Investing.com -- Moody's Ratings has announced an upgrade in the ratings of USA Compression Partners, LP (NYSE: USAC ), including its Corporate Family Rating (CFR) to Ba3 from B1, Probability of Default Rating to Ba3-PD from B1-PD, and senior unsecured notes ratings to B1 from B2. The Speculative Grade Liquidity Rating (SGL) remains the same at SGL-3. The outlook for the company has been revised from positive to stable.

The improvement in USAC's credit ratings is a reflection of the company's increased profitability and debt leverage, according to John Thieroff, Moody's Ratings Vice President and Senior Credit Officer. He added that the company's capital spending moderation in 2025 should allow it to approach cash flow breakeven and maintain leverage in the low 4x range.

The upgrade in USAC's CFR is attributed to strong operating performance, improved credit metrics, and favorable industry fundamentals in the company's US markets. Continued growth is expected due to increasing natural gas demand and the greater need for compression as key shale basins mature. The company's operations in the Permian Basin, where increasing gas to oil ratios and strong oil prices drive high activity levels, contribute to these favorable conditions.

USAC plans to continue opportunistically building new large horsepower (HP (NYSE: HPQ )) units, with the expectation that this activity will be funded largely within cash flow after years of significant cash flow expenditure. The company is predicted to continue to benefit from favorable pricing dynamics and strong utilization rates, which have been above 90% since early 2023 and are expected to remain well above that level due to strong demand, particularly for large HP units.

The company's high horsepower (HP) compression fleet, which makes up more than 75% of USAC's 3.86 million active HP fleet, is deployed over diverse geographic areas, providing the company with an extensive scale. A fee-based contractual revenue stream generates stable gross margins that have consistently exceeded 60%. The company's long-term relationships with its high credit quality customer base and the burdensome cost to the customer associated with returning equipment adds to the stickiness of revenue. However, the rating is constrained by exposure to volatile commodity prices, short-term contracts, significant debt levels, and limited free cash flow generation in favorable market conditions.

USAC's senior notes are rated B1, one notch below the Ba3 CFR, reflecting the unsecured debt's junior position relative to the partnership's senior secured ABL revolving credit facility. The notes are unsecured and guaranteed by substantially all of USAC's domestic subsidiaries.

USAC's SGL-3 Speculative Grade Liquidity Rating indicates adequate liquidity through mid-2026, supported primarily by its $1.6 billion secured ABL revolving credit facility. At the end of 2024, USAC had $783 million available borrowing capacity under the revolver, which should comfortably cover capital needs in excess of cash flow. Reduced growth spending in 2025 should allow the company to approach cash flow breakeven, something it has not historically done. USAC's next notes maturity is in 2027; the revolver expires in December 2026.

The stable outlook reflects the expectation that USAC will continue to grow its earnings while largely spending within cash flow and maintain credit metrics supportive of its credit rating.

USAC's ratings could be upgraded if the firm focuses on debt reduction and de-levers such that it is expected to maintain Debt/EBITDA below 3.5x in a mid-cycle earnings scenario while generating consistent positive free cash flow and adhering to conservative financial policies. A downgrade is possible if USAC's leverage rises above 4.5x or distribution coverage falls below 1x on a sustained basis.

USA Compression Partners, LP, headquartered in Dallas, Texas, is a publicly traded partnership providing compression services to the domestic natural gas industry. Energy Transfer (NYSE: ET ) LP (Baa2 stable) holds the non-economic general partnership interest in USAC as well as 39% of its common units.

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