Archrock Inc (AROC) 2014 Q4 法說會逐字稿

Good morning. Welcome to the Exterran Holdings Incorporated and Exterran Partners LP fourthquarter 2014 earnings conference call.

At this time, I'd like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

We will open the teleconference with questions after the presentation. Earlier today Exterran Holdings and Exterran Partners released their financial results for the fourth quarter of 2014. If you have not received a copy, you can find the information on the Company's website at www.Exterran.com. During this call, Exterran 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 issue 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, 2013, Exterran Partners Annual Report on Form 10-K for the year ended December 31, 2013 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 www.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 & CEO. I would now like to turn the call over to him. Mr. Childers, you may begin your conference.

Thank you, operator. Good morning, everyone.

With me today is Jon Biro, CFO of Exterran Holdings, and David Miller, CFO of Exterran Partners. As we usually do, we will provide a review of both Exterran Holdings and Exterran Partners before we open the call up for questions. Let me start with comments about our recent results.

For Exterran Holdings, I am pleased to report that we delivered solid operating performance across all of our businesses in the fourth quarter as we grew operating horsepower in both our North America and International Contract Operations businesses, significantly increased bookings in our fabrication business and delivered solid margin performance in each of our operating segments.

For Exterran Partners, we achieved strong organic horsepower growth and a record level of quarterly distributable cash flow in the fourth quarter. Our distributable cash flow coverage was 1.41 times, excluding cost cap reimbursements in our solid fourth quarter capped a highly productive 2014 for Exterran. In the year, we initiated a regular dividend, generated improved profitability in our contract operations and fabrication segments as measured by gross margin percentages compared to 2013, delivered our highest annual EBITDA as adjusted in the past five years, and announced and prepared for the separation of our company into two more focused companies.

At Exterran Partners we executed two attractive acquisitions and achieved record levels of EBITDA as further adjusted and distributable cash flow. We are proud of the results for both the fourth quarter and for 2014, and this has set us up well as we move into 2015.

Turning to the performance of our operating segments, in our North America Contract Operations business, we had organic growth of 112,000 operating horsepower in the 2014. Now this increase was driven primarily by increasing activity in the Eagleford shale and the Permian, which accounted for a majority of the 134-horsepower of growth that we saw primarily in liquids-rich-plays and gas lift applications, and that growth was partially offset by about 22,000-horsepower declines primarily in conventional dry gas areas.

Looking at our operating horsepower trends for 2014, we had organic growth of about 360,000-horsepower in our growth markets, partially offset by a decline of about 100,000-horsepower in conventional and dry gas plays. As a result we achieved organic operating horsepower growth of 262,000, or about 9% for the year. Including the two MidCon acquisitions, our North America Contract Operations business grew approximately 816,000-horsepower, or 28% in 2014.

Financial performance in North America Contract Operations was also strong as we benefited from our fleet investment program, our acquisitions, continued implementation of our performance initiatives, and a modest price increase. For 2014, gross margin dollars were up by 20% on the 16% revenue increase and gross margin percentage was 57% in 2014, up from 55% in 2013.

Our International Contract Operations business also had a good year in 2014, as gross margin dollars were up by 11% on a 4% revenue increase. Our 2014 results benefited from the start up of a project in Brazil, full year contribution from projects in Trinidad and Iraq that commenced in 2013, increased revenue in Mexico, and increased activity at a production facility in Indonesia.

We also had an outstanding year of bookings in our International Contract Operations business. At December 31, our International contract operation backlog of new projects stood at $69 million and included 67,000-horsepower compression. Bookings in the fourth quarter included a compression project in Bolivia and a processing and treatment project in Brazil. And these new projects are expected to positively impact our financial results by mid-2016.

Our after market service business profitability continues to be within our target range. Revenue for the fourth quarter was higher than expected due to increased activity in North America, Eastern hemisphere and Latin America, although revenue declined over in 2014 as reduced activity in the United States offset increases in International.

In our fabrication business, increased throughput in our fabrication facilities, a higher portion of that throughput being from our higher margin products, and process improvements helped drive increased profitability. Fabrication gross margin was 18% in 2014, up from 15% in 2013. Our fabrication backlog was a healthy $953 million at December 31, up over prior quarter and prior year levels.

Fabrication bookings were $1.6 billion in 2014 compared to $1.3 billion in 2013. Bookings were $475 million in the fourth quarter, up over prior quarter and prior year periods. Bookings in the quarter included key contract awards for compression equipment in the US, Bolivia and Trinidad, natural gas processing in treatment plants in the US, and a solid level of bookings for production equipment in the US.

Now, turning to our markets and the outlook for our business, on a macro level, as you all know, prices have dropped significantly over the last several months. The US rig count has declined sharply from 2014 highs and oil and gas producers have lowered capital spending budgets for 2015. Despite this, most research analysts expect that oil and natural gas production in the US will grow in 2015 from 2014 levels albeit at a reduced rate. And international production is expected to remain stable or grow slightly in 2015.

While this forecast of production growth does not eliminate the impact of lower commodity prices on our business, being on the production side of the oil and gas industry does reduce the expected magnitude of the impact of lower commodity prices, compared to businesses that are more closely tied to drilling activity. With this macro-perspective in mind, let me discuss a more detailed view of the expectations for each of our primary business segments.

Starting with our North America Contract Operations business, our large installed base of 3.7 million operating horsepower is deployed to produce and transport natural gas and to facilitate the production of oil and gas lift applications. With natural gas production expected to grow in 2015, we expect that this business will be much less impacted by commodity price volatility and lower producer CapEx spending compared to oil and gas service companies that are more directly tied to drilling and completion activity, though we do expect to see lower bookings in this business compared to 2014. And, as a result of that, we have reduced our 2015 growth capital expenditures in our North America Contract Operations business by about 1/3 over prior year levels.

Further, we expect we could see an increase in stop activity as customers focus on production costs, and we expect we can see some pricing pressures. Customers look for all available opportunities to manage their costs and profitability. Despite these headwinds, we expect the impact from the lower bookings and higher stop activity will be relatively small due to our production-related business model, which should lead to comparatively stable performance in the year.

Our International Contract Operations activities are driven largely by natural gas production. And we expect natural gas production internationally to remain stable or to grow. In addition, the majority of our International infrastructure projects are driven by longer term plans from our customers and are tied more closely to localized markets and commodity pricing in those markets than to global commodity prices.

With a strong backlog of committed projects in our International Contract Operations business, underpinned by relatively long term contracts, in 2015 we expect increased growth capital expenditures. Additionally, a majority of our International growth CapEx is reimbursable from our customers on the start-up of these projects.

In our after market Services business, we provide maintenance, services and parts on equipment owned by our customers, bits operating and production activities. So this business is also associated with a production of oil and natural gas, and will offer some comparative stability in this market. Though, as this the past, we do expect that some customers will defer some of their maintenance activities as part of their focus on lowering costs.

Turning to our fabrication business, as we have noted in the past, this business is the one most responsive to short-term changes in industry activity in our portfolio. Given the outlook for industry capital budgets being reduced, we expect a lower level of bookings and some project delays in our fabrication business in 2015. However, with a solid level of bookings in 2014 we entered 2015 with a robust backlog of projects to execute, which provides us with good revenue visibility into the first half of 2015.

Now, finally, in respect of each of our business segments, we are monitoring activity levels closely, we are staying close to our customers. We will remain focused on free cash flow and have in place plans to aggressively manage our costs in order to stay aligned with activity levels.

Before I close, I would like to make a few comments about our pending separation transaction. And on that I am pleased to announce that we are on track with the plan to separate our International services and Global Fabrication businesses into a new publicly traded company. We believe the separation will enable these businesses, as well as the Company's remaining US services business to have clear, strategic focus, and enhanced flexibility to pursue their own strategic priorities.

Our leading International services and Global Fabrication businesses will be well positioned to benefit from the global energy infrastructure build-out. We believe that the proposed separation will help to highlight the value of the stable cash flows generated by our US Contract Operations and after market Services businesses. We are excited by the opportunity for both businesses and current market conditions do not alter our conviction that this is the best strategy to create value for our shareholders now and in the future. We continue to expect the transaction will close in the second half of 2015.

Now, let me close the Exterran Holdings part of my call with the following. We have accomplished a lot since launching our performance improvement initiatives in 2011, as we have aimed to simplify our company and reduce costs, improve the profitability and competitive position of our businesses and maximize the value of our businesses for our stockholders. Through our efforts and the work of our tremendous employees over the last three years, Exterran Holdings has a better portfolio, higher margin businesses, a strong financial position and a continuing focus on improved profitability.

From an overall market perspective, we remain optimistic about the long term outlook for oil and gas production-oriented businesses both in the United States and in International markets, supported by the expectation of increasing oil and natural gas production levels in coming years. With our enhanced operating and financial positions, we believe that we are well-positioned to both navigate commodity price cycles and to take advantage of long term secular growth opportunities. And we believe our strategic separation will create two businesses that will be better positioned to capture more profit and growth, as well as generate more value for our investors.

Now I would like to turn to the Exterran Partners part of my comments. Exterran Partners generated solid results, delivering a 25% increase in revenue year-over-year and a 17% increase in EBITDA as further adjusted. We completed two significant acquisitions valued at a total of $483 million and invested $233 million in new compressor units.

As a result, we increased operating horsepower by 776,000-horsepower, or 34%, to slightly over 3 million-horsepower. For the fourth quarter we increased the quarterly distribution to $0.5575 cents per limited partner unit or $2.23 on an annualized basis, up 4.7% compared to the year ago period. We continue to increase distributable cash flow through fleet investments and acquisitions, including drop-down transactions.

As you know, Exterran Holdings has made cost-cap payments to Exterran Partners as part of the omnibus agreement between the two companies. Driven by improved performance, we eliminated the need for these payments at the end of 2014 and the cost-cap payment provisions terminated as of January 1, 2015.

In 2015, we will continue to bolster Exterran Partners' leading market position as a provider of natural gas contract compression operations through continued implementation of our performance improvement initiatives. And looking ahead, we believe that Exterran Partners is well-positioned to manage through industry cycles as our fee base business, which is tied to the production and flow of hydrocarbons, provides relatively stable cash flows.

Now moving to the financial section of today's call, I would like to turn the call over to Jon for a review of the financial results for Exterran Holdings and quarterly trends, as well as guidance for the first quarter of 2015.

Thanks, Brad. I will first provide a summary of the results for the fourth quarter and then will provide guidance for Exterran Holdings. Exterran generated EBITDA, as adjusted, of $182 million for the fourth quarter, the highest quarterly level in over five years. And this compares to $171 million generated in the third quarter.

Revenues for $794 million for the fourth quarter compared to $724 million in the third quarter. We also reported diluted net income from continuing operations attributed to Exterran common shareholders excluding items of $0.31 per share in the fourth quarter compared to $0.25 in the third quarter.

Now, turning to the segment results. North America Contract Operations revenue came in at $200 million in the fourth quarter, up 5% compared to $191 million in the third quarter, and at the high end of our guidance due to solid organic growth and a full quarter's contribution from the second MidCon acquisition that closed in August of 2014. We achieved organic growth of 112,000 operating horsepower in the quarter, an increase of 3.1% over September 30, 2014 levels.

In our North American Contract Operations business, growth expenditures were $83 million and $292 million in the fourth quarter and full year 2014, respectively. While maintenance capital expenditures were $18 million and $72 million in the fourth quarter and full year, respectively.

Now regarding our International Contract Operations business-- fourth quarter revenue came in at $124 million, similar to third quarter levels and gross margin was 60% in the fourth quarter. Our International operating horsepower was 976,000 at December 31, 2014, an increase of 24,000-horsepower driven by increased activity in Latin America.

Moving on to fabrication, our fabrication operations had another solid quarter with revenue and margins generally in line with our expectations. Fabrication revenue of $362 million during the fourth quarter was roughly comprised of 55% production in processing and insulation, 30% compression and about 15% from [blelly]. Geographically the revenue split was roughly 60% from North America and 40% from International.

During the fourth quarter, fabrication revenues and gross margin percentage benefited from the completion of two large projects. Fourth quarter gross margin percentage also benefited from process improvements as Brad discussed, as well as a $4 million partial reduction in award to expense accrual related to a prior year project in North America.

Our fabrication backlog increased to $953 million at December 31, 2014, compared to $840 million at September 30, 2014. Bookings were strong at $475 million for the fourth quarter, representing a 42% sequential increase, and an 18% increase year-over-year. In the fourth quarter, bookings were roughly two-thirds for North America and one-third from International markets, while the year-end backlog breaks out as roughly 55% for North America and 45% for International markets.

In our after market services business, revenues of $108 million were higher than expected driven by a sequential increase in activity in both US and International markets. SG&A expenses were $95 million in the quarter, flat compared to third quarter levels and depreciation and amortization expense was $90 million. In the quarter we recognized non-cash, long-lived asset impairments of $21 million, primarily related to our idle compressor fleet and restructuring towards the $2 million related to our separation transaction.

Interest expense was $27.4 million compared to third quarter interest expense of $25.7 million. Our consolidated tax rate was 74% for the quarter, which included the recognition of a non-cash valuation allowance of $7.2 million against expiring foreign tax credits and income tax expense of $4.7 million related to valuation allowances against foreign NOLs. Without these two items, our tax rate would have been approximately 41% during the quarter.

For the fourth quarter and full year 2014 our effective tax rate for net income from continuing operations excluding items was approximately 45%. This 45% tax rate includes the $4.7 million tax expense we recognized in the quarter for tax valuation allowances associated with foreign NOLs, which increased the fourth quarter tax rate by approximately 8%.

Before I discuss our guidance, I would like to point out certain unusual losses that impacted fourth quarter EPS excluding items. During the fourth quarter, due to the significant strengthening of the US dollar, we incurred currency losses of $6.8 million. These currency losses are included in other income and expense on our income segments and resulted in about a $0.09 per share reduction to our EPS excluding items.

Now, turning to guidance for the first quarter of 2015. In North America Contract Operations, we expect revenue of approximately $200 million and gross margin to be in the 56% to 58% range. In International Contract Operations, we expect revenue of approximately $120 million and the gross margin to be around 60%. In our fabrication business, we expect revenue in the $290 million to $300 million range and we expect gross margins around 16%, down from fourth quarter levels driven by the $4 million warranty expense reversal in the fourth quarter and some pricing pressure for certain shorter cycle products.

For the first quarter of 2015, we expect after market service revenue to between $80 million to $90 million with gross margins around 20%. Regarding SG&A expenses, we expect these expenses to be in the low $90 million level. Depreciation and amortization expense should be around $95 million, and interest expense should be approximately $27 million in the first quarter of 2015. For the first quarter and full year 2015, our effective tax rate for net income for continued operations excluding items is expected to be around 45%.

Now, regarding capital spending-- net capital expenditures were $151 million for the fourth quarter. Loan capital spending for the fourth quarter was $114 million, which included $83 million in North America primarily for our fleet new build program. Maintenance CapEx for the quarter was $24 million.

For the full year 2014 net capital expenditures were $517 million, including maintenance capital expenditures of $96 million. For 2015, we expect net capital expenditures to between $470 million to $525 million, including maintenance capital of between $100 million to $110 million. In our North America Contract Operations business, we expect growth capital spending in the $180 million to $200 million range in 2015 down from $292 million in 2014.

In North America, we expect about 80% of their capital expenditures will be for the customers of Exterran partners and will be funded by Exterran Partners. North America Contract Operations maintenance capital spending in the first quarter is expected to be flat to slightly higher compared to fourth quarter levels. Regarding growth CAP, we expect growth capital will be split roughly equally between North America and our International business.

In our International Contract Operations business, we expect an increased levels of growth capital expenditures related to our backlog of new, long term projects in Latin America. And as Brad mentioned, the majority of these expenditures are reimbursable from our customers upon the start-up of these projects.

During the fourth quarter, debt declined by $11 million at the Exterran Holdings parent level. Debt increased $80 million at the partnership level largely due to organic growth fleet investments funded under our partnership's revolver. In total consolidated debt increased by $69 million in the quarter.

Exterran Holdings' leverage ratio, which is debt to adjusted EBITDA, as defined in our credit agreement, was 1.6 times at December 31, 2014. In June of 2014, we completed the redemption and settlement of all Exterran Holdings outstanding 4.25% convertible senior notes and the related call transaction in exchange for $370 million in cash and net common shares of 251,000 shares. In 2014, approximately 1.6 million common shares, including just under 1.2 million common shares in the fourth quarter, were issued pursuant to the exercise of warrants associated with the cost spread we put in place in 2009.

At December 31, most of these warrants had been exercised. Between January 1 and the end of the issuance period on January 12, 2015, an additional 6,000 shares were issued to satisfy the exercise of these warrants. All warrants have expired and there will be no further issuances associated with this transaction.

Cash distributions received by Exterran Holdings based on its limited partner and general partnership interest in Exterran partners were $15.2 million for the fourth quarter compared to $14.8 million for the third quarter of 2014. And finally, last month Exterran Holdings' Board of Directors declared the 5th quarterly cash dividend to common shareholders of $0.15 per share which was paid on February 17, 2015, to shareholders of record on February 9.

I will now turn it over to David to talk about Exterran Partners. David?

Thanks, Jon.

Exterran Partners had another solid quarter in Q4. Fourth quarter ending operating horsepower increased sequentially by 93,000 or 3.2% to just over 3 million operating horsepower as a result of our significant organic growth.

Turning to financial results, Exterran Partners EBITDA as adjusted was up 7.2% to $80.5 million, as compared to $75.1 million in the third quarter of 2014. This increase was driven by organic growth and a full quarter contribution from the August 2014 MidCon acquisition.

Distributable cash flow was $53.4 million in the fourth quarter of 2014 compared to $45.7 million in the third quarter of 2013. Maintenance capital expenditures were $9.8 million in the fourth quarter as compared to $13.4 million in the third quarter. Distributable cash flow coverage in the fourth quarter was 1.51 times as compared to 1.31 times in the third quarter. Excluding the benefit of the cost cap payments, our distributable cash flow coverage was a solid 1.41 times in the fourth quarter of 2014.

Cost cap reimbursements from EXH to EXLP were $3.6 million in the fourth quarter of 2014, all of which related to the SG&A cost-cap. With a solid level of distributable cash flow coverage, we have eliminated the need for cost-cap reimbursements at the end of 2014.

Revenue from the 2014 was $161.1 million as compared to $153.2 million in the third quarter. Revenue improved 5% sequentially, largely as a result of strong organic growth in the fourth quarter, as well as a full quarter impact of the August 2014 MidCon acquisition. Gross margin was 61% in the fourth quarter, up 60% from Q3 2014, and cost of sales per average operating horsepower was $21.16 in the fourth quarter, down 2% compared to the third quarter of 2014 and down 10% from prior year levels--driven by the benefits of our recent acquisitions, organic growth, and efficiency initiatives.

SG&A for the fourth quarter were $21.4 million, compared to $20.7 million in the third quarter, up in part due to the full quarter impact of the August 2014 MidCon acquisition. Depreciation and amortization for the fourth quarter was $35 million compared to $33.6 million in the third quarter. Interest expense for the fourth quarter was $17.2 million compared to $16.1 million in the third quarter, largely due to higher debt levels.

Net income per limited partner unit was $0.27 in the fourth quarter, up from $0.26 in the third quarter, and net income per limited partner unit excluding items for the fourth quarter was $0.36, excluding charges of $4.8 million due primarily to non-cash, on live asset impairment charges related to our fleet.

Late last month, Exterran Partners announced its distribution of $0.5575 per limited partner unit or $2.23 per limited partner unit on an annualized basis. Our quarterly distribution is a half cent higher than the third-quarter distribution, and two and a half cents higher than the fourth-quarter 2013 distribution. As a reminder for the third quarter, the sequential distribution increase of $0.01 per limited partner unit included an incremental half cent related to the August 2014 MidCon acquisition.

On the balance sheet, total debt increased by $80 million during the quarter to $1.3 billion at December 31, 2014. The increase in debt was due to additional borrowings to fund growth CapEx. Available, but undrawn capacity of Exterran Partners debt facilities at December 31, was approximately $190 million.

Earlier this month, however, we increased the borrowing capacity of our credit facility by $250 million to $1.05 billion. Pro forma for this increase, available, but undrawn debt capacity under Exterran Partners debt facility at December 31, would have been approximately $440 million.

As of December 31, 2014, Exterran Partners had a total leverage ratio, which is covenant debt to adjusted EBITDA as defined in the credit agreement, of 4.3 times as compared to 4.1 times at the end of the third quarter. Gross capital expenditures for the fourth quarter were $95 million consisting of $85 million for fleet growth capital and $10 million for maintenance activities. For the full year 2015, we expect total fleet growth capital expenditures to be in the $145 million to $165 million range, and maintenance capital expenditures of approximately $55 million to $60 million.

In summary, fourth quarter highlights for Exterran Partners include a solid distributable cash flow coverage of 1.41 times, excluding cost cap reimbursements and strong organic growth of 93,000 operating horsepower.

At this point, I would like to turn the call back over to the operator and open it up for questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

And our first question here comes from Mr. Mike Urban from Deutsche Bank. Please go ahead, sir.

Great run down and very helpful in terms of thinking about the outlook here in this clearly challenging environment. I assume your comments on seeing relatively stable business from the installed basin in North America is indicative of your experience so far. Again, we are only a couple months into the year.

But one question I do get a lot is with respect to the gas lift business. I think there is a concern out there that might be a little bit more volatile or subject to some of the operator cuts that we are seeing out there? Do you think that is case? Have you experienced that at all? Our view is that it's still production related and nobody is out there shutting in oil production even at the current prices, but I would be interested to hear your perspective.

Yes, I do think that we could expect more turnover in that range of our Horsepower overall -- some of it associated with gas lift. But as you point out, and I still think that a lot of those units are deployed and will continue to be deployed in oil production that remains economic. A few other thoughts on those units, in particular though, is that they are great units that we use for gathering as well as for gas lift and they are transferable among our plays for both gas lift and for gathering.

So we find that these still are going to be in the market desirable units and in-demand units. We haven't seen anything significant impacting us, impacting the utilization of those units from an overall perspective to date. But we do know that we build good units that are going to work for a long time in multiple plays. So we think that the impact is one we can manage.

Is that still in the neighborhood of maybe 15% to 16% of the business?

Yes. That is a good estimate.

Okay. And in the Fabrication side, it was great to see the big uptick in backlog and orders there. And you did say that you have good visibility in the first half of the year. Roughly what is the runoff there, and how should we think about that visibility? I am assuming it is fairly front-end loaded but if you could give us color on the timing of how that flows through the P&L.

Sure. Your assumption is right. Clearly it is more front-end loaded. With our Compression business, that runoff typically goes out something like six months, six to nine months International. And with the other businesses, production equipment is a little bit shorter so more than the three to six months and P&T is a little longer, more in the nine to twelve months range. So, on average, you're going to see a run-off of that backlog that's really in the six to nine month range overall.

That is very helpful. A couple of housekeeping questions. You have provided us some detail just looking forward toward the spin on the breakout in Aftermarket between North American [and] International. I may have missed it, but I didn't see it anywhere. Do you have that?

Mike, can you help us with the question again? The Aftermarket business, you are going to be breaking that out with the spin. You've provided us some detail on that in some of your presentation and filings. Do you have the North America versus International revenue and gross profit breakout? It is close enough to 50/50 to use that as a working assumption.

On a revenue basis? Because the margins are a little higher Internationally.

Yes, it's on a revenue. That was revenue, Mike, for clarification.

Okay. And then finally, just given some of the warrant issuance, what is the current share count, roughly?

Yes. Just under [69 million]. For Holdings.

Great. That is all for me. Thank you.

Thanks, Mike.

Blake Hutchinson, Howard Weil. Please go ahead, sir.

Good morning, guys.

Hey, Blake.

Just sticking to the Fabrication business and relating it to the CapEx plans that you outlined, you talked about organic CapEx being down perhaps a third in North America and then actually up and maybe significantly Internationally. As we project that onto the Fabrication business, would that be a good way of thinking about how order flow may play out for the Fab business domestically and abroad? Or steer me away from thinking along those lines.

Blake, very fair question but I would steer you away from thinking about the Fabrication look as being comparable to that CapEx projection. The two businesses move separately from where we see opportunity trades, for example, customers that want to spend CapEx and invest typically in units, they are going to go into buying them. And other companies are going to use the Contract Operations opportunity to not spend CapEx on Compression. Those are the customers that we are going to seek to maximize over this time. So the relationship between those two is not really fair on that basis, just based on customer preference.

The other reason to think about it differently is some of our front-end loaded CapEx is a result of prior commitments and prior decision making. And so it has a longer tail than does the response time that we get out of the Fabrication side customers. So I would not equate those two.

Okay. That is helpful. Then, thinking about the International Contract Compression opportunity set, it sounds fairly robust at this point. What has your experience been if we look at the customer base? It is very evident that at least you know their upstream budgets have been, and will be may be even, significantly impacted. What is the typical spillover from the oil side of the ledger to the gas and infrastructure side of the ledger? We are dealing with a whole different budget set of people and at least for now that outlook looks fairly stable for some of the larger kind of national oil companies.

We think the projects that we have in our backlog will proceed. We don't see and haven't gotten direct budget reductions being a challenge to the projects that we are working on actively at this time. Certainly none of those that are in production, including the four or five fairly substantial projects in Latin America that we are executing on right now. And we don't see a budget impact putting those projects at risk at this time.

Okay. Then finally on the North American Compression business, you outlined your quote stable kind of view for at least maybe not utilization but at least active Horsepower. Typically you engage in a pricing discussion towards year end and correct me if this the wrong.

Should we think that about that as being relatively sticky in six month increments and the discussion happens? Characterize your business versus the general oil service landscape where that discussion is getting pretty heated right now.

Yes, we fortunately are in a different position in our industry overall compared to the other service companies. For one, our utilization and that of the industry remains fairly high as you have seen from others that have announced in this space. And typically we need to see more excess equipment to have and experience anything significant on the pricing front and that is in sharp contrast, I think, to what you are seeing on some of the services that are more in the drilling and completion side of the business today.

So we have that strength working for us. Last year the price increase was fairly sticky. We haven't talked about the impact or the price increase for 2015 and candidly, we are just not in a position to talk about forward-pricing. It is too controversial, as you know, so I am going to stay away from that.

That is great that. Is it for me. I will turn it back.

Thanks, Blake.

And our next question comes from Jeremy Tonic from JPMorgan.

Hi, it is actually Andy Burt here for Jeremy. Two quick questions. First, regarding the drop-down potential for EXLP -- has higher cost of equity factored into your thinking about the drop downs at all?

It is a totally fair question and the answer is that it would be if we were doing it to issue equity, but it really hasn't driven the timing at this point -- what we want to do on the drop down side. So I don't think that that's going to be a factor that you should look at as one that we are working around over a longer period or a calendar period. So the short answer is, I think, no.

Perfect. In terms of the third party M&A environment, how is the environment for Contract Compression packages revolved in recent months? Kind of specifically potential for asset package sitting within producers similar to the acquisitions made from Chesapeake last year?

It is an interesting environment. We do believe this environment should spring up opportunities both of scale and as well as opportunistic sets of operations within our customer base. We have some active opportunities that we're definitely talking to customers about. We're pretty excited if they want to defer or change their CapEx profile it gives us an opportunity to talk to them about expanding their operations with us or undertaking more operations with us. So we like that opportunity set. We think that there's going to be a chance for us to have some market impact there.

But, like with anything of magnitude or this material, no comment on the big acquisition front. We can't talk about anything that may or may not be going on internally. I will just tell you that in this capital constricted environment for the producers in particular, we're pretty excited about what that opportunity could mean for us.

Great. Thanks for the color.

Thank you. Our next question here comes from Joe Gibney from Capital One. Go ahead, stir.

A quick question following on Blake's other question on Fabrication. Just wondering you would speak qualitatively to order mix maybe as it pertains to prior cyclical downturns. Where is most of the pain felt initially? Does it come more on the Compression side and is it more domestic focused and does the [P&T/PEQ] keep hanging there a little bit? I'm just trying to get a sense of the trajectory of the mix here in the initial part of this year?

We have seen a change in the mix and the expectation right now is that the business that we're likely to trade the most on in the upfront based on what's gone on with the value of liquids and oil prices -- it's going to be in P&T. We've seen some strength and some resilience in the overall mix around Compression and even PEQ.

Just one minor housekeeping question. I am curious if you could update us at year-end what the percentage of mix of your North American contract fleet was as it pertains to liquids and dry gas?

You know, the way we still think about it is -- it is roughly a 50/50 mix between Horsepower deployed predominantly in dry gas plays, but that could include very profitable [shale] plays compared to Horsepower deployed in more liquids prone applications which would include associated gas and gas lift, as well as production that's primarily tied to liquid stripping.

Okay. I appreciate it, guys.

Thank you.

Sharon Lui from Wells Fargo. Please go ahead.

Good morning.

Good morning.

Just wondering if you could comment on the visibility of organic growth spending for North America Contract Ops. The 2015 budget is a significant reduction from 2014 levels. What is the risk that CapEx could be reduced further?

From this point forward we believe the CapEx level, we are talking about it today -- we think it is actually a good level to gauge the activity that we see and have visibility into in the year but it is front-end loaded. We think there is only limited chance or opportunity to reduce this CapEx if we see anything different than we are seeing today. So, I think it is a pretty good CapEx number based on what we see. And I can say that because it is mostly front-end loaded. Some 70% of it or more is in Q1 and Q2, tapering off through Q3 and Q4, which mean we have some real opportunity and flexibility in the back half of the year depending on what we see in the market.

Okay. And the spending, is there a rough breakout in terms of what is going to be allocated to gas lifts versus larger Horsepower applications?

No. We typically don't break it out very much but what we are looking at overall is building across the Horsepower ranges, but definitely with more emphasis on large Horsepower in this program for 2015.

Okay. And I asked for the drop-downs for the MLP. You typically do a drop in the first half of the year. Does the timing of the separation of the International business impact the timing of the drop-downs, or how should we think about that?

We obviously don't disclose timing on drop downs, but we do -- there are a number of things we consider. We've said in the past that the impending separation transactions should not impact our timing as we think about drop-down.

Okay. You also commented on managing costs. Maybe if you could provide some color on how meaningful savings could be from further right-sizing the Company, or from a reduction in material costs?

The way I think about the cost reduction discussion that we are having is that we want to keep the business right-sized to maintain profitability across our businesses and profitability from EBITDA percentage level. That is what we will have in mind should we see the need to take further cost action going forward.

Then, in terms of material cost, have you seen pricing -- cost savings on that end?

The areas where we have seen cost savings opportunity are mostly in consumables. So, for lube oil and fuel for our truck fleets. The decline in oil prices translated into cost savings opportunities on those commodities in our business. We are seeing that impact directly. Beyond that, the materials we buy are not really as influenced in the major component manufacture sector, so not really influenced by the current cycle. So we don't see it in the materials beyond those consumables.

Great. Very helpful. Thank you.

Thank you.

Our next question comes from Daniel Burke from Johnson Rice & Company.

Good morning, guys.

Good morning.

I wanted to make sure I had the messaging on [Mako] correct here. You talked about a comparatively stable performance, still have at least by historical standards, a decent first half way to grow CapEx budget -- gas production still growing. How much of a challenge is it to hold and sustain the current active operating Horsepower as you look forward through 2015?

Since we expected growth in gas production, we expect continued demand for Compression and equipment, just at a reduced rate. And then, in the intermediate term we'd expect much more pressure on gas production. Right now supply and demand appear to be pretty close to in balance. We expect more production growth in the intermediate phase. So when I think about the business overall, I think that some of the producers and some of the companies maybe have ordered a lot of equipment that will get put to work, including equipment that we're going to put to work. They are going to taper off their growth trajectory so they are going to have to catch up with that in the profile.

Then beyond that we still see sustained demand and more growth in Compression just as we see more growth in natural gas production. So I actually think that we could have a period of sloppiness as producers move from their focus on as much oil intense and liquids intense plays into more dry gas production, but in that tradeoff it is going to require that we move equipment around and it could pose a lull in some of the start activity for us, as well as an increase in stop activities and demands costs. But I expect that to be a sloppy market that still feeds into the intermediate and longer term growth, but the fundamentals in the business are just too strong for it to play out much differently than that and that is just on the gas demand size.

So whether it is associated gas or dry gas, the gas production has to come to meet demand from one of the sources and that's going to be good for Compression.

That is helpful. On the Fab side, you mentioned at least the potential for delays. Does that encompass a notable part of your Fabrication backlog? I mean could that apply to more than 10% of the backlog or a figure less than that?

Based on what we have seen so far, a lot less than that. We have seen very limited demand from our customers to cancel and defer in a way that impacts our overall backlog position or shorter term expectations on pull-through. So cancellations and delays to date -- very minimal. This environment creates that risk and we have seen some, but again, very small.

Maybe one last one. Versus where you were when you were contemplating the split of Exterran, I would imagine, it seems pretty self evident, the outlook for Fabrication isn't quite as robust at this point. Would you contemplate an adjustment in the relative leverage levels of the two entities?

You know, we haven't seen the need to go there yet, and so we haven't contemplated a change in that overall level. And, in fact, what we still see is that even with the business that we are expecting in 2015, that the leverage load on the SpinCo side of the business is very manageable coming at, still at the 1.6 times. And so we really haven't contemplated that.

Okay. I appreciate the time, guys. Thanks.

Thank you. Our next question comes from Peter van Roden from Spit Fire Capital. Please go ahead, sir.

Hey, guys.

Good morning.

The first question -- you mentioned an increase in stop activity. What do you guys look at in terms of hydrocarbon prices to measure that? Just kind of a lookout and say -- at this level, our customers will increase stop activity, and so on.

What we see is when customers are focused on deploying capital and building out and growing their production, they tend to take a lot of Horsepower with other equipment in the oil field. When customers stop growing as radically, an they start looking at how to maximize their own cash flow and minimize their LOE, then they turn to optimizing all of their operations and that includes Compression.

So the units that went out one to five years ago especially at the well head, get a re-look as the customers focus on cost. And that's when we see the cost activity. It is harder to tie to a specific hydrocarbon price as it is to think about the ways customers are going to seek to maximize their own profitability.

Got it. That is all I had. Thanks, guys.

Thank you.

I am showing no further questions at this time. I would like to turn the call back over to Mr. Childers for closing remarks.

Great. Thanks, operator.

Thank you everyone for your interest in Exterran Holdings and Exterran Partners. We are totally proud of both the quarter and year we had in 2014. Again, we would emphasize that this business is well-poised to manage through this cycle and we are continuing to be excited about the secular growth opportunity that increasing production is going to offer us. We will look forward to talking to you at the end of our first quarter. Thanks, everyone.

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