Exterran Corporation

Greetings and welcome to the Exteron fourth quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Blake Hancock, Vice President and Best Relations for Exteron. Thank you. You may begin.

Good morning, and welcome to Exterin Corporation's fourth quarter 2020 conference call. With me today are Exterin's President and Chief Executive Officer, Andrew Way, and David Barta, Exterin's Chief Financial Officer. During this conference call, we may make statements regarding future expectations about the company's business, management's plans for future operations, or similar matters. These statements are considered forward-looking statements within the meaning of the U.S. securities laws and speaks only as the date of this call. The company's actual results could differ materially due to several important factors, including the risk factors and other trends and uncertainties described in the company's filings with the Securities and Exchange Commission. Management may refer to non-GAAP financial measures during this call. In accordance with Regulation G, the company provides a reconciliation of these measures in its earnings press release issued earlier today and a presentation located in the investor relations portion of the company's website. With that, I'll now turn the call over to Andrew.

Thanks, Blake, and good morning, everyone. I hope you and your families are keeping well during these difficult times. I'm sure you will all agree that the fourth quarter and 2020 as a whole has been challenging for many reasons, primarily related to the COVID pandemic, which has greatly affected the global economy and changed our lives in many ways. At Exterin, our primary focus throughout 2020 was employee safety, particular attention to cost actions, and executing our strong backlog, all while navigating the challenging oil and gas macro environment. During the fourth quarter, Exterin executed well against its performance metrics with our expectations and guidance in the high 30 million EBITDA range. As adjusted, EBITDA came in at 39 million. This was driven by a modest improvement in contract operations revenue, along with improved margins in our product sales business, underscored by strong cost management, both at the operating expense and SG&A levels. As we look forward, the rollout of the COVID vaccination brings hope that life will one day return to a semblance of normalcy, which is becoming evident with travel and indicators like the rebound in commodity prices over the past couple of months. However, I believe the pandemic is far from over as we continue to see some logistical challenge emerge, with hotspots appearing in some regions across our operations. We remain optimistic about all the events that have unfolded during the past couple of months and the proactive steps we have taken to achieve positive results despite these challenges. Commercially, we had some very significant wins. beginning with the large Middle East product sales award we secured in the first quarter of 2020, followed by over 200 million of contract operations renewals in Latin America. We continued to manage what was in our control as our SG&A came down by another 13% year over year as we focused on margin improvements and returns. I'm excited to report today that 2020 saw us continue on our strategic journey to transition away from a traditional oilfield service company to an energy industrial service company. This took a significant step forward at the end of the year with the closing of the sale of our U.S. compression fabrication business, which considerably reduces the volatility in earnings whilst also demonstrating the stability and higher margins delivered by our core business. Another important element of our transformation is our water solutions business, or EWS, which had a very productive year in 2020. The team focused on driving market penetration around knowledge of our products and services, while also looking to progress our industry-leading technology. Over the past couple of quarters, I've talked about the increasing commercial discussions we've been engaged in regarding our EWS business. And I'm extremely happy to announce that during the first quarter of 2021, the company won its first significant eco project, This exciting project is a multi-year contract in the Middle East worth over $200 million. This project represents a stake in the ground for Xterrin and further launches our transformation to an energy industrial service company. Just looking at our eco backlog at the end of the year, in addition to this award, EWS now makes up approximately 15% of the company's backlog. What is even more exciting is the fact that we see additional opportunities for the percentage to grow over the coming year, given other projects that are in the pipeline. Globally, we're seeing an increase in opportunities for pilots of our products, which supports our strategic direction to use the company's geographic scale to position the product line. The team is also working on a number of key product development initiatives that will support increased efficiencies in process and operations that will drive a step change in the carbon footprints of water treatment facilities. Additionally, we have launched an initiative to readdress the usability of produced water with an integrated process and system approach that will drive costs down dramatically to obtain desalination water from produced water. The team has filed patents over the course of 2020 related to some of these developments, and we are keen to see the opportunities unfold over the coming years. This product line is valuable to us for many reasons, including the fact that it is an environmental and sustainable solution. It has strong IP, high margins, and has applications across multiple industries over the medium to long term. As more companies and industries look to control their waste consumption, the need to reuse and recycle will be critical to environmental sustainability. This all bodes well for our technology having a long-term solution for these problems. As I look at our traditional product lines around the world, I feel better about what the next 12 months holds compared to six months ago. We continue to see resiliency in the international markets and new opportunities in eco, product sales, and our AMS segment. The US market, however, continues to face challenges, but there are some green shoots, albeit limited. While the timing of new project awards and turnaround in the U.S. market is challenging, we're also investing a significant amount of time exploring how we will participate and contribute to the energy transition. Xterran's foundation is built on processing and moving molecules and electrons, whether that be oil, gas, water, or electricity, which provides us with the needed skill set to contribute to some of the cleaner energies. However, even closer to home, we're focused on expanding our service offerings to our customers. As many of you know, many in the industry are targeting meaningful emission reductions over the coming years. Our aftermarket service teams are enhancing our service offerings to provide customers with additional sustainable offerings, including conversion kits to electric drive, low-emission valves, leak detection and repair services, along with the preventative maintenance solutions to drive lower operating costs. and improve cleaner operating efficiencies. Overall, I'm extremely pleased with the progress the company has made in its transformation and the long-term prospect for the company to participate in the energy transition. And with that, I'll turn it over to Dave.

All right. Thanks, Andrew. All results presented have been restated to exclude the U.S. compression fabrication business from our reoccurring numbers as it was reclassified to discontinue operations. For the quarter, we delivered EBITDA as adjusted of $39 million, which was in line with our guidance on revenue of $152 million. This represents an EBITDA margin rate of 26% compared to 21% in Q3 and 24% in Q4 2019. From a segment perspective, revenue for contract operations was $84 million, while adjusted gross margin was $58 million, resulting in an adjusted segment gross margin rate of 69%. Eco backlog at the end of the quarter stood at $1.1 billion. For AMS, revenue was $30 million and adjusted gross margin was $6 million. This resulted in an adjusted segment gross margin rate of 18%. The margin rate was impacted due to the service parts mix and some contract revenue delays. Revenue in the product sales segment was $38 million and adjusted gross margin was $5 million, resulting in an adjusted gross margin rate of 14%. Revenue decreased sequentially as we completed a number of international compression projects in Q3, along with some COVID-19 related project delays. Margins increased for the quarter due to better mix. Our product sales backlog was 465 million at the end of the fourth quarter, compared to 497 million at the end of the third quarter. SG&A expenses were 28 million, down from the 30 million in the third quarter. Full year SG&A was 123 million, down from $142 million in 2019 and down from $153 million in 2018, reflecting the strong cost controls and productivity achieved over the past two years. Moving to the balance sheet, net debt at the end of the fourth quarter was $522 million. Our leverage ratio is 3.98 times and compares to 3.51 at the end of the third quarter. During the quarter, we made an offensive decision to approach our banks for an amendment to our revolver. We secured that amendment, which allows us to recognize a pro forma EBITDA contribution from eco projects that are under construction subject to certain limitations and restrictions. We also elected to reduce the total size of the revolver by 50 million to 650 million. Andrew discussed the increase in commercial activity we were seeing globally, and this was the driver for that revolver amendment. Now turning to 2021, as we said for the past two quarters, we expect 2021 to be a growth year for the company given our strong backlog even with the assumption of limited new bookings that would impact the year. This still remains the case. For the year, we expect full-year EBITDA is adjusted in the range of $140 to $160 million. This range takes into account the continued fluid environment that exists as a result of the ongoing pandemic. The water eco deal we just announced is an 18 to 24-month build and will not contribute to this year's EBITDA. SG&A for the year should be between $125 and $135 million. This range anticipates some additional commercial, project management, and engineering costs that may be required given the improving macro environment. The total committed CapEx for the year is expected to be between 75 and 85 million. Reimbursable CapEx, which would be reflected as additions of deferred revenue, should be between 35 and 40 million. Some other guidance topics for the year, cash taxes should be between 20 and 25 million, interest expense between 40 and 45 million, And deferred revenue to be recognized for the year should be between $50 and $55 million. And lastly, net working capital should be a use of cash of around $50 million, but this is dependent on finalizing project schedules, which will drive inventory purchase and customer payment timing. Looking at the first quarter of the year, we expect this to be the low point for EBITDA for the year, driven by the typical seasonality in AMS and less revenue recognized from our product sales backlog. We see first quarter EBITDA is adjusted in the low to mid $30 million range, and it will be improving each subsequent quarter. And with that, I'll turn the call back over to Andrew for his closing remarks.

Thanks, Dave. So looking forward, Exterrin is well on its way in its transformational journey, and the water wind during the first quarter sets a strong foundation for the years to come. Our sustainable product offerings and global footprint provides us the opportunity to continue to participate in the energy transition, as many in this space will struggle to find their way in the evolution. Our core competencies revolve around processing, treating, and moving molecules, regardless of the type, and will give us the ability to look at ways to participate across the water consumption and reuse advancement, along with the hydrogen, renewable, natural gas, and carbon capture value chains. Our extensive service footprint and install base affords us the ability to help our customers focus on their emission reduction targets while allowing us to build additional recurring revenues. We will maintain a strong focus on protecting the core of the organization and improving our long-term cash flow and returns of the organization. We have a solid backlog to start the year that will require a strong focus on execution and delivery. I'm very excited about the opportunities I see ahead. And with that, I'll now turn the call back to the operator.

Thank you. At this time, I'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Kyle May with Capital One Securities. Please proceed with your question.

Good morning, everyone. Good morning, Kyle. Andrew, you mentioned the 12-month outlook has improved over the last couple of months. Can you talk more about where you're seeing the improvement and also give us a regional update of the business?

Yeah, sure. So first, over the past 12 months, I'd say that our regional teams in particular have continued to do a really great job of building, first of all, the foundation for strong customer relationships, which in turn has led to a fair amount of bid activity. That bid activity is obviously what feeds our pipeline. And as we sit today, we've seen over the past six to nine months a fairly large pipeline, but a lack of awards, which I think gave us a pause at the end of 2020 as we were considering, will these projects go ahead? Well, what I'd say this year, as demonstrated by the water project, is that a lot of this pipeline has really started to get to a place where we feel customers will be making awards. So not only is the pipeline continuing to grow, but I think there's a confidence that we're seeing, certainly internationally. I'll talk about the U.S. in a second. But certainly internationally, there's a lot more dialogue, a lot more late nights on calls with the Middle East, a lot more weekend calls, and just a lot more activity with regards to the commercial pipeline. Whereas I'd say six months ago, internally we were very busy, and it just felt as though it was going into a pipeline. So something's different. We were talking about this recently as a leadership team. Something's different in the last two to three months, and it feels as though it's prime in order for a lot of these projects that we've been bidding on to come through, which is just great news for us. As I sit today, I'd say that the Middle East continues to be by far the busiest region for us. Over the last 12 months, we've continued to develop our team in the Middle East. We've added resource, both from application and engineering. We've built stronger project management teams. We've added commercial resource to the region for both our core products and also some of the products that we've talked about that we're expanding into. And so as we sit today, our largest part of our pipeline, whether it be new customer orders for customers that are looking to potentially add additional trains, gas processing trains that we've previously sold. So similar to the U.S. model where we've got a large installed processing fleet, we're seeing customers in the Middle East wanting to add a second train or in some cases a third or a fourth train. So that's very positive. And then also I'd say our water pipeline in the Middle East is as strong as it's ever been, and it continues to be. Every time we operate in new areas and our reputation and the technology gets known, it gets more and more traction. And so, as I said in my prepared remarks, our team did a really good job last year building the capabilities in the region and explaining and really putting our portfolio out there, and that's really manifesting itself into a lot more bid activity. In a nutshell, Carl, we're really busy on the front end commercially right now bidding projects and working through technical clarifications and projects for both eco and product sales. Asia Pacific, which is predominantly for us being an aftermarket AMS business, has really seen some new breakthrough in opportunities both, again, on eco and product sale, also for processing facilities. I really feel this year will be a breakthrough year for us in the region selling processing facilities that we haven't typically seen. And again, we also have a number of clients in the region interested in our water technologies, and we're spending quite a bit of time with a few applications which also include some offshore thoughts that we have with some of the water clean and reusable technology that we have right now. slightly behind the Middle East in terms of total pipeline, but refreshing to see the activity level. Latin America for us has really been about renewals. As I said in my prepared remarks, the team has truly done an outstanding job renewing contracts in a brutal environment in 2020. There's no doubt about that. And the team has done a great job managing various challenges with various customers. And I'd say this year, It's a continuation of that theme. We have a lot of renewals to work through, and we feel very good about that right now. But we're also seeing spots of customers that have a need for equipment to purchase. And so again, we have some processing equipment that we're currently seeing in the pipeline and some other activity there, along with some water deals. And so that's encouraging. And then I saved the North America for last for a reason, and I think that's the area that we're still seeing today some challenges. Really for us in the past 12 months has been right-sizing the organization. We've taken appropriate cost actions to see the demand and the supply drivers. We've got some green shoots for the first time in a while. We're certainly seeing that in certain basins, mostly gas-related. But equally, given our strong AMS performance that we've seen in terms of the focus areas, we're certainly working on some opportunities and some areas in order for us to help our customers either de-bottleneck or in some cases enhance some of the facilities. So in that order, Middle East, the strongest. We certainly have good visibility in Asia. Latin America is about renewals. And then I think for us, it's probably more of a second half, 2021, wait and see what happens in North America. Hopefully that gives you a little color.

Yes, that's very helpful. Thank you, Andrew. And For my next question, maybe this one's better for Dave. Appreciate the guidance that you provided for the year, but can you talk a little bit more about maybe the cash flow expectations and the impact on the leverage ratio in 2021?

Yeah, we provided a model assumptions for you during the prepared comments, so maybe just a little more qualitative commentary. First of all, obviously those tie together with our assumptions of the market. Obviously, as Andrew just said, there are definitely some, I'm going to call them green shoots, but some bright signs. Some of those are in kind of a pre-bid budgetary position, but we certainly have some bright spots. But what we provided was based on the muted market assumptions going forward, and I think the first question is, why does that matter? More product sales, and many of the opportunities we see are more along the lines of product sales, so more gas plant opportunities. Historically, those have a good cash flow associated with them, so they're not things that have deferred cash. You're generally paid as you're building and providing those products. Hopefully, we can see improvements in the product sales. That would certainly help bias that in a positive way. Then the big project we booked in the Middle East, this is also, again, factoring into the working capital. guidance today is based on our current schedule and the assumptions, which, as we've said, have been certainly impacted by COVID to a large degree. And so we're still working through with the customer the final schedules for that project, and along with the actual schedule of completing that project is how they are paying and reimbursing us. And so, again, it's based on our current view of that, and we're certainly always working to improve that, but that project does require working capital early in the project, and then as we get later into the project, then it's actually a positive cash curve at that point. And I think beyond working capital, which certainly is a factor in that guidance, we're making decisions to invest in the business, as shown by this award of this water contract operations project, and those are conscious decisions we're making that we think are the best use of capital for this business where certainly in the short run it impacts cash flow, basically capital investment. In the long term, these are good projects. They're generally high return projects, high margin projects that certainly at least meet, if not exceed, our threshold for return. So again, we think that that's a good use of capital while, again, in the short run it impacts free cash flow. in the long run, you know, the right decision for the business, particularly given the opportunities we're seeing in water and how that can continue to transform this company given the technology and so forth we bring. Certainly in the short run, you know, this all impacts leverage, and we're above kind of our historic leverage rates and where we, you know, prefer to be. We prefer leverage to be lower, but, you know, again, we're making these decisions looking forward, you know, really feel comfortable with the cash flow assumptions from these projects that eventually then start bringing leverage down as the cash starts showing up and the investments are complete.

Got it. Thanks for the time this morning. I'll turn it back and jump in the queue.

Thank you. Our next question comes from the line of Doug Becker with Northland Capital Markets. Please proceed with your question.

Thanks. Andrew, you mentioned at a high level some of the opportunities you see to help customers achieve energy transitions, sustainability targets, but I was hoping you could go into more detail about where you see the best near-term opportunities and just how would you try and quantify the opportunity for Extern?

Yeah, so it's a big topic, and I don't think today, as it sits with Extern, we have a full transition theme. I think for us, it's more of a energy collaboration and ultimately transition. But I don't think we see a market where there will be no demand for the products and services that we offer today. I think gas is an important component and I think the narrative around gas continues and we certainly believe from the pipeline that we see today that there is an opportunity to continue to grow in that space. And as it relates to gas specifically, there are a lot of areas that we play today and for many years We've been helping customers in certain regions produce it more efficient, more clean, taking out some of the nasties further upstream. And whether it's our process and treating or our aiming plant designs, they're all areas and spaces that we're able to help our customers integrate better solutions today. As we think locally in the short term, from a U.S. market perspective, we've seen a lot of interest in conversion to electric drives. from traditional gas. We're certainly seeing an opportunity for us in the short term to put more low-emission valve solutions and sort of emission control products and technologies around our offerings. And then certainly our water business, I think that has the biggest breakthrough in terms of our ability to provide reusable water, whether it's at the well site or whether it's during a process further downstream, not having to you know, potentially ship water in and then ultimately not ship water out and being able to clean it to the standards that we just described in my prepared remarks and what we talked about previously is a real breakthrough for us. And so I think in the short term, we certainly see more opportunities to do more of what we're doing. And then in the longer term, we're currently working through and searching for other potential solutions for some of the adjacent ideas that we have of how we can bring our solutions to bear. This is a work in progress for Exterrin, and it isn't a headline discussion as we speak, but we're working through, I'd say, collaboration towards more of an energy transition story.

That's definitely encouraging. You've mentioned the pipeline around water a couple times. How big do you think EWS could be in a year or two? I guess it's about 15% of eco backlog right now. Where do you see the opportunity there? Is it 20%, 25%? And then how do you balance that with just the capex associated with growing those businesses and the leverage ratio?

Yeah, great question. Yeah, great question and one that we speak quite frequently, not just ourselves but through the industry and the board and having a discussion around the size and scale and scope. And I think what we're seeing as various countries around the world think about legislative policies and regulatory challenges in a different way. And I'd say in some countries, we are further advanced on legislation in terms of reuse than we are here in the US. I'd say that there's also differences by state that we're seeing unfold here in relation to the overall topic of water and reuse and how big and how important can that be. Everything that we're investing in, every patent that we have filed, and we continue to work that path also in 2020, is only going to aid the narrative around regulatory sustainability and the importance of water. Today, I think this is the first time we've seen our water pipeline larger than the rest of the products combined in Exterim, and we're very excited about the opportunity set that we see, as I said, particularly in the Middle East. Not all those projects are eco. There are some of those projects that are traditional product sales where we would sell the product with a solution and probably an AMS solution on the back end of it. But in terms of how big it can be, I think part of that's going to be how we as a company allow the water business to be bigger as a percentage of the total external portfolio than our traditional core. I think it's too early to declare what that looks like, but our intentions over time is for the water business to be the larger segment that we have in the company. and that's the goal that we have, and that's backed with the resources and the support and the team that we've built out in the past 12 months. As I said, we haven't stood still. Dave, maybe you have a few thoughts.

Yeah, Doug, and this will kind of follow up to Kyle's question as well. You know, we see, as Andrew just said, tremendous opportunities for the technology that we have to be applied, and certainly today the focus is in energy, but Frankly, there are opportunities outside of energy. When you think about what do we do, we clean water. That's not just an energy problem. So there's certainly other opportunities. Yes, many of these customers are looking, and in fact, I think probably universally, customers are looking to put more investment on their partners' balance sheets. So whether that's capital or working capital, we're seeing that. And one of the things we're doing is also looking for other ways to finance those, so other type of what I'll call partnerships that might exist where someone else carries that equipment investment, and maybe someone that's more appropriate. I mean, we're not a bank. We're not an investment shop that looks to make returns just on the equipment or the interest, but there are people that that is what they look for. They look for those infrastructure-type investments where they can get a decent return, and those are avenues we're exploring. Difficult with all the accounting rules perfect that in a way that keeps that debt and that investment off our books. But it's something we're spending quite a bit of time on now and, frankly, hope that we come up with some solutions there. So we can keep bringing our technology to customers, keep aiding to the pursuit of more sustainable environmental solutions, but put that investment on someone's balance sheet that that's what they do for a living.

That makes sense. And just one more, if you could address the margin outlook in the first quarter, particularly as it relates to aftermarket and product sales where, you know, aftermarket, we saw the dip in margins and then pretty strong margins in product sales. But just outlook for the first quarter given some of those variances.

Yeah, I don't have the specific numbers here. Obviously, we're going to pull them up. But, you know, I think our aftermarket business, there is, and we mentioned it, there's a bit of seasonality with that business, frankly, in the The southern region, South America, it's actually their holiday period, so we generally have a little less activity in Latin America during the first quarter, so generally see that in terms of revenue and a bit in margins. It comes down to a couple other factors. One would be a mix of parts versus services, so more parts, generally lower margin, and As we mentioned, too, there's a couple of AMS deals where we've got some costs right now and not the full revenue, and we expect that to improve as we move into the second quarter. Kind of a continuation, I guess, of the margins we saw in AMS in the fourth quarter, get into the first quarter, and then should improve going forward. Same story a bit with products. As we mentioned, completed some of the international compression projects during the third quarter, so still had a pretty good margin in products in the first quarter. As we come into the first quarter, though, frankly, the big project we're working on is that project in the Middle East. So we've got a P&T facility here in the U.S. that right now doesn't have the volume, and so we're being – certainly we have some pressures due to – fixed cost absorption, both in terms of plant and some of the overhead. You know, we've made significant adjustments in our cost structure, but we've also made a conscious decision, one of those other decisions we've made, to keep certain technical skills around engineering and project management, given this backlog we're seeing and the COVID activity. So that will weigh on us a bit with some of the costs without the revenue in the first quarter on the product side.

Thank you very much.

Thank you. Our next question comes from the line of Samantha Ho with Evercore ISI. Please proceed with your question.

Hey, guys. Thanks for taking my question. You know, I recall that there was two large water projects that you thought could have been awarded in the back half of last year. It looks like you guys have one on the books now. Curious if this other project is out there and if other projects that you guys are bidding on have similar sort of long bill cycle times and if you know, similar sort of terms as the one that you just announced today?

Yeah, great question, Samantha, and good morning. I think what you're referring to is some remarks we made in the middle part of last year where the second half of the year we're expecting to see some water contracts come through, and you're right. The first one happened at the early part of Q1, so it slipped, and as I said in my prepared remarks and I just commented to Kyle, That was really the trend of 2020, very difficult to project some of the projects that were coming through in terms of award activity. That second large water contract we're currently working through as we speak. And we have a number of other projects that are both product sales and other methodologies in how we could generate revenue in the pipeline as well. So not all the projects that we have would take that 12, 18, 24 months to build. and realize the revenue, we have some other projects and opportunities that we're working on too. But I think the timing of what you described, certainly we saw it pushed on the fourth quarter. We booked the first one in the first quarter here and we're working on other projects as we speak and hope to announce some additional wins in the near term.

Great. And then maybe just keeping on the Middle East topic. I noticed that on your sustainability award you guys kind of highlighted, or your sustainability report, that you guys highlighted some work that you had done in terms of helping customer theirs reduce flaring. And that just seems to be a topic that's just really going to start blowing up in the U.S. soon. I was wondering if you could maybe explain to us, you know, how you go about doing that and then where we would see that, you know, is it – yeah, if you could just sort of explain – that process, how it benefits your different segments, what it really means for Exteron as we potentially get some new regulations here in the U.S. That would be really great.

Yeah, I think this is Dave. Maybe I'll start and let Andrew jump in. When you're flaring, you obviously have gas that you don't have another use for. And so I think the primary way we weigh into that is bringing our process and treating technology to capture that gas and do something sustainable and productive with it. So whether that's generating electricity at the site for the site. As Andrew mentioned, there is a move towards more electric drive equipment. Well, you've got to come up with that power somewhere. If you've got gas, you're flaring it, potentially you turn to power. There's your source for electricity. And so that's certainly front and center for us in our process and treating business is to bring our gas plant technology, whether on a very large scale or smaller scale, to bear to do something with that gas that otherwise would have been just burned off.

Thank you. Our next question comes from the line of Tim Monachillo with ATB Capital Markets. Please proceed with your question.

Thanks. Good morning, everyone. Good morning. First question was just on the water contract that you announced. I'm wondering if you could give a little bit more details in terms of how long the term on the contract is and what you expect for CapEx requirements for that one project.

Yes, Tim, at this point, I think it's too early in the process to kind of get into that specific detail on term. This is a competitive bid, and a lot of the information is clearly competitive. So I think at this stage, we prefer not to share that. What I will say is that this is a typical project that we see in some of the Middle East countries where we're helping our customers with some existing fields. This particular field is a developing field. There are small water operations Aside from the facility that we just won, this is up to 350,000 barrels of liquids a day. It's a good size quantity to apply the technology with some early oil conditioning that will help our customers on that side of things to very high water content. And so we see this particular opportunity to be pretty standard in terms of some of the fields in this particular country. And we will continue to build out more and more solutions to support that customer as we go forward. But as it relates today, I think the contract award size, we're comfortable with over $200 million, 18 to 24 months before we'll start seeing that flow through. And then as this becomes more public and the information is more relevant, we'll update you as we go forward on this project.

Okay. I guess in terms of the CapEx, guidance, $75 to $85 million. I assume that would only probably include about half of the project. Is that a great way to think about it, given the 18 to 24-month build time?

Yeah. Again, it's tied to the customer schedule, and like all of our projects early on, you tend to have more engineering, and then you get into CapEx, and it tends to be more back-end loaded, frankly, if you look at the curve of how we spend capital, because it's engineering up front, and then procurement, and build, and so forth. So, without getting into any more specifics, they're definitely in our guidance, obviously, that the CapEx impact for this year is included.

Okay. Does that range contemplate the award of that second water solutions contract that you guys are working on?

No, the growth CapEx guidance we gave is for what we call committed projects. So it includes this one as it is a committed project that's been signed, but does not include any other projects that haven't been signed. And frankly, again, with most ECO projects, we're now in March, so even an award in the near future, probably some, but minimal CapEx just given the normal process. Okay.

How much of that CapEx guidance would be for maintenance and sustaining capital, including renewals of contracts?

Yeah, around $20 million for what we'd call non-growth and just general corporate-type CapEx, so maintenance CapEx and other.

Okay, great. I guess just the last one on CapEx then, is there an upper – and uh uh i guess spending that you guys would be comfortable with in 2021 given the size of the the project outlook that you're looking at today i'm not sure fully under you're talking in total or a specific project yeah i'm just saying like if if you were to win some big projects um how high could would you be comfortable uh with catholics going in 2021

Yeah, I think the governor on that obviously is leverage in our outlook. We don't want to be in a position where we're making, you know, decisions for the company based on short-term leverage concerns. So we're going to want to make sure we keep a reasonable leverage position. And, you know, it so depends on the specifics too. You know, the reimbursable component is always another variable, you know, We're working hard on DPO and getting our suppliers to join in some investment in these projects as well. Certainly, there are opportunities to get into projects where we can construct the cash flow in a way that allows us to maintain reasonable leverage but still fulfill what a customer would like us to do with them. you know, we'll continue to work all those levers and, you know, we don't want to be in a position to tell customers we can't. And as I said earlier, you know, we're also looking for ways to kind of offload that capital with financial type investors that are comfortable with, you know, that as their business versus us and what we do.

Okay, I appreciate that. And then second line of questions I have is just around the energy transition. I'm curious if you could speak specifically on a couple items, including your exposure to CCUS, potential for hydrogen, and also RNG. One of your competitors has spoken sort of in detail on the, I guess, internal expertise and potential leverage and growth within those segments as well. So I'm just curious to know where you see your exposure.

Yeah, I think there's, again, I'll give us a few thoughts on that. We've been spending quite a bit of time, and Blake and his other job is business development, on where we could play in some of these. And I think there's really two initial ways. One is, if you're talking about RNG, for example, there's processing, albeit different scale than what we do today with a large natural gas processing facility. But you've got a processing facility, you've got transportation, you've got compression, same is true with hydrogen. So there's certainly some core competencies we have around what we do today and how those could apply in some of the more renewable energy transition space. I think the other area is what do we do on our eco side? We design things well, we build them well, and then we run them extremely well. And I think you have that opportunity too. Every single one of these energy transition type applications has a services element to it. And I think we're looking at where does it make sense for us to play. We're not going to get into areas where it doesn't make sense from us from a return standpoint or a margin standpoint, but we're spending a lot of time looking at where we could take what we do really well as a company and apply it in the energy transition space.

Okay, great. I appreciate the details. We'll turn it back.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Brian DiRubio with Baird. Please proceed with your question.

Good morning. Dave may be starting to... Can you help us understand, so what are the drivers that get you to the low end of the guidance versus the high end of the guidance?

Yeah, I think the... you know, one of the variables, and I kind of alluded to it a bit in some of the, to answer some of the questions. This project in the Middle East is one variable, and as we've said, that project has been slowed by COVID. Certainly, you know, that specific region has had their challenges, thought they were getting through them, and kind of got into their second wave. That project, being as big a project as it is, that schedule, and we're very close to having that nailed down and back on track. But we've kind of put some allowances in there if things with that project run a little faster or slower based on what happens with COVID, which is unfortunately anybody's guess. So that's probably the biggest variable we have in there. We don't have an assumption in our base plan for a bunch of product orders, gas plant orders that aren't on the radar. And I think that can certainly be something that could move us certainly higher in the range if we can, and we're starting to see those, as we've mentioned, many of them in a kind of budgetary pre-bid type stages. There's some projects that have been sidelined. We're probably most hopeful on those because those have been sidelined, and some of those, the discussions are coming back well on those. We've been well into engineering phase on some of those projects, and in fact, some cases have inventory sitting that could apply to those. So some of those could happen and could happen faster, and that would certainly bias us towards the upper end of that range. And we'll just have to frankly see. We provided a range that's fairly broad, but we wanted to certainly provide a range where we're very comfortable with the low end and have a path to get to that high end should things open up a bit for us.

Yep, that's fair. And as we think about, you know, look at your backlog in ECO, can you help us understand what the weighted average life of that backlog is?

Yeah, we generally haven't, you know, provided that. I think, you know, historically, we've talked about, you know, the average length of initial contracts being, you know, seven to eight years. And, you know, contracts we've been signing the last few years tend to be longer than that. And I think in the 10K, you'll see a rollout of that backlog. So I'd probably refer you to that as we will file that K later today. Okay, great.

Then just looking at the balance sheet, one thing that's stuck out to me, your accounts receivable balance seems a bit elevated. Do you have any thoughts on what's going on over there?

Yeah, I think there's a couple things. One, the North American business tended to have PSOs that most of our customer terms in North America are 30 days, and internationally they tend to be longer than that. So you're seeing a little bit of a mix in the businesses that the U.S. business has really dropped to little to nothing. So you're seeing a little bit of the weighting of the international terms. And there are some receivable challenges we have. We have one, and there's a note on the K, so you'll see it there. We've got an ongoing challenge that's going to arbitration with a customer in Latin America, and that's a fairly significant receivable balance, over 30 million. So there's that one specific challenge there, but beyond that, frankly, we've been pleasantly surprised. Many of our key customers have continued to pay very good, but we do have that one issue that, again, is noted in the K.

Got it. And how should we think about what you view as adequate liquidity levels?

You know, we tend to run the business on kind of a multi-year rolling forecast, so always trying to make sure we're as best we can looking forward, which is difficult in these environments. And, you know, I think, you know, we certainly feel like – just the normal operations of the business, the normal cash needs, kind of an operating cash basis, we're in good shape. This is not a business that has wild fluctuations in inventory and so forth that require you to think about maintaining, kind of put some liquidity in your pocket. For us, really, the question around liquidity often comes down to how comfortable we are on bidding on an eco project where there's CapEx required. And that's where we're, I would say, being very, very selective now in terms of making sure these projects hit our criteria. The good news is they're a lot more predictable. You know what you're signing up to if you sign up to one of these projects. We don't need to, as many companies that have shorter cycles maybe and have more inventory needs need to keep a bunch of liquidity in our pocket. Operating cash is very predictable and CapEx is a conscious decision we make.

Got it. And then just finally, of what material inflation, specifically I'm thinking about steel costs, you know, how are you guys addressing that with your products and obviously your ECO contracts that are being built? Thank you.

Yeah, I think certainly existing eco contracts, you know, certainly things like steel and copper and other things don't really impact us. We're not generally putting those kind of inputs into an existing operation once it's up and running. And many of those contracts just on a kind of non-material inflation, we have inflation factors built into the contract. So if we see labor rates, which is a bigger variable when you're running an O&M side of a contract, we've got offsets in pricing for labor increases. So where we'll see more of an inflation impact would be on an existing project that we're currently constructing given the length of time. With those, we try to anticipate upfront. We try to really push hard on productivity to offset anything. And you certainly have the opportunity to go back to customers in certain circumstances with engineering changes. And we try to be as upfront, account for everything as we can, and make sure we've got the right contingencies and so forth in place to guarantee that we're going to deliver a project as promised in terms of returns and margins.

Great, thanks for the time.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Way for any final comments.

Thank you, Aubrey. Appreciate everyone dialing in today. We look forward to updating you all at the end of the first quarter. Thanks a lot.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.