Archrock Inc (AROC) 2011 Q3 法說會逐字稿

Good morning. Welcome to the Exterran Holdings, Incorporated and Exterran Partners LP third quarter 2011 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 third quarter ended September 30, 2011. If you have not received a copy, you can find the information on the Company's website at exterran.com. During this call, the companies will discuss some non-GAAP measures in reviewing their performance, such as EBITDA as adjusted, EBITDA as further adjusted, gross margin, gross margin as adjusted, and distributable cash flow. You will find definitions and a reconciliation of these measures to GAAP measures 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 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 Company's 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 31, 2010; Exterran Partners' annual report on Form 10-K for the year ended December 31, 2010; 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 disclaim any intention or obligation to revise or update any forward-looking statements.

Your host for this morning's call is Gordon Hall, Chairman of the Board of Exterran Holdings. I would now like to turn the call over to him. Mr. Hall, you may begin your conference.

Thank you, Ellen, and good morning, everyone. With me today is Brad Childers, who has been appointed as Interim CEO of Exterran. And also with me are Michael Anderson, who is CFO at the Holdings level; and Michael Aaronson, who is CFO at the Partners level.

We will discuss during this call our earnings for the third quarter and our outlook going forward. But first, I want to say a few words on behalf of the Exterran Board. The Board has confidence in Exterran, its unique combination of products and services, the significant future opportunities for global oil and gas infrastructure development, and its worldwide employees, who are among the most skilled experts in our industry. Together, these attributes provide a solid platform for future growth and improving profitability.

For a number of quarters, we have underperformed as a business. In fact, and to put it simply, our performance has been unacceptable. The Board and the management team both recognize that changes are necessary. I want to assure you that we are committed to enhancing shareholder value and that we are taking action to do just that. Recruiting a new CEO is obviously one such step. A bit later in the call, Brad will talk about other important steps that we are taking to significantly improve our performance. The Board fully supports the hard look that management has been taking at the business, and we endorse the Company's aggressive focus on business improvement. Importantly, the Board also remains committed to the Company's drop-down strategy around Exterran Partners.

Before I turn it over to Brad, let me give you a quick update on the CEO search. Monday of this week, Ernie Danner completed his service to Exterran, and all of us on the Board are very appreciative of his dedicated service and commitment to Exterran over the past 13 years. As we said during our last earnings call, the Board is leading a search for a new CEO, and we are committed to identifying and recruiting the absolute best leader for Exterran. I can tell you that you the process is going well. We have been interviewing candidates, and there is now a short list.

As we previously said, we expect to name the new CEO before the end of the year, and I believe it could be sooner. Obviously, I can't say any more at this stage, but let me assure you that we understand how important our selection of a new CEO is to our customers and employees, as well as to all of our investors. And we look forward to being able to make an announcement as soon as possible. Further, the Board has great confidence in Brad and the rest of the management team to guide the Company during this period.

So again, thank you for participating in our call this morning. All of us, the management team and the Board, are committed to creating value for EXH and EXLP shareholders, and we thank you for your continued support. In addition to serving as our Interim CEO, Brad a has been serving as President of Exterran's North American business. For the past 2 months, he has been leading our profit improvement project and driving that global effort. So now I will turn it over to Brad.

Thank you, Gordon. I'm pleased to be stepping into this position to lead the organization as we continue our search for a permanent CEO.

On our last quarterly call, we mentioned that we are going to be aggressive about sizing our business appropriately to reflect current business conditions, and we told you that we would be looking hard to further improve performance. Over the past several months, we have worked with an internationally respected consulting firm that specializes in helping companies improve their financial and operational performance. As a result of this work, we've developed a clear understanding of where we can be most profitable. It is in those areas that we will focus our energy. And we understand where we will be most aggressive at reducing costs. We've also identified where we need to improve our processes to be more profitable and where we need to focus our growth efforts. In short, we've been looking at everything that will improve our operating performance, and we're now moving quickly to act on the conclusions of our work.

The 2 examples I will share relate to right-sizing our operations and improving our cost structure. When we opened our engineering center in Chennai, India, about 3 years ago, we were anticipating a certain level of eastern hemisphere fabrication and integrated projects activity that simply did not develop in the time frame we expected. Earlier this month, we began closing that facility. The size of our organization will now better reflect the current market while allowing us to flex quickly when the situation changes. We expect our integrated projects business to grow in the future but realize that we need to reduce our costs now to better balance current profitability with future growth.

In addition, across all of our businesses and regions, we have identified significant opportunities to address our cost structure. Beginning immediately, we are reducing our work force. This reduction will equate to $20 million to $25 million in annual savings, with approximately $10 million to $15 million of that associated with SG&A. We expect to realize these savings beginning in the first quarter of 2012, and they should be fully realized by mid-2012.

I want to be clear that this is not -- this is a hard decision. And it is in no way a reflection on the quality of the people or the work done by our employees. We're grateful for their contributions to Exterran, and we understand that this will be a difficult time for many of our colleagues. But this is a necessary step to align our costs and capabilities with our current activity levels.

Now, we're not ready to give details or even estimates on the other profit improvement areas we've identified. But examples of these opportunities for profit improvement include such things as sourcing initiatives to reduce the cost of millions of dollars of parts and products we utilize in our operations, as well as better pricing discipline in both our AMS and fabricated product lines. Across the Company, we can and expect to improve performance. And we expect to see significant results from these actions, even without taking into account potential growth in the business.

Of course, our effort is not focused on cost reduction alone. Our work has also helped us to identify areas where we can grow, areas where we must increase our investments and improve profitability. Through this work, we've identified significant growth opportunities for Exterran, including the opportunity to expand fabrication manufacturing capacity in North America. Again, it would be premature to put any additional benefit or timing estimates on these profit improvement efforts, aside from the work force reduction at this time. But we look forward to sharing more with you in the months ahead. And in the meantime, we're going to be focused on delivering excellent customer service and value to our customers, growing our business, and implementing this profit improvement plan.

Now, I would like to turn the call over to Michael for a review of our financial results.

Okay. Thanks a lot, Brad. Good morning to everyone. I'm sure that by now, you have had a chance to look at our press release that we had issued earlier this morning.

Let's first of all look at the third quarter results for Exterran Holdings. Overall third quarter performance was slightly better than the guidance that we had provided during our earnings call in August. If we start in North America, Contract Operations revenue was $151 million in the third quarter. That was in line with our guidance range. And during the quarter, we saw growth -- continuing growth in liquids-rich and shale gas areas including Eagle Ford, Marcellus, Barnett, etcetera, offset by higher than expected stop activity in older conventional and dry gas producing areas. We believe the trends that we're seeing are very consistent with the ongoing evolution of overall North American natural gas production.

Given the growth opportunities we see in our current backlog, we expect that operating horsepower will increase modestly in the fourth quarter, although we expect this will still result in slightly lower full-year 2011 horsepower growth than we had expected in our prior guidance. Last quarter, we had highlighted 50,000 horsepower growth in the last half of the year. And although our backlog is good, low gas prices lead us to believe we will fall short of this goal by the end of December. Nevertheless, we still believe we are at the front end of an attractive growth market for North American Contract Operations, and we expect improved horsepower growth during 2012.

Gross margin in the segment decreased somewhat sequentially to 49% and that was a little bit below our guidance. We continue to attack our North American operating costs and enhance overall efficiencies, although some of this progress has been offset by higher lube oil prices and also seasonally higher repair costs, related to hot summer weather in July and August. We do expect to have further positive progress on the cost front during the fourth quarter.

Maintenance capital is $21 million in North America during the third quarter, and that compares to $22 million in the second quarter. At the end of the quarter, we had a total North American contract compression fleet of 3.6 million horsepower, and fleet utilization was 78%. Looking ahead at the fourth quarter, we expect North American Contract Operations revenues to be in line with third quarter levels, with operating horsepower increasing modestly during the quarter. We expect margins to improve slightly on a sequential basis, with the benefits of efficiency initiatives continuing to slightly offset ongoing cost pressures.

Let's turn over now to the International Contract Operations segment. We had revenue of $114 million in the third quarter. That was higher -- a little bit higher than expected. It was also up from $111 million in the second quarter. Gross margin of 58% was above second quarter levels and also in line with our guidance range.

Both revenues and gross margins benefited from improved operating performance in Latin America, with growth in Mexico and also some one-time revenue benefits that we saw in both Argentina and Brazil. At the end of the quarter, the international fleet was 1.2 million horsepower. Utilization rate was 79%. As we look forward into the fourth quarter, we expect International Contract Operations revenues and margins to be relatively flat compared with third quarter levels.

In the past few weeks and since the end of the third quarter, we have actually now signed a 4-year agreement with an important customer operating in the Middle East to provide 3 natural gas compression trains with capacity to compress a large volume of gas, over 100 million standard cubic feet of natural gas per day. Exterran is going to own, operate, and maintain these compression units and associated equipment in the field. This project, which is actually our largest yet in the Middle East, will utilize 48,000 horsepower of idle compression equipment from our North American fleet, and this project is expected to start up beginning in the first quarter of 2012. So, we're excited about this project. It presents a great opportunity to use existing fleet units and also build a stronger base of contract operations in the Middle East.

Let's move over now to the Fabrication segment. There, we had revenues of $333 million in the third quarter, gross margin of 9%. Revenue was a little bit higher than expected, in large part due to solid ongoing activities in North America. Overall, Fabrication margin percentage declined a bit, due to the increasing share of Fabrication revenues coming from what is a slightly lower margin North American market, as well as we had a cost overrun in one of our larger eastern hemisphere projects during the quarter. Fabrication revenues during the quarter consisted of about 45% compression equipment, 35% production and processing equipment, and 20% Belleli.

Looking at it geographically, we had about 60% of our revenues coming from North America, and our backlog today is a little bit more than one-half from North America, a little bit less than one-half in the international markets. The share of backlog from North America has increased significantly from about only one-third a year ago to a little bit more than half today. So, if you look at Fabrication revenues for the first nine months of 2011, they have actually increased by 14% over the 2010 period. The increase obviously has been driven in large part by activity levels in North America, where we see continuing strong demand across all of our product lines, resulting from the buildout of infrastructure in the shale plays in the oil and liquids-rich basins.

Now, to help us meet this increased demand, we have reopened a small production equipment facility in south Texas, and we're also in the process of adding further capacity on the manufacturing front in North America. Our production equipment and processing equipment year-to-date bookings in North America are more than double what they were a year ago. And although booking levels for new business in the international markets remained relatively low during the third quarter, we do see some positive new business activities that are encouraging in Latin America, as well as in parts of the eastern hemisphere. For the fourth quarter, we expect Fabrication revenues of $260 million to $280 million, with margins of around 10%. The expected sequential decrease in Fab revenues is a result of both lower international bookings, as well as planned shutdowns of our North American fabrication shops over the Christmas holiday period. We expect that North America will again represent more than one-half of Fabrication revenues during the fourth quarter.

Moving to the Aftermarket Services segment, third quarter revenue was very strong, $107 million. That was higher than expected, driven by increased activities in Latin America and North America, and we also did have a retroactive rate increase for an O&M contract in eastern hemisphere that was about $4 million. Gross margin was 19%. That was higher than expected, with about 3 percentage points driven by that retroactive rate increase in the eastern hemisphere. Both the North America AMS revenues and margins were improved during the quarter, but we will state that conditions continue to be pretty competitive in those markets. Looking at the fourth quarter, we expect to generate Aftermarket Services revenues in the $90 million to $95 million range, with margins in the mid-teens.

Now, within the other income and loss category, we had a loss of $14 million for the quarter. This loss was driven primarily by a non-cash foreign exchange loss of $15 million. That was due to the revaluation of an inter-Company loan to reflect the decline of the Brazilian real relative to the US dollar during the third quarter. So, during the quarter, we have actually adjusted our definition of EBITDA to include FX effects on the revaluation of inter-Company balances. This was done in large part just to be more in line with the definitions of EBITDA that we include in our debt covenant calculations, as an example. And before this quarter, this inter-Company -- non-cash inter-Company balance FX effects has really not been material in any prior quarter. For the quarter, we had EBITDA of $100 million.

Third quarter results did include pre-tax charges of about $202 million, including a $196 million non-cash goodwill impairment charge related to our Fab and AMS businesses and also a $3 million restructuring charge. During the quarter, we performed an impairment test for goodwill on the AMS and Fabrication segments and we determined that a write-down of goodwill was appropriate. The lower stock price in the marketplace that we saw since the beginning of August was the primary driving factor in impairing the goodwill on the balance sheet, as this share price decline actually results in a higher implied cost of capital in the discounted cash flow models that we use for evaluating the business segments and the goodwill. The $3 million restructuring charge that I spoke of included both severance as well as consulting services.

Looking at net capital expenditures, there was $65 million in the third quarter. Total CapEx included about $30 million in growth capital, which was primarily for new fleet units and projects in North America. Now, looking forward, we expect that net CapEx for the full year 2011 will be in the $230 million to $240 million range. And that includes maintenance capital in the $90 million to $95 million range.

Now, we do continue to move forward with our North American new fleet build program that we discussed last quarter. That consists of about 95,000 horsepower and a total cost investment of $67 million. We spent about $16 million on the fabrication of these kind of units during the third quarter. But we did not put any of the units -- we did not complete them and put any of those units to work until the first part of October. Currently as we look out in the fourth quarter, a very large portion of the units are already committed in terms of their contracts. The current build program is going to extend into the second quarter of next year.

If we look at the balance sheet, total consolidated debt increased by $5 million during the quarter. So, total debt was $1.71 billion at September 30, and that consisted of Exterran Holdings debt, which remains steady at $1.17 billion, and Exterran Partners, which increased by $5 million to $544 million. Available but undrawn debt capacity at September 30 was about $350 million. That includes about $150 million of Partners. It is important to note that we have no significant debt maturities until 2014 at Exterran and 2015 at EXLP. At the end of the quarter, Exterran had a 4.3 times total debt to EBITDA ratio. That was up modestly from 4.2 times a quarter ago. And EXLP maintained a comps of 3.7 times debt to EBITDA ratio.

If we look at Exterran Partners' performance today, EXLP has almost 1.9 million horsepower. That is about 53% of the combined Exterran Holdings and Exterran Partners US contract operations business. Now last week, EXLP announced its fifth consecutive quarterly distribution increase, and the Partners distribution is now at $1.95 on an annualized basis. The quarterly distribution is about $0.005 higher than the second quarter 2011. And it is also $0.02 higher than the third quarter 2010 distribution. The total cash distribution to be paid by Partners for the third quarter will be about $19.3 million. And of this amount, Exterran Holdings will receive $7.2 million, including the amount for its GP interest. Now the general partner will receive about $1.2 million of the distribution, so that equates to an annualized distribution for the general partner of about $4.6 million.

Overall, Exterran Partners' results were generally a little bit better than our expectations. EBITDA during the quarter increased from $32 million to $38.6 million, while distributable cash flow increased from $19 million in the second quarter to $25.7 million in the third quarter. Importantly, distributable cash flow covered the third quarter distribution by 1.3 times. This is a very strong coverage there. Overall results were benefited by a full-quarter contribution of the assets that we purchased in the June drop-down transaction, as well as organic growth of about 19,000 horsepower within Exterran Partners. At the end of the quarter, EXLP -- the fleet had a spot utilization rate of 90%.

As mentioned -- as I mentioned earlier, Exterran is building new units to meet the demand for incremental new business in North America. And we expect that about half of these units will be for EXLP customers and will in turn be funded at the EXLP level. So, EXLP clearly is expected to benefit from the new build units as well as from an improving overall US contract compression market. So in summary, Partners had a good quarter. Recent highlights included increased operating horsepower as a result of the drop-down, as well as organic growth and another increase in the quarterly distribution. We believe that all of these factors position Partners well for future growth.

And of course, lastly, we do expect to file the Exterran and Exterran Partners 10-Qs over the course of the next couple of days. So operator, at this point, we would like to open up the call for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions).

Our first question comes from Joe Gibney from Capital One. Please go ahead.

Thank you. Good morning.

Good morning, Joe.

Michael, I was wondering if you could elaborate a little further on the 4-year Middle East contract with an international rental. You indicated it will kick in, in the first quarter of 2012. Just trying to understand the level of revenue incremental this represents.

I will tell that you it is still very confidential. We have exclusions with regard to what we can tell you about it. But we're very excited about this project. It is going to kick in beginning in the first quarter. We will get to be fully operational in 2Q.

This is pretty much straight compression for us in international markets. We're excited about it because we're using a lot of large idle units that are currently in the US. But it is not going to include a bunch of installation or processing or production equipment like some of our other recent international jobs. So therefore, on a revenue basis, it is not necessarily going to be kind of the same revenue per horsepower that you see for the overall international business. It is going to be a little bit more in line with somewhere between our typical North American deal and typical international revenue per horsepower. Because it is just straight compression horsepower, if you get what I mean.

Sure. All right. We will stay tuned on that. I appreciate it.

Yes. We're excited about it.

And Brad, if you could, just curious, if you could talk a little bit about -- I appreciate your commentary on profit improvements and the wait and see and we will move forward with that as we go. I wanted to touch a little bit more on business development and marketing, more on the eastern hemisphere side, particularly within Fabrication, how you approach that, how you kind of begin to rebuild this a little bit. Is it sort of core to restoring a little bit more growth, other than hunkering down a little bit now and reordering to your current cost structure and what is appropriate. But just trying to understand your thoughts on facilitating broader business development and marketing in the eastern hemisphere Fab.

Joe, it is Michael. I will take the first crack at that one.

It is something that has gained a huge amount of focus. We have talked with you and others about it over the course of the past year. We think a lot of this is certainly market driven. We have talked in the past a little bit about some jobs that we have missed out on. But in large part, it is the market kind of moving sideways and out to the right.

Nevertheless, as part of the profit improvement and part of ongoing what is right for our business, this has been an area, specifically business development and eastern hemisphere, that we've focused on a lot over the course of 2011. As an example, we have added new, what we call business unit directors, regional business unit directors in the eastern hemisphere. We have basically 3 of those guys that are helping our management in the eastern hemisphere run the business. They're real important guys for us. We brought in 2, into the business, 2 out of 3 are new, for our business this year. Plus, we've added a new Head of Business Development, somebody who has got very good compression as well as production equipment background. We're really excited about the things that these guys are doing.

So, we're not just standing by and waiting for the market to turn. I think we are aggressively getting after it with regard to how our organization is structured and the individuals we've got running some of these key components of the business. But bottom line is, we need to market to move a little bit more in our favor to win some of these jobs. We do see some relatively nice things on the horizon, so I think our optimism is growing. But it is not quite here yet.

Fair enough. No, I appreciate it.

Just a couple modeling, housekeeping questions for me, and I will turn it back. Just you referenced the percentage of backlog North America being just over 50%. I was curious within that 50%, how much of that is compression and how much of that is production and processing?

Let me look at that really quickly. All right.

With regard to the backlog in North America, we are a little bit more oriented towards production and processing equipment than compression. In fact, that is probably like a 60/40 split in favor of production and processing. And international, still, the vast majority of the backlog is Belleli. It is more than half. And then if you look at the oil and gas, we've probably got a similar breakdown as we do in North America. We've got about 60% related to production and processing and 40% compression.

Okay. That's helpful. And just the last one for me.

Michael, you and CEO would appear, but what is the ownership position in EXLP at quarter end for Holdings?

So we got 35%. We haven't done anything in terms of changes in ownership. And that 35% is basically 33% of the LP units plus 2% for the GP.

Great. I appreciate it, gentlemen. I will turn it back.

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

Good morning, everyone.

Good morning, Jim.

Michael, you talked a bit, kind of broadly, I think more at Holdings, but trying to center in a little bit on Partners. On the cost side of the equation, the costs came down pretty nicely and obviously helped out the margin side. Your comments with respect to Q4 that you have some pluses and minuses but probably keep things relatively similar sequentially, does that hold true for Partners, or do you think there is room for that to get a little bit better? No, I mean in general, with Partners being half of the North American business now, I think we are going to see the trends be pretty similar. You know, this quarter, we had slightly higher horsepower growth at Partners. Some of that is related to new customers coming to the Exterran Partners family or our Exterran family overall. But we expect to be able to make cost progress on both fronts and would expect, again, modest horsepower growth and relatively flat to slightly higher revenues for both.

And as you think about that and your cost initiatives as you roll into 2012, maybe from a margin percentage standpoint or just how you're thinking about costs, how much further down do you think you can get costs over the course of the next 12 months or so?

It is a great question, and I know a lot of people are really interested in it, but I can tell that you we are really at the front end of figuring out what this profit improvement program is going to mean to us as we're building in our 2012 business plan. And I think we want a little bit of time to kind of build that in, and I'm sure that we will be talking to you again after we get into the beginning of the new year, we're looking out into 2012, and be able to give you some better guidance with regard to where we think we're going to go with costs. Directionally, I think we are going to be very consistent. We think there are improvement opportunities out there for us, both in what we've been doing for all of 2011, as well as what we're doing with regard to this profit improvement program. But it is really too early today to get too specific about numbers.

All right. And on the -- flipping sides on the pricing front, pricing in the business has been relatively stable over the last 2 or 3, 4 quarters. And you are obviously picking up utilization and putting out some more horsepower. I'm curious with what the opportunities are out there for a possible bump-up in pricing, or is it kind of a market that you're going to be stuck at this level plus or minus?

Well, you know, pricing is going to differ from segment to segment. Brad did talk a little bit about exerting some more pricing discipline as we're looking at our fabricated product and AMS segments. I think both of those are very possible and present opportunities for us.

You're clearly talking about the North American Contract Operations business. And clearly, pricing has been nothing but flat over the course of the past couple of years. Meanwhile, we, our competitors, our customers, have all faced those same operating cost pressures that are largely based upon labor inflation, things such as lube oil and gasoline. So, those inflation pressures have been pushing for a while. And we're now getting to a point where we're seeing much better utilization in growth and horsepower. So, we will have to look at that as we get into 2012.

But the good news for us is that both we and our customers are facing those same kind of inflationary pressures, so we will have to look at potential price increases as we get into next year. But I think that as an overall industry, that's something that certainly is not outside the realm.

Okay. And last, just housekeeping modeling stuff. At Partners, should we think of SG&A, DD&A, run rates of 3Q being applicable to 4Q and kind of going forward?

Yes, certainly on the D&A side. The G&A, again, we will have to see what the effects from our profit improvement program are going to be. But for right now, I think that is a fine modeling assumption to put in. And hopefully we are going to be able to do better than that.

Great. Thanks, Michael.

Our next question is from Tom Curran from Wells Fargo. Please go ahead.

Good morning, guys.

Good morning, Tom.

Congratulations on the build, own, and operate award in the Middle East, or I guess I should say, redeploy, own, and operate.

Thanks a lot. We're excited about it, as you know.

Michael, could you tell us where the division's total backlog stood as of the end of the quarter?

The divisions, when you're talking about --

No, no, just International Contract Ops.

Yes, so we've got -- at the end of the quarter, we were looking at -- we were looking at about $16 million or $17 million of annualized revenue yet to fold into the business. That does not include the booking that we got post quarter end.

Okay. So sequentially, backlog rose about $10 million?

Yes. Yes, we had some stuff in Latin America that we added into the backlog over the course of the quarter, relatively small, but still continuing nice, nice work to add in. And then, obviously, the bigger job is not yet put in to the backlog, and we will talk about that more specifically at our fourth quarter conference call.

Okay. And then, could you share some color on the additional prospects out there for -- on the Contract Ops side that you're getting some traction with?

Actually, when we were talking about some of our -- are you talking about on the international front, Tom?

Yes, International Contract Ops.

So, I think this is the big one for us, in terms of International Contract Ops. There are some continuing opportunities that we see with regard to some Latin America, kind of bread and butter business for us. Nothing of this kind of size right now on the horizon. When I was talking about what we saw in terms of some potential new business on the front in Latin America, it was more on the fabrication side. So we're chasing a few things that could be meaningful for us in the next quarter or two.

Okay. That provides a nice segue then to Fabrication. I wanted to follow up on an earlier theme with regards to business development. Could you quantify what the recalibration of the opportunity in India means for the total eastern hemisphere opportunity? And then, it sounds as if your -- you've been getting steadily ever more optimistic about how the North America market is evolving, and could that potentially basically just offset the smaller opportunity you now see in India?

Well, okay, let me address those kind of as you asked them. First of all, what we did in India was really bring down our cost structure to make it more in line with what we see in terms of current profitability, workload, etcetera. And the office in India was just devoted to engineering capability, to both bid and execute largely integrated projects jobs in the eastern hemisphere. And we had built that up 3 years ago with regard to anticipated kind of what we thought would be a baseline of steady work. That hasn't happened, as you know, with regard to the projects that we brought in. So, what we're doing there is we're bringing down kind of our baseline load of engineering.

We still have good engineering capabilities in the eastern hemisphere and in the UK and Dubai and in Singapore. So, we still have lots of resources. It is just that we're not going to have quite as many. To the extent that we bring in new business, these are kind of things that we can utilize, outsource resources, to provide. So, we don't believe that we're impairing our ability in terms of new business development. We're basically just adjusting our infrastructure, because we don't see the same kind of level of projects that we did 3 years ago. So, it is a tight line that we're walking but believe we're walking it in the right way, in terms of trying to manage current cost structure with potential business development and profitability.

Your second part of the question, is North America going to outweigh what we've got on international? And I would say to that, North America, we think we're on the front end of a good market. We've been seeing good fabricated product growth over the course of 2011. We believe we are beginning to see good horsepower growth and into 2012. But you know, you ought to just face the facts that we've got 75% of the world's gas production that is outside North America. The eastern hemisphere, in particular, has huge growth potential for us. And we want to see that market continue to grow and to get better for us.

So while I think North America is going to help defray it, we clearly need in this business to be able to grow on the eastern hemisphere front. And we're still optimistic about that. But in the meantime, we're moderating our cost structure so that we're better able to be reasonably profitable right now and still be able to grow in the future.

Michael, one more I will squeeze in here on Fabrication. Could you just provide us with an update across the 3 main growth markets you've been focusing on, by which I mean early production facilities in Iraq, Australia, coal-bed methane? And then the FPSO fleet buildout in Brazil and whether you would add any new markets to those 3 at this point?

No, I think that those are still 3 pretty big ones that we are optimistic about. In regard to Iraq, we currently have work that we are doing. It is part of our current revenue mix in terms of production facilities, just plain and simple sold equipment that is going into that marketplace. Australia has been very quiet with regard to new bids over the course of the past several quarters. Still believe that there is going to be opportunity over the longer term. It is going to be a sale of just straight compression-type equipment.

It is heating up a little bit with regard to Brazil and FPSO opportunities. There are bids out now from Petrobras with regard to FPSO modules, likely to be bid very late this year, maybe into the beginning of next year. There are other opportunities as well. So, I would say that we are devoting significant resources to that effort. We are optimistic about it over the long term, and there are some things that are on the relatively near-term horizon.

But they're pretty big opportunities, they're pretty complicated. We will see exactly when those bids come to fruition and what happens with them. But we are certainly on them and feel that the FPSO market is a good long-term investment for us, with a lot of the activity not only on Singapore, but now it is obviously shifting over to Brazil as well.

Thanks, Mike. I appreciate the comprehensive answers.

You bet.

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

Thanks. Good morning, guys.

Good morning, Mike.

I certainly understand and appreciate the sense of urgency in terms of moving forward with a restructuring plan at this point. But given that you feel that you're pretty close to having a new CEO in place, why not kind of take a wait and see and then see what that person might want to do, rather than perhaps pre-committing them to a path here. You are making some, you know, material changes to the organization at this point.

Mike, this is Gordon. Good morning.

I think that the things that we're doing would make sense for anyone that came in to do. We're not making any major strategic steps. We're making steps that are just blocking and tackling. And the Board has been very cooperative in that process and listened to what management wants to do, and we think it makes a lot of sense.

Okay. And more specifically, it sounds like you are cutting some positions here. Are some of those in the US? Or is that primarily on kind of the G&A side? In other words, are you cutting a lot in the field, which would seem to be contradictory relative to the tight labor markets we hear about, the cost inflation that you yourselves have talked about? Just if you could provide a little more granularity there.

No, it is a good question. So, the 2 examples that Brad talked about were taking the closure of the India engineering office, which again is mapped mainly to integrated projects in the eastern hemisphere. The other head count and work force reductions that we're looking at are really across all of our regions and all of our business lines. You know, we are doing this on a smart basis, I think. And that is to say, there was not a specific number that everybody had to hit across the organization. What we tried to do is do what we thought made sense.

So, when you're bringing up, hey, if you're looking at your manufacturing and fabrication businesses and what you've got going in the field of increasing horsepower, those are not areas that do not make sense to cut in any significant degree. Where we've done it has been more of our fixed cost areas. But it is in a lot of places around the world in our business lines. The other thing that we had to be very cognizant of is there are investment opportunities that we've got in terms of things such as some of the manufacturing and production equipment capacity in North America and also FPSO opportunities around the world. Also very cognizant about what we've got from a sales and business development standpoint, where we talked about a few minutes ago, probably weren't as heavily invested in that, in the eastern hemisphere as we should have been.

So, the short answer is, it is everywhere. But I think we approached it in a way that we said, let's do what is right for the business, position it for profitability today without impairing our ability to be able to grow going forward.

Thanks for that color. I appreciate it.

And last question, on D&A and G&A for the fourth quarter, did you say that would be flattish? Is that what you mentioned earlier?

We did not say. I think I'm going to take a pass with regard to G&A. There is a lot of moving parts right now with regard to what we're doing with some restructuring and the profit improvement. D&A will probably be up just a tad quarter over quarter.

Thank you. That's all for me.

Our next question comes from Sharon Liu from Wells Fargo. Please go ahead.

Hi, good morning.

Hi, Sharon.

Hi. Just wondering in terms of the cost savings outlined, how much does it -- how much of it relates to EXLP?

So, I hit that just a few minutes ago, and basically, we're going to take a pass right now with regard to specific numbers in any of our segments until we get through the business planning phase and work through what that is going to mean for the North American Contract Operations business and EXLP. Directionally, there is going to be cost savings that apply into the North American business and into the SG&A components. But right now, not prepared to give you a real good number on that, Sharon. Apologize, but we need to take a little bit more time and build that into our plan for 2012.

Okay. But I guess from just a distributable cash flow standpoint, because of the cost caps that you have in place, should the impact be pretty minimal for the distributable cash flow?

For distributable cash flow after the cost caps, the answer is yes. So, as we have savings, what that will likely mean is that that continues along the path that we've talked about of reducing the cost caps in coming quarters. So, probably not going to have a big impact on distributable cash flow for EXLP.

Okay. And I guess it would be reasonable to assume that there would be an allocation of some of the restructuring charges to the partnership, also?

We're not currently intending to have restructuring charges allocated to the partnership.

Okay.

This has been an Exterran Holdings-driven activity.

Okay. And then, I guess in terms of guidance for CapEx, do you have it for the partnership level in terms of maintenance and growth?

Yes, for the full year, we are going to -- what is in the Q is going to be $27 million to $29 million of maintenance capital, which is to say that maintenance capital on a third quarter to fourth quarter basis should be relatively flat to maybe up modestly.

And for growth CapEx?

We have not put a guidance number in there. But as we said, the capital expenditures for the new fleet that will be hitting really beginning in the fourth quarter, about half of those we expect to be hitting for Exterran Partners. The timing right now is a little bit difficult to predict in terms of when those units get completed, and the CapEx doesn't really hit until the units are on contract and getting started. So, I'm going to take a pass on that number, in terms of exactly what it is going to be. We talked about the total plan being $67 million in terms of this fleet build. Half of that, somewhere in the $30 million to $35 million spread over the handful of 2 or 3 quarters is what we will see hitting Exterran Partners over time, in all likelihood.

Okay. Great. Thank you, Michael.

You bet.

Our next question comes from Daniel Burke from Johnson Rice. Please go ahead.

Good morning, guys.

Hey, Dan. Good morning.

A question -- the discussion around expanding Fabrication capacity in the US, trying to place that into context with the characterization of that as a pretty competitive market. Does that mean you're considering any additional product lines in which you perform fabrication work? Or any larger styled opportunities?

I think we're going to stick with the product lines that we've got, for the most part. And specifically, it is really in the production equipment and processing equipment that we see constraints with regard to capacity and continuing opportunities for growth. So, when we talk about it, it is more in those product lines.

Okay. Another question, on the international award announced here, the 48,000 horsepower, how unique was that as an opportunity? In other words, is the migration of idle domestic horsepower a theme that we will continue to talk about? Or was this more appropriately characterized as a pretty one-off opportunity?

Well, we talked about this being the biggest deal that we've seen in contract compression in the Middle East, so it is pretty significant. And Dan, we've talked about just the sheer magnitude of what we've got in terms of the North America fleet and international operations, we tend not to see them in quite this big of a chunk. But I can promise you, we're really focused. We think this is a tremendous opportunity.

I would not bake these into my financial model at this point. But I think that there are going to be some opportunities for these kind of things, typically in smaller increments. We do see some opportunities in Latin America, Mexico being one of those places, and Middle East is -- this is a little bit unusual for us, but what we're hoping is that as we catch on and build this set of compression trains and work well with this customer, we're going to see some more opportunities to follow along with it. So, cautious optimism on the ability to do some more of this.

Okay. Great. And then to append just one last one, Michael.

I don't know if you had it last quarter, you all disclosed it. Anyway, in domestic contract compression, to get the figures on sort of the net adds in the new and unconventional areas against any reduction you might have seen in legacy areas?

Yes, and I'm not going to get the numbers exactly right. But we saw, it was kind of in the 65,000 or 70,000 horsepower range in terms of growth in the new areas that I highlighted at the beginning of the call. So, you know, the Marcelluses, the Eagle Fords, the Avalons, etcetera, offset by a similar amount in the dry gas kind of basins. What we have seen over the course of this past quarter is generally an increasing amount of activity, both on starts and, unfortunately, as well as on stops, which is really coming about from continuing sub-$4 gas and what people are doing with some of the older conventional plays.

Michael, what is the base of horsepower that is left in the dry gas and conventional, just in terms that I think at some point that bleed begins to taper?

Yes, we don't track things specifically with regard to all the horsepower and exactly what basin and play it looks like. But the ballpark for this is, you've got conventional gas that is about half the market and unconventional that is about half the market as well. So, that is about as good of a marker as I can give you right now. I will say that the way that this business grew up, as Hanover and Universal and all of the predecessors, we built pretty strong market shares in some of these older conventional plays, and so some of that right now is working against us, as those are not the growth areas.

Got it. Thanks for the time.

Our next question comes from Robert Christensen from Buckingham Research. Please go ahead.

Thank you. About a year ago, I think, what, 600,000 horsepower domestically was written off. I've got the number, $150 million.

Yes.

Where is that horsepower today? Is it still sitting in the yard? How much has been sold?

Sure, Bob. What we said -- and thanks for the question -- it was 600,000 horsepower that we had that was impaired at the end of 2010. And we basically said that we thought that that equipment had value in the order of $90 million that we would realize through the sale of that equipment over the course of about 3 years. And if you look at what we have done for an entire business through 3 quarters, we've sold almost $40 million worth of equipment.

Now, not all of that has come from that pool. But that gives you a little bit of indication. I mean, it is a constant thing of what we do in terms of tweaking our fleet, selling equipment. But there is still a lot of that 600,000 horsepower yet to be sold and redeployed by others over the course of the next couple years.

On your short list of a new CEO, is your short list candidates in the oil service, formerly oil service or oil service industry, the producer industry, or the financial industry?

Bob, I really can't give you any color on that. What we're looking for is a strong leader. We're looking for demonstrates execution capability, which gives you some clue. We're looking for global experience, and we're looking for relevant industry experience.

Okay. I guess my question is, the final, all of the Fab that you're doing in the US compression, it seemed to be working against the rental business, that people want new over rental. How would you field that question? It seems to me the MLPs, midstream MLPs, their birth and then they really spawned and continue to grow, doing the full thing of gathering, processing, and compressing. And they're putting in new, and you don't seem capable of breaking in on just a rental plank, if you will. Can you articulate what is going on there?

Absolutely, Bob. It is a great, great insight. Great question. And we also think it is the normal course of operations in terms of the evolution of natural gas and production.

And what we're seeing right now, I mean, you did hit it. We're seeing a little bit more in terms of sold product that is going into the initial buildout infrastructure of some of these new basins. So, where you have new pipe and new compression or processing capabilities, where these assets are going to be there for a long, long time, and a lot of this is getting done by the midstreamers, you're seeing people say this is the right kind of asset mix to own. And we're going to buy it and get it installed. That is normal course operations.

What you then see on top of that, which is for us is, in the coming quarters and years is, as you need additional compression horsepower to move what is now a declining pressure base of this gas into those gathering systems, into the processing facilities from the wellhead, adding additional horsepower on the gathering stations, that oftentimes is going to come from an outsourcing standpoint. As an example, what we're seeing geographically is we're seeing good activity with regard to some of these fabricated product sales going into, again, new places, Eagle Ford and Marcellus for the initial infrastructure build. Encouragingly, Bob, one of the things that we're seeing is now some of the older basins, we're actually seeing some decent horsepower growth on our contract compression business in places such as Barnett and Fayetteville, where the basins have declined. You see declining pressures. And you just simply need more horsepower to move that gas through the system. That is the natural evolution, and that is kind of an overall perspective for what we're seeing today.

Okay. Thank you. I will get back in line.

Our next question is a follow-up from Tom Curran from Wells Fargo. Please go ahead.

It's me again, guys. I thought I would jump back into queue. Returning to Aftermarket, you could update us, I guess, what was the mix between North America and international for 3Q and then the expectation for 4Q?

Sure. So, we actually had a similar growth for both international and North America during the quarter, so both of them did pretty well in terms of growth. Today, you've got a business mix that is about two-thirds North America and about one-third international. It may be a little bit less than that as we go forward. We may see a little bit more coming from the international side. But that two-third, one-third mix has been relatively cost enforced.

Okay. Thanks.

That's all the time we have for questions today. I will now turn the call back to Michael Anderson for any closing remarks.

All right. We want to thank all of you for being on the call today. We do appreciate your participation and your questions. And we are certainly looking forward to talking to you guys again here in a few months. So, thanks again.

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