Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, for Exterran Holdings, Inc. (Note: The input metadata lists "Archrock, Inc.", but the filing text explicitly identifies the registrant as Exterran Holdings, Inc.). Exterran is a global provider of natural gas compression services, equipment fabrication, and aftermarket services. The reporting period is significantly impacted by the expropriation of the company's Venezuelan assets by the state-owned oil company PDVSA in June 2009, which has been classified as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenue | $679.7 million | $2,060.9 million |
| Net Income (Loss) Attributable to Exterran | $18.2 million | ($572.0) million |
| Net Income (Loss) from Continuing Operations | $22.6 million | ($223.7) million |
| Loss from Discontinued Operations (Net of Tax) | ($3.8) million | ($345.4) million |
| Operating Cash Flow (Continuing) | N/A | $323.7 million |
| Capital Expenditures | N/A | ($303.6) million |
| Total Debt (Long-term + Current) | $2,385.7 million | $2,385.7 million |
| Cash and Cash Equivalents | $86.2 million | $86.2 million |
| Working Capital | $555.0 million | $555.0 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenue for the nine months ended September 30, 2009, decreased by approximately 7.7% compared to the prior year period, driven by reduced activity in North America contract operations and the Fabrication segment due to deteriorating market conditions.
- Significant Losses: The company reported a net loss of $572.0 million for the nine months ended September 30, 2009, compared to net income of $108.1 million in the prior year. This reversal is primarily due to:
- Discontinued Operations: A $380.0 million impairment charge related to the expropriation of Venezuelan assets.
- Goodwill Impairment: A $150.8 million charge in the International Contract Operations segment.
- Fleet Impairment: An $86.7 million charge for retiring idle compression assets in North America.
- Investment Impairment: A $98.1 million loss on non-consolidated affiliates (Venezuelan joint ventures).
- Segment Performance:
- North America Contract Operations: Revenue down 9% (nine months) due to a 9% decrease in average operating horsepower.
- Fabrication: Revenue down 8% (nine months) due to project completions and reduced new bookings.
- International Contract Operations: Revenue increased 1% (nine months) due to new contracts in the Middle East and Brazil, offsetting losses in Mexico.
- Debt Restructuring: In June 2009, the company issued $355.0 million of 4.25% convertible senior notes due 2014. Proceeds were used to repay approximately $173.8 million of revolving credit facility debt and $135.0 million of asset-backed securitization debt.
Guidance, Outlook, and Risks
- Outlook: Management expects further horsepower declines in North America through the remainder of 2009 and into 2010 due to the economic environment and excess supply of idle equipment. However, international revenues are expected to increase in 2010 due to project start-ups in the backlog.
- Capital Expenditures: The company plans to spend approximately $375 million to $400 million in net capital expenditures for the full year 2009.
- Liquidity: Management expects net cash provided by operating activities to be sufficient to finance operating expenditures, capital expenditures, and scheduled debt repayments through December 31, 2009.
- Key Risks:
- Venezuela Expropriation: The company has recorded a loss but maintains a claim for compensation. Recovery is uncertain and not recorded until resolved.
- Debt Covenants: The company is currently in compliance with all financial covenants. However, the Partnership (Exterran Partners, L.P.) estimates it could violate its Total Debt to EBITDA covenant by the end of 2009 if demand deteriorates further and it cannot consummate planned acquisitions or restructure debt.
- Regulatory: Potential new EPA regulations regarding greenhouse gas emissions and hazardous air pollutants could result in significant compliance costs.
- Subsequent Event: In October 2009, the company announced a transaction expected to close in November 2009, where the Partnership will acquire approximately $143.0 million of contract operations assets and customer agreements from Exterran.
Investor Verification Checklist
- Venezuela Claim Status: Verify the progress of legal proceedings regarding the $380 million expropriation loss and the likelihood of insurance recovery (policy limit $50 million).
- Partnership Covenant Compliance: Monitor Exterran Partners, L.P.'s ability to meet its Total Debt to EBITDA covenant (max 5.0 to 1.0) given the current economic downturn.
- North America Horsepower Utilization: Track the trend of operating horsepower and utilization rates in North America, which are critical drivers of the Contract Operations segment.
- Convertible Note Conversion: Assess the dilution impact of the $355 million 4.25% convertible notes, noting the initial conversion price of ~$23.15 and the economic hedge via call options/warrants.
- Regulatory Compliance Costs: Evaluate the potential financial impact of proposed EPA Clean Air Act regulations on the company's compressor fleet.