Archrock Inc (AROC) 2004 Q3 法說會逐字稿

Good morning. Welcome to the Hanover Compressor Company third quarter 2004 financial results conference call. With us this morning is John Jackson, President and Chief Executive Officer. Earlier today Hanover released its financial results for the third quarter ended September 30, 2004. If you have not received a copy, you can find the information on the Hanover website, www.hanover-co.com. I want to remind listeners that the news release Hanover issued this morning, the Company's prepared remarks on this conference call, and the related question-and-answer session include forward-looking statements. These forward-looking statements include projections and expectations of the Company and represent the Company's current belief. Various factors could cause Hanover's results to differ materially from those projected in its forward-looking statements.

Information concerning the factors which could cause Hanover's actual results to differ materially from those in its forward-looking statements can be found in the earnings press release as well as the Company's SEC Form 10-K for the year-ended December 31, 2003, the Company's SEC Form 10-Q for the three months ended June 30, 2004, and the Company's other SEC filings. Currently all teleconference participants are in a listen-only mode to prevent background noise as today's call is being recorded. After the speakers' remarks, there will be a question-and-answer period. [Caller Instructions] I would now like to turn the call over to our host, Mr. John Jackson. Mr. Jackson, you may begin your conference.

Thanks a lot. I want to welcome everyone today to Hanover's third quarter earnings call for 2004. And since we had our last call-- from then to now we've obviously had some changes, the most significant of which is our former CEO, Chad Deaton, leaving and myself taking over his role. And I just wanted to tell everyone I'm very excited about this opportunity. I really look forward to the future here at Hanover as we move forward. Along that line, I wanted to just touch on a couple of things first relative to management and the direction of the Company. From the management perspective, the leadership team here at Hanover, other than the departure of Chad and my taking over his role, is unchanged. We're moving ahead with the management team we had in place, it's a well-developed and well-rounded management team with a lot of experience both domestically and internationally. We have over 5,000 people around the world, 3,000 of them in the U.S. and 2,000 plus internationally that are very experienced and very adept at customer relations in moving Hanover forward and I'm very excited to be working with a broader base of the employees.

From a standpoint of the direction of Hanover, the direction of Hanover's going to be unchanged from what it has been in the past two or three quarters, and we'll touch on that both on a macro and a micro basis as we go through this call today. But we had a management conference about a month ago where we took the top 80 people or so from around the world, brought them together, and talked about the next 15, 18 months and where we wanted to go, what the direction was, the goals and objectives; and collectively put that together and laid those out. Those goals are unchanged and that direction is unchanged. I believe the management team and the employee base have been communicated with so that everyone understands what we are trying to achieve. And our targeted growth areas are the same: Russia, the west coast of Africa, the Middle East, as well as continuing to grow in Latin America; while maintaining and improving our performance in the U.S. markets. So with that, I'd like to turn my comments to a few things that have happened recently.

First, Canada. We announced earlier this week the pending sale of our rental asset fleet in Canada to Universal. We believe this is a good deal for both parties. We were restricted on fabricating for ourself in Canada. We had a shrinking fleet in Canada as people were exercising purchase options and we were choosing not to add to our fleet through a third party in Canada. And we had outsourced the O & M on our rental fleet in Canada, thereby reducing our ability to maximize our margins. So we chose to exit that area, redeploy that capital, initially on debt paydown and longer term give us more flexibility on growth. And we believe this will improve our focus and move us in a direction we want to go to our target markets that we just mentioned. The proceeds, as I just mentioned, will be used in the fourth quarter to pay down debt. The transaction will be accounted for as discontinued operations in the fourth quarter. That would include both the rental-fleet sale and the Collicutt sale. The gain loss on the transaction at this time is expected to be minimal. We do need to close October results, and then we will be able to have the basis with which to calculate it; but it should not be a lot either way, a small gain or a small loss.

Now, if we look at 2004 and what Hanover's been trying to accomplish and how that story has shaped up, I'd like to just give you the three main components of how we view that story and the progress we've made on a year-to-date basis this year as compared to last year. Those three pieces were really -- we wanted to begin to delever the company, we wanted to improve EBITDA and we wanted to exhibit capital discipline. This year through nine months we've paid down on a gross basis, excluding the PIC accretion, approximately $97 million of debt. If we compare that to the nine months of last year, excluding the Schlumberger notes, we had increased our debt approximately 24 million. We've paid down, from the year-end debt balance, approximately 5% of our debt balance excluding the accretion. On an EBITDA basis, if we exclude the shareholder settlement, benefit this year and charged last year to normalize that, our EBITDA this year would be about $230 million as compared to about 211 last year. That's a 9% increase in EBITDA.

And then finally on capital discipline, last year, including the 15 million we spent on buying the rest of Balelli (ph) we had spent 120 on capital for nine months. This year we've spent 58. That's just over 50% reduction in capital. So when you package all that up, we've paid down debt, we've grown EBITDA, and we've slashed capital spending all simultaneously. So that's, in our mind, making more with what we already have, which has really been our goal this year. And it positions us very well as we move into '05 and I'm going to talk about that at the end, but we're not done with making more with what we already have. We're going to talk about the quarter -- we're going to turn our attention on the quarter and I'm going to highlight for you some of the opportunities for improvement. We think we can still drive these numbers to better-performance levels. So let's move to the quarter now.

Overall EBITDA was approximately 80 million this quarter versus 78 million last quarter. There's a few unusuals in here I'll point out as we go through each line of business. Starting with the domestic rental business. Last quarter we said revenue would move back in line to the 85 to $86 million range, and that's exactly what we experienced. However, gross margins were down to the 56% range this quarter. We have three geographic business units in the United States, two of those geographic business units are actually performing pretty well and one of them has had poor performance this year. We had a number of management changes in that GBU earlier in the year. We've put a number of new management people in there from operations, sales; and the entire head of the GBU has all been changed, primarily in the second quarter this year, and we've seen some of that impact here in the third quarter. We've had inventory writedowns this quarter of about $600,000. We've had some other charges that add another 3 or $400,000.

We believe, as we move into the fourth quarter, we'll begin to see margins improve in this GBU. We expect the management team there-- we have high confidence in them and we expect them to be able to deliver ongoing results that are similar to our other GBUs in the U.S. And we have high expectations of that beginning in the fourth quarter and continuing into '05. As a result, we believe, as we look ahead that we'll see in the fourth quarter margins move back to the 58 to 59% range and we'll be able to sustain those or potentially slightly higher into '05; 58 to 60% in '05. The second thing I want to talk about in domestic rental business is the utilization. Utilization's down 2% from June to September. This is primarily the result of a correction of an error in how we were counting our units that we utilize domestically. We had double-counted the utilization of some units. This goes back in time a few quarters, but largely has built up over the last year. And our utilization was probably overstated in the range of about 2% at June. So utilization quarter-to-quarter, if you factor out the error correction, is about flat; which is in line with our revenue.

Now, as we move to the outlook for next quarter and going ahead, I've already touched on margins. The other area I want to focus on is pricing. This is an area where we think we have some near-term opportunity. Our marginal units that are being rented today are going out at -- every marginal unit that we're renting in our high horsepower multistage and low horsepower multistage, we're going out at a higher rental rate than we've been receiving. So on the incremental marginal unit we are renting, we're receiving price increases. Secondly, we have our fleet broken into really a third, a third, a third. A third of it is under Alliance agreement, a third of it or so -- this is contracted horsepower, is under some form of term contract, and we have about a third of our revenue which is on month-to-month. That revenue which is on month-to-month, we are targeting price increases beginning in the first quarter of 2005 that we believe--looked at across the entire fleet would average about a 1 to 1.5% price increase impact on the whole fleet; recognizing we can only target about a third of our fleet at a time for price increase because of how the other contracted horsepower is tied up under contracts. So, from a domestic perspective, we're not pleased with the margins results this quarter. We do like the pricing outlook, we do like the opportunity to improve our performance in our specific GBU in the U.S., and bring margins back up to where we think they should be. And we think that's a very near-term outlook.

Parts of service, we had some sale of some assets this quarter that added to our revenue base and added to our margin base and that's the primary driver there for the increase quarter-on-quarter. The base parts and business -- the base parts and business activity had low 20% -- 22% margins or so. We would expect going into the fourth quarter, those margins to remain in the 22 to 24% margin and we would expect the base revenue to be in that 38, $39 million kind of range.

Turning our attention to compression fabrication. This is an area that we've seen continual improvement on throughout the year. If you look at one-- first-quarter, second, quarter, third quarter, we had 8%, 8%, and then 12% margins. But, I think we said on the last call, we were seeing exit rates on margins in the compression fabrication closer to the 12% and we believed that was the kind of range we could get to in the third quarter, and we did. As we look ahead to the fourth quarter, we would expect our revenue to drop off some based on the backlog and where it's -- the timing of delivery. We would expect that to move down into the mid-30s as far as revenue, but we would expect margins to stay in the, say, 11% range give or take a percent. So we are having a little bit of a drop-off in backlog from the low 50s to the low 40s. We do have a lot of quote activity going on with compression fabrication and we expect to be able to maintain or grow that backlog back to the levels of the 45 to $50 million range as we go forward; based on quote activity out there today. And we do expect to be able to maintain our margins in that 10 to 12% range, as we've said.

Production and processing fabrication. We had good revenue growth in this area. We expect to sustain this level of revenue into the fourth quarter, if not-- probably even seeing a 5 to 7% increase in revenue in the fourth quarter. Also this quarter we had a particular job that we lost $1 million on. We didn't have it -- we did not have a decline in expected margin, we actually lost $1 million on it. So the loss alone accounted for a little over 1% of margin degradation, but if you would expect to generate at least 10% on something like that going forward, there's another 1%. So as you look ahead, we would again expect our margins to move back into, say, the 11 to 12% range in the fourth quarter and going ahead; barring any other operational upset, which we don't foresee at this time. So the 9% margins we experienced this quarter we believe we'll be able to return those to double-digits and grow our revenue base a little bit in the fourth quarter. The backlog has grown this quarter in the production and processing area from about 50 million to the low 70s. So we see the outlook for that area continuing to be very active, both domestically and internationally.

On the SG&A area, we did have the increase that we talked about last quarter, Sarbanes-Oxley 404 costs continue to come in and hit us much more heavily in the second half of this year than the front half of this year, as we're working very diligently on that process. It's definitely a -- attention getter inside the Company across all operational and financial and legal and HR areas. Everybody in the Company is being impacted by the work that we're needing to do to get compliant with Sarbanes 404. We expect as we move into the fourth quarter we'll continue to see these SG&A levels remain up at this kind of level. As we move into '05, we would expect to see G&A come down some, at least as it pertains to Sarbanes. We have some other areas we're focusing on, too, but we would expect to see it come down a little bit as we move into '05 and moderate. We'll be giving guidance on '05 on more of our year-end earnings call.

Now, turning our attention to the last pre-tax item, it's a securities-related benefit. As you'll note, we had a $4 million benefit this quarter from the cancellation of the contingent note that came out of the shareholder settlement. That was a -- that was a benefit driven solely by our stock-price performance, if it traded above 12.25 on average for 15 straight days the note would cancel and, obviously, we have done that. So we were able to record that this quarter and are very pleased to have that behind us.

As we look at taxes, we had $4.7 million effect this quarter of no U.S. tax benefit. We would expect this impact to be in the $6 million range in the fourth quarter. The reason it was lower this quarter was because of the shareholder litigation settlement reversal. That came through with no benefit, uh, against it and it was an income -- an income item. So as we move into the fourth quarter we will see more of the $6 million impact, give or take a little bit.

On the liquidity front, this continues to remain a very positive story for us. We have $13 million drawn on the revolver at the end of the quarter. We paid off about $61 million of debt this quarter. We'll continue to pay additional amounts in the fourth quarter with the proceeds from the anticipated close of the Canada sale, that should close on Monday. And the close of Collicutt should occur by the end of the year, that's our current projection.

Capital spending in the quarter continues to be, uh, reined in. We had $58 million year-to-date with about 30 million of that being maintenance capital. So we've brought our maintenance capital down, we've brought our overall capital program down. And from an EBITDA guidance perspective, if we -- if we factor out the -- what will be happening in the fourth quarter, which is the reclass of Canada to discontinued operations, we would still expect to be in that 300 to 310 range, or the upper part of our range of guidance of 280 to 315 that we've given all year. Well, that's the quarter. So now where does that position Hanover for 2005? We think we're actually positioning ourselves quite well. There's three or four points here I want to touch on. We want to continue to do a few things.

One, we want to continue to pay down debt through excess cash flow. With the Canada proceeds, we will pay down somewhere in the 150 to $160 million range of debt from where we started the year. That's well in excess of our targets, but certainly doesn't position us where we want to be for the long-term; so we will continue to pay down debt. Secondly, we want to extract additional value from what we already have. We've done some of that, as I discussed earlier, but we have opportunities to do more as I've highlighted on the call here. Those would include increasing utilization, improving pricing, better cost performance in our domestic GBUs, fabrication margin optimization, and SG&A opportunities to reduce SG&A in 2005. So with that framework, then, that allows us to pursue a few other things. That allows us to pursue the completion of the Nigerian project we talked about on the last call. We expect to have those installed by late this year or early next year and then being commissioned in the first quarter of next year and probably revenue generation late first quarter to mid-second quarter is our current anticipation on those projects in Nigeria. That adds almost $1.7 million plus of revenue a month with mid-70s gross profit on those jobs. So we're looking forward to getting those online.

We also now feel like we are positioned to grow in a disciplined manner. We can take some of our excess cash flow and pay down debt, we can take some of our cash so that we generate and begin to pursue projects with more confidence since that cash flow is there. We want to expand our footprint in our new markets: Russia, Middle East and West Coast of Africa. And we want to use our size in Latin America. We want to leverage that size to pursue additional projects there where we can bring that incremental project in at a nice high rate of return because we already had the infrastructure in place. So we believe, while the quarter wasn't everything we wanted it to be, it's certainly showing the improvement we want to see. We have more improvement we expect to see, and we plan to continue deliver improving performance as we move ahead. So with that I'll conclude my comments and turn it over to questions.

[Caller Instructions] Ken Sill with CSFB.

A couple of questions. We didn't talk much about the international compression markets, um, you know, margins there were down sequentially pretty substantially although I know that those margins tend to move around a little bit. You're trying to grow South America --is there anything going on right now or that we can expect in Q4?

I actually did inadvertently miss a comment on international. On the international -- on the international front, we had in the second quarter we had an inflation adjustment of 1.3 on the revenue side and then it did not repeat in the third quarter. And in the third quarter, we had inventory adjustments on taking physicals of $1.5 million that charged against our margin. And we did also have a little bit of increased maintenance and repair that we talked about on the last quarter call that we expected to see in the quarter and we did see some of that. So I, frankly, just uh -- just missed that comment on the $1.5 million. But we did have inventories-- so both domestically and internationally we had about $2 million of inventory charges in the quarter from physicals.

About 500,000 in the U.S.?

Yeah.

Yeah. So that just comes out of the next year -- I mean next quarter --

Yeah. It should not repeat. We should see an improvement in the margin in the international arena probably in the -- close to 70% range as we move into the fourth quarter from 68. We shouldn't have the repeat -- we won't have the repeat of the physical.

Okay. Well, that helps. I was wondering if you could comment, um, you know, going out and talking to other people in the industry, uh, you know, a former executive at Hanover, apparently, is now one of your competitors, um, you know, I've been hearing a little bit about him from some of the other guys. What do you see his impact on your business and how is he gonna affect things going forward?

Well, he's a very small company, certainly is a competitor on a regional basis, but we don't expect his impact really to be very -- that company's impact to be very significant to us. Obviously on the marginal unit they may get a few units we might have been able to rent but we really see Universal as our main competitor from a day in and day out, across the spectrum basis. But there is some impact there but there's a number of small little start-ups on that on the lower end of horsepower to the midsized horsepower, a few units here and there. But, from our perspective, it's just not a big issue.

And is there any impact with some of these platforms in the Gulf of Mexico being out to your business or is that not -- you're just not owning-- the platforms that have been damaged.

No, we're not -- it's really not -- there was one platform we had a unit on that was damaged a little bit but we have rates on that that continue. So from our perspective, there's no disruption from the hurricane activity.

Okay. And, uh, you know, one of the big concerns-- you've kind of addressed it and that's the -- the issue with the departure of Chad and his impact on the relationship with Schlumberger and the Alliance agreement. You just don't see that having much of an impact going forward?

Not at this time. One thing that Chad had done when he was here was getting other people involved with the Alliance and the Alliance was not lynchpinned solely to Chad. I know starting at our Chairman level, Victor Grijalva is former Schlumberger and he has a good work working relationship with Schlumberger; meets with Andrew Gould, a couple of times a year. Our general counsel, Gary Wilson, who's joined us in the last four or five months, is former Schlumberger, is very well connected to the people there, has a very good relationship with the people who, frankly, are in charge of the Alliance. And then we have someone that we've designated inside the Company who spent two years at Schlumberger through the Camco acquisition, who is our Alliance rep with Schlumberger and has been very active with the geo market managers out there talking about very specific projects. So, uh, we've had conversation, post the announcement of Chad with Schlumberger. They have indicated to us and we've indicated to them that we're both still very committed to trying to make this work and we have some activity that's moving ahead on this and hopefully in 2005 we'll see some real live revenue generating benefit from the Alliance.

Okay. And one last question on the production equipment side. A couple of quarters ago you mentioned that the Balelli was doing some desulfurization equipment for a refinery in Europe. Is that -- has that been installed and are there any follow-ons there?

It is not -- it's probably a second-quarter '05 installation. So that has not been completed yet but it's underway.

Okay. And that -- that's the first one there's not been any follow-on orders on that stuff yet.

That's correct. This is sort of a beta test site to get this in and see how it works for this refinery in Germany.

[Caller Instructions] Thiru Ramakrishnan, Simmons & Company.

One kind of housekeeping question. What would have domestic gross margins been ex -- excluding the performance -- the poor performance from the one GBU?

They would have -- they would have approached, um --

Over 60%?

Well, they would have approached upper 50s. You would have had about probably -- close to $2 million more of gross profit.

Okay.

Run the math on that.

And did you -- did you mention where this GBU is -- what geographic region?

No, I did not.

Would you not care to comment on that?

I -- yeah. I think the people know and we'd care not to comment on it. We'll -- again, I think this is an opportunity. It's a -- unfortunate this quarter but I think it's a good opportunity.

Okay.

Okay?

And then internationally, um, in your press release and then on the call you touched on growth opportunities. If you could, um, just add some more color on what -- especially, you know, within Russia and, um, some of the other -- the west coast of Africa, et cetera. What kind of, you know, product lines you want to penetrate in these markets and whether or not, uh, these are based on contracts that are already in place, or is this kind of just what you're seeing out there?

Well, let me -- for example, in Russia, I think traditionally in the past we've done about $20 million in sales into Russia and their related countries, formerly related countries. This year year-to-date, for example, we've seen in the nine months maybe 8 million, $9 million of revenue from sale of product, both compression and production equipment into Russia. But in our backlog that we have recorded and booked jobs that just haven't run off yet, we have another 25 to $26 million in backlog in the Russia and CIS and so forth. So that's gonna put us in the 30 to $35 million range for the year as far as business activity, assuming we don't win anything else.

The other thing is that we've built our infrastructure in the Moscow office area. We have people now that are on the ground there in deal flow day in and day out. So the product lines, actually surprisingly, we have some compression activity there that we thought would be a little bit further out; but it's also gas plants and production -- production and treating equipment. So it really spans the entire product line as far as what we already have booked and as far as what we're quoting today. So right now, our plan on Russia and those related countries is to sell product. And where we can, try and begin to build an O&M base and then over time look at putting asset exposure into those countries.

And then last question, I know you're not going to have your full, uh -- '05 guidance until next quarter, but just in terms of capital expenditures, have you, uh -- what are your thoughts year-over-year from '05 to '04 in terms of whether it's gonna be more, less, or kind of roughly the same.

Well, my guess would be that '05 would be more than '04. Not dramatically, not overspending cash flow, not at the expense of continuing to pay down some debt, but we spent $58 million this year.

Right.

I think in the fourth quarter we'll spend somewhere between 25 and $50 million, probably the 25 to 35 range. But there's a couple projects that could come along that would ramp that up a little. So we'll spend probably less than $100 million this year. My expectation is we'd be a little bit higher than that next year. But we might be talking 20 or $30 million, 30 or $40 million. It really just depends on what the opportunities are. We're gonna be trying to focus in on the best opportunities and spend that capital there. But it will be north of where it is this year most likely.

Eric Kalamaras with Wachovia.

I had a question on--I kind of want to dovetail off of that capital expenditure question. Looks like you scaled back capital expenditures significantly and you look out to '05 and you say it's -- going to be a little higher than '04. You've -- you've got a lot of leverage on the balance sheet, you've accelerated the debt reduction like you said you would, um, and I'm curious as to -- as to where the -- where the target is next year and -- and how much more --I mean you're generating some discretionary cash flow that you could use for incremental debt reduction. I'm just curious as to -- if you would consider advancing your debt target or if your capital expenditure budget could actually move up at the tail end of next year? I'm just curious what you do with the incremental cash?

Yeah, if you look at our outstanding debt balance that's prepayable at par, for example, once we get done with applying our Canadian proceeds to that, we'll have well under $100 million that's prepayable at par, somewhere in the 60, $70 million range. So if we throw off cash -- if we threw off 50, $60 million of cash flow and took it to debt, we would have paid off everything that's payable at par. Um, so the question that faces us is if -- do we want to accelerate further debt reduction? We'll have some debt that's callable next year and what we'll just be looking for is the most efficient use of that cash and the most efficient way to retire debt. And accelerating that debt retirement, if it's efficient and cost effective and makes sense, we'll certainly look at those opportunities to do that.

But if not, we'll look at deploying our cash into capital projects because we believe there's some very good growth opportunities. Some very specific projects we're looking at now that, uh, would manifest themselves in the first half of '05 that we would start spending our capital on. And then when you look into '06, early '06 is the first call date on the Schlumberger note -- of the Schlumberger note -- I call it the Schlumberger note, it's the zero coupon note now-- that we could call it 102.5 and that's potentially of interest to us to really target that as a -- as a potentially exciting accelerating point, to accelerating the debt paydown. So whether that occurs-- a further acceleration in '05 or whether it occurs in early '06, we're still very targeted on it but we're going to look at the balance now between growth and debt reduction.

Okay. I appreciate that. And then the second follow-on would be looking out into -- into capital in '05 wherever the number happens to be. Can you -- can you give me a sense as to what -- what the breakout would be between your incremental international projects and-- from a capital perspective and then what the lead time is between when that capital is employed and when you could start seeing meaningful market penetration?

Okay. The breakout question, is that between international and domestic?

Yes.

Okay. We would expect, just based on the project slate we see in front of us that we're looking at right now, we would expect probably 80% or so of that growth capital to be international. I think we've been saying that for a while and what we see in the marketplace today really doesn't change our opinion of that. That's where the bulk of the projects that we want to pursue are. There are some domestically but they tend to be smaller dollars and not as many. Um, and then the -- the follow-on question was what, I'm sorry?

Well, the follow-on question was really when you start spending capital.

Oh, the lead time--

Yeah, what's the lead time, then?

Well, there's two pieces to the lead time, I think, that -- one is the project comes up from the customer and it's very -- let's go, go, go, let's get this thing going we want this thing online and -- in six months and we got to bid this right now, let's get it down. And then as we start really getting into the project, approvals slow down, the concept changes. So I think some of the projects that we were looking at, say, three months ago that we thought would have been decided on, perhaps this quarter, have slowed. So I think there's a -- a project analysis phase that's going on that slows us down. But once it's awarded it's usually around six months from awarding, six to nine months from awarding to the revenue stream coming online depending on the size of the project.

Some can be a little bit faster than that internationally but as a general rule I'd use six to nine months. So there are some projects we're pursuing right now, for example, that if they were awarded and we were the one to be awarded them in the next quarter, three to six months; that we would expect the second half of '05 to start seeing some of the benefit from that incremental project award and the late front half of '05 from the Nigerian projects. So that's kind of how we see '05 shaping up, is really beginning to win some particular projects in the front half of the year, seeing the benefit of it coming on in the latter half of the year.

Okay. Thank you. I guess one last question before I let you go. The incremental international projects, the margin that you get, would you expect that to be near your -- your -- kind of your weighted average international margin or slightly above, slightly below? Can you handicap that at all?

Generally speaking, we would expect it to be at least at where we are today, if not above. Part of our margin impact internationally is also because of our infrastructure and some of the new markets we're moving into, uh, but we would expect it to be at 70+%, 70 to 75.

Geoff Kieburtz, Smith Barney.

Just a real quick question which you may have actually answered just in the last exchange. But at this junction do you feel as if there are any projects that you see in the marketplace that -- that you, for whatever reason, liquidity or otherwise are unable to consider pursuing?

Not that we're looking at. There have been a couple of projects that came up this year and, frankly, that haven't even been awarded yet that were in the 40 to $50 million range that, frankly, is just not what we're gonna do. We're not gonna pursue a project for $40 million but we're going to fund the whole thing ourself. So beyond that, uh, no, I think most of the things we look at are anywhere from 2 million to $20 million and right now based on where we are with the Canada sale, I think we have more comfort that we can pursue a select number of those and fund them.

Okay. And -- and the way you answered the question, it was -- it's the size, not the anticipated profitability of these 40 to $50 million projects that --

Yeah. We have a screening process from an anticipated profitability that -- you know, regardless of size, if it doesn't meet our hurdle rate and returns and cash-on-cash cycles and so forth, that we just don't bother with. So it's definitely size.

Okay. And -- and are those -- I guess what I'm trying to get a sense of is as you look toward the future in your own analysis, um, you know, are -- are you thinking -- well I guess it's two questions. How long do you think it might be until Hanover is in a position to be able to contemplate that size of project? And the associated question is, you know, how big a part of the sort of market opportunities do those sized projects represent?

Well, I think from our standpoint, uh, from a market -- to do them in reverse, the market opportunity, certainly there's -- there's a few projects out there of that size and what we really try and do to not just totally avoid missing that project altogether, is we try and skinny down and bid on a piece of it with someone else.

Right.

Or be a part of a subcontractor who's bidding the large larger project. So, you know, when they come and say, do you want to bid on the $50 million piece of this, we're like, no, we'd really rather just pursue one piece of this project. So we've done that in a couple of instances. And the one I'm really thinking of, it was actually a project in Russia putting our capital at risk, it was between 40 and $50 million that, frankly, based on our experience in Russia, the size of the project, the new market, the rule of law; it just, from a risk perspective, just didn't make sense.

Right.

If you look at our Nigerian project base of what we're putting to work over the next six months, we're going to have approximately $50 million of capital deployed in Nigeria when you span all the different projects we have there. No one project's $50 million, but we're going to have $50 million in Nigeria and I think we're-- between that and maybe adding a little bit more -- we don't want to make Nigeria a $250 million area until we get the $50 million on and working.

Very understandable.

So we want to deliver on that and then execute and learn and then grow moderately. So how long can we do a $50 million project on our own? It's difficult to say depending on how we -- how we do some other things in this company but I don't anticipate that being '05. It'd be '06 or beyond. Depending on some other things we might do within the Company. But right now I don't see that in the near-term future for us.

[Caller Instructions] Kevin Pollard, RBC Capital Markets.

Just real quick question, I want to make sure I understand the impact of the sale of your Canadian fleet in the fourth quarter. That -- that's about 3 to 4 million in revenue per quarter and that'll be reclassified into discontinued operations?

That is correct.

Okay. And that's all out of your international rental business.

That is correct.

Okay. And then the impact was 83,000 horsepower.

83,000 horsepower.

Okay. And the margins on that revenue, are they pretty comparable to that segment or are they lower or higher?

Actually, they're a little bit lower than our international segment. So our margins might move up say a point or so based on Canada going away because they were in the -- in the 60s instead of the 70s.

At this time, there are no further questions. Mr. Jackson, do you have any closing remarks?

Well, I just want to thank everyone for joining us today and we'll continue to look for improvement out of Hanover as we move forward. Thanks a lot.

Ladies and gentlemen, this concludes today's Hanover Compressor Company third-quarter financial results conference call. You may now disconnect.