This most recent quarter may have been the turning point that investors in Archrock Partners (NASDAQ: APLP) have been waiting for. Last quarter, there was a high rate of order activity and higher contract prices for gas compression horsepower. These factors increased the partnership's revenue and cash flow for the first time in over a year. It wasn't a monumental change, but every recovery starts with the end of the decline, right?

Let's take a look at Archrock Partners' most recent quarterly results and look at why management thinks investors should be excited for 2018.

Gas compression unit at sunset

Image source: Getty Images.

By the numbers

Metric Q2 2017 Q1 2017 Q2 2016
Revenue $138.2 million $137.3 million

$140.0 million

Adjusted EBITDA $66.9 million $61.1 million $71.2 million
Net income per share $0.08 ($0.07) $0.05
Distributable cash flow $39.1 million $34.4 million $46.7 million

Data source: Archrock Partners earnings releases. *EBITDA= earnings before interest, taxes, depreciation, and amortization.

If you squint hard enough, you can see an improvement in Archrock Partners' results. Revenue increased less than $1 million and gross margin jumped 2 percentage points to 61%. The reason these minuscule changes translated into net income was that the first quarter also had some asset impairment charges and higher overhead costs. 

The combined fleet of gas compression at Archrock Partners and Archrock (NYSE:AROC) ended the quarter with a utilization rate of 87%, which is unchanged from the prior quarter. However, both entities added 32,000 horsepower to their available fleet. These two started investing heavily in their compression fleet this quarter as capital spending for the quarter was $56 million, more than double from the prior quarter. 

From an investor's perspective, the most encouraging sign was that distributable cash flow increased and its distribution coverage ratio was 2.04 times. The company is covering its payout with plenty left over. Before management decides to increase that payment, it wants to see the partnerships debt levels come down to a more manageable level. At the end of 2016, management said it wanted its debt-to-EBITDA ratio to be 3.5 times by the end of the third quarter. That goal seems overly optimistic right now considering that the debt-to-EBITDA ratio stands at 6.3 times.

What management had to say

Last quarter, Archrock CEO Brad Childers talked about the increase in new orders and how those would start to improve results as the year went on. This quarter, he extended that view well into 2018 and believes that the opportunity for Archrock will be immense over the next four years.

While we recognize that WTI [West Texas Intermeidate crude] and Henry Hub prices are down year-to-date, we have seen no meaningful slowdown in customer activity levels, and we expect to see year-over-year operating horsepower growth at year-end 2017. In addition, we expect our robust backlog to carry our momentum into next year.

On the outlook for 2018, we'll be working with our customers as they develop their 2018 capital plans over the coming months. Our gain increased the visibility through that process. But considering market expectations for natural gas production, we note that the EIA forecast to U.S. 2018 natural gas production growth of 3 Bcf [billion cubic feet] a day compared to 1 Bcf a day forecasted for 2017.

As we have stated consistently, we believe our business is in an excellent position to participate and capitalize on the secular growth drivers that are expected to increase natural gas production by between 15% to 20% through 2021, and likely more beyond that.

That is an ambitious goal. Keep in mind, though, that several LNG export terminals will commence operations in the U.S. Gulf Coast, there will be multiple gas export pipelines to Mexico, and petrochemical facilities using natural gas as a feedstock will be popping up all over the place in this time frame. With that much additional demand to fill, producers and transportation companies will have to install a lot of pipelines to move that gas, which will need compression horsepower.  

What a Fool believes

Commodity market crashes and recoveries never happen on a timescale that is convenient for investors or management teams. Based on the growth between this quarter and the prior one, it's hard to see any situation where Archrock Partners will get its earnings up or debt profile down to meet that debt-to-EBITDA target. 

That said, the winds are now at Archrock's back. Natural gas production and demand continue to grow, and idle compression equipment across the U.S. is either getting put to work or retired. These two factors will likely translate to higher revenue and better margins that should significantly impact the bottom line. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.