I'd like to move to a discussion of our capital strategy. At the time of our corporate simplification transaction in April of 2018, we established a three-year capital allocation plan. As we sit here today, looking ahead to the final period of this plan in 2020, I'm proud of where we stand as we are well on track to achieve the capital allocation objectives we laid out in 2018. These objectives were: first, to meet the needs of our customer base by investing in high return, large horsepower compression equipment. The growth we delivered in our operating horsepower and financial performance demonstrate how well we've been able to meet this objective.

Second, leverage reduction, we are on track to reduce our leverage to below four times in 2020, our current leverage ratio stands at 4.3 times, a reduction of about 1 turn from year-end 2017. As we now expect our 2020 growth CapEx to be less than $125 million combined with our continuing profitability improvement, we believe we are well positioned to achieve our 2020 leverage reduction target.

Third, capital return, we're delivering on our promise to provide an ongoing and growing return to our shareholders through the payment of a quarterly dividend. We increased the dividend by 10% in each of the second quarters of 2018 and 2019 and we're committed to growing the dividend by another 10% to 15% by the end of 2020. And significantly the successful execution of our strategy has put us in a position to generate positive free cash flow in 2020. Over the long term, we're committed to positioning and managing this business to generate positive free cash flow.

Finally, as we begin working with our customers to understand their plans and needs for next year, let me share with you what we'll be focused on for 2020 and beyond. First and foremost, we'll continue to work diligently to meet the needs of our customers safely every day. As we do so, we're committed to delivering the highest levels of service quality. To accomplish this, our employees have worked and will work tirelessly to high grade every part of our business. This is investing in a competitive compression fleet, which has continued to grow in the categories of large horsepower equipment that is most in demand in the high growth place today.

Since 2010, our large horsepower equipment as a percentage of our operating fleet has increased from approximately 55% to 74% today. We remain just as committed to investing in the technology, systems and operating platform improvements that will continue to drive superior service for our customers as well as continuing profitability and returns for our investors.

Together with the improvements we've made to our fleet, the improvements we've made to our operating platform, were substantial contributor to the profit improvement that we've driven into this business elevating our contract operations gross margins' from 51% in 2010 to 62% in the most recent quarter. Looking into 2020, these efforts to high grade our fleets, invest in technology and high grade our operations and our profitability will continue and support our commitment to deliver on our capital allocation objectives, including delivering free cash flow in 2020.

Now I'd like to turn the call over to Doug for a more detailed review of our third quarter performance.

Doug S. Aron -- Senior Vice President and Chief Financial Officer

Great. Thanks, Brad, and thanks to all of you for joining us this morning. Archrock reported another period of solid operational and financial results. Revenue for the third quarter totaled $245 million, an increase of 5% compared to the prior year period. Our adjusted EBITDA of $112 million this quarter is $22.5 million or 25% higher than the third quarter of 2018 and was driven primarily by higher operating horsepower and improved pricing.

As Brad noted, the third quarter results included $7 million in gains related to the sale of compression assets to Harvest Midstream and others. Net income for the third quarter of 2019 was $20 million, double the $10 million reported in the third quarter of 2018.

Turning to our business segments, in contract operations revenue improved for the 10th consecutive quarter to $198 million, up 17% from the third quarter of 2018. This increase as compared to the prior year resulted from higher operating horsepower and rate increases implemented across our fleet at the start of the year. We delivered gross margin and contract operations of $122 million, up from $100 million in the prior year quarter as, again, we benefited from price increases, a larger operating fleet and focused cost management. Third quarter gross margin percentage of 62% is equivalent to the last quarter and up over 200 basis points from the prior year quarter.

In our aftermarket services segment, we reported third quarter revenue of $47 million compared to $63 million in the prior year third quarter, driven by several customers deferring maintenance activities. We continue to prioritize high margin business within our AMS operations and as a result have maintained gross margins of 19%, which was at the high end of our full year expectation of between 17% and 19%.

SG&A totaled $30 million for the third quarter compared to $26 million from the prior year and $29 million last quarter. The increase in SG&A over the prior year was partially driven by our investment in significant technology initiatives. For the third quarter, growth capital expenditures totaled $49 million bringing year-to-date growth CapEx to $241 million as we continue to expect full year growth CapEx to be between $285 million and $300 million.

Maintenance CapEx for the third quarter of '19 was $14 million bringing year-to-date total to $46 million and keeps us on pace for our full year guidance of between $60 million and $65 million. We generated $34 million from asset sales in the third quarter including $30 million associated with our previously announced sale of non-core compression equipment to Harvest Midstream.

For the first three quarters of 2019, we have completed $56 million of asset sales, as we continue to manage and prune our fleet where it make strategic sense. For the full year, we expect approximately $70 million of asset sales, including the aforementioned sale to Harvest. We exited the third quarter with total debt of $1.83 billion, up from $1.63 billion at the end of the second quarter as we funded with debt a portion of the Elite acquisition.

For the third quarter, leverage reduced to 4.3 times from 4.7 times in the third quarter of 2018 and from 4.4 times last quarter. This was achieved despite our strategic acquisition of Elite, which was leverage neutral and continued investment in high return compression assets to support our 2019 growth program. We remain steadfast in our focus to reduce leverage, and we remain on target to achieve our leverage goals of below 4 times in 2020.

We exited the third quarter with available liquidity of $246 million. We recently declared our third quarter dividend of $0.145 per share or $0.58 on an annualized basis, unchanged from the prior quarter and reflecting a 10% increase over the prior year. Our latest dividend represents a yield of 5.9% based on yesterday's closing price in a total estimated dividend payment of $22 million.

Our third quarter dividend will be paid on November 14 to all shareholders of record on November 7. Cash available for dividend for the third quarter of 2019 totaled $68 million leading to third quarter dividend coverage of 3.1 times. We are proud of our ability to deliver value to shareholders through an attractive dividend yield, combined with peer-leading dividend coverage. Our strong third quarter results keep us on pace to deliver on our guidance we provided on our second quarter earnings call, including adjusted EBITDA of between $400 million and $410 million.

We don't plan to give full-year 2020 guidance until we report our fourth quarter 2019 results. However, as previously mentioned, we do expect capital expenditures to be less than $125 million next year. And as a result, we should be well positioned to deliver free cash flow in 2020.

With that, we'd now like to open up the line for questions. Jerry, can you begin that process?

Questions and Answers:

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] The first question is from TJ Schultz, RBC Capital Markets. Please go ahead, sir.

TJ Schultz -- RBC Capital Markets -- Analyst

Great, thanks. Good morning, guys.

Doug S. Aron -- Senior Vice President and Chief Financial Officer

Good morning.

TJ Schultz -- RBC Capital Markets -- Analyst

Hey. I guess just first, thinking about supply and demand for Compression and ultimately your ability to kind of maintain pricing into 2020, as you guys discussed, producers are dialing back some activity. How does that evolve and at the same time, you and others are pointing to the lower horsepower additions next year. Just trying to get your thoughts there over the next 12 months or so.

D. Bradley Childers -- President and Chief Executive Officer

Sure. Look, we're still seeing good activity in the market. I'd say the market remains constructive in its demand for compression equipment and for our services. Clearly, however, we're off the frenetic pace that occurred in '18 and '19 and so coming off of a high pace, I wouldn't consider it to be a decline, it's just a reduced level of growth and it still remains constructive and quoting activity with customers remains good. And that translates into pricing. I would point out that I think pricing remains firm in the marketplace and that's what we're seeing currently as we are bidding and quoting and starting horsepower. And just finally, I'm going to point out we're at a high level of utilization, both in our business on that 88% and in industry overall. And in the past, utilization rates in the high 80s have been a period of very constructive pricing for the market and I think that's going to be the case, and it looks like it's going to continue to be the case in the current market.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. And as we think about things like utilization and supply and demand, do you have a view of on how much of kind of the industry fleet could be retired next year or over the next 12 months, just based on age and things like that? Or is that not really material to the equation?

D. Bradley Childers -- President and Chief Executive Officer

It's not immaterial to the equation. So I'll give you a way to think about it, it's the way we think about it and that is that the equipment is 25 to 30-year equipment, sometimes longer. And that should mean that equipment that was added into the space 25 to 35 years ago is that it has a good chance of being retired. That would equate to a decline rate or an amount of horsepower moving out of the space of 2% to 3% overall. Unfortunately, it's not that simple because not all the equipment was added ratably. The business has grown over time and so the horsepower additions currently are larger than the horsepower additions 25 and 35 years ago. That gives you a way to think about it for the industry overall.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. No, that's helpful. Just last one for me on kind of consolidation in the space have been continuous, I guess Kodiak and Pegasus the most obvious recent deals, do you see those private deals specifically changing kind of the competitive landscape for you all? Do you anticipate further consolidation in the space? And how do you see Archrock kind of fitting in to that theme moving forward? Thanks.

D. Bradley Childers -- President and Chief Executive Officer

Sure. And so a couple of things, in our business we're really pleased with the consolidation activity we have in the quarter. The acquisition that we made of Elite was really a good acquisition and a good combination for our business, high quality assets. It was a part of the addition of about 300,000 horsepower in the quarter, all located with newer equipment in a great place for us with a couple of marquee customers. So we thought that that consolidation was great to see in the space. As for what others do, less interested in talking about their business, but any consolidation in this space is good and we're happy to see it. And then finally just to close the loop on your question, this space has always had some private players entering into it and the management teams that are part of some of the private players that have entered into the business recently were part of private players that entered into the business 20 years ago. And so that part of this business remains more consistent than it is novel. So that's just not new to what the competitive landscape looks like.

TJ Schultz -- RBC Capital Markets -- Analyst

Got it. Makes sense. Thank you.

Operator

Next question is from Jeremy Tonet, JPMorgan. Please go ahead, sir.

Jeremy Tonet -- JPMorgan -- Analyst

Hi, good morning. Just quickly back to pricing and looking more specifically at this quarter, quarter-over-quarter, was that increase more reflective of Elite or legacy assets or maybe just the mix?

D. Bradley Childers -- President and Chief Executive Officer

It's just the mix, it's very hard to distinguish the two. We did not have Elite for long. And it's not such a large addition to our already 3.5 million horsepower fleet that it can show up clearly as driving it. We think, however, it's just been a healthy environment from an overall revenue per horsepower and pricing, we've captured that in our base business and Elite have that too.

Jeremy Tonet -- JPMorgan -- Analyst

Okay. And I know it's smaller but aftermarket services, it sounds like a more kind of deferrals into year-end. Do you see kind of that trend continuing in 2020 and then more specifically, do you think the guidance range-is there a possibility that may be fallen a bit below the lower end?

D. Bradley Childers -- President and Chief Executive Officer

Well, clearly, the business has continued to decline throughout 2019 and look, we think the reasons for that are a few that have to change. There is a combination of budget exhaustion going on with some of our customers. Dry gas plays, in particular, are especially financially tight, given the current dry gas price, that's where a lot of legacy's equipment that attracts aftermarket services activity. And finally, capital discipline. Look, it's definitely set into the marketplace, it's been very good for our contract operations business in that our customers have look to us to help them with their compression needs, but it has incentivized, I think, more deferrals in the AMS space. All of those factors will change over time and as they do, we expect that business and the revenue in that business to rebuild. Calling the time frame for that pretty challenging, however, but we're looking for that to occur not in the fourth quarter, but more into the middle of 2020 that business typically picks up more in Q2 and Q3.

Doug S. Aron -- Senior Vice President and Chief Financial Officer

And Jeremy, I think, maybe I'll just add to the back half of your question on the guidance side, historically AMS has always been a little bit more difficult for us to forecast, a little more variability than contract compression. So certainly not to the point where we want to update guidance for Q4. We're going to stick with our annual guidance model but as Brad mentioned two things, one, we don't believe that this maintenance deferral can happen forever and despite budget exhaustion at some point, people will need that work to be done and we're just not quite sure when that is, but overall very comfortable reiterating our EBITDA guidance of between $400 million and $410 for next year.

Jeremy Tonet -- JPMorgan -- Analyst

Okay. Great, that's helpful. Last one for me. Just thinking about the current environment, obviously, with activity normalizing as we move in the next couple of years. Even some talks of certain pipes takeaway pipes being even pushed out a couple of years from now, what's -- when you think about the dividend growth rate, what is sustainable growth rate longer term for your business or how you at least think about that?

D. Bradley Childers -- President and Chief Executive Officer

So when we set the current capital allocation policy, including the dividend growth rate guidance through 2020, I'll remind you that was in 2018 and it was part of our corporate simplification. As we look at this business -- and by the way, we're really pleased that we achieved not just that growth rate, but an increasing coverage on top of that, greater than three times for the current quarter. So it's pretty robust demonstration of both healthy growth in our business and disciplined capital management and achieving the targets that we set. After we achieve that goal, we'll look ahead candidly starting in 2020 to think about what our capital allocation should and could look like. I'll point out that once we achieve these objectives and are generating free cash flow, the whole opportunity set of capital allocation options will then be available to us and whether the best return for our investment is then by increasing the dividend at whatever rate, whether it's repurchasing shares given market conditions, investing in the business, or repaying debt, we'll have all those options available and we'll look into the 2020 period, to come up with how we recommend to the Board and the Board approved that next level of what capital allocation should look like.

Jeremy Tonet -- JPMorgan -- Analyst

Great, thanks.

Operator

We have a question from John Watson, Simmons & Company. Please go ahead, sir.

John Watson -- Simmons Energy -- AnalystSimmons Energy

Thank you. Good morning.

D. Bradley Childers -- President and Chief Executive Officer

Good morning.

John Watson -- Simmons Energy -- AnalystSimmons Energy

Hey, Brad, in past years, you have discussed how Archrock could order more horsepower than you did end up ordering, should we think about that being the case for your 2020 budget? Said differently, is there more demand for your units next year than your initial CapEx budget suggest and you're exercising capital discipline?

D. Bradley Childers -- President and Chief Executive Officer

Yes. Thanks, John. I'm going to trust that our sales team did put you up to this question. But the truth is, yes. Look, for every year, including '18, '19 and as we look out to '20, candidly we think that there is incremental demand potentially with new customers for equipment that we are not positioning our business to satisfy this time. We're fully meeting the needs and we're investing at a level that meets the needs of our core customers, we're in tight communication with them to ensure we can supply their needs. But yeah, we believe there is an increment of investment available that we're not chasing. But, look, we believe that at some point, capital discipline means something and generating good returns for our investors and getting this business to show the strength of the stable production leverage business model is worth making sure we can do. So, to answer your question short is yes.

John Watson -- Simmons Energy -- AnalystSimmons Energy

Yeah, OK. I agree completely. I think that's prudent and given the Elite acquisition and the CapEx spend year-to-date, I had expected operating horsepower deployed to increase more significantly by the end of the quarter. I'm sure asset sales were an offsetting factor, but can you walk me through any of the other puts and takes influencing operating horsepower that I might be missing?

D. Bradley Childers -- President and Chief Executive Officer

Sure. Look, horsepower for the quarter was essentially flat, but it was in fact down about 7,000 horsepower. I wouldn't read a lot into it, in some quarters we grow, in some quarters it doesn't grow as much. So we're down 7,000 from an organic horsepower in the fleet perspective before taking into account the Elite acquisition and the divestitures that we described. So overall, it's still a very good quarter from utilization and bookings and starts with our customers but starts were slightly down and stops were slightly up and that level of movement on a 3.9 million horsepower fleet produced pretty much in just a flat quarter and that's what I think you're seeing.

John Watson -- Simmons Energy -- AnalystSimmons Energy

Okay. And then lastly, you mentioned some softness in dry gas basins. More generally, and I guess for the oil basins are you expecting a deceleration in Gas Lift demand given what we've seen with completions activity over the past few months?

D. Bradley Childers -- President and Chief Executive Officer

Yes, I think so, I mean, we haven't been able to translate that directly into a change in demand for Gas Lift, demand still remains for that portion of the market as well. But I think that with overall production levels not growing on the oil side just like on the gas side at the rates that we had in '18 and '19, that will slow the growth also for demand for Gas Lift.

John Watson -- Simmons Energy -- AnalystSimmons Energy

Right, OK. Thanks for the color. I'll turn it back.

Operator

You have a question from Mr. Daniel Burke, Johnson Rice. Please go ahead.

Daniel Burke -- Johnson Rice & Company -- Analyst

Hey, guys, good morning.

D. Bradley Childers -- President and Chief Executive Officer

Good morning.

Daniel Burke -- Johnson Rice & Company -- Analyst

Let's see, things left to query on, looks like on the CapEx side for this year, it looks like the pace of spending, Brad, for other CapEx, where you guys are spending some on your tech initiatives is a little behind schedule, but I don't know if that's the right way to put it. What do we see in there, what's the update on those initiatives and you guys had a lot going on internally certainly over the last few months?

D. Bradley Childers -- President and Chief Executive Officer

We did, on the technology improvements that we're looking at, that spending is actually moving up in the fourth quarter and it was up a little bit in the third quarter, moving up in the fourth quarter. Through 2020, it's going to be, I think, the heavy spend area. Some of that movement quarter-to-quarter is just the inability to forecast exactly when the dollars are going to lead. So I wouldn't try any conclusions out of the spend rate on that, the project itself though is one that we're pretty excited about. So getting our platform migrated to the cloud, into a full cloud environment with our ERP, putting in the best barcoding mechanisms with supply chain to get some efficiencies there as well as improving the communications infrastructure we have in the field is the project that we're investing in. Again, that investment phase goes through 2020 and into 2021 and we're excited about what that's going to bring to the business, overall, the project is progressing. But we're still on the front-end real heavy lifting part of that.

Daniel Burke -- Johnson Rice & Company -- Analyst

Got it. And then shift gears maybe, talk a little bit about maybe gross margin on the contract ops side, just wondering as the business slows from as you put it the frenetic pace you've seen over the last couple of years, what's your ability to manage your input costs and prevent that creep from chewing into margin a bit looking forward?

D. Bradley Childers -- President and Chief Executive Officer

Look, I'll share with you first that the business and the operations team have done a great job managing our overall OpEx and spend rate to date to deliver the gross margin performance that we're achieving, it's no small feat to safely operate in the field, to deliver excellent customer service and meet the cost targets that we've laid out to support our profitability targets. So they've done a great job to date, I think that what you're going to see is some equilibrium on both revenue and cost as the market does not grow at the same accelerated rate it was previously and we see that opportunity set contract a little bit. We see lead times for equipment coming in a little bit. I believe that the pricing environment will remain more stable and I believe the cost environment will remain more stable, and I think that's going to support us being able to maintain the level of profitability we've achieved with the long-term ambition as evidenced by the technology project that we're never going to be satisfied, we're still going to look for more.

Daniel Burke -- Johnson Rice & Company -- Analyst

Okay, all right. Great. We'll, look, Brad. Thank you. I'll leave it there.

D. Bradley Childers -- President and Chief Executive Officer

Thanks.

Operator

We have a question from Kyle May, Capital One Securities. Please go ahead.

Kyle May -- Capital One Securities -- Analyst

Good morning.

D. Bradley Childers -- President and Chief Executive Officer

Good morning.

Kyle May -- Capital One Securities -- Analyst

Apologies if I've missed this earlier, but as we're thinking about the fourth quarter in the context of your full-year guidance for 2019, can you walk us through the different variables that could swing results to one end or the other of your guidance range?

D. Bradley Childers -- President and Chief Executive Officer

Yeah, I think as you -- first, you've got the two main operating segments both contract operations, which we've seen is very predictable and performing at levels that we're at or maybe even exceeded our expectations, obviously, the addition of the Elite horsepower. I think from a modeling perspective, what we've talked about with folks is that we had initially said when we bought that business, it would be about $55 million of annual EBITDA, that included $5 million of annual synergies, that it would take us up to 12 months to achieve those synergies. So for modeling purposes, when I think we updated folks after we made that acquisition, it was sort of 5/12th[Phonetic] of that $50 million. And so all of that sort of variable coming into the quarter, we touched a little on AMS having been below our expectations, certainly on the revenue side so far year-to-date. Candidly, we probably model that for Q4, even at the beginning of the year we would have expected that to be a little on the lower end.

So those are two key items that you might think about as what could reflect the difference between the lower and higher end of our range and then we've seen pointed out in a few morning notes this morning that perhaps folks aren't as willing to give us credit for the gain on asset sales that we achieved in the third quarter. And I think it's easy to think about those as one-time events because it's not necessarily "our core business". But I'd tell you, as you think about Archrock's strategy of pruning the fleet historically, getting rid of either less standardized packages or particularly let's use Harvest as an example, because that's the one that we have made public. Those were 23 or 24-year old average age equipment with a single customer in very much a mature basin. that being the San Juan Basin. It made very good sense for the operator there, the owner to own those assets. We've got a reasonable price and we did book a gain. We traded existing EBITDA for that gain. And so that would be, I guess, the last piece I would point to in terms of, if you're trying to think about whether we come in at that middle of the range, high end of the range low end of the range or even above that higher end of the range would be in my mind whether or not you include that gain on sale of assets that we include in our adjusted EBITDA, perhaps some of you guys don't. To me, those would be the areas that could mean the difference for the quarter.

Kyle May -- Capital One Securities -- Analyst

Got it, OK. And one other question that we get oftentimes in -- will just say, more distressed environments, like we're in now. People often ask about the strength of your contracts. And I guess really what it boils down to is when you're thinking about your long-term contracts that are three plus years, what's the potential that these get either canceled or restructured or I guess, big picture, how do we think about that?

D. Bradley Childers -- President and Chief Executive Officer

Sure. The good news side of our business, on the contract side as well as on the longer-term stable performance is that first on the contracts, this business has a history of our customers honoring our contracts and our contracts having integrity and holding up through the cycle. We have not had a history of canceled contracts at all of any notes in the space. I'm not aware of that being a part of anybody else's history, but it's certainly not a part of what we experienced in Archrock. So integrity of contracts in the space is really good. The second thing I'd point out and probably more fundamentally and maybe why that's the case is that this business is levered to natural gas and oil production. That generates great stability of our operations and great stability for the customers as well because we're levered to their production and to their cash flow and to their revenue. And that means that through the last period of time, I'll point out in contrast to what others in the industry experience, our utilization went from about a peak of 87%, 88% to a trough of 79%, not exactly a crisis in what was considered to be one of the deepest sharpest drops in the space in energy for a long time and this business held up well. I think the industry held up well. We expect that this is not going to change in the future. If anything, we're going to continue to bring that bottom up through the improvements we've made to our fleet and to our operations. We expect to maintain strong utilization through industry conditions, and multiple industry environments.

Kyle May -- Capital One Securities -- Analyst

Okay, great. That's all from me. Thank you.

D. Bradley Childers -- President and Chief Executive Officer

Thanks, Kyle.

Operator

We have a question from Tom Curran, FBR. Please go ahead, sir.

Thomas Curran -- B. Riley FBR -- Analyst

Good morning, guys.

D. Bradley Childers -- President and Chief Executive Officer

Good morning.

Thomas Curran -- B. Riley FBR -- Analyst

Brad, returning to the technology modernization program. When it comes to that programs' major initiatives, my understanding is that the first one expected to be completed is the Oracle ERP system migration to the cloud. Could you please just confirm or correct that and then give us an idea of when you would expect to have that initiative finished?

D. Bradley Childers -- President and Chief Executive Officer

Sure. So it's not really the case. Fortunately, we've already migrated components to the cloud. And so this has been an ongoing project. The details of like every step in the project is -- for a migration like this is too detailed to get into on a conference call such as this. But fortunately, we've already had success moving some of our modules and work modules in the company to the cloud. The migration of Oracle to the cloud is going to be in 2020. Beyond that, right now, we're not going to go too public with the exact timing of when that's going to occur and how it's going to occur. We believe the team is well positioned to mitigate and manage the risks around an ERP project of the scope and scale. I'll point out that we're fortunately with one vendor today and we're staying with that vendor and using that vendor's cloud-based products. So it's not a change of a vendor or a system, it's moving from an on-premises system provided by that vendor to their cloud-based solution.

Thomas Curran -- B. Riley FBR -- Analyst

Good to hear. Doug, sticking with the technology program, any visibility at this point on how next year's $20 million roughly investment is likely to be split between SG&A and CapEx?

Doug S. Aron -- Senior Vice President and Chief Financial Officer

Yeah, I would say yes, we do have an internal view of that and Tom, again, I think we're going to stick with our kind of plan of laying out our 2020 guidance in more detail when we provide that on our fourth quarter earnings call, not trying to be cagey at all. But, again, having gone from quarterly guidance to annual guidance this year and feeling very good about delivering on that. I do think that again points to sort of the stability and predictability of this business and we want to make sure our pencil's sharp before we deliver that information.

Thomas Curran -- B. Riley FBR -- Analyst

Fair enough. Last one for me and understandable if the answer is somewhat the same, but since you did touch on the fact that ongoing asset sales are in some ways an actual recurring reality for you. Coming out of the merger and integration could you update sort of what that quarterly run rate range should be for asset sales?

Doug S. Aron -- Senior Vice President and Chief Financial Officer

Yeah, I mean, I would look at our historical numbers. And I don't think that the Elite -- the Elite units that we acquired, the business that we acquired is a very young fleet. And so we wouldn't expect that to have had an impact other than specifically the transaction with an affiliate of Elite that had to sell the horsepower that we did there. So, again, that is a little bit of an unpredictable part of our business but we will give guidance on what we expect that to be when we report our fourth quarter results.

Thomas Curran -- B. Riley FBR -- Analyst

Great. So stay tuned for all the above with the upcoming annual guidance. I appreciate you taking my questions, guys.

Doug S. Aron -- Senior Vice President and Chief Financial Officer

Yeah, maybe not quite to hook we'd hope for to keep you interested in the next call. But we'll do our best.

Thomas Curran -- B. Riley FBR -- Analyst

All right, guys. Thank you.

D. Bradley Childers -- President and Chief Executive Officer

Thanks.

Operator

There are no more questions. Now I'd like to turn the call back over to Mr. Childers for final remarks. Please go ahead, sir.

D. Bradley Childers -- President and Chief Executive Officer

Thank you everyone for joining our call this morning. Look, I'm proud of our entire team who continue to dedicate themselves to delivering reliable, safe and quality service on behalf of our customers, and I believe this dedication is evident in our performance for the quarter and our outlook for the future. Thank you everyone for participating on our call this morning and for your interest in Archrock.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Paul Burkhart -- Treasurer & Vice President of Investor Relations

D. Bradley Childers -- President and Chief Executive Officer

Doug S. Aron -- Senior Vice President and Chief Financial Officer

TJ Schultz -- RBC Capital Markets -- Analyst

Jeremy Tonet -- JPMorgan -- Analyst

John Watson -- Simmons Energy -- AnalystSimmons Energy

Daniel Burke -- Johnson Rice & Company -- Analyst

Kyle May -- Capital One Securities -- Analyst

Thomas Curran -- B. Riley FBR -- Analyst

More AROC analysis

All earnings call transcripts

AlphaStreet Logo