Archrock Inc (AROC) 2009 Q1 法說會逐字稿

Good morning. Welcome to the Exterran Holdings, Inc. and Exterran Partners LP first quarter 2009earnings conference call. At this time I would like to inform you that this conference is being recorded and all participants are in a listen only mode. We will open the teleconference for questions after the presentation. Earlier today Exterran Holdings and Exterran Partners released their financial results for the first quarter ending March 31, 2009. If you have not received a copy you can find the information on the Company's website at Exterran.com.

During this call, the companies will discuss some non-GAAP measures in reviewing their performance such as EBITDA as adjusted, EBITDA as further adjusted, gross margin, gross margin as adjusted, and distributable cash flow. You will find definitions and a reconciliation of these measures to GAAP measures on the summary pages of the earnings release at the Company's website at Exterran.com.

During today's call Exterran Holdings may be referred to as Exterran or EXH and Exterran Partners as either Exterran Partners or EXLP. Because EXLP's financial results and position are consolidated into Exterran the discussion of Exterran will include Exterran's Partners unless otherwise noted.

I want to remind listeners that the news release issued this morning by Exterran Holdings and Exterran Partners, the Company's prepared remarks on this conference call and the related question and answer session will be including forward-looking forward-looking statements. These forward-looking statements include projections and expectations of the Company's performance and represent the Company's current beliefs. Various factors could cause results to differ materially from those projected in the forward-looking statements. Information concerning the risk factors, challenges and uncertainties that could cause actual results to differ materially from those in the forward-looking statements can be found in the Company's press release as well as in the Exterran Holdings annual report on Form 10-K for the year ending December 31, 2008, Exterran Partners' annual report on Form 10-K for the year ending December 31, 2008, and those set forth from time to time in Exterran Holdings and Exterran Partners filing with the Securities and Exchange Commission which are currently available on Exterran.com. Except as required by law, the companies expressly disclaim any intention or obligation to revise or update any forward-looking statements.

Your host for this morning's call is Steve Snider, Chief Executive Officer of Exterran Holdings and also Chief Executive Officer and Chairman of Exterran Partners. I would now like to turn the call over to Mr. Steve Snider.

Good morning, everyone. Thank you, operator. My welcome to the first quarter earnings call for Exterran. Joining me today in the room here are Ernie Danner, our Chief Operating Officer, Michael Anderson, our CFO, and David Miller who is CFO of our LP. With my pending retirement we continue the management transition. So by far the bulk of this call today will be handled by Ernie and Michael as they make their comments and handle most of the questions.

A little background on Ernie who some of you know and some of you don't. Ernie joined us in 1998 at Universal Compression as our Chief Financial Officer. He has a strong finance background and series of operating and finance roles in the private equity world. And he had progressive operating roles with universal. Took over as President of Latin America, moved on to President of International, and then became Chief Operating Officer. And then he stepped away from the business for a year following the merger. And last fall I was fortunate to convince Ernie to return as the Chief Operating Officer, and at the same time we announced the transition plan for Ernie to become CEO when I retire at the end of June. I believe there is really no one better to assume the leadership of this Company than Ernie, especially in the difficult and rapidly changing economy that we all find ourselves in today.

So with that, I will turn it over to Ernie for his comments.

Thanks, Steve. On behalf of the board, employees and my fellow stockholders I want to give my sincere thanks to Steve for his 20 plus years of stewardship and leadership to Exterran and its predecessors. Although Steve will be greatly missed, I am hopeful we can continue to draw on his wealth of experience even after his departure. On a personal note, I will miss his guidance and humor at the office each and every day, but know our friendship will continue for many years.

So as I get started on my first call, I would like to spend just a minute discussing my philosophy as CEO. First of all, I view my primary role as leading our operating teams around the world. To align our structure with that focus we will not fill my current position of Chief Operating Officer. That is a role I will continue to execute.

Second, I am completely aligned with Steve on Exterran's key long term value creation opportunity. Our strategy is to maximize the cash flow from our North America operations and to redeploy this cash in higher growth international markets. I am convinced that one of the keys to our long-term success is developing and growing the right people to help us manage our business, position us for growth, and importantly to evaluate risk. One of my key deliverables as CEO will be to ensure we develop our talent.

And finally, I intend to be extremely focused on the financial performance of the Company. And ensuring we generate the right returns on our incremental investments. This will mean a sharp focus on capital management and risk evaluation. As we announced in our press release earlier today, we are diligently working to ensure that our fixed and variable costs are in line with our business activity levels. We are committed to reducing our operating and G&A costs including personnel reductions, across all facets of our business.

Now I would like to give you a brief overview of four key issues that are affecting our business. First, as probably everyone on this call is unfortunately aware, North America is currently a tough market for natural gas, and our North America contract ops business faces considerable near term challenges. As an opener I would like to point out that today's market appears to be a more severe decline than the downturn of 2001 and 2002. Given the oversupply of and falling demand for natural gas and the speed and depth in which this downturn has occurred.

This dynamic is creating a difficult situation for us and that our customers have quickly shifted their focus from maximizing production to lowering their costs. And one way they lower their costs is to undertake three compression related activities. First, right sizing of well head and fuel compression. Second, simply shutting in uneconomic wells and returning their compressors. And third, maximizing the utilization of their owned compression equipment including the new equipment being delivered now that was ordered last year. Over the past several years our customers have purchased a lot of compression equipment to aid in the production from new plays in new wells. Due to delays or cancellations of gas projects, this purchasing pattern has led to an oversupply of compression assets in the market. The resulting negative impact on our operations from these three factors has been worse than expected. And we attribute approximately three-fourths of our horsepower loss in the first quarter to these three unsustainable customer activities.

In the first quarter, we lost roughly 4% of our working horsepower in North America. That equates to about 150,000 horsepower. These returns were widespread across essentially all of our basins and horsepower classes. Unit returns were escalating in the quarter. That is, they were higher in March than they were in January. And we expect to continue to lose working horsepower due to these reasons for the balance of 2009.

Turning to what I consider one of the key successes of the Company, one of my early concerns was our level of customer service, particularly North America where we had acute problems in the months immediately following the merger. And while we can never be totally satisfied with our level of customer service, I am pleased to report that our North America operating team and dedicated field employees have overcome these post merger issues. And we are now delivering high quality service to our customers and once again are considered a valued supplier.

As a result of this turnaround in service, other than in normal kind of isolated occurrences, we are not losing business due to service issues. In fact, we believe and have been told by our customers that our improved service has been a major reason for many of our fleet unit starts. And that this increased service performance, coupled with our available idle assets, will enable us to both increase our market share in this tough environment and to increase our utilization once the current market dynamics are worked through. We also believe we have a competitive advantage stemming from our scale and our density of operations which we will use to drive mark share gains, as well. And as to pricing, we are appropriate, we were being aggressive with price to put idle units to work. And, of course, we are keenly focused on the cost levels of our field operations. We are committed to continue to right-size our operations, as necessary, throughout periods of contraction without sacrificing service quality.

Now I will turn to the second issue a forward look at our fabrication business. We have a tough near term outlook due to current market conditions. We expect to work off a substantial portion of our $ billion backlog in the next few quarters. Consequently, toward the end of 2009 and into 2010, our revenue outlook is uncertain. We are experiencing low activity level on bids for new compression packages, particularly in North America. In international projects markets, projects are being delayed but activity level on potential new large projects continues at a reasonable pace, albeit slower and lower than previous years.

We recently announced the closing of two major compressor fabrication facilities in North America aimed directly at reducing compressor fabrication capacity, and and we will continue to monitor this situation and make additional adjustments in our fabrication operations as necessary. In terms of additional backlog in the quarter, we were awarded meaningful contracts for compressor packages in Latin America, and the backlog declined only modestly from year end levels as new orders helped to offset strong revenues recognized in the first quarter.

The third issue I will address is Venezuela. On Tuesday, the Venezuela National Assembly gave preliminary approval for legislation that would allow the Venezuelan government and its state owned oil company, Pedavesa, to immediately assume control over or expropriate the operations and assets of certain oil sector service providers, including us, without taking any further legal measures. We currently are unable to predict the effect this law, if it were implemented, we are unable to predict what effect it would have on us. While the proposed law provides that companies whose assets are expropriated may be compensated in cash or securities, again, due to the timing of this we are unable to predict what, if any, compensation we would receive in exchange for these assets. Because of the uncertainty and timing, we have not taken any impairment on our wholly owned operations in the March quarter.

However, we did recently announce charges related to our JVs. We are not the managing partner of our JVs and do not control its operations. In February of 2009, the Venezuelan National Guard occupied one of the JV's facility and transitioned its operation to Pedavesa. The other two JVs each sent a notice of default in April of 2009 to their sole customer, the Venezuela state-owned oil company Pedavesa, due to its lack of payments for services rendered. As a result of these default notices, we have recognized a $97 million impairment which places nominal value on the JVs at the end of the quarter.

Turning to our significant wholly owned operations, Venezuela represented about 5% of our revenues in 2008. And about $500 million in assets before the reserve that we took in the first quarter. This includes about $107 million owed in unpaid receivables related to our Venezuelan operations. Venezuela is in an acute state of flux and we are continually monitoring our situation in the region and I'm sure we will have more to report in the next quarter.

The fourth and final issue is our continued emphasis on international expansion. Our international activity is a key part of our growth and diversification strategy. We are generally pleased with the continued interest in the international markets for our contract operations model, and our backlog for international contract ops grew during the quarter. Particularly active international markets include Latin America. We are in the middle of executing many projects and believe our total solutions approach for compression and treatment plants continues to be a competitive advantage.

In the eastern hemisphere we believe there is potential for significant growth in Asia/Pacific and in the former Soviet Union states, as well as the Middle East. Again, we are in the execution phase for large contract ops and fabrication projects in several countries in the region. Our customers for these projects are primarily major international oil companies. However, as evidenced in Venezuela, the pursuit of international opportunities is not without risk. Some of our more challenging markets other than Venezuela include Argentina where activity remains very stagnant and we do not expect a turnaround any time soon. And in Nigeria where risk management is key as we execute existing projects and should we move forward with any new projects.

So summarizing our opening comments, I believe our long-term prospects continue to be exciting and we intend to continue our commitment to service quality and developing our people in order to capture market opportunities in each of our operating regions. Capital has become very dear in all of our markets and it presents both a challenge and an opportunity for us. For future capital projects, we intend to be very selective in terms of risk management and return profiles. But we recognize that these projects can add significant value to our Company so we will continue to pursue them.

Current market conditions pose considerable challenges to our business and we are committed to right sizing our costs to meet these lower levels of activities. And finally we believe we have the right people in place to address these difficult market conditions head on and expect to emerge from this downturn in a better competitive position than we entered it.

With that, I will turn the call to Michael for the financial discussion.

Thanks a lot, Ernie, and good morning, everyone. As I open my comments, I also wanted to take a minute here to thank Steve for his great contributions to our industry, our Company, and most importantly to all the individuals here at Exterran, including myself, whom he has helped develop through the years. We're all going to miss Steve and his personal involvement in our lives and in our business.

I'm sure that by now you've all had a chance to review our press release that we issued this morning. So I'd like to start off with a review of the first quarter financial performance for both Exterran and Exterran Partners. I'll also discuss our earnings outlook for the second quarter. Most of the comparisons this quarter will be against the fourth quarter as well as the guidance that we provided in our last earnings call.

In general, our first quarter financial performance was in line with expectations. If we first look at North America contract operations, revenue was $194 million in the first quarter. That was in line with expectations. Down sequentially from the fourth quarter. Gross margin in North American contract operations segment decreased to $111 million. That's about 57% of revenues in the first quarter and that compares to gross margin of $116 million or 58% in the fourth quarter. Cause was due to decreased activity levels and also some increased make ready expenses for our idle fleet units.

At March 31, we had total North America contract compression fleet of 4.58 million-horsepower. The fleet utilization in North America was 72%. That's down from the 76% at the end of December. And during the quarter operating horsepower in North America declined by 147,000. That is a steeper decline than expected, largely as a result of the customer optimization and market conditions that Ernie discussed earlier.

Looking ahead at the second quarter of 2009, we expect North America contract operations revenues of $180 million to $182 million in margins, slightly below first quarter levels. This second quarter revenue level would equate to a horsepower decline similar in size to what we saw during the first quarter. Our international contract operations revenue was $123 million in the first quarter. That's just a little bit below our guidance range of $124 million to $126 million and that was due to some unexpected project stops on projects in Venezuela. International contract operations gross margin was 63% in the first quarter. Unchanged from fourth quarter levels and slightly above our low 60s guidance range. The international fleet utilization declined to 87% in March 31. That compares to 91% of December 31 on a base of about a million and a half horsepower.

Operating horsepower internationally decreased by about 61,000 in the first quarter. That's a result of some expected job losses that we had discussed in Brazil and Mexico but also the unplanned horsepower reductions in Venezuela. On an overall basis Exterran's worldwide fleet totaled approximately 6.1 million-horsepower March 31 and worldwide utilization was 76%. That compares to the 79% that we had at the end of 2008.

With a couple of project wins during the quarter in Latin America, our international contract operations backlog is now over $140 million in annualized revenues for projects that are expected to start during the course of 2009 and early 2010. A year ago we reported this backlog at over -- I'm sorry a quarter ago, just a quarter ago we reported this backlog at $130 million of annualized revenues. Obviously the big developments in the international contract operations segment involved Venezuela. While we did not impair any existing operating assets in Venezuela during the first quarter, we will of course be closely monitoring developments, legal pronouncements and taking appropriate business action and accounting treatment as we move forward.

As I mentioned our first quarter international contract ops revenues were $123 million. Of this, about $32 million of the revenues were in Venezuela and about $91 million were elsewhere. As we look forward, should Venezuelan operations continue during the second quarter, we would expect normal revenue declines in that country due to ongoing contract terminations equating to about a $5 million sequential decrease. We would expect that the $91 million of non Venezuelan revenues will grow sequentially by about a similar $5 million amount during the second quarter with the commencement of new work from our existing backlog.

Margins in the segment will likely decline sequentially during the quarter and they will certainly be under pressure due to Venezuelan difficulties, as well as some cost increases in Argentina, some of which are related to normal seasonal fluctuations. Exterran contract operations in Venezuela today consist of about 325,000-horsepower, and during the first quarter those Venezuelan operations for us generated gross margin dollars of about $20 million and incurred about $5 million worth of SG&A.

If you look at fabrication operations we generated revenue of $343 million. That's somewhat above our guidance range of $320 million to $340 million. Gross margin was about 16%. And that was in line with our guidance in the mid-teens. Fabrication backlog declined by about 7% sequentially but still remained at a relatively high level which was $1.05 billion at March 31. That compares to $1.13 billion that we had December 31. Our [Balelli] operations, which represented about 30% of our fabrication sales activity in 2008 had another strong quarter in terms of revenues, profitability and new bookings. Balelli represents about $524 million of our fabrication backlog and that consists primarily of relatively longer term projects.

As we look at the second quarter we expect fabrication revenues of $290 million to $310 million with margins in the mid-teens. Let's look at aftermarket services where first quarter revenues were $78 million. That is just a little bit below our guidance of $80 million to $85 million. That's a result of customers deferring maintenance expenses in both North America and international markets. Gross margin percentage was 21% and that was in line with our guidance of margins in the low 20s. And in the second quarter we do expect to generate aftermarket revenues again of about $80 million to $85 million, and margins, again, in the low 20s.

The first quarter results included pre-tax charges that totaled $104 million. That includes $97 million in non-cash charges related to the investments in nonconsolidated affiliates of Venezuela, and then also a $7 million charge for the manufacturing facility consolidation that we had released on a press release earlier in the quarter. Excluding the impairment items, we generated EBITDA of $183 million in the quarter and earnings per diluted share of $0.53. This calculation of earnings per share does include a tax rate of 44%. That's unusually high due to some international tax adjustments. As we do move forward we expect our normal effective tax rate to be in the mid- to high 30s.

Net capital expenditures for the first quarter were $120 million. Total CapEx included about $72 million of growth capital. For the year we continue to expect that capital expenditures will be in the $400 million to $450 million range. And maintenance capital in the $120 million to $130 million level. We have reduced our growth capital spending in North America but we've increased the international capital expenditures by a similar amount as a result of the new contract operations jobs that we won in the quarter. With these revisions we expect that about 80% of our 2009 growth capital will be invested in international markets. And as highlighted in our last call, about $50 million of the growth capital that we spend during 2009 is expected to be reduced by upfront payments on new contract operations jobs. What that does is it really reduces our cash out the door number for expected capital expenditures to be more in the $350 million to $400 million level.

If we look at the balance sheet side of things, total consolidated debt was $2.6 billion, debt to capitalization was 56% at the end of March. At the end of March, Exterran Holdings' revolving credit facility had $310 million drawn against it. Available debt capacity, after taking into account letters of credit, was $370 million, and that includes capacity under our ABS facility and also the bit of capacity we have under the Exterran Partners revolving facility. We continue to believe our financial position is still good. We currently maintain debt levels and financial ratios within our credit facility limitations. In fact, Exterran's total debt to EBITDA ratio at March 31, as it's defined in our credit agreement, was 3.2 times and that compares to a covenant maximum of five times. But even if we eliminated all of the benefit from the Venezuelan contract operations and aftermarket services over the past 12 months, this 3.2 times debt to EBITDA ratio at March 31 would increase by only 0.4 times which would get us to a pro forma number of about 3.6 times. I would also note that the loss of the JV income is really not much of an impact on the debt ratios as we actually only get to get EBITDA credit for that for cash distributions not income. And in 2008 we only had $3.5 million of cash distributions from those joint ventures.

We have no significant debt maturities until October 2011 at EXLP and July 2012 at Exterran. Our debt, with the impact of interest rate swaps, is 63% fixed, and our average all in interest rate today is around 4%.

Let's look for a minute now at Exterran Partners. EXLP, as you know, owns a compressor fleet of just over- 1 million horsepower, 1,041,000-horsepower. That's about 23% of the combined Exterran Holdings and Partners US contract ops business. Last week EXLP did announce its distribution of $0.4625 per quarter, or $1.85 on an annualized basis for the distribution. This distribution represents an 8.8% increase over the annualized rate from a year ago. For the quarter, EXLP generated EBITDA of $22.8 million and distributable cash flow of $13.2 million. EBITDA was benefited by about $2.7 million from the cost cap arrangement with Exterran. The distributable cash flow was sufficient to cover first quarter distributions by 1.4 times and even without the benefit of the cost caps EXLP covered the distribution by 1.14 times in the first quarter.

In the first quarter Exterran Partners fleet average operating horsepower was 900,000 and that compares to 908,000 in the fourth quarter, so a slight decline there. At March 31 EXLP's fleet had a utilization rate of 85%.

Last bit here is that we do expect to file the Exterran and Exterran Partners 10-Qs later today or tomorrow.

So at this point, Operator, we would like to take this time to open up the call for questions.

Thank you, gentlemen. (Operator Instructions) From Wachovia we are going to Tom Coran. Mr. Coran, you line is open, sir, please go ahead.

Our next question comes from Gary Farber with C.L. King.

Good morning. I want to ask a couple questions. One, can you talk about what you are seeing from your competitors in the US as far as pricing and things like that. Then can you talk about the SG&A outlined, how one should expect that to pace throughout the year.

In terms of the competitor pricing in the US, pricing on our base business has been holding very well. We do see competition on where if we have an idle unit and one of our competitors has the appropriately matched idle unit we see small price pressure there. But by and large spread across the entire fleet the pricing has been very stable throughout this market. Except on incremental things it seems fine.

On the SG&A front, Gary, I think we did a pretty good job of managing costs fourth quarter to first quarter bringing those down sequentially by several million dollars. As we talked about on this call, and as we highlighted in our press release, we don't think that's enough with regard to cost reductions. We will be working real hard about what we are going to do in terms of both our variable operating costs and our fixed overhead costs. We don't have an answer for you at this point but we are going to be looking at it real hard and managing our cost as best we can as we move forward in a tough environment.

Right. Just one other question. In the cost to goods sold line item how much of that would be labor, if any?

Well, it's going to vary upon all the different segments. But just to give you some basis for that, within contract operations labor is somewhere in the neighborhood of half of the cost. Whereas if you look at fabrication it's actually a much smaller portion. It's probably in the 10% to 15% portion of total cost of sales.

All right. Okay. Thank you.

Our next question will come from Robert Christianson, Buckingham Research Group.

The net investment in Venezuela assets, what is it at the moment?

As of the moment it's $400 million. It started the quarter at $500 million and we had $100 million that we reserved for the JVs. Of the $400 million that is left , which is the gross assets, about $100 million of it, actually $107 million, is the receivable that we've got outstanding. And the rest is for the most part the fixed assets, contract operations and some miscellaneous other

Again, Michael, of the $400 million, that's your gross assets. What is the depreciated assets, the net assets? Do you have any debt against those assets?

No. And actually that is, I believe, a net of accumulated depreciation number. When I mentioned that, that's not net of working capital liabilities, accounts payable, those kind of things. It doesn't really account for the right-hand side of the balance sheet. But we don't have external debt there in Venezuela for our operations.

Where does the natural gas go? Does it go to like factories, or does it go to their electricity generating plants?

A big use is certainly for power generation, but also for reinjection for oil production. So some industrial use but I don't think that's a big use in Venezuela.

Arbitration, is that the likely event or --

Bob, this has just all transpired really in the last couple of days. I think it's premature for us to get into speculation and details about where it's going to go. We've operated for a long time in Venezuela. I think we've certainly thought a lot about risk mitigation over the years and where that goes. But right now, whether it's real or whether advice from counsel at this point, it's just not, I think, very smart for us to start talking about where this might go.

The financial covenants that you have, I know there's a lot of different instruments in your Company. Does any writeoff in Venezuela put you through any kind of debt covenants at all?

There are carveouts within our debt to EBITDA test and also EBITDA to interest test with regard to exclusion of impairments.

And the final one off the subject. Marcellus. Everybody seems to be running there pretty actively at the moment in my exploration universe. You guys have said you have a position up there. Could it be a much bigger part of the operation a year or two from now? Can you put some perspective on how much horsepower you might have in the area already, I guess in the Appalachia, and how what your thoughts are there?

I will share with you that in the first quarter our working horsepower in the Northeast actually grew. It was the basin that we did have growth in. And we are excited about opportunities in Marcellus. We will see what the time frame for that to play out is. But we have a very strong market position in the northeast and expect it to be a growth area for us.

About how much horsepower is there already?

I don't know off the top of my head.

I will get back to you. Thank you very much.

Let's next go to Mike Urban with Deutsche Banc.

Ernie, I was wondering if you could go through and reconcile perhaps your comments on pricing. On one hand you are seeing pricing levels generally hold out there on a competitive basis. Earlier in your comments you said in certain instances you are looking to be aggressive on price with an eye toward share. That's a change I think versus where the Company has been in the past. One, what's driving that, and two, can you reconcile the two if you aren't seeing pricing pressure-wide why cut the price.

I think we are very focused on putting our idle assets to work. So where we have, to reconcile this -- let me break the discussion into two pieces. We have a lot of assets that are working just fine as they are, where they are and they are under contract. And where we are the incumbent with a strong position. Pricing on those, while our customers are all pushing us to lower price, we have not raised our prices aggressively through this period, if at all, so those prices are holding very well. So that part which represents the lion's share of our business is stable.

Where we have incremental opportunities to put idle units to work, we are going to be very aggressive and have been in terms of the pricing. That's the growth as opposed to the base and so it's not having, when you blend the two together, it's not having a huge effect on our net price per horsepower. So incrementally, yes, you will see us be aggressive to gain market share. This is a time when we need to take advantage of the density of our operations, some of our cost advantages as a result of being the largest player and to gain market share during this period.

Great. That's very helpful. And kind of an unrelated question in terms of the horsepower losses in North America that you had during the quarter, you quantified roughly three-quarters of that. What would you attribute the other quarter loss to?

It's a variety of things. Certainly somewhat less than 10% was service related, we believe. The other tends to be some right sizing where we are not exactly sure if we got the equipment or not so we just were conservative on how we put forth that 75%. It generally is not loss to competitors through this period. And it is mostly, as I said, just our customers putting forth their owned equipment and just shutting in wells.

That makes sense. So you feel that the share situation is at least stable at this point and hopefully with some the things you talked about earlier you can regain some of that share and get some of that old equipment back to work?

We absolutely feel that way.

That's all for me. Thank you.

And now let's return to Tom Coran with Wachovia Capital Markets.

Good morning, guys. Can you hear me?

Yes.

Great. Try this again. Ernie, could you quantify how much of the total horsepower you've had returned since, say, mid-year '08 has been solely related to production shut-ins?

I cannot at this time. We started working hard on the reasons for stops late into the fourth quarter and our data around the underlying, where we really felt good about sharing the data around our underlying stop reasons developed really then. Going back and quoting why and what was well shut-ins, we don't have good data.

Perhaps another way of asking what I'm trying to get at, do you have a sense for how much horsepower you might see go back to work that would solely be in response to the expectation that we've moved back to an uptrend for gas prices and would not be rig count dependent?

I see where you are going. I'm sorry. All of this equipment that we have gotten back in the last year is good equipment. So first I want to say that this is high quality equipment that is certainly capable of going back to work. Second, as commodity prices go up and these wells get either reworked or there is more in drilling or whatever, we expect to get a lion's share of that work. So how much of it is? If it was working a year ago there is a chance it can work today and it will be dependent on how much activity there is and what the commodity prices are. We are going to have to work through this overhang of excess compression owned by our customers and that's going to take a couple more quarters we think.

Okay. And then a bit of a longer term strategic growth question here. Looking across the other areas of surface production services that you'd like to expand into, which specific businesses in treatment or processing or national markets do you expect to present the most promising investment opportunities over the next 12 months?

In the next 12 months? Well, I don't think we will step outside what our core business today is in the next 12 months. We will be doing the same activities we are doing today around treatment and processing and production equipments within that period. And the markets that will be the best to growth markets will be Mexico, continues to be an active market for us. We have opportunities throughout the the former Soviet states particularly in the Stans. And to some extend in Indonesia.

For any kind of meaningful further diversification moves in terms of the suite of services you will be providing that is a multi year time horizon?

It is. This year we will be very focused on doing what we are doing today better.

Thanks. I will turn it back.

That's move on to Capital One Southcoast, Joe Gibney.

Good morning, everybody. How are you. Most of my questions were asked and answered. I wanted to follow up a little bit on the services side. Ernie, you mentioned discussing not losing any business here with an emphasis on service. As you think about controlling SG&A, right sizing the business, should we be concerned at all about are you paring back on the service technician side? This has been, as you've regained some of your share and retrenched back in North America again, a portion of the strength of late. Is most of the retrenching on cost more still associated with fabrication and you're still holding on the service technician side to keep that competitive advantage?

I will break that into two pieces. We will have to, if unfortunately we continue to lose working horsepower in North America we will right size our operations in the field for the working horsepower loss. To some extent there will be headcount reductions there. And certainly we will attack the way we go about delivering our products in every way we can to cut cost from the system. But always with the sole limitation that customer service cannot be sacrificed. The pain we went through a year ago which was an opportunistic market is not one we will revisit. We will keep our customer service levels very high. But we will cut costs as well. There is some opportunity there.

Okay. And I joined the call late but the delta on the international contract build going from 130 to 140, regionally speaking where were these incremental bookings?

They were in Mexico and Brazil.

And the fabrication of backlog burn, you indicated working off a substantial portion in the next couple quarters. Obviously in terms of bookings and the revenue flow through looking beyond next couple quarters becomes a little unclear, understood. Could you quantify what that substantial portion is in the next couple quarters?

And I will pull out a data point we had in our 10-K which is the only time we disclose the backlog runoff but at that point we had $1.15 billion backlog and said we realize the $800 million of that in revenues in 2009. So that other $300 million would be in 2010. I would say that is a ratio that hasn't changed a lot if you wanted to apply that as we go forward.

That's helpful. I appreciate it. I will turn it back.

Let's go to Wachovia and Sharon lieu.

Hi, good morning. Just wondering if you expect a similar horsepower and revenue decline in the second quarter for the partnership given the composition of its fleet in customers.

A similar decline from the fourth quarter is probably a fair assessment. A similar decline to overall EXH is probably not. Sharon, I know you know when you look at how EXLP has performed in terms of horsepower trends versus the overall Exterran business, it has done better. That is a result of the composition of its business and customer base and also due to the fact that if there are new customers to the Exterran family that the default is that those new customer goes to Exterran Partners, and those factors have helped it do better from horsepower performance standpoint and we would expect that type of trend on a relative basis would continue.

Okay. Also, how do you view the coverage ratio and distribution growth in this environment?

Well, I think we are comfortable where we are from a coverage standpoint. And personally I don't think that we or anybody -- at least not too many people in this space -- think there is a lot of reward for distribution growth at this point. There is probably a lot of reward for maintenance of distributions and I think that is where we are focused right now.

Thank you.

(Operator Instructions) Let's go to Brad Handler with Credit Suisse.

Good morning, all. Steve, I would like to wish you well in your next endeavors. And I appreciated the chance to work with leaders in this relationship. And Ernie congratulations to you. If I can come back to Mike's pricing question. I think you guys have spoken to the notion -- I think you spoken to a slippery slope in terms of pricing. So if you start to price certain units that obviously are part of maybe larger relationships and it puts potential pressure on other units to bring pricing down there. Is there something -- some reason -- am I off base or is there something that doesn't apply in that logic as it relates to some of the idle units that you are thinking?

That is always the issue when you talk about pricing. The fundamental difference today versus two or three years ago is that there is more excess compression in our fleet and in our competitor's fleet. So as we address this situation going forward and the loss of market share we experienced over the last two years we cannot continue to be the one that absorbs this by keeping pricing stagnant. As we go forward and compete for projects we will be aggressive on that issue. Otherwise the flip side is we keep getting more idle units and our competitors put their idle units to work.

All right. I appreciate that. Let me switch gears, please. On the fabrication side, maybe the way to ask it I would not have guessed that the second quarter revenue number would be quite as low as the range you have given, Michael. Is there is something specific seasonally or are we seeing such a dramatic dropoff already in the North American execution? Or is there some other factor that is bringing that down relative to maybe a more gradual work off of the backlog?

Obviously we are working off backlog. The backlog number as you can see is still over $1 billion is healthy. One of the things that you aren't seeing that you certainly saw nine or 12 months ago was the strength of the North American market. Some of those jobs were kind of quick turnarounds and never really hit backlogs. As Ernie talked about North America compression, that's a market you just aren't seeing much activity. So we aren't seeing that kind of volume business that comes through and in and out of a quarter, same kind of thing with regard to the North America production related activity that we would see some again several quarters ago and we are not seeing right now.

So perhaps the natural -- the rate of execution of what's in the backlog is in this $300 million a quarter range and any of the quick turn work was on top of that. So there was almost $100 million of that say in the fourth quarter of '08?

I'm not sure it was quite that much with regard to the volume in fourth quarter. But certainly what you are saying is true in terms of the composition. We aren't seeing the quick turn stuff in North America basic products right now. The runoff of the backlog will vary a bit from quarter to quarter, depending how much activity we have in the shops. From the time of getting stuff through. Again, I think what you said is largely true. I'm not just sure about the precision of the dollars.

That makes sense. I think a month ago as we discussed it, we talked about mid-teens margins, mid-teens margins is something you could still hope to try to hold on to in the fabrication space as you worked off this backlog, please help me understand that a little bit. If the international is this ever growing portion, or very a significant portion of what you are delivering, is that basically the answer is that the margin mix is maybe high teens and international versus something in the single digits domestically. There is a comfort level with staying in the mid-teens during the course of '09 as a result of that?

There certainly is now. The backlog that we have for the billion dollars was stuff that was largely booked. Quarter or two or three or four ago. At that point that was market. I think the mix issue as you described it does work in our favor with regard to the international, the greater diversification of products gets us to a better margin than if you're thinking about a pure compression fabrication business looked like five or six years ago which was several points below this. So I think that benefits us. But I would have to say that as we look at new projects and our competitors look at new projects today, especially things -- if there is anything coming up in North America those are competitively fought out. And in a lot of those cases the margins are lower than mid-teens for a North America compression project, if there is one right now.

That all makes sense. Thanks. I will turn it back.

And there are no further questions at this time. I will turn the conference over to Ernie Danner for additional or closing remarks.

Thanks, everyone, for participating today. And we look forward to our next call -- in about three months. Thanks again for your support.

And again that does conclude today's conference call. Thank you for your participation.