Archrock Inc (AROC) 2011 Q4 法說會逐字稿

Good morning. Welcome to the Exterran Holdings Incorporated and Exterran Partners LP fourth-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 fourth-quarter and full-year, ended December 31, 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'll 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 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 Brad Childers, President and CEO. I will now turn the call over to Brad. You may begin.

Thank you, and good morning, everyone. With me today is Bill Austin, CFO of Exterran Holdings, and Michael Anderson, CFO of Exterran Partners. Also with me is Mark Sotir, Executive Vice Chairman of Exterran Holdings. I'd like to start this morning by turning the call over to Mark to provide some introductory comments.

Thanks, Brad, and good morning everyone. Brad and I thought it would be useful if I spent a minute to share my perspective on Exterran, both as a Board member but also as someone who's managed a company similar to Exterran. A company that is large, global, is very asset-intensive and one that has a significant and extensive field organization. So with that perspective, and having now also spent several months reviewing this business, I can tell you that I see a significant amount of upside and value creation opportunity at Exterran.

There are two major themes. First, the Company is a market leader. And because of that, has significant scale opportunities that we will take advantage of. Second, and most importantly, there's a great opportunity to simplify the business, both the Company and its infrastructure. We will do this by implementing consistent business processes across the entire organization, and this will result in increased productivity. We will also streamline the organization to reduce costs and therefore drive higher margins. So Brad and Bill will cover some of these plans and initiatives in greater detail during their remarks.

Finally, again as a Board member, I just want to say that I'm very excited about our prospects and I look forward to working with Brad, Bill, and the rest of the management team on making Exterran a success. I will now turn it back over to Brad to lead our call.

Thanks, Mark. As we hold our first earnings call since I stepped into the position as CEO on a permanent basis, and since we have added Bill and Mark to the team, I was hoping to start with a discussion of what I and the management team see as the state of Exterran and what we are working on to improve performance. First off, the management team and I are excited about the business, about what we see for growth in the markets we are in, and with the customers we serve, and importantly, about the opportunities we've identified to improve our performance, by simplifying our organization and taking out costs. Exterran has a solid business with a market leadership position and favorable long-term industry dynamics that we expect will drive attractive growth for our products and services.

But over the past few years, Exterran has clearly underperformed as a business for its shareholders. Here's my take on these performance issues and their impact. We generated declining markets and profitability over an extended period. While somewhat due to market conditions, too much of this declining profitability was the result of cost inefficiencies as well as overruns on some of our large projects.

Our business has contracted in size, with declining revenue and backlog levels, and we did not reduce our underlying cost structure including SG&A sufficiently to be in line with that lower level of activity. What my team and I have been focused on over the past several months is to identify the causes of this underperformance and more importantly, determining the steps we will take to fix them. While this work is ongoing, we have identified several opportunities, and have started to implement a plan that will improve our business.

As we undertake this effort, let me share what we will accomplish. First, we will enhance our cash flow profitability by taking out costs, by continuing to reduce and right-size our SG&A expense, and by increasing pricing where we believe it makes sense to do so. We will consolidate and simplify our businesses to make us faster and more efficient. Finally, we will grow our businesses in the markets where growth opportunities are available, and we can do so profitably. Importantly, we have not waited to start implementing these changes. Over the last six months, we have taken several steps to begin to drive improvement.

More concretely, let me outline some of these steps. We implemented the previously-announced workforce reduction program across all of our business segments. We've closed locations and consolidated management activities. The closures have included locations in India, Egypt, the Hague, and the consolidation of an administrative region in North America. We have begun to reengineer our supply change process to enable us to drive cost savings throughout the Company over the coming months and years.

We implemented centralized pricing in our North American after-market services and fabricated product lines to give us more control over our pricing, as well as to allow us to respond more quickly to changes in market conditions. We are increasing our business development and sales staffing levels globally to drive increased bookings. And we've added project management skills and improved project management controls to better manage the execution of our large projects. This list is absolutely not all-inclusive, but it does give you some examples of the steps we're taking. As we execute on these and other efforts, we will enhance our near-term performance and position ourselves to be successful over the long run.

Based on these actions, we will see noticeable improvement in our operating and financial performance throughout the year, subject to a change in customer activity based on current natural gas prices, which I will discuss shortly. Some of the metrics that I will be focused on, and that I think will be helpful for you to see as well during 2012, will include improving margins across our product lines throughout the course of the year. Growing operating horsepower costs at our North American contract operations business and reducing our debt-to-EBITDA ratio to 4 times at the Exterran Partners level by the end of the year.

I do want to caution that our first-quarter results will likely be lower than those generated in the fourth quarter. Bill Austin will address this later in the call, but despite this quarter-to-quarter lumpiness, we're committed to delivering these improvements steadily through the year and expect to see our overall operating performance and capital position improve in 2012. Additionally, one of the key performance improvement opportunities we have is to simplify our terms, our Company and our businesses in terms of the processes we employ, the focus we put on all of our product and service lines, and the infrastructure we use to manage our business. While in some cases this may require us to stop activity that is impairing profitability, we will be focused on improving profits and the earning power of our business over the long term.

This profit improvement work is ongoing, and we will continue to refine and implement our plans as we move ahead. And we will provide updates in our earnings calls over the course of the year. Switching gears, I want to talk about recent activities and operating highlights, including a few areas where some of the early results of our profit improvement work are starting to show up. First and importantly, today we announced another accretive drop-down in compression and processing assets from Exterran to Exterran Partners for total consideration of approximately $184 million. We expect this transaction to close by the end of the first quarter. Proceeds from the transaction will be used to reduce debt at the Exterran Holdings level. Exterran remains fully committed to our MLP strategy and our goal remains to transfer all of our US contract operations into Exterran Partners over time.

Today we also announced a change in the CFO at Exterran Partners, effective April 2. Michael Anderson has made many valuable contributions to Exterran and played a pivotal role in the establishment of Exterran Partners. His leadership will be missed, and we wish him will on his next endeavor. I am pleased to welcome David Miller back to the Exterran Partners CFO position. He led Exterran Partners as CFO a couple of years ago, and he brings both that experience and the important overall financial management skills to his new position that will provide continuity and enable us to ensure a smooth transition as we continue to execute our growth strategy.

Now turning to the fourth quarter, when looking at the quarter, we had a solid performance overall with operating results generally above our expectations. Bill will cover our financial results in detail, but I wanted to highlight some of our recent accomplishments. In North America contract operations, operating horsepower increased by 48,000-horsepower in the fourth quarter, our largest quarterly increase since 2005. 25,000-horsepower of this growth was achieved at Exterran Partners. We continued to see growth in the liquids-rich and shale gas areas, with modest declines in activity in dry gas markets. Also, beginning February 1, we instituted a price increase, our first such increase since 2006. Further, we continue to focus on efficiencies in our operations, and believe we have opportunities to continue to reduce costs. However, much of that work to date has been offset by increases in gasoline, lube oil, and mobilization costs.

Looking more closely at the North America marketplace, we too are concerned about the current low natural gas price, but are encouraged by the ongoing development of shale and liquids-rich basins and the favorable effect they have for our compression, production equipment and processing and treating business lines. Importantly, we have not yet seen a meaningful drop in activity as a result of low gas prices this winter, though that risk is ahead of the us if this pricing environment continues, over an extended period of time.

In our international contract operations segment, we recently announced a new gas conditioning treating and compression services contract with PEMEX in Mexico. We're also excited about the large contract compression project in the Middle East that we discussed on our last call. Unfortunately, the termination of a couple of projects in Brazil is expected to negatively impact results in the first half of 2012. Importantly, the two new projects in Mexico and the Middle East are expected to drive growth in our international contract operations business in the second half of 2012.

Looking at our global compression fleet, we've booked new international contract operations projects that will utilize about 70,000-horsepower of idle compression assets, a large portion of which have come from our North American fleet. We will continue our efforts to redeploy our assets to meet market demand across our worldwide operating regions. In our fabrication business, backlog increased by approximately $93 million during the fourth quarter, as compared to the relatively low levels at the end of September, 2011. Previously-announced major project awards include natural gas processing facilities for Petrobras in Bolivia and more recently for Boardwalk Partners in the Eagle Ford shale in South Texas. In the fourth quarter, bookings in both of our compression and production processing product lines in North America were at their highest level for the year.

In our aftermarket services business, due to the focus we have put on that service line, we achieved improved financial results in terms of both revenue and gross margin percentage in the second half of 2011. We will continue our efforts to focus on higher-margin opportunities and discontinue low-profit business activities that have negatively impacted our performance in the past.

So summing up our operating highlights, we have seen some early successes from the profit improvement initiatives we've undertaken, including improving business development and backlog, increased margins in North America due to cost controls and price increases, and increasing working horsepower in North America. Importantly, we continue to focus on safety and service, our global safety performance beat our 2011 target, and we achieved a third consecutive year of improved rankings in North America service quality. Now I'd like to turn the call over to Bill for a review of our financial results.

Thanks, Brad, and good morning, everyone. First, let me say I am pleased to join the team at Exterran, including Brad, Mark, and many others. I also want to thank Michael Anderson. He's helped me tremendously during this transition, and I, too, wish him will on his new endeavor.

As you might imagine, we are all trying to come up to speed quickly in our new roles, not the least of which is me. There have been a number of key initiatives which began in the second half of 2011, and while there has been traction, there remains much to be done. Execution, as Brad stated and I reiterate, is the key for the year. Second, I will go through the results for last year for both Exterran Holdings and Exterran Partners and give guidance for the first quarter. As I have quickly learned, there were a number of actions taken in the fourth quarter, but in many instances, the results do not show up for six months. And I will try to point them out in my commentary.

Now I will provide a summary of results and while I may repeat some of the points Brad made in his opening remarks, I think some of these obviously bear repeating. First, our North American contract operations revenue was $150 million for the fourth quarter, somewhat below our guidance, but gross margin was relatively unchanged at 49%. We were very pleased by our 48,000-horsepower growth during the quarter, again our best quarterly performance in more than six years. A lot more growth came at the back end of the quarter, so we did not see as much revenue growth, but this sets us up well going into 2012.

Maintenance capital was some $18 million in North America during the fourth quarter, as compared to $21 million in the fourth quarter. We had a total North American contract compression fleet of 3.6 million-horsepower at December 31, and our fleet utilization came in at 79%. Looking ahead at the first quarter, we expect North American contract ops revenues of around $152 million to $153 million, up from the fourth quarter levels, due to a partial quarter benefit from the February price increase which Brad talked about, but also the contribution from new build units. We expect gross margins to be modestly up, driven primarily by the expected higher revenues and those costs reduction initiatives. Maintenance capital spending is expected to be very similar to the fourth-quarter levels.

Now moving on to the international contract operations. In the fourth quarter our revenue was $115 million and gross margin came in at 60%. Both somewhat above our guidance, but we benefited from inflation recovery billings in Argentina and higher-than-expected rebilling of lube oil expense in the Eastern hemisphere. Our international fleet stood at 1.3 million-horsepower December 31, and we have a utilization rate of 76%, while operating horsepower was down sequentially during the quarter, primarily as a result of reduced activity in Brazil. Now, looking at the first quarter, we expect international contract operation revenues will be in the $110 million range, lower than the fourth-quarter levels, primarily as a result of project stocks in Brazil and those one-time benefits in the fourth quarter which I just mentioned above. We expect margins in the high 50% range again in the first quarter.

Moving on, our current backlog for international contract operations work is in excess of $40 million of annualized revenue, the majority of which is expected to be placed into operation in the last half of 2012. Our backlog consists primarily of a large compression project in the Middle East, a processing facility in Mexico, and smaller compression projects in Mexico, Argentina, Brazil, and Colombia. These drivers are expected to more than replace the revenue lost due to the project stops in Brazil.

Now moving onto fabrication results for the fourth quarter, revenue came in at $311 million, above our guidance range, and included a relatively large amount of installation revenue. Gross margins of 7% were lower than expected, largely as a result of a project execution issue in the Eastern hemisphere, which actually reduced those margins by 3%. Fabrication revenues during the fourth quarter consisted of about 36% compression, 39% production, processing and treating, and 25% in Belleli. Our fabrication backlog increased nicely from $578 million at the end of the third quarter to some $666 million at the end of the fourth quarter. For both revenues and backlog, about 60% were from North America and about 40% from international. I would point out the share of backlog from North America has increased significantly from only about 40% a year ago. Now in the first quarter, and looking forward, we expect fabrication revenues of somewhere between $225 million and $245 million with margins in the 9% to 10% range.

Although fabrication backlog rose in the fourth quarter, our first quarter fabrication revenue is expected to be down as a result of a number of factors, including fourth quarter benefited from the completion of significant installation activity to a lot of new backlog, which show revenue recognition later in the year, and three, we are utilizing some of our compression fabrication capacity to build new fleet units for our North American business, again in the first quarter. We clearly expect the first quarter to be a low point for this segment and we will see improved revenues beginning in the second quarter. Importantly, we have seen increasing prices in several of our businesses, which is embedded in our backlog which we booked in the fourth quarter, and we should start accruing benefits late in the second quarter.

Moving on to the aftermarket services, fourth-quarter revenue came in at $127 million with a gross margin of 18%. Both revenues and profitability were better than expected. In North America, we benefited from a significant amount of year-end business, some of which was due to relatively warm weather and some parts sales for customer installations. In the Eastern hemisphere, we also benefited from spare parts and service businesses associated with the start-up of a large processing plant. We believe we are also beginning to benefit on the margin side from our profit improvement initiatives.

Again, Brad touched on that, and we will probably touch on that a little bit more in the Q&A. Looking at the first quarter, we expect the aftermarket services revenues to be in the $85 million to $90 million, as we typically see the first quarter activity a bit lower from a seasonality perspective. Margins in the mid to upper teens, as we continue to focus on more profitable activities.

Again, moving on, our SG&A expenses came in at $85 million in the fourth quarter. This was down from $91 million in the third quarter. It's somewhat lower than expected, in part driven by one-time incentive compensation reductions of approximately $3 million, and local tax credits of some $3 million in Brazil and the US. Without the repeat of those fourth-quarter benefits, we expect SG&A in the first quarter to be in the low- to mid-$90 million range. We do expect to meet our SG&A cost reduction targets from our workforce reduction program, but we have redeployed some of these savings in areas including our sales force, business development, project management, and some of our supply chain resources as part of our efforts to improve overall profitability.

So right now, our ongoing SG&A trend is pretty flat. However, overall, this SG&A trend needs to be lower, and with our cost initiatives, we will deliver more savings during the year. We generated EBITDA as adjusted of some $119 million in the fourth quarter compared to $100 million in the third quarter. EBITDA for the fourth quarter of 2011 included $13.8 million of benefits related to non-income tax recoveries in Brazil. These benefits represent both in-period and previous-period items.

Moving on, net loss from continuing operations attributable to Exterran stockholders for the fourth quarter of 2011 included a $48.6 million valuation allowance that was recorded against the deferred tax asset for Brazil tax losses. The valuation allowance did not impact our cash flows, liquidity position, or compliance with debt covenants. To summarize, Exterran had a solid performance, as Brad said, in the fourth quarter in terms of its operations and new business development activity. Some seasonality issues and the timing of the rollout of our new projects set us up for somewhat lower results in the first quarter of 2012, but importantly, they do set us up for an improving overall trend throughout the balance of the year.

Moving on, net capital expenditures were $97 million in the fourth quarter. Total CapEx included about $66 million in growth capital, primarily from our previously-announced fleet build program. Maintenance capital for the quarter was some $22 million, including the aforementioned $18 million in North America. Looking forward, we expect that net capital expenditures for 2012 will be in the $325 million to $375 million range, including maintenance capital in the $105 million to $115 million range. We expect to spend about $150 million to $190 million in net fleet growth capital, and about $70 million for investments, other than our contract operations fleet. Currently, we expect that fleet growth capital will be split 60/40 between North American and international markets.

As Brad mentioned earlier, Exterran is building new units to meet demand for certain types of higher-utilized units in North America. We expect that approximately 70% of these units will be for the partnership and will be funded at the partnership. We continue to move forward with our North American new fleet build. We have spent approximately $28 million on fabrication of these units during the fourth quarter, and we expect to add about 130,000-horsepower of new units to the fleet in 2012.

Moving on to the balance sheet, total consolidated debt increased by $64 million during the quarter from $1.71 billion at September 30 to $1.77 billion at December 31. Exterran Holdings debt was $1.23 billion and Exterran Partners debt was $546 million. For 2011, Exterran Holdings debt, and this is exclusive of the Partners, declined by some $221 million. We are committed to generating cash flow and further reducing borrowings at that current level. Available but undrawn debt capacity at December 31 was approximately $345 million, including $155 million at Partners.

As of December 31, 2011, Exterran had total leverage -- this is total debt to adjusted EBITDA -- at a ratio of 4.3 and Partnership had a total leverage ratio of 3.7. Both of these were unchanged from the end of the third quarter. I would point that we have no significant debt maturities until January of 2014 at Holdings and November of 2015 at Partnership. As Brad discussed earlier, we expect to achieve a reduced total leverage ratio of 4.0 times at the Exterran Holdings level by the end of 2012 as a result of the various initiatives we are pursuing.

Now, let's look at Exterran Partners. Late last month, Partners announced it's sixth consecutive quarterly distribution increase, and Partners' distribution is now equal to $1.97 per unit on an annualized basis. This distribution is $0.005 higher than the third quarter of 2011 and $0.02 higher than the fourth quarter of 2010 distribution. Total cash distribution paid by partners for the fourth quarter of 2011 was $19.6 million. Of this amount, Holdings received approximately $7.4 million based upon its common and general partner interest in partnership. The general partner received about $1.2 million of the distribution, equating to an annualized distribution for the general partner of just over $4.8 million.

Now, the XLP, or the Partnership generated EBITDA as further adjusted of $37.5 million and distributable cash flow of $24.5 million in the fourth quarter. Distributable cash flow covered the fourth-quarter distribution by some 1.25. Exterran Partners benefited by the organic growth of about 25,000 operating horsepower within the Partnership for the quarter. At December 31, the Partnership's fleet had a spot utilization rate of 92%. Now, without taking into account the newly announced drop-down, we expect Partners' maintenance capital will be in the $30 million to $35 million range in 2012.

Overall, 2011 was a very successful year for the Partners. Compared to prior-year levels, revenues increased 30% to $308 million, EBITDA increased 33% to $139 million, and distributable cash flow increased 35% to $90 million. Now today, and Brad mentioned this, today we announced that Exterran Partners has agreed to acquire compression and processing assets from Exterran Holdings for a consideration valued at approximately $184 million. That's applying about an 8-times EBITDA multiple.

The compression services assets include contracts serving approximately 40 customers of Exterran Holdings and its affiliates and comprised approximately 188,000-horsepower. This represents approximately 5% by available horsepower as a combined US contract operations business of both Holdings and Partners. In addition, the acquisition includes approximately 75,000-horsepower currently being leased from Holdings to Exterran Partners. The processing service asset that we did in the drop-down, the natural gas processing plant with a capacity of 10 million cubic feet a day is located in the Northeastern United States, and is used to provide processing services pursuant to a long-term services agreement.

At the end of 2011, Partners had a total of about 1.87 million-horsepower or about 53% of the combined Holdings and Partners US total operations business. The acquisition is expected to expand Exterran Partners contract operations fleet to approximately 2.1 million-horsepower, which would comprise approximately 58% by available horsepower of the combined US contract operations business. The transaction consideration includes the delivery to Holdings of approximately 1.9 million common units of Exterran Partners or the cash equivalent thereof. And Exterran Partners' assumption of a portion of Holdings' indebtedness.

Now, in addition, Exterran Partners is currently in the process of amending its revolving credit facility to increase its size by an additional $200 million, which it expects to complete prior to the closing of the acquisition. This transaction is subject to regulatory approval and other closing conditions, and is expected to close by the end of the first quarter of 2012. For Exterran Partners, this acquisition expands its fee-based business and enhances its leading market position as a provider of natural gas contract operations services in the United States.

Holdings is expected to benefit from its continued ownership of Partners and continues to expect to offer the balance of Holdings, US contract operations business, Exterran Partners over time. Exterran Holdings expects to use transaction proceeds to enhance it's capital position, and the reduction of debt at the parent level. Lastly, and I know this has been a long presentation with lots of information, but lastly, we expect to file Exterran Holdings and Partners 10-Ks in the next few days. Thanks, and I'll turn this back to Brad.

Thanks, Bill. Bill caught it, let me correct one thing I've stated earlier, which was our debt reduction target of 4 times absolutely applies to Holdings and I understand that I said Exterran Partners when I did that earlier. I wanted to make sure I correct that. Before I close and turn it over to questions, let me just reiterate, I think you can tell I'm excited about the opportunity we have at Exterran. We have a market-leading position, the best employees in the industry, and a favorable outlook regarding the long-term growth for the use of our products and services around the globe. We are optimistic about the long-term trends in the global energy markets, for successful industry deployment of enhanced drilling and completion techniques has enhanced the readily-available supply of oil and natural gas.

With our extensive production-oriented product and service offering and established customer relationships, we believe that Exterran is extremely well-positioned to take advantage of these encouraging market trends. And critically, the new management team is excited about opportunities to improve performance at Exterran. While there are near-term challenges, our team is committed to driving significant and lasting performance improvement, taking advantage of industry growth opportunities to create long-term value for our stockholders. Operator, at this point I'd like to open up the call for questions.

(Operator Instructions). The first question comes from Mike Urban from Deutsche Bank. Please go ahead.

A question for Brad and then maybe Mark as well, you're still relatively new to all this, but as you've taken a look at the business so far, and I think you alluded to some of these things, what are some of the places where you might be deemphasizing or reducing your exposure, where the return of the margin opportunity is not as great and then of course the flip side of that, where are we going to see the emphasis increase?

Sure. Mike, it's Brad. Let me try to take a crack at this. In the portfolio, and I'll talk just about two examples that we have in two different business lines. One would be AMS. In evaluating that portfolio and these businesses, we have seen activity and certain parts of the services that we offer to our customers that's just not generating the right level of profitability for the investment.

So targeting those areas, customers, geographies and products, where we're just not making money, and either figuring out quickly how to make money or how to stop it is an example of the type of thing that were going to look at. Similarly, in some of our fabrication businesses, we have low levels currently of business in backlog and there are a lot of costs associated with some of those business lines that we are trying to pull out and improve the processes, so that we have a better match for the existing level of business. So those are just two examples and things like that at different levels and different scales that we're targeting and correcting.

Next its. And in terms of some of the cost savings and efficiencies, I guess in particular you kind of talk about $20 million, $25 million as the quantifiable numbers. How much of that we already seen versus what we should still expect going forward here?

This is Bill. We initiated some of those cost reductions in the fourth quarter. There are still more to go for the first half of the year. I would say a fair amount of it has been completed. But you don't see it as much in the first quarter because we took some of that and we've invested in a couple of areas. I think you'll start to see more of it in quarter two through quarter four. But still, some had to be done internationally and there are some domestically as part of that original $20 million to $25 million.

So just to be clear, the actions have taken place and some will continues to take place in the first quarter, but you don't feel like we've seen a meaningful margin impact from that yet? In other words, most of that is still to come from an actual performance and margin standpoint?

Most of it will come from the second quarter on through the second half. That's right.

That's great. I've got a bunch of others, but I will at some of the folks go and I can jump back and if I need to.

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

Brad, you mentioned the first in a long time price increase on the compression side. A couple of questions around that. Can you give us some idea maybe what the magnitude of the price increase and kind of what the reception has been? And I guess following up on that, do you expect if gas prices do stay weak for the rest of this year, will that price increase hold?

I can expand on it a little bit. I don't want to talk about the magnitude of the price increase. But the reception from our customers has actually been pretty good. We haven't seen any real negative reaction to the price increase, because it has been so long, there have been cost pressures in the industry that everyone knows of. It was fairly will received. And so the pushback has been minimal.

Also going forward, this applied to our existing operating compression in the field. And we see that there is a risk, if this gas price continues at the current low levels, that later in the year we could start to see some more negative impacts from that. We haven't seen it yet, but the volume of gas that has to be both compressed and produced is going to remain pretty good. And we don't expect that there's going to be such a backlash or the impact like we saw in 2009 in the field that would result in drastic new price pressure, but I have to acknowledge that there's uncertainty in that comment. And that is, of course, a risk. We just haven't seen it yet, and don't expect a lot of it from this point going forward.

That's helpful. And on the cost side, focus specifically on the operating costs. You guys have been working for a while to keep chiseling that down. Is there still room on that front to bring costs down, and are you kind of thinking between pricing going up a little bit and possibly on the cost side getting benefits that margins expand in 2012?

Yes. I really do think that there's going to be a little lumpiness, but we expect to see steady improvement in our margins in contract ops. On the cost issue, we've had some good, categorically underneath that number is some noise. But we've had some pretty good improvement on our labor utilization and on our materials management. But over the most recent period, as I said earlier, it's been offset because we had strong oil price driving up both the transportation costs as well as lube oil costs. And finally we've also had some good progress in trying to manage our lube oil volumes which we expect to get the benefit of, but the commodity price risk remains. But yes, we see upside and you think you're going to see upside, too.

Sure. And last quick one, on SG&A reduction program, you got any specific commentary, Bill maybe for SG&A at the Partners level? And are you see that churning?

At the partners level, obviously, long-term, we'd like to see the cost caps rapidly diminished. We saw some of that in the fourth quarter. Long-term between drop downs and cost initiatives, our goal is to do away with the need for the cost caps. That's a work in progress. But it's certainly our goal to get it done.

Thanks, you guys. Good job.

The next question comes from Joe Gibney, from Capital One. Please go ahead.

Just a couple of questions on fabrication. I was curious specifically what fell into the quarter in terms of timing on some of your recent large bookings? For instance Bolivia is accounted for in metallurgy and fabrication?

Interesting. Bolivia did fall into the quarter, but I would point out that a large portion of Bolivia is installation. So as big as the project is, and we haven't announced just how big, but it is a big project, a fairly large portion of that is installation, which we do not show in the backlog.

Okay, that's hopeful. And in terms of your margin outlook, you referenced execution issue in the Eastern hemisphere, which was a drag on 3%. 1Q looks like your trough revenue quarter within fab. Is it also the trough margin quarter here in this 9% to 10% margin band? Do you expect that to move materially higher as you work your way through the year? Execution issues with this one singular the project behind us now in the Eastern hemisphere?

Clearly we want the first quarter to be both low at the top of both in margin and in revenue. That's our goal, and hopefully you'll see that throughout the four quarters of the year.

And I was wondering if you could expand just a little bit on the centralized pricing concept. I didn't quite gather whether this was applicable to all of North America, across all of your service lines, if this was relegated simply to contract ops, if you could talk about that a little bit more and what that means in terms of market responsiveness, which you referenced?

Sure, it's Brad. Let me take a crack at that. We already have fairly centralized pricing that applies to our contract compression business. So that wasn't mentioned because it already exists. The pricing move that we've made to centralize this is to really have much more centralized product line management over pricing on AMS compression fabrication and production equipment.

We also already had pretty good centralized pricing over our processing treating segment. And what we saw in the market in 2011 is that the market really took off and so did our North American fabrication volumes. And we wanted to ensure that going forward we could be more responsive to pricing in the market as the market moves. And so we've centralized that through our product line team to make sure that we can help guide pricing as easily as we have see the market changing and move on volume.

Helpful. Last one from me, and then I'll turn it back. On your actual contract side, can you update us on the timing of the Middle East contract? I believe it was expected to start in the first quarter and be fully operational in Q2. Is that still the case? I was curious about some of these moving parts of the two projects in Brazil that are dragging here in 1Q on the termination, could potentially come back. So what the broader outlook is on the contract side within Brazil.

Sure. Let me talk about the business of the international level overall. And answer your question on the Middle East project specifically. That project starts in March or April. The first station will begin operations. And the last of three stations will begin operations I believe by June or July. So that the time frame on the start of that horsepower. As far as the Brazil jobs, these are contracts that would've terminated and are terminating in the year and I believe it's about --

We have five project stops total in Brazil.

So that's about 30,000-horsepower. And so we're taking a dip in Q1 and Q2, but from Q2 through Q4, building back up that operations contract business in total internationally between what we're doing in the Middle East and Mexico, so that for the full year, we will see improved horsepower and utilization of international business. But we do have a setback as some of these large projects roll off in Brazil.

Helpful. I appreciate it. I'll turn it back.

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

My questions pertain to the drop-down transaction. Just to confirm, the 8-times EBITDA multiple, that pertains also to these units that's currently being leased?

Sharon, it's Michael Anderson. The answer is yes. 8-times for the whole package of assets.

Okay. And in terms of the debt that's being assumed, roughly $140 million, is that going to be placed on the EXLP's revolver for the time being?

Yes. Basically that debt is passed down and it's immediately refinanced.

Okay. And then in terms of the actual units being dropped down, is there a concentration in a particular region or a particular customer?

No, not really. It's a very similar mix to the overall Exterran Holdings and Exterran Partners portfolio in terms of type of unit, size of units, geographic dispersion. Obviously we're dealing with a little bit smaller portfolio of assets. There's a little bit of customer concentration, but certainly nothing that affects the overall customer concentration in any meaningful way for Exterran partners.

Okay. And I guess my last question, for the processing plant, I'm assuming that's all just fee-based contracts?

It is. It's one of the processing plants that we announced a year ago, that we built for one our customers. We completed this last one in the fourth quarter, and it is largely a fixed fee kind of basis contract on a long-term 12-year deal.

Okay. With I guess take or pay volumes or is there any volume commitments for that plant?

None that we would be subject to. Basically our customers pay us a fixed fee whether they're pushing gas through the processing facility or not.

Okay, great. Thank you so much, Michael, and best of luck.

The next question comes from Blake Hutchinson with Howard Weil. Please go ahead. Please go ahead.

Just, first question, I guess its surprising to see the idea of horsepower additions here to the contract fleet in North America as gas prices plummet. What is driving -- is there kind of a new sweet spot in terms of horsepower in these new plays that's driving the build? And if so, what is that and is there something physical from the reservoirs that we think this demand will keep up?

Sure. Blake, it's Brad. There are a couple of dynamics in the market right now. The biggest dynamic that's driving fleet additions is the same that's driving infrastructure additions in the North America market as we transition into new plays and the very wet, oily rich plays that have a lot of associated gas, new infrastructure is required. So you're seeing that demand both on the fabrication side for compression as well as moving into some of these fields. So that's what is really still keeping the demand up despite the low natural gas price. That's really driven by just too much natural gas in the near term. But the need to put compression on the new plays continues.

And then on the sweet spot question, the answer is not really. But we have seen over the last decade, however, is continuing emphasis on larger horsepower units and applications. More in the centralized gathering application in the fields. And so the horsepower, the spread of horsepower is becoming more concentrated on the higher end 1,000-horsepower-plus size units for a whole bunch of what we're putting in the fleet.

The only caveat I'd put on that is we're also seeing really nice demand for some small horsepower units for gas lift and that's just to help with liquids and oil production in a bunch of the emerging plays. So the focus on larger horsepower continues, but there is good gas lift work going on right now, and we're taking advantage of that to deploy a bunch of our existing small horsepower.

And I guess following up on that, so if the horsepower demand that you're seeing is from larger centralized gathering lines, all things being equal, you probably expect the utilization there to be more long-lived and consistent?

Yes. I think that's a very fair statement. But I will also point out that some of these plays and the way they're developing and putting infrastructure on these plays is new. This idea that we keep hearing about a manufacturing model, some of it we understand, and we need to see how these plays develop and play out to feel more comfortable with that statement, but yes, I do think so.

And just an education on how gas lift evolves. Is it similar as you face larger declines to stay conventional gas where over time, a 58-horsepower unit needs to turn into 150 and so on?

You're going to get past my technical expertise on production systems real quick, but I think the answer is really no. Most of the gas lift goes on at the wellhead. And it's there to take the liquids off, to alleviate production or to push production on the liquid side. So I don't think that same dynamic applies. Again, I could be stepping over my technical expertise on that.

Sure. And for Bill on the guidance, I guess kind of putting together the first-quarter guidance with the promise of kind of a bigger back half swing in fabrication and international compression operations, should we be thinking about perhaps third quarter as the point where would start -- understanding that we are not running the business for revenue, but for profit, is third quarter the point where we might start to get a favorable year-over-year revenue comparison?

Profit, yes, I don't look at the revenue, but you're going to start to see real traction in that third quarter. I got to look on the revenue side. I don't care as much of the revenue as you might expect. You'll start to see the revenue as well, but as I say, I focus more on what we should see from a profit standpoint, so the answer to your question is yes to both.

I like to hear that. Thanks a lot, and I will turn it back.

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

Are there covenants that we should be aware of? Can you run down a list of bank covenants or tell me where to go look in the 10-K or 10-Q?

I'll let Michael handle some of that.

Sure, Bob. Basically it's pretty simple covenants. If you look at the Exterran Holdings side, is basically 5-times debt to EBITDA. That's our primary covenant. And we also have and we just talked about today, we're at 4.3 times both at the end of Q3 and Q4. There's also an interest coverage, basically EBITDA to interest, it is 2.25 times, it's really not that relevant. At the Exterran Partners level, similar mix of covenants. Debt-to-EBITDA is 4.75, however there's a step-up every time a do an acquisition or drop-down it goes to 5.25 for a period of couple of quarters and then drops back down to 4.75. And we have a similar EBITDA to interest coverage at 2.25.

Thank you. A follow-up question and I think Brad was doing some of the thought process on North American compression for us related to the shale plays. My question, and I guess problem, is that we've seen on-shore supply growth probably grow 15% over the last 24 months, yet your contracted North American compression has hardly grown at all. So it suggests to me that some of the conventional fields are on decline and that you're quite exposed to conventional gas fields, and you're losing horsepower there.

It also suggests to me that the new breed of competitor, these giant MLP midstream companies, are taking a great deal of share. So I don't see your volume growth against the backdrop of great supply generation in this country. So could you perhaps put some light on what else is detracting, I guess, from the supply growth? Contracted horsepower?

Yes, I can. I think I can. Part of the dynamic that you're you are seeing is actually spot-on. We have a lot of compression located in a lot of conventional and even some unconventional plays that are higher in production costs compared to some of the developing plays that we see where we have growth. And as we grow in the growth plays, we do have declines in some of those conventional and coal bed methane and other plays that is offsetting a portion of that growth. And that is a dynamic we have in our business. And that is definitely present.

But what you've also seen over that 24-month period is a lot of gas coming from new plays that are not yet as compression-intensive as they will become over time. So it's absolutely a dynamic. And what we saw in the fourth quarter was that the balance tipped, and we were able to get more growth out of the growth plays than we saw in declines in some of the more conventional and long-lived legacy basins in North America. And we do expect to see some continuation of that trend. So I hope that from the basins in place perspective that gives you some understanding of that dynamic that were seeing which is growth in the growth plays, but yes, we have some offsets and declines in some of the older and more mature basins.

And if I might just a follow-on, I guess, aspect of it, you know, the giant midstream MLPs that are fully integrated will design your gathering processing and put brand-new compression in, and there you stand, wanting to rent it. This new breed of competitor is awfully strong, bulked up, and care to comment?

The MLPs and the midstream companies comprise both a competitor force as well as some of our most significant customers. So there is the interplay there. But we haven't seen and what we haven't seen and what I really don't expect to see, is it not -- it's not displacing the contract operations model. They are a factor in playing into the same traditional buy lease analysis based on the longevity of the application that previously the producers would have monopolized. So they fit into the middle of the market, which we compete with on one side and we supply on the other side. But a buy/lease analysis of the longevity of the equipment, as well as our ability to drive good volume throughput and service quality, redeployment and help manage the residual value risk of the equipment that may be on a short-term basis, the value of that business model remains.

Well, we haven't seen an impact there. I mean, you're not growing your North American contract operations numbers. Something isn't right. 24 months of growth in North American supply, and I got flat. Something is displacing something. I'm at a loss.

The only other thing I'd steer you to is the volume of gas that has come on the market coming out of a few of the plays, the Haynesville in particular, which is really a very prolific play, both from initial production as well as from an initial pressure perspective, has given the market a big jolt of gas. The other thing that's happening is on the associated gas side in a lot of liquids plays, we're still seeing too much gas coming into the market. So the last few years have absolutely been tough. But I do believe that there are other reasons that have driven some of that lack of growth. And we have also seen good growth in the industry overall. And I believe that's going to continue. So Bob, we will continue this discussion, I'm sure.

Thank you.

Let's take one more question and then will be running over. Operator?

Thank you. Today's final question comes from Tom Curran from Wells Fargo. Please go ahead.

Michael, let me echo Sharon's remarks and sentiment. Best of luck. You will be missed. And great overview, guys. This is all been very helpful. Brad, as a follow-up to the prior line of questioning, turning to where you are seeing the growth, number one, are you starting to see it in the Haynesville? I know you have consistently highlighted that as the unconventional gas play for the lag has tended to be the longest from IP to the point where you need to reduce compression potentially as long as three years? And then two, in those growth markets, what has the mix been for the demand your seeing between rental and purchase?

Thanks. That's a good question. We see growth in a lot of the plays, and I still think of the Haynesville from a compression perspective is one of our industry-leading bait-and-switch plays for the last 10 years. Because it's been developed with such great promise, but it's dry gas and we're seeing lots of producers going away from Haynesville with their drilling rigs and into liquids-rich markets where they can make more money, too. So we have not seen a lot of growth in compression in the Haynesville.

Where we see the growth is much more focused on the Eagle Ford, on the Marcellus, we see nice growth in the Permian. We've seeing really good growth, ironically, in the oldest shale play in the country, in the Barnett, where they both have added more field compression and are exploiting some wet rich areas in the reservoir for liquids production. So those -- I didn't mention the Marcellus, I don't think, and we also saw good growth coming out of the Marcellus. But the Haynesville remains somewhat elusive from it's overall demand for compression. So that one has not played out.

It sounds as if in terms of the contract compression side, that you're almost getting this barbell in terms of incremental demand you're seeing, where it's either for smaller units increasingly to be used for gas lift, or the largest ones where your taking the gas gathering approach to the unconventional plays. Is that correct? And then could you put some numbers around the growth you've seen in the gas lift segment?

Let me hit the first part of that. On the size of units, where we see demand, it comes concentrated in some unit types are now. So we've seen on the gas lift side, pretty good demand around the 200-horsepower range. And then we are experiencing, I think a comment I made earlier may have steered us away from this. So let me supplement a little bit.

We also see pretty good demand in a few of the markets, the Eagle Ford in particular, for the 800-horsepower range unit, which is much more of a midsize for us. But the dominant focus of the buildout is in the 1,000-horsepower and larger units. So it's more balanced than I think I may have conveyed earlier. So let me give you that first. And so the barbell effect, it may not be as strong that midrange demand in the mix.

The other part of your question I didn't address, and I wanted to, is one of the dynamics with a lot of purchase activity for compression that we believe we are seeing right now is the infrastructure buildout. As these new plays are developed, new pipelines and gathering systems as well as central processing and gas plants are going in. Those will be pretty long-lived investments. They're very amenable to permanent compression, or that is to purchased compression.

And as those facilities get built out, and there's more drilling and production upstream of the those systems, I think that is when we continue to see much more of an uptick in demand for contract compression. So part of it, I think, is timing and market development. The permanent infrastructure is going in, and that's going to open up more E&P activity and production upstream.

That all makes sense and is very helpful. I'll just close with one more here. Within aftermarket, both in terms of the top line upside we've seen, relative to your guidance the last two quarters, I think, and then more importantly, the margin, how much of that has been driven by international, either by a growing international portion of the business, or by the profit improvement steps you're taking, but internationally?

Let me start this and turn it over to Bill to make sure. The improvement we've seen through the profit improvement in North America has so far been pretty incremental. So I think there is more to come on that front. So I don't want to convey that the improvement we've seen right now is driven by a lot of those steps. We really have just gotten started, I think were going to get incremental improvement over the course of several quarters from those profit improvement initiatives. As far as a mix of the impact of international, I'll ask Bill to answer that.

Brad, spot on in terms of what's going on in North America. What you saw what's going on in North America a bit more of a mix both in North America and internationally. So we saw revenue of sides in both areas as well as some profit margin improvement in both areas. So it was a good mixed bag in the fourth quarter.

Okay. Thanks for the detailed answers, guys. I'll turn it back.

Thanks a lot. Well, we are over our time. We appreciate everybody's participation in the call this morning, and we look forward to talking to you next quarter. Thanks, everyone.

Thank you for participating in the Exterran Holdings Incorporated and Exterran Partners LP fourth-quarter 2011 earnings conference call. This concludes the conference for today. You may all disconnect at this time.