Q4 2020 Exterran Corp Earnings Call
Greetings and welcome to the Exterran and 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 I knew interest you require operator assistance during the conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Blake Hancock, Vice President Investor Relations for Exterran.
You may begin.
Good morning, and welcome to Exterran Corporation's fourth quarter 2020 conference call with me today are experienced president and Chief Executive Officer, Andrew way, and David BARDA experienced 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 losses and speak 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 and 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 and its earnings press release issued earlier today and our presentation located and the Investor Relations portion for the Companys website with that I will 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 per.
Similarly related to the Covid pandemic.
Which has greatly affected the global economy and changed our lives in many ways.
At Exterran, our primary focus throughout 2020 with 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, Exterran and executed well against its performance metrics with our expectations and guidance and the high 30 million EBITDA range and adjusted EBITDA came in at $39 million.
This was driven by a modest improvement and contract operations revenue, along with improved margins and our product sales business and.
The scored 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 for one day returned to a semblance of normalcy, which is becoming evident with travel and indicators like the rebound and 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.
Mitch with hotspots appear and in some regions across our operations. We remain optimistic about all of the events that have unfolded during the past couple of months and the proactive steps we've taken to achieve positive results. Despite these challenges.
Commercially we have some very significant wins beginning with the large middle East product sales award, we secured and the first quarter of 2020, followed by over $200 million of contract operations renewals and Latin America. We continued to manage what was and our control and our SG&A came down by another 13%.
That year over year as we focused on margin improvements and returns I am excited to report today for 2020 source continue on our strategic journey to transition away from a traditional oilfield service company to and energy Industrial Service Company. This took a significant step forward at the end of the year with a <unk>.
And other sale of our U S compression fabrication business, which considerably reduces the volatility and earnings whilst also demonstrating the stability and higher margins delivered by our coal business.
Another important element of our transformation is our water solutions business or AWS, 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 increase and commercial discussions we have been engaged and regarding our gws business and I.
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 and the middle east with over $200 million.
This project represents a stake and the ground for Exterran and further launches all transformation two and energy Industrial service company, just looking at our eco backlog at the end of the year. In addition to this award <unk>.
<unk> now makes up approximately 15 percentage of the company's backlog and 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 and the pipeline.
Globally, we have seen an increase and 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 and processes and operations that will drive a step change and the carbon footprints of water treatment facilities.
Currently we have launched an initiative to readdress, the usability of produced water with and integrated process and system approach that will drive cost down dramatically to obtain desalination and 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 is and 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.
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.
And I look at our traditional product lines around the world I feel better about what the next 12 months holes compared to six months ago, we continue to see resiliency and the international markets and new opportunities and eco product sales and our EMS segment.
The U S market. However continues to face challenges, but there are some green shoots, albeit limited.
While the timing of New project Awards, I'm turnaround and the U S market is challenging and we're also investing a significant amount of time exploring how we will participate and contribute to the energy transition.
Exterran and foundation is built on processing and moving molecules and electrons, whether that'd be oil gas water or electricity, which provides us with the needed skill set to contribute to some other cleaner energies.
However, even closer to home we are focused on expanding our service offerings to our customers as many of you know many and the industry are targeted and meaningful emission reductions over the coming years.
Our aftermarket service teams are enhancing our service offerings to provide customers with additional sustainable offerings, including including conversion kits to electric drive low emission valves leak detection and repair services, along with a preventative maintenance solutions to drive lower operating costs and improve cleaner operating efficiency.
Please.
Overall I am extremely pleased with the progress the company has made and its transformation and the long term prospects for the company to participate and the energy transition and with that I'll turn it over to Dave Alright. Thanks, Andrew All results presented have been restated to exclude the U S compression fabrication business from our reoccurring numbers.
And as it was reclassified to discontinued 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% and Q3 and 24% and Q4 2019.
From a segment perspective revenue for contract operations was 84 million, while adjusted gross margin was 58 million and resulted in adjusted segment gross margin rate of 69%.
Backlog at the end of the quarter stood at $1 1 billion for.
For Ams revenue was $30 million and adjusted gross margin was $6 million. This resulted in adjusted segment gross margin rate of 18%.
And rig was impacted due to the service parts mix and some contract revenue delays.
Revenue and the product sales segment was $38 million and adjusted gross margin was $5 million, resulting in an adjusted gross margin rate of 14%.
And it decreased sequentially as we completed a number of international compression projects and Q3, along with some COVID-19 related project delays and margins increase for the quarter due to better mix or.
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.
G&A expenses were $28 million down from the $30 million and the third quarter.
Full year SG&A was $123 million down from 142.002 million 19, and down from $153 million and 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 was 398 times and compares to 351 at the end of the third quarter.
During the quarter, we made and offensive decision to approach our banks for an amendment to our revolver with secured debt amendment, which allows us to recognize a pro forma EBITDA contribution for <unk> 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.
The increase and commercial activity, we are seeing globally and this was the driver for that revolver Amendment.
I will turn into 'twenty and 'twenty, one 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 and limited new bookings that would impact the year.
This still remains the case for the year, we expect full year EBITDA as adjusted and the range of $140 million to $160 million.
This range takes into account the continued fluid environment that exist as a resolve the ongoing pandemic.
The water Eco deal. We just analysis of 18 to 24 month build and will not contribute to this year's EBITDA.
G&A for the year should be between 125 and $135 million. This range anticipates, some additional commercial project management and engineering costs and 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 addition to deferred revenue should be between 35 and $40 million.
And 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 and Ams and less record revenue recognized from our product sales backlog we.
We see first quarter EBITDA as adjusted and 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 Exterran is well on its way and it's 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 and the energy transition as many in this space will struggle to find their way and the evolution.
Our core competencies revolve around process and 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.
Actual gas and carbon capture value chains.
Our extensive service footprint and installed base affords us the ability to help our customers focused 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 and.
Very excited about the opportunities I see ahead and with that I'll now turn the call back to the operator.
Yes.
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Our first question comes from the line of Kyle May with capital One Securities. Please proceed with your question.
Good morning, everyone.
Good morning, Andrew You mentioned, the 12 month outlook has improved over the last couple of months.
Can you talk more about where youre seeing the improvement and also give us a regional update of the business.
Yes sure.
So first over the past 12 months I would say that our regional teams in particular have continued to do a really great job and built in.
First of all the foundation for strong customer relationships, which in turn has led to a fair amount of bid activity.
And that bid activity is obviously, what feeds our pipeline and as we sit today, we've seen over the past six to nine months.
Fairly large pipeline, but a lack of awards, which I think gave us a pause and.
And at the end of 2020, as we would consider and what are these projects go ahead.
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 has the pipeline been continuing to grow but I think theres a confidence that we'll see and certainly internationally and I'll talk about the U S and the second but certainly internationally, there's a lot more dialogue.
A lot more late night phone calls or the middle East a lot more we can kohl's 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 is different we've been talking about this recently and the leadership team some things different and the last two.
And three months and it feels as though.
Its prime and order for a lot of these projects that we've been bidding on to come through which is just great news for us.
And as I sit today I would say that the middle East continues to be by far the busiest region for us and over.
Over the last 12 months, we've continued to develop our team and the Middle East. We've added results both from an application and engineering, we built stronger project management teams, we've added commercial resources to the region.
For both our core products and also some other products that we've 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.
And for customers that are looking to potentially add additional trained gas process and trains that we've previously sold so similar to the U S model, where we've got a large installed.
Process and fleet, we see and customers and the middle East wanting to add a second train and in some cases, a third or fourth train and.
And that's very positive and then also I would say a water pipeline and the middle East is our strongest and 17 and it continues to be.
Every time, we operate in new areas and.
And our reputation and the technology gets known.
It gets more and more traction and so as I said in my prepared remarks.
<unk> did a really good job.
Last year build and the capabilities and the region and explain and and really putting a portfolio out there and thats really manifesting itself into a lot more bid activity so and in a nutshell call. We're really busy on the front and commercially right now bid and projects and working through technical clarifications and projects for both eco.
And product sales.
Asia Pacific, which is predominantly for us bean and aftermarket Ams business is.
It really seems some new breakthrough in opportunities both again on eco and product sale also for processing facilities and I really feel this share will be a breakthrough year for us in the region sell and processing facilities that we haven't.
And 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.
That we have with some of the water clean and renewable technology that we have right now so Asia Pacific slightly behind the middle East and 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 and extend.
And job renewing contracts and a brutal environment in 2020, there is 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.
Sparks of customers that have a need for equipment to purchase and so again, we have some process and equipment that we're currently seeing in the pipeline and some other activity day, along with some water deals.
And so that's encouraging and then I saved and North America for last for a reason and I think thats the area that we're still seeing today some challenges.
Really for us and the past 12 months has been right sizing the organization, we've taken appropriate cost actions to to see the demand and the supply drivers and.
We've got some green shoots for.
For the first time and a while.
And we're certainly seeing that in certain basins, mostly gas related.
But equally.
Given our strong performance that we've seen in terms of the focus areas. We are certainly working on some opportunities from some areas in order for us to help our customers either demos debottleneck or in some cases enhance some of the facility so and that OTA middle East the strongest and we certainly have good visibility and Asia.
And 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.
And for my next question, maybe this is better for Dave <unk>.
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 and 2021.
Yes, we provided the.
Model assumptions for you during the prepared comments, so maybe just a little more qualitative commentary.
First of all obviously those tied together with our assumptions of the market and we obviously, we're as Andrew just said there are definitely from some call and green shoots, but some bright signs some of those are and kind of.
Pre bid budgetary position, but we've certainly pass from a bright spots but.
What we provided and was based on the muted market assumptions going forward and I think the first question is why does that matter.
And 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 and generally paid as youre building and providing those those products. So hopefully we can see improvements and the product sales that would certainly help.
And the positive way.
And then the Big project, we booked and the middle East and so.
Also factoring into the working capital so our.
Our guidance today is based on our current schedule and the assumptions, which as we've said.
And then certainly are impacted by Covid.
And 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 for and so again, it's based on our current view of that and we're certainly always working.
And to improve that and what it does require that project does require working capital early and the project and then as we get later into the project that is actually a positive cash curve at that point.
And I think beyond working capital, which certainly is certainly a factor and that guidance and we're making decisions to invest and the business and.
As shown by this award of the water contract operations project and those are conscious decisions, we're making that we think are the <unk>.
Best use of capital for this business were certainly in the short run and it impacts cash flow for the <unk>.
Capital investment and the long term. These are good projects are generally and high return projects high margin projects that certainly at least meet if not exceed our threshold.
For return and so we got and we think that that's a good use of capital while if you got and in the short run impacts free cash flow and the long run the right decision for the business, particularly given the opportunities, we're seeing and water and how that can continue to transform this company given the technology and so forth we bring.
And certainly in the short run impact.
Impact leverage and were above kind of our historic leverage.
Rates and where we are.
Prefer to be we've preferred leverage to be lower but again, we're making these decisions looking forward.
And really feel comfortable with the cash flow assumptions from these projects.
Eventually that and start bringing leverage down as the cash start showing up and 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.
Andrew you mentioned it at a high level some of the opportunities you see to help customers achieve energy transition and 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 Exterran.
Yes, so it's a big topic and I don't think today as it sits with Exterran and 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.
And as important component and I think the narrative around gas continues and we certainly believe from the pipeline that we see today.
There is an opportunity to continue to grow in that space and as it relates to gas specifically.
There are a lot and areas that we play today and for many years, we've been helping customers in certain regions produced at more efficient more clean.
Taken out some of the nasty further upstream and whether you saw our <unk>.
Process, and treating and of our Amy and plant designs and they are all areas and spaces that we're able to help our customers integrate <unk> solutions today.
As we think locally and in the short term from.
From a U S market perspective, we've seen a lot of interest and conversion to electric drive from from traditional gas, we're certainly seeing an opportunity for us and the short term to to put more low initial low emission valve solutions and sort of emission control products and technologies around our offerings.
And then Sidney our water business I think that has the biggest breakthrough in terms of our ability to provide reusable water what other steps.
The well sites or whether it's steering a process further downstream and not having to.
Potentially ship ordering and then ultimately not ship water out and being able to to clean it to the standards that we just described in my prepared remarks, and what we've talked about previously.
It's a real breakthrough for us and so I think and the short term, we certainly see more opportunities to do more of what we're doing and then and the longer term. We are 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 this so this is a work in progress for Exterran.
And it isn't a headline discussion as we speak but we're working through I would say collaboration towards more of an energy transition story.
So that's definitely encouraging.
You've mentioned the pipeline around water a couple of times, how big do you think AWS 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 or is it $20 25 per cent and then how do you balance debt with.
And just the.
The capex associated with growing those those businesses and the leverage ratio just yeah. Great question, Yeah, Great question, and one that we speak quite frequently.
I'm not just ourselves for.
For the industry and the board and having a discussion around the size and scale and scope and I think what was CNS.
Various countries around the world think about legislative and regulatory challenges and a different way and I would say in some countries. We are further advanced on legislation in terms of and we use them. We are here and the U S.
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 we use and how big and how important cannot be.
Everything that we're investing and 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 a water pipeline lodges and the rest of the products combined and Exterran.
And we're very excited about the opportunity set that we see as I said, particularly in the middle East now.
Not all of those projects are ego, they're off some of those projects that are traditional product sales. The way, we would sell the product with a solution and probably and Ams solution on the back end of it.
But in terms of how big and can be I think part of that is going to be how we as a company allow the water business to be bigger as a percentage of the total exterran portfolio than our traditional coal.
And I think it's too early to declare what that looks like but our intention over time is for the water business to be the largest segment that we have and the company and Thats. The goal that we have and thats backed with the resources and the support and the team that we built out and the past 12 months as I said, we haven't stood still.
Dave maybe you have a few for you Doug and I, just kind of follow up the Kyle's question as well.
We see just as Andrew just said tremendous opportunities for the technologies that we have to be applied and certainly today and our focus is and energy, but frankly, there are opportunities outside of energy. When you think about what do we do we clean water thats not just and energy problems. So there is certainly other opportunities yes.
Many of these customers are looking at and in fact, I think probably universally customers who are looking to put more investment on their partners' balance sheets. So other less capital or working capital, we're seeing that and one other things we're doing.
And also looking for other ways to finance those so other type of I'll call. It partnerships that might exist where someone else carriers, adding.
Equipment investment and maybe someone that's more appropriate I mean, we're not a bank and we're not a <unk>.
Investment shop.
It looks to make returns just on the equipment or the interest but there are people.
That is what they look forward and I look for those infrastructure type investments, where they can get a decent return and those are avenues, we are exploring difficult with all the accounting rules to two.
Perfect for that in a way that keeps that debt and net investment off our books, but it's something we're spending quite a bit of time on now and frankly I hope that we come up with some solutions. There. So we can keep bringing our technology and our customers keep aiding to the pursuit of more sustainable environmental solutions, but put that inverse.
Estimate on someone's balance sheet and that's what they do for a living.
And that makes sense and.
Just one more if you could address the margin outlook and the first quarter.
Particularly as it relates to aftermarket and product sales, where aftermarket we saw the dip in margins and then pretty strong margins in <unk>.
Product sales, but.
Just outlook for the first quarter, given some of those variances.
And I don't have the specific numbers here and I'm, just looking to pull them up but.
And I think our aftermarket business, there isn't and when we mentioned that there's a bit of seasonality with that business frankly, and the southern region, Latin America, or South America, it's actually their holiday periods and so we generally have a little less activity.
And in Latin America during the first quarter. So I don't see that in terms of revenue and a bit and margins and then.
It comes down to a couple of other factors one would be a mix of par.
Parts versus services, so more parts generally lower margin and then.
<unk>.
As we mentioned two theres a couple of deals.
Deals, where we've got some costs right now and not the full revenue and we'd expect that to improve as we move into the second quarter. So.
What kind of a continuation I guess of the margins, we saw and hang them up from the fourth quarter and into the first quarter and then it should and should improve going forward.
Same story a bit with products as we mentioned we completed some of the international compression projects during the third quarter. So we still have a pretty good margin product for the first quarter as we come into the first quarter, though.
And the frankly, the Big project, we're working on is that project and the middle East.
So we've got the <unk>.
PMT facility here in the U S, but right now it doesn't have and volume and so we're being certainly we could have some pressures due to fixed cost absorption and both in terms of plant and in some of the overhead we've made significant adjustments into our cost structure, but we've also made a conscious decision and one of those other listeners and since we've made the keep.
Certain technical skills around engineering and project management and given this backlog, we're seeing and the quote activity. So that will weigh on and it's a bit with some of the cost without the revenue and the first quarter on the product side.
Thank you very much.
Thank you. Our next question comes from the line of Samantha Hoh with Evercore ISI. Please proceed with your question.
Hey, guys. Thanks for taking my question and.
We call that there was two large water projects that you thought could have been avoided in the back half of last year and it looks like you guys have won on the books now curious if this other.
Other project is out there and and.
Other projects that you guys are bidding.
And bidding on have similar Longdale cycle times and.
And malaria.
<unk> asked the one that you just announced.
Yes, great question Samantha and.
Good morning, I think.
And what you're referring to with some remarks, we made and the middle part of last year, where the second half of the year, we're expecting to see some water contracts come through and and you are right. The first one.
It happened at the early part of Q1, so it's slipped and as I said in my prepared remarks, and I just commented to Kyle that was really the trend of 2020 and very difficult to project. Some of the projects that were coming through in terms of award activity.
Second large water contract, where we're currently working through as we speak.
And we have a number of other projects that are both product sales and other.
And the other methodologies and 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 Sydney, we saw it pushed from the fourth quarter.
We booked the first one and the fourth first quarter here and we're working on other projects as we speak and hope to announce some additional wins and the near term.
And okay, Great and then maybe just keeping on the mid east topics and I noticed that on your Sustainment already and what you guys kind of highlighted.
And as standard, though he reported that you guys highlighted some work that you had done in terms of helping customer of theirs.
And reduced flaring and that's what seems to be a topic, that's just really going to affect lineup and the U S. And I was wondering if you could maybe explain to US how you go about doing that and then where we would see that.
Yes.
Blaine that process, how it benefits different segments, what it really means for exterran and as we potentially get some new.
Since here and he asked that way.
Really great Yeah, I think that's a day, maybe I'll start and let Andrew jump in.
And you're flaring and you obviously have gas that you don't have another use for and so I think the primary way we way into that is bringing our process and trading technology.
To capture that gas and do something sustainable and productive with it so whether thats generating and 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 and if you've got gas flaring and potentially you turned to power. There is your source for electricity and.
And that's certainly.
And center for Us and our process and treat and businesses to bring our gas plant technology. While they are on a very large scale or smaller scale to bear to do something without gas it otherwise would've been burned off.
Thank you. Our next question comes from the line of Tim from Keller with ATB capital markets. Please proceed with your question.
Thanks. Good morning, everyone. Good morning first 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 for Capex.
Requirements for that one project, yes, and Tim at this point I think it's too early and the process to kind of get into that specific detail on Tim. This is a competitive bid and a lot of the information is clearly competitive. So I think at this stage, we would prefer not to share that what I will say is that this is a typical project debt we see.
And some of the middle East countries, where we're helping our customers with some existing fields.
This particular field and to develop and field there are small water operations.
Aside from the facility that we just won.
And this is up to 350000 barrels of liquids a day.
It's a good size quantity to apply the technology with some early all condition and that will help our customers on that side of thing to very high water content and so.
So we see this particular opportunity to be pretty standard in terms of some of the field and this particular country and.
We will continue to build out more and more solutions to support that customers would 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.
And then as this becomes more public and that information is more relevant we'll update you as we go forward on this project.
Okay.
And.
I guess.
In terms of the Capex guidance $75 million to $85 million.
And I sit and that would only probably included about half of the project.
Is that correct way to think about it given the 18 to 24 month build time.
Yes.
And it's tied to the customer schedule and like all of our projects that early on you tend to have more engineering and then we get into Capex and it tends to be more backend loaded frankly with if you look at the curve of how we spend capital because of the skin and engineering upfront and and procurement and build and so forth.
So.
And then any more specifics there are definitely in our guidance for obviously is that the capex for impact for this year is included.
Okay.
Does that range contemplate.
The award of that second.
Water solutions contract that years and working on.
The cash.
Capex growth Capex guidance, we gave is for what we call committed projects. So it includes this one as it is a committed project thats been fine, but does not include any other projects.
Projects that haven't been signed.
And frankly with most most eco projects, where we're now in March so even.
And award and the near future.
Some but minimal capex just given the normal process.
Okay.
How much of that Capex guidance would be for for maintenance and sustaining capital including a.
Renewals renewals of contracts and yes.
That wraps around the country for us.
Around $20 million for what we would call non growth and just general corporate type Capex, so maintenance capex and other.
Okay great.
I guess just last one on Capex and is there an upper and.
I guess the spending that you guys would be comfortable with in 2021 and given the size of the project outlook that you're looking at today.
I'm not sure fully under if you're talking to and total or specific projects, yes, I'm, just saying like if you were to win some big projects.
How high would you be comfortable with Capex going in 2021.
And I think the governor on that obviously as leverage and our outlook.
Don't want to be in a position, where we're making decisions for the company based on short term leverage concerns and so we're going to want to make sure we keep up.
And a reasonable.
Leverage.
Physician and.
And it.
And so it depends on the specifics to the Reimbursable component and there's always another variable.
We're working hard on GPO and get it and our suppliers to join and some investment and these projects as well. So certainly there are opportunities to get into projects, where we can we can construct the cash flow and a way that allows us to may.
And maintain reasonable leverage.
Still fulfill what a customer would like us to do with them. So.
We will continue to work all those levers and.
And we don't want to be in a position to tell customers, we cant and as I said earlier. We're also looking for ways to kind of offload debt capital with financial type investors that are comfortable with that as their business versus us and.
And what we do.
Okay I appreciate that.
And then second line of questions average is just.
And on the energy transition.
I'm curious if you could speak specifically on a couple items, including your exposure to seeking U S.
Potential for for hydrogen and also R&D and.
One of your competitors has spoken to and detail on the.
I guess internal.
Expertise.
And potential leverage and growth within those segments as well so I'm, just curious where you see your exposure.
I think there is going to 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.
And where we can play and some of these and I think there's really two initial ways. One is there if you're talking about <unk> for example.
And there is processing, albeit different and different scale than what we do today with our large natural gas processing facility, but if you've got a processing facilities and got transportation and you've got compression and same is true with hydrogen. So theres certainly some core competencies, we have around what we do today and how those could apply and some of the more room.
<unk> energy transition space and I think the other area is what do we do and our eco side, we design things well, we build them, well and and we run them extremely well and.
You have that opportunity to 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 do we could take what we do really really well as a company and apply it and.
And the energy transition space.
Okay, Great I appreciate the details I'll turn it back.
Okay.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad and our next question comes from the line of Brian <unk> with Baird. Please proceed with your question.
Good morning.
And Dave maybe starting to you can you help us understand so what are the drivers that gets the low end of the guidance for the high and the guidance.
Yeah, I think the.
One other variables and I kind of alluded to a bit and some of the answer some other questions.
This project and the Middle East is one variable and as.
As we've said.
That project has been slowed by Covid.
Certainly.
And specific region has had their challenges and thought they were getting through them and kind of got into the second wave.
That project being as Big a project as it is that schedule and we're.
We're very close to having that.
Nailed down and back on track, but.
And kind of put some allowances and 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 and there we don't have an assumption and our base plan for a bunch of product orders gas plant orders that arent on the radar and I think that can certainly be something that.
Move us certainly higher than the range if we can.
And we're starting to see those and as we've mentioned many of them in and kind of budgetary pre bid type.
Stages, there's some projects that have been sidelined.
And most hopeful on those because those have been sidelined and there are some of those are discussions are coming back well on those we've been well into engineering and phase on some of those projects and in fact, some cases have inventories sitting.
They 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 that's fairly broad.
But we wanted to certainly provide a range, where we're very comfortable with a low and and have a path to get to that high end and should things.
Open up a bit for us.
That's fair and just.
Think about look at your backlog in <unk>.
Can you help us understand what the weighted average life of that backlog is.
Yeah, we generally havent.
Provided that I think and historically.
And we've talked about the average length of initial contracts being seven to eight years and <unk>.
<unk>, we've been fine and the last few years tend to be longer than that and I think and the 10-K youll see a rollout of that backlog. So I would probably refer you to that is we will file the K later today.
Okay great.
And then just looking at the balance sheet, one thing that stuck out for me your accounts receivable balance it seems a bit elevated.
And any thoughts on what's going on over there.
Yes, I think Theres a couple of things one.
And with the North American business tended to have dsos that and most of our customer terms and North America are 30 days and internationally they tend to be longer than that and so you've seen a little bit of a mix in the business as the U S business is really.
Dropped a little and nothing so you're just getting a little bit of a weighting of the international terms and there are some receivables challenges we have we.
We have wanted us and theirs.
Noted and the K, so you'll see it there we've got our ongoing challenge is going to arbitration with a customer and Latin America and.
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 and but we do have that one issue. That's again as noted in the K.
Got it and how should we think about what you view as a.
Adequate liquidity levels.
We tend to run the business on a kind of a multi year rolling forecast. So always trying to make sure. We're as best we can looking forward, which difficult and these environments and.
I think we.
We certainly feel like.
Just a normal operations and the business and normal cash needs kind of operating cash basis. We're in good shape thats not a business that has wild fluctuations in inventory and so forth that require you to think about maintaining kind of put for liquidity in your pocket for us really the question around liquidity off it comes down to how comfortable.
And we are on bidding on our eco project, where there's capex required and.
And that's where we're and I would say.
And very very selective now in terms of making sure. These projects fit our criteria. The good news is they're a lot more predictable.
You know what you are signing up to if you sign up for one of these projects. So.
And we don't need too many companies that have shorter cycles, maybe and have more inventory needs keep need to keep a bunch of liquidity and our pocket.
Operating cash is very predictable and Capex is a conscious decision we make.
Got it and then just finally.
Raw material inflation, specifically I'm thinking about steel costs. How are you guys addressing that with your products and obviously your ECL contracts that are being built.
Thank you.
And certainly existing eco contracts.
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 operations once it's up and running.
And many of those contracts just on non material inflation, we have inflation factors built into the contracts. So if we see labor rates, which is a bigger variable when you're running and O&M side of a contract we've got offsets and pricing for labor increases.
So we will see.
More of and inflation impact would be on and existing projects.
We are currently and constructing and given the length of time and.
Those and we try to anticipate upfront, we tried 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.
And we try to be as upfront for account for everything and we can and make sure. We've got the right contingencies and so forth and place for.
Guarantee you that we're going to deliver a project as promised and terms of returns and margins.
Great. Thanks for the time.
Thank you ladies and gentlemen, this concludes our question and answer session and I will turn the floor back to Mr way for any final comments.
Thank you.
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.