Archrock Inc (AROC) 2009 Q3 法說會逐字稿

Good morning. Welcome to the Exterran Holdings Inc. and Exterran Partners LP third-quarter 2009 earnings conference call. At this time, I would like to inform you this call is being recorded and that all participants are in a listen-only mode. (Operator Instructions).

Earlier today, Exterran Holdings and Exterran Partners released their financial results for the third quarter ended September 30, 2009. If you have not received a copy, you can find the information on the companies' 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 in the summary pages of the earnings release and on the companies' 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 Partners, unless otherwise noted.

Also, the term international will be used to refer to Exterran's operations outside the U.S. and Canada, the combination of U.S. and Canada will be referred to as North America.

I want to remind listeners that the news release issued this morning by Exterran Holdings and Exterran Partners, the companies' 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 companies' performance and represent the companies' 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 companies' press release, as well as in the Exterran Holdings annual report on Form 10-K for the year ended December 31, 2008.

Exterran Partners' annual report on Form 10-K for the year ended December 31, 2008, and those set forth from time to time in Exterran Holdings' and Exterran Partners' filings 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 Ernie Danner, President and Chief Executive Officer of both Exterran Holdings and Exterran Partners. I would now like to turn the call over to him. Mr. Danner, you may begin your conference.

Thank you and good morning. Welcome to the third-quarter 2009 earnings call for Exterran Holdings and Exterran Partners. Joining me on the call today are Michael Anderson, CFO for Exterran Holdings, and David Miller, CFO for Exterran Partners.

In today's call, I will highlight some recent successes I believe we have achieved, some key challenges facing our business, and our focus areas moving ahead.

So starting with the successes. I believe we continue to move in the right direction regarding two important focus areas for Exterran -- cash flow generation and providing superior service to our customers. As a result of the strong, consistent effort from all of our employees, we made big strides in reducing our debt balances during this quarter.

And I think it is very noteworthy that our customer satisfaction is increasing in a time period of challenging market conditions and also during a period of enhanced focus on controlling costs. It's a notable achievement by our employees.

And although I am pleased by these recent successes, we face major challenges in North America, where we continue to experience reduced overall activity levels in contract ops and some slowdown in our fabrication activities.

In the last call, we said that we expected operating horsepower declines in our North America contract operations business to continue at more moderate levels in the second half of 2009, and that is what we are seeing. And based on current market conditions, we now expect activity levels to continue to decline into 2010, as a recovery in our production-oriented business will likely lag a rebound in drilling activity.

And additionally, as a result of the significant amount of idle compression capacity in North America, our contract operations pricing also trended down in the third quarter, and we expect continued pricing pressure going forward.

On the cost side, I believe that we are doing a very good job of managing costs in our North America contract operations business. We're beginning to see the impact of efforts we started at the beginning of 2009 to look at the totality of our field costs, which includes both operating costs and maintenance capital expenditures.

This quarter, we saw a slight increase in our per-unit operating costs, but this was more than offset by our lower maintenance capital expenditure costs. We believe this all-in cash approach is the right way to manage our business while we maintain our commitment to safety, service, and preservation of our fleet. The concepts of this all-in cost control and superior service quality are not mutually exclusive, and our employees are doing an exceptional job on both fronts.

Now, turning briefly to Exterran Partners. The overall performance of Exterran Partners was negatively impacted by the weak conditions during the third quarter. However, the pending drop-down transaction with Exterran Holdings strengthens the LP's financial position and will enhance its distributable cash flow. We at Exterran remain fully committed to the MLP and our strategy of moving Exterran Holdings U.S. contract ops business into EXLP over time.

In our fabrication segment, backlog declined $162 million in the third quarter, and when you break it down, our backlog declined $81 million in compression and $102 million hundred and $102 million at Belleli.

Our compression backlog decline related mainly to continued weak demand in North America for new compression units. Outside of North America, and particularly in the eastern hemisphere, we continue to see decent activity levels for compression fabrication.

The backlog decline at Belleli has been driven by execution of some major orders booked over the last several years that have not yet been replaced by any new large orders. Bookings at Belleli are typically lumpy like this, and we continue to see significant opportunities for the business and are generally positive about our prospects in 2010.

Exclusive of Belleli, we have seen strength in our production and processing fabrication activity, and our production and processing backlog increased during the quarter, and we continue to see solid overall activity levels in this important part of our business.

Going forward, we remain focused on improving our customer service and our cash flow generation. As such, we will continue to invest in our service infrastructure in a manner that allows us to provide excellent service and positions us to capitalize on market opportunities as they arise.

We will also continue our commitment to employee training and development programs to enhance overall service quality and maintain safe operations. Evidence of our good work to date includes better equipment runtimes, increased focus on the preservation of our [iowa] equipment, and positive feedback and service ratings from our customers. During this period, we are laying important foundational work that I believe will pay off for our company once industry conditions begin to improve.

And as we've said, the other key focus for us at Exterran is cash flow. We continue to aggressively manage our costs throughout all facets of our business, including capital expenditures, working capital, SG&A costs, and operating costs. And in the third quarter, these efforts led to debt reduction of $124 million.

In addition, during the quarter we announced guidance for 2010 total capital expenditures of between $200 million and $300 million, significantly down from expected CapEx levels for 2009. The major category of reduction in CapEx spending will be the North America contract operations business.

We believe this focus on cash flow will allow us to generate positive free cash flow after capital expenditures in the fourth quarter of 2009 and in 2010.

I will now turn the call over to Michael for the financial review.

Thanks a lot, Ernie, and good morning, everyone. I'm sure that by now you've had a chance to review our press release that we issued earlier this morning.

So in general, we had a good quarter from an earnings perspective with most performance measures above our guidance levels, and we really had a great quarter from a cash-flow generation and debt-reduction perspective.

Let's look first at the third-quarter financial performance for Exterran Holdings. Our North America contract operations revenue was $168 million in the third quarter. That was somewhat above our guidance. Operating horsepower declined by $142,000 during the quarter, and this decrease is consistent with our forecast of declines slightly less than second-quarter performance.

Gross margin percentage decreased sequentially during the quarter to 56%. That was due to a combination of both cost and pricing pressure. Cost per average horsepower were up 5% compared to the second quarter. They were unchanged compared to the year-ago figure, and while operating margins were down a bit, our total cash cost to service our fleet, which includes the maintenance capital expenditures, were down on both an overall and a per-horsepower basis.

Maintenance capital in North America declined from $21 million in the second quarter to $12 million in the third quarter, and this is a good trend and we believe also a good way to measure our North American operating performance.

We had a total North America contract compression fleet of 4.34 million hp at September 30, and fleet utilization was 69%.

Looking ahead to the fourth quarter, we expect North America contract operations horsepower to decline, again a bit less than what we experienced in the third quarter. So revenues are expected to be in the $153 million to $155 million range.

We expect operating costs per average horsepower to be relatively consistent with third-quarter levels. With ongoing pricing pressure, this would mean a modest decline in gross margin percentage versus the third quarter.

Our international contract operations revenue was $96 million in the third quarter, with gross margin percentage of 61%. Overall, gross profit dollars were generally in line with our expectations with higher-than-expected gross margin percentage offsetting what was lower-than-expected revenues.

The third-quarter revenues were impacted a bit by delayed starts for two Eastern Hemisphere contract operation jobs that started up in October.

Our international fleets stood at 1.2 million horsepower at September 30 and had a utilization rate of 83%.

Looking at the fourth quarter, we expect international contract operations revenues will increase to $100 million to $102 million based on start up of several jobs from backlog. We expect that margins will be similar to third-quarter levels.

Moving on to fabrication. There we generated revenues of $340 million in the quarter, gross margins of about 18%, and those were both somewhat better than guidance. Revenue was higher than expected due to accelerated revenue recognition on a large job in Latin America, and also completion of some installation work in North America.

For the fourth quarter, we expect that fabrication revenues will be $270 million to $290 million, and margins should be in the mid-teens.

Moving to aftermarket services, third-quarter revenue was $76 million. That was somewhat lower than our guidance due to weak activity levels really in all regions. The gross margin percentage was 21%. That was in line with the guidance that we had provided in the low 20s.

If we look at the fourth quarter, we expect to generate aftermarket service revenues of $70 million to $75 million, with margins again in the low 20s. Overall, AMS activity levels continue to be negatively impacted by our customers really just more aggressively managing their maintenance activities right now.

As a result of our cost-reduction initiatives during June, we reduced SG&A expenses from $86 million in the second quarter to under $82 million in the third quarter. We expect that SG&A levels will be at a similar level in the fourth quarter.

We had almost $13 million in other income in the third quarter. That was mainly the result of beneficial currency translations.

Overall, we generated EBITDA of $161 million. Interest expense was $33 million, which included about $4 million of non-cash interest related to our 4.25% convertible notes that we issued in June.

The diluted share count was 77.5 million in the third quarter, and that includes a little over 15 million shares that were associated with the new convert offering from June.

Earnings per diluted share from continuing operations, excluding some charges, was $0.38. Net CapEx for the quarter declined from $96 million in the second quarter to $71 million in the third quarter. The third-quarter total CapEx included about $52 million in growth capital, the vast majority of which was for the international contract operations backlog work.

We now expect that capital expenditures for 2009, for the year that we are about to complete, will be in the $375 million to $400 million range, including maintenance capital in the $95 million to $105 million range. And both of these ranges are modest declines from our annual guidance that we provided last quarter.

As Ernie discussed in his opening remarks, we expect that 2010 CapEx should be in the $200 million to $300 million range. We continue to expect that the vast majority of our 2009 and 2010 growth capital will be in international markets.

On the balance sheet, total consolidated debt declined from $2.51 billion at June 30 to $2.39 billion at September 30, and that [says] we reduced debt by $124 million during the quarter. Available but undrawn debt capacity at the end of the quarter was more than $800 million.

Let's switch over for a minute now and look at Exterran Partners. As a reminder, EXLP's fleet is just north of 1 million hp, 1,039,000. That's about 25% of the combined Exterran Holdings and Partners U.S. contract operations business.

The drop-down that we announced last month, and that we expect to close in the next week or two, should add about 273,000 hp to the EXLP fleet.

Last week, EXLP announced in its third-quarter 2009 distribution would be $0.4625, and that's $1.85 on an annualized basis. This distribution is the same level as what we had in the second quarter of 2009 and also in the year-ago period, third-quarter 2008.

During the quarter, EXLP generated EBITDA of $18.4 million and distributable cash flow of $10.6 million. Distributable cash flow covered the third-quarter distribution by 1.15 times.

Now in connection with the proposed drop-down transaction, it's important to note that EXLP closed a new $150 million asset-backed securitization facility a few weeks ago. That increases its financial flexibility and available liquidity, as well as extending its debt maturity profile. We believe this new financing facility has attractive pricing and it is also large enough to fund another drop-down without raising additional debt capital.

During the quarter, EXLP did incur $324,000 of other expense on the income statement, and that consisted of transaction expenses associated with the drop-down transaction.

In connection with the closing of the drop-down, the omnibus agreement between Holdings and Partners will be amended to reflect adjustments in the cap on SG&A expenses, and those are going to increase from $6 million per quarter to $7.6 million per quarter. The cap on operating costs will remain at 2175 per horsepower per quarter, and the termination dates for the caps will be extended by one year and should now terminate on December 31, 2010.

One last item on EXLP, it did benefit, as you know, from the cost caps during the quarter in the amount of about $2 million. The cost cap benefit is included in EBITDA and distributable cash flow, but it is actually not included in earnings per unit. So if you were to put the earnings per unit on a comparable basis to reflect the benefit of the cost caps, earnings per unit would increase by about $0.10 per unit.

So, that's it, and lastly, we expect to file the Exterran and Exterran Partners 10-Qs in the next few days. And before we go to questions, let's turn it over to Ernie for some closing remarks.

Yes, just one quick closing remark. As I said earlier, our focus going forward will continue to be on customer service and on free cash flow. The whole company is focused on those two things.

If we are successful in these two areas, we believe we're doing the right thing for our customers, for our shareholders, and for our employees. So those will be our two guiding areas for the foreseeable future. And so, now, we'll turn the call back to the operator for questions.

(Operator Instructions). Brad Handler, Credit Suisse.

Could you please -- Michael, could you please go through the cash flow statement a little bit for us? I know the Q is coming out soon, but I just want to get a better feel for the cash generated that helped you pay down the debt. Do you have cash flow from operations and then working capital?

Yes, I'll give you the -- just the highlights that I think that you need. Working capital benefit was just north of $100 million. The CapEx, as we talked about, was $71 million. I think that's going to get you there. Those are the items that you need to know.

Yes, pretty much. So the cash flow from operations is probably a little stronger than -- you had some other items helping besides just net income and depreciation.

Yes, the working capital was a big benefit over the course of the quarter. It's something that we have talked about for a long time as being a big focus area for us, and I think we started to make some real progress in that area.

Just as an unrelated follow-up, and then I'll hop off. Can you speak to -- I appreciate your all-in costs' perspective, but can you speak to the direct cost per horsepower increase in the quarter? Is that a function of a little less absorption of overheads, given lower utilization? So is that going to continue to put pressure on things, or are there some other elements that you can continue to work on to kind of keep that in check?

Yes, it's clearly -- in a market where you have a declining horsepower installed base, working base, we're going -- it's going to be hard staying ahead of that game. So there will be periods like this quarter where the absorption, as you call it, from a direct cost standpoint is challenging.

We think that we will stay in this area from an operating cost standpoint -- you'll see a quarter or two dip up, dip down as we continue to manage costs in a declining working horsepower market.

Okay, but trading (multiple speakers)

Nothing big. There was nothing big in there, plus or minus.

Mike Urban, Deutsche Bank.

Ernie, was wondering if you could update us a little bit on some of the initiatives you have going on to maybe retake some of the share that you guys had lost as you were going through the merger process. Obviously, working horsepower was down, but that was expected. So I guess I'm trying to get a sense of if you feel like you were down less than the market, or just a general update on that process.

Yes, we think we are doing well. We continue to see -- the challenge for us on this is that we continue to see our customers have -- are doing -- they have more, I would say, more opportunity to optimize than we probably expected them to, and that effort continues to result in stops for us, and that's happening in a market where we're not seeing, based on historical patterns over the last two to three years, we are not seeing the opportunity set to put units to work.

So as it applies to market share, we think we're doing pretty well. We think we're doing fine, and most cases positive on this issue.

So that the initiatives around service and empowering our employees to make the right decision from a maintenance standpoint to keep those units running and focused on runtime, I think we're doing really well, Mike. I think those are going fine.

The challenge is -- just our customers continue to optimize, and I guess the only other thing I would point to on this is that we tend to have our mix of customers, probably versus our smaller competitors, we tend to have a disproportionate number of large customers. Those are almost by definition the guys that can do the most when it comes to optimizing their fuel compression activities.

And so, I think we're getting hit fairly hard by that. It will go on, we now think, for another quarter or two. So, is that responsive to your question?

Yes, absolutely. And on the pricing front, I realize this is difficult to tell with the information that we have, and if I just look at the revenue in the U.S. relative to the working horsepower, you actually had per-unit pricing up a little bit. Is that a function of mix or am I just -- have my math wrong?

Yes, actually, if you look at the average operating horsepower, Mike, you should come up with a number that's down sequentially about 1.5% if you're looking second quarter to third quarter.

Where are you seeing the most price pressure or is it across the board? Is it large units, small units, certain regions or basins?

It's across the board. It is -- there is excess capacity in I think pretty much all the horsepower classes, and so it's across the board.

Robert Christensen, Buckingham Research Group.

Thank you. Does Exterran still have substantial loss carryforwards and are they NOLs? I know the Congress is rethinking two-year to a five-year look-back. Can you tell us if you would be a beneficiary of that and how to think about it?

Bob, the answer to your first question, we have north of $800 million in NOLs in the U.S. and something north of $100 million for NOLs in other places around the world. That has been an important part of why our cash tax rate tends to be a little bit low.

I'm not really going to opine upon this point about what's going to happen with regard to tax -- you know, legislation changes. Right now, I anticipate being able to -- that will be an important benefit for us in terms of cash flow in future years.

Would that benefit go up if it went from a two-year look-back to a five-year look-back? As they're considering, I guess? This is all, I guess, fairly new stuff. I don't mean to press you too hard if you don't (multiple speakers)

Bob, I don't think so.

Second question, if I may, all these producers are really pursuing the natural gas liquids-rich streams in the Granite Wash and the Eagleford. Are you guys seeing more business related to that emphasis of drilling these days?

Yes, we are. We see the same things you just cited, and that's one of the reasons our production and processing backlog continues to hold, even as we continue to deliver good revenue in that part of our business. So there's a lot of interest there, and we think we are very well positioned to capitalize on that.

We never hear much about the water company that you bought, the water treatment handling company that you bought for $100 million about a year ago. Is that acquisition working out and does it have increasing relevance today?

Well, Bob, it is continuing to execute well in the West. And we have fine ongoing cash flows from it, probably down, frankly, a little bit from where we would want it to, due to some environmental changes that -- in the West that made it actually easier to disperse water into rivers as opposed to treat it first. So we lost just a little bit of the business.

We have not been successful so far in moving that technology into other producing basins, but continue to work very hard on it. So --

Are you referring to sort of, like, the Marcellus, which has --

That would be a great opportunity for us, as is some of the coal-bed methane activity that's ahead of us in Australia. So -- their sweet spot really revolves around coal-bed methane more so than it does the shale plays in terms of where we think we can most easily apply it.

Speaking of international coal-bed methane, Exxon -- 2 million acres in Germany. Is that a place that you are prospecting or is it just too soon?

It's just too soon. But yes, we think all the shale gas plays throughout Europe and, as they develop, markets around the world for shale and other tight gas areas will be very good for us. As you build gathering systems and you take care of fields, that's our business. So, yes, we're excited about that opportunity.

I'll get back in line. I've got one more. I'll let somebody else on. Thanks.

Chris Glysteen, Simmons & Company International.

Just wondering on the international contract front, can you provide us with where your backlog stands today of annual revenue potential?

Yes, it's down a little bit from last quarter. It was at 120; now it's about 110.

And how have -- with regard to booking new business on that front, things probably slower, wondering if you could just comment on where we stand with regard to the potential of adding to that backlog number.

Yes, things are slower. As we rein in our CapEx going forward, particularly in terms of 2010, we don't think we will book near as many international CapEx projects in 2010.

When you look out past there, I don't think the story has changed much. Growing internationally on the contract ops side will still be a key focus for the business. We do have targeted opportunities that are embedded in that $200 million to $300 million guidance we have given for 2010. But it will be lower from an activity level than what we've seen over the last year or two.

Are the majority of those potential on-the-horizon projects located in Latin America? Or are they evenly dispersed between Latin America, Middle East, and elsewhere?

Yes, they are kind of evenly dispersed. There is one project that we are very keen about in Latin America and there's another one, I think, that we're also excited about that's in the Middle East. That will be perfect sizes for us. We'll see if they happen. But yes, it's spread in between the two areas.

Sharon Lui, Wells Fargo Securities.

Just wondering, what's the EBITDA and maintenance CapEx tied to the pending drop-down to EXLP?

Yes, we have not disclosed that yet. We are putting together financials. They will be released in an 8-K not too far after we close.

It hasn't been necessarily too hard for people to kind of gravitate towards what we have announced for the deal, which is 273,000 hp, and what that equates to from an EBITDA perspective. If you look at the LP today, there's a pretty direct relationship, both in the drop-downs and what it does today with regard to operating horsepower of -- basically, if you have 273,000 hp, that roughly equates on a ratio basis to something in the mid-20s in terms of EBITDA.

And that drop-down fleet is similar in scope to what we have at EXLP today -- in terms of EBITDA generation. And it would be probably about the same with regard to maintenance capital as well.

Okay, so I guess back of the envelope, that's somewhere in the neighborhood of, I guess, five times to six times in terms of the acquisition multiple.

That's in the ballpark.

Okay. And maintenance CapEx, about 17% of EBITDA?

That is, again, a decent ballpark number to be looking at.

Okay. I guess just a question about maintenance CapEx and a growth CapEx at the partnership. It looks like it's trending below your full-year guidance. Any update on that front?

Yes, we'll have an update that we will actually put into the Q that comes out here in the next couple of days. The number is a little bit lower.

Joe Gibney, Capital One Southcoast, Inc..

Just want to circle around a little bit. Ernie, I drilled down on fabrication last quarter -- would it be down a little bit more. Is it fair to say -- I mean, just from your outlook there, that -- is domestic certainly still heading down and international kind of maybe flat to up, Belleli lumpy but still somewhat encouraged, while you are still pretty positive on production processing. Is that sort of where you are reining that into? Are we kind of closer to -- you think closer to an inflection point, maybe, on bottoming out and order flow?

Yes, I think you nailed the way you said the first part, and in terms of order flow, the only place that the bottoming-out question I think kind of comes in is in North America. And yes, I think it can only go up from what we've seen over the last three or four months, at this point.

Okay, that's fair. And just to circle around a little bit on Mike's line of questioning on the price pressure domestically as -- that characterizing competitive behavior at this point as we've worked through a couple of quarters here where it's been pretty tough slogging. Has the competitive behavior changed at all, relative to, yes, there's a lot of inventory on the ground, yes, [competitive] utilization has come down, but is anything markedly changed here this quarter versus where we were last quarter, and is there pricing disciplines continuing to erode a little bit and (multiple speakers) reference --

No, I don't think anything has changed. I think it's been similar to what we've had over the last couple of quarters, particularly three is probably too long, but the last couple of quarters have seen similar pricing behavior as what we're having now.

And nothing changed from a competitive dynamic relative to what's transpired at one of your private competitors, Valera, with a new majority stake and ownership position there. Hopefully instilling a little bit more discipline into the pricing market, I'm imagining.

We see no change, plus or minus.

And then, last one, Michael, just thoughts on ForEx. I know this can dance significantly and it's pretty hard to have a crystal ball on it, but any thoughts at least directionality into the fourth quarter on it? Is it going to be a pretty significant delta to the model?

Yes, I don't anticipate having a number that is this big, probably anywhere close to this big, going into the fourth quarter related to currency. But -- and it generally has worked in our favor.

Part of that is the depreciating dollar. We try to manage it so we don't have much in the way of currency exposure. Worked out to the good this quarter. It can work either way. But, regardless, it should be a much smaller number as we go forward.

[John Donnell], Howard Weil Incorporated.

Good morning, guys. Good quarter. One more question on the North America pricing outlook here. As we can expect perhaps that a pick-up in activity maybe the back half of 2010, based on some of the just overall rig count increases here we are seeing, do you think the pricing in North America is such that your customers are going to be induced to rent from you guys as opposed to going out and building their own capacity like we saw during the last upturn? Or do there (multiple speakers)

Yes, that would be our expectation. I think the combination of pricing declines with kind of uncertainty and more challenging capital constraints at the customer's level should lead to us having a very good market once it does turn around. So we're going to be very focused on making sure that our contract -- our idled units go to work and that our customers do not look to buy.

Fair enough. And switching over to fabrication again real quick, you mentioned that Belleli had had some large orders pull through here in the third quarter. With the outlook for the 2010 orders as it is now, do you think that, if some of those come through, that that's revenue that could end up in the -- hitting the books in 2010 or is that a longer lead time [than] might get into 2011 and beyond?

I think it will do both. I think it will -- if we can land some of the larger orders we are working on, I think it hits -- certainly it hits the second half of 2010. And then, they will -- these things are big enough that they go through 2011, and some cases, you book them and they go into almost the first half of 2012. So they are major lumpy projects.

That's all I've got. Thanks, guys. Good quarter.

Tom Curran, Wells Fargo Securities.

Michael, you had thought that your customers were very close to -- or had finally returned all of the outsourced horsepower they were going to, and that optimization process was complete or very close to being complete. Where would you estimate it is now and could you try to quantify that somehow?

Yes, I'll take that one, Tom. I -- we did -- we thought they were further along and we would've thought -- we thought 30 -- or 90 days ago that there wouldn't be as much continued optimization as we've seen. So, we are a little more conservative on that look.

I think there's not as many new units coming to them that will replace our units, but their ability to -- their engineers and their field engineers to continue to squeeze down the amount of compression they need to deliver this gas, there's just more room there than we thought.

Quantifying it, I think -- as we said earlier in the call, I think we think we will continue to see moderating levels of returns through this year, but we do think they will continue into next year in terms of net returns. So I don't know how much further than that we can go at this point.

Okay. And that's helpful, Ernie. Thanks for that update. When it comes to the outsourced market, could you provide an update on the estimated total overhang currently and how much of that available horsepower you guys own?

Well, Tom, the one thing that we do know is we -- the amount of idle fleet that we've got in North America, and that's a pretty big chunk at 1.3 million horsepower, so we believe that competitors are experiencing the same kind of trends.

But they are smaller and they started off with better utilization rates. So our best guess is that when you look at the outsourced market, we have got most of the idle equipment that is out there in the industry. As Ernie went through, it's tough to figure out what our customers have.

We believe though that whatever they do have, from an idle equipment standpoint, has been dwindling pretty rapidly. We wouldn't expect that there is a whole lot left, but we don't know. It's a real hard number to get your arms around.

We do believe that when you look at our idle fleet, that is significant upside when this market does turn. We don't have to put much growth capital into North America market at all to have some significant upside because that idle fleet can potentially generate a lot of cash flow.

Then, last question on North America. Given your current outlook for how you see the overall market evolving over the course of 2010, where -- where is the lowest you think your margins could go while just trying to maintain your current share?

That's a really -- how low is low is a wonderful question. And I don't think we know.

I think we will continue to be aggressive in terms of our customer interaction, and we will not just let this go away. Incremental cash flows for this business are generally positive. So I think there is some room for it to go lower. Our pricing has generally [come] down over this last quarter one to two points.

So you can -- your crystal ball on how far that keeps going before we see turnaround in activity is probably not much cloudier than mine. So, two or three quarters? Times one to two a quarter? I don't know.

And Tom, I guess the other thing just to add in here. This is a business that, as you know, it is about one-third outsourced in the U.S. and two-thirds is performed by mainly our customers. On their own units.

So, while we may see some pricing pressure and cost pressure in this downturn, because we do have some surplus equipment in the outsourced market, there's got to be some kind of sensible tie over the longer term with regard to what it costs our customer to operate their equipment and what it costs us.

And so, while there is certainly potential downside as we see it right now, those things should go somewhat in tandem. It's not costing our customer a whole lot less to operate the equipment that they've got in their own fleet today. Just -- those costs really are not going down.

And that's exactly what I have been looking to as a source of solace for the fact that there's clearly got to be some rational floor there, right? No matter what's happening with pricing or some of these other trends.

Yes, there is. There is.

Thanks, guys; that's all very helpful. Two more quick ones. Michael, could you share what percentage of total fabrication revenues were compressor fabrication?

Yes. The compressor fabrication number -- if you just look at it for North America, it was about 25% of total fabrication revenues for the quarter. And the rest of it was about another 15%.

Okay, so compressor fabrication in total was 40% of total fabrication revenues?

Yes.

Okay. Great. And then, my final one, could you update us on the plan regarding the president of Eastern Hemisphere position following Norm's departure?

Yes. We have made the decision that Joe Kishkill, who runs our Latin America business and has been with us for a number of years and is very -- has been very instrumental in the growth that we've had in Latin America, and a great leader, has -- he's accepted the position at -- in Eastern Hemisphere and will be transferring over there pretty much immediately.

So, Joe will be at the helm and I think he will do a great job of continuing our growth efforts in the Eastern Hemisphere. And in the short run, in Latin America we have two very capable guys running the north and south of that that have been reporting to Joe, and we're going to let them run it for a while and see. And I think we'll do very well. And they will report directly to me.

Congratulations and best of luck to Joe. I look forward to meeting him at some point. That's all I have.

You will like him. You'll be impressed.

Brad Handler, Credit Suisse.

A couple maybe just follow-ups. You mentioned -- let me come back to the cash flow question, I guess, if it -- a little different. You talked about being free cash flow positive in the fourth quarter. I haven't had a chance to really work through what your guidance suggests, but it does seem as though, again, you are probably doing -- you're probably generating cash on the working capital front. Maybe it just sort of begs the general question, how were you guys managing working capital, how are you generating cash? Maybe just some color on that.

Well, I'd like to succinctly answer that by we hope we are managing it very effectively. We've talked about working capital in this business for a long time, and I think it's been difficult with the merger and conversion of ERP systems topped up with tough economic conditions where, quite frankly, a lot of our customers are dragging us out a little bit.

We also had some build-up of inventory, just like some of our customers had gone out and purchased compression equipment. We had to do the same thing with some of our component supply, CAT engines, etc.. A lot of that stuff now has kind of come to an end, and we've been able to now work pretty effectively on trying to make our receivables in -- just make a lot of progress there, bringing down past dues and bringing down total amounts, working on the inventory front as well.

We think there is more ground to make up. And there is items that we think in the fourth quarter and 2010 that we can continue to make impact in terms of positive cash flow. I would say just off the top, without a working capital benefit, that we will be cash flow positive when you look at the earnings generation of the business, the cash earnings generation relative to what we're going to spend on CapEx, working capital should be a positive over and above that.

It was -- that was the case in the third quarter. We expect that to be the case in the fourth quarter, and as well in 2010.

So just to be clear, so you think you are free cash flow positive. [If you have] neutral working capital, that's an extra bonus.

Yes, that's right.

That's good to hear. The -- than the last one, I guess, for me for now -- international utilization -- again, haven't quite worked through the numbers, but it sounds like you're -- based on your guidance, you're talking about something still in the, what is it, the 83%, 84% range for the fourth quarter.

Yes.

Is that -- it feels lower than I might have guessed, right. You've got the two projects you talked about being delayed, but those are now starting. Where is the utilization still being dampened?

We had a couple of jobs that stopped in Argentina. It's a tough market right now. But all in all, I think horsepower is going to hang in there pretty well. We do have the new jobs, and so that will increase it as well.

The other thing that I would caution against is really too much emphasis just on the horsepower in the international markets because an awful lot of what we're doing in the new contract operations backlog that we've got is not going to be horsepower-related equipment. There is some horsepower. It will go on there. It will be 100% utilized for the new jobs. It should bring utilization up a little bit.

But the horsepower numbers are actually not going to change that much. But the revenue stream will continue to move up over the coming quarters as we get these operations jobs up and running.

Yes, these are -- to a large extent, our growth that we're going to put on in the fourth quarter and the first half of 2010 are production and processing plants.

That's interesting. But if I think about whatever horsepower you do have, is there -- does it take Argentina turning around to get the overall utilization of the international back up into the high 80s or something? Is that a way for us to think about it?

No, I don't believe so. Those units can move around between countries. Certainly, Mexico has been an area where we have some idle units and we will be looking to put those to work, but those two countries are probably where most of the idle ones are.

I don't believe we can say it takes Argentina coming around to do that. It's -- there is a variety of places we'll be looking to put these units to work. I don't think you'll see a meaningful uptick in utilization there, though, until probably the second half of 2010.

Your final follow-up question comes from Robert Christensen, from Buckingham Research Group.

You know, the free cash flow generation is pretty exciting. And I think it's an accomplishment -- tighten it up on your end. That said, the money being directed to pay down debt, what kind of accretion is there for EPS with a dollar being paid to debt as opposed to a dollar being allocated to a share repurchase? I mean, can you help me help me out? I'd like to see a little bit towards the share repurchase.

Bob, we haven't had that question in a couple of quarters. I do appreciate it. I think it's a good one.

You know, we have a share repurchase program that's out there, but we have been focused very much on generating cash and paying down debt in this year. And I think in this quarter, if you just do the math, and Ernie did it for us in the opening comments, $124 million of debt repayment over the course of the quarter, that's cash that we generated moving from the debt bucket really into the equity bucket. I mean, that's more than $2.00 a share in terms of free cash flow generation.

That's very, very strong stuff, and I think as you do that, that's going to show up from a share valuation perspective.

With regard to share purchases, it's just something that I think we will certainly look at later. But right now, we're going to be focused. Let's generate the cash and, in the near term, reduce debt. That should show up in terms of value for us, we think. (Multiple speakers).

Doesn't it show up quicker, though, if some of it was directed? I mean, $25 million at your share base would -- at a $25 stock was 1 million shares on 77 thousand -- 77 million shares, was it?

Bob, I would tell you that clearly the math works that way. And we recognize that we are going to execute on this plan for a couple or three more quarters before we turn to share repurchase. We're going to keep our employees focused on generating it. There's plenty of time to repurchase shares if that becomes the right mode. We're not ready to pull that trigger at this point.

And then, I guess with all the excess equipment that you have here of horsepower, are their tariffs when you move some of that, let's say, to an Australia? Is it suitable equipment for an Australia? I mean, the Houston Ship Channel is right there. I mean, there's -- seems to be a point of egress when it goes to Australia. Do they tax it or something? Is there -- what's to prevent just a couple of hundred -- thousand horsepower over a couple of years going to some of these emerging unconventional plays around the world?

We'll be very focused on doing that. And no, the tariffs are not such that they stop the movement. There are some areas, like Brazil, where it's pretty expensive, but that's true with new or used units. And most of these units come out of the U.S. and aren't fabricated elsewhere.

So we'll be looking very hard and we think you are right that it's a huge opportunity for us to use this idle horsepower in various markets around the world. (Multiple speakers). It's not just the U.S..

That concludes today's question-and-answer session. Thank you for participating in the Exterran Holdings Inc. and Exterran Partners L.P. third-quarter 2009 earnings conference call. This concludes the conference for today. You may all disconnect at this time.