Brad Childers - President and CEO Jon Biro - SVP and CFO David Miller - SVP and CFO, Exterran Partners, LP.

Mike Urban - Deutsche Bank Praveen Narra - Raymond James Blake Hutchinson - Howard Weil Andrew Burt - JPMorgan Daniel Burke - Johnson Rice & Company TJ Schultz - RBC Capital Markets Sharon Lui - Wells Fargo.

Good morning and welcome to the Exterran Holdings' and Exterran Partners' Second Quarter 2015 earnings call. At this time, I'd 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 second quarter 2015. If you have not received a copy, you can find the information 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, 2014, Exterran Partners' Annual Report on Form 10-K for the year ended December 31, 2014 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. And you host for this morning's call is Brad Childers, President and CEO. And I would now like to turn the call over to him. Mr. Childers, you may begin your conference..

Thank you, operator and good morning everyone. By way of introduction, because we’ve not yet completed our separation transaction, the format for this second quarter call be the same as we have used for past calls, i.e., we’ll discuss the Company’s results overall and not broken out into Archrock and Exterran Corporation’s results.

So with that format in mind, joining me today for the call will be Jon Biro, CFO of Exterran Holdings and David Miller, CFO, Exterran Partners. Before we begin our review of the Exterran Holdings and Exterran Partners results, let me start by addressing the status of our separation transaction.

In November 2014, we announced our separation plan with a goal of completing the transaction during the second half of 2015. Over the past eight months, we’ve made tremendous progress to be in a position to do just that.

So much so, that today we are prepared internally to separate the companies into Exterran Corporation, our international services and global fabrication business Archrock, our domestic contract service business early in the third quarter.

On our first quarter conference call, with this progress well in hand we tightened our time frame for the separation from the first half of 2015 to the third quarter.

Our preparation to separate required significant investment as time, energy and effort on the part of our employees and we were able to prepare ourselves for the separation faster than anticipated.

And we did this while maintaining our focus on delivering high quality products and services to our customers and managing our operational and financial performance to deliver stable and profitable results for our investors.

On July 13, we launched one of the final steps in the separation process; a senior notes offering for Exterran Corporation or SpinCo. The proceeds from this offering were fees to pay-off the $350 million in senior notes currently outstanding at Exterran Holdings.

If this financing had been completed as planned, today, we would most likely to operating separately as Exterran Corporation and Archrock. But the timing of our financing was unfortunate.

Macro reasons and a significant deterioration in oil prices in mid-July coupled with a precipitous decline in the prices of existing energy related debt securities caused the market to effectively close to new energy related issuers. This led us to withdraw our debt offering on July 24 and delay the closing of our separation transaction.

Now given the severity in speed of the decline in the financial markets that caused us the pull our debt offering, it should be apparent that this delay is not a reflection of Exterrans operating performance as you will see shortly nor is it a reflection of our financial position or credit profile which remain strong with more than ample liquidity.

It was merely a consequence of bad signing. Importantly, this delay does not impact our conviction that operating as two companies is in the best interest of our shareholders and provides the best long term opportunity for growth and profitability of all of Exterran’s business lines. In short, we remain firmly committed to completing our spin off.

This is only a delay in our plan, which is progressed rapidly and productivity to put us in a position to close when we complete our financing. Today, we’re working on all available financing options to complete the spin-off.

Fortunately, we are not locked into any one path for the completion of the transaction and we are committed to completing the transaction as expeditiously as possible and launching both companies in a strong financial position. In the interim, we’re also well positioned to continue operating as one Company.

Our financial position is strong and our operational performance is solid. Internally, we’ll continue the operational migration toward managing our businesses as Exterran Corporation and Archrock and continue to pursue growth opportunities and manage our costs prudently for both.

While we operate as one Company we’ll benefit from new perspectives and insights brought to us by new members of our management team and by new members of the Board that joined Exterran in anticipation of the completion of the separation. We’re especially pleased with the addition of Andrew Way.

Andrew will be appointed CEO of Exterran Corporation at the conclusion of the separation. But he’s already on board with us and fully participating in our progress toward the separation, and diving into the operations of our international services and global fabrication businesses which will become Exterran Corporation after the spinoff.

So with that let's take a look at the second quarter. Exterran's production focused services and fabrication businesses achieved solid operating performance in the quarter, especially in light of current market conditions.

In our North America contract operations business operating horsepower revenues were down only 2% compared to first quarter results. We continue to see production based demand in growth plays including the Eagle Ford and Permian to experience some declines primarily in non shale conventional plays.

Despite the revenue decline gross margin percent was strong, coming in at 59% in the second quarter, unchanged from the first quarter of 2015 and up a 160 basis points compared to the second quarter of 2014.

This continued gross margin performance and year-over-year improvement is the result of our ability to maintain pricing as well as lower alluded field costs and other cost reductions that we put into our North America operations.

Our international contract operations business also generated good operating results in the second quarter with revenue and gross margin generally in line with expectations. Operating horsepower declined modestly due in part to the exercise that purchased options in Argentina and slightly higher staff activity throughout Latin America.

But this decline's temporary as these stops will be replaced by new projects that will use a significant amount of existing horsepower including a major project in Brazil starting late in the third quarter and a project in Bolivia that will start producing revenue in 2016.

Our aftermarket services businesses have continued to be a bright spot and have performed well both in the US and in international. Overall we continue to see a mostly normal level of maintenance activities from our global customer base without significant deferrals of acquired maintenance.

The cost reduction efforts that are helping our contract operations businesses are also positively impacting our aftermarket services profitability.

In fabrication, our revenues came in at the lower end of our guidance range, but this modest underperformance was primarily the result of project delays, some at the request of our customers that we believe we will capture in the third quarter.

And despite the markedly different commodity price environment, our second quarter 2015 fabrication revenues were only down about 13% compared to the prior year period as we worked through the high backlog level we achieved coming into 2015.

In addition our fabrication gross margin percentage held up well in the second quarter after taking into account an inventory charge that we recorded in the quarter. This was achieved through solid cost management during a period of declining volumes and an increasingly competitive environment.

While we're still in a period of reduced capital investment by our customers, fabrication bookings did still improve by 53 million over the first quarter's results. Now let's turn to our markets. And as I do I want first to discuss our view of the overall market environment and its potential impact on our production related businesses.

We believe that our US and international services businesses which represented about 84% of our second quarter gross margin dollars will continue to be relatively stable.

As these businesses are tied primarily to existing production levels for natural gas and secondarily to new production additions they're not as impacted by commodity price volatilities compared to businesses that are more closely tied to drilling and completion activities.

On the other hand we expect that our fabrication business which represented the remaining 16% of our gross margin dollars in the quarter will be more impacted by the industry slowdown as that business relies more on new capital spending driven by new production capacity additions. Now let me provide a more detailed outlook for each business.

Starting with our North America contract operations business, through the first half of 2015 North America contract operations revenue was $400 million, up about 18% over prior year levels, driven by the MidCon acquisition and organic growth supported by investments in our compression fleet.

We believe our production related business model should continue to support relatively stable performance in our North America contract operations business over the course of the year. Still we have seen a reduction in new bookings and an increased level of staff activity compared to 2014.

We expect the delays in drilling completion activities and increased focus on cost for our customers will exert some pressure on both our new bookings and the level of staff activity as customers seek to reduce their lease operating expenses by optimizing compression.

From an overall perspective however compression horsepower needs to remain flat or grow for natural gas production levels in the US to remain flat or grow. Even with the dynamics I described we continue to see demand in select highly utilized portions of our fleet.

And as a result we expect to add additional units to the fleet in the second half of 2015.

On our overall CapEx spend, however, in response to the more challenging market conditions and our focus on maintaining cash flow, we’ve reduced 2015 growth CapEx in our North America contract operations business and now expect about 40% reduction compared to 2014 levels. Turning to our international contract operations.

Revenues for the first half of 2015 were down 4% compared to the prior year levels which benefited from additional revenue on a project in Brazil that terminated earlier than expected. Excluding this benefit first half revenues in 2015 would have increased modestly over the prior year period.

While we’ve not seen and we do not expect the same level of new project opportunities into 2015 that we saw in 2014, our key focus this year is on the execution of our backlog of committed projects. These projects, like most of our international contract operations business, are underpinned by relatively long term fee based contracts.

At June 30, 2015, our international contract operations backlog of new projects was $56 million of annual revenue including 71,000 horsepower of compression. We believe these new contracts will allow us to continue to generate stable revenues and gross margins as they come on line and replace some of the recent stops we’ve experienced.

In our aftermarket services business, we continue to see strong demand in most of our markets. Aftermarket services revenue in the first half of 2015 was down 6% over prior year levels, driven primarily by our exit from Australia and Gabon.

Gross margin percent on the other hand was up 150 basis points for the first half of 2015 and gross margin dollars were essentially flat compared to the prior year period, primarily as a result of these strategic markets exists and continued strong demand in our other markets.

In our fabrication business, in the first half of 2015, revenue was down just 2% over prior year levels as we work through the high backlog level we had entering 2015.

The second quarter bookings were modestly higher than the first quarter and we’ve seen higher level of inquiries and activities across many of our product lines in the second quarter which is encouraging. Despite this, we are not booking sufficient new business to replace the level of backlog runoff we’re experiencing.

And as a result, we may see declining revenues in our fabrication business late in 2015. Before I close the Exterran Holdings portion of my comments, I would like to talk about our cost management efforts.

As I discussed last quarter, in light of market conditions, and in order to maximize profitability, cash flow and a financial position, we’ve continued to reduce our cost structure.

Our cost reduction efforts have cut across all of our business segments and our corporate overhead with a goal of ensuring that each business line is and will remain right-sized for business activity levels.

Steps that we’ve taken so far in 2015 include the following; we’ve reduced our global headcount by about 1,200 full time employees and contractors or by about 12% of our total work force; these reductions have occurred throughout the Company with the largest reductions coming out of our fabrication businesses in the United States, Singapore and Dubai.

We implemented a companywide salary and wage freeze and have taken other steps to manage overall compensation and benefit costs; and we’ve continued to drive additional cost reduction across our supply chain.

Overall, we’ve accomplished a reduction in SG&A of over $40 million on an annualized basis comparing the current quarter annualized with the prior year level, looking ahead, however, we have recently added some incremental SG&A cost and preparation for our separation transaction. Jon will provide a little more color on those.

In addition to improving our cost structure, we’ve also scaled back our capital spending driven by lower investment in our North America contract operations business. Our total CapEx in 2015 is expected to be at about $100 million or 18% lower than 2014 levels.

Despite continued challenges in the market, Exterran have a stable and steady second quarter with solid execution in our business segments. Looking ahead, we’ll continue to stay close to our customers, managing our cost in line with activity levels and focusing on differentiating our products and services.

Last, we remain completely committed to our strategic separation transaction and we’ll pursue every opportunity to close the transaction when reasonable financing is secured. Now, let’s review the Partnership’s results.

Exterran Partners’ stable natural gas compression business produced strong distributable cash flow coverage and solid results in the second quarter. And our results benefited from the compression assets we acquired from Exterran Holdings in April of this year.

For the second quarter 2015, we increased the quarterly distribution to [$0.5675] for a limited partner unit or $2.27 on an annualized basis. We will continue to seek to grow the partnership through fleet additions and acquisitions.

Now moving to the financial section of today's call, I'd like to turn the call over to John for a review of the financial results for Exterran Holdings and quarterly trends and guidance for the third quarter of 2015..

Thanks Brad. First I'll provide a summary of the results for the second quarter and then I'll provide guidance for Exterran Holdings. Exterran generated EBITDA as adjusted of a $160 million on revenues of $684 million for the second quarter compared to the prior year period EBITDA. EBITDA increased modestly by 1% while revenues declined 7%.

We also reported diluted net income from continuing operations attributed to Exterran common shareholders excluding items of $0.22 per share in the second quarter compared to a $0.07 loss in the prior year period. Now turning to segment results, the financial performance of each of our segments was generally in line with our prior guidance.

North America contract operations revenue came in at $198 million in the second quarter down 2% compared to the first quarter but up 9% over the prior year period.

In our North America contract operations business growth capital expenditures were $42 million in the second quarter down compared to 77 million in the first quarter as we focus on cash flow generation in this environment. Maintenance capital expenditures were $21 million in the second quarter compared to $17 million in the first quarter.

In our international contract operations business revenues were $150 million in the quarter down 5% compared to the first quarter, down 14% compared to the second quarter last year. As a reminder, second quarter 2014 results included a revenue of $17 million from a project in Brazil that terminated in 2014. Gross margin was a solid 61% in the quarter.

In our aftermarket services business revenues were $91 million in the second quarter, up 5% from the first quarter and down 9% compared to last year's second quarter. This year-over-year revenue decline was primarily due to our exit Gabon and Australia. Gross margins were very acceptable at 23% in the second quarter.

In our US aftermarket services business second quarter 2015 revenues were 57 million and gross margin was 19%. In our international aftermarket services business revenues were $34 million and gross margin was 29%. We had another solid quarter in our fabrication business.

Revenue of $279 million during the second quarter breaks down to about 53% production and processing and installation, 32% compression and about 15% from Belleli. Geographically the revenue split was roughly 60% in North America and 40% from international.

Fabrication gross margins were 14% compared to 16% in the first quarter of 2015 and 13% in the second quarter of 2014. Second quarter margins included an increase of 3.5 million in expense for inventory reserves compared to the prior year period with reduced gross margins by approximately 130 basis points in the quarter.

Our fabrication backlog was $600 million at June 30th, 2015 compared to $730 million at March 31, 2014. Bookings were $150 million for the second quarter up from depressed first quarter levels of $96 million. In the second quarter bookings were roughly 50% from North America and 50% from international markets.

In quarter end backlog also was roughly 50% from North America and 50% for international markets. SG&A expenses were $84 million in the second quarter. A decline of 12% compared to $96 million in the second quarter of 2014. Decreased compensation and benefits costs were the primary driver for the year-over-year cost savings.

Depreciation and amortization expense was $94 million for the second quarter down 17.6 million compared to last year due to a project in Brazil that commenced and terminated operations in 2014.

In the quarter we recognized restructuring and other charges of $19.6 million primarily related to our separation transaction including inventory write downs and workforce reductions associated with the current market environment. In addition we recognized non-cash long lived asset impairments of $15.4 million related to our idle compressor fleet.

Interest expense was $98 million, a modest increase compared to first quarter levels. And last our consolidated tax rate was 19% for the quarter.

This rate was lower than expected primarily due to lower state income taxes as a results of a Texas margin tax rate reduction and [indiscernible] quarter and non-taxable joint venture proceeds received in the quarter. Now turning to guidance for the third quarter of 2015.

In North America contract operations, we expect revenue of approximately $195 million and gross margin to be in the 58% to 59% range. For our international contract operations, we expect revenue in the $110 million to $115 million range with gross margins around 60%.

The potential modest sequential revenue decline will be driven by lower deferred revenue recognition for a project in Mexico and lower cost recoveries from a customer in Brazil partially offset by the impact of new projects starting up in Brazil.

In aftermarket services, we expect revenue in the $80 million to $90 million range with gross margins around 20%. In U.S. aftermarket services, we expect revenue in the $50 million to $55 million range with gross margins around 18%.

In international aftermarket services, we expect revenue in the $30 million to $35 million range with gross margins in the mid 20% range. In our fabrication business, we expect third party revenue between $240 million and $280 million with gross margins around 13%. We expect SG&A expenses to be around the mid to high $80 million level.

The sequential increase will be due to de-synergies of approximately $4.5 million of quarterly cost as a result of our cost structure being positioned to support two separate companies following the closing of our spin off transaction.

In the third quarter of 2015, we expect depreciation and amortization expense in the $95 million to $100 million range and interest expenses of approximately $28 million.

For the third quarter and full year 2015, our effective tax rate from net income from continuing operations attributable to Exterran’s stockholders, excluding items, is expected to be in the low to mid 40% range. Now regarding capital spending. Net capital expenditures were $104 million for the second quarter.

Growth capital spending in the second quarter was $66 million, which included $42 million for North America, primarily for our fleet newbuild program. Maintenance capital expenditures for the quarter were $30 million, up from first quarter levels of $22 million.

For 2015, we continue to expect net capital expenditures to be between $400 million $450 million and maintenance capital expenditures of between $100 million and $110 million.

In our North America contract operations business, we now expect growth capital spending in the $165 million to $185 million range in 2015 compared to previous guidance in the $160 million $180 million range.

In North America, we expect about 90% of these 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 third quarter is expected to be flat to slightly higher, compared to second quarter levels.

For our international operations, we expect growth capital expenditures of around $105 million to $115 million in 2015, approximately half of which will be reimbursed by our customers on or before project start out. During the second quarter, debt increased $2 million at the Exterran Holdings parent level.

Debt increased $40 million at the Partnership level, largely due to fleet investments funded under our Partnership’s revolver. Therefore, in total, consolidated debt increased by $42 million in the quarter. Exterran Holdings’ leverage ratio as defined in our credit agreement was 1.6 times at June 30, 2015 compared to 1.5 times at March 31, 2015.

As Brad mentioned, Exterran has ample liquidity with undrawn and available capacity of $808 million under our credit facilities as of June 30, 2015, including $359 million at Exterran Partners.

Cash distributions to be received by Exterran Holdings based on its limited partner and general partner interest in Exterran Partners are $18.5 million for the second quarter compared to $15.6 million for the first quarter.

Last week, Exterran Holdings Board of Directors declared a seventh quarterly cash dividend to common stockholders of $0.15 per share. This will be paid on August 17, 2015 to shareholders of record on August 10th. I will now turn the call over to David Miller to talk about Exterran Partners.

David?.

Thanks Jon. Exterran Partners had a strong operating result in the second quarter. Partners’ financial results and leverage position were bolstered by $102.3 million dropdown completed early in the quarter.

And the all equity finance dropdown Exterran Partners issued approximately 4 million LP units and 80,000 GP units to Exterran Holdings to acquire customer contracts and associated compression units representing 148,000 horsepower and additional compression units totaling 56,000 horsepower that were previously leased some Exterran Holdings to Exterran Partners.

Exterran Partners' EBITDA as further adjusted was $83.2 million in the second quarter of 2015 compared to $78.7 million in the first quarter of 2015.

The increase in EBITDA as further adjusted was driven primarily by higher average operating horsepower due to the contribution of assets purchased from Exterran Holdings this quarter as well by approximately $1.8 million of gains on sales of assets to customers.

Distributable cash flow was $48.3 million in the second quarter of 2015 compared to $51 million in the first quarter of 2015.

The decline is attributable, the decline in distributable cash flow was largely attributable to higher maintenance capital expenditures in the second quarter which were $15.3 million as compared to $10.1 million in the first quarter of 2015 and higher interest expense in the quarter.

Our distributable cash flow coverage was a solid 1.24 times in the second quarter of 2015, down from 1.42 times in the first quarter primarily as a result of higher maintenance capital expenditures. In addition we closed the drop down transaction on April 17th 2015.

As a result we did not have a full quarter's benefit of the cash flows from the required assets but paid full distributions on the units issued to acquire the assets from Exterran Holdings.

Second quarter ending operating horsepower increased sequentially by 98,000 to approximately 3.13 million operating horsepower as the addition of the assets purchased from Exterran Holdings on April 2015 more than offset a modest decline in the underlying fleet.

Excluding the drop down Exterran Partners saw an organic horsepower decline of approximately 50,000 operating horsepower as a result of customer purchases of equipment approximating 16,400 horsepower and larger declines in non shale, nor growth plays and additions from growth and shale plays such as the Eagle Ford and the Permian.

Revenue for the second quarter was a $167.8 million as compared to a $164.3 million in the first quarter. Revenue improved largely as a result of increased average operating horsepower in the second quarter due to the contribution from assets purchased from Exterran Holdings in April 2015.

Gross margin was 61% in the second quarter, flat as compared to the first quarter levels but up approximately a 180 basis points from Q2 2014 level.

Our strong second quarter gross margin percent as attributable to our maintenance of revenue per horsepower in this challenging environment and lower cost for horsepower both sequentially and year over year. Cost of sales per average operating horsepower was $21.08 in the second quarter.

This was down 1.9% compared to the first quarter of 2015 versus the prior year period cost of sales per average operating horsepower was down 4.6% driven by the benefits of the MidCon acquisition, organic growth, cost management and efficiency initiatives at lower lube oil prices.

SG&A expenses were 20.7 million for the second quarter consistent with the first quarter levels despite the additional SG&A related to the drop down assets due in large parts to the reduction in overall SG&A Exterran.

Interest expense for the second quarter was $19.1 million up from $17.8 million in the first quarter due primarily to a higher average debt balance during the second quarter. Net income for limited partner unit was $0.30 in the second quarter up from $0.28 in the first quarter.

Net income for limited partner unit excluding items for the second quarter was $0.33, excluding $2.1 million due primarily to non cash long lived asset impairment charges related to our fleet. Lastly Exterran Partners announced its distribution of $0.5675 per limited partner unit or $2.27 per limited partner unit on an annualized basis.

Our quarterly distribution is a $0.005 higher than the first quarter distribution and $0.025 higher than the second quarter 2014 distribution. On the balance sheet total debt increased by $40 million during the quarter to approximately $1.4 billion at June 30th, 2015.

The increase in debt was due to additional borrowings to fund the purchase of fleet units. Available undrawn debt capacity under Exterran Partners debt facilities at June 30th was approximately $359 million.

As of June 30th, 2015 Exterran Partners had a total leverage ratio which is convent debt to adjusted EBITDA as defined in the credit agreement a 4.2 times as compared to 4.4 times at the end of the first quarter. The improvement in this leverage metric was largely attributable to the all equity drop down we completed in the second quarter.

Growth capital expenditures for the second quarter were $71 million consisting of $56 million for fleet growth capital and $15 million for maintenance activities. For the full year 2015 we now expect total fleet growth capital expenditures to be in the $155 million to $175 million range.

As compared to previous guidance and the $135 to $155 million range due to continued customer demand for types of compressing units that are highly utilized within Exterran’s fleet. Through June 30, 2015, EXLP spent approximately $114 million in growth capital.

So even with this increase, second half 2015 growth capital expenditures are expected to be significantly lower than the first half investment and new fleet units. We continue to expect maintenance capital expenditures in the $50 million to $55 million range.

In summary, second quarter highlights for Exterran Partners included the completion of a dropdown, solid gross margin management and attractive distributable cash flow coverage of 1.24 times. At this point, I’d like to turn the call back over to the operator to open it up for questions..

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question is from Mike Urban from Deutsche Bank..

On your previous call, you talked about little bit of -- and I guess little bit here today talked about some pricing or constantly some pricing concessions from your customers; one, have you seen that kind of normalized or stabilized if you’re going to be work through all those issues; and two, do you think you’ve been able to offset that from a cost perspective and your margins and your guidance would imply that that you have, but would be interested on your comments on that..

You somewhat have the analysis in the way you phrased the question. We do believe that we’ve endured pricing pressure really well and one of the reasons to that we believe is that compared with prior downturns we didn’t enter this downturn with the same amount of excess compression in the field that we believe was available in prior downturns.

And so pricing has held up I think a bit better because of that. And then in addition we don’t have the same amount, we didn’t have the same amount of price increase coming into this and the industry didn’t have as we saw in prior downturns. So we think that the customers noted that and understood that our pricing position was in a different spot.

So, through this period while we work closely with our customers on this issue to help them manage their businesses, we think pricing is held up well and we think we’ve made it through the past round of that pressure intact and we did get some benefit to offsetting price, or should the cost management within our operations to maintain our margin in the position that we’ve maintained it..

So, as it stands today then just given the pricing dynamics at the leading edge and what your cost have been at the leading edge.

You feel like you can kind of at least hang in somewhere around current margins, is that a fair comment?.

Jon gave the guidance to what we’re looking for in Q3 which is still pretty solid margin performance. But our customers have some businesses to manage and the current oil price environment is making it harder on them.

So the way I think of it is, I think we made it through well round one and we’ll see if there are additional rounds and pressures that we have to navigate. But we’re ambitious overall in maintaining the stability of our performance on both horsepower as well as margin from an overall perspective..

And then, I don’t think anybody has been thrilled to see the new renewed drop in the oil price. But has that create any renewed sense of urgency or it might perhaps accelerated, any discussions you might be having regarding customer purchases or purchases of customer assets.

Maybe they were hoping for rebound and then maybe focused on ramping up again and maybe now that’s been put on hold. And I guess based on your experience in the high yield markets, maybe those options are available to your customers neither the financing themselves.

So does that create any potential opportunities and has that changed versus maybe three or six months ago?.

Mike I like the way you’re thinking. Let’s hope some of our customers have some of those thoughts right now. But in fairness it’s just too early to tell. We’re literally days into the dynamic you just described. And so it’s just too early to really get there.

But we’re working hard on those opportunities and we believe we will capture some growth through smaller acquisitions in the fleet over time. So, I like the way you’re thinking, hopefully our customers were listening..

And then last question just a housekeeping question. Appreciate the additional breakout on U.S. versus international aftermarket. But as we model SpinCo, you gave some preliminary guidance when you were marketing the -- how you did on G&A allocated to SpinCo.

Do you have the final number there?.

We came in very close to and within the range that we provided in Q2..

So to split the differences in middle of the range is reasonable number?.

Yes..

Our next question is from Praveen Narra from Raymond James..

Hey, good morning guys.

Could you give us some color on what inning you guys are in terms of the process cost initiatives? Have you guys identified most of what you think you can get out of the system? Or are you still finding additional possibilities as we move along?.

Good question and we do get the question phrased as what inning we're in fairly often and my first response is usually the same which is that I'm never going to feel like I'm going to call it, we're past the fifth inning and I'm not sure it's really innings based because the opportunity to improve our business is not going to go away.

That said we obviously captured some really nice gains over the last couple of years through great cost management and the next increments are getting harder, but I remain committed that we have more operational efficiency in our field operations that we're going to get through more systematic yet harder to reach cost reductions and that we're working on those and this market environment you know reinforces every incentive we already had to make sure we capture them.

So you're not going to get me to call past the fifth inning I still think we have good work to do and we are focused on capturing those..

Okay. And then in terms of the utilization, obviously people are still ordering what sounds like the higher-horsepower equipment.

Can you give us a sense -- for the utilization that has ticked down, is that solely happening on the gas lift side? Or what are the dynamics behind that?.

Yes, I can give you some color. From an overall perspective it's not hit any portion of our fleet harder than others from the line of equipment perspective. It is different on a played perspective.

So let me unload that a little bit, surprisingly by the way the fleet from gas lift perspective has remained at the same level of utilization as we've had in prior quarters as we've seen real good but it's taken resilience in that part of our fleet.

So across the board it's, the decline is coming from all categories of equipment, not any one hot, large, or small disproportionately.

Where we do see more returns and higher levels of stock activity is in the conventional dry gas plays, as we continue to experience the migration and with accelerated focus for cost management by our customers we continue to see the migration overall in North America natural gas production from legacy conventional plays to the more growth oriented shale plays.

.

That's helpful, thank you..

Our next question is from Blake Hutchinson from Howard Weil. .

First of all, Brad, around some of your commentary on fabrication order flow, from the sound of it, it didn't exactly sound like you had given up on getting to the point where you can replace topline, however declining, in fabrication with order flow as the year goes on.

Could we take that to suggest, along with the commentary around inquiries, that 2Q order flow may represent somewhat of a baseline to improve upon here? Or do you not want to step out that far?.

Blake did you really just give me the option.

I think that the good news is that we did see both the orders come in as well as activity inquiries higher than we saw in Q1 and you may recall when we talked to you in Q1 and the industry was trying to figure out Q1 it really did go like the markets stood still for a quarter while people were trying to figure out what to do.

They finally got onto their capital plans and activity levels in Q2, so I think it did stabilize a bit and we are optimistic that Q2 is certainly more indicative of what the market should offer than Q1.

The thing that gives us pause is of course the most recent days-old retrenching on oil price gives us a bit of caution on that but we remain committed this is a good business and that while production is in natural gas in particular in North America and internationally is going to grow, that we're going to go through these periods of adjustment and they could last longer than we want them to last but this business is a good business that is going to fabricate business that goes right into production of natural gas and that we've seen a better, we've seen better performance and I think more indicative performance in Q2 than we experienced in Q1..

And the project delays you cited, just to be clear, were delays in potential order flow? Or those were delays in getting revenue out the door?.

Great clarification, they were primarily delays in getting revenue out the door as we slowed down activity within our own system and as I said some of it was at customer request, others were to allow us to manage cost well but it really pushed some revenue that would have been in Q2 otherwise into Q3..

Great. And then on the international contract compression operations, just wanted to understand -- I guess we understand that your CapEx this year and what you're working on this year was essentially born of success in bidding in 2014.

Coming into 2015, was the pipeline for new opportunities that you kind of had on the drawing board or potential-bid board always a bit leaner than 2014? Or has this been a product of a tougher oil price environment? Trying to differentiate what that pipeline looks like?.

I love the question because it demonstrates some of the core fundamentals of that international compression business really well. But 2014 was comparatively speaking I mean going back to ’13 and ’12 a monster bookings year for contract operations in international. We hadn’t seen that level of activity in some time.

And so it’s just a great bookings year and it’s largely coincidence that so many large projects hit at the same time in international contract operations. And we had a really good capturing in the market. And so we knew that ’14 was a standout.

And so while ’14 was all about bookings, ’15 would be all about execution on those projects, which is has been and the execution on those projects is going extremely well.

But the other point and the more important point is that what we’re seeing this year and what we saw in ’14 was really not macro market driven, that international contract operations business strength comes from this production in natural gas typically associated with micro pricing environments that is gas markets that are not influenced directly by global commodity prices; and so those projects were more independently developed based upon supply and demand within local market.

So for example within Brazil or marketing gas from Bolivia to Brazil, or within Mexico, or within Argentina; so they’re very independently driven not really subjected to the macro market environment. We really think that’s one of the key strengths and sticking points for that actual business..

Next question is from Andrew Burt from JPMorgan..

So the 11% yield on Exterran Partners seems to probably be credit and growth there.

How you guys approach distribution growth given the strong coverage heading into the third quarter?.

So we saw -- we had 1.24 coverage in this quarter, which we think is a nice level of coverage, and we think it was a little bit lower due to some of the factors I sided on the call. We like having a little bit of cushion in our coverage as we’re entering a market like this or in a market like this.

And then secondly as I pointed out last call, we’re at 4.2 times debt to EBITDA we’re a little bit more levered than we like to be. And so, we like this consistent steady distribution growth and a little bit of cushion in our distribution coverage as we move forward..

And then staying on Exterran Partners, back to the cost savings, there is pretty sizeable savings quarter-over-quarter.

Should we think about the recent shift as kind of a new normal now that the lubricant and fuel savings have been realized? So is there more to come on a short-term basis in terms of cost savings other than continued progress on the longer term cost management program?.

Look, this is a tough market to call, getting that through into our margin on a very short-term basis. So I wouldn’t go there. I would be very bullish about what we can continue to drive for gross margin and profits on a longer term basis..

And then last question, nice full increase in the growth CapEx estimate for North America contract compression. Is that from a particular basin that you’re seeing strength in or certain stage in the mid stream value chain anything, any color would be helpful there. Thanks..

So that investment reflect that we have some categories of units in our fleet that are very highly utilized and we just are trying to stay ahead of the curve and not run out of high demand units from our customers.

But from a basin perspective, the growth that we’re experiencing and what we’re still seeing the most traction includes as we mentioned the Eagle Ford, the Permian, the Bakken and the Niobrara, is where we really see horsepower, that horsepower growing. Hopefully that’s helpful..

And then can you just remind us what Exterran’s positioning is for contract compression within the Marcellus and how you see the Partnership growing its footprint there? And that’s it for me. Thank you..

So Marcellus is a market we are in, the market we’ve been in for a long time and I’d say that it’s one of the most competitive markets that we have on two fronts; strong competition within the outsourced service providers, very solid, very good competition. So it means that we fight and they fight for opportunity there.

It’s also a market with the most, not the significant, but really significant mid stream presence and so a lot of owned horsepower so we sell a bunch of the compression in the Marcellus as well. But we still see that as an attractive growth play. And we intend to continue to fight for market share in the Marcellus..

Our next question is from TJ Schultz from RBC Capital Markets..

Just post the spin, what’s the expectation on time frame to drop the rest of the horsepower or the pace and drops into the MLP?.

As you know, we don't typically provide guidance on timing for dropdowns. And there is a lot of considerations to go into, how is that, when we’re going to make a dropdown. Those can be competing opportunities in the market. Where our unit price is trading, availability of capital, there is a number of factors that go into it.

And so, as we think about dropdowns going forward, we’ll consider all of those. And in addition, we have to keep in mind that we need to make sure we preserve the tax free nature of the spin and dropdowns. And dropdowns are part of that consideration along with the number of other things..

Next question is from Daniel Burke from Johnson Rice..

I guess I want you to address stocks out there in the market. I thought the topline guide for NACO looked pretty good. Brad, you have coached us that stops have a little bit of a seasonal bias towards Q2. It sounds like you also sold some horsepower to customers.

But how do we think about stop activity looking ahead to the second half of the year?.

We've given the top-line guidance through Q3, which we think is reflective of what we expect from horsepower moves in the quarter. And I'll also agree that in the past, we've seen that in the cycle it's not so much seasonal in a way that is traditional for other types of businesses.

But what we see in our activity is that they very often focused on a lot of their maintenance activities as well as field assessments of their assets and both their owned and outsourced during this time of the year and that’s what led to seeing some of that potential or apparent seasonality.

And so while that holds true, I'm just going to point out, this is a pretty interesting and unique market environment for us to call out this tightly.

What I do believe is that the overall stability of this business model where we may lose a little bit of horsepower or we’re going to gain a little horsepower in quarters and in periods that look like this is that the overall stability of our cash flow and the profitability of the business is incredibly resilient compared to what you can find elsewhere in the oil patch for investment right now.

And so, whether there are 50,000 up or 50,000 down candidly, we’re really pleased and we’ll continue to push and maximize the performance of what is that base of very stable business..

And then maybe, on the CapEx uptick at the Partners level, if I followed all the numbers correctly, it seemed like maybe a part of that is actually a shift of some planned capital spend from the parent level to EXLP.

And I guess I just wanted to ask, did I followed that correctly? And if so what sort of the rationale or the thinking there?.

It’s wasn’t really a shift from the parent and the MLP, it just -- most of the increase at the parent is with more than 80% of the operating assets down at the Partnership, most of the shift at the parent is going to go to EXLP customers.

And so again like Brad said earlier, what we've seen is continued demand in some highly utilized areas of our fleet. So we've seen the need to build more of those units. And we think that most of those units that we’ve build and put to work. we’ll go to work at the Partnership level..

And then maybe just one last one, if I could cram it on Brad, I thought the comparison on the NACO side between this downturn and prior downturns was helpful.

And to the extent that it looks like aftermarket is proving pretty resilient in this downturn, I was curious if you might be able to outline some ways the aftermarket is a little different this cycle than during prior downturns as well?.

That one is harder to call, because part of the rationale and the contract operations side was really associated with the equipment in the marketplace. But, I do think that one positive in the AMS business right now that we’re benefitting from is just very directly a few years ago, we overhauled how we managed our AMS business.

I think we now have a stronger overall management into the market of that business, which is building in, both better revenue capture and certainly better cost management, in keeping that team well utilized. I don't think, and we've been watching this pretty closely.

I just don’t think that to-date our customers have the total collapse in their budgets not from a maintenance of their existing production. And remember, our AMS business, just like our contract operations business, is very much tied to the maintenance of the production.

So they haven't seen a lot of deferrals or risk taking or deferred maintenance and rationalization around the activities that maintain production, unlike in other parts of the business where they slashed CapEx around production capacity additions and drawing in completions.

So I do find and I do believe that it's just the extension for that business as with contract that’s -- that we’re much more on the production associated side of what and where our customers spend their money..

And we do have final question from Sharon Lui from Wells Fargo..

Just I guess given the commodity backdrop, maybe if you can touch on how you’re managing perhaps any changes in the credit quality of some of your key E&P customers?.

We’re monitoring the credit profiles of our customers very closely and we’ve refined some of our internal processes. But I think historically our bad debt expense has been very low. So we’ve managed that situation very well and we’re heightening our management in that particular area..

And have any opportunities materialize in terms of maybe perhaps acquiring the compression units?.

We’ve talked about this in the past Sharon, it is definitely a discussion that we have with our customers. And an opportunity set that we too expect in this environment given budget constraints some of our customers should find more appealing than previously.

But those transactions are hard to pull together, it’s been a challenge -- and remains the challenge for our customers to pull their treasury CapEx management team together with their operations field and with the operating cost team in a way that producing a lot of traction on those transactions.

So while we remain optimistic especially in this environment haven’t landed any yet..

And I guess looking at the CapEx budget for the MLP, as you mentioned for the second half is much lower than the first half.

Any thoughts whether that could trend into 2016 if current commodity prices persist?.

Look, from a macro environment, I think it’s very fair to say that if we don’t see a change in the environment then we will not drive the change in our current level of spending.

We’ll need to see more opportunity for our fleet to go to work and utilization to be maintained or improve before we’ll see it and drive a drastic change in our CapEx budget moving forward..

So I guess the guidance sort of requires an annualized CapEx number of about $100 million.

Is that a reasonable assumption going forward?.

I don’t think so, Sharon, I mean part of that is we front end loaded some of our CapEx this year and so I’d look at it more on an annual basis and that would be more of an annualized run than what we’ll spend in the second half..

That was our final question. I’ll now turn it back over to Brad for closing comments..

Great. Thanks everybody. We appreciate your interest in Exterran Holdings and Exterran Partners. And we’ll look forward to updating you, following our third quarter. Thanks very much..

Thank you. Ladies and gentlemen that concludes today’s conference. Thank you for participating and you may now disconnect..