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Why Magnetar Financial adds new position in Exterran Holdings

Smita Nair

Must-know: Magnetar Financial's 1Q14 positions (Part 2 of 7)

(Continued from Part 1)

Magnetar Financial and Exterran Holdings

Magnetar Financial started new positions in Exterran Holdings Inc. (EXH), Rowan Companies Plc. (RDC), SiriusXM (SIRI), and Yahoo! Inc. (YHOO). Top positions sold were EOG Resources (EOG) and EQT Corp. (EQT).

Magnetar initiated a brand new position in Exterran Holdings (EXH) which accounts for 2.90% of the fund’s 1Q portfolio.

Exterran operates in the full-service natural gas compression business. It is a premier provider of operations, maintenance, service, and equipment for oil and natural gas production, processing, and transportation applications. It has three primary business lines: contract operations, aftermarket services, and fabrication.

Exterran said in its annual filing that, “During 2013, we saw steady activity in North American shale plays and areas focused on the production of oil and natural gas liquids. This activity has increased the overall amount of compression horsepower in the industry. However, these increases continue to be offset by horsepower declines in more mature and predominantly dry gas markets, where we provide a significant amount of contract operations services.”

Headquartered in Houston, Texas, Exterran Holdings owns an equity interest in Exterran Partners L.P. (EXLP), a master limited partnership (or MLP) that provides natural gas contract operations services to customers throughout the United States. EXH owns a 2% economic interest in EXLP through its general partner interest and owns a 39% limited partner interest.

First quarter revenue misses estimates

Exterran Holding reported lower 1Q14 profits. Net income was $32.6 million or $0.47 per share—down from $50.2 million or $0.76 per share for the 1Q13. The decrease in net income was primarily due to a decrease in income from discontinued operations and an increase in selling general and administrative (SG&A) expense driven by higher compensation and benefits costs. The company’s quarterly revenue fell 20.8% to $643 million on a year-over-year (or YoY) basis and came below estimates due to lower fabrication revenue.

North America contract operations saw a 1% decline in revenue due to the termination of three natural gas processing plant contracts during 2Q13. International Contract Operations revenue increased 1% “in relation to contracts that commenced in 2013 in Trinidad and Iraq, a $2.2 million increase in revenue on a project in Indonesia primarily due to increased pricing, and a rate increase, net of currency devaluation, in Argentina that increased revenue by $1.4 million. These increases in revenue were partially offset by a decrease in revenue of $5 million in Brazil primarily due to projects that were either terminated in 2013 or were idle during the first quarter of 2014.”

Fabrication revenue declines due to lower booking activity

Aftermarket Services revenue increased 5% driven by an increase in revenue in Latin America and North America. Fabrication revenue decreased mainly due to lower revenue from operations in North America, the Eastern Hemisphere, and Latin America. However, gross margin and gross margin percentage for the segment increased due to cost overruns on three large turnkey projects in the 1Q last year, and improved pricing and product mix associated with projects in North America and the Eastern Hemisphere.

Fabrication backlog was $669.1 million—down from $994 million in 1Q13. Fabrication bookings were $276.6 million for the 1Q14. Exterran said in its 10Q filing that “booking activity levels for our North America fabricated products during 1Q14 have remained relatively flat compared to the fourth quarter of 2013. Although we believe our North America fabrication backlog will rebuild during 2014, we do not believe our backlog will return to relatively high 2012 levels due to increased efficiency as well as a shift in product mix away from our longest lead time products, such as installation. Our continued focus on increasing throughput in our fabrication facilities is resulting in shorter lead times, which generally lead to lower backlog levels.” It added that North America fabrication revenue was lower sequentially, reflective of lower booking activity levels during the middle of 2013.

The management said on the earnings call that its MLP “Exterran Partners achieved a 14% increase in revenue compared to the results for the prior-year period, driven by the compression assets we acquired from Exterran Holdings in March of 2013, as well as organic horsepower growth.” They added that Exterran Partners “should continue to benefit from the strong opportunities for intrinsic growth that we’re seeing in the North America contract compression market. In addition, we believe that the performance improvement initiatives being implemented in our North America contract operations business will continue to improve the efficiency of our operations and help drive enhanced financial performance for Exterran Partners in the second half of 2014.”

Exterran sees new contract operations projects in Latin America

Exterran said it will benefit from “recent awards of significant new contract operations projects in Latin America and Exterran Partners April, 2014, acquisition of compression assets from MidCon Compression LLC,” adding that, “Looking at our markets, our overall opportunity set remains promising across our product and service lines, and demand is particularly active for compression products and services in North America.”

In April, Exterran signed a 12-year compression services contract with the consortium BCAM-40, where Petrobras is the field operator, and will commence operations following the construction and installation of a compressor station in Bahia, Brazil. The project will utilize approximately 28,000 horsepower of compression equipment, as well as associated natural gas production equipment. In addition, Exterran said it has been awarded a number of other contract compression projects in Latin America during the 1Q14 including two in Mexico involving a total of 19,000 horsepower of compression and another in Colombia utilizing 6,000 horsepower, plus expansions to current projects in Argentina involving 17,000 additional horsepower. The majority of these projects have minimum contract terms of approximately four years.

Exterran Holdings declared a dividend of $0.15 per share of common stock—a rate of $0.60 per share on an annualized basis. It said the cash distribution to be received based upon its limited partner and general partner interests in Exterran Partners was $13.7 million for the 1Q14, compared to $13 million for the 4Q13 and $12.2 million for the 1Q13.

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Continue to Part 3

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