Exterran Corporation (EXTN) is a global sustainable systems and process company offering solutions in the oil, gas, water, and power markets. As a leader in natural gas processing and treatment, produced water treatment, and compression products, solutions, and services, Exterran provides critical midstream infrastructure solutions to customers worldwide while helping them reduce flaring, emissions, and fresh water usage.
Business Overview
Exterran operates in three primary business lines: contract operations, aftermarket services, and product sales. In the contract operations segment, the company provides processing, treating, compression, and water treatment services through the operation of its natural gas and crude oil production and process equipment, natural gas compression equipment, and water treatment equipment for its customers. The aftermarket services segment focuses on selling parts and components and providing operations, maintenance, repair, overhaul, upgrade, startup and commissioning, and reconfiguration services to customers who own their own oil and natural gas compression, production, processing, treating, and related equipment. The product sales segment designs, engineers, manufactures, installs, and sells equipment used in the treating and processing of crude oil, natural gas, and water, as well as natural gas compression packages, to customers globally and for use in the company's contract operations business line.
Exterran's operations are classified into four geographic regions: North America, Latin America, Middle East and Africa, and Asia Pacific. This diverse geographic footprint allows the company to serve a global customer base consisting of companies engaged in all aspects of the oil and natural gas industry, including large integrated oil and natural gas companies, national oil and natural gas companies, independent oil and natural gas producers, and oil and natural gas processors, gatherers, and pipeline operators.
Financials
Exterran's financial performance has been impacted by the volatility in the energy industry, particularly the structural shift towards a focus on cash flow and returns over growth, which was exacerbated by the COVID-19 pandemic. In the fiscal year 2022, the company reported annual revenue of 630.2 million, a decrease from the previous year's 680.4 million. However, the company's resilience is evident in its ability to navigate these challenges, as demonstrated by its annual net income of -110.9 million and annual operating cash flow of 45.3 million.
Quarterly Performance: Adapting to Market Conditions
Exterran's quarterly performance reflects its ability to adapt to changing market conditions. In the most recent quarter, the company reported revenue of 160.3 million, a decrease from the 221.3 million reported in the same quarter of the previous year. This decline was primarily due to decreases in the contract operations and product sales segments, partially offset by an increase in the aftermarket services segment.
The contract operations segment revenue decreased to 92.3 million from 120.5 million in the same quarter of the previous year, primarily due to contract stops in the Latin America and Middle East and Africa regions. The product sales segment revenue decreased to 46.1 million from 64.6 million in the same quarter of the previous year, mainly due to lower demand for processing and treating equipment. The aftermarket services segment revenue decreased to 21.9 million from 36.2 million in the same quarter of the previous year, driven by lower part sales and overhaul services in the North America and Latin America regions.
Gross margin for the quarter was 34.1 million, or 21.3% of revenue, compared to 93.3 million, or 42.2% of revenue, in the same quarter of the previous year. The decrease in gross margin was primarily due to the revenue declines in the contract operations and product sales segments, as well as higher costs associated with a specific product sales project.
Adjusted EBITDA, a non-GAAP financial measure, was 16.1 million for the quarter, compared to 53.8 million in the same quarter of the previous year. The decrease in Adjusted EBITDA was primarily due to the lower gross margin, as well as higher selling, general, and administrative expenses.
Liquidity
Exterran's liquidity position remains strong, with 57.1 million in unrestricted cash and 146.3 million in available borrowing capacity under its revolving credit facility as of June 30, 2022. The company's working capital decreased to 96.1 million at the end of the second quarter of 2022, compared to 118.3 million at the end of 2021, primarily due to increases in contract liabilities and accounts payable, partially offset by increases in accounts receivable and the current investment in sales-type leases.
Exterran's capital expenditures are primarily focused on growth and maintenance in its contract operations business. The company currently plans to spend approximately 195 million to 210 million in capital expenditures during 2022, including approximately 175 million to 185 million on contract operations growth capital expenditures and 20 million to 25 million on equipment maintenance and other capital expenditures.
Exterran's long-term debt consists of a 650 million revolving credit facility and 350 million in senior unsecured notes due in 2025. As of June 30, 2022, the company had 336 million in outstanding borrowings under the revolving credit facility and was in compliance with all financial covenants.
Merger with Enerflex: Unlocking Synergies and Opportunities
In January 2022, Exterran announced a merger agreement with Enerflex Ltd., a Canadian corporation. The merger is expected to create an integrated global provider of energy infrastructure solutions, leveraging the complementary strengths and capabilities of both companies. The transaction is subject to customary closing conditions, including regulatory approvals, and is anticipated to close in the second half of 2022.
Outlook
Exterran's outlook remains cautious, as the company continues to navigate the evolving market conditions and the potential impact of the proposed merger. The company has not provided specific financial guidance for the full year 2022, but it remains focused on optimizing its portfolio of products and services, enhancing its operational excellence, and positioning the business for long-term success.
Despite the challenges, Exterran's diverse business model, geographic reach, and commitment to innovation position the company to navigate the current environment and capitalize on future opportunities. The company's resilience is evident in its ability to adapt to changing market conditions, maintain a strong liquidity position, and pursue strategic initiatives like the proposed merger with Enerflex.
Risks and Challenges
Exterran operates in a dynamic and challenging industry, which exposes the company to various risks and uncertainties. These include volatility in oil and natural gas prices, competition from new technologies, economic and political instability in certain regions, supply chain disruptions, and the ongoing impact of the COVID-19 pandemic.
The company's contract operations business, which accounts for a significant portion of its revenue, is capital-intensive and dependent on the demand for its services. A decline in demand for oil and natural gas or a prolonged downturn in the energy industry could adversely impact Exterran's financial performance.
Additionally, the company's product sales and aftermarket services segments are subject to fluctuations in customer spending and the timing of project awards, which can create uncertainty in the company's financial outlook.
Exterran's ability to navigate these risks and uncertainties will be crucial in determining its long-term success. The company's focus on operational excellence, cost optimization, and strategic initiatives like the proposed merger with Enerflex will be key to its resilience and adaptability in the face of industry challenges.
Conclusion
Exterran Corporation has demonstrated its resilience in navigating the challenges of the energy industry, including the structural shift towards cash flow and returns, the impact of the COVID-19 pandemic, and the volatility in oil and natural gas prices. The company's diverse business model, geographic reach, and commitment to innovation have enabled it to adapt to changing market conditions and maintain a strong liquidity position.
While the company's recent financial performance has been impacted by the industry headwinds, Exterran's focus on optimizing its portfolio, enhancing operational excellence, and pursuing strategic initiatives like the proposed merger with Enerflex suggest a path forward. The successful completion of the merger and the realization of the anticipated synergies could unlock significant opportunities for Exterran and position the combined entity as a leading global provider of energy infrastructure solutions.
As Exterran continues to navigate the dynamic industry landscape, its ability to leverage its strengths, adapt to changing market conditions, and capitalize on emerging opportunities will be crucial in determining its long-term success. Investors will closely monitor the company's progress as it navigates the challenges and uncertainties ahead.