Archrock Inc (AROC) 2010 Q1 法說會逐字稿

Good morning. Welcome to Exterran Holdings Inc. and Exterran Partners LP first quarter 2010 earnings conference call. At this time, I would like to inform you this conference is being recorded and that 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 ended March 31, 2010. 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 measure in reviewing their performance, such as EBIDTA as adjusted, EBIDTA as further adjusted, gross margin, gross margin as adjusted, and distributable cash flow. You will find definitions and reconciliation of these measures to GAAP measures in the summary pages of the earnings release, and on 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 Partners, unless otherwise noted. Also, the term international will be used to refer to Exterran's operations outside the US and Canada, and the combination of US 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 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 the Exterran Holdings annual report on Form 10K for the year ended December 31, 2009; Exterran Partners annual report on Form 10K for the year ended December 31, 2009; 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 at exterran.com. Except as required by law, the Companies expressly disdain 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.

Thank you. And good morning, and welcome to the first quarter 2010 earnings call for Exterran Holdings and Exterran Partners. Joining me on the call are Michael Anderson, our CFO at Exterran Holdings, and David Miller, who's the CFO at Exterran Partners. On this morning's call, I will provide some quick highlight of our first-quarter performance, along with some commentary on the market conditions, priorities and our activity levels, and then a summary of some key issues moving forward.

In the first quarter, we had our third quarter in a row of significant cash flow generation, and reduced our debt by $117 million from year-end levels. We achieved this positive cash flow primarily through continued focus on controlling operating and capital costs, and they occurred throughout the company. We also benefited from $50 million of insurance proceeds associated with the expropriation of our business in Venezuela.

Operationally, we are getting mixed signals regarding our North America contract operations business. On the one hand, we continue to see encouraging signs of stabilization of our fleet utilization, and inquiry levels for new business were better than expected in the first quarter. On the other hand, our customers note some caution about lower natural gas prices, and the possible impact on activity levels in the second half of the year. So, in considering this, our overall read of the situation is that the market will get better, but we are still uncertain regarding the timing of that. And as such, we remain committed to managing our total cost of operations in this market, but we are becoming more focused on getting an increasing number of units started and operating in the field, all the while maintaining service quality during this increased activity. And while our operating expense, on a full horsepower basis increased this quarter, continued maintenance capital management helped drive another quarter of relatively low overall costs per horsepower.

We remain focused on our total cash operating cost, including both operating expense and maintenance capital. We believe that we are performing very well on this basis, particularly in light of our improving service performance and our excellent equipment run times. Additionally, our revenue per horsepower ticked up slightly in the quarter, which we see as another positive sign that activity levels are picking up. However, there is still not enough data to conclude that there will be a rebound at this point.

So, in North America we will continue to focus on safety, improving customer service, managing all of our costs, and the redeployment of our idle equipment. Outside of North America, we continue to see healthy demand for our products and services, whether it is in the form of contract operations or fabrication cells. Increasingly, these projects are for treating and processing facilities, but we also remain excited about compression opportunities in various markets around the world.

In our international contract operation business, we benefited from the start of two new projects in Brazil in the first quarter, and expect to start two more in Brazil in the second quarter. Our focus in international operations continues to be a successful start up of our project backlog, combined with efficiency on operating costs, and growing the business through investing in the right projects with the right economics. In our fabrication business, our backlog declined slightly during the quarter, although we remain optimistic about the health and trend lines of this business segment. Our Belleli bookings increased nicely from fourth quarter levels, and we are at the highest level since the first quarter of 2009. In our other business lines, we have strong inquiry levels across compression, production equipment, and process and treating.

Turning to a minute about integrative projects. As we've discussed in the past, we continue to see solid market demand for our integrated projects. Especially ones with a significant production and processing component in both our sale and contract operations business lines. And often, we are able to enter into longer-term operations and maintenance contracts on these integrated projects that we sell, providing an ongoing cash stream. Given this demand, we plan to continue to invest in, and grow, our project management and support team, to insure our ability to efficiently execute these projects.

And we are excited about our recently announced agreement to build, own and operate two gas plants in the Appalachian Basin in the Northeast United States. This is a great example of our strategy to meet our customers' needs by delivering Exterran's unique combination of capital, engineering, manufacturing and service. And anchored by a 12-year contract with a solid customer, this project is an example of market opportunities to invest growth capital in a manner that underpins and enhances the cash flow generation and return profile of our Company.

Looking ahead, we will continue to focus on improving customer service and strong capital discipline. Our primary measure of operating success will continue to be customer satisfaction levels. And from a financial basis, our guiding measure will be operating cash flow after maintenance capital expenditures. For 2010, we expect to deploy this discretionary cash flow on the reduction of debt balances, as well as the investment in longer-term growth projects that have attractive returns. We will remain committed to using this cash flow wisely, and living within this cash flow, and making our decisions to invest in growth opportunities.

We also remain committed to our long-term relationship with Exterran Partners. Partners' first-quarter performance was enhanced by continuing cost controls and a full quarter contribution from the acquisition of an additional 270,000-horsepower from holdings, that was completed in November. Exterran Partners increased operating horsepower during the quarter and had solid distributable cash flow coverage; although, weak natural gas prices remain a near-term concern.

With that, I will turn it over to Michael for the financial section of the call.

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

Overall, the quarterly operating performance was in line with expectations, and we had another great quarter in terms of cash flow, reducing debt by $117 million. Let's look first at the quarter results for Exterran Holdings. On the North American contract operations front, revenue was $153 million in the first quarter. That was above the guidance range that we had provided of $148 million to $150 million. Operating horsepower declined by 29,000 during the quarter. That was better than our guidance and a significant improvement versus the 116,000 horsepower loss during the fourth quarter.

Gross margin percentage decreased sequentially during the quarter to 53%, that was driven by increased operating expenses. Operating costs per horsepower increased just over 10% compared to the fourth quarter, and they were up slightly compared to the year ago period. Our total cash cost, however, which includes maintenance capital, as Ernie referred to, continue to reflect strong cost management and good results. In fact, our cash operating costs in North America have been trending nicely over the past year, and our cash costs per horsepower this quarter were 16% below cash cost per horsepower a year ago. A key component of that is maintenance capital, which was $8 million in North America during the first quarter, that was unchanged from the fourth quarter levels, but it was down from $29 million a year ago.

As a reminder, as we've discussed before, we have pushed this concept of running our North American contract operations business based on total cash costs down to our individual business unit levels. We believe it is the right way to run and measure our business and, quite frankly, the results have been very good. While we have aggressively pushed costs out of the system during 2009, our philosophy today is that we are maintaining slightly higher head count, in order to be positioned to provide great service to our customers, if and when the market begins to pick up. We had a total North America contract compression fleet of 4.2 million horsepower at March 31, and the fleet utilization was 66%.

Looking ahead at the second quarter, we expect North America contract operations revenues of $148 million to $150 million. This second-quarter revenue level would equate to modest declines in operating horsepower, similar in amount to the 29,000 decline we saw during the first quarter. We expect that operating costs per average horsepower to be similar to first-quarter levels and margins should be flat to perhaps modestly down. We expect maintenance capital spending to be close to the levels we've been at over the past three quarters or so. Although, we will caution that a pickup in market activity would likely mean modest increases in the maintenance capital, as we get more units ready for reapplication.

Looking at international contract operations, revenue for the quarter was $110 million, that compares to $109 million in the fourth quarter. As a reminder, the fourth quarter included about $2 million of recoveries related to prior periods which had benefited revenues. Gross margins were 63% for the quarter. That's similar to fourth quarter margins, and also in line with the guidance that we provided. Revenues and margins were helped by the contribution of new projects which started in the first quarter. At the end of the quarter, the international fleet had 1.2 million horsepower and the utilization rate was 83%.

When we look forward in this business segment for the second quarter, international contract operations revenues, we expect them to be in the $112 million to $114 million range. And that's based upon new project starts. We expect that the margins should be similar to first quarter levels, in the low 60s.

If we look at fabrication, we generated revenue of $244 million in the first quarter, and gross margins of about 19%. Revenue was lower than expected, actually, due to the delay of a $40 million low-margin installation job that basically fell out of the first quarter. We now expect this to close during the second quarter, but this delay both reduced revenues and increased margin percentage modestly in the first quarter. When we look at the second quarter, we expect that fabrication revenues should improve a bit and we expect those to be in the $290 million to $310 million range, with margins in the mid-teens.

Looking at Aftermarket Services, first-quarter revenue was $70 million and gross margin was 19%, and for the second quarter we expect Aftermarket Service revenues of $70 million to $75 million and margins around 20%. SG&A expenses were $84 million in the first quarter, that's similar to fourth quarter levels and it's actually a little bit lower than expected, due to some delayed spending in a number of areas. We continue to expect SG&A levels to increase during 2010, as we continue to invest in our infrastructure, especially in the Eastern hemisphere. And we expect SG&A expense to be a few million dollars higher in the second quarter, partly as a result of pay raises which were reinstituted in April, after a year-long salary freeze.

We had $2 million in other income in the first quarter. That was mainly driven by a $5 million pre-tax gain on the sale of some corporate entities, and receivables related to the Cawthorne Channel project, that we sold a big project as part of the fourth-quarter business. This income, the other income in the quarter, was partially offset by currency translation losses. We generated EBIDTA of $124 million for the first quarter, compared to $140 million for the fourth quarter. Interest expense was $33 million, and that, again, includes about $5 million of non-cash interest expense related to our convertible notes. Results for the first quarter of 2010 were positively impacted by a $4 million tax benefit, and that came about largely from the sale of the assets related to Cawthorne.

Income from discontinued operations, net of tax, was about $10 million for the first quarter. That was driven by a devaluation of the Venezuelan bolivar. This January currency devaluation in Venezuela resulted in a gain, as our remaining Venezuelan net liabilities have now been repriced in a cheaper currency. Net income for the quarter on a diluted share basis was $0.10, but if you take away the non-recurring items, which is primarily the Cawthorne Channel gain, we had a loss of $0.02 per share. Net capital expenditures for the quarter were $42 million. Our total CapEx spending included $29 million in growth, and that was primarily for our international contract operations backlog. Maintenance capital for the quarter, as we mentioned, it was $8 million in North America, $3 million in international, so the total was $11 million.

CapEx, as we look forward, we still expect the total range to be $250 million to $300 million for the full year. Maintenance capital we've ticked down a little bit. We expect that range now to be $90 million to $100 million. And of the total CapEx amount, we had talked about having $100 million of uncommitted growth capital at the beginning of the year, and we've still yet to commit on about two-thirds of that.

If you look at the balance sheet, total consolidated debt again declined by $117 million during the quarter. So it went from $2.26 billion to $2.14 billion at March 31. Part of the debt reduction came from the $50 million cash payment on the Venezuelan insurance policy. You will recall that we booked the insurance gain related to these discontinued operations in the fourth quarter, and we actually received the cash during this year's first quarter. We also reduced working capital during the quarter by about $18 million. When you sum these things up together, over the past three quarters we've now generated cash flow and reduced our debt balances by $366 million. That equates to roughly $6 per share of an implied increase in equity value.

As we look forward, we expect that opportunities to generate cash flow from excess working capital levels and idle assets. We expect these opportunities to moderate during the remainder of 2010. But we are still committed to the goal of generating cash flow in excess of our capital requirements. At the end of the quarter, available but undrawn debt capacity was about $775 million.

Look for a minute now at Exterran Partners. I think as you've seen, EXLP announced a distribution for the first quarter 2010. It was level at $0.4625, that's $1.85 on an annualized basis, same level that we had in the fourth quarter, and the same level as a year ago. EXLP generated EBIDTA of $22.4 million and distributable cash flow of $14.4 million in the first quarter. Distributable cash flow was sufficient to cover the first-quarter distribution by 1.24 times. And cash flow benefited from a full quarter's contribution from the November dropdown transaction. Distribution coverage was benefited by our continuing success, of course, in lowering maintenance capital.

In the first quarter, Partners fleet average operating horsepower was 1,060,000 horsepower; that compares to just over 900,000 in the fourth quarter. But importantly, Partners actually grew horsepower during the course of the first quarter. At the end of the quarter, it was 1,060,000, and that was actually up about 10,000 from the December 31 horsepower level. So, at the end of the quarter, EXLP fleet utilization was 80%. Total horsepower was 1,318,000, and that remains at about 31% of the combined Exterran Holdings and Exterran Partners contract operations business in North America.

The last comment I have is we do expect to file the Exterran and the Partners 10Qs in next couple of days. Before we get to questions, I'll turn it back over to Ernie for a few closing comments.

My final comments really are around our priorities for 2010. I want to remind all our shareholders and employees that we have four priorities for 2010. And through these we believe we've got the business and our organization focused on the right priorities.

The first of these is safety. Everything at Exterran starts with safety. We are highly committed to our employees, our customers and our community to continue to operate at standards that are the best in our class.

Second priority is service. We remain committed to continuous improvement to our service quality. We made great strides over the course of the past 24 months, but we are far from done in our efforts to provide the best possible service to our customers.

Third priority is cash flow. Again, we've made great progress in the nine months and, as Michael said, we've repaid about 15% of our total debt, or about $365 million, which transfers about $6 per share from debt to equity of our stockholders. We are committed to continued capital discipline, proven cost management, and generating cash flow in excess of our maintenance and growth capital needs.

And our fourth priority are people. We can't achieve these first three priorities without having a great workforce. We have the best people now and we are committed to providing our employees with the right business culture, training and career development opportunities. I want to thank all of our employees for the great progress we've made over the past couple of years, and their huge contributions to our debt repayment and the cash flow generations, in what has been a very difficult environment.

And with that, I'll turn the call over to questions.

Thank you. (Operator Instructions).

The first question is from Brad Handler from Credit Suisse. Please go ahead.

Thanks. Good morning, guys.

Good morning, Brad.

Good morning, Brad.

Let's see. A couple different ones, I guess. With all of the operator interests shifting to liquids rich gas sources, can we please spend a little time talking about the opportunity that presents for you? And in a sense, obviously, I'm talking about the production and processing side, I don't know, to the extent you can quantify that for us on an individual unit or what have you; that would be really helpful.

Well, Brad, it's certainly going on and it is affecting us. Our Production Equipment business, which in itself is not a huge part of what we do, but a great part of the service we provide. It has been a big pickup. And, so, we are making good progress there.

On the larger projects, around process and treating, where the ticket items get a little bigger, we are seeing, again, exactly what you've said. People are focused on high BTU gas, and are taking CO2 even out in the Haynesville area, and it is generating a lot of opportunities. I would point to the -- our press release of last week; where we are going to own and operate a couple of plants in the Appalachian area that are exactly on point with this. So, we are -- we continue to work and have optimism, but it is hard to quantify exactly what that is going to mean. It is relatively new, but we are seeing a lot of opportunities.

Is it possible to think about a -- I guess I think I know the answer is no, but if we think about a standard skid relative to a 1200 horsepower standard compression skid. How much additional capital might be associated with the extraction of liquids? And again, is there any -- am I right to think that you all are in a position to be able to monetize that for the operators?

We could certainly monetize it. And, I will tell you that it just varies so much. We can do plants that are very local. I mean, that cost less than $1 million or $2 million, and you can do big treating and processing facilities that are $100 million. So it really just depends on the size -- on the amount of liquids and the complexity that you are trying to handle. So it is very hard to do from a standardization standpoint. I hate to be evasive to you, it's just -- there's too big a dispersion to answer the question.

Okay. How about more broadly? And I recognize some of this is not quite happening yet anyway, right? We are probably looking at, over time, this becoming more relevant. But how much -- if we look at your US contract operations business today, can you divvy up how much is compression versus everything else, i.e. just the production and processing side, I guess?

Yes. From a contract off, that is an easy answer. It is 100% pretty much right now in the US on compression. And one of the unique things about our announcement earlier on the two plants, is these will be -- we built a lot of these plants in the US and sold them for many years, but this will really be our first time to own and operate material-sized plants in the US. We have some in Mexico and we have some in the Eastern Hemisphere that we've owned and operated; but really the first time we do this in the US, to a material size.

Okay. That is interesting. I will hog the call one more minute, if I may. A little bit of color around the dollar per horsepower increase that you saw in the quarter, please? Presumably that is mix more than pricing, or --?

It is actually more a result of fewer stops in the quarter and, as we've discussed over the last year or two, as our contracts have been rolling over, many of them have repriced at lower levels because of the over-supply of compression. And in the last quarter, we just simply had fewer units that repriced to lower levels. So I think that is a function of the fact that a lot of the turmoil in 2009 is behind us from a stop standpoint, and perhaps a little less cost pressure in the field.

I think I -- I want to make sure I understand it. So you didn't get pricing lower. I get that. But there was something that had to have gone up?

No. There was a little bit that went up. The part that went up, you are correct, is mostly mix.

Okay.

And, Brad, I wouldn't put -- try to read a lot into this. First of all, it is a very small increase. Secondly, there are going to be some other items that go in there that would vary from quarter-to-quarter, freight revenue and those kinds of things, that can move this number around just a little bit. I still think it is interesting to note, we did have a slight increase. That is certainly good news, but I think it is still probably a little early to read a lot into it.

Okay. All right. Thank you very much, guys.

Thank you. The next question is from Mike Urban from Deutsche Bank. Please go ahead.

Thanks, good morning.

Hi, Mike.

Good morning, Mike.

I was wondering if you could talk a little about what might drive the decision, not necessarily from dominion, but just the customer in general, to do an own and operate plan, as opposed to some of the plants that you've built and sold in the past?

So, from an E&P guy standpoint, they can own it and run it, or they can outsource it. The historical way they have been outsourcing this, and by far the way they do most of it, is to gather and take some commodity risk and/or take control of the commodity, at that point. And, for us, it is somewhere in between there, so that they can outsource it, and we just maintain and operate the plant on a fixed monthly fee, regardless of throughput in this case. So I think it is somewhere in between from a commercial standpoint.

And then the other issue that goes to a lot of this, is it starts to look a lot like our international business; where the driver is that if they will come to us with -- and take a standardized product that we have standardized and have built many times over the years, and let us control and run it, that we will get it up and running quicker. I think speed matters a lot in these situations, and that was a big driver in this case.

And would you anticipate being able to do more own and operate type plants like this, or where do you anticipate most of them being kind of the traditional model where either the gatherers would do that or you would just sell the equipment?

Yes, I think it is way too early to say this will be a trend or anything. We like the model a lot, and we would obviously enjoy doing some more, but right now, I would not factor in a ton more of these.

Okay. And shifting over to fabrication for a second, you did talk about some low margin work being shifted into the second quarter. Was that the entirety of the strong margin in the first quarter, or were there some other things going on?

It was a couple points of the margin. But it was -- a point or two, I should say. The rest of the business did quite well over the course of the quarter. I would say there was a little bit of core out-performance on the rest of it, and then benefiting from moving that low-margin job out into the second quarter. But you can see, our second quarter guidance is still mid-teens kind of margins. I would say that overall the fabrication business is doing quite well.

Okay. That is all for me. Thank you.

Thank you. The next question is from Tom Curran from Wells Fargo. Please go ahead.

Good morning, guys.

Hi, Tom.

Good morning, Tom.

Circling back to the line of questioning on the North American processing and treatment own and operate opportunities. Michael, we've spoken about this a bit so far, but could you just expound upon the advantages you think you have when it comes to those opportunities and bidding on them against say a Mark West or the gatherers, both in terms of what you bring to the table, and then maybe, specific basins or geographic areas where you might have an edge, as well?

I don't know that it is an edge over these guys in a lot of cases, as much as it is a different model. I don't think anybody can bring our scale of the combination that we do, where we can provide the capital; we have engineered products that are kind of standardized, or we can modify to the extent we need to. We control our own fabrication in this, because we do it in our shop and then we can service it. So, our edge really comes -- what edge we have comes from the combination of all four of those and again, I think that equates to speed, as we go through this. When the customer wants to control the commodity side of it, then I think we have a great advantage. If the customer really is looking to a Mark West, in your example, to pass on some of that handling of the commodity risk, then we have a disadvantage, because we don't do that in our market.

I would just add, the other thing is we have close to a thousand customers in our North American contract operations business. We are dealing with these guys day in and day out. We have, often times, good insight into what their plans are and what they're going to do. In terms of a geographical strength, we've talked, I think, for a while, about the northeastern Marcellus is a place that we have operated for more than 30 years. It's a good stronghold for us. We're everywhere that people are and where they need to be. I would also say that probably South Texas geographically and where Eagle Ford is, is another place that I think we are strong, and should be able to have good insight into what customers are doing.

That is helpful. I know you are still doing your own research into this and trying to get your arms around it, but have you been able to come up with a rough estimate of the percentage of the total opportunities out there that clearly might fall into what you would consider your sweet spot?

No. I don't think we are any further -- we are further, but we are not ready to disclose anything along that.

Okay. And then, last question for me here; more of a housekeeping one. Michael, could you provide a breakdown for fabrication revenues for the quarter between compressor fabrication and production and processing, and then within each, North America versus international?

You bet. I will try to keep it pretty simple.

If you look at first quarter revenues, if you look at the three big buckets, production and processing, Belleli, and compression, not too far different from each of those being a third. Belleli was a little bit less than that, probably a quarter, and compression was a little bit more than that, pushing around 40%. Within each of those buckets, if you look at production and processing, probably pretty well split between international and North America. International was a little bit bigger, maybe 55% of that total. Then on compression, it was probably about 60% to 65% international; the rest being North America.

Great. And then how about the same for order inflow in the quarter?

Order inflow, I would say big picture about 70% of it was international, 30% was North America. I would say, let's see, production processing was about a third. Belleli was a little bit less than a third in production and processing -- I'm sorry, compression was closer to 40%, so kind of a similar mix there. Does that work for you?

It does. Thanks for the details, guys.

The next question is from Robert Christensen from Buckingham Research. Please go ahead.

Can you please help us on the collapse of the euro and how it will impact your second quarter, and maybe the balance of the year? Is it a positive, negative, and where does the impact lie?

Well, Bob, I think we've talked a lot about in the past -- currency is not a big driver for us. We do have a little bit, in terms of other income, from quarter to quarter. That is typically in terms of translation adjustments. If we have something, for instance in Brazil, that is denominated in dollars. But for the most part we are matched up pretty well in all our geographies, revenues and costs. And that would also apply to a place like Italy, where we are matched up, from the Belleli business, in terms of revenues and costs. I don't think that we are running true economic exposure from that standpoint, in any meaningful way. However, if the euro is weaker when we report, then euros get translated at a lesser rate and they are not worth as much from a dollar perspective. You can do your own math. We have talked about the Belleli business being about a third of our fabrication revenue. At 290 to 310, in terms of guidance for the second quarter, Belleli will be about a third of that.

And Bob, I would probably just add, that since not a lot of our competitors are European-based, I don't think it affects us; our ability to win projects in any material way.

But it could be enhanced to some extent --

The next question if I might, why do the -- I guess you call them gatherers, the MLPs, if you will, prefer to buy new compression as opposed to knock on your door and buy used compression, which really is probably pretty close to new? What is --? Is there a financial aspect to it, an MLP tax reason that they prefer new over coming to you?

Well, the question, I will modify it a little bit.

Yes.

The question of whether or not they buy or outsource via service, I do think there is a financial driver there and just the way distributable cash flow is calculated. Since distributable cash flow, and if they outsourced, and it was -- our charge to them was pure service and it had a capital component to it, that lowers their DCF, as compared to them buying a unit; where the depreciation and the (inaudible) -- the depreciation doesn't show up in their distributable cash flow. So, I think that is the major difference.

In terms of why they would buy new versus buy a used one, I don't know. I can't make any explanation for why that is. We haven't aggressively tried to sell our used units to them over time, but at times it could make sense.

Thank you.

(Operator Instructions). The next question is from Joe Gibney from Capital One Southcoast. Please go ahead.

Thank you. Good morning.

Good morning, Joe.

Ernie, I just wanted to talk a little about term contracting. There's certainly an emphasis here from the integrated project side. You referenced solid market demand on the call. I understand the maintenance contract side, ongoing cash stream there, you seem to be -- and it makes strategic sense, emphasizing term contracting. Just curious, and you referenced this with the Dominion 12-year term. Is there a greater willingness for operators to contract longer term now, cyclically versus prior cycles? Just curious on your thoughts there? I understand the longer-term mentality and it make a great deal of sense. I am just curious, from an operator mind set, what you are seeing there?

I would tell you, the only difference would be the availability of capital today versus probably three years ago. In a market where they had a little easier access to capital, and maybe on -- certainly on the gas side, where commodity prices were very high, we very much competed with them owning the units. That is still a deal for them, but if they want to outsource now, we probably have a little more leverage, in terms of getting longer term contracts, than we did two or three years ago. So, I think it is probably slightly different in terms of that.

It gets very different in terms of compression versus production and processing. Because on compression, they would be willing to do a shorter term contract, because they have high degree of confidence that they can replace us if we are doing a bad job. Or that if we decide we want to raise rates dramatically, or for whatever reason, it is the barriers to entry are relatively low. But as we move over to the treating and processing side of our business, they very much want a long-term contract to protect themselves, because their ability to replace us is very hard. Barriers to entry are high (inaudible), the time line to build a treating and processing facility to replace is challenging. So, for them, they need that longer term contract just to protect themselves.

Understood. That is fair.

Just a geographic and product line question. Could you comment a little bit about your approach to Iraq and the build out there; your comfort level with that market; and then FPSO topside equipment? I know you guys have referenced some of these opportunities in some of your recent presentations. I'm curious what else you're seeing there. Has it continued to be a market that is moving up in and to the right for you?

In terms of Iraq, we are very excited about the ability to provide equipment for the build out of their infrastructure. These are facilities particularly on the old side, on early production facilities that we have experience in and have been executing. But, again, it will be on the equipment side. I don't believe we have either the capabilities or the appetite to be on the ground, installing early production facilities there. It is -- we just don't have that breadth and depth of capabilities to do. I think we will sell a lot of that equipment into that market over the next few years, as that infrastructure is built out, but we won't be doing any installation work. We are excited about it; just slightly different.

And then, as it applies to the FPSO. Yes, it is definitely up and to the right. We continue to pursue this aggressively and work hard in Brazil, where we have a good footprint, solid management and history there, and where the demand by Petrobras, they are going to do eight FPSOs of their own. And the size of these, and what it can mean for us, is material. So we're working really hard on this issue these days. We remain excited and optimistic.

Okay, got that. Appreciate it. I will turn it back.

Thank you. The next question is from Brad Handler from Credit Suisse. Please go ahead.

Hello. Thanks for -- just a couple of follow-ups, please.

Maybe you did this a little bit, so forgive me, but can you just review your free cash again, and how much was it, in your determination, in the quarter? And then how much of that came from the favorable receivables out of Cawthorne?

So, the total cash flow for the quarter, $117 million. $50 million of it was the insurance proceeds from Venezuela, and we benefited about $18 million on just total working capital. The Cawthorne, kind of the residual pieces of Cawthorne that we sold, brought in about $5 million. So, those are things that you can take away and get to a core level of ballpark $50 million or so, from operations without working capital benefit.

Okay. Great. Thanks. That is helpful. And then one more.

On the maintenance CapEx, please remind me, so, if you start to put equipment back to work, if you have to retrofit that equipment to fit the work, is that also -- is that just maintenance CapEx? Or does that go into growth CapEx? How will you treat that? I am trying to gauge relative to what you have been saying.

Yes, Brad. That is a good question.

So, the way we think about it is, if we do a material retro-fitting of a unit, we really change its application, re-stage it. It changes the way it can be used; that we consider a growth CapEx. If all we are doing is really a huge overhaul that keeps it largely intact for the same application, even though that is a capital item at that point, that goes into maintenance CapEx. Most of what we will do when we start putting units back to work as the market turns around, will be in the maintenance CapEx category, not in the growth CapEx.

You expect enough -- there is enough consistency of need and your stage -- you have added more stages generally here, or equipment is new enough, or whatever it is, that it is probably -- you expect it to be applicable?

Yes, for by far the largest part of that. Hopefully we will find some opportunities where we run out of certain categories and we have to do some retro-fitting or, God forbid, we even have to build some new units. But we have a lot of idle units in a variety of ways that we think can make this work, in the near term.

Got you. And if you spent -- so in the first quarter you spent $11 million on maintenance CapEx, and you are saying you will spend $100 million for the year, right?

$90 million to $100 million is the guidance for the year.

So what assumptions is that about putting equipment back to work? Obviously it is making some.

What that implies is that the second half of the year, that there is material uptick in our make-ready activities, on the most part. I will tell you, on the other sort, to some extent, what we are doing from a maintenance capital standpoint is unsustainable. Because a lot of what we have done over the last year revolves around making sure our employees are not doing heavy maintenance, either too much of it, or doing it too early. So, we have really pushed them to make sure they analyze, as opposed to just on hours of units. But to go out and do the analyzation of the units with the equipment we provided them, so they can look at it and say, "Well, this can wait six months, we can still keep our run times up, we will do our preventative maintenance religiously, we'll do what's needed to be done. But we're not going to do them ahead of time." So, you can only do that for so long, because ultimately it kind of catches up. So we are being conservative in terms of how we guide on that. But in that bigger number is both a worry that we can't put it off forever, and an assumption that we will get increased activity.

Got you. Okay. Thank you. That is very helpful.

Robert Christensen is online with a follow-up question, from Buckingham Research. Please go ahead.

Hello, Bob.

Hi there. You brought up Venezuela. It brought up a question. Where are we in the pursuit of arbitration with -- where are we on that path, if at all? And what is going on in Venezuela at the moment, vis-a-vis your equipment? What is the condition of it and that kind of thing?

I will take the first part, Bob. We've talked about this. This is a long process from an arbitration standpoint. We did make another step during the first quarter. We actually officially started and filed for arbitration, but that kind of just triggers the next step in the process, which is going to be that both parties, us and they, will be preparing what are called memorials, which is a big written statement about your case. And that takes nine-ish type months, nine to 12 months, in the ballpark there, before those documents, those memorials would go before an arbitration panel to really start analyzing and thinking about where it will go. We talked about this being a multi-year process, in terms of how the arbitration panel decides, any appeals that will be made and ultimately being able to collect. We still believe we have a terrific case and we will ultimately win, but it will take a while.

So, in terms of the existing equipment and what is happening in-country. We are not operating. We still have a few employees there that are managing what we are running down. But there are -- we have two major projects that were in process at the time of the expropriation. That they are paying us some money for over this next, really in the next two quarters, to finish out for them. Because they just need us. And we will do that as long as it creates incremental cash. And then secondly, we do understand that the equipment is -- that they are struggling to keep the equipment running well. And are actually now talking to us, and I am sure other people, about providing them new compression to replace the compression that was running just fine 18 months ago.

So, our approach to Venezuela is very much that, you know, look, they are citizens of the world and we would be happy to do business there, and we really are setting the arbitration as one path. And then we will look, and be very smart and skeptical from a credit standpoint, but if we can find ways to provide them service, keep our employees safe and make money, then we will do that going forward.

Good. Thank you.

There are no further questions at this time.

Well, thanks, everyone, for your interest in the call and your time today. And we will be back again in another about 90 days.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.