Archrock Inc (AROC) 2006 Q1 法說會逐字稿

Hello, and welcome to today's Universal Compression's earnings conference call. [OPERATOR INSTRUCTIONS].

I'd now like to turn the call over to today's host, Mr. David Oatman, Vice President of Investor Relations of Universal Compression. Sir, you may begin.

Thank you. Good morning everyone. Welcome to the Universal Compression earnings conference call for the three months ended March 31, 2006 We prepared a summary page of financial and statistical data about the quarter in our earnings release, which is posted to our universalcompression.com website under the Investor Relations tab. As we have in the past, during this call, we will discuss non-GAAP measures in reviewing our performance such as EBITDA as adjusted. You will find a reconciliation of these measures to GAAP measures in the summary page of the earnings release.

As a reminder, in addition to providing statements of historical fact, today's conference call will include certain comments that are not statements of historical fact but instead constitute forward-looking statements. Investors are cautioned there are risks, uncertainties and other factors that may cause the Company's actual performance to be significantly different from the expectations stated or implied by any comments we make today. These forward-looking statements are affected by, among other things, the risk factors in forward-looking statements described in the Company's transition report on Form 10-K for the nine months ended December 31, 2005, and those set forth from time to time in the Company's filings with the SEC, which are available through the Company's website and through the SEC's EDGAR system website at www.SEC.gov. The Company expressly disclaims any intention or obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise.

I will now turn the call over to Mr. Steve Snider, Universal's Chairman, President, and Chief Executive Officer.

Thank you, David, and good morning to all of you. As usual, joining me is our Chief Financial Officer, Michael Anderson. I will provide summary comments about our results, operating highlights and outlook, and Michael will follow with financial results and guidance.

I'm pleased to report another record quarter of performance at Universal, driven by strong market demand across all of our business segments. We once again achieved record levels of revenue, EBITDA as adjusted, and earnings per share for the first quarter 2006. In addition to current high levels of activity, our customers are committing to additional compression equipment and services well into next year in both the domestic and international markets. This long-term view taken by our customers increases our financial visibility and helps solidify our expectation of continued growth for the foreseeable future.

Natural gas market activity remains strong, as our customers continue their efforts to maintain or hopefully increase production levels. The maturity of U.S. gas reservoirs forces U.S. producers to stay active just to offset the impact of accelerating production decline rates. Interest in developing international markets is robust as the energy industry works to meet the growing worldwide demand for natural gas. As a result, the demand for natural gas compression is strong.

For the three months ended March 31st, 2006, our diluted earnings per share of $0.68 represents a 51% increase over the adjusted prior year period results. Based on strong first quarter performance and an improved outlook for the remainder of the year, we have increased our earnings per diluted share guidance for 2006 from a range of $2.65 to $2.80 which was provided in February to a new range of $2.80 to $2.95. This level of earnings would represent a 30 to 37% increase over adjusted calendar 2005 results.

I'll now provide operating highlights for each of our business segments. First, domestic contract compression. It continues to be very active. Comparing the March quarter with the prior year period our average working domestic horsepower increased by 5% and our revenues increased by 22%. Profitability has been enhanced by price increases and utilization improvement, which have helped offset increases in fuel operating expenses. On March 31st, our domestic fleet totaled 1.968 million horsepower with a spot utilization of 91.7%. Domestic utilization is currently 90.9%.

With strong current market conditions and with the need to offset increasing operating expenses we implemented a domestic contract compression rate increase on a significant portion of out of term contracts effective April 1st. This rate increase was implemented a little earlier in the year than previously expected due to continuing cost pressures and tight market conditions for compressor units. We expect the rate increase will result in approximately a 5 to 6% contract compression revenue growth for Universal. To date we have seen modest customer push-back.

Our international contract compression segment remains strong as well. In the March quarter, we had unit start-ups in Latin America, Canada, and Indonesia. We have several new international contract compression projects totaling about 65,000 horsepower that are expected to commence operations mainly in the last half of 2006 and early 2007. As a reminder, international growth in the second half of 2006 should be offset somewhat by the likely exercise of a customer purchase option on a 25,000 horsepower compression facility in Latin America. Bid activity remains robust for new projects that would benefit financial results beginning in 2007.

Our international fleet totaled 591,000 horsepower on March 31st. International utilization was 93.9 at March 31st and is now 92.7, as we have a few units in Mexico that have been idled but most of which are slated to go back to work later in the year on other projects. Looking at our total operating statistics, our overall spot contract compression utilization, including both international and domestic, was 92.2% at March 31st at 2006 and is currently 91.3.

We continue to have an active new build program for our contract compression fleet targeting both domestic and international markets as we expect to add approximately 200,000 horsepower to our fleet during this calendar year. We had relatively few new fleet units completed during the first quarter, but we expect these activities to accelerate in the June quarter as we continue to secure relatively scarce key components for our compressor packages. We are building larger horsepower multistage units that are in high demand in the natural gas markets around the world. These new fleet units are long lived assets that generate an excellent return on capital investment.

Moving to our fabrications segment, our compressor fabrication backlog increased from $145 million at December 31st, 2005, to $228 million at March 31st 2006 and is currently a record $263 million. This increased level of backlog reflects strong market demand as well as customer commitments for delivery of new units further out into the future. As a result of the extended new order lead times our current backlog represents about three to four quarters of future business, whereas our backlog levels about a year ago represented about two to three quarters of work. The longer lead times have resulted in increased visibility for our fabrication operations. Because we are currently allocating more of our new build facility capacity to our contract compression fleet, we expect fabrication revenues to dip in the second quarter before picking back up in the second half of 2006.

Last month we completed an expansion of our Houston fabrication facility which will enable to us meet our sizable backlog of both fleet and sale units and increases our shop capacity for larger horsepower equipment. During the March quarter, domestic demand remains strong. Canadian activity increased. We completed a turnkey installation project in Argentina, and we shipped units for Australia and Thailand. We continue to price new fabrication bids aggressively, and expect fabrication margins to average around 12% in calendar year 2006. Our current backlog is roughly 75% for the domestic market and 25% international.

In our aftermarket service segment, revenues increased marginally on a sequential basis but were up a solid 14% compared to the prior year period. Margins remain in the low 20% area. During the March quarter, we added new locations in Africa and Europe through a small acquisition. This transaction is part of our ongoing strategy to broaden our international sales and service infrastructure and we are optimistic about growth opportunities in these new markets for Universal. This acquisition represents the fourth consecutive year we have added an international service company to the Universal portfolio.

Our business is built on a simple premise. Customers rely on to us provide the most reliable and efficient services to maximize the natural gas production and enhance asset efficiency. In order to supply world-class natural gas compression services, we have assembled what we believe are the most talented employees in the industry, and built a modern and growing fleet supported by an extensive worldwide sales and service you know from structure. With our focused business strategy, I believe Universal is well positioned to meet industry growth opportunities.

Now I will turn the call over to Michael for a review of our financial results and guidance.

Thanks a lot, Steve, good morning, everyone.

I'm sure by now you've all received and reviewed our press release we issued earlier this morning. In my summary of financial results for the three months ended March 31, 2006, the usual comparison will be the three months ended December 31, 2005, as well as the guidance we provided in February. I'll also talk about our year-over-year performance by comparing the three months ended March 2006 to the three months ended March 2005. Total revenues were a record $229 million for the quarter, that's a 2% increase sequentially and an 18% increase on a year-over-year basis. All four segments recorded double-digit increases on a year-over-year basis.

In looking first of all at our domestic contract compression business, revenue was $94 million in the three months ended March 31, 2006. That's an increase of 8% sequentially and is a very strong 22% increase compared to the year-ago quarter. With the new fiscal year, we did have a slight accounting change in the way that we addressed domestic contract compression revenues and the revenues are now grossed up by the amount of property taxes that are typically reimbursed to us by our customers. So this change has no effect on our bottom line, but did it have the effect of increasing revenues by about $1.5 million during the first quarter. The offsetting expense here is reflected in SG&A. A large portion of the first quarter of revenue variance above our previous guidance range of 91 to $92 million was therefore due to this small change.

Gross margin in the domestic segment of 65% in the first quarter was up somewhat from the prior quarter level. As the impact of price increases helped improve profitability. Driven by the new April price increases discussed earlier by Steve, we do expect domestic contract compression margins to increase slightly to the 65 to 66% range for the second quarter. International contract compression revenue was 33.3 million in the first quarter, that was essentially flat on a sequential basis, but it was up 16% compared to the prior year period. International contract compression gross margin was 74.8% in the March quarter. That was in line with our guidance. We do continue to face cost pressures in certain markets, such as Argentina, and we expect international contract compression margins to continue to be in the low to mid 70% range in the second quarter.

In the fabrication operations, revenues were $56 million in the first quarter, that was just a little bit above our guidance. The revenue level is a 6% decrease sequentially, but it's a 17% increase as compared to the prior year period. Fabrication gross margin was 11% in the first quarter, just a little bit higher than our guidance, and in comparison, we recorded fabrication margins of 13% in the December quarter and 6% in the year-ago period.

In the aftermarket services business segment, first quarter revenues of $45 million were at the high end our guidance range and it was up 1% sequentially and up 14% compared to the prior year period. Aftermarket service revenues were helped a little bit by the acquisition which had closed in early February as well as by healthy North American activity both in the U.S. and Canada. Margins increased from 20% in the December quarter to 21% in the first quarter.

SG&A expense increased from 23.8 million in the December quarter to 26.6 million in the March quarter due largely to two primary items. First of all increases in costs associated with equity-based compensation, that is 123-R. And that amounted to $1.2 million. We also had the inclusion of the $1.5 million of reimbursable property taxes that I spoke about a minute ago. That was offsetting revenue.

We expect SG&A to increase modestly on a sequential basis and with our continuing focus on expanding our international marketing and business development activities. If we look at EBITDA as adjusted, it was a record $76 million in the first quarter. That's an increase of 2% on a sequential basis, and it's up 34% on a year-over-year basis. Interest expense was 14.1 million in the first quarter compared to 14.7 million in the December quarter. And first quarter, of course, did include interest expense related to borrowings associated with the stock bay back that we done December. Looking forward we expect that interest expense will continue in the 14 to $14.5 million level over the next couple of quarters. Income tax expense, we had a 36.3% effective rate in the first quarter. That's down from the 37% rate that we had in December when we had a couple of year-end adjustments there. As we look forward we expect our tax rate should continue to be around the 36% level.

We did generate diluted earnings per share of $0.68 in the first quarter, that was above our guidance range. It's also an earnings record for Universal and represents an increase of 13% sequentially from the December quarter and it's 51% better than the prior year period results. It is worth noting that the first quarter EPS did benefit by a total of about $0.03 from foreign currency gains and other income. Other income is largely related to fleet unit sales.

Net capital expenditures were $37 million in the first quarter. That's up from 34 million in the December quarter. A year ago Capex was $32 million. Capital expenditures during the quarter included $24 million in growth capex, about $6.5 million in maintenance overhauls, $8 million in other miscellaneous expenditures which included costs related to our recent fabrication facility expansion. As expected growth capital spending was weighted a bit more towards domestic market, about two-thirds was domestic and one-third international, and growth capital pending also included about $2 million for the repackaging of existing units.

Debt to capitalization declined from 52.5% at the end of December to 51.1% on March 31, looking at it another way, debt to trailing 12-months EBITDA declined from 3.5 times at December 31 to 3.2 times at the end of March. We repaid about $24 million in debt during the quarter from free cash flow generation. Total debt at the end of the quarter including capital lease obligations was $898 million. That's the March 31 balance. That's down from 923 million at December 31st. Working capital investment, which for us excludes cash and debt, was $98million at March 31. That was down a bit from the $120 million mark at December 31. Cash position at the end of the quarter was $45 million.

Our revolver, which does extend into 2010, had $60 million drawn against it on March 31st. That compares to balance of $80 million at the end of December. In terms of credit availability we had approximately $117 million in unutilized credit availability as of March 31. We expect to fail our 10-Q for the three months ended March 31, 2006 either later today or tomorrow. Let me now summarize our guidance for the second quarter ending June 30th, 2006, and provide an update for the full year guidance for 2006. First of all, for the second quarter, revenue is expected to be between $215 million and $225 million for the quarter. Specifically, domestic contract compression revenue is expected to increase to about $100 million in the second quarter. That would give the domestic contract compression business a very healthy 25% year-over-year growth rate.

International contract compression revenue is expected to increase to approximately $34 million in the second quarter. That would give the international contract compression business a solid 12% year-over-year growth rate. Now, again, the gross margins are expected to be 65 to 66% domestically and in the low to mid 70% range on the international contract compression segment. Fabrication revenue is expected to be between 38 million and $42 million in the second quarter with a gross margin in the 10 to 12% range. As discussed earlier by Steve, fab revenues are expected to be a bit down in the second quarter as we will be building aggressively for the contract compression fleet and then we expect fabrication revenues to increase nicely during the second half of 2006. Aftermarket service revenue is expected to be in the $46 million to 50 million range with a gross margin in the low 20% area.

And finally that brings us to diluted earnings per share which is expected to be $0.65 to $0.69 in the second quarter. This EPS guidance would represent an increase of 16 to 23% compared to the year ago period. Let's now move on to the updated guidance for the full calendar year 2006. Driven by our strong first quarter calendar levels and improved business outlook, we are raising our full year financial guidance. We now expect total revenues to be $950 million to $970 million, and that's an increase of 18 to 20% over calendar 2005 revenue. The higher expected revenues are due to both the contract compression price increases as well as higher fabrication and installation activities.

With our overall strong first quarter performance we're also increasing guidance for earnings per diluted share for 2006 to the new range of 2.80 to $2.95 per share. This new guidance represents a 30 to 37% increase over adjusted earnings per share of $2.15 that we had in calendar 2005. We continue to expect net capital expenditures after sales of PP&E of approximately 210 million to $240 million in 2006. That guidance is unchanged. The new growth capital for the year is expected to be 150 to $180 million, and that should be split two-thirds domestic, about one-third international. We expect to generate free cash flow in 2006 after our capex requirements.

Like to now turn the call back to Steve for some closing comments.

Thanks, Michael. Well, it's another great quarter for Universal. Our businesses are performing well. We continue to see strong demand from our customers. We're forecasting nice growth rates moving forward. The first quarter saw incrementally better performance than we had forecast and we expect continued strong performance during the rest of the year. As a result we increased our guidance.

We certainly continue to see many challenges in the business, namely cost inflation, service labor shortages, and continued long lead times on components. Still, many of these factors may work to Universal's advantage as a market leader and help prolong the current positive market cycle. I'd like to again take this opportunity to thank the thousands of Universal employees who have worked very hard during the challenging times, and allowed us to grow our business, continue to provide superb service to our customers and enhance gas production and lastly to do so with one of the best safety records in the industry. We all appreciate these outstanding efforts. That concludes our prepared remarks, operator, so we'll now open the call for questions.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from Geoff Kieburtz with Citigroup.

Sounds like you and your customers are facing significant capacity constraints and you are starting to get enhanced pricing leverage S. Is that a fair take away from your comments?

Yeah, Geoff, and I'd say it's a continuation of the leverage that started a couple years ago but as deliveries get longer we certainly have more opportunities there.

The way you characterized your price increase was interesting. Can I interpret that it is a 5 to 6% price increase?

No. It's a 5 to 6% average on domestic contract compression revenues. On some sizes, it was on a smaller portion of the fleet, so it's really a 15 to 18% kind of price increase on the units that we accelerated.

Okay. And that does seem to be a step-up from the price increase levels that you've put through before, correct?

It's a little bit of a step-up. We've stepped up each time we've gone to the market, we've been a little bit more aggressive, so we moved up just a little bit again.

And how much of that would you expect to drop down into , margin increase?

Well, I don't know that I have a definitive answer. I think what we're going to see is just a slight pickup in gross margins, but with the revenues being higher we'll see a higher gross dollar profit. So if you keep your margins somewhere around the 65% range but on a higher revenue base that will tell you what we get to.

And the -- with -- additionally you mentioned the extending sort of term of these contracts. How do you -- do you have protection there in terms of these margins, and are you committing to customers well into next year, are the contracts allowing you to pass through any unanticipated cost increases?

We're not taking any really long term contracts other than our alliances. Most of our contracts are six to 12-month initial period, then they're month to month after that, including these contracts that we just increased.

So what you were commenting on is simply commitments being made by customers well out into next year?

That's exactly right, because we have to get in the delivery queue for equipment.

I haven't done the math yet. Maybe you can dispense with this quickly. But the revenue growth that -- revised revenue guidance but no change in capex, is that entirely a function of the price increases?

Basically, yes.

All right. And you also mentioned some scarce components. Can you just describe those a little bit, kind of what you're experiencing in regards to not only cost from vendors but delivery times?

Well, the two major items that became scarce somewhere around last fall and did so relatively quickly are engines and compressors, and we're still seeing on big horsepower equipment lead times of around a year to get engines and compressors for the fabrication group.

Okay.

That's both for our own net and for third party sales. With you being one of the larger consumers of that equipment, we have pretty fair allocation positions, so we're getting a steady flow now at this point.

Great. Are you seeing any evidence that your customers are being forced to go to a service provider simply because they can't get compressor assets even if they wanted to run them themselves?

In some cases, that's correct, and we're also able to allocate the items we have coming in between fabrication in the fleet and in some cases we just reserve them for the fleet.

Got you. Thanks very much.

Sure.

Thank you. Our next question comes from Mike urban with Deutsche Bank.

thanks. Good morning.

Good morning.

you think you addressed this in a couple different ways in Geoff's questions, but wanted to take a more comprehensive view of the praising situation. Basically, we historically haven't thought of the compression business as a model that has a tremendous amount of pricing leverage because the customers at the end of the day could always get new equipment, so -- or buy equipment, rather than rent. Is the pricing era function of demand that's out there or new equipment and your on the part fabrication capacity or a little bit of both?

It's a little bit of both plus the cost increases that we see in the competitive nature of the labor market and our desires to keep our people in Universal. So we are trying to keep up with cost increases, but we also have the leverage of a tight mark and a tight commodity.

Mike, if you just look at margins over the course of the past couple of years, they haven't moved all that much. They've moved up a little bit. We just did a 65% quarter, but, you know, they have been, you know, within a point or two of that, if you look back historically on a quarter by quarter basis. So there's not a lot of margin expansion.

right. Well, you guys were also a bit -- doing a pretty good job, so that helps. Kind of following on, if there is a scarcity out there, and maybe this sun realistic, are you able to in this market, continue to move to -- clients to the outsourcer or the rental model rather than if did you see demand continue to pick up, just continue to manufacture and fabricate for your own fleet? In other words, not really provide the -- as much as the option to buy, or is that unrealistic in a weaker market because it's a relatively -- entry business? In other words, they alley get it somewhere?

Well, it's a low barrier entrance business but the low barriers have a difficulty getting in the queue. So some of our customers tend to bay large blocks of horsepower from us buy from us and contract more because of the allocation because of -- within our company of assets to fleet use rather than to third-party sales. And since they're not available elsewhere in a large extent they'll continue to come here, and we'll put contract compression units out. So you're going down the right path. That really is appropriate for large horsepower units, where the lead times are long and the delivery is tight. Once you get into mid-range, there are more alternatives, not nearly so tight of a market.

That's all for me. Thank you.

Our next question comes from Brad Handler of Wachovia Securities.

Thanks, good morning. If we could talk about your fabrication and maybe implied capacity. So if I heard you, $263 minl backlog and fab, three or four quarters worth of business. Some I reading it right that maybe at current pricing levels you kind of have 75 million or so of revenue potential in fab right now?

You mean per quarter?

Yeah.

Yeah, maybe a little high, but 65 to 70 million, somewhere in there.

And I guess that obviously depends on allocation of space towards fab.

It does, and like we said, the next quarter is going to be a little weaker on fab, and that goes back to last fall when delivery zoomed out on components, or delivery times for fabricating units went out, so we have kind of a hole in the schedule.

Can you give us a feel for what kind of pricing increases you're putting in on the fab side?

On the fab side, we are -- on just plain out bid project, we continue to bid at higher profit margins than we have in the past, particularly where it's large horsepower and there's allocation issues. On the product we're able to get a little bit higher margins. We do have some customers that have an alliance with us and we have a negotiated rate that we charge them for fabrication. So you put all that together and that gets you out to the 12% that we gave you.

Okay. Since mentioned it, can you give us a feel for in your backlog how much of that is alliance business versus bid-out work? Do you guys know that?

Not offhand, no.

Okay. You mentioned, I think, if I heard you right, you mentioned current spot utilization in the of U.S. Just under 91%.

Correct.

Did I hear that right? And is there some transition underway that might have taken that number down just a little bit?

Two things underway there. One is there is some transition with the April first price increase, we targeted at taper first increase some smaller horsepower compression on which our profitability wasn't in the quarter we preferred, so when I quoted those price increases a little while ago, they were higher numbers, so we had to raise some prices significantly, and because there is capacity available in a small horsepower we lost some of those customers who went to other equipment. Most of that is being redeployed, and we're going through that process right now of shifting it and getting it ready for it its next project M. of it is not being redeployed but with the amount of the increase we moved ahead significantly in the amount of revenue we're generating with a little bit less horsepower working.

Okay. You mentioned there was more than one thing to think about there?

I really combined them into one statement. Sorry. I did mention there was more than one.

No, that's --

It was the size of the increase and the smaller horsepower.

Okay. Trying to think if I had something else. I guess I'm blanking on it. Thank you. That's it for me.

Thank you. Our next question comes from Karen David-Green with Oppenheimer.

Congratulations on an outstanding quarter.

Thank you.

Just wondering if you can comment a little bit more with regards to the 200,000 horsepower reactivation program, what the timing is specifically per quarter of getting some of that new equipment into the market and what the average horsepower size on a lot of that compression is.

Well, hey, Karen, with regard to the average horsepower size, it is almost all 1,000 and over horsepower that we're going to be putting out into the market. A general breakdown with regard to the 200,000 we said about a third of that or so is going to be going to the international market, and that is really going to be right at the end of the year, a little bit in the third quarter, mostly in the fourth quarter. The rest of there domestic part of it will be generally split out fairly evenly between second, third, and fourth quarter.

Okay. Do you know approximately how much of that horsepower is currently contracted?

An awful large chunk of it. Probably something 80% plus.

But on the international as well as the domestic side?

On the international side, all of it is, they're designated for projects.

But in the 80% that includes both international and domestic. You blend them to get 80%.

And you mentioned bidding activity has picked up internationally. Is that on the just -- what side of the business is that picked up on, and do you see any increases in gas processing facilities, anything like that, that would be kind of a new business for you guys?

The contract compression projects are going through their cycle right now as we're bidding more projects, and they tend to come in waves in different markets but Latin America is active again with more projects coming out. We've had some conversations about processing but nothing that's particularly firm or even close to being firm right now. They're mostly just conversations. We've -- continue to see steady activity coming out of the Asian market. Our acquisition in Africa is beginning to bring some aftermarket business in, and giving us more exposure to opportunities in that part of the world, so we're sorting through those as we speak. So putting all that together, there's a good deal of activity in the international arena.

Thanks, gentlemen.

Thank you. Our next question comes from Martin Malloy with Southcoast Capital.

Good morning. Congratulations on a good quarter.

Thanks, Marty.

Sorry if I missed this but in terms of the domestic contract compression price increase in April did you give a dollar amount per quarter that you expect revenues to go up as a result?

We said 6 to 8% of domestic contract compression revenues.

5 to 6%.

we said 5 to 6%.

and also provide the guidance figure of about $100 million for second quarter revenues.

Okay.

So that would back in to something approaching $5 to 6 million.

Okay. And geographically in North America are there areas where the supply-demand relationship is tighter for compression units than others?

Not really because the same unit is applicable in all the areas, and it's more of a unit availability. So I wouldn't say it's tighter in any particular market. The equipment in that horsepower category is going into shale gas and some coal bed methane but it's all various plays around the country.

Thank you.

Our next question comes from Geoff Kieburtz.

Yes, I'm a repeat customer. The 200,000 horsepower, you said what percentage is going to the U.S.?

About two-thirds is going to the U.S.

And you said even over the second, third, and fourth quarter?

Yes.

And the one-third going international is some starts in the fourth quarter, then most in the fourth quarter?

Yes.

And the other question was who are your key suppliers of engines and compressors?

Well, the key suppliers, the two we use the most of are Caterpillar engines and Aerial compressors, and their alternatives, chiefly Waukesha Engines, Dresser Engines, but they're all in the similar position of longer lead times.

So alternative suppliers are not really a relief on this.

Not much. Occasional they have more availability but not a huge amount. They've been pretty well booked up.

And has that had any material effect on your capital cost per horsepower on new equipment?

Not dramatically. They've been coming out with price increases in the low single digits a couple times a year on those components. We've been able to continue to engineer efficiency in the fabrication process to kind of keep our cost for equipment pretty close.

Okay. Great. Thank you.

Yes.

Thank you. Our next question comes from Brad Handler.

I remembered the other question, I guess. If you could speak a little bit about fleet sales going forward, I know you've mentioned this as a regular part of the business, but maybe -- you mentioned the price increase on the smaller side. Is there perhaps some sort of weaning out on the smaller end that you might expect now that you have gotten some units back? Just some sort of sense on what we could expect would be helpful.

Brad, with regard to the fleet sales that we talked about that's in our other income, most of that really happened in Canada, where that's more a normal part of how that market works. Outsourcing is not as big a part of the picture there. There really have been very little in the way of fleet sales out of the domestic fleet.

Okay. Michael, if you could help me understand that, how is that accounted for? Was it contract compression at one point up in Canada?

Yeah. Contract compression units that were sold out of the fleet and customers looking to buy those.

Were they -- I'm sorry, were they with the same customer in Canada, so there's an initial contract compression term with the customer, then they're turning around and buying them anyway?

Sometimes. In Canada it's not infrequent that we give purchase options on contract compression.

And you're still mostly selling out right in Canada, anyway.

Yes, the Canadian market is mostly a sale market, still.

So that just falls in the fabrication business, right?

The outright sales do.

so there's some portion of the fleet which continues to regulate turnover from contract compression into sales, and that's -- you're booking that in other income.

That's right. And Michael is correct, most of that is in Canada. There's always a little bit in the U.S. It's spotty. Comes and goes. But any major reduction in the fleet in the U.S. was done two or three years ago when we went through the fleet and upgraded it all.

Okay. If I can just belabor the point a little bit, and I sort of apologize, so if horsepower was kind of flat in the U.S. quarter on quarter, sounds like you're attributing part of that to some difficulties, if you will, or delays in getting access to parts to turn out new compression units.

that's right. We hit a window back in the fall, Brad, where deliveries zoomed out, almost doubled in a matter of a few weeks. What we had on order for the fabrication business that was longer lead time was coming as scheduled in the first quarter, came in, we built that, we had a little hole in the schedule there because we couldn't get enough more engines and compressors to add much to the fleet in the quarter. So now it's shifting back the other direction the coming quarter.

Okay. All right. That's helpful. Thanks.

Thank you. Our final question comes from Robert Christensen with Buckingham Research.

Thank you. Last but not least. The mix of your U.S. compression in terms of big units versus smaller units, how would you characterize big versus small? I think 1,000 horsepower is the benchmark?

It is. And there's no real firm industry standard for big horsepower midrange and small. Typically we thick of big horsepower being 1,000 and up and small being maybe 200 or 300 and down, everything else is mid range. But what we're building really is large horsepower.

And in your, what, 2 million horsepower how much is big and how much is small? Is that shifted over time? Is it more --

oh, yes, it's definitely shifted. All the capital we've put in has been big horsepower. Looking at the numbers now, but I think it the's about 60% large horsepower.

40% of the fleet is a thousand and over. You had it backwards. In the U.S.

And the bigger units right now have the stronger pricing on them? Is that --

Yes.

Did I glean that?

You did.

One final, if you will. You say it's going throughout the country but the country has two or three very large shale plays going on. Is there a -- of your 200,000 horsepower, 200 units, 1,000 each, how many of those are going to the Barnett Shale area of the Fort Worth basin?

Maybe I can answer this way. The Barnett Shale is probably the single biggest location that we're supplying horsepower to on a regular basis, and actually how much of that is going to the Barnett Shale out of the new horsepower is somewhat irrelevant, because these are continuing to turn and churn. There's units coming out of the Barnett Shale and other previously used assets going to the Barnett Shale. I don't have a figure of how much of 200,000 horsepower is going there but a good chunk of it.

When you say churn does that mean smaller units coming out, substituting larger horsepower as the play evolves, matures? As wells get smaller in their daily output potential? Is it related to that?

Churn is a term that means that the compressor no longer fits the application, so we right-size the compressor for them and take the other one back and reapply to the another customer. It can either be upsizing or down-sewing. It's just turning the unit over to another customer.

But Is it -- more of the big is going in and the smaller coming out that the Barnett Shale, using the most visible play in the United States, is highly contributive to your current results and future results at the moment?

The last conclusion is right. I can't agree, though, that there's smaller units coming out and larger units going in. What we look at the shift in the fleet, it's the nationwide shift, and it can be units coming from Pennsylvania that end up in the Barnett Shale and vice versa but the trend is there's equipment going on. Same thing with tight sands.

Thank you. Very good. Thank you very much, Steve.

Thank you. I show no further questions. I'd like to turn the call back over to Mr. Steve Snider for any closing remarks.

Thank you very much for your attention and your good questions. It was a great quarter, and we'll look forward to reporting another one next quarter, we hope. Thanks. Bye-bye.

Thank you, this concludes today's teleconference. Thank you for your participation and have a great day. You may disconnect at this time. Thank you.