Archrock, Inc. annual report, FY2010

Business context and reporting period

Entity mismatch: The supplied filing is Exterran Holdings, Inc.’s Form 10-K, ticker EXH, for the fiscal year ended December 31, 2010—not a filing identified as Archrock, Inc. The filing includes unaudited fourth-quarter data.

Exterran provides natural-gas compression and oil and gas production, processing, fabrication, and aftermarket services. It reports four segments: North America contract operations, international contract operations, aftermarket services, and fabrication.

Financial performance and liquidity

The 2010 effective interest rate averaged 6.3%, up from 4.8%. The company reported $131.3 million of debt effectively exposed to floating rates after swaps; a 1 percentage-point rate increase would add about $1.3 million in annual interest expense. It was in compliance with debt covenants at year-end, with a 3.9x total-debt-to-EBITDA ratio against a 5.0x maximum. Of $1.218 billion in nominal undrawn capacity across its revolving and asset-backed facilities, $422.0 million was available under covenant limits.

Material changes versus the prior comparable period

• Revenue declined 9%, and adjusted EBITDA declined 26%. The net loss narrowed substantially from 2009, but remained a loss; the comparison is affected by large prior-year impairment charges and discontinued-operation items.
• North America contract operations revenue fell 13% and gross margin fell 22%; average operating horsepower declined 10% and revenue per average operating horsepower declined 3%.
• International contract operations revenue and gross margin each rose 19%, primarily reflecting new projects in Indonesia and Brazil.
• Fabrication revenue fell 19% and gross margin fell 24%; backlog declined to $703.5 million from $812.5 million.
• Aftermarket revenue increased 4%, but gross margin fell 27% and its margin rate declined from 20% to 14%.
• Fourth-quarter 2010 revenue was $615.8 million and the quarterly net loss attributable to stockholders was $118.0 million. The quarter included a $142.2 million fleet impairment charge.

Outlook, risks, and unusual items

• Management expected North American activity, particularly in shale plays and natural-gas-liquids areas, to increase in 2011 and anticipated revenue growth, subject to commodity prices and the available supply of idle competitor and customer equipment. It planned 2011 net capital expenditures of $225 million to $275 million, including $85 million to $95 million for contract-operations maintenance.
• Management expected operating cash flow and credit availability to cover operating costs, capital spending, interest, and scheduled debt repayments through December 31, 2011, based on then-current conditions. It noted that refinancing could carry higher interest costs.
• In December 2010, Exterran decided to retire and sell about 1,800 idle compressor units, approximately 600,000 horsepower, and recorded a $136.0 million impairment. It cautioned that proceeds below its estimates could require further impairment. A separate $7.6 million impairment related to other retired units; flood damage caused a further $3.3 million impairment.
• PDVSA took control of substantially all Exterran’s Venezuelan assets and operations in 2009. In 2010, discontinued operations included a $41.0 million benefit from PDVSA-related asset payments and a $12.2 million currency remeasurement gain. Exterran had filed an ICSID arbitration claim and could not predict whether or when it would receive additional compensation.
• Key risks include energy-market weakness and pricing pressure, short initial contract terms, fixed-price project overruns, international political and currency exposure, substantial debt and covenant/cross-default risk, and potential costs from emissions and other environmental regulation. The company also reported substantial self-insurance and minimal insurance on offshore assets.
• The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of year-end.

Most important facts for investors to verify

• Confirm whether this Exterran Holdings filing is the intended filing for the Archrock request.
• Assess whether North American fleet utilization, pricing, and operating horsepower improved after year-end, and whether the 2011 revenue outlook materialized.
• Review realized sale proceeds and any subsequent impairment charges for the retired compressor fleet.
• Check debt maturities, refinancing terms, covenant headroom, and the Partnership’s leverage and distribution capacity.
• Track fabrication backlog conversion, project execution, and margin performance, as well as any Venezuelan arbitration or recovery proceeds.
• Evaluate actual compliance costs and requirements under engine-emissions and other environmental rules.