Archrock Inc (AROC) 2010 Q4 法說會逐字稿

Good morning. Welcome to the Exterran Holdings, Inc. and Exterran Partners LP fourth quarter 2010 earnings conference call. At this time, I would like to inform you that 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 fourth quarter ended December 31st, 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 Company 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 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 out of 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 the related question-and-answer session include 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 ended December 31st 2009, Exterran Partners Annual Report on Form 10-K for the year ended December 31st 2009, and those set forth from time to time in Exterran Holdings and Exterran Partners filings with the Securities & Exchange Commission, which are currently available at 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 Mr. Danner. Sir, you may begin.

Thank you very much. Good morning, and welcome to the fourth quarter 2010 earnings call for Exterran Holdings and Exterran Partners. And as normal joining me on the call this morning are Michael Anderson, who is the CFO at the Holdings level, and Michael Aaronson, who is the CFO at Exterran Partners. And in today's call I will provide commentary on our operating activities and outlook, and then turn the call over to Michael Anderson for the financial review.

Starting in North America. Our overall business in North America continues to evolve and improve. And this business stabilized in mid-2010, showed some modest improvement in the second half of the year, and we expect continued improvement in 2011 in North America. And like much of the industry, our growth is coming mostly in the liquids-rich areas. Talking about our Contract Ops portion of our business first, some areas are growing rapidly, like the Eagle Ford and the Marcellus, but some are in decline, particularly the coal bed methane and older more conventional areas. This is due to lower natural gas prices, slowing activity by our customers in these older more conventional areas.

Looking forward we would expect our horsepower to grow in 2011. In the second half of 2010 it grew about 21,000 horsepower, 10,000 in the fourth quarter, and for 2011 we expect overall networking horsepower growth in excess of 50,000 horsepower. And this has the continued pattern of material growth in areas that are liquids-rich, offsetting contraction, and the conventional coal bed methane. So we think that dynamic extents well into 2011.

Looking at our operating costs in North America, we continue our efforts to enhance the efficiency of our operations. And this is both on the cost side and own the service-quality side. And in the fourth quarter our cost for horsepower declined somewhat, leading to marginally improved profitability. Looking ahead, and like much of the industry, the cold weather that we experienced in January are likely to lead to increased costs in the fourth quarter. But overall in 2011 and notwithstanding this tough start, we expect to take costs out of the system and enhance our overall operating efficiencies.

Looking at Fabrication segment in North America. Bookings were up in the second half of 2010 for fabrication products, and both the compression and the processing treating lines, and inquiries are at healthy levels. However, toward the very end of 2010, many bookings slipped into 2011, and this will have the effect of our fourth quarter revenues being a bit weaker and then be followed by a stronger second quarter for fabrication in North America in the balance of the year. So overall we expect to have a good year in North American fabrication and see attractive year-over-year growth.

Turning to our Contract Operations fleet on the compression side, during December of 2010 we began to implement a longer-term strategy to upgrade our fleet. This strategy will provide our customers with units that better match their needs and are of a more uniform configuration. As part of this strategy, we have decided to sell or retire approximately 1,800 compression units, that represents about 600,000 horsepower that are currently idle. As a result, our fourth quarter 2010 results include a $142 million impairment charge. These units that we are retiring are not required for our immediate future needs, and we believe we can create better value by selling these units and reinvesting the proceeds in assets that can be put to work on an outsourced basis much quicker than the assets we are retiring.

We are currently seeing very high utilization rates in certain classes of equipment and feel that now is the right time to evolve our fleet to meet changing demand characteristics. We would expect this process to take over three years or so, and will generate about $90 million to the Company. This action leaves us with about 860,000 idle horsepower in North America that we think are appropriate units for future service to Exterran.

So in summary, on North America, we believe that the work our field people have done over the past several years to improve our service levels has positioned us well to capitalize on an improving North American market. We believe that demand for natural gas in North America will continue to increase. This is due to the combination of relatively lower natural gas prices and the certainty of supply. We are positioning ourselves to have the right equipment, people and systems to grow along with this growth in gas supply.

Turning to our international markets. As we noted in our last earnings call, our international business quote and bid activity level slowed in the second half of 2010. However, based on current inquiry levels and current quote activity, and coupled with known infrastructure development plans and the capital spending budgets of our customers, we are cautiously optimistic that our international business will begin to rebound by the second half of 2011. Our key growth markets include Mexico, Brazil, Iraq, Kazakhstan, Russia, and China.

So going through international segments, and beginning with the International Contract Ops. During the fourth quarter, our utilized horsepower dipped as a result of a customer exercising a long-standing purchase option to buy 29,000 horsepower. We have owned and operated this horsepower on their behalf for more than ten years in the Asia-Pacific region. This piece of business previously generated Contract Ops revenue of about $10 million to $11 million per year, and this sale results in proceeds to the Company of about $20 million. While we are not excited about this Contract Ops revenue, this has been a very successful project for us, and it just made sense at this time for the customer to exercise their purchase option.

We are continuing to operate these units for the customer, but the revenues that we generate will be booked into our AMS segment, and not the Contract Ops segment and will be lower than our historic Contract Ops revenue. During the fourth quarter, we started no major projects, and our backlog for committed International Contract Ops business remains low at this time. A significant portion of this backlog, which increased to about $20 million in annual revenue is comprised of process and treating projects. Our capital spending for this backlog was substantially complete by the end of 2010.

So if you combine lower second half of the year bookings, completed projects, and the lead times required in this space, we would not expect to commit material capital dollars to International Contract Ops projects until the second half of 2011 and then into 2012. Finally, our fourth quarter results in International Contract Ops were negatively impacted by continued cleanup of some importation tax issue in Brazil from prior-year activities. During the quarter, the total effect was a reduction in pre-tax income of approximately $5 million on our Contract Ops margins.

So International Fabrication segment. We continue to be optimistic about demand for our products and services. Our bookings in the fourth quarter include a product for Iraq and Kazakhstan, and were up from the lower third quarter levels, and much like we cited in the North America segment, we would expect second quarter revenue to be higher than first quarter revenue in this segment.

Switching to Exterran Partners. Our fourth quarter performance benefited from the increased operating horsepower, and this is again tied to growing demand in the shale areas, and a four quarter contribution from the August 2010 acquisition from Exterran Holdings. We increased our distribution another half a cent per unit for the quarter, and our distributable cash flow coverage ratio remained solid at 1.27. We expect the partnership to benefit from the positive trends we previously discussed, and that we see in North America, and continue to grow both from organic growth and dropdowns from the Holdings Company.

Some final remarks before I turn the call over to Michael, over the past two years a primary focus of Exterran has been the generation of free cash flow, and we have made good progress on bringing down our working capital and freeing up cash from various parts of our operations. As a result of this focus, we have generated strong cash flow and reduced debt levels by over $600 million, or approximately $10 per share since the end of 2008. Moving ahead, we have created a balance sheet and an operating culture that will allow us to grow our business, while continuing to generate free cash flow.

We expect growth for 2011 of at least 5% on both the revenue and the EBITDA lines, and coming more in the second half of the year as we build our Contracts Ops business and execute new fabrication projects, and just to point out we have not historically provided this type of annual guidance on revenue and EBITDA, and we are really not likely to do so in the future, but with the timing of our revenue recognition weighted more towards the second through fourth quarters, we thought it was appropriate to provide our view on the full year, as well as our normal guidance of the quarterly.

In our operating areas, we continue to believe that we can create value for our customers by delivering quick, unique operating solutions that utilize our broad product lines, and provide a simpler single source solution of many of our customer's treating and processing needs. We also remain committed to the principal of distinguishing ourselves from our competitors by providing superior service, while setting industry standards for safety performance.

On the financial front, we do expect continued dropdowns to EXLP, and we expect to use the proceeds from these transactions and our operating cash flow to fund investments in growth projects and fleet assets, and expect that cash flow in excess of these needs for capital, will allow us to continue to reduce our debt at the Exterran Holdings level, and expect the reduction to be between $250 million and $300 million for 2011. With that I will turn it over to Michael for the financial review.

Okay. Thanks a lot Ernie, and good morning everyone. I am sure by now you have had a chance to look at our press release we issued earlier in the morning. Fourth quarter performance was very much in line with the segment by segment guidance that we had provided in early November at the time of the last earnings call, with the exception being our fabrication and AMS businesses that produced margins that were a little bit below our mid-teens expectations.

As Ernie mentioned we had another great quarter in terms of cash flow generation, we reduced debt by $74 million, that is a little bit more than a dollar a share for the quarter. Cash flow was actually even better during the quarter as we utilized about $43 million of cash for the early retirement of interest rate swaps associated with our refinancing activity during the quarter. So before retiring the swaps, we actually had about $117 million of cash flow during the quarter.

Let's now look at the fourth quarter results for Exterran Holdings. The North American Contract Operations revenue was $151 million in the fourth quarter. That was a little bit above guidance range, and was helped by stable pricing on a revenue per horsepower basis and modest horsepower growth. As Ernie mentioned, horsepower increased by about 10,000 during the quarter. That was in line with guidance, and similar to an increase of about 11,000 that we had during the third quarter. Gross margin percentage increased a little bit sequentially during the quarter to 50%, and that was driven somewhat by lower operating costs.

If you look at operating costs per horsepower they decreased about 3% compared to the third quarter. Maintenance capital was $18 million in North America, just a little bit higher than the $16 million that we spent in the third quarter. Adjusted for the fleet impairment, we had a total North America contract compression fleet of 3.7 million horsepower at the end of the year, and the fleet utilization was 77%.

Looking ahead at the first quarter, we expect North America contract operations revenues of around $150 million. That is going to be in line with fourth quarter levels. First quarter revenue level would equate to relatively flat to modestly positive operating horsepower levels compared to the fourth quarter. We do expect flat to modestly down margins due in large part to the cold weather-related cost pressures. Maintenance capital we expect to come in very close to fourth quarter levels.

When we look at International Contract Operations, there the revenue in the fourth quarter was $112 million, that is just a little bit above the guidance range of $108 million to $110 million. That was helped primarily by some rate adjustments to offset wage increase, and also some retroactive revenue that we got associated with the operation of the gas plant, both of these things occurred in Argentina. These one-time benefits totaled about $2 million for the quarter, so without that we would have been right at the top end of the guidance. Gross margin of 60% was in line with our guidance.

The international fleet had 1.2 million horsepower at December 31st, and the utilization rate was 82%. Operating horsepower was down sequentially during the quarter primarily as a result of the sale of those Thailand units, and also a little bit of reduced activity in Argentina which was largely offset by some increased activity in Mexico. If we look at the first quarter, we expect that International Contract Operations revenue will be in the $105 million to $107 million range. That is a bit lower from the current levels, primarily the result of $1 million to $2 million in kind of nonrecurring revenues that we had in the fourth quarter, as well as the sale of the Thailand units which were generating close to $3 million in revenues per quarter. We expect that margins will be a little bit below 60% in the first quarter. The Contract Operations backlog on the international front is about $20 million of annualized revenue right now.

Let's move over to Fabrication. There we generated revenues of $266 million in the fourth quarter, and gross margins were 14%. Revenue was near the upper end of the guidance range, while margins were a little bit lower than expected, largely as a result of some cost misses in the Eastern Hemisphere. Revenues during the quarter when you break things down from a product line perspective consisted of about 34% compression, 24% Belleli, and the other 42% or so in production and processing. And geographically about one-third of the revenues were in North America, and the other two-thirds were in internationals. That is the fourth quarter.

As we look forward the backlog is similar to that. It shifted a little bit more towards North America. The backlog right now is 38% North America and62% international. When we look into the first quarter, we expect that fabrication revenues will be a little bit weaker. $220 million to $240 million in terms of the guidance range. Margins will be in the low teens and again repeating some of Ernie's comments we expect first quarter fab revenues to be on the weaker side, but we do believe that the recent activity in the bookings will lead to nice growth for the segment for both the second quarter, as well as when we look at things on a year-over-year basis, 2011 compared to 2010.

Looking at aftermarket services, fourth quarter revenue was $86 million, gross margin was 12%. Revenues improved from third quarter levels largely due to increased activity in the Eastern hemisphere and Latin America, but overall margins do remain under pressure due to competitive market conditions. If we look at the first quarter in AMS we expect that revenues will be $80 million to $85 million, and margins in the low to mid-teens. SG&A expenses were $92 million in the fourth quarter, that was generally in line with our guidance, and we expect that SG&A expense should be flat in the first quarter.

We had about $6 million in other income in the fourth quarter, that was mainly driven by currency translation gains, and also gains on the sale of used units and some other assets. We generated EBITDA of $104 million for the fourth quarter. When we look at interest expense, a couple of unusual things there, interest expense totaled $38 million in the fourth quarter. That is a bit higher than expected. Due in part to our refinancing activities, and also some interest penalties that we had related to the Brazilian importation taxes.

As we look forward we expect that cash interest expense for Exterran will be about $25 million in the first quarter, and that is going to be benefiting from the debt reductions, and also our refinancing activities, but when we look at the interest expense that we will book from a GAAP basis, that should be about $11 million higher, or about $36 million in the first quarter. That non-cash portion, $11 million for the quarter includes deferred financing fees, the OID related to the convertible notes, and now the new bit, which is amortization of the interest rate swaps that we had terminated during the fourth quarter, we had the asset impairment of $142 million in the fourth quarter,that was primarily related to the decision to retire and sell about 600,000 horsepower primarily from the North America Contract Operations fleet. It is important to note that the impairment charges did not impact cash flows, liquidity or compliance with our debt covenants.

Fourth quarter depreciation and amortization experience was $105 million. As we look forward, we expect that number will come down in the first quarter, and expect it to be in the mid-$90 million range. That accounts for both the loss of the sold units that we had in Thailand, as well as the reduced depreciation expense that we will have associated with the impaired units. Net capital expenditures were $62 million in the fourth quarter. Total CapEx included about $31 million of growth capital, and that was primarily for new projects in Latin America and North America.

Looking forward, capital expenditures for 2011, we expect to be in the $225 million to $275 million range. And that will include maintenance capital in the $85 million to $95 million range. When you break this apart, we do expect that we will spend about $50 million of capital for investments other than our Contract Operations fleet. So if you back into the number that says about $80 million to $130 million in 2011 fleet growth capital, and currently little of this capital is really committed to specific contracts.

When we look at the balance sheet total consolidated debt again declined by $74 million, so debt went from $1.97 billion to $1.90 billion at December 31. We remain committed to generating free cash flow and we will expect to reduce Exterran Holdings debt, now that is exclusive of partnership debt by $250 million to $300 million during 2011, from the current level that we have at the Exterran Holdings net of partners debt it is $1.45 billion, and over the year we expect that will become something less than $1.2 billion. We expect that this debt reduction will come from both operating cash flow, as well as transactions with and related to Exterran Partners.

During the year we do expect Exterran Partners to increase its debt levels as it grows both through organic new builds and potential further dropdowns. In terms of credit availability, our available but undrawn debt capacity at the end of the year was $523 million, and that includes $101 million that is at the partnership level.

Let's switch over now and talk about Exterran Partners. Late last month, EXLP announced an increased distribution for the fourth quarter to get to $0.4725, or $1.89 on an annualized basis. That distribution is a half cent higher than what we had in the third quarter, and $0.01 higher number than what we had in the second quarter, and also in the year-ago period.

When you look at total cash distributions that were paid by partners for the fourth quarter, they were $16 million, and of the $16 million Exterran Holdings received $9.5 million based upon its ownership of both common and general partner interests. The general partnership portion received $836,000 in the fourth quarter,and that equates therefore to an annualized distribution for the GP of just over $3 million. When you look specifically at the numbers for EXLP EBITDA was $31.4 million and distributable cash flow was $20.4 million for the fourth quarter. Our coverage was 1.27 times.

The Partner did benefit by the full quarter's worth of contribution from that August 2010 dropdown, as well as from organic growth which was about 22,000 horsepower during the quarter for Exterran Partners. Partners also had part of that asset impairment. It was about $25 million in the fourth quarter, and that related to about 117,000 horsepower. And again, for Partners the impairment charges did not impact cash flows, liquidity, or compliance with debt covenants. In the fourth quarter, the fleet average operating horsepower was 1.364 million for Exterran Partners, and that compares to just north of 1.2 million in the fourth quarter. At the end of the year the spot utilization was 88% for Exterran Partners.

As we look forward the maintenance capital number for Partners we expect that to be $22 million to $26 million in 2011. And then important numbers with regard to interest expense. In the fourth quarter interest expense at Partners was about $6.5 million. As we look forward that number in the first quarter will probably take up just a little bit $7 million to $8 million is our estimate. But we believe that it should be just $4 million to $4.5 million of that should be cash, the balance of it will be related to deferred financing fees, and the new aspect of amortization of terminated swap costs will be included in that total interest expense number.

When we step back and look at Exterran Partners it was really a very successful 2010, we completed an accretive dropdown of 255,000 horsepower, which improved distributable cash flow coverage, and also the credit profile at Partners. Partners successfully refinanced all of its debt towards the end of the year with a new five-year $550 million credit facility, and we also made some progress with regard to the float on the units. Exterran Holdings during the year sold about 5 million units of the EXLP units that it owned back in September, which enhanced the overall liquidity and daily trading volumes for EXLP units. So we have seen that volume uptick a good bit since that transaction.

Overall Partners improved share price by over 20% during the course of 2010, and also increased its distributions in each of the last two quarters of the year. Since the October 2006 IPO, Exterran and EXLP have now completed five successful dropdown transactions, and today about 44% of the overall Exterran US horsepower is at the Exterran Partners level. Since 2006 EXLP has grown its distributions by 35%. Of course as we look ahead, we do remain committed to growing the partnership, increasing distributions over time, through both accretive acquisitions and organic growth.

I believe our outlook is enhanced by now improving business conditions in the US. Still a little bit more than 2 million horsepower at Exterran Holdings that has not yet been dropped down the partnership, a good and flexible capital structure at Exterran Partners, and improved MLP equity markets. So that really concludes our comments at this point. We do expect to file the Exterran and Exterran Partners 10-Ks in the next few days.

At this point, operator, we would like to open up the call for some questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). The first question comes from Mike Urban from Deutsche Bank.

Thanks, good morning.

Good morning, Mike.

Good morning, Mike.

Ernie, I was wondering if you could go in to more detail about the fleet strategy, and then the review that you undertook in the US. Have you seen a change in customer preference or the demand dynamic in the market that led you to do this, or just something that kind of it was time to do?

It is certainly both of those things. The dynamic has changed in the shales, what is needed for the future gas supply in the shales is certainly different than what has been needed for more conventional applications, and a more diverse, spread-out producing region, so the change in the demand is certainly there, but also his is something that has been going on for as you said, just a long period of time. If you look at changes in the amount of gas gathering and the pressures that they are gathering at, and what that has done over the last ten to 15 years, this is not something that is new, but it is something that we haven't evolved with as rapidly as I think we can and will in the future. So we will be more proactive in how we manage the fleet going forward, and we have historically kind of taken the approach we invest in fleet and we hold it forever.

And we are now going to be more proactive and adapt our fleet to meet changing dynamics, and the only other thing I would point to is that the time period, our expectations about natural gas prices in the future are different today than they were three years ago. And if you come back to the 2007 and 2008 period with $8 gas, it made a lot of sense to produce a lot of the kind of marginal wells that at $4 gas it doesn't make as much sense to. So the change for us is that we believe that the US is going to enter into a long, plentiful gas supply like everything else, and the forward curve suggests. I don't think there is anything rocket science there, but if you are in a sustained $4 to $5 high-volume environment, that requires different compression than a highly volatile price, where you are producing some $7 to $8 gas. And we are adapting our fleet to that. So we are excited about the opportunity. It just means we have too much of a certain class of equipment, and that we are going to monetize that and build into some assets that have more demand.

Right. So that, I guess, leads into the next question, and it sounds like you are going to do this, you have not put a lot of capital into the North American business lately, more focused on reactivating existing assets, is there going to be more of a shift on building some new capacity and new equipment going forward?

There is. I mean, we have been successful putting a lot of our assets to work, it just doesn't show up in the net numbers as much because we have had more continuing idles, so what we have got is we do have some classes of assets where we are getting good returns, and we think it makes a lot of sense to invest in, so we are not out of those yet, but with the growth demand we see, and our conversations with our customers, we are going to get there pretty quickly, and so with our new improved service levels, we think it is a good opportunity to continue to grow, and we are going to put capital to work on that. The returns are good.

Okay. So our much of the, I guess it was $80 million to $130 million of growth capital is going to be allocated to the US?

We don't know for sure yet, Mike. Half would be a good start. And there is a band around that. It could be a lot more, but we have more surety that it is going to happen in North America than Eastern hemisphere, so we are pretty sure that is going to be there. So half is as good a guess as now.

If you go towards the upper end of that range, would that imply that you had those opportunities come through in the US?

Yes (Overlapping speakers) That is probably, well it could go either way. The projects in Eastern hemisphere and even Latin America tend to be bigger projects. So if you land some of the ones that we have, that we are kind of thinking maybe at the end of the year, we land them earlier, then that can jump it up just as much as a bigger ramp up in North America. With our capital the way it is, and with the balance sheet work we have done, we are poised to do a lot more than this, and obviously we are still generating and paying down debt even at these levels. So we will flex that up with the opportunities that are there. And still live within our goals of creating free cash flow.

Okay. I will turn it over. Thank you.

Your next question comes from Jim Rollyson from Raymond James. Please go ahead.

Good morning, guys. Ernie just following-up on one of the things that you said, talking about kind of reworking or retooling your fleet to match the market we are in today, I assume that means you not expecting some of the units you have written off, or will be selling to ultimately come back into the market, necessarily and complete with you?

Well, there is always that chance. As we think through that dynamic, and as we price our units, we think the most likely place for this to go, if you think about the full compression, two-thirds of compression in the US is owned, and not in an outsourced. It completes with us as owned compressions by producers or gatherers. So logically that is where most of this will go. And then if you think about the third that is outsourced, we are half of that market. So you boil all of that down, there is idle compression out there that somebody will sell to the outsourcers that want to buy that, and if we don't participate in that, we are just kind of shooting ourselves in the foot. So we are going to be very smart about how we price that. And we are going to price those units that we monetize in a way that we are better off getting the cash, and putting it into something else than we are just sitting on it.

Right. Makes sense. From a margin or cost standpoint, obviously first quarter you mentioned the weather impacts, any sense of magnitude you are hoping to get costs down as you move throughout the year?

I think a lot is going to depend, we did have a target that I would love to throw out, but there have been developments. Between the weather and what we see in terms of rising lube oil and natural gas for our trucks, and a lot of competition around the labor and our growth areas. We are comfortable we are going to take costs out of the system, but those things are changing as well, and moving against us. So right now we are just going to say we are going to lower it, and not give an order of magnitude.

And then last question for me just from a partners perspective. Obviously you have been doing a dropdown a year kind of timing in the last few years. The last one was mid-2010 or just after. Any sense of timing of when one might happen? Or is that still pretty up in the air?

Jim, it is Michael, and I think we are going to stick to our historical guidance of not providing specific outlook on when dropdowns are going to occur. But you heard us talk today about generating cash flow, part of that cash flows is going to come from Partnership transactions, which means that we are likely to be in the same ballpark of doing a transaction a year. I think we will leave it at that, we remain committed. We think dropdowns make a lot of sense for us, and right now, Partners is doing well from an operating standpoint, and has been doing better in the market place, so we think dropdowns continue to make a lot of sense.

Great. Thanks, guys.

Operator, are you there?

Mr. Christensen, please go ahead with your question.

Yes, how much horsepower do you have in coal bed methane in North America?

Bob, I don't know that answer off of the top of my head. It is certainly, I can tell you it's centered around the San Juan, and some in Alabama in terms of where it is, but I do not know the answer to that question off of the top of my head.

Okay. The FPSO business. We keep seeing some FPSOs out of Brazil, and not seeing any awards come your way. Could you update us on that, please?

Well, we don't announce awards on that type of stuff. We do continue to have a healthy backlog for projects that are going into Brazil. They are being executed, and continue to be executed for us out of our Singapore facility. And we continue to be working hard on providing local content in Brazil, but to date, we have not landed a contract that we would execute in Brazil. We are continuing to get business, but it will be executed out of our Singapore facility.

I thought there was this local content rule, Ernie.

There is. But all it says is that the provider has to have a certain percent of local content in their deal. If you look at Modec's and SMB, that allows them to have some content that is outside of Singapore, or they could have all of it outside of Singapore, but the penalties get to be fairly high in terms of the bid spec. So we continue to provide product to both of them for stuff that will end up there. It is just not being executed in Singapore at the current time from us, some of theirs is being executed in Singapore obviously. Does that make sense to you, Bob?

Yes. How much revenue right now is coming from some of these liquids rich crude oil plays that are just booming in the US. If I had to think the incremental revenues in your Company between the third and fourth quarter, could you take a stab how much was coming from these plays?

No, we don't quite break it out like that. We're adding horsepower a lot, and as I said in the call, in terms of the Marcellus and the Eagle Ford, the Marcellus is obviously not all liquids rich. Some of it is just proximity. But the numbers are somewhere around 25,000 to 50,000 horsepower, and each one of those markets was added in the second half of the year.

Bob, the other thing I would add, I mean we are getting benefit from things like production equipment and things that are happening in Eagle Ford specifically. The production equipment business for us is not huge, but it is doing better kind of year-over-year, and quarter-over-quarter.

I wanted to get a sense of magnitude on that?

No, the production equipment for us in total in the US is about a $100 million type revenue business. Gives you a sense for that.

And our processing and treating lines are continuing to serve. I mean, they are right at that liquids rich on the processing side, and a lot of our backlog continues to be built from that in North America.

Just trying to get a sense of the increment. You gave me a $100 million run rate annually. What kind of increment are we seeing? In the production, treating, processing for these plays? Is it stepping up meaningful?

It is where the growth is.

Right.

And it's just how much, your question is how much is coming there, and the net answer is what does that mean is coming out of the other conventional basins. And we haven't totaled it up as how much is coming from there, but we can do so, but we are not prepared to do it right now.

Okay. Thanks.

Next question comes from Tom Curran from Wells Fargo.

Good morning, guys.

Good morning, Tom.

Good morning, Tom.

Returning to this high-level strategic review you did, I have two follow-up questions. The first would be what did you conclude about the very recent trend in outsourcing, and as a result of it what do you expect over the time period that the review spans, it sounds like at least three years, what would be first? And then second, as a result of that, how would you expect your total North American revenues to shift over the next three years?

So in terms of the percent of the market is outsourced as opposed to owned, there have been some dynamics there that will move, we think they are counter balancing, and the end result is it stays around where it is at around one-third of the market. The counter balances are, we continue to see gatherers wanting to add horsepower that they own. That is moving against us, but with cost of capital coming down, we continue to see capital come into the outsourced providers, and we believe that we can make money providing that, so pricing has come down, and that has offset a lot of that. So the E&P guys net-net moved more outsourced and the gatherers continued to grow on theirs, and that ends being about one-third, we think that continues for the next three years. Capital could of course change that, if cost of capital gets sparked up really high, that could move it, but presumably it sparks up for the E&P guys as well.

That is interesting. And how about the historical relationship between the annual growth in total natural gas production, and then the growth in total US horsepower, both owned and outsourced?

We don't see that changing from the 5% over time. And that is just, we have been in a lull of that as plays like the Haynesville come on. But the Haynesville is going to mature and it is going to need compression to the extent it provides a lot of the gas. Obviously a lot of new drilling is going on in the last 12 months in the Haynesville, or not as much, so it is going to mature, and it is going to need compression. So we expect that 5% to continue over a long period of time. We have blips in it, but don't see a change.

Okay. Both of those responses are encouraging to me. Turning internationally, you had mentioned some bookings in Iraq, Ernie, I am assuming those would be the sort of mini production and processing plants that you build on skids we had discussed, and if so, how many more of those do you think could be awarded just industry wide over 2011?

So the Iraq stuff that we put in and booked was early-production facilities for oil, and they are the kind of 20,000 to 25,000 barrel a day early production facilities. There are a lot more of those-to-be awarded, some of the concession winners are doing it this way, and some are going straight to what they would consider their more stick-mounted permanent facilities, but we think this is a big growth opportunity for us, and we are putting a lot of effort, we are active on two or three bids and we will see how they go. This is the Iraq area is where we have partnered with a particular EPC Company, and they will do the installation work and the balance of plant, and we are providing our equipment out of our Hamriya facility in the Emirates. So it is a good partnership, and we think we are very competitive, and we are executing on some now. But it is a big opportunity.

Okay. And then just more broadly internationally. Whether you want to address it across both Contract Ops and fabrication or just fabrication, could you give us an indication of the percentage of what you are chasing that you are very confident about winning it, it is just a question of timing.

I am sitting here trying to figure out how to answer that one.

I don't know if it is number of projects out of this number. You guys used to talk about for example, the number of specific projects for Contract Ops that you were pursuing or you expected to come into the backlog, or just total revenues?

It varies all over the page. I mean we have some that we are very confident in, and we are far along in terms of the bidding. We have some that we are early on. So I don't know how to think about it in terms of the percent of the total one. It is like anybody else. You have got some that have matured and you are there, and a lot that are in the early stages. As I weigh them all, I think the best way for me to answer that is just to say for a change we have given guidance on 2011 in terms of revenue growth for the Company, and I think that is as far as we are going to go right now.

Okay. Thanks for all of the color, Ernie.

You bet.

Your next question comes from David Anderson from JPMorgan. Please go ahead.

Good morning, Ernie, just a couple of quick questions here on North America. You talked about how the dynamics are shifting a little bit, and how you are changing your compression to meet that. Can you talk about how the dynamics change from the dry gas to wet gas to really kind of the oil side on the Bakken? What is the opportunity set for each of those in terms of how your customers use your compression?

Well, on pure oil production like in the Bakken, where they are really just still flaring gas, we are not using compression at all. Ultimately they will have to do something with that gas I can't believe the north United States will let them flare it forever. And that will could be reinjection or the pipelines can get developed, then you will have compression applied.

Okay.

When you get to the liquids area it is about gas, and it is separating out the liquids, so our production equipment goes into that in the early part of it, our processing treating goes, if there is enough critical mass that they are going to strip the liquids there, and then the compression comes to deliver the residual gas through the system. So we are involved all along the liquids-rich areas, and the more oilier it gets, our piece of that business really becomes that production equipment that Michael talked about that is a little over $100 million a year. We are participating in that.

You said two-thirds of your customers actually own their compression, I assume that is a lot less in these wet gas plays?

No, I don't know that that is true.

Oh.

It varies. Clearly in the Eagle Ford I think it is less outsourced than that today. As they develop, I think we are getting very good market penetration. Our operating guys are doing a great job in that area, and we are meeting our customer's demands fairly quickly with our idle equipment. So that is going very well. So that one, I think, is less than two-thirds owned and more outsourced, but I don't know if that applies to the other ones.

On a completely different subject, I don't recall you guys talking about Iraq very much. One of the things you hear when you talk to the service companies is there going to be a tremendous amount of workovers going on over there in this initial stage? I have heard from BP and the like that there is old compression equipment just sitting around rusting, getting beaten up out there. That is going to be a big thing that they are going to need to change. What are your thoughts about that market? Are you looking towards that market for your compression business, and how do you address that?

We are looking at it. And there has been a couple of recent concessions. The first concession is around what they have done that are gas focused have been left, and we are talking to both of those winners, one in particular in a strong way, but your other point about just the modernization and upgrading of all of the compression, we will be there. We are strong in compression worldwide, and this is our area, and if there is an opportunity, we generally get a shot at it. We don't win them all, but we generally get a shot. Yes, we are focused on it. It just hadn't gotten to the point of material compression orders in Iraq for us to talk about.

Is that a 2011 event?

I would think that is more in the 2012.

More in the 2012. Ernie thank you very much.

Your next question comes from Mike Urban from Deutsche Bank. Please go ahead.

Thanks. I had a couple of follow-ups. Again, related to the reorganization or reevaluating the US business, up until now again with the focus being on reactivating the idle assets, you had been a little bit reluctant to raise prices, even on a cost push basis, and you still do have a decent number of idle assets out there, just wondering how if at all that strategy has changed, given the new approach going forward in the US?

Well, we are not optimistic that pricing is going to move in the US any time soon. There is still capital coming into it, and people are making the margins at this low level that attract new capital, and so that is not a recipe for price increases at the current time. I think that if we see some of the cost pressures start really coming in on what I talked about earlier about lube oil and natural gas, that may provide us a little more coverage to do so, but we are not optimistic on pricing any time soon.

It was more the latter there that I was wondering about. Even as your costs were going up, I think you were a little reluctant to push the pricing higher, so it sounds like that maybe has changed a little bit, you can at least maintain, I guess what I am trying to get at is should we think of you of at least being able to maintain your margins as you put more horsepower back to work?

Yes, we are comfortable with that. And the other part of the equation that we haven't talked much about, is it is just now true that we have been saying for a long time, and believing, but it is just now true that our customers are really getting comfortable that we are delivering great service, and like anybody else it is hard to, until you get to that point it is hard to raise prices, unless you have a very rare commodity, until you get your customers agreeing that you are giving great service, and we are there now, so that also opens the door for more of that.

Okay. Great. And then last thing I had was I know it is difficult just with the profitability kind of around or below zero there, the tax rate, Michael, how should we think about that?

I liked your answer, it is difficult. But when we look at it from a macro standpoint, the tax rates and the way we have got things structured, mid-30s is kind of a normalized rate, but there is inefficiency to it, when you are plus or minus around zero. So when we have losses, it is likely that we are not going to be able to benefit to that same extent in the mid-30s. It is going to be something less than that.

And then as we turn things around and begin to post profits, there will probably be inefficiency on that side at the very beginning, so when you have some modest profits, you are probably going to be a little bit higher than mid-30s, but mid-30s when you blend it all in in terms of where we operate is the right number, but I can tell you it is very, very difficult in all of the 30-plus countries that we operate in, and where we are from a net income and taxable standpoint to give you really good guidance in terms of effective tax rates.

Okay. That is all for me. Thanks.

The next question comes from [Tariq Assisi] from FrontPoint. Please go ahead.

Hi.

Good morning, Tariq.

Hi, how are you guys?

Good.

Just a couple of questions. You alluded to earlier that EXLP liquidity has improved, and we have also seen nice growth in its market capitalization. I am wondering if that in any way influences the dropdown strategy in particular, given the depth in the MLP market today, and those other variables, whether you are open to a dropdown that is perhaps a little bit larger in size and scope than what we have seen in the past?

I think and we actually said thisI think a quarter ago in the call. The MLP markets have gotten better, the outlook for North American compression in our view has gotten better. That all leads to as we look at dropdowns the ability to look at something sooner, more frequent or larger, all seem to be things that make sense for us, and quite frankly the numbers just work better when you have got a better, more robust business, and you have got the tools that the LP has in terms of access to debt capital and a better unit price. So I think we are in alignment with you in terms of where you are thinking on that.

How much horsepower at this stage do you guys have available that is ready and able to be dropped down, if you elect to make that decision?

Yes. So our constraint that we have talked about in the past is just to make sure that we have got the contracts in the converted service format, and that is going to give us a little bit more than 500,000 horsepower that we have got today. And we are making good progress in that as 2011 is going to be easier for us to make real inroads to get the rest of the business converted over. We I don't think it's going to ultimately be a roadblock for us, but right now that is one constraining factor.

But right now you have about 500,000 horsepower available to be dropped down?

A little bit more than that.

A little bit more than that? Okay. Okay. So if I were to make a very simple assumption and say, assume $800 of horsepower for a dropdown, that equates to roughly about $400 million in assets that could be dropped down? Is that like a decent, or is that an appropriate size to think about?

You are doing very good that simple math in terms of what we have in terms of what we have available that we could put down there. And that is a typical kind of valuation. We are typically looking at cash flow multiples and opposed to pro horsepower. But we are where a lot of the dropdown multiples have been. I can't argue or refute your math. You have seen what we have done, which has typically been something more in the order of 250,000 horsepower in terms of the drop down.

Okay.

We go back to as we think about it, we are probably thinking a little bit, if we are changing our thinking, it is getting a little bit bigger.

Okay. Okay. And then finally in the press release, there was a statement that you are targeting about $250 million to $300 million of free cash flow towards debt repayment, and what I am wondering is that how do you guys think about the capital structure at EXH Holdings, and what the appropriate leverage is, and then once you reach that appropriate leverage, the deployment of capital between growth and return to shareholders, either in the form of a dividend at EXH Holdings at some point, or reinstating a buyback? And the reason I say that is you look at the share price over the course of the last few years, especially in relation to its peer group, it has been a very poor performer for a variety of reasons, but that being said, I mean, this is a business that I would in the trough is generating, $250 million to $300 million of free cash flow. That equates to about $4 or $5 per share free cash flow. At the trough trading around 4 or 5 times free cash flow. So there seems to be a discrepancy. And I am thinking if you have that option, why wouldn't you buy back your shares at that type of valuation to get that return, relative to reinvesting in the business where you might not necessarily generate that type of return?

A lot of points there. I will tackle a couple of them, and then Ernie can bat clean up that I have missed on it. I think first of ail, one point I will take off is, you talk about a dividend for EXH that is probably not in the cards for us at any point in the near future. We have a great dividend-paying entity with regard to the Partners, so we think for people want to invest for dividends. We think that is a great way to go. Appreciate you pointing out the free cash flow we have generated. We think that is a huge attribute for this business, something that we think we have done quite well.

With regard to where we are trying to go from a capital structure standpoint at EXH, again coming back to, we think about 3 times debt to EBITDA is the right amount of leverage for EXH, we expect to generate significant cash flow over the course of 2011. Right now we are in the high 3s in terms of debt to EBITDA, so we have some work to do in terms of bringing that ratio down. I think once we have done that, we have hit our target, which is going to come about from doing the cash flow things, doing the LP things, and improving the business, having the business grow, then I think your questions with regard to what do you do with the incremental cash and capital, I think comes more in to play.

Yes, the only thing I would add to that is just to echo what Michael said, in terms of we are a year away from having this good problem, but we have made a lot of progress on our debt. We continue to think we can both grow the business and have free cash flow, and if you do that, then you get your leverage can get out of whack, and you have to decide what to do, and you have named the alternatives. It is either more growth, buying back shares, or instituting a dividend. So we have got a year to execute on the strategy we have laid out, and then we will have that very good problem, and we will figure out what to do with it at that point.

So I think we are out of time now for our hour, and thank everybody for their questions and interest today. And we will talk to you again in a another couple of months. Bye.

Thank you for participating in the Exterran Holdings Incorporated and Exterran Partners LP fourth quarter 2010 earnings conference call. This concludes the conference for today. You may all disconnect at this time.