Bradley Childers - President & CEO Andrew Way - CEO, Exterran Corporation Jon Biro - CFO, Exterran Corporation David Miller - CFO.

Andrew Burd - JPMorgan Mike Urban - Deutsche Bank Blake Hutchinson - Howard Weil.

Welcome to Exterran Holdings and Exterran Partners Third Quarter 2015 Conference Call. At this time I would like to inform you this conference is being recorded and that all participants are in a listen-only mode. We will open the teleconference for questions after the presentation.

Earlier today Exterran Holdings and Exterran Partners released their financial results for the third 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 positions are consolidated into Exterran, the discussion of Exterran will include Exterran Partners, unless otherwise noted.

The term "international" will be used to refer to Exterran's operations outside of the U.S. and Canada and the combination of U.S. 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. In addition this conference call may include forward-looking statements regarding Exterran Corporation.

The company is to be spun off from Exterran Holdings into a separate publicly traded company, that will consist of international contract operations, International aftermarket services and global fabrication businesses of Exterran Holdings. Various factors could cause results to differ 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 Exterran Holding's Annual Report on Form 10-K for the year-ended December 31st, 2014.

Exterran Partners Annual Report on Form 10-K for the year-ended December 31st, 2014, Exterran Corporation's registration statement on Form 10 and those set forth from time to time in Exterran Holdings. Exterran Partners and Exterran Corporation's filings with the Securities and Exchange Commission which are currently available at Exterran.com.

Except as required by law the Companies expressly disclaim any intention or obligation to revise or update any forward-looking statements. Your host for this morning's call is Brad Childers, President and CEO. I would now like to turn the call over to him. Mr. Childers, you may begin your conference..

Thank you, Operator. Good morning everyone. With the separation of our Company closing later today, the format of today's call will be different compared to prior calls. We will discuss our historical results for the third quarter as a combined company and discuss our outlook as two separate companies.

Therefore today I'm joined by the future management team for Exterran Corporation andrew Way, who will be CEO of Exterran Corporation and Jon Biro, who will be the CFO of Exterran Corporation. Also joining me is David Miller, CFO of Exterran Partners, who will become CFO of Archrock and Archrock Partners.

Let me start off by providing the agenda for today's call.

I will begin with an update on the separation transaction, an overview of Exterran Holdings as a combined company and Exterran Partners' third quarter results, as well as comments regarding the current and future market conditions for the Archrock businesses, then Andrew will provide his market outlook for the Exterran Corporation businesses and finally, Jon and David will provide a more detailed commentary on Exterran Holdings and Exterran Partners third quarter results, as well as guidance for the fourth quarter for Archrock and Exterran Corporation.

With that introduction, let's start with an update on the separation transaction. In November 2014, we announced our plan to separate Exterran Holdings into two industry-leading infrastructure companies. Exterran Corporation will be comprised of our international services and global fabrication businesses and Archrock will be comprised of our U.S.

contract operations and aftermarket services businesses. I'm pleased to say that we expect to close the separation transaction later today. The closing of the transaction represents the successful culmination of more than a year of hard work by Exterran employees, as well as the Company's legal and financial advisors.

I want to especially thank Exterran employees for their hard work in bringing this transaction to a successful conclusion and the perseverance in managing through such significant changes and most importantly, for their continued discipline and focus on staying safe and providing customer service and product quality.

Additionally we believe this transaction positions Archrock and Exterran Corporation well to create significant value for Exterran Holdings shareholders. Archrock will be a yield oriented pure play U.S. compression company, leveraged to the long-term growth of U.S. natural gas production.

We have announced our intention for Archrock to declare an initial dividend of $0.1875 per share for the fourth quarter of 2015. This dividend is 25% higher than the $0.15 dividend declared for the third quarter of 2015. We have also announced our intention to target a 15% annual rate of increase in Archrock's dividend through 2017.

Exterran Corporation will be a well-capitalized leader in international services and a provider of global fabricated products.

We have announced that Exterran Corporation has determined not to pay a dividend at this time and will focus on rue redeploying the majority of its cash flows into its businesses, including the more capital-intensive international contract operations business. Free cash flow will then be used to reduce debt.

Starting tomorrow we will operate as two separate and independent companies and we're excited to begin our new separate paths. As I stated many times before we strongly believe this separation will enable both companies to serve our customers more effectively and create more value for our investors. Now let's take a look at the third quarter.

As you saw in our press release this morning Exterran's production focused services and fabrication businesses performed very much in line with our expectations, achieving solid operating and financial performance in the quarter. Exterran Holdings services businesses continued to demonstrate relative stability in light of current market conditions.

Sequentially Exterran Holdings EBITDA as adjusted for the third quarter was $155.1 million, down just 5% from the second quarter. EBITDA is further adjusted for Exterran Partners, with $78.2 million in the third quarter, down just 6% from the second quarter. From an activity perspective, our U.S.

contract operations business end of period operating horsepower declined 1% from the second quarter and revenues declined 3% compared to second quarter levels. We continue to see some demand in growth plays, however we experienced increased stop activities, as customers optimize production and seek to reduce their filled operating costs.

Given the volatility, all energy related companies are seeing in this environment, we're still pleased with the stability exhibited by this business.

With regard to profitability, gross margin percent was very good, coming in at 59% in the quarter, unchanged from the second quarter of 2015 and up 200 basis points compared to the third quarter of 2014.

We focused hard on controlling our costs throughout our Company and this continued strong gross margin performance was partly a result of those efforts, as well as lower lube and fuel costs. Activity levels in our international contract business also remains relatively stable.

As a result of this stability, our revenues were down slightly while profitability increased. This increase in profitability is a result of solid cost management, coupled with the long-term contracts we have in place which provide stable revenue.

Compared to the second quarter our aftermarket services revenues declined by about $8 million in the third quarter, primarily due to lower activity levels in our international businesses.

Generally we continue to see a mostly normal level of maintenance activities from our global customer base, particularly in North America, without significant deferrals of maintenance spending. Our cost reduction efforts are not only helping our contract operations businesses, but are also positively impacting our aftermarket services profitability.

As I mentioned in my introduction, I will give a brief overview of our fabrication business, leaving the majority of the discussion on the outlook for the business, to Andrew later in the call. Despite the volatility and market conditions in the quarter, our revenues came in at the middle of our guidance range.

The low commodity price environment and reduced capital budgets continue to be a headwind for our fabrication business. However, we're continuing to right-size our cost structure in this business to align with the current demand.

Although pricing is coming under pressure in this difficult market, we were able to deliver gross margins of 13% in the quarter. Now I will provide the outlook for the future, our truck businesses That is U.S. contract operations and aftermarket services. Starting with our U.S.

contract operations business, we believe this business will continue to demonstrate the relative stability of our production related business model in the current market environment. That said we and our customers are facing significant challenges.

One of the specific challenges we're all working through is reduced visibility into future activity levels. This reduced visibility makes it harder to plan for when new equipment may be needed. The recent levels of stop activity will likely continue, as customers remain focused on optimizing field operating costs.

In response to these more challenging market conditions, we have again reduced 2015 growth capital expenditures in our U.S. contract operations business and are now expecting about a 40% reduction compared to 2014. Additionally we will continue to focus on cost management at all levels within our Company. In our U.S.

aftermarket services business we continue to see relatively stable demand in most of our markets, while our customers are being selective in the maintenance activities they pursue, I'm very pleased with way the business is performing in this market.

Our broad market reach across all major producing areas, gives us the benefit of being able to service our customers wherever they operate. So concluding the Archrock part of the discussion, let me say this.

Despite continued challenges in the market, our trucks businesses generated stable and steady third quarter financial performance, rooted in solid execution in our production oriented businesses.

During this downturn Archrock will focus on exceptional coverage to our customers, maintaining a solid balance sheet, maximizing cash flow and returning cash to our shareholders in the form of dividends.

And while we don't know when the market conditions will improve, we're confident Archrock will be able to meaningfully participate in recovery when it arrives. Now I will briefly review the partnership's results which of course are similar to those generated by the Archrock businesses I just reviewed.

Exterran Partners contract operations business produced solid results in the third quarter. For the third quarter 2015 we had revenues of $163.3 million and a gross margin of 61%. This performance allowed us to yet again increase our quarterly distribution to $0.5725 per limited partner unit or $2.29 on annualized basis.

While still maintaining a 1.14 times coverage ratio. This performance highlights the stability of our business during a difficult market and should provide a solid base for both Archrock Partners and Archrock going forward.

I would like to now turn the call over to Andrew Way, to discuss his thoughts on our third quarter performance and the outlook for Exterran Corporation's businesses..

Thank you Brad. Good morning everyone. It is good to be on my first earnings call with Exterran. Over the past few months I have had the opportunity to travel to many of our global operations, meet with customers, investors and have gained an appreciation of the business and the great group of employees that we have.

As many of you know, I spent almost 20 years with General Electric in various technology services businesses, most recently leading the drilling and production business within GE Oil and Gas.

I was attracted to this role primarily based on my understanding of Exterran's position in the market place, its global presence, legacy and international contract operations and product depth. I believe we have a terrific future and I'm looking forward to leading the team. Let's look at the outlook for Exterran Corporation's business segments.

First our international contract operations business. In the third quarter, this business which provides the stable foundation continued to perform extremely well. Revenues in the third quarter of 2015 were down just 1% compared to the second quarter of 2015, while profitability increased to 64% gross margin.

The profitability increase was supported by continuing cost reduction and focused productivity initiatives. we expect additional cost reductions over the next few quarters. The stability demonstrated is a continuation of the dynamics that have characterized this business for quite some time.

Projects come to the end of their initial term and are renewed and others roll off and new projects come on to replace them. In the third quarter, the Latin America team continues to execute well, making significant progress on various installations and start-ups due in the first half of 2016.

The large land based Brazilian project receiving gas from the offshore Manatee Field with 28,000 horsepower and associated gas processing equipment, successfully started up on time and will start full billing in the fourth quarter.

This is a great example of the new Exterran Corporation and the capabilities to design, install, commission large scale projects on time and on budget, adding significant value to our customers. This new 12-year long-term contract demonstrates the confidence our customers place in our people and our product reputation around the globe.

As we have not seen the same level of new project bookings in 2015 that we saw in 2014, our focus this year has been on the effective execution of our backlog of committed projects.

Continued operational excellence improvements, contract renewals and supporting our clients in the development of their future gas needs, as they have taken a pause in their capital investments. Our projects under construction like most of our international contract operations business are underpinned by long-term, fee-based contracts.

As we execute on these projects and reach start up, they will provide stable revenues and margin to replace some of the known contracts that will come to the end of their natural life. While it is still early in our planning process, we believe 2016 has a number of global opportunities driven by the need for natural gas as a local energy source.

Our international aftermarket service business has almost completed its exit from low performing companies and as such gross margins in the quarter were 27%, up over the underlying margins in the same period in 2014 by 370 basis points.

The team's priority on margins and sustainable success, required cost actions and restructuring which is now largely behind us. The focus now is to build upon on our success in scalable countries and continue to add to the services we offer customers around the world.

In our fabrication business or our Product Sales business, as I will refer to it going forward, in the third quarter 2015 our revenue was down 7% sequentially from second quarter, as continued challenged market activity weighed on our business.

The strong backlog of business we had entering the year has mitigated the impact of the declining market we have experienced and has helped us to maintain the profitability in our product sales business. On a positive note the third quarter bookings were up 18% over what we booked in the second quarter.

However, overall market activity continues to be slow and we continue to see customers pushing projects further out and deferring awards where they can reduce their capital expenditures.

in light of the current market environment ,we will continue to focus on right-sizing in our cost structure, aligning our global capacity and driving Lean manufacturing processes to reduce factory cycle times and drive reductions in working capital.

Our product business has a relatively high portion of variable costs and we're highly focused on reducing these costs to get through the bottom of the cycle. In conclusion, although we currently face difficult industry headwinds, I'm confident in the ability of Exterran Corporation to do well in the short-term and thrive in the long-term.

In the short-term we're keenly focused on reducing our cost structure at both the SG&A and operating expense levels, controlling our working capital and capital expenditures and providing high quality products and services to our customers, so we can maximize cash flows during this downturn.

In the long-term, I believe we will be well-positioned to capitalize on the recovery, our production related international services and product sales business, providing important products to our customers that underpin their ability to produce oil and gas at attractive costs.

I'm excited by the prospects for the business and delighted I joined Exterran as it embarks on its new path. I'm confident we can make the right decisions and take the required actions in this difficult period and come out of this downturn leaner, quicker and more efficient in the global markets.

I would now like to turn the call over to Jon Biro, for a review of the financial results for Exterran Holdings, the quarterly trends and the guidance of Exterran Corporation for the fourth quarter 2015..

Thank you Andrew. Exterran Holdings EBITDA as adjusted of $155 million, on revenues of approximately $650 million for the third quarter. Sequentially compared to the second quarter of 2015 EBITDA as adjusted and revenues each decreased modestly by about 5%.

As you saw in our release, we also reported diluted net loss from continuing operations attributed to Exterran common shareholders excluding items of $0.45 per share in the third quarter, compared to net income of $0.25 in the prior year period.

The loss in the third quarter 2015 was primarily driven by a $26.7 million non-cash currency loss associated with the remeasurement of intercompany debt of our Brazilian subsidiary. The currency loss is included in other income on our income statement and had an adverse impact of $0.39 per share during the quarter. Now turning to our segment results.

Importantly, even during this period of limited visibility, due to the overall market conditions the financial performance of each of our segments was generally in line with the guidance we gave in our second quarter earnings call.

North America contract operations revenue came in at $192 million in the third quarter, down 3% compared to the second quarter, but flat over the prior year quarter. Gross margins were strong at 59%, despite the lower revenues due to lower operating costs due to the lower lube oil and fuel expenses.

In our North America contract operations business growth capital expenditures were $29 million in the third quarter, down compared to $42 million in the second quarter. Maintenance capital expenditures were $21 million, compared to $21 million in the second quarter.

In our international contract operations business revenues were $114 million in the third quarter, down 1% compared to the second quarter and down 8% compared to the third quarter last year. As a reminder, we recorded revenue of approximately $9 million in the third quarter 2014, on a project that terminated during that quarter.

Gross margin was a solid 64% in the quarter. And improved compared to the second quarter due to good cost management. In our aftermarket services business revenues were $82 million in the third quarter, down 9% from the second quarter and down 14% compared to last year's third quarter.

The year-over-year revenue decline was primarily due to our exit from Australia in late 2014 and Gabon in early 2015. Gross margins were good at 23% in the third quarter, largely due to the higher sales in the quarter that drove labor efficiencies in North America. In our U.S.

aftermarket service business, third quarter 2015 revenues were $57 million and gross margin was 21%, versus 19% in the second quarter. In our international aftermarket services business, revenues were $25 million and gross margin was 27%, compared to 29% in the second quarter.

In light of the current market environment, we had a good quarter in our fabrication business. Revenue of $261 million during the third quarter breaks down to about 57% production, processing and installation, 26% compression and about 17% from Belleli. Geographically the revenue split was roughly 59% from North America and 41% from international.

Fabrication gross margins were 13% compared to 14% in the second quarter of 2015, primarily due to lower activity levels and a less favorable product sales mix. Clearly the market is taking its toll on our profitability.

However, we remain highly focused on maintaining gross margins of at least in the double digits in our fabrication business through this downturn. Our fabrication backlog was $516 million at September 30, 2015, compared to $600 million at June 30th 2015.

Bookings were $177 million for the third quarter, up from second quarter levels of $150 million, but still well below our revenues, resulting in a book to bill ratio of 68%. In the third quarter bookings were roughly 50% from North America and 50% from international markets.

Quarter end backlog was roughly 45% from North America and 55% for international markets. SG&A expenses were $82 million in the third quarter, a decline of 13% compared to $95 million in the third quarter of 2014. Decreased compensation and benefits costs were the primary driver for the year-over-year cost-savings.

Depreciation and amortization expense was $95 million for the third quarter, down from $98 million compared to the third quarter of 2015. In the quarter we recognized restructuring and other charges of $12 million, related to our separation transaction and workforce reductions associated with the current market environment.

In addition we recognized noncash long-lived asset impairments of $24 million, related to our idle compressor fleet. And Other net expense as shown on the face of our income statement of $30 million, of which $26.7 million was driven by the noncash remeasurement of our Brazilian intercompany loans.

Interest expense was $29 million, a modest increase compared to second quarter levels. Last, our consolidated tax rate was 14% for the quarter. The tax revision included a tax credit of $20.7 million, due to recording the benefit of R&D tax credits following the completion of a study during the quarter.

Offsetting this benefit were valuation allowances of $17.4 million in the third quarter, largely due to the foreign currency loss in Brazil I mentioned earlier. Net capital expenditures were $94 million for the third quarter.

Growth capital spending in the third quarter was $57 million which included $29 million for North America, primarily for our fleet new build program. Maintenance capital expenditures for the quarter were $29 million, down slightly compared to second quarter levels.

During the third quarter, debt decreased by $27 million at the Exterran Holdings parent level. Debt increased by $13 million at the partnership level, largely due to fleet investments funded under the partnership's revolver. In total consolidated debt declined by $14 million in the quarter.

Upon completing the separation transaction, we expect both Archrock and Exterran Corporation to be well capitalized, with adequate liquidity to fund their operations. Pro forma as of September 30th 2015 debt for Archrock would have been approximately $116 million, before paying $10 million to $15 million of transaction related expenses.

And pro forma liquidity would have been approximately $190 million, excluding transaction expenses. Exterran Corporation's pro forma debt would have been $520 million, before paying $25 million to $30 million of transaction related expenses and pro forma liquidity would have been $29 million, again excluding transaction expenses.

Archrock will be entitled to receive all of the proceeds, as Exterran Corporation collects the $79 million currently due. from Petovesa. Additionally upon a qualified capital raise as defined under Exterran Corporation's credit agreement, Exterran Corporation will pay an additional $25 million to Archrock.

Cash distributions to be received by Exterran Holdings based on its limited partner and general partner interests in Exterran Partners are $18.9 million for the third quarter compared to $18.5 million for the second quarter. The distribution to be paid on November 13th, 2015 will be received by Archrock.

Last week Exterran Corporation paid the eighth quarterly cash dividend to common stockholders of $0.15 per share. As we previously announced, following the closing of the transaction, Exterran Corporation will not pay a dividend. David Miller will comment on Archrock's dividend policy.

As Brad and Andrew discussed and as I discussed on our call last quarter, we have continued to focus our efforts on cost reduction in the current environment. Our cost reduction efforts have cut across all of our business segments and corporate overhead.

We believe these cost reductions will continue to benefit Exterran Corporation and Archrock post separation. As part of these efforts through the third quarter we have reduced global head count by about 1600 full time employees and contractors or about 14% of our global workforce.

These reductions have occurred throughout the Company, with the largest reductions coming out of our fabrication business in the United States, Singapore and Dubai. In addition to improving our cost structure, we have 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 about $130 million or 23% lower than 2014 levels.

Now before I give guidance for Exterran Corporation, I want to preference my comments by noting that for Exterran Corporation and Archrock, we expect significant noise including non-recurring items in our financial statements for the fourth quarter and for all of 2015.

For Exterran Corporation, the historical financial statements will be prepared on a carve out basis through the separation transaction close date, consistent with the method used to prepare the financial savings in the Form 10.

Additionally for Archrock's consolidated financial statements, based on the accounting rules, not all expenses that will be eliminated post separation will be classified in discontinued operations.

Also for Archrock, we expect certain charges related to a valuation allowance on foreign tax credits, debt extinguishment costs and other transactions expenses David will discuss further. I will now provide guidance for Exterran Corporation for the fourth quarter of 2015 and again David will then provide guidance for Archrock.

For Exterran Corporation's international contract operations, we expect fourth quarter revenue in the $113 million to $118 million range, with gross margins in the low-60% range. The potential modest sequential revenue increase will be driven by the full quarter benefit of the large project starting up in Brazil.

For Exterran Corporation's aftermarket service business, we expect revenue in the $25 million to $30 million range, with gross margins in the mid-20% range. In our product sales business, we expect revenue including sales to Archrock of between $230 million and $270 million, with gross margins in the 10% to 12% range.

This lower level of profitability is a result of both lower gross margins on our recent bookings, as well as lower fixed cost absorption in our manufacturing facilities. For Exterran Corporation we expect SG&A expenses to be in the mid-$50 million range in the fourth quarter.

In the fourth quarter 2015 Exterran Corporation expects depreciation and amortization of around $40 million. Interest for the fourth quarter assuming a separation date of November 3rd is expected to be about $5 million. On a run rate basis, we expect interest expense at Exterran Corporation to be about $8 million per quarter.

Due to the separation transaction closing in the middle of the quarter, we're not providing guidance for the fourth quarter effective tax rate for Exterran Corporation. Now regarding Exterran Corporation's outlook for capital spending.

For 2015 Exterran Corporation expects total capital expenditures to be between $145 million and $165 million, including maintenance capital expenditures of between $25 million and $30 million.

Much of our total CapEx will be for our international contract operations business, where we expect growth capital expenditures of around $95 million to 105 million in 2015.

As a reminder generally 40% of our growth capital expenditures for the international contract operations business are reimbursable by our customers on or before projects start up. I will now turn it over to David Miller to talk about Exterran Partners, as well as guidance for Archrock. David..

Thanks, Jon. Exterran Partners had solid operating results in the third quarter. Exterran Partners EBITDA as further adjusted was $78 million in the third quarter of 2015, compared to $83 million in the second quarter of 2015.

Our EBITDA as further adjusted decreased this quarter, due in part to a $2 million swing in other income from the second quarter to the third quarter, primarily related to gains on sales of assets. In addition lower average operating horsepower contributed to lower EBITDA.

Distributable cash flow was $45.2 million in the third quarter of 2015, compared to $48.3 million in the second quarter of 2015. The decline to distributable cash flow was largely attributable to the lower EBITDA in the quarter.

Maintenance capital expenditures in the third quarter were $15.7 million, as compared to $15.3 million in the second quarter of 2015. Our distributable cash flow coverage was 1.14 times in the third quarter, down from 1.24 times in the second quarter, primarily as a result of modestly lower distributable cash flow in the third quarter.

Third quarter ending operating horsepower decreased sequentially by 23,000 horsepower, to approximately 3.11 million operating horsepower. Revenue for the third quarter was $163.3 million, as compared to $167.8 million in the second quarter.

Gross margin was 61% in the third quarter, flat compared to 61% in the second quarter and up approximately 100 basis points from Q3 2014 levels. Our strong third quarter gross margin percentage is attributable to our continued focus on costs, as well as lower lube oil expenses.

Cost of sales per average operating horsepower was $20.48 in the third quarter, down 2.9% compared to the second quarter of 2015 for the same reasons mentioned above. SG&A expenses were $20.7 million for the third quarter, relatively frat with second quarter levels.

Net income per limited partner unit excluding items for the third quarter was $0.23, excluding a noncash long-lived asset impairment charge of $7.2 million related to our fleet, compared to $0.33 in Q2. Last week Exterran Partners announced its distribution of $0.5725 per limited partner unit or $2.29 per limited partner unit on an annualized basis.

Our quarterly distribution is a $0.005 higher than the second quarter distribution and $0.02 higher than third quarter 2014 distribution. On the balance sheet, total debt increased by $13 million during the quarter to approximately $1.4 billion at September 30th, 2015. The increase in debt was due to additional borrowings to fund new fleet units.

Available but undrawn debt capacity under Exterran Partners debt facilities at September 30th was approximately $346 million. As of September 30th, 2015, Exterran Partners had a total leverage ratio which is covenant debt to adjusted EBITDA as defined in the credit agreement of 4.2 times, flat to the second quarter level.

Gross capital expenditures for the third quarter were $54 million, consisting of $38 million for fleet growth capital and $16 million for maintenance activities.

For the full year 2015, we expect growth capital expenditures at Exterran Partners to be in the $165 million to $175 million range and we continue to expect maintenance capital to be in the $50 million to $55 million range.

In summary, Exterran Partners had another solid quarter demonstrating relative stability and strong gross margin performance in the third quarter of 2015. I will now turn to guidance for the fourth quarter for Archrock which includes the consolidation of Archrock Partners results. As Jon referenced earlier, Archrock's fourth quarter will be noisy.

In addition to Exterran Corporation's results for one month being presented as discontinued operations, we expect to take a noncash valuation allowance of approximately $45 million to $65 million for foreign tax credits, that are not expected to be utilized due to the spend transaction.

We also expect to record debt distinguishment costs in the $10 million to $13 million range, related to the redemption of the outstanding Exterran Holdings senior notes. In addition we expect to consider other restructuring expenses during the quarter related to the transaction which we have estimated to be in the $10 million to $15 million range.

Now turning to guidance. For consolidated Archrock contract operations, we expect revenue to be in the $185 million to $190 million range and gross margin percent to be in the 58% to 60% range. Also for the fourth quarter we expect aftermarket services revenue of $50 million to $55 million and gross margin in the 18% range.

Regarding SG&A we released last week an expectation that our consolidated Archrock Q1 2016 SG&A will be in the $33 million to $38 million range. As mentioned we expect Q4 to be noisy and that SG&A will settle out over the next six months as we progress through the separation.

Due to the complexity of the separation transaction, we're not providing guidance for Archrock's fourth quarter effective tax rate. We will provide some high level guidance for 2016.

We expect Archrock's effective tax rate in 2016 on pretax income from continuing operations attributable to Archrock stockholders, excluding items to be in the 20% to 25% range. While we expect Archrock's cash tax rate to be in the 5% to 15% range in 2016. In our U.S.

contract operations business, moving on to growth capital, we now expect growth capital spending to be in the $165 million to $175 million range in 2015, compared to previous guidance this the $165 million to 185 million range.

We expect the vast majority of the Q4 2015 growth capital expenditures will be for customers of Archrock Partners and will be funded by Archrock Partners. For the full year we continue to expect maintenance capital expenditures in the $70 million to $75 million for consolidated Archrock.

As noted in our press release last week, Archrock expects to declare an initial dividend of $0.1875 per share for the fourth quarter of 2015, payable in the first quarter of 2016. We also announced that we're targeting a 15% growth rate through 2017. Ultimate dividends declared are of course subject to the approval of Archrock Board of Directors.

From a capital position perspective we expect an initial debt balance at Archrock on a standalone basis of approximately $160 million, excluding the incremental $10 million to $15 million of additional transactional expenses we expect to incur during the fourth quarter.

As a result Archrock expects to have $190 million of debt capacity at the parent upon completion of this transaction, excluding the incremental transaction expenses. Also as Jon mentioned, Archrock is entitled to certain contingent payments from Exterran Corporation which should reduce Archrock's funded debt in 2016.

In addition, Archrock Partners had approximately $346 million of debt capacity at the end of the third quarter. We believe this access to debt capital should position us well to pursue our strategic objectives, including the pursuit of organic growth and acquisitions.

At this point, I would like to turn the call back over to Brad for some closing comments..

Great. Thanks David. I know this has been a longer discussion than usual, given the transaction that's pending and the amount of material we wanted to communicate today. Let me close with just a few thoughts.

With the culmination of this separation transaction, also comes the reality of the end of current working relationships for many of us, as we move to Exterran Corporation and Archrock. This aspect of the transaction makes this a challenging moment for me personally.

I have been with Exterran for 13 years and have had the privilege of being CEO for the last four. For the entire time my focus has been on how to grow and develop the best Company we possibly could. This separation transaction is the culmination of much of that work, as we will be splitting the Company we have been striving to build.

It is a little sad to be leaving some of the friends, colleagues and stakeholders I have worked with over my tenure. So to all of the Exterran employees, customers, vendors, shareholders, bankers and analysts, thank you for the opportunity you have given me and thank you for your support and trust. But this is not really a true end.

It is the beginning of a new journey for me and for both companies. I'm excited about the prospects for both Archrock and Exterran Corporation.

It is because I completely believe this transaction is in the best interest of our Company, our customers, our employees and our shareholders, that I have supported getting it to this point and I could not be happier that we're finally here.

My goal going forward is to make Archrock into the best company it can be and I'm sure Andrew feels the same way about Exterran. Good luck to those going with Exterran and please stay in touch. For those coming to Archrock, I look forward to continuing to work with you and building a great operation at Archrock. Thank you.

Now at this point, I would like to turn the call back over to Jon for a clarification and then we will open it up for questions..

Yes, thanks, Brad. Just to clarify Exterran Corporation's pro forma liquidity as of September 30th would have been $299 million, excluding transaction expenses. So with that, we will turn it back over to the operator for questions..

[Operator Instructions]. And our first question comes from Mike Urban with Deutsche Bank. You may begin..

So obviously the culmination of a lot of work here, both in getting to this point from a restructuring standpoint and then the actual transaction.

Don't know if you have had a chance to breathe, let alone think about going forward, but a question for both companies, now that a lot of these moving parts are hopefully settling in and behind you, what is the focus going forward? What are some of the things that the company together didn't do as well as they could have or could have better exploited from a market opportunity standpoint? And what are those opportunities and how do you plan to take advantage of them?.

Sure, so look, thanks for the question, Mike. I will go first and speaking on behalf of Archrock and then I will let Andrew comment on Exterran Corporation. Thinking about Archrock going forward, this is probably not different for the whole company, but we do have a challenging environment that we have to navigate through.

And our focus during this immediate phase given the market environment we're in, is going to be continual focus on great execution, cost management, capital preservation and positioning the companies well and positioning Archrock well for what will be an eventual upturn.

On the fundamentals for the Archrock business however, we're also optimistic that we will continue to see natural gas production grow in our business and so our focus on horsepower growth, as we add some 17 billion cubic feet a day of natural gas production over the next five years, is going to be the lynch pin for our organic growth.

We also look at a market that has some consolidation opportunities in it. With our customers and in the marketplace we will be looking for those to help deliver ultimately growth and distributable cash flow. It will be the mantra and the focus for Archrock going forward. We see those as great opportunities to capture some of the growth..

I think a lot of the cost comments are similar for Exterran.

I think in the short-term as I mentioned, we got to continue to build out the projects that we're currently executed in various countries and really build upon the stability of the ICO business, the long term fee-based contracts that gives us an opportunity to move into those markets with our product business.

And as Jon mentioned, really maintain our discipline in product sales and make sure that we continue to focus and capture the opportunities that we can. So we have some short-term challenges in that market, but clearly some longer term opportunities as we go forward..

And sticking with the Exterran Corporation piece, the ICO business is pretty consolidated while the product sales business I think of as more fragmented.

What do you say is better opportunity? You have a high market share and Iko is it more just expanding the geographic footprint, moving into additional markets or do you see some consolidation opportunities on the product sales or both? I would just be interested on either of your views there?.

So, Mike, I think on the product sales we have a terrific presence in North America. We have great product offerings where we put products together to provide solutions to our customers. And where those products come together in those applications, we're a critical part of our customer's needs.

As we think of the global opportunities, the success we have had in certain markets, our focus is going to be continuing to put the sum of the parts together, continue to focus on solutions, selling and working through the current portfolio and making sure that we're designing and continuing to drive efficiencies for what's really important to our customers coming out of this cycle.

We have a lot of focus today internally on availability and reliability of the equipment. So just continuing to drive more of that into the operations and then I certainly think that we have opportunities over time to grow in both countries we're operating in today, in international contract operations and explore new geographies..

And our next question comes from [indiscernible] with Credit Suisse. You may begin..

So just on EXLP's distribution growth and the current distribution coverage, I see the current yield of EXLP in excess of 11%, it is clear that the markets are not valuing the distribution growth which you guys are providing.

So how do you think about the tradeoff between maintaining the distribution growth going ahead, versus possibly building excess coverage or bringing down leverage?.

Sure. It is a tough balance. Number one, I'm not sure that on a short-term basis we can evaluate the current yield in this market environment and read into that communication from our investors as being so direct that they are not valuing the growth.

I noticed that a lot of MLP's yields are up in this environment, including ours and so it is hard to single point that and conclude that investors are going to under value the growth and yield.

That said I think over a longer term we do have to pay attention to where the yield settles and evaluate whether or not our capital is best deployed for that continued growth of the distribution at EXLP or whether it would be better valued elsewhere, including investment or debt repayment.

It is a very fair question in looking at the balance and not anxious to conclude too much in this market environment, given the overall position of yields throughout the MLP business..

Sure and as I look at the asset utilization levels in 3Q 2015, how should I think about that number going ahead into next year?.

To be clear it is the utilization percentage that we have at 91% at EXLP and 84% at Archrock that you are asking about?.

Yes, specifically at EXLP?.

Yes, so the challenge in this environment, as I tried to highlight earlier and Jon reiterated too, is the visibility going forward is definitely impaired right now. It is impaired for us. It is impaired for others in the industry.

So as we think about utilization, right now we're happy with how resilient the operation has been to both hold up utilization and our revenue numbers, but in this current market environment, we could continue to see basically the type of erosion that we have had for the last two quarters, until we see a bottoming out of the market and/or a change in the dynamic..

Okay.

And the final one from me, the 15% growth which you guys mentioned about ARock, how much of that is predicated by the underlying growth of the distributions from EXLP?.

So some of it is predicated, obviously it is a long term guidance of two years on our 15% growth. So we have assumed some growth in the EXLP distribution in that. We also have other businesses up at Archrock that we can use to help supplement that distribution growth if necessary.

But was we've said before, we would like to keep the distribution tethered pretty well to the distributions, the dividend tethered pretty well to the distributions that we receive up from EXLP to Archrock. From Archrock Partners to Archrock.

So we don't give guidance on our planned distribution growth at Exterran Partners, so I can't answer that question fully. But I can say that there is some backed in there..

And our next question comes from Blake Hutchinson with Howard Weil. You may begin..

First I guess for Andy and Jon, on the international guide, the $113 million to $118 million and top line, is that range fairly, pretty much highly dependent upon when you actually start recording on the Brazilian project in 4Q? That is part one.

And can you just remind us what you have coming on in the first half of 2016 qualitatively, if not quantitatively out of backlog?.

Yes, it is dependent upon the Brazilian project as you mentioned coming online, but we're confident it will be online and then the backlog, we have one more project in Brazil coming online, that will be helpful from a revenue standpoint. Excuse me, that project is in Bolivia, I misspoke..

Okay.

One the product sales business, the mention of askew and negative mix for 3Q, I take that where we stand in terms of margin differentials, that is a comment on the fact that you ran through more North American compression equipment in terms of output in 3Q, is that the way to think of that?.

No, I wouldn't say that, it is just the mix of the various product lines comes together. So it is not compression specific..

I guess just some commentary around the look from the ending backlog figures that production and processing is the real strength, in terms of order flow and at the same time you mentioned that North American International's split was 50/50, I guess I would have thought that especially North America, that production and processing might be a little bit more completion sensitive, is there something else at work there that we should be attentive to, in terms of the resiliency of that business line? Specifically North America?.

I think a couple of things, first of all, as Brad mentioned in terms is visibility we're also seeing some very difficult visibility in the product sales. I would say bid activity and just general activity in the company has been okay, it has been holding up.

There have been pockets of growth and whether that is in the international market or also in North America, we kind of highlighted last week when we had a discussion in the equity story, that we have seen a steady level of bookings, albeit certainly lower than last year, but predominately in the SCOOP, parts of the Permian, Marcellus.

We have seen some nice steady opportunities in that area, so certainly are processing and treating business isn't generating the projects that we saw last year, but we're going to continue to focus on the opportunity that we have in front of us..

Just one last one for Brad, I just want to make sure that we're characterizing what visibility we do have correctly, when you refer to recent levels of stop activity and how that melds into your guidance for NACO, are you simply saying that, when you say recent levels, are you referring to the last couple of quarters experience, I think you said in a previous answer or is it more what we saw exiting 3Q that we should be thinking of perhaps accelerating or just kind of continue to discount what we have seen the last couple of quarters?.

Sure. Blake, I think that you have got to look at the performance in the year overall, it is too tough, we're looking at 30,000 to 40,000 horsepower changes net in a quarter, on a 3.6 million horsepower base.

So it is stability that we're very happy with overall, but it is really hard to get to scientific and too close to call on the numbers that as such a small numerator over the denominator. So I would look at the year overall..

And our next question comes from Andrew Burd with JPMorgan, you may begin..

Post separation how do you view M&A, do you view it any differently and what is the potential to use general partner currency in support of growth at the underlying partnership? And I'm sorry, I wasn't clear and focused on EXH and EXLP?.

Yes Andrew, I did pick that up. I think that the nice thing that we have about this structure now with Archrock and Archrock Partners, is that it does give us potentially multiple equity currencies to use going forward.

That said, we will be highly selective in how we do that, just to make sure that we're buying and accumulating accretion and not dilution and how we do going forward. But if and when it was useful and cost effective, we would not hesitate to use equity at either side or at either level..

And in terms of drop downs in the current environment, is assuming that leverage stays constant and cost of equity were to stay constant, what types of things have you thought about for Arock to do, to enable a drop-down to happen, whether it be lower multiples or to take equity or cost caps or something like that?.

We have face this situation before and so rather than talking about what we do going forward, I can just refer back to what we have done in the past and we have done kind of all of the things that you mentioned, I think that the one that we really would like to keep off of the table is cost caps.

However if you talk about doing a drop-down that takes a longer term, in terms of valuation takes a longer term perspective on what the units should be worth, versus where they are currently, we have done that.

We have done, our last drop-down was for all equity, so there are ways that we can manage completing a drop-down in the current environment, if that is the direction that we would go..

And clearly the underutilization is largely upstairs and the utilization at the partnership remains pretty robust.

How do you think about in the effort for EXH to become a pure play or a more pure play GP holdco, how do you think about eventually sending some of those utilized units down to the partnership, how would a drop-down of those units be structured or would those ever be moved to the partnership if they weren't currently under contract?.

Sure. Look first two thoughts, one is that even though idle capacity is not at Archrock, it is larger than at Partners. In the past we have done drop-downs predominately by customers, so that included operating horsepower and little idle. Although we have added idle to a few of the more recent drop-downs.

Which means that it is the natural consequence that more horsepower would reside at the parent level. And the parties, that is both Archrock Partners and Archrock are totally agnostic as to how they source compression.

So that compression provides access for the overall fleet, so I really think it is still more viable to consider that both utilization and then idle capacity of the two entities on a consolidated basis, because we operate the pool as one fleet.

And then second, when we think about the future, we will proceed with the sale of assets or the transferred assets and drop-downs from Archrock to Archrock Partners, but we think about it in a way that has to take into account the market environment we're in, what our particular capitalization objectives are at Partners, as well as at Archrock and also the intent to ensure that we preserve the tax free nature of the spin transaction which also poses restrictions on asset transfers..

Then last question from me on operations, per unit revenues and per unit costs I think came in moreso than they have sequentially over the last few quarters, is that a mix shift thing or is that part of a trend and an acceleration of declines that we can expect going forward?.

It is interesting, we did have a small mix change, where we have on average slightly larger horsepower as we closed the third quarter, than we had at the end of Q2 and we have seen that trend continue as we started more large horsepower and as we have seen stop activity and well head.

So it is true, we have seen a bit of a mix shift, but I will tell you that it is really not coming through in the revenue per horsepower or cost per horsepower numbers, as strongly as the quarter might suggest.

What we really saw on the top line is a combination of freight expense being a major driver and a little bit of moderation on revenue per horsepower through mix and price, but the main driver was less freight. And on a sequential basis, that is the main one on a quarter over quarter basis.

And on cost, it really has been just the effect of great cost management and good pricing on commodity fuel stocks, lube oil and fuel. So those are the main drivers on the revenue per horsepower and cost per horsepower..

And just a follow-up on the costs, the lubricants, is that something that if commodity price stays constant, is that something that you expect to wring out some more cost savings with or have we pretty much hit the 9th inning with that?.

Yes, I think that without a further reduction which I'm not really hoping for, we're slightly hedged on our exposure to commodities, though we would like to see good industry activity. Yes, I think that it is not going to go lower on a cost per horsepower basis, that one could be there.

But the benefit that we get is the recurring benefit of the current price environment going forward..

And our next questions comes from James West with Evercore ISI..

This is [indiscernible] filling in for James. I have a question, I hate to go back on the pricing for drop-downs and what not, but we have seen a pretty wide range, in terms of the pricing that you guys have done in drop-downs over the last five years.

And I was just wondering if you could really break down what the drivers were for that, is it where we're in the market, the contract coverage, how it is financed? It would be really great to have like a view of high level what you guys look at? And then how you look at the premiums possibly that you pay on a third party type of transaction? The price that you pay for MidCon's obviously a lot more than what you did last, this past year? So just would like to hear what you are thinking about when you evaluate these options?.

This is David Miller.

To start I'm a little surprised to hear that you said there is a lot of variability in the valuations over the last five years, we did do one drop-down that was at a slightly lower multiple which was reflective of the current environment, where we were seeing a lot of horsepower attrition during that period, so we priced it one, because the market conditions were unfavorable at the time, so we priced it a little bit more attractive, taking into consideration what the DCF valuation was looking forward, in an environment where you are losing horsepower.

Beyond that, our drop-downs have been in a pretty tight multiple range I would say, we don't give actual multiple ranges, but when we do the math and we do it on an EBITDA multiple basis, so that is pricing the operating horsepower that we move down, it is reasonable consistent.

And the variations that we have shown is reflective really of market conditions and when I talk to market conditions, I'm talking about what the prospects for the compression business are at the time we're doing the drop-down looking ahead.

And frankly, when Exterran and now Archrock is taking back units, where the units are trading, because that has an implication for what the valuation of the businesses are or where the business is at the time of the drop-down.

And the moving onto third party acquisitions, those are usually at a slightly higher multiple than what we're paying on our drop-downs, but not always and the rationale for that is because when we consolidate a business, we get some synergies that we don't get when we do a drop-down.

And so we looked at the mid-Con, if you look at the mid-Con acquisitions.

I think what you referenced, we paid perhaps from the math that you guys did, we paid a slightly higher multiple than we paid on our drop-downs, but when we look at our math, it comes out pretty good acquisitions for us and pretty comparable, because of the synergies that we get when we combine them with our operation and bring them onto our platform..

And actually my last question is for Andrew.

I was really interested in terms of what sort of customer demand you are seeing in terms of larger fabrication type projects, where has there been any sort of shift in terms of needing higher spec equipment or more technology, where your background at GE really can fulfill a need there that we didn't really consider before?.

I think in this environment, Samantha, customers are clearly wanting to make sure that whatever capital equipment they purchase or OpEx, that it is put to the right use and so words like availability and reliability is quite common and the team has done a real nice job in our ICO business and in the aftermarket services business focusing our customers on programs that we have developed, whether it is pushing maintenance cycles in between events or whether it is just productivity in our customers operations.

So as that comes into our product family, I certainly see that as an area to focus on over the next six months, 12 months, as we come through this cycle and make sure that we're listening to our customers and making sure that we're applying the right internal dollars on application engineering and focusing our teams to meet our customer's needs.

So I think that there is more that we can do there and as I said at the beginning, I'm excited about the opportunities that I see in that space to provide that level of service going forward..

And our next question comes from Blake Hutchinson with Howard Weil..

I just wanted to check in on a couple of numbers, to make sure that we come away with the product sales guidance for 4Q was inclusive or non-inclusive of potential sales to Arock?.

It includes, it includes sales of Archrock..

And I think there was a paper shuffle on one end, the margin guidance was 10% to 12% Jon?.

Correct..

And we have no further questions at this time. I would like to turn the call over to Brad Childers for your final remarks..

Great. Thank you everyone. Thank you for your interest in Exterran Holdings, now Exterran Corporation and Archrock and the two companies look forward to talking to most of you again in our separate forums when we close our fourth quarter. Thank you..

Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect..