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What changed in Archrock, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Archrock, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+270 added−267 removedSource: 10-K (2024-02-21) vs 10-K (2023-02-22)

Top changes in Archrock, Inc.'s 2023 10-K

270 paragraphs added · 267 removed · 200 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

62 edited+6 added−17 removed89 unchanged
Biggest changeAt this 14 Table Archrock, Contents time, we cannot determine whether the administration’s efforts on social cost or other interagency climate efforts will lead to any particular actions that give rise to a material adverse effect on our business, financial condition, results of operations and cash flows.
Biggest changeAt this time, we cannot determine whether the administration’s efforts on social cost or other interagency climate efforts will lead to any particular actions that give rise to a material adverse effect on our business, financial condition, results of operations and cash flows. 14 Table Archrock, Contents At the international level, the U.S. joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France, which resulted in an agreement intended to nationally determine their contributions and set GHG emission reduction goals every five years beginning in 2020.
This ongoing communication allows us to respond swiftly to customer requests. 11 Table Archrock, Contents Customers Our customer base consists primarily of companies engaged in all aspects of the oil and gas natural industry, including large integrated and independent oil and natural gas, processors, gatherers and transporters.
This ongoing communication allows us to respond swiftly to customer requests. 11 Table Archrock, Contents Customers Our customer base consists primarily of companies engaged in all aspects of the oil and natural gas industry, including large integrated and independent oil and natural gas processors, gatherers and transporters.
We have historically shown and are committed to maintaining capital discipline and financial strength, which is critical in a cyclical industry and business such as ours. Maintaining ample liquidity and a prudent balance sheet supports our ability to continue to deliver on our long–term strategies and positions us to take advantage of future growth opportunities as they arise. Technology Transformation.
We have historically shown and are committed to maintaining capital discipline and financial strength, which is critical in a cyclical industry and business such as ours. Maintaining ample liquidity and a prudent balance sheet supports our ability to continue to deliver on our long–term strategies and positions us to take advantage of future growth opportunities as they arise. Technology Deployment.
Although it is not currently possible to predict how these executive orders, national commitments or any proposed or future greenhouse gas or climate change legislation or regulation promulgated by Congress, the states or multi–state regions will impact our business, any regulation of greenhouse gas emissions that may be imposed in areas in which we conduct business could result in increased compliance costs or additional operating restrictions or reduced demand for our services, and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Although it is not currently possible to predict how these executive orders, national commitments or any proposed or future GHG or climate change legislation or regulation promulgated by Congress, the states or multi–state regions will impact our business, any regulation of GHG emissions that may be imposed in areas in which we conduct business could result in increased compliance costs or additional operating restrictions or reduced demand for our services, and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Safety is a core value of our company, and safety performance is a key measure of success that has been included in our short–term incentive program for over 16 years. We actively promote the highest standards of safety behavior and environmental awareness and strive to meet or exceed all applicable local and national regulations.
Safety is a core value of our company, and safety performance is a key measure of success that has been included in our short–term incentive program for over 17 years. We actively promote the highest standards of safety behavior and environmental awareness and strive to meet or exceed all applicable local and national regulations.
Compression is typically required throughout the natural gas production and transportation cycle, including at the wellhead, throughout gathering and distribution systems, into and out of processing and storage facilities and along intrastate and interstate pipelines. Our service offerings focus primarily on midstream applications, with 79% of our operating fleet being used in the gathering and processing cycle stages.
Compression is typically required throughout the natural gas production and transportation cycle, including at the wellhead, throughout gathering and distribution systems, into and out of processing and storage facilities and along intrastate and interstate pipelines. Our service offerings focus primarily on midstream applications, with 75% of our operating fleet being used in the gathering and processing cycle stages.
Aftermarket Services Overview Our aftermarket services business sells parts and components and provides operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment. We believe that we are particularly well–qualified to provide these services because our highly experienced operating personnel have access to the full range of our compression services and facilities.
Aftermarket Services Overview Our aftermarket services business sells parts and components and provides operations, major and routine maintenance, overhaul and reconfiguration services to customers who own compression equipment. We believe that we are particularly well–qualified to provide these services because our highly experienced operating personnel have access to the full range of our compression services and facilities.
All of our compressors are designed to automatically shut down if operating conditions deviate from a pre–determined range and are also equipped with telematic devices that enable us to remotely monitor the units. We maintain field service locations from which our field technicians service and overhaul our fleet.
All of our compressors are designed to automatically shut down if operating conditions deviate from a pre–determined range and substantially all are also equipped with telematic devices that enable us to remotely monitor the units. We maintain field service locations from which we service and overhaul our fleet.
We are typically responsible for the costs and expenses associated with our compression equipment except for fuel gas, which is provided by our customers. Service Standards and Specifications. We provide contract operations services according to the particular specifications of each job, as set forth in the applicable contract.
We are typically responsible for the costs and expenses associated with our compression equipment except for fuel gas or electricity, which is provided by our customers. Service Standards and Specifications. We provide contract operations services according to the particular specifications of each job, as set forth in the applicable contract.
Although most of the state–level initiatives have to date been focused on large sources of greenhouse gas emissions, such as electric power plants, it is possible that smaller sources such as our natural gas–powered compressors could become subject to greenhouse gas–related regulation.
Although most of the state–level initiatives have to date been focused on large sources of GHG emissions, such as electric power plants, it is possible that smaller sources such as our natural gas–powered compressors could become subject to GHG–related regulation.
That figure is intended to be used to guide federal decisions on the costs and benefits of various policies and approvals; such efforts have been the subject of a series of judicial challenges, which have been largely unsuccessful to date.
This figure is intended to be used to guide federal decisions on the costs and benefits of various policies and approvals; such efforts have been the subject of a series of judicial challenges, which have been largely unsuccessful to date.
Among the newly proposed methane requirements that may impact our operations broader applicability to compression equipment relative to the existing rules, increased work practices and inspection requirements and mandates for certain new zero–emissions equipment.
Among the newly adopted and proposed methane requirements that may impact our operations are broader applicability to compression equipment relative to the existing rules, increased work practices and inspection requirements and mandates for certain new zero–emissions equipment.
In addition, the EPA rules provide air permitting requirements for certain large sources of greenhouse gas emissions. The requirement for large sources of greenhouse gas emissions to obtain and comply with permits will affect some of our and our customers’ largest new or modified facilities going forward, but is not expected to cause us to incur material costs.
In addition, the EPA rules provide air permitting requirements for certain large sources of GHG emissions. The requirement for large sources of GHG emissions to obtain and comply with permits will affect some of our and our customers’ largest new or modified facilities going forward, but is not expected to cause us to incur material costs.
During the years ended December 31, 2022, 2021 and 2020, we generated 80%, 83% and 84%, respectively, of our total revenue from contract operations. 7 Table Archrock, Contents Compression Fleet The compressors that we own and use to provide contract operations services are predominantly large horsepower, which we define as greater than 1,000 horsepower per unit, and consist primarily of reciprocating compressors driven by natural gas–powered engines.
During the years ended December 31, 2023, 2022 and 2021, we generated 82%, 80% and 83%, respectively, of our total revenue from contract operations. 7 Table Archrock, Contents Compression Fleet The compressors that we own and use to provide contract operations services are predominantly large horsepower, which we define as greater than 1,000 horsepower per unit, and consist primarily of reciprocating compressors driven by natural gas–powered engines.
As noted above, the EPA has undertaken efforts to regulate emissions of methane, considered a greenhouse gas, in the oil and gas sector, with the development of additional, more stringent rules under way.
As noted above, the EPA has undertaken efforts to regulate emissions of methane, considered a GHG, in the oil and gas sector, with the development of additional, more stringent rules under way.
Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons, hazardous substances, or other regulated wastes may have been disposed of or released on or under the properties owned or leased by us or on or under other locations where such materials have been taken for disposal by companies sub–contracted by us.
Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons, hazardous substances, or other regulated wastes may have been disposed of or released on or under the properties owned or leased by us or on or under other locations where such materials have been taken for disposal by companies subcontracted by us.
Climate Change Climate change legislation and regulatory initiatives may arise from a variety of sources, including international, national, regional and state levels of government and associated administrative bodies, seeking to restrict or regulate emissions of greenhouse gases, such as carbon dioxide and methane. Congress has previously considered legislation to restrict or regulate emissions of greenhouse gases.
Climate Change Climate change legislation and regulatory initiatives may arise from a variety of sources, including international, national, regional and state levels of government and associated administrative bodies, seeking to restrict or regulate emissions of GHG, such as carbon dioxide and methane. Congress has previously considered legislation to restrict or regulate emissions of GHG.
We support diversity in hiring, as is reflected in the diversity of our Board of Directors, of which three of our seven independent directors are female or identify as a member of an underrepresented racial/ethnic group. Similarly, one–third of our executive leadership team is female and 29% of our total workforce is ethnically diverse.
We support diversity in hiring, as is reflected in the diversity of our Board of Directors, of which three of our independent directors are female or identify as a member of an underrepresented racial/ethnic group. Similarly, one–third of our executive leadership team is female and 28% of our total workforce is ethnically diverse.
Energy legislation and other initiatives continue to be proposed that may be relevant to greenhouse gas emissions issues. Almost half of the states, either individually or through multi–state regional initiatives, have begun to address greenhouse gas emissions, primarily through the planned development of emission inventories or regional greenhouse gas cap and trade programs.
Energy legislation and other initiatives continue to be proposed that may be relevant to GHG emissions issues. Almost half of the states, either individually or through multi–state regional initiatives, have begun to address GHG emissions, primarily through the planned development of emission inventories or regional GHG cap and trade programs.
In April 2021, the current administration announced reentry of the U.S. into the Paris Agreement along with a new “nationally determined contribution” for U.S. greenhouse gas emissions that would achieve emissions reductions of at least 50% relative to 2005 levels by 2030.
In April 2021, the current administration announced reentry of the U.S. into the Paris Agreement along with a new “nationally determined contribution” for U.S. GHG emissions that would achieve emissions reductions of at least 50% relative to 2005 levels by 2030.
The remaining 21% of our operating fleet is used in gas lift applications. Wellhead and Gathering Systems . Natural gas compression is used to transport natural gas from the wellhead through the gathering system.
The remaining 25% of our operating fleet is used in gas lift applications. Wellhead and Gathering Systems . Natural gas compression is used to transport natural gas from the wellhead through the gathering system.
Implementing telematics and advanced data analysis across our fleet has enabled us to respond more quickly and optimally to downtime events, minimize prolonged troubleshooting, prevent unnecessary unit touches and stops, which are the primary cause of wear and tear of the 10 Table Archrock, Contents equipment, and, ultimately, predict failures before they occur.
Implementing telematics and advanced data analysis across our fleet has enabled us to respond more quickly and optimally to downtime events, minimize prolonged troubleshooting, prevent unnecessary unit touches and stops, which are the primary cause of wear and tear of the equipment, and, ultimately, predict failures before they occur.
Independent of Congress, the EPA has promulgated regulations controlling greenhouse gas emissions under its existing CAA authority. The EPA has adopted rules requiring many facilities, including petroleum and natural gas systems, to inventory and report their greenhouse gas emissions. In 2021, we did not operate any facilities that were subject to these reporting obligations.
Independent of Congress, the EPA has promulgated regulations controlling GHG emissions under its existing CAA authority. The EPA has adopted rules requiring many facilities, including petroleum and natural gas systems, to inventory and report their GHG emissions. In 2023, we did not operate any facilities that were subject to these reporting obligations.
To this end, we created the TARGET ZERO program that includes over 90 safety and environmental procedures, and their necessary tools, equipment and training, that are designed to foster a mindset that integrates safety into every work process. Through this program, we achieved excellent safety performance, with a total recordable incident rate of 0.32 in 2022.
To this end, we created the TARGET ZERO program that includes over 90 safety and environmental procedures, and their necessary tools, equipment and training, which are designed to foster a mindset that integrates safety into every work process. Through this program, we achieved excellent safety performance, with a total recordable incident rate of 0.05 in 2023.
During the years ended December 31, 2022, 2021 and 2020, our five most significant customers collectively accounted for 32%, 31% and 28%, respectively, of our contract operations and aftermarket services revenue. No single customer accounted for 10% or more of our revenue during the years ended December 31, 2022, 2021 and 2020.
During the years ended December 31, 2023, 2022 and 2021, our five most significant customers collectively accounted for 33%, 32% and 31%, respectively, of our contract operations and aftermarket services revenue. No single customer accounted for 10% or more of our revenue during the years ended December 31, 2023, 2022 and 2021.
We believe the U.S. natural gas compression services industry continues to have growth potential over time due to, among other things, increased natural gas production in the U.S. from unconventional sources, the aging of producing natural gas fields that will require more compression to continue producing the same volume of natural gas and expected increased demand for natural gas in the U.S. for power generation, industrial uses and exports, including liquefied natural gas exports and exports of natural gas via pipeline to Mexico.
We believe the U.S. natural gas compression services industry continues to have growth potential over time due to, among other things, increased natural gas production in the U.S. from unconventional sources, the aging of producing natural gas fields that will require more compression to continue producing the same volume of natural gas due to lower pressures and the rise in gas-to-oil ratios for maturing wells and expected increased demand for natural gas in the U.S. for power generation, industrial uses and exports, including liquefied natural gas exports and exports of natural gas via pipeline to Mexico.
Depending on the particular program, we could be required to control emissions or to purchase and surrender allowances for greenhouse gas emissions resulting from our operations.
Depending on the particular program, we could be required to control emissions or to purchase and surrender allowances for GHG emissions resulting from our operations.
Learning and Talent Development We invest significant resources to develop the talent needed to provide our industry–leading natural gas compression services. We work closely with suppliers to develop training programs for our field service technicians. Our field service technicians are supported by a dedicated training team and collectively completed over 40,500 hours of operational and technical training during 2022.
Learning and Talent Development We invest significant resources to develop the talent needed to provide our industry–leading natural gas compression services. We work closely with suppliers to develop training programs for our field service technicians. Our field service technicians are supported by a dedicated training team and collectively completed over 37,000 hours of operational and technical training during 2023.
These fundamentals include significant natural gas resources in the U.S., increased unconventional oil and natural gas production, decreasing natural reservoir pressures and expected increased natural gas demand in the U.S. from the growth of liquefied natural gas exports, exports of natural gas via pipeline to Mexico, power generation and industrial uses. Improve profitability .
These fundamentals include significant natural gas resources in the U.S., increased unconventional oil and natural gas production, decreasing natural reservoir pressures, rising gas-to-oil ratios for maturing wells and expected increased natural gas demand in the U.S. from the growth of liquefied natural gas exports, exports of natural gas via pipeline to Mexico, power generation and industrial uses. Improve profitability .
With the exception of the proposed methane rules discussed above, we cannot predict whether re–entry into the Paris Agreement or pledges made in connection therewith will result in any particular new regulatory requirements or whether such requirements will cause us to incur material costs.
With the exception of the proposed methane rules discussed above, we cannot predict whether re-entry into the Paris Agreement or other international pledges will result in any particular new regulatory requirements or whether such requirements will cause us to incur material costs.
U.S. federal laws also require development and implementation of spill prevention, controls and countermeasure plans, including appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak at such facilities.
U.S. federal laws also require development and implementation of spill prevention, controls and countermeasure plans where petroleum storage quantities exceed certain thresholds, including appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak at such facilities.
We have strong relationships with a deep base of midstream companies and natural gas and crude oil producers. Our contract operations revenue base is sourced from approximately 340 customers operating throughout all major U.S. natural gas and crude oil producing regions. 9 Table Archrock, Contents Fee–based cash flows .
We have strong relationships with a deep base of midstream companies and natural gas and crude oil producers. Our contract operations revenue base is sourced from approximately 290 customers operating throughout all major U.S. natural gas and crude oil producing regions. Fee–based cash flows .
In our experience, these maintenance practices maximize equipment life and unit availability, minimize emissions, minimize avoidable downtime and reduce the overall maintenance expenditures over the equipment life. As of December 31, 2022, the average age of our operating fleet was 11 years.
In our experience, these maintenance practices maximize equipment life and unit availability, minimize emissions and avoidable downtime while reducing the overall maintenance expenditures over the equipment life. As of December 31, 2023, the average age of our operating fleet was 11 years.
Every new hire field employee enters a program whereby they are assigned an experienced mentor, for an average of six months, under whose direct supervision they apply their classroom learning in the real world setting.
Generally, new hire field employees enter a program whereby they are assigned an experienced mentor, for an average of six months, under whose direct supervision they apply their classroom learning in the real world setting.
This project, among other things, has helped us achieve increased asset uptime, improved the efficiency of our field service technicians, improved our supply chain and inventory management and reduced our emissions and carbon footprint, thereby improving our profitability as discussed further below in “Business Strategies.” Business Strategies We intend to continue to capitalize on our competitive strengths to meet our customers’ needs through the following key strategies: Capitalize on the long–term fundamentals for the U.S. natural gas compression industry.
We believe these efforts, among other things, will help us achieve increased asset uptime, improve the efficiency of our field service technicians, improve our supply chain and inventory management and reduce our emissions and carbon footprint, thereby improving our profitability as discussed further below in “Business Strategies.” Business Strategies We intend to continue to capitalize on our competitive strengths to meet our customers’ needs through the following key strategies: Capitalize on the long–term fundamentals for the U.S. natural gas compression industry.
Meanwhile, several states — including, most notably, New Mexico and Colorado — have been developing their own more stringent methane rules that will or are anticipated to impose additional requirements on the industry and that may be effective sooner than any new EPA rules.
Meanwhile, several states — including, most notably, New Mexico and Colorado — have been developing their own more stringent methane rules that will or are anticipated to impose additional requirements on the industry.
The definition of “waters of the United States” and, relatedly, the scope of CWA jurisdiction, have been the subject of notable rulemaking efforts and judicial challenges over several decades.
The definition of “waters of the United States” and, relatedly, the scope of CWA jurisdiction, have been the subject of notable rulemaking efforts and judicial challenges over several decades. In May 2023, the U.S.
In addition, our aftermarket services business provides opportunities to cross–sell our contract operations business. During the years ended December 31, 2022, 2021 and 2020, we generated 20%, 17% and 16%, respectively, of our total revenue from aftermarket services. Competitive Strengths We believe we have the following key competitive strengths: Large horsepower.
In addition, our aftermarket services business provides opportunities to cross–sell our contract operations services. During the years ended December 31, 2023, 2022 and 2021, we generated 18%, 20% and 17%, respectively, of our total revenue from aftermarket services. Competitive Strengths We believe we have the following key competitive strengths: Superior safety performance.
As part of this strategy, we sold approximately 341,000 and 147,000 non–core horsepower during the years ended December 31, 2022 and 2021, respectively, which drove an increase in our large operating horsepower from 77% of our fleet as of December 31, 2020, to 84% as of December 31, 2022. Optimize our business to generate attractive returns.
As part of this strategy, we sold approximately 199,000 and 341,000 horsepower during the years ended December 31, 2023 and 2022, respectively, which drove an increase in our large operating horsepower from 81% of our fleet as of December 31, 2021, to 85% as of December 31, 2023. Optimize our business to generate attractive returns.
The executive order also established an Interagency Working Group on the Social Cost of Greenhouse Gases, which is called on to, among other things, capture the full costs of greenhouse gas emissions, including the “social cost of carbon,” “social cost of nitrous oxide” and “social cost of methane,” which are “the monetized damages associated with incremental increases in greenhouse gas emissions,” including “changes in net agricultural productivity, human health, property damage from increased flood risk, and the value of ecosystem services.” The current administration adopted an interim social cost of carbon of $51 per ton in February 2021, with an updated cost figure of $190 per ton, as suggested by the EPA, expected to be announced by the Interagency Working Group in April 2023.
The executive order also established an Interagency Working Group on the Social Cost of Greenhouse Gases, which is called on to, among other things, capture the full costs of GHG emissions, including the “social cost of carbon,” “social cost of nitrous oxide” and “social cost of methane,” which are “the monetized damages associated with incremental increases in greenhouse gas emissions,” including “changes in net agricultural productivity, human health, property damage from increased flood risk, and the value of ecosystem services.” The current administration adopted an interim social cost of carbon of $51 per ton in February 2021, but in recent rulemakings the EPA has referenced a figure as high as $2,400 per ton effective in 2030.
We are focused on increasing productivity and optimizing our processes. Between 2019 and 2021, we invested in a process and technology transformation project that replaced our existing ERP, supply chain and inventory management systems and expanded the remote monitoring capabilities of our compression fleet.
We are focused on increasing productivity and optimizing our processes. Between 2019 and 2021, we invested in a process and technology transformation project that replaced our existing ERP, supply chain and inventory management systems and expanded the remote monitoring capabilities of our compression fleet. During 2023, our focus shifted to fully harnessing these technologies across our business.
Suppliers We have pricing agreements in place with all of our primary suppliers of compression equipment, parts and services, including Ariel Corporation, Waukesha Pearce Industries and Caterpillar, Inc. and its distributors, and work closely with these key suppliers on value engineering, to lower total lifecycle cost and improve equipment reliability.
Suppliers We have pricing agreements in place with all of our primary suppliers of compression equipment, parts and services, and work closely with these key suppliers on value engineering, to lower total lifecycle cost and improve equipment reliability.
It will be our continuous goal that we achieve a rate of zero in all future periods. 17 Table Archrock, Contents We also provide our employees and their families with access to a variety of flexible and convenient health and wellness programs that support the maintenance or improvement of our employees’ physical and mental health and encourage engagement in healthy behaviors, including our employee–led RockFIT program that develops and sponsors corporate health and fitness challenges throughout the year.
We also provide our employees and their families with access to a variety of flexible and convenient health and wellness programs that support the maintenance or improvement of our employees’ physical and mental health and encourage engagement in healthy behaviors, including our employee–led RockFIT program that develops and sponsors corporate health and fitness challenges throughout the year.
The following table summarizes the size of our natural gas compression fleet as of December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Aggregate ​ ​ ​ Number ​ Horsepower ​ % of ​ ​ ​ of Units ​ (in thousands) ​ Horsepower ​ 0 — 1,000 horsepower per unit 1,494 585 16 % 1,001 — 1,500 horsepower per unit 1,361 1,840 49 % Over 1,500 horsepower per unit 638 1,301 35 % Total 3,493 3,726 100 % ​ General Terms of our Contract Operations Service Agreements We typically enter into a master service agreement with each customer that sets forth the general terms and conditions of our services, and then enter into a separate supplemental service agreement for each distinct site at which we provide contract operations services.
The following table summarizes the size of our natural gas compression fleet as of December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Aggregate ​ ​ ​ Number ​ Horsepower ​ % of ​ ​ ​ of Units ​ (in thousands) ​ Horsepower ​ 0 — 1,000 horsepower per unit 1,356 555 15 % 1,001 — 1,500 horsepower per unit 1,304 1,765 47 % Over 1,500 horsepower per unit 688 1,439 38 % Total 3,348 3,759 100 % ​ General Terms of our Contract Operations Service Agreements We typically enter into a master service agreement with each customer that sets forth the general terms and conditions of our services, and then enter into a separate supplemental service agreement for each distinct site at which we provide contract operations services.
We believe this fee structure and the longevity of our operations reduces volatility and enhances the stability and predictability of our cash flows. Diversified geographic footprint. We operate in substantially all major natural gas and crude oil producing regions in the U.S. Increased size and geographic density offer compression services providers operating and cost advantages.
We believe this fee structure and the longevity of our operations reduces volatility and enhances the stability and predictability of our cash flows. 9 Table Archrock, Contents Diversified geographic footprint. We operate in substantially all major natural gas and crude oil producing regions in the U.S.
Our customers pay a fixed monthly fee for our contract operations services, which generally is based on the amount of horsepower associated with a specific application, and are required to pay a reduced monthly fee during periods of limited or disrupted natural gas flows.
Our customers pay a fixed monthly fee for our contract operations services, which generally is based on the amount of horsepower associated with a specific application. In certain circumstances, such as limited or disrupted natural gas flows, our customers may be provided a reduced monthly fee.
We support gender and ethnic pay equity and believe we offer competitive and comprehensive compensation benefits packages that include bonuses, an employee stock purchase plan, a 401(k) plan with employer contribution, healthcare and insurance benefits, health savings and flexible spending accounts with employer contribution, paid time off (including 16 hours per year as paid time to volunteer), family leave, an employee assistance program and tuition assistance, among many others.
We support pay equity and believe we offer competitive and comprehensive compensation benefits packages that include bonuses, an employee stock purchase plan, a 401(k) plan with employer contribution, healthcare and insurance benefits, health savings and flexible spending accounts with employer contribution, paid time off (including 16 hours per year as paid time to volunteer), family leave, an employee assistance program and tuition assistance, among many others. 16 Table Archrock, Contents We believe in the ultimate goal of serving as the best corporate citizen possible and are dedicated to inspiring and empowering our employees to operate continuously according to our core values of safety, service, integrity, respect and pride.
We have the largest fleet of large horsepower equipment among all outsourced compression service providers in the U.S. As of December 31, 2022, 84% of our fleet, as measured by operating horsepower, was comprised of units that exceed 1,000 horsepower per unit. We believe the trends driving demand for large horsepower units will continue.
In addition, 85% of our fleet, as measured by operating horsepower, was comprised of units that exceed 1,000 horsepower per unit. We believe the trends driving demand for large horsepower units will continue.
The amendments also establish methane standards for a subset of equipment that the current NSPS regulates, including reciprocating compressors and pneumatic controllers, and extend the current VOC standards to the remaining unregulated equipment.
The amendments also establish methane standards for a subset of equipment that the current NSPS regulates, including reciprocating compressors and pneumatic controllers, and extend the current VOC standards to the remaining unregulated equipment. In December 2023, the EPA adopted even more stringent rules with respect to methane and VOC for new and existing sources, via NSPS OOOOb and NSPS OOOOc.
In December 2018 and again in December 2020, the EPA announced that it was retaining without revision the 2015 NAAQS ozone standard. In June 2021, the EPA announced it will reconsider the December 2020 decision, with a decision expected in 2023.
In December 2018 and again in December 2020, the EPA announced that it was retaining without revision the 2015 NAAQS ozone standard. In June 2021, the EPA commenced a process for reconsidering the December 2020 decision, but more recent EPA announcements suggest that no changes are expected until 2025.
None of our employees are subject to a collective bargaining agreement. 16 Table Archrock, Contents We consider our employees to be our greatest asset and believe that our success depends on our ability to attract, develop and retain our employees.
Human Capital As of December 31, 2023, we employed approximately 1,100 employees in 14 states and conducted business in 42 states. None of our employees are subject to a collective bargaining agreement. We consider our employees to be our greatest asset and believe that our success depends on our ability to attract, develop and retain our employees.
While no incidents are acceptable, the incidents we experienced were extremely minor in nature and resulted in no lost time.
While no incidents are acceptable, the incidents we experienced were extremely minor in nature and resulted in no lost time. It will be our continuous goal that we achieve a rate of zero in all future periods.
Available Information Our annual reports on Form 10–K, quarterly reports on Form 10–Q, current reports on Form 8–K and any amendments to those reports filed or furnished to the SEC pursuant to the Exchange Act are made available free of charge on our website, www.archrock.com, as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
Our employee–led Archrock Cares program brings together employees across functions and backgrounds to break down traditional corporate barriers and form strong bonds through the pursuit of shared interests and volunteering and giving opportunities across the country. 17 Table Archrock, Contents Available Information Our annual reports on Form 10–K, quarterly reports on Form 10–Q, current reports on Form 8–K and any amendments to those reports are available free of charge on our website, www.archrock.com, as soon as reasonably practicable after they are filed electronically with the SEC.
Paper copies of our filings are also available free of charge from Archrock, Inc., 9807 Katy Freeway, Suite 100, Houston, Texas 77024, Attention: Investor Relations. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers who file electronically with the SEC. The SEC’s website address is www.sec.gov .
The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers who file electronically with the SEC. The SEC’s website address is www.sec.gov .
Our investments have focused on the automation of workflows, integration of digital and mobile tools for our field service technicians and expanded remote monitoring capabilities of our compressor fleets.
We are focused on harnessing technology across all aspects of our business to drive operational efficiencies and enhance our value proposition to our customers. This includes the automation of workflows, integration of digital and mobile tools for our field service technicians, expanded remote monitoring capabilities of our compressor fleets and emissions solutions.
We expect this will increase the number of units a field service technician can oversee and also reduce vehicle miles traveled and fuel consumption, thereby also reducing emissions.
We expect this will increase the number of units a field service technician can oversee and reduce vehicle miles traveled and fuel consumption, thereby also reducing emissions. 10 Table Archrock, Contents In addition, large horsepower equipment is our primary focus in order to capitalize on the trends that have been driving, and that we believe will continue to drive, demand for large horsepower units.
Our employees give generously and are passionate towards many causes, for which they receive 16 hours per year of paid time off to volunteer. Our employee–led Archrock Cares program brings together employees across functions and backgrounds to break down traditional corporate barriers and form strong bonds through the pursuit of shared interests and volunteering and giving opportunities across the country.
Our employees give generously and are passionate towards many causes, for which they receive 16 hours per year of paid time off to volunteer.
During 2022, our focus shifted to the integration of our process and technology transformation project into our operations, which we expect will lower our internal costs and improve our profitability over time.
We expect the technological transformations to lower our internal costs and improve our profitability over time.
Our sales efforts concentrate on demonstrating our commitment to enhancing our customers’ cash flows through superior customer service and after–market support. Superior safety performance. We believe our collective safety performance is pivotal to the success of our business and is of primary importance to our customers.
In addition, we focus on achieving a high level of reliability for the services we provide in order to maximize uptime and our customers’ production levels. Our sales efforts concentrate on demonstrating our commitment to enhancing our customers’ cash flows through superior customer service and after–market support. Large and stable customer base .
The final rule, which was published in the Federal Register in January 2023 and becomes effective on March 20, 2023, restores certain water protections that were in place prior to 2015 under the CWA for traditional navigable water, the territorial areas, interstate waters and upstream water resources that significantly affect those waters. 15 Table Archrock, Contents Waste Management and Disposal RCRA and analogous state laws and their implementing regulations govern the generation, transportation, treatment, storage and disposal of hazardous and non–hazardous solid wastes.
The EPA and the Army Corps of Engineers issued a final rule effective September 8, 2023 to implement the terms of that decision. 15 Table Archrock, Contents Waste Management and Disposal RCRA and analogous state laws and their implementing regulations govern the generation, transportation, treatment, storage and disposal of hazardous and non–hazardous solid wastes.
We have a strong safety culture and a proven ability to safely manage our business in a variety of commodity and economic environments. Our safety–centric culture has consistently produced industry–leading safety performance for many years, including a 2022 total recordable incident rate of 0.32. Large and stable customer base .
Our safety–centric culture has consistently produced industry–leading safety performance for many years, including a 2023 total recordable incident rate of 0.05. Large horsepower. As of December 31. 2023, we have the largest fleet of large horsepower equipment among all outsourced compression service providers in the U.S.
Our website also includes our Code of Business Conduct, our Corporate Governance Principles and the charters of our audit, compensation and nominating and corporate governance committees. Information on our website is not incorporated by reference in this 2022 Form 10–K or any of our other securities filings.
Additionally, we make available free of charge on our website: • our Code of Business Conduct; • our Corporate Governance Principles; and • the charters of our audit, compensation and nominating and corporate governance committees. ​
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In addition, we focus on achieving a high level of reliability for the services we provide in order to maximize uptime and our customers’ production levels. We guarantee our customers 98% availability in all of our contract operations service agreements, and during the year ended December 31, 2022, our availability was 99.1%.
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We believe our collective safety performance is pivotal to the success of our business and is of primary importance to our customers. We have a strong safety culture and a proven ability to safely manage our business in a variety of commodity and economic environments.
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As of the end of 2021, we had completed several major phases of a process and technology transformation project that enables us to harness technology in all aspects of our business to drive operational efficiencies and enhance our value proposition to our customers.
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We have a meaningful presence in associated gas plays, including the Permian and Eagle Ford shales which, combined, account for approximately two-thirds of our operating horsepower. Increased size and geographic density offer compression services providers operating and cost advantages.
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In addition, we continue to focus on increasing the percentage of large horsepower equipment within our fleet in order to capitalize on the trends that have been driving, and that we believe will continue to drive, demand for large horsepower units.
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While the rules have been approved by the EPA Administrator and published on the EPA website, they have not yet been published in the Federal Register. Once published, the rules become effective 60 days thereafter. A separate BoLM rule to address methane emissions on public lands was proposed in November 2022.
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While the EPA in 2020 adopted deregulatory amendments to the 2016 rule that removed the transmission and storage segments from the oil and natural gas source category and rescinded the methane–specific requirements for production and processing facilities, that 2020 rulemaking was voided by action of Congress and the President effective June 30, 2021.
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More recently, the international community’s December 2023 meeting known as COP28 reaffirmed commitments to the Paris Agreement and concluded an agreement that the world should move away from fossil fuel energy in a just, orderly, and equitable manner and achieve net zero GHG emissions by 2050, while recognizing a transitional role for fossil fuels.
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As a result, the 2016 rules became effective again immediately.
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Supreme Court announced a decision that sharply narrowed that definition to relatively permanent bodies of water connected to traditional navigable waters and wetlands with a continuous surface connection to other jurisdictional waters, thereby invalidating protections for many other historically regulated wetlands and waters.
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Further, in November 2021, the EPA proposed the framework for more stringent methane rules for newer sources, along with emissions standards that will for the first time be applicable to existing sources, with both a supplemental rule proposal by the EPA and a separate BoLM rule proposal addressing methane emissions on public lands issued in November 2022.
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Information on our website is not incorporated by reference in this 2023 Form 10–K or any of our other securities filings. Paper copies of our filings are also available, without charge, from Archrock, Inc., 9807 Katy Freeway, Suite 100, Houston, Texas 77024, Attention: Investor Relations.
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In a draft assessment in April 2022, the Clean Air Scientific Advisory Committee favored maintaining the 2015 NAAQS ozone standard. Those decisions have been subject to judicial challenge.
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At the international level, the U.S. joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France, which resulted in an agreement intended to nationally determine their contributions and set greenhouse gas emission reduction goals every five years beginning in 2020.
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As a result of judicial and regulatory action, different approaches to the definitions adopted in 2015 and in 2020 by the EPA and the Army Corps of Engineers were stayed or vacated during 2021, with the effect of restoring to effectiveness rules and guidance from the mid–1980s. In October 2022, the U.S.
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Supreme Court heard arguments in a case on the appropriate scope of CWA jurisdiction; the outcome of that case may shape the administration’s approach to its ongoing jurisdictional rulemaking effort.
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In the meantime, in October 2022, the EPA and the Army Corps of Engineers announced a final rule intended to provide a legally durable definition of “waters of the United States” designed to clarify and stabilize the scope of the agencies’ jurisdictions.
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The COVID–19 pandemic has largely run its course in the U.S.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThese effects may include adverse revenue and net income effects, disruptions to our operations and supply chain, customer shutdowns of oil and gas exploration and production, employee impacts from illness, school closures and other community response measures, and temporary inaccessibility or closures of our facilities or the facilities of our customers and suppliers. 18 Table Archrock, Contents The extent to which our operating and financial results continue to be affected by the COVID–19 pandemic and may be affected by future pandemics or other public health crises will depend on various factors and consequences beyond our control, such as the duration and scope of such pandemic or public health crisis, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat any such pandemic or public health crisis.
Biggest changeThe extent to which our operating and financial results may be affected by future pandemics or other public health crises will depend on various factors and consequences beyond our control, such as the duration and scope of such pandemic or public health crisis, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat any such pandemic or public health crisis.
ITEM 1A. RISK FACTORS As described in “Forward–Looking Statements,” this 2022 Form 10–K contains forward–looking statements regarding us, our business and our industry. The risk factors described below, among others, could cause our actual results to differ materially from the expectations reflected in the forward–looking statements.
Item 1A. Risk Factors As described in “Forward–Looking Statements,” this 2023 Form 10–K contains forward–looking statements regarding us, our business and our industry. The risk factors described below, among others, could cause our actual results to differ materially from the expectations reflected in the forward–looking statements.
Further, a default under one or more of the Debt Agreements would trigger cross–default provisions under the other Debt Agreements, which would accelerate our obligation to repay the indebtedness under those agreements. As of December 31, 2022, we were in compliance with all covenants under the Debt Agreements.
Further, a default under one or more of the Debt Agreements would trigger cross–default provisions under the other Debt Agreements, which would accelerate our obligation to repay the indebtedness under those agreements. As of December 31, 2023, we were in compliance with all covenants under the Debt Agreements.
For example, legislative, regulatory or executive actions intended to reduce emissions of GHGs could increase the cost of consuming crude oil and natural gas, thereby potentially causing a reduction in the demand for such products.
For example, legislative, regulatory or executive actions intended to reduce emissions of GHG could increase the cost of consuming crude oil and natural gas, thereby potentially causing a reduction in the demand for such products.
As of December 31, 2022, we had $1.5 billion in outstanding debt obligations, net of unamortized debt premiums and unamortized deferred financing costs, outstanding under our Credit Facility and Senior Notes. Many factors, including factors beyond our control, may affect our ability to make payments on our outstanding indebtedness. These factors include those discussed elsewhere in these Risk Factors.
As of December 31, 2023, we had $1.6 billion in outstanding debt obligations, net of unamortized debt premiums and unamortized deferred financing costs, outstanding under our Credit Facility and Senior Notes. Many factors, including factors beyond our control, may affect our ability to make payments on our outstanding indebtedness. These factors include those discussed elsewhere in these Risk Factors.
This could have a material adverse effect upon our business, results of operations, financial condition and cash flows. 24 Table Archrock, Contents Labor and Supply Chain Risks Our ability to manage and grow our business effectively may be adversely affected if we lose management or operational personnel.
This could have a material adverse effect upon our business, results of operations, financial condition and cash flows. Labor and Supply Chain Risks Our ability to manage and grow our business effectively may be adversely affected if we lose management or operational personnel.
In addition, where contamination may be present, it is not uncommon for neighboring land owners and other third parties to file claims for personal injury, property damage and recovery of response costs.
In addition, where contamination may be present, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury, property damage and recovery of response costs.
For example, these commitments could: • make it more difficult for us to satisfy contractual obligations; • increase our vulnerability to general adverse economic and industry conditions; • limit our ability to fund future working capital, capital expenditures, acquisitions or other corporate requirements; • increase our vulnerability to interest rate fluctuations because the interest payments on a portion of our debt are based upon variable interest rates and a portion can adjust based on our credit statistics; • limit our flexibility in planning for, or reacting to, changes in our business and our industry; • place us at a disadvantage compared to our competitors that have less debt or less restrictive covenants in such debt; and • limit our ability to incur indebtedness in the future. 21 Table Archrock, Contents Covenants in our Debt Agreements may impair our ability to operate our business.
For example, these commitments could: • make it more difficult for us to satisfy contractual obligations; • increase our vulnerability to general adverse economic and industry conditions; • limit our ability to fund future working capital, capital expenditures, acquisitions or other corporate requirements; • increase our vulnerability to interest rate fluctuations because the interest payments on a portion of our debt are based upon variable interest rates and a portion can adjust based on our credit statistics; • limit our flexibility in planning for, or reacting to, changes in our business and our industry; • place us at a disadvantage compared to our competitors that have less debt or less restrictive covenants in such debt; and • limit our ability to incur indebtedness in the future.
The loss of any of our most significant customers would result in a decline in our revenue and cash available to pay dividends to our common stockholders. Our five most significant customers collectively accounted for 32%, 31% and 28% of our revenues during the years ended December 31, 2022, 2021 and 2020, respectively.
The loss of any of our most significant customers would result in a decline in our revenue and cash available to pay dividends to our common stockholders. Our five most significant customers collectively accounted for 33%, 32% and 31% of our revenues during the years ended December 31, 2023, 2022 and 2021, respectively.
Our Credit Facility is also subject to financial covenants, including the following ratios, as defined in the corresponding agreement: ​ ​ ​ EBITDA to Interest Expense 2.5 to 1.0 Senior Secured Debt to EBITDA 3.0 to 1.0 Total Debt to EBITDA January 1, 2023 through September 30, 2023 5.50 to 1.0 Thereafter (1) 5.25 to 1.0 (1) Subject to a temporary increase to 5.50 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter.
Our Credit Facility is also subject to financial covenants, including the following ratios, as defined in the corresponding agreement: ​ ​ ​ EBITDA to Interest Expense 2.5 to 1.0 Senior Secured Debt to EBITDA 3.0 to 1.0 Total Debt to EBITDA (1) 5.25 to 1.0 (1) Subject to a temporary increase to 5.50 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter.
Similarly, any claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to 26 Table Archrock, Contents compete effectively or obtain adequate insurance in the future.
Similarly, any claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future.
Among the newly proposed methane requirements that may impact our operations are broader applicability to compression equipment relative to the existing rules, increased work practices and inspection requirements and mandates to certain new zero–emission equipment.
Among the newly adopted and proposed methane requirements that may impact our operations are broader applicability to compression equipment relative to the existing rules, increased work practices and inspection requirements and mandates for certain new zero–emissions equipment.
Occasionally, we have been assessed penalties for our non–compliance, and we could be subject to such penalties in the future. 28 Table Archrock, Contents We routinely deal with oil, natural gas and other petroleum products.
Occasionally, we have been assessed penalties for our non–compliance, and we could be subject to such penalties in the future. We routinely deal with oil, natural gas and other petroleum products.
If we do not successfully manage expectations across these varied stakeholder interests, it 30 Table Archrock, Contents could erode our stakeholder trust and thereby affect our brand and reputation.
If we do not successfully manage expectations across these varied stakeholder interests, it could erode our stakeholder trust and thereby affect our brand and reputation.
Meanwhile, several states — including, most notably, New Mexico and Colorado — have been developing their own more stringent methane emissions rules that will or are anticipated to impose additional requirements on the industry and that may impose stricter requirements than any EPA rules.
Meanwhile, several states — including, most notably, New Mexico and Colorado — have been developing their own more stringent methane rules that will or are anticipated to impose additional requirements on the industry.
The conflict has caused, and could intensify, volatility in natural gas prices, and the extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have a substantial negative impact on the global economy and/or our business for an unknown period of time.
These ongoing conflicts have caused, and could intensify, volatility in oil and natural gas prices, and the extent and duration of these military actions, sanctions and resulting market disruptions could be significant and could potentially have a substantial negative impact on the global economy and/or our business for an unknown period of time.
If we are unable to access the capital and credit markets on favorable terms, or if we are not successful in raising capital within the time period required or at all, we may not be able to grow or maintain our business, which could have a material adverse effect on our business, results of operations and financial condition. 22 Table Archrock, Contents Our inability to fund purchases of additional compression equipment could adversely impact our financial results.
If we are unable to access the capital and credit markets on favorable terms, or if we are not successful in raising capital within the time period required or at all, we may not be able to grow or maintain our business, which could have a material adverse effect on our business, results of operations and financial condition.
Our business is highly competitive and there are low barriers to entry. Our competitors may be able to more quickly adapt to technological changes within our industry and changes in economic and market conditions as a whole, more readily take advantage of acquisitions and other opportunities and adopt more aggressive pricing policies.
Our competitors may be able to more quickly adapt to technological changes within our industry and changes in economic and market conditions as a whole, more readily take advantage of acquisitions and other opportunities and adopt more aggressive pricing policies.
We paid quarterly cash dividends of $0.145 per share of common stock during the year ended December 31, 2022.
We paid quarterly cash dividends, $0.61 annually, per share of common stock during the year ended December 31, 2023.
Accordingly, we cannot predict whether changes related to the phase–out of LIBOR, including any credit spread adjustments, insufficient liquidity in the SOFR or alternative reference rate markets or other reforms, as they occur, will have an adverse effect on the market value of, the applicable interest rate on and the amount of interest paid on our current or future debt obligations, including the Credit Facility. 23 Table Archrock, Contents Customer and Contract Risks The erosion of the financial condition of our customers could adversely affect our business.
Accordingly, we cannot predict whether changes related to the phase–out of LIBOR, including any credit spread adjustments, insufficient liquidity in SOFR or alternative reference rate markets or other reforms, as they occur, will have an adverse effect on the market value of, the applicable interest rate on and the amount of interest paid on our current or future debt obligations, including the Credit Facility.
By using technology to make our systems and processes more efficient, we intend to lower our internal costs and improve our profitability over time. However, the implementation of the process and technology transformation project has required significant capital and other resources from which we may not realize the benefits we expect to realize.
We expect the technological transformations to lower our internal costs and improve our profitability over time. However, the implementation of the process and technology transformation project has required significant capital and other resources from which we may not realize the benefits we expect to realize.
From time to time, various legislative or administrative initiatives may be proposed that could adversely affect our tax positions. There can be no assurance that our tax provision or tax payments will not be adversely affected by these initiatives. In addition, U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations.
There can be no assurance that our tax provision or tax payments will not be adversely affected by these initiatives. In addition, U.S. federal, state and local, and international tax laws and regulations are extremely complex and subject to varying interpretations.
See Part I, Item 3 “Legal Proceedings” and Note 15 to our Financial Statements for additional information regarding certain legal proceedings to which we are a party. New regulations, proposed regulations and proposed modifications to existing regulations under the CAA, if implemented, could result in increased compliance costs.
See Part I, Item 3 “Legal Proceedings” of this form 10-K and Note 16 (“Commitments and Contingencies”) to our Financial Statements for additional information regarding certain legal proceedings to which we are a party. 26 Table Archrock, Contents New regulations, proposed regulations and proposed modifications to existing regulations under the CAA, if implemented, could result in increased compliance costs.
The occurrence of any of the foregoing could have a material adverse effect on our business and financial condition. ITEM 1B. UNRESOLVED STAFF COMMENTS None.
The occurrence of any of the foregoing could have a material adverse effect on our business and financial condition.
Climate change legislation and regulatory initiatives may occur from a variety of sources, including international, national, regional and state levels of government and associated administrative bodies, seeking to restrict or regulate emissions of greenhouse gases, such as carbon dioxide and methane.
Climate change legislation and regulatory initiatives may arise from a variety of sources, including international, national, regional and state levels of government and associated administrative bodies, s eeking to restrict or regulate emissions of GHG, such as carbon dioxide and methane. Congress has previously considered legislation to restrict or regulate emissions of GHG.
Current, as well as potential future, laws and regulations that limit GHG emissions or that otherwise promote the use of renewable energy over fossil fuel energy sources could increase the cost of our midstream services and, thereby, further reduce demand and adversely affect our sales volumes, revenues and margins. 29 Table Archrock, Contents A climate–related decrease in demand for oil and natural gas could negatively affect our business.
Current, as well as potential future, laws and regulations that limit GHG emissions or that otherwise promote the use of renewable energy over fossil fuel energy sources could increase the cost of our midstream services and, thereby, further reduce demand and adversely affect our sales volumes, revenues and margins.
Pandemics, such as the COVID–19 pandemic, or other public health crises could significantly impact public health, economic growth, supply chains and markets.
Pandemics or other public health crises could significantly impact public health, economic growth, supply chains and markets.
Legal and Regulatory Risks From time to time, we are subject to various claims, tax audits, litigation and other proceedings that could ultimately be resolved against us and require material future cash payments or charges, which could impair our financial condition or results of operations.
This temporary pause on pending approvals of LNG exports may be unpredictable and may negatively impact our business. ​ From time to time, we are subject to various claims, tax audits, litigation and other proceedings that could ultimately be resolved against us and require material future cash payments or charges, which could impair our financial condition or results of operations.
The Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”), which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to U.S. dollar LIBOR in financial contracts.
The Federal Reserve Board and the Federal Reserve Bank of New York organized the ARRC, which identified SOFR as its preferred alternative to U.S. dollar LIBOR in financial contracts.
If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a time when we are not able to obtain liability insurance, our business, results of operations and financial condition could be negatively impacted. 19 Table Archrock, Contents We face significant competitive pressures that may cause us to lose market share and harm our financial performance.
If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a time when we are not able to obtain liability insurance, our business, results of operations and financial condition could be negatively impacted.
Industry and General Economic Risks Pandemics and other public health crises, including the ongoing COVID–19 pandemic, may continue to negatively affect demand for our services, and may continue to have a material adverse impact on our financial condition, results of operations and cash flows.
If any of the following risks actually occur, our business, financial condition, results of operations and cash flows could be negatively impacted. Industry and General Economic Risks Pandemics and other public health crises may negatively affect demand for our services, and may have a material adverse impact on our financial condition, results of operations and cash flows.
We may not be able to maintain or increase our asset and customer base unless we have access to sufficient capital to purchase additional compression equipment. Cash flow from our operations and availability under our Credit Facility may not provide us with sufficient cash to fund our capital expenditure requirements, including any funding requirements related to acquisitions.
Cash flow from our operations and availability under our Credit Facility may not provide us with sufficient cash to fund our capital expenditure requirements, including any funding requirements related to acquisitions. Our ability to grow our asset and customer base could be impacted by limits on our ability to access additional capital.
Also, recent activism directed at shifting funding away from companies with energy-related assets could result in a reduction of funding for the energy sector overall, which could have an adverse effect on our ability to obtain external financing as well as negatively affect the cost of, and terms for, financing to fund capital expenditures or other aspects of our business.
Also, recent activism directed at shifting funding away from companies with energy-related assets could result in a reduction of funding for the energy sector overall, which could have an adverse effect on our ability to obtain external financing as well as negatively affect the cost of, and terms for, financing to fund capital expenditures or other aspects of our business. 30 Table Archrock, Contents Climate change may increase the frequency and severity of weather events that could result in severe personal injury, property and environmental damage, which could curtail our or our customers’ operations and otherwise materially adversely affect our cash flows.
Additionally, some of our midstream customers may provide their gathering, transportation and related services to a limited number of companies in the oil and gas production business.
During times when the oil or natural gas markets weaken, our customers are more likely to experience a downturn in their financial condition. Additionally, some of our midstream customers may provide their gathering, transportation and related services to a limited number of companies in the oil and gas production business.
The modification or interpretation of existing environmental laws or regulations, the more vigorous enforcement of existing environmental laws or regulations, or the adoption of new environmental laws or regulations may also negatively impact oil and natural gas exploration and production, gathering and pipeline companies, including our customers, which in turn could have a negative impact on us.
The modification or interpretation of existing environmental laws or regulations, the more vigorous enforcement of existing environmental laws or regulations, or the adoption of new environmental laws or regulations may also negatively impact oil and natural gas exploration and production, gathering and pipeline companies, including our customers, which in turn could have a negative impact on us. 28 Table Archrock, Contents Climate change legislation, regulatory initiatives and stakeholder pressures could result in increased compliance costs, financial risks and potential reduction in demand for our services.
We do not believe continued implementation of the NAAQS ozone standard will have a material adverse impact on our business, financial condition, results of operations or cash flows, but we cannot yet predict the impact, if any, of any new Federal Implementation Plan involving new NAAQS standards. 27 Table Archrock, Contents New environmental regulations and proposals similar to these, when finalized, and any other new regulations requiring the installation of more sophisticated pollution control equipment or the adoption of other environmental protection measures, could have a material adverse impact on our business, financial condition, results of operations and cash flows.
New environmental regulations and proposals similar to these, when finalized, and any other new regulations requiring the installation of more sophisticated pollution control equipment or the adoption of other environmental protection measures, could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Many U.S. states, either individually or through multi–state regional initiatives, have begun to address GHG emissions, primarily through the planned development of emission inventories or regional GHG cap and trade programs.
Energy legislation and other initiatives continue to be proposed that may be relevant to GHG emissions issues. Almost half of the states, either individually or through multi–state regional initiatives, have begun to address GHG emissions, primarily through the planned development of emission inventories or regional GHG cap and trade programs.
Supply and demand for oil and natural gas is dependent upon a variety of factors, many of which are beyond our control. These factors include, among others, the potential adoption of new government regulations, including those related to fuel conservation measures and climate change regulations, technological advances in fuel economy and energy generation devices.
These factors include, among others, the potential adoption of new government regulations, including those related to fuel conservation measures and climate change regulations, technological advances in fuel economy and energy generation devices.
In addition, inflation may adversely affect customers’ financing costs, cash flows, and profitability, which could adversely impact their operations and our ability to collect receivables. The conflict in Ukraine and related price volatility and geopolitical instability could negatively impact our business. In late February 2022, Russia launched significant military action against Ukraine.
In addition, inflation may adversely affect customers’ financing costs, cash flows, and profitability, which could adversely impact their operations and our ability to collect receivables. 18 Table Archrock, Contents Ongoing International Conflicts and Tensions The conflict in Ukraine, the Israel-Hamas war and related price volatility and geopolitical instability could negatively impact our business.
Any of these measures may reduce the amount of cash available for payment of dividends and the funding of our business requirements, which could have an adverse effect on our business, operations, cash flows or the price of our common stock.
Any of these measures may reduce the amount of cash available for payment of dividends and the funding of our business requirements, which could have an adverse effect on our business, operations, cash flows or the price of our common stock. 21 Table Archrock, Contents The breach of any of the covenants under the Debt Agreements could result in a default under the Debt Agreements, which could cause indebtedness under the Debt Agreements to become due and payable.
The amendments also establish methane standards for a subset of equipment that the current NSPS regulates, including reciprocating compressors and pneumatic controllers, and extend the current VOC standards to the remaining unregulated equipment.
The amendments also establish methane standards for a subset of equipment that the current NSPS regulates, including reciprocating compressors and pneumatic controllers, and extend the current VOC standards to the remaining unregulated equipment. In December 2023, the EPA adopted even more stringent rules with respect to methane and VOC for new and existing sources, via NSPS OOOOb and NSPS OOOOc.
Tax–related Risks Tax legislation and administrative initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition. We operate in locations throughout the U.S. and, as a result, we are subject to the tax laws and regulations of U.S. federal, state and local governments.
We operate in locations throughout the U.S. and, as a result, we are subject to the tax laws and regulations of U.S. federal, state and local governments. We have investments in unconsolidated affiliates that operate in the U.S. and international locations. From time to time, various legislative or administrative initiatives may be proposed that could adversely affect our tax positions.
Changes in economic conditions outside of our control could result in higher interest rates, thereby increasing our interest expense and reducing the funds available for capital investment, operations or other purposes. In addition, a substantial portion of our cash flow must be used to service our debt obligations.
We may be vulnerable to interest rate increases due to our variable rate debt obligations. Borrowings under our Credit Facility are subject to variable interest rates. Changes in economic conditions outside of our control could result in higher interest rates, thereby increasing our interest expense and reducing the funds available for capital investment, operations or other purposes.
Financial Risks We have a substantial amount of debt that could limit our ability to fund future growth and operations and increase our exposure to risk during adverse economic conditions.
A decision not to pay dividends or a reduction in our dividend payments in the future could have a negative effect on our stock price. 20 Table Archrock, Contents Financial Risks We have a substantial amount of debt that could limit our ability to fund future growth and operations and increase our exposure to risk during adverse economic conditions.
We also may not be able to take advantage of certain opportunities or make certain investments because of our debt levels and our other obligations. Any of these competitive pressures could have a material adverse effect on our business, results of operations and financial condition.
We also may not be able to take advantage of certain opportunities or make certain investments because of our debt levels and our other obligations.
Any such difficulties could have an adverse effect on our business, results of operations and financial condition. Threats of cyber-attacks or terrorism could affect our business. We may be threatened by problems such as cyber-attacks, computer viruses or terrorism that may disrupt our operations and harm our operating results.
Any such difficulties could have an adverse effect on our business, results of operations and financial condition. Threats of cyber-attacks or terrorism could affect our business. We rely on our information technology systems for critical operations.
In December 2018 and again in December 2020, the EPA announced that it was retaining without revision the 2015 NAAQS ozone standard. In June 2021, the EPA announced it will reconsider the December 2020 decision, with a decision expected in 2023.
In December 2018 and again in December 2020, the EPA announced that it was retaining without revision the 2015 NAAQS ozone standard. In June 2021, the EPA commenced a process for reconsidering the December 2020 decision but more recent EPA announcements suggest that no changes are expected until 2025.
While we have not directly faced any such challenges to the facilities at which we provide contract operations and know of no pending or threatened efforts targeting those facilities, expanded opposition to energy infrastructure, including facilities at which we provide contract operations, could potentially give rise to material impacts in the future.
While we have not directly faced any such challenges to the facilities at which we provide contract operations and know of no pending or threatened efforts targeting those facilities, expanded opposition to energy infrastructure, including facilities at which we provide contract operations or in the future might otherwise have an opportunity to provide contract operations, could potentially give rise to material impacts in the future. 27 Table Archrock, Contents We are subject to a variety of governmental regulations; failure to comply with these regulations may result in administrative, civil and criminal enforcement measures and changes in these regulations could increase our costs or liabilities.
In addition, our assets may be targets of terrorist activities that could disrupt our ability to service our customers. We may be required by our regulators or by the future terrorist threat environment to make investments in security that we cannot currently predict.
We may be required by our regulators or by the future terrorist threat environment to make investments in security that we cannot currently predict. The implementation of security guidelines and measures and maintenance of insurance, to the extent available, addressing such activities could increase costs.
Many of our contract operations service agreements have short initial terms and are cancelable on short notice after the initial term, and we cannot be sure that such contracts will be extended or renewed after the end of the initial contractual term.
The loss of all or even a portion of the services we provide to these customers, as a result of competition or otherwise, could have a material adverse effect on our business, results of operations and financial condition. 23 Table Archrock, Contents Many of our contract operations service agreements have short initial terms and are cancelable on short notice after the initial term, and we cannot be sure that such contracts will be extended or renewed after the end of the initial contractual term.
Any increase in our interest expense could negatively impact our results of operations and cash flows, including our ability to pay dividends in the future. Our Credit Facility contains LIBOR benchmark replacement provisions.
In addition, a substantial portion of our cash flow must be used to service our debt obligations. Any increase in our interest expense could negatively impact our results of operations and cash flows, including our ability to pay dividends in the future.
We cannot provide assurance that we will declare or pay dividends in any particular amount or at all in the future. A decision not to pay dividends or a reduction in our dividend payments in the future could have a negative effect on our stock price.
We cannot provide assurance that we will declare or pay dividends in any particular amount or at all in the future.
If we do not make acquisitions on economically acceptable terms, our future growth could be limited. Our ability to grow depends, in part, on our ability to make accretive acquisitions.
Any of these competitive pressures could have a material adverse effect on our business, results of operations and financial condition. 19 Table Archrock, Contents If we do not make acquisitions on economically acceptable terms, our future growth could be limited. Our ability to grow depends, in part, on our ability to make accretive acquisitions.
A significant increase in the price of such equipment, materials and services as a result of inflation, ongoing effect of the COBID–19 pandemic or otherwise, could have a negative impact on our business, results of operations, financial condition and cash flows.
A significant increase in the price of such equipment, materials and services as a result of inflation, or other factors, could have a negative impact on our business, results of operations, financial condition and cash flows. 24 Table Archrock, Contents Information Technology and Cybersecurity Risks We may not realize the intended benefits of our process and technology transformation project, which could have an adverse effect on our business.
However, at this time, there can be no assurance as to whether any alternative benchmark or resulting interest rates may be more or less favorable than LIBOR or any other unforeseen impacts of the discontinuation of LIBOR.
At this time, there can be no assurance as to whether any alternative benchmark or resulting interest rates may be more or less favorable than SOFR. 22 Table Archrock, Contents Uncertainty relating to the phasing out of LIBOR may adversely affect the market value of our current or future debt obligations, including our Credit Facility.
In the fourth quarter of 2018, we began a process and technology transformation project, which has, among other things, replaced our existing ERP, supply chain and inventory management systems and expanded the remote monitoring capabilities of our compression fleet.
Between 2019 and 2021, we invested in a process and technology transformation project that replaced our existing ERP, supply chain and inventory management systems and expanded the remote monitoring capabilities of our compression fleet. During 2023, our focus shifted to fully harnessing these technologies across our business.
Many of our customers finance their exploration and production activities through cash flow from operations, the incurrence of debt or the issuance of equity. During times when the oil or natural gas markets weaken, our customers are more likely to experience a downturn in their financial condition.
Customer and Contract Risks The erosion of the financial condition of our customers could adversely affect our business. Many of our customers finance their exploration and production activities through cash flow from operations, the incurrence of debt or the issuance of equity.
Continued inflation or an increase in inflation rates could negatively affect our profitability and cash flows, due to higher wages, higher operating costs, higher financing costs, and/or higher supplier prices. We may be unable to pass along such higher costs to our customers.
If inflationary pressures return in 2024, this will increase our labor costs and the costs of parts, lube oil and other materials used in our operations. An increase in inflation rates could negatively affect our profitability and cash flows, due to higher wages, higher operating costs, higher financing costs, and/or higher supplier prices.
The implementation of security guidelines and measures and maintenance of insurance, to the extent available, addressing such activities could increase costs. These types of events could materially adversely affect our business and results of operations. In addition, these types of events could require significant management attention and resources and could adversely affect our reputation among customers and the public.
In addition, these types of events could require significant management attention and resources and could adversely affect our reputation among customers and the public. 25 Table Archrock, Contents Tax–related Risks Tax legislation and administrative initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition.
In addition, competition from other buyers could reduce our acquisition opportunities or cause us to pay a higher price than we might otherwise pay. An affiliate of Hilcorp holds a significant portion of our common stock, and Hilcorp’s interest as an equity holder may conflict with the interests of our other shareholders or our noteholders.
In addition, competition from other buyers could reduce our acquisition opportunities or cause us to pay a higher price than we might otherwise pay. While we paid quarterly dividends to holders of our common stock during the year ended December 31, 2023, there can be no assurance that we will pay dividends in the future.
Our industry requires the continued operation of sophisticated information technology systems and network infrastructure. Despite our implementation of security measures, our technology 25 Table Archrock, Contents systems are vulnerable to disability or failures due to hacking, viruses, acts of war or terrorism and other causes.
Despite our implementation of security measures, our technology systems are vulnerable to disability or failures due to social engineering/phishing, malware (including ransomware), malfeasance by insiders, human or technological error, hacking, viruses, and as a result of bugs, misconfigurations or exploited vulnerabilities in software or hardware, acts of war or terrorism and other causes.
Inflation continues to rise and has caused the Federal Reserve to raise interest rates with indications of future increases, which has created further uncertainty for the economy and for our customers. If inflationary pressures continue into 2023, this will increase our labor costs and the costs of parts, lube oil and other materials used in our operations.
While inflation rates have fallen over the second half of 2023, uncertainty remains on future inflation trends and whether the Federal Reserve will raise or lower interest rates, which has created further uncertainty for the economy and for our customers.
Uncertainty relating to the phasing out of LIBOR may adversely affect the market value of our current or future debt obligations, including our Credit Facility. Borrowings under our Credit Facility bear interest at a rate per annum of either, at our election, the U.S. dollar LIBOR rate for specified interest periods or a base rate, plus an applicable margin.
Our Amended and Restated Credit Agreement changed the referenced rate from LIBOR to SOFR so that borrowings under the Credit Facility bear interest at, based on our election, either a base rate or SOFR, plus an applicable margin. The Amended and Restated Credit Agreement contains SOFR benchmark replacement provisions.
Removed
If any of the following risks actually occur, our business, financial condition, results of operations and cash flows could be negatively impacted.
Added
We may be unable to pass along such higher costs to our customers.
Removed
While the magnitude and duration of potential social, economic and labor instability as a direct result of the COVID–19 pandemic cannot be estimated at this time, we continue to closely monitor the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees.
Added
In late February 2022, Russia launched significant military action against Ukraine, and in October 2023, Israel launched a military response against Hamas in Gaza.
Removed
Old Ocean Reserves, an affiliate of our customer Hilcorp, has the right to designate one director to serve on our Board of Directors as long as Old Ocean Reserves or it successors (together with its affiliates) owns at least 7.5% of our outstanding common stock. As of December 31, 2022, Old Ocean Reserves owned 10.8% of our outstanding common stock.
Added
We face significant competitive pressures that may cause us to lose market share and harm our financial performance. Our business is highly competitive and there are low barriers to entry.
Removed
Given its ownership level and board representation, Old Ocean Reserves may have some influence over our operations and strategic direction and may have interests that conflict with the interests of other equity and debt holders. 20 Table Archrock, Contents While we paid quarterly dividends of $0.145 per share of common stock during the year ended December 31, 2022, there can be no assurance that we will pay dividends in the future.
Added
Covenants in our Debt Agreements may impair our ability to operate our business.
Removed
The breach of any of the covenants under the Debt Agreements could result in a default under the Debt Agreements, which could cause indebtedness under the Debt Agreements to become due and payable.
Added
Our inability to fund purchases of additional compression equipment could adversely impact our financial results. We may not be able to maintain or increase our asset and customer base unless we have access to sufficient capital to purchase additional compression equipment.
Removed
Our ability to grow our asset and customer base could be impacted by limits on our ability to access additional capital. We may be vulnerable to interest rate increases due to our variable rate debt obligations. Borrowings under our Credit Facility are subject to variable interest rates.
Added
We own and manage some of these technology systems, but also rely on the systems provided by a host of third-party service providers, vendors, and business partners.
Removed
As a result, the proposals or consequences related to this transition could have a material adverse effect on our debt service obligations, financing costs, liquidity, financial condition, results of operations or cash flows and could impair our access to the financial markets.
Added
We and certain of our third-party providers collect, maintain and process data about customers, employees, business partners and others, including personally identifiable information, as well as proprietary information belonging to our business, such as trade secrets.
Removed
The publication of U.S. dollar LIBOR rates for the most common tenors (overnight and one, three, six and twelve months) will cease publication on June 30, 2023.
Added
We are subject to numerous and evolving cybersecurity risks and threats, including cyber-attacks, computer viruses or terrorism that threaten the confidentiality, integrity and availability of critical technology systems or information and may disrupt our operations and harm our operating results. Our industry requires the continued operation of sophisticated information technology systems and network infrastructure.
Removed
Our Credit Facility requires that we execute an amendment that establishes an alternate reference rate should the U.S. dollar LIBOR cease to be published (among other circumstances), to be agreed upon by us and the administrative agent under our Credit Facility and giving due consideration to the then-prevailing market convention for determining a rate of interest for syndicated loans in the U.S. at such time, with notice rights subject to objection by required lenders under the Credit Facility.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changePROPERTIES The following table describes the material facilities that we owned or leased at December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ Location Status Square Feet Use by Segment Houston, Texas Leased 75,000 Corporate office — Contract Operations and Aftermarket Services Brookwood, Alabama ​ Leased ​ 14,000 ​ Contract Operations and Aftermarket Services Bakersfield, California ​ Leased ​ 5,250 ​ Aftermarket Services Greeley, Colorado ​ Leased ​ 10,000 ​ Contract Operations and Aftermarket Services Broussard, Louisiana Owned 89,000 Aftermarket Services Houma, Louisiana Owned 60,000 Contract Operations and Aftermarket Services Gaylord, Michigan Leased 13,000 Contract Operations and Aftermarket Services Carlsbad, New Mexico ​ Leased ​ 11,200 ​ Contract Operations and Aftermarket Services Farmington, New Mexico Owned 62,000 Aftermarket Services Oklahoma City, Oklahoma Leased 41,000 Contract Operations and Aftermarket Services Waynoka, Oklahoma ​ Owned ​ 13,000 ​ Contract Operations and Aftermarket Services Yukon, Oklahoma Owned 85,000 Contract Operations and Aftermarket Services Tunkhannock, Pennsylvania ​ Leased ​ 9,000 ​ Contract Operations and Aftermarket Services West Alexander, Pennsylvania ​ Leased ​ 15,000 ​ Contract Operations and Aftermarket Services Asherton, Texas Leased 9,000 Contract Operations and Aftermarket Services Big Lake, Texas ​ Leased ​ 12,000 ​ Contract Operations and Aftermarket Services Brenham, Texas Owned 10,000 Contract Operations and Aftermarket Services Cleburne, Texas ​ Leased ​ 8,500 ​ Contract Operations and Aftermarket Services Bridgeport, Texas ​ Leased ​ 12,000 ​ Contract Operations and Aftermarket Services Cotulla, Texas Leased 10,000 Contract Operations and Aftermarket Services Kenedy, Texas ​ Leased ​ 11,000 ​ Contract Operations and Aftermarket Services Marshall, Texas Leased 11,000 Contract Operations and Aftermarket Services Midland, Texas Owned 51,000 Contract Operations and Aftermarket Services Pecos, Texas Leased 10,000 Contract Operations and Aftermarket Services Victoria, Texas Owned 23,000 Contract Operations and Aftermarket Services Victoria, Texas Owned 55,000 Contract Operations and Aftermarket Services Zapata, Texas Leased 23,500 Contract Operations and Aftermarket Services Evansville, Wyoming Leased 15,000 Contract Operations and Aftermarket Services Rock Springs, Wyoming Leased 9,000 Contract Operations and Aftermarket Services ​ Our executive office is located at 9807 Katy Freeway, Suite 100, Houston, Texas 77024 and our telephone number is 281–836–8000.
Biggest changeProperties The following table describes the material facilities that we owned or leased at December 31, 2023: ​ ​ ​ ​ ​ ​ ​ Location Status Square Feet Use by Segment Houston, Texas Leased 75,000 Corporate office — Contract Operations and Aftermarket Services Greeley, Colorado ​ Leased ​ 10,000 ​ Contract Operations and Aftermarket Services Houma, Louisiana ​ Owned ​ 60,000 ​ Contract Operations and Aftermarket Services Carlsbad, New Mexico ​ Leased ​ 11,200 ​ Contract Operations and Aftermarket Services Yukon, Oklahoma Owned 85,000 Contract Operations and Aftermarket Services West Alexander, Pennsylvania Leased 15,000 Contract Operations and Aftermarket Services Asherton, Texas Leased 9,000 Contract Operations and Aftermarket Services Kenedy, Texas ​ Leased ​ 11,000 ​ Contract Operations and Aftermarket Services Midland, Texas Owned 51,000 Contract Operations and Aftermarket Services Pecos, Texas Leased 10,000 Contract Operations and Aftermarket Services Victoria, Texas ​ Owned ​ 23,000 ​ Contract Operations and Aftermarket Services Victoria, Texas Owned 66,000 Contract Operations and Aftermarket Services ​ Our executive office is located at 9807 Katy Freeway, Suite 100, Houston, Texas 77024 and our telephone number is 281–836–8000.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWhile we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these 31 Table Archrock, Contents actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
Biggest changeWhile we are unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. ITEM 4.
However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends.
Added
See note 16 (“Commitments and Contingencies”) to our Financial Statements for additional information regarding litigation, claims and other legal proceedings. Item 4. Mine Safety Disclosures Not applicable. PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changePurchases of Equity Securities by Issuer and Affiliated Purchasers The following table summarizes our purchases of equity securities during the three months ended December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Maximum ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of Shares ​ ​ ​ ​ ​ ​ ​ Total Number of ​ That May Yet be ​ ​ ​ ​ Average ​ Shares Purchased ​ Purchased Under ​ ​ Total Number ​ Price ​ as Part of Publicly ​ the Publicly ​ ​ of Shares ​ Paid per ​ Announced Plans ​ Announced Plans ​ Purchased (1) Share or Programs or Programs October 1, 2022 — October 31, 2022 ​ — ​ $ — ​ N/A ​ N/A November 1, 2022 — November 30, 2022 6,682 ​ 7.60 N/A N/A December 1, 2022 — December 31, 2022 — ​ — N/A N/A Total 6,682 ​ ​ 7.60 N/A N/A (1) Represents shares withheld to satisfy employees’ tax withholding obligations in connection with the vesting of restricted stock awards during the period.
Biggest changePurchases of Equity Securities by Issuer and Affiliated Purchasers The following table summarizes our purchases of equity securities during the three months ended December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Approximate Dollar ​ ​ ​ ​ ​ ​ ​ ​ ​ Value of Shares ​ ​ ​ ​ ​ ​ ​ Total Number of ​ That May Yet be ​ ​ ​ ​ Average ​ Shares Purchased ​ Purchased Under ​ ​ Total Number ​ Price ​ as Part of Publicly ​ the Publicly ​ ​ of Shares ​ Paid per ​ Announced Plans ​ Announced Plans (dollars in thousands, except per share amounts) Purchased (1) Share (2) or Programs or Programs October 1, 2023 — October 31, 2023 ​ 79,112 ​ $ 12.26 ​ 79,112 ​ $ 42,535 November 1, 2023 — November 30, 2023 3,444 ​ 13.18 — 42,535 December 1, 2023 — December 31, 2023 95,000 ​ 14.68 95,000 41,140 Total 177,556 ​ $ 13.57 174,112 ​ ​ (1) Represents shares of common stock purchased from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock awards and shares repurchased under the 2023 Share Repurchase Program during the period.
“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this 2022 Form 10–K. Unregistered Sales of Equity Securities and Use of Proceeds None.
“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this 2023 Form 10–K. 35 Table Archrock, Contents Unregistered Sales of Equity Securities and Use of Proceeds None.
The following discussion includes forward–looking statements that involve certain risks and uncertainties. See “Forward–Looking Statements” and Part I, Item 1A. “Risk Factors” in this 2022 Form 10–K. This section primarily discusses 2022 and 2021 items and comparisons between these years. For a discussion of changes from 2020 to 2021 and other financial information related to 2020, refer to Part II,
See “Forward–Looking Statements” and Part I, Item 1A. “Risk Factors” in this 2023 Form 10–K. This section primarily discusses 2023 and 2022 items and comparisons between these years. For a discussion of changes from 2021 to 2022 and other financial information related to 2021, refer to Part II,
ITEM 6. [RESERVED] ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Financial Statements, the notes thereto, and the other financial information appearing elsewhere in this 2022 Form 10–K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Financial Statements, the notes thereto, and the other financial information appearing elsewhere in this 2023 Form 10–K. The following discussion includes forward–looking statements that involve certain risks and uncertainties.
Comparison of Five Year Cumulative Total Return The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this 2022 Form 10–K into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those Acts. 32 Table Archrock, Contents Holders As of February 15, 2023, there were approximately 1,700 holders of record of our common stock.
The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this 2023 Form 10–K into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those Acts.
The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by banks, brokers and other nominees. Securities Authorized for Issuance under Equity Compensation Plans For disclosures regarding securities authorized for issuance under equity compensation plans, see Part III, Item 12.
Holders As of February 14, 2024, there were approximately 1,550 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by banks, brokers and other nominees.
The graph assumes reinvestment of dividends and adjusts all closing prices and dividends for stock splits.
The results are based on an investment of $100 in each of our common stock, the S&P 500, the AMNAX and the AMZ. The graph assumes reinvestment of dividends and adjusts all closing prices and dividends for stock splits.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Common Stock Our common stock is traded on the New York Stock Exchange under the symbol “AROC.” On February 15, 2023, the closing price of our common stock was $9.64 per share.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common Stock Our common stock is traded on the New York Stock Exchange under the symbol “AROC.” On February 14, 2024, the closing price of our common stock was $16.26 per share. 34 Table Archrock, Contents Comparison of Five Year Cumulative Total Return The performance graph below shows the cumulative total stockholder return on our common stock compared with the S&P 500, AMNAX and AMZ indices over the five–year period beginning on December 31, 2018.
Removed
The performance graph below shows the cumulative total stockholder return on our common stock compared with the S&P 500, AMNAX and AMZ indices over the five–year period beginning on December 31, 2017. The results are based on an investment of $100 in each of our common stock, the S&P 500, the AMNAX and the AMZ.
Added
Dividends On January 25, 2024, our Board of Directors declared a quarterly dividend of $0.165 per share of common stock, or approximately $25.9 million, which was paid on February 13, 2024 to stockholders of record at the close of business on February 6, 2024.
Added
Any future determinations to pay cash dividends to our stockholders will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, and credit and loan agreements in effect at that time and other factors deemed relevant by our Board of Directors.
Added
We cannot provide assurance that we will declare or pay dividends in any particular amount or at all in the future. Securities Authorized for Issuance under Equity Compensation Plans For disclosures regarding securities authorized for issuance under equity compensation plans, see Part III, Item 12.
Added
See Note 17 (“Stockholders’ Equity”) for further details on the 2023 Share Repurchase Program. (2) Average price paid per share includes costs associated with the repurchase, as applicable. ​ Item 6. [Reserved] Item 7.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeContractual Obligations Our material contractual obligations as of December 31, 2022 consisted of the following: • Long–term debt of $1.5 billion, of which $1.3 billion is due in 2027 and 2028, with the remainder due in 2024; • Estimated interest on our long–term debt of $444.0 million, consisting of annual payments of approximately $103.5 million in 2023, approximately $100.7 million in 2024, and approximately $84.4 million or less in 2025 through 2028; • Purchase commitments of $210.7 million, of which $178.0 million is due in 2023, that primarily consist of commitments to purchase fleet assets and information technology–related costs; and • Operating lease payments of $21.4 million that are spread relatively evenly in 2023 through 2032.
Biggest changeThe actual timing, manner, number, and value of shares repurchased under the program will be determined by us at our discretion. ​ The following table summarizes shares repurchased under the 2023 Share Repurchase Program during the year ended December 31, 2023: ​ ​ ​ ​ ​ ​ Year Ended (dollars in thousands, except per share amounts) ​ December 31, 2023 Total cost of shares repurchased ​ $ 8,860 Average price per share ​ $ 11.81 Total number of shares repurchased ​ 750,374 Contractual Obligations Our material contractual obligations as of December 31, 2023 consisted of the following: • Long–term debt of $1.6 billion, all of which is due in 2027 and 2028; • Estimated interest on our long–term debt of $428.8 million, consisting of annual payments of approximately $108.3 million in 2024 through 2026, approximately $82.5 million in 2027, and approximately $21.4 million in 2028; • Purchase commitments of $192.7 million, of which $151.6 million is due in 2024, that primarily consist of commitments to purchase fleet assets and information technology–related costs; and • Operating lease payments of $18.0 million that are spread relatively evenly in 2024 through 2032.
Cost Management . In order to improve our operations and further reduce operating expenses, we are investing significant resources into a process and technology transformation project that has, among other things, replaced our existing ERP, supply chain and inventory management systems and expanded the remote monitoring capabilities of our compression fleet.
In order to improve our operations and further reduce operating expenses, we are investing significant resources into a process and technology transformation project that has, among other things, replaced our existing ERP, supply chain and inventory management systems and expanded the remote monitoring capabilities of our compression fleet.
Domestic natural gas production generally occurs in either primarily natural gas basins, such as the Marcellus, Utica and Haynesville Shales, or in basins where natural gas is produced alongside oil, also known as “associated” gas, such as the Permian and Delaware Basins, Eagle Ford and the Mid–Continent.
Domestic natural gas production generally occurs in either basins where natural gas is produced alongside oil, also known as “associated” gas, such as the Permian and Delaware Basins, the Eagle Ford and the Mid–Continent or in natural gas basins, such as the Marcellus, Utica and Haynesville Shales.
We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. In addition, we evaluate for impairment idle units that have been culled from our compression fleet in prior years and are available for sale.
We periodically review the future deployment of our idle compressors for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. We also evaluate for impairment our idle units that have been culled from our compression fleet in prior years and are available for sale.
We review long–lived assets, which include property, plant and equipment and intangibles assets that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable.
Impairment Assessments of Property, Plant and Equipment and Identifiable Intangible Assets We review long–lived assets, which include property, plant and equipment and intangibles assets that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable.
The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 6.9% and 2.6% at December 31, 2022 and 2021, respectively. As of December 31, 2022, there were $5.7 million of letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4%.
The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 7.7% and 6.9% at December 31, 2023 and 2022, respectively. As of December 31, 2023, there were $4.5 million of letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.1%.
In projecting future taxable income, we begin with historical results adjusted for changes in accounting policies and incorporate assumptions, including the amount of future U.S. federal and state pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax–planning strategies.
In projecting future taxable income, we begin with historical results adjusted for results of discontinued operations and changes in accounting policies and incorporate assumptions, including the amount of future U.S. federal, state, and international pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax–planning strategies.
We have no near–term maturities and believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our future liquidity needs. 40 Table Archrock, Contents We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions or otherwise.
We have no near-term maturities and believe that our operating cash flows and borrowings under the Credit Facility will be sufficient to meet our future liquidity needs. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt securities in open market purchases, privately negotiated transactions or otherwise.
The increase in growth capital expenditures from 2021 to 2022 was the result of increased investment in new compression equipment as a result of higher customer demand. Maintenance Capital Expenditures.
The increase in growth capital expenditures from 2022 to 2023 was the result of increased investment in new compression equipment as a result of higher customer demand. Maintenance Capital Expenditures.
Our Credit Facility agreement requires that we meet certain financial ratios (see Note 14 to our Financial Statements) and contains various additional covenants including, but not limited to, mandatory prepayments from the net cash proceeds of certain asset transfers, restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, engage in transactions with affiliates, merge or consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay distributions.
Our Credit Facility agreement requires that we meet certain financial ratios (see Note 15 (“Long-Term Debt”) and contains various additional covenants including, but not limited to, mandatory prepayments from the net cash proceeds of certain asset transfers, restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, engage in transactions with affiliates, merge or consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay distributions.
While we generally attempt to mitigate the impact of increased prices through strategic purchasing decisions, diversification of our supplier base, where possible, and the passing along of increased costs to customers, there may be a time delay between the increased commodity prices and the ability to increase the price of our services. Labor.
While we generally attempt to mitigate the impact of increased prices through strategic purchasing decisions, diversification of our supplier base, where possible, and the passing along of increased costs to customers, there may be a time delay between the increased commodity prices and the ability to increase the price of our services. 38 Table Archrock, Contents Labor.
These expenditures substantially modify the operating parameters of the compression package such that it can be used in applications for which it previously was not suited. Growth capital expenditures were $146.3 million and $37.2 million during the years ended December 31, 2022 and 2021, respectively.
These expenditures substantially modify the operating parameters of the compression package such that it can be used in applications for which it previously was not suited. Growth capital expenditures were $190.3 million and $146.3 million during the years ended December 31, 2023 and 2022, respectively.
See Note 14 to our Financial Statements for further details of these notes. At–the–Market Continuous Equity Offering Program Under our ATM Agreement, we may sell, from time to time, shares of our common stock having an aggregate offering price of up to $50.0 million.
See Note 15 (Long-term Debt”) to our Financial Statements for further details of these notes. At–the–Market Continuous Equity Offering Program Under our ATM Agreement, we may sell, from time to time, shares of our common stock having an aggregate offering price of up to $50.0 million.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10–K for the year ended December 31, 2021 filed with the SEC on February 23, 2022. 33 Table Archrock, Contents Overview We are an energy infrastructure company with a pure–play focus on midstream natural gas compression.
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10–K for the year ended December 31, 2022 filed with the SEC on February 23, 2023. Overview We are an energy infrastructure company with a pure–play focus on midstream natural gas compression.
Our geographic diversity, technically experienced personnel and large fleet of natural gas compression equipment enable us to provide reliable contract operations services to our customers. We operate in two business segments: • Contract Operations .
Our geographic diversity, technically experienced personnel and large fleet of natural gas compression equipment enable us to provide reliable contract operations services to our customers. 36 Table Archrock, Contents We operate in two business segments: • Contract Operations .
Such differences are reflected as increases or decreases to income tax expense in the period in which the new information becomes available. Recent Accounting Developments See Note 2 to our Financial Statements.
Such differences are reflected as increases or decreases to income tax expense in the period in which the new information becomes available. Recent Accounting Developments See Note 3 (“Recent Accounting Developments”) to our Financial Statements.
The net gain on sales of assets during 2022 was the result of $28.1 million of gains recognized on sales of certain contract operations customer service agreements and approximately 770 compressors and $12.4 million of gains recognized on other compression and transportation asset sales.
The net gain on the sales of assets during 2022 was primarily the result of $28.1 million of gains recognized on sales of certain contract operations customer service agreements and approximately 770 compressors and $12.4 million of gains recognized on other compression asset sales and transportation and shop asset sales during the period. Other expense (income), net.
The increase in revenue was due to increased revenue from both our contract operations business and aftermarket services business. See “Contract Operations” and “Aftermarket Services” below for further details. Net income was $44.3 million and $28.2 million during the years ended December 31, 2022 and 2021, respectively.
The increase in revenue was due to increased revenue from both our contract operations business and aftermarket services business. See “Contract Operations” and “Aftermarket Services” below for further details. Net income was $105.0 million and $44.3 million during the years ended December 31, 2023 and 2022, respectively.
Likewise, if the estimated useful life is increased, the adjustment to the useful life would decrease depreciation expense per year on a prospective basis. Impairment of Assets During the year ended December 31, 2022, we recorded long–lived and other asset impairments of $21.4 million.
Likewise, if the estimated useful life is increased, the adjustment to the useful life would decrease depreciation expense per year on a prospective basis. Impairment of Assets During the year ended December 31, 2023, we recorded long–lived and other asset impairments of $12.0 million.
The increase in maintenance capital expenditures from 2021 to 2022 was the result of an increase in scheduled maintenance activities due to maintenance cycle requirements as well as additional make–ready investment as we return idle equipment to work to meet customer demand. Projected Capital Expenditures.
The increase in maintenance capital expenditures from 2022 to 2023 was the result of an increase in scheduled maintenance activities due to maintenance cycle requirements as well as additional make–ready investment as we return idle equipment to work to meet customer demand. 43 Table Archrock, Contents Projected Capital Expenditures.
GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
The accounting standards for income taxes provide that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
Other Sources of Cash We received proceeds of $120.3 million and $112.9 million from business dispositions and other asset sales during the years ended December 31, 2022 and 2021, respectively.
Other Sources of Cash Business Dispositions and Other Asset Sales. We received proceeds of $72.2 million and $120.3 million from business dispositions and other asset sales during the years ended December 31, 2023 and 2022, respectively.
Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Cash Requirements Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations.
Such repurchases or exchanges, if any, may be material, will be upon terms and prices as we may determine and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Cash Requirements Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations.
For compressors that are removed from our active fleet, the fair value of a compressor is estimated based on the expected net sale proceeds compared to other fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.
Compression Fleet. The fair value of a compressor is estimated on the expected net sale proceeds compared to fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.
Critical Accounting Estimates We describe our significant accounting policies more fully in Note 2 to our Financial Statements. As disclosed in Note 2, the preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures of contingent assets and liabilities.
As disclosed in Note 2, the preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures of contingent assets and liabilities.
Maintenance capital expenditures were $84.2 million and $47.3 million during the years ended December 31, 2022 and 2021, respectively.
Maintenance capital expenditures were $92.2 million and $84.2 million during the years ended years ended December 31, 2023 and 2022, respectively.
Relative stability in commodity prices over much of the past decade encouraged investment in domestic exploration and production and midstream infrastructure across the energy industry, particularly in the low–cost basins characterized by oil and associated natural gas production.
Significant investment in domestic exploration and production and midstream infrastructure across the energy industry has been made over much of the past decade, particularly in the low–cost basins characterized by oil and associated natural gas production.
We used the net proceeds of these offerings for general corporate purposes. During the years ended December 31, 2022 and 2021, we sold 447,020 and 357,148 shares of common stock, respectively, for net proceeds of $4.2 million and $3.4 million, respectively, pursuant to the ATM Agreement.
We used the net proceeds of these offerings for general corporate purposes. During the year ended December 2022, we sold 447,020 shares of common stock, respectively, for net proceeds of $4.2 million, pursuant to the ATM Agreement. There were no shares of common stock sold during the year ended December 31, 2023.
See Note 11 to our Financial Statements for additional information about this investment. Trends and Outlook The key driver of our business is the production of U.S. oil and natural gas. Approximately 79% of our operating fleet is deployed for midstream natural gas gathering applications, with the remaining fleet being used in gas lift applications to enhance oil production.
Trends and Outlook The key driver of our business is the production of U.S. oil and natural gas. Approximately 75% of our operating fleet is deployed for midstream natural gas gathering applications, with the remaining fleet being used in gas lift applications to enhance oil production.
Significant judgments and estimates are required in determining consolidated income tax expense. Deferred income taxes arise from temporary differences between the financial statements and the tax basis of assets and liabilities.
We operate in the U.S. and have investments in unconsolidated affiliates that operate in the U.S. and international locations. Significant judgments and estimates are required in determining consolidated income tax expense. Deferred income taxes arise from temporary differences between the financial statements and the tax basis of assets and liabilities.
In addition, we had $19.7 million of unrecognized tax benefits (including discontinued operations) recorded as liabilities related to uncertain tax positions and a liability of $2.1 million recorded for potential penalties and interest (including discontinued operations) related to these unrecognized tax benefits at December 31, 2022, which we are uncertain as to if or when such amounts may be settled.
In addition, we had $19.5 million of unrecognized tax benefits (including discontinued operations) recorded as liabilities related to uncertain tax positions at December 31, 2023, which are uncertain as to if or when such amounts may be settled.
To compensate for these limitations, management uses this non–GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of our performance. 37 Table Archrock, Contents The reconciliation of net income (loss) to gross margin is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands) ​ 2022 2021 2020 Net income (loss) ​ $ 44,296 ​ $ 28,217 ​ $ (68,445) Selling, general and administrative ​ 117,184 ​ 107,167 ​ 105,100 Depreciation and amortization ​ 164,259 ​ 178,946 ​ 193,138 Long-lived and other asset impairment ​ 21,442 ​ 21,397 ​ 79,556 Goodwill impairment ​ ​ — ​ ​ — ​ ​ 99,830 Restructuring charges ​ ​ — ​ ​ 2,903 ​ ​ 8,450 Interest expense ​ 101,259 ​ 108,135 ​ 105,716 Debt extinguishment loss ​ ​ — ​ ​ — ​ ​ 3,971 Gain on sale of assets, net ​ ​ (40,494) ​ ​ (30,258) ​ ​ (10,643) Other expense (income), net ​ 1,845 ​ (4,707) ​ (1,359) Provision for (benefit from) income taxes ​ 16,293 ​ 10,744 ​ (17,537) Gross margin ​ $ 426,084 ​ $ 422,544 ​ $ 497,777 ​ RESULTS OF OPERATIONS Summary of Results Revenue was $845.6 million and $781.5 million during the years ended December 31, 2022 and 2021, respectively.
To compensate for these limitations, management uses this non–GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of our performance. 39 Table Archrock, Contents The reconciliation of net income to gross margin is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands) ​ 2023 2022 2021 Net income ​ $ 104,998 ​ $ 44,296 ​ $ 28,217 Selling, general and administrative ​ 116,639 ​ 117,184 ​ 107,167 Depreciation and amortization ​ 166,241 ​ 164,259 ​ 178,946 Long-lived and other asset impairment ​ 12,041 ​ 21,442 ​ 21,397 Restructuring charges ​ ​ 1,775 ​ ​ — ​ ​ 2,903 Interest expense ​ 111,488 ​ 101,259 ​ 108,135 Gain on sale of assets, net ​ ​ (10,199) ​ ​ (40,494) ​ ​ (30,258) Other expense (income), net ​ 1,086 ​ 1,845 ​ (4,707) Provision for income taxes ​ 37,249 ​ 16,293 ​ 10,744 Gross margin ​ $ 541,318 ​ $ 426,084 ​ $ 422,544 ​ RESULTS OF OPERATIONS Summary of Results Revenue was $990.3 million and $845.6 million during the years ended December 31, 2023 and 2022, respectively.
See Note 20 and Note 25 to our Financial Statements for further details of our fleet asset impairments. 44 Table Archrock, Contents Income Taxes Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid.
See Note 21 (“Long-Lived and Other Asset Impairment”) and Note 26 (“Fair Value Measurements”) to our Financial Statements for further details of our fleet asset impairments. Income Taxes Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid.
Current conditions could limit our ability to access the debt and equity markets to raise capital on affordable terms in 2023 and beyond. If we are not successful in raising capital within the time period required or at all, we may not be able to fund these capital expenditures, which could impair our ability to grow or maintain our business.
If we are not successful in raising capital within the time period required or at all, we may not be able to fund these capital expenditures, which could impair our ability to grow or maintain our business. Cost Management .
Capital Requirements and the Availability of External Sources of Capital. We have funded a significant portion of our capital expenditures and acquisitions through borrowings under our Credit Facility and have issued a substantial amount of debt, which could limit our ability to fund future planned capital expenditures.
We have funded a significant portion of our capital expenditures and acquisitions through borrowings under our Credit Facility and have issued a substantial amount of debt, which could limit our ability to fund future planned capital expenditures. Current conditions could limit our ability to access the debt and equity markets to raise capital on affordable terms in 2024 and beyond.
Subject to certain conditions, including approval by the lenders, we are able to increase the aggregate commitments under the Credit Facility by up to an additional $250.0 million.
Portions of the Credit Facility, up to $75.0 million, are available for the issuance of swing line loans and $50.0 million is available for the issuance of letters of credit. Subject to certain conditions, including approval by the lenders, we are able to increase the aggregate commitments under the Credit Facility by up to an additional $250.0 million.
See Note 20 to our Financial Statements for further details. 39 Table Archrock, Contents The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (dollars in thousands) ​ 2022 2021 Idle compressors retired from the active fleet ​ ​ 145 ​ 230 Horsepower of idle compressors retired from the active fleet ​ ​ 100,000 ​ 85,000 Impairment recorded on idle compressors retired from the active fleet ​ $ 21,431 ​ $ 21,208 ​ Restructuring charges .
The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (dollars in thousands) ​ 2023 2022 Idle compressors retired from the active fleet ​ ​ 105 ​ 145 Horsepower of idle compressors retired from the active fleet ​ ​ 53,000 ​ 100,000 Impairment recorded on idle compressors retired from the active fleet ​ $ 12,034 ​ $ 21,431 ​ Restructuring charges .
We were in compliance with all other covenants under our Credit Facility agreement. 42 Table Archrock, Contents Senior Notes As of both December 31, 2022 and 2021, we had a principal balance of $1.3 billion of outstanding senior notes that consisted of the following: • $800.0 million of 6.25% senior notes due in April 2028 and • $500.0 million of 6.875% senior notes due in April 2027.
Additionally, all undrawn capacity on our Credit Facility was available for borrowings as of December 31, 2023. ​ Senior Notes As of both December 31, 2023 and 2022, we had a principal balance of $1.3 billion of outstanding senior notes that consisted of the following: • $800.0 million of 6.25% senior notes due in April 2028 and • $500.0 million of 6.875% senior notes due in April 2027.
Our estimate of useful lives and salvage values are based on assumptions and judgments that reflect both historical experience and expectations regarding future use of our assets, including wear and tear, obsolescence, technical standards, market demand and geographic location.
Property, plant and equipment are carried at cost and depreciated using the straight–line basis over the estimated useful life of the asset. 46 Table Archrock, Contents Our estimate of useful lives and salvage values are based on assumptions and judgments that reflect both historical experience and expectations regarding future use of our assets, including wear and tear, obsolescence, technical standards, market demand and geographic location.
These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative income (loss) before income taxes.
These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses.
Costs and Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands) 2022 2021 Selling, general and administrative $ 117,184 ​ $ 107,167 Depreciation and amortization 164,259 ​ 178,946 Long-lived and other asset impairment 21,442 ​ 21,397 Restructuring charges ​ ​ — ​ ​ 2,903 Interest expense 101,259 ​ 108,135 Gain on sale of assets, net ​ ​ (40,494) ​ ​ (30,258) Other expense (income), net ​ ​ 1,845 ​ ​ (4,707) ​ Selling, general and administrative.
Costs and Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands) 2023 2022 Selling, general and administrative $ 116,639 ​ $ 117,184 Depreciation and amortization 166,241 ​ 164,259 Long-lived and other asset impairment 12,041 ​ 21,442 Restructuring charges ​ ​ 1,775 ​ ​ — Interest expense 111,488 ​ 101,259 Gain on sale of assets, net ​ ​ (10,199) ​ ​ (40,494) Other expense (income), net ​ ​ 1,086 ​ ​ 1,845 ​ Selling, general and administrative.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on our financial position, results of operations or cash flows.
Management is not aware of any such changes that would have a material effect on our financial position, results of operations or cash flows. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various state and local jurisdictions.
The decrease in interest expense was primarily due to a decrease in the average outstanding balance of long–term debt and the $4.9 million write–off of unamortized deferred financing costs related to an amendment to our Credit Facility in 2021, which were partially offset by an increase in the weighted average effective interest rate. Gain on sale of assets, net.
The increase in interest expense was due to an increase in interest rates, a higher average outstanding balance of long–term debt and the write-off of $1.0 million of unamortized deferred financing costs as a result of the Amended and Restated Credit Agreement, partially offset by an increase in capitalized interest. Gain on sale of assets, net.
Regarding our aftermarket services business, the base of owned compression in the U.S. has increased over the past several years, which we believe will help sustain our aftermarket services business over the long term. 35 Table Archrock, Contents Key Challenges and Uncertainties In addition to general market conditions in the oil and natural gas industry and competition in the natural gas compression industry, we believe the following represent the key challenges and uncertainties we will face in the future.
Regarding our aftermarket services business, the base of owned compression in the U.S. has increased over the past several years, which we believe will help sustain our aftermarket services business over the long term.
Actual results may differ from these estimates under different assumptions or conditions and these differences can be material to our financial condition, results of operations and cash flows. Depreciation Property, plant and equipment are carried at cost and depreciated using the straight–line basis over the estimated useful life of the asset.
Actual results may differ from these estimates under different assumptions or conditions and these differences can be material to our financial condition, results of operations and cash flows. Depreciation Property, plant and equipment, net, at December 31, 2023 was $2.3 billion and depreciation expense was $159.3 million for the year ended December 31, 2023.
The change in net cash used in investing activities was primarily due to a $142.0 million increase in capital expenditures and a $14.7 million increase in our investment in unconsolidated affiliates, partially offset by a $7.4 million increase in proceeds from the sale of business and other assets. 43 Table Archrock, Contents Financing Activities.
The increase in net cash used in investing activities was primarily due to a $58.8 million increase in capital expenditures and a $99.6 million decrease in proceeds from the sale of business, partially offset by a $51.6 million increase in proceeds from sales of property, plant and equipment and a $7.4 million decrease in investments in non-consolidated affiliates. Financing Activities.
We currently plan to spend approximately $270.0 million to $295.0 million in capital expenditures during the year ended December 31, 2023, primarily consisting of approximately $180.0 million to $200.0 million for growth capital expenditures and approximately $75.0 million to $80.0 million for maintenance capital expenditures.
While market activity continues to be strong, we currently anticipate reducing capital expenditures in 2024 compared to 2023 to support free cash flow generation after dividends, and plan to spend approximately $275.0 million to $290.0 million in capital expenditures during the year ended December 31, 2024, primarily consisting of approximately $175.0 million to $180.0 million for growth capital expenditures and approximately $80.0 million to $85.0 million for maintenance capital expenditures.
The increase was primarily driven by a higher gross margin from our aftermarket services business, decreased depreciation and amortization expense and interest expense and an increased gain on sale of assets, net, partially offset by higher SG&A expenses and lower gross margin from our contract operations business and higher SG&A. ​ Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Contract Operations ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ Increase ​ (dollars in thousands) ​ 2022 2021 (Decrease) ​ Revenue ​ $ 677,801 ​ $ 648,311 ​ 5 % Cost of sales (excluding depreciation and amortization) ​ 278,898 ​ 244,486 ​ 14 % Gross margin ​ $ 398,903 ​ $ 403,825 ​ (1) % Gross margin percentage (1) ​ 59 % 62 % (3) % (1) Defined as gross margin divided by revenue.
These changes were partially offset by a decrease in the gain on sale of assets and the unrealized change in fair value of our investment in an unconsolidated affiliate and increases in our provision for income taxes, interest expense, depreciation and amortization and restructuring charges. ​ Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 Contract Operations ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ Increase ​ (dollars in thousands) ​ 2023 2022 (Decrease) ​ Revenue ​ $ 809,439 ​ $ 677,801 ​ 19 % Cost of sales (excluding depreciation and amortization) ​ 306,748 ​ 278,898 ​ 10 % Gross margin ​ $ 502,691 ​ $ 398,903 ​ 26 % Gross margin percentage (1) ​ 62 % 59 % 3 % (1) Defined as gross margin divided by revenue.
Depreciation and amortization. The decrease in depreciation and amortization was primarily due the impact of assets reaching the end of their depreciable lives, compression and other asset sales and impairments and certain intangible assets reaching the end of their useful lives, partially offset by the increased depreciation and amortization expenses associated with fixed asset additions. Long–lived and other asset impairment.
These increases were partially offset by a decrease in depreciation expense resulting from assets reaching the end of their depreciable lives, the impact of compression and other asset sales, and long-lived asset impairments. 41 Table Archrock, Contents Long–lived and other asset impairment.
Aftermarket Services ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ Increase ​ (dollars in thousands) ​ 2022 2021 (Decrease) ​ Revenue ​ $ 167,767 ​ $ 133,150 26 % Cost of sales (excluding depreciation and amortization) ​ 140,586 ​ 114,431 23 % Gross margin ​ $ 27,181 ​ $ 18,719 45 % Gross margin percentage ​ 16 % 14 % 2 % Revenue in our aftermarket services business increased due to the increase in both service activities and sales of parts and components driven by increased customer demand during 2022 compared to 2021.
Aftermarket Services ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ Increase ​ (dollars in thousands) ​ 2023 2022 (Decrease) ​ Revenue ​ $ 180,898 ​ $ 167,767 8 % Cost of sales (excluding depreciation and amortization) ​ 142,271 ​ 140,586 1 % Gross margin ​ $ 38,627 ​ $ 27,181 42 % Gross margin percentage ​ 21 % 16 % 5 % Revenue in our aftermarket services business increased primarily due to higher service activities and parts sales from the continuation of the market recovery which began in the prior year and continues to drive an increase in customer demand.
We typically use the proceeds from these sales to repay borrowings outstanding under our Credit Facility, however, we are not able to estimate the timing of asset sales nor the amount of proceeds to be received and as such, we do not rely on asset sale proceeds as a future source of capital.
We typically use the proceeds from these sales to repay borrowings outstanding under our Credit Facility, however, we are not able to estimate the timing of asset sales nor the amount of proceeds to be received and as such, we do not rely on asset sale proceeds as a future source of capital. 45 Table Archrock, Contents Cash Flows Cash flows provided by (used in) each type of activity were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands) ​ 2023 2022 Net cash provided by (used in): ​ ​ ​ Operating activities ​ $ 310,187 ​ $ 203,450 Investing activities ​ (232,491) ​ (130,916) Financing activities ​ ​ (77,924) ​ (72,537) Net decrease in cash and cash equivalents ​ $ (228) ​ $ (3) ​ Operating Activities.
In the near term, however, we expect this transition to result in a modest natural gas production growth rate, to which demand for our products and services is closely aligned. Demand for natural gas-powered compression. Demand for our services is dependent on the demand for natural gas in the markets we serve.
Demand for natural gas-powered compression. Demand for our services is dependent on the demand for natural gas in the markets we serve.
We anticipate increased 2023 capital expenditures, particularly growth capital expenditures, as compared to 2022 due to increased investment in new compression equipment as a result of higher customer demand. 41 Table Archrock, Contents Dividends On January 26, 2023, our Board of Directors declared a quarterly dividend of $0.15 per share of common stock, or approximately $23.6 million, which was paid on February 14, 2023 to stockholders of record at the close of business on February 7, 2023.
Dividends On January 25, 2024, our Board of Directors declared a quarterly dividend of $0.165 per share of common stock, or approximately $25.9 million, which was paid on February 13, 2024 to stockholders of record at the close of business on February 6, 2024.
Although the EIA expects natural gas production to increase, natural gas consumption is expected to decrease slightly, reflecting a decrease in the usage of natural gas in the electric power generation sector, as a result of increased power generation from renewables, partially offset by increased LNG exports and exports of natural gas via pipeline to Mexico.
Natural gas consumption is also expected to increase, reflecting consistent usage of natural gas in the electric power generation and residential sectors, as well as increased LNG exports and exports of natural gas via pipeline to Mexico. We believe the outlook for the energy industry in the U.S. is positive.
The change in other expense (income), net was primarily due to a $2.4 million decrease in insurance proceeds related to damages to facilities and compressors caused by Hurricane Ida, a $1.9 million unrealized change in the fair value of our investment in an unconsolidated affiliate and a $0.9 million decrease in indemnification expense remitted pursuant to our tax matters agreement with Exterran Corporation.
The decrease in other expense (income), net was primarily due to a $0.9 million decrease in the unrealized change in the fair value of our investment in an unconsolidated affiliate during the year ended December 31, 2023 compared to the year ended December 31, 2022.
Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower in response to improving market conditions, partially offset by the impact of the strategic dispositions in 2022 and 2021. 38 Table Archrock, Contents Despite the increase in revenues, the decrease in gross margin in our contract operations business reflects the impact of a larger increase in cost of sales.
Revenue in our contract operations business increased primarily due to higher rates for contract compression in response to market conditions and an increase in average operating horsepower, partially offset by the impact of strategic dispositions of horsepower in 2022. ​ 40 Table Archrock, Contents The increase in cost of sales was primarily due to a $10.8 million increase in parts expense as a result of an increase in maintenance activities and a $1.9 million increase in lube oil expenses which were both driven by higher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated.
Provision for Income Taxes ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ Increase ​ (dollars in thousands) ​ 2022 2021 (Decrease) ​ Provision for income taxes ​ $ 16,293 ​ $ 10,744 52 % Effective tax rate ​ 27 % 28 % (1) % The increase in the provision for income taxes is primarily due to the tax effect of the increase in book income during the year ended December 31, 2022 compared to the year ended December 31, 2021.
Provision for Income Taxes The increase in provision for income taxes was primarily due to the tax effect of the increase in book income during the year ended December 31, 2023, compared to the year ended December 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ Increase ​ (dollars in thousands) ​ 2023 2022 (Decrease) ​ Provision for income taxes ​ $ 37,249 ​ $ 16,293 129 % Effective tax rate ​ 26 % 27 % (1) % ​ 42 Table Archrock, Contents LIQUIDITY AND CAPITAL RESOURCES Overview Our ability to fund operations, finance capital expenditures and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets.
In addition, increased focus of our customers on reducing emissions from, or the use of, combustion engines in compression could increase demand for electric motor-driven compressors or require us to make modifications to our existing natural gas-powered units. 36 Table Archrock, Contents Operating Highlights ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ (horsepower in thousands) ​ 2022 ​ 2021 ​ 2020 ​ Total available horsepower (at period end) (1) ​ 3,726 3,878 4,120 ​ Total operating horsepower (at period end) (2) ​ 3,448 3,247 3,388 ​ Average operating horsepower ​ 3,328 3,282 3,657 ​ Horsepower utilization: ​ ​ Spot (at period end) ​ 93 % 84 % 82 % Average ​ 87 % 82 % 86 % (1) Defined as idle and operating horsepower.
In addition, increased focus of our customers on reducing emissions from, or the use of, combustion engines in compression could increase demand for electric motor-driven compressors or require us to make modifications to our existing natural gas-powered units.
The decrease in net cash provided by operating activities was primarily due to increased cash outflow for cost of sales, contract costs, and SG&A, as well as decreased cash inflow from accounts receivable. Partially offsetting these decreases in operating cash were increased cash inflow from revenue and deferred revenue. Investing Activities.
The increase in net cash provided by operating activities was primarily due to increased cash inflows of $115.2 million from gross margin and changes of $15.4 million in deferred revenue, partially offset by changes of $24.3 million in contract costs, $12.2 million in accounts payable and other liabilities and decreased cash inflows of $9.1 million from accounts receivable. Investing Activities.
Outlook The EIA Outlook forecasts the following year–over–year changes: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2023 ​ 2024 ​ U.S. dry natural gas production 2 % ​ 2 % U.S. oil production 5 % ​ 3 % U.S. natural gas domestic consumption ​ (2) % ​ (1) % Liquefied natural gas exports 13 % ​ 4 % The events of 2022 drove broad realization that a more diverse energy mix is needed to satisfy global energy demand and preserve energy security, making it a rewarding time to be in the business of transporting U.S. natural gas.
Similar increases in demand in 2023 were seen in our aftermarket services business, where we experienced an increase of 8% in aftermarket services revenue. 37 Table Archrock, Contents Outlook The EIA Outlook forecasts the following year–over–year changes: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2024 ​ 2025 ​ U.S. dry natural gas production 1 % ​ 2 % U.S. oil production 1 % ​ 3 % U.S. natural gas domestic consumption ​ 2 % ​ (1) % Liquefied natural gas exports 2 % ​ 19 % The EIA Outlook expects natural gas production to continue to increase to all-time highs in 2024 and 2025.
The increases in production in 2022 resulted in strong demand for our compression services and we increased our investment in new fleet units. Our contract operations revenue and total operating horsepower increased 5% and 6%, respectively in 2022.
Our contract operations revenue and total operating horsepower increased 19% and 5%, respectively in 2023.
The development of these basins producing both commodities has created additional incremental demand for natural gas compression over the recent past as it is a critical method to transport associated gas volumes or enhance oil production through gas lift. 34 Table Archrock, Contents Current Trends According to the EIA Outlook, average U.S. oil and dry natural gas and production were as follows: ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2022 2021 2020 Average dry natural gas production (Bcf/d) 98.0 93.6 91.3 Average oil production (MMb/d) 11.9 11.2 11.3 ​ Looking back to 2021, the economic recovery from the effects of the COVID–19 pandemic brought a rebound in energy demand around the globe; however, producers limited drilling and completion activity to achieve maintenance levels of production and cash flows in the course of the pandemic.
The development of these basins producing both commodities has created additional incremental demand for natural gas compression over the recent past as it is a critical method to transport associated gas volumes or enhance oil production through gas lift.
Sources of Cash Revolving Credit Facility During the years ended December 31, 2022 and 2021, our Credit Facility had an average daily balance of $235.4 million and $295.3 million, respectively.
We had a liability of $2.5 million recorded for potential penalties and interest (including discontinued operations) related to these unrecognized tax benefits at December 31, 2023, which we are uncertain as to if or when such amounts may be settled. 44 Table Archrock, Contents Sources of Cash Revolving Credit Facility During the years ended December 31, 2023 and 2022, our Credit Facility had an average daily balance of $298.8 million and $235.4 million, respectively.
Removed
Significant 2022 Transactions During the year ended December 31, 2022, we completed sales of certain contract operations customer service agreements and approximately 770 compressors, comprising approximately 172,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We recorded an aggregate gain on the sales of $28.1 million.
Added
Significant 2023 Transactions In November 2023, we agreed to serve as the lead investor in a series A financing round for Ionada, a global carbon capture technology company committed to reducing GHG emissions and creating a sustainable future.
Removed
See Note 3 to our Financial Statements for additional information about these dispositions. In April 2022, we agreed to acquire for cash a 25% equity interest in ECOTEC, a company specializing in methane emissions detection, monitoring and management. As of December 31, 2022, we own 22.7% of ECOTEC. We acquired the remaining equity interest of 2.3% in January 2023.
Added
Ionada has developed a post-combustion carbon capture solution to reduce carbon dioxide emissions from various small to mid-sized industrial emitters in the energy, marine and e-fuels industries, among others. See Note 12 (“Investments in Unconsolidated Affiliates”) to our Financial Statements for additional information about this investment.
Removed
In 2022, the rebound in energy demand triggered supply constraints and price spikes for multiple commodities. That, coupled with the conflict in Ukraine, increased market uncertainty and price spikes as the market and consumers balance supply security and affordability. Even given this uncertainty in the market, oil and natural gas production in 2022 continued to rebound, particularly natural gas production.
Added
Current Trends According to the EIA Outlook, average U.S. oil and dry natural gas and production were as follows: ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2023 2022 2021 Average dry natural gas production (Bcf/d) 103.8 98.0 93.6 Average oil production (MMb/d) 12.9 11.9 11.2 ​ During 2023, U.S. natural gas and oil production grew to record levels, resulting in strong demand for our compression services and we increased our investment in new fleet units.
Removed
Similar increases in demand in 2022 were seen in our aftermarket services business, where we experienced an increase of 26% in aftermarket services revenue in 2022.
Added
Key Challenges and Uncertainties In addition to general market conditions in the oil and natural gas industry and competition in the natural gas compression industry, we believe the following represent the key challenges and uncertainties we will face in the future. Capital Requirements and the Availability of External Sources of Capital.
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The EIA Outlook expects natural gas production to continue to increase primarily in the Permian region in West Texas and Southeast New Mexico and in the Haynesville region in Louisiana and East Texas due to the expected completion of new pipeline infrastructure expansions in 2023 and 2024.
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Operating Highlights ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ (horsepower in thousands) 2023 ​ 2022 ​ 2021 ​ Total available horsepower (at period end) (1) ​ 3,759 3,726 3,878 ​ Total operating horsepower (at period end) (2) ​ 3,607 3,448 3,247 ​ Average operating horsepower ​ 3,554 3,328 3,282 ​ Horsepower utilization: ​ ​ Spot (at period end) ​ 96 % 93 % 84 % Average ​ 95 % 87 % 82 % (1) Defined as idle and operating horsepower.
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We believe the outlook for the energy industry in the U.S. is positive.
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The increase was primarily driven by a higher gross margin from both our contract operations business and aftermarket services business and decreases in long-lived asset impairment expense and SG&A.
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Increasing customer focus on free cash flow . Many of our customers have begun transitioning their business model to focus on sustainable free cash flow generation rather than growth, and the COVID–19 pandemic further fueled this change in focus.
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The increase in cost of sales was also due to an increase of $8.1 million in total employee compensation expense. Further, cost of sales for the year ended December 31, 2023 includes an increase of $9.1 million for sales tax as a result of a change in tax compliance for sales tax associated with contract operations cost of sales.
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We expect this transition to have a positive impact on the industry in the long term, as we anticipate the change will reduce volatility through cycles and improve the financial strength of our customers.
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Prior to 2023, contract operations sales tax amounts were recognized in SG&A. Partially offsetting these cost increases was the decrease in expense attributable to the horsepower sold in 2022. Gross margin percentage increased primarily due to an increase in revenue which exceeded the increase in cost of sales.
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Start–up, maintenance, lube oil and other operating expenses increased, driven by higher pricing throughout our supply chain, as well as increased volumes associated with unit redeployment as customer activity accelerated. Partially offsetting these cost increases was the decrease in expense attributable to the horsepower sold in 2022 and 2021.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeA 1% increase in the effective interest rate on the outstanding balance under our Credit Facility at December 31, 2022 would have resulted in an annual increase in our interest expense of $2.5 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information specified by this Item is presented in Part IV, Item 15 of this 2022 Form 10–K.
Biggest changeA 1% increase in the effective interest rate on the outstanding balance under our Credit Facility at December 31, 2023 would have resulted in an annual increase in our interest expense of $2.9 million. Item 8. Financial Statements and Supplementary Data The information specified by this Item is presented in Part IV, Item 15 of this 2023 Form 10–K.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.

Other AROC 10-K year-over-year comparisons