Exterran Partners, L.P. Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Archrock Partners, (APLP)

Exterran Partners, L.P. (EXLP) Q1 2013 Earnings Call May 2, 2013 11:00 AM ET

Executives

D. Bradley Childers - Chief Executive Officer and President

William M. Austin - Chief Financial Officer and Executive Vice President

David Miller - Former Vice President

Analysts

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Sunil Sibal - Citigroup Inc, Research Division

James A. Bardowski - Sidoti & Company, LLC

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Marc Silverberg - Barclays Capital, Research Division

Operator

Good morning. Welcome to the Exterran Holdings Inc. and Exterran Partners LP First Quarter 2013 Earnings Conference Call. At this time, I'd like to inform you this conference is being recorded. [Operator Instructions] Earlier today, Exterran Holdings and Exterran Partners released their financial results for the first quarter of 2013. If you have not received a copy, you can find the information on the company's website at exterran.com During this call, the companies will discuss some non-GAAP measures in reviewing their performance such as EBITDA as adjusted, EBITDA as further adjusted, gross margin and distributable cash flow. You will find definitions and a reconciliation of the measures to these GAAP measures in the summary pages of the earnings release and on the company's website at exterran.com.

During today's call, Exterran Holdings may be referred to as Exterran or EXH, and Exterran Partners as either Exterran Partners or EXLP. Because EXLP's financial results and position are consolidated into Exterran, the discussion of Exterran will include Exterran Partners unless otherwise noted. Also, the term international will be used to refer to Exterran's operations outside the U.S. and Canada, and the combination of U.S. and Canada will be referred to as North America.

I want to remind listeners that the news release issued this morning by Exterran Holdings and Exterran Partners, the company's prepared remarks on this conference call and the related question-and-answers include forward-looking statements. These forward-looking statements include projections and expectations of the company's performance and represent the company's current beliefs. Various factors could cause results to differ materially from these projected in the forward-looking statements.

Information concerning the risk factors, challenges and uncertainties that could cause actual results to differ materially from those in the forward-looking statements can be found in the company's press release, as well in the Exterran Holdings' annual report on Form 10-K for the year ended December 31, 2012, Exterran Partners' annual report on Form K (sic) [10-K] for the year ended December 31, 2012, and those set forth from time to time in Exterran Holdings' and Exterran Partners' filings with the Securities and Exchange Commission, which are currently available on exterran.com. Except as required by law, the company has expressly disclaimed any intention or obligation to revise or update any forward-looking statements.

Your host for this morning's call is Brad Childers, President and CEO. I would now like to turn the call over to him. Mr. Childers, you may begin.

D. Bradley Childers

Thank you. Good morning, everyone. With me today is Bill Austin, CFO of Exterran Holdings; and David Miller, CFO of Exterran Partners. Let me highlight a few of our accomplishments in the quarter to get us started. Exterran Holdings and Exterran Partners each recorded improved profitability on a year-over-year basis. Exterran Partners completed an offering of $350 million of 6% senior notes in the quarter. And Exterran Holdings and Exterran Partners completed $174 million drop-down transaction.

In today's call, we'll provide a review of both Exterran Holdings and Exterran Partners before we open it up for questions. On the Exterran Holdings part in today's call, I'm going to review our operating performance and our business development trends. Exterran Holdings had solid operating performance in the quarter. First quarter highlights included our third consecutive quarter of positive earnings from continuing operations excluding charges and the highest level of quarterly EBITDA in over 3 years. At $146.5 million, EBITDA, as adjusted, was 4% better than the prior quarter and 52% better than the year-ago period. Net income from continuing operations, excluding charges, was $0.21 per share.

Looking at the operating results for each of our segments. In North America contract operations, our first quarter results benefited from prior-period horsepower growth driven by healthy activity levels in liquids-rich and shale plays, our January 2013 price increase and ongoing efficiency initiatives, including good labor utilization. With these positive developments, North America contract operations revenue was up by 6%, and gross margin percentage increased from 51% in the prior-year period to 55% for the quarter.

Working horsepower was flat pretty much as we expected as we saw an increase of about 32,000 horsepower in our growth areas, partially offset by a decline of about 30,000 horsepower in conventional dry gas plays. Our top growth areas included the Eagle Ford, Avalon, Niobrara Shale plays and the Mississippi Lime.

We expect to have opportunities to continue to grow our working horsepower in 2013 and beyond, though operating horsepower levels for the first half of 2013 are expected to be flat. We're investing in new compression units to further standardize our fleets, including larger units for gas gathering, as well as smaller units using gas lift for secondary oil recovery.

Additionally, we are on track with several process-driven initiatives being rolled out this year to improve the efficiency of our field service operations. Our actions include increasing the standardization of our field service practices and the deployment of mobile communication tools to our field technicians.

In our international contract operations business, we had solid operating performance in the quarter, driven by our large installed base of operations and ongoing cost initiatives. As expected however, international contract operations' financial results were down as compared to the prior quarter, which were positively impacted by retroactive rate increases and previously discussed settlements related to the termination of a few projects.

Our current backlog of contracted horsepower equates to over $40 million of annualized revenue and includes the contract operations project in Iraq expected to start later this year. Now this project is our first contract operations project in Iraq, and we're optimistic about future prospects in that country. Delays on new projects impacted our first quarter bookings level. Although based on our existing backlog, and new business opportunities, we expect to grow our international contract operations business over the remainder of 2013.

In our Aftermarket Services business, overall profitability remains good, driven primarily by improved pricing and cost discipline, although as expected, revenues were somewhat gone from fourth quarter levels.

In our Fabrication business, we had good financial results in the quarter and significant year-over-year improvement. We achieved improved profitability driven by a reduction in operating expenses from the implementation of profit improvement initiatives, higher margins associated with a project in Eastern Hemisphere that commenced in the second half of 2012, and a continuation of improved market conditions in the U.S. Fabrication revenue was up 75%, and gross margin percentage improved from 10% to 12% as compared to the prior-year period. And with significantly higher workflows and improved profitability, gross margin dollars more than doubled.

Fabrication performance in the quarter was negatively impacted, however, by cost overruns on turnkey projects that reduced our gross margin percentage by about 2%. Without this, the improvements in our fabrication operations would have been even more evident.

Our continuing initiatives for the year include actions to improve our project management expertise and streamline how we plan for, source and deliver materials for our fabrication operations.

In conclusion, on the external holdings section of my comments, we had good overall operating performance in the quarter. We are executing well in our core operations. We continue to see and will capture upside through our process-driven initiatives, which we expect to drive improvement as we maintain our focus on increasing the profitability of our businesses.

In North America markets, we had solid bookings in each of our compression, production equipment and processing and treating product lines to meet demand in both liquids-rich and shale plays. And next week, we're opening a production equipment fabrication facility in northeast Ohio to serve the growing Marcellus and Utica markets.

In international markets, project delays have impacted our bookings, and our overall backlog of this work has declined over the past 2 quarters, as we execute existing projects and increase our selectivity around new business in that area. But I believe that our current opportunity set and market conditions will allow us to maintain our current overall activity levels. And as a result, I believe we are on track to achieve our second consecutive year of improved performance in 2013.

Now turning to Exterran Partners, Exterran Partners delivered solid performance in the quarter, driven by implementation of our growth strategy and performance initiatives, as distributable cash flow was a record for the partnership and 8% higher on a sequential basis. Drivers for our improved performance included the contribution of assets purchased in the drop-down transaction with Exterran Holdings in March 2012, our investment in new fleet units, our January 2013 price increase and the implementation of profit improvement initiatives.

As a result, Exterran Partners achieved a 38% increase in distributable cash flow on a 20% increase in revenue over the results for the prior-year period. With improved operating performance, Exterran Partners gross margin percentage increased from 50% in the first quarter of 2012 to 56% in the first quarter of 2013.

Looking ahead, we expect to benefit from the contribution of the March 2013 drop-down and performance initiatives being implemented in our North America contract operations business throughout 2013 to improve the efficiency of our field service operations. Our goal is to continue to grow the partnership through organic growth related to the strong market fundamentals in the U.S., further execution of our drop-down strategy with Exterran Holdings and third-party acquisitions.

And moving on the financial section of today's call, I'd like to turn the call over to Bill for a review of our financial results for Exterran Holdings, including a summary of our quarterly trends and our guidance for the second quarter.

William M. Austin

Thanks, Brad. As Brad said, I'll provide a breakdown of our results by segment and provide second quarter guidance. But first, let me repeat, we continue to make progress in all of our segments and continue to press forward in our processed initiatives.

Now I'll provide a brief summary of the results of Exterran Holdings before we discuss the segment results. Again, as Brad said, it bears repeating, and I know this is a little bit of a repetition, but we generated EBITDA as adjusted just shy of $147 million for the quarter. That's up 4% for the fourth quarter of 2012 and some 52% over prior year levels. We did report positive earnings per share from continuing operations, excluding charges of $0.21 per share, that's up from $0.09 per share in the fourth quarter and a loss of $0.42 per share in the prior-year period, as first quarter of last year.

Now moving on to the segment results. North America contract operations revenue came in at $159 million in the first quarter, somewhat above our guidance range, but it was driven -- the increase was driven by increased activity levels and the January price increase. Gross margin at 55% in the first quarter was similar to the fourth quarter levels and up from 51% in the first quarter of '12. Again, the profitability in the first quarter was positively impacted by ongoing efficiency initiatives and an increase in rates.

In the second quarter, we expect the revenue to be somewhat lower than the quarter 1 levels and gross margin percentage to be in the 52% to 53% range. And this is driven by the closing of a natural gas processing plant and an expected associated demobilization cost of approximately $4 million incurred over the next couple of quarters.

Maintenance capital came in at $19 million in North America during the first quarter as compared to $16 million in the fourth quarter of 2012 and $15 million in the prior year period. Maintenance capital spending in the second quarter is expected to be slightly higher than these first quarter levels.

Moving on, our international contract operations revenues came in at $110 million for the quarter, down as expected as compared to the fourth quarter revenue of $128 million which, as Brad said, included retroactive rate increases in Argentina, and settlements related to projects in Mexico and Brazil.

Our first quarter results, however, included the benefit from some increased activity levels in Indonesia, Brazil and Colombia. Gross margin of 58% in the first quarter as compared to 63% in the fourth quarter of '12, again, this is positively -- the fourth quarter was positively impacted by those retroactive payment settlements in Latin America.

Looking at the second quarter, we expect international contract operations revenues to be above quarter 1 '13 levels, gross margin percentage is expected to be in the mid-50%, 50% range. It's somewhat lower than the first quarter levels as some project demobilization activity in Latin America slipped into the second quarter.

Now based on the startup schedule of projects in our backlog, and Brad talked about the backlog of some $40 million of revenue in our backlog. We expect our gross margin percentages in the second half of 2013 to increase and our annual revenues to increase modestly over the 2012 levels.

Our international working horsepower was 1,007,000 horsepower at March 31, it's basically flat for the quarter. Fabrication operations had another solid performance in the first quarter, fabrication revenue came in at $459 million, above our guidance range, driven by solid plant activity levels for our product lines in United States, as compared to the $458 million in the fourth quarter and $262 million in the year-ago period. Gross margins came in at 12%, similar to the prior period but up from the prior year. They were somewhat lower than expected again, as Brad referred to the certain turnkey execution issues discussed.

Gross margin dollars at $56 million were up from $54 million in the fourth quarter and some $27 million in the year-ago period. Fabrication backlog came in at $994 million at the end of the first quarter as compared to $1.07 billion at the end of the fourth quarter but up from the $955 million at the March 31 quarter of 2012. Fabrication revenues during the first quarter was comprised of about 30% compression, 60% production and processing, and 10% Belleli Energy, and was roughly 70% from North America and 30% from international.

Now bookings during the first quarter were roughly 75% North America and 25% from international markets. As you break the backlog down, the backlog is roughly 60% North America, and about 40%, international. In the second quarter, again, while we had some charges in the first quarter, we expect revenues to be in the $425 million to $475 million range but the gross margin back to what I guided to into in the first quarter, more in the 13% to 14% range.

In our aftermarket services businesses in the first quarter, revenue came in at $84 million, down from the fourth quarter levels as expected. Gross margins at 22% compared to 20% in the previous and prior year quarters.

Looking forward to the second quarter, we expect aftermarket service revenues in the $90 million to $95 million range and gross margins, again, back in the low 20% range.

Moving on to our SG&A, our SG&A expenses came in at $85 million in the first quarter, lower than guidance, which was in the $90 million range. But this is lower compensation and benefit-related cost and some bad debt recoveries. This was also down from $102 million in the fourth quarter. In the fourth quarter, there were a fair amount of onetime issues in that quarter.

Moving on to the second quarter, we expect SG&A expenses in the $90 million range. And moving on to our depreciation and amortization expense, came in at $83 million in the first quarter. We expect depreciation and amortization charges and expenses in the mid-$80 million range in the second quarter.

Our tax rate was 37% for the quarter as is compared to our guidance of 38%. As we look at the remainder of the year, however, we look at that 37% as the right rate to model for the remainder of the year. Net capital expenditures were $92 million in the first quarter, gross capital spending was about $69 million including $64 million in North America, primarily for our previously announced fleet build program.

Maintenance capital spending for the quarter came in at $24 million. Now, during the first quarter, we received our fourth installment payment of $4.7 million from the sale of our joint venture assets in Venezuela. We also received the second and third installment of approximately $17 million each for a total of approximately $34 million for the first quarter and second quarters of 2013 from the sale of our wholly-owned assets in Venezuela. The cash payments from the sale of Venezuelan assets are not included in our EBITDA as adjusted calculations and are not included in net income from continuing operations attributable to Exterran stockholders.

Moving on, available with undrawn debt capacity at March 31 was approximately $505 million -- almost $506 million at Exterran Holdings levels and some $412 million at Partners. Total consolidated debt at $1.63 billion at March 31, 2013, compared to $1.56 billion at December 31, 2012, and some $1.71 million at the March 31, 2012.

During the first quarter, debt did increase by some $13 million at Exterran Holdings level. It's driven by the timing of our buildings for certain fabrication projects, and they did increase by some $52 million to $733 million at the partnership. And this was to help bond organic growth opportunities. Exterran total leverage ratio, which is the total debt to adjusted EBITDA, as defined in our credit agreement, was 2.5 at March 31, 2013. This compares to 2.4 at the end of 2012 and some 3.6 at year ago March 31 levels.

But as I step back in summary, we really had another solid financial quarter. We believe we're well-positioned for the year, and we expect to do a solid year-over-year growth in 2013. With that, I'll turn the call over to David to talk about the Exterran Partners.

David Miller

Thanks, Bill. For the quarter, Exterran Partners generated EBITDA as further adjusted of $52.4 million as compared to $48.9 million in the fourth quarter of 2012. Distributable cash flow was $37.1 million in the first quarter, up from $34.2 million in the fourth quarter of 2012. Distributable cash flow coverage in the first quarter was 1.34x. As a reminder, we're paying the distributions on the units that we issued in connection with the drop-down that do not have the benefit of those assets in the quarter as the transactions closed on March 31.

Net income for the limited partner unit was $0.31 in the first quarter compared to $0.31 in the fourth quarter 2012 and $0.09 in the year-ago period. In the first quarter, Exterran Partners average operating horsepower increased by 22,000 to approximately 1.98 million operating horsepower, driven by strong organic growth in operating horsepower in Q4 of 2012.

Revenue grew to $106.1 million the first quarter as compared to $102.3 million in the fourth quarter, primarily due to the increased average operating horsepower. Gross margin was 56% in first quarter, as compared to 56% in the fourth quarter of 2012 and 50% in the prior-year period. Cost of sales per average operating horsepower was $23.74 in the first quarter, up 4% from the fourth quarter 2012 and down 5% from prior year levels. As mentioned, we completed $174 million drop-down transaction with Exterran Holdings on March 31.

In connection with the drop-down transaction, the omnibus agreement between Exterran Partners and Exterran Holdings was an amended to, among other things, increase the capital and SG&A cost from $10.5 million per quarter to $12.5 million per quarter for the remainder of 2013 and a $15 million per quarter in 2014; and to increase the cap on operating cost from $21.75 per operating horsepower per quarter to $22.50 per operating horsepower per quarter, beginning on January 1, 2014. Both of these caps will now terminate on December 31, 2014. Our goal is to reduce and eventually, eliminate the need for these payments as Exterran Partners expect to benefit from the field service initiatives and Exterran's North America contract operations business, as discussed earlier by Brad.

Excluding the benefits of the cost cap payments, our distributable cash flow coverage increased to 1.15x in the first quarter of 2013 from 0.85x in the year-ago period. Earlier this week, Exterran Partners announces distribution equal to $2.07 on an annualized basis. This distribution is a half cent higher than the fourth quarter distribution in 2012 and $0.02 higher than the first quarter distribution in 2012.

On the balance sheet, total debt increased by $52 million during the quarter to $733 million at March 31, 2013, as capital was deployed to fund internal growth opportunities. In March 2013, we completed a private offering at $350 million of 6% senior notes due to 2021 and used the proceeds to repay borrowings under our revolving credit facility. Upon completion of the notes offering, we amended our senior secured credit agreement which, among other things, reduced the borrowing capacity under the revolving credit facility by $100 million to $650 million and extended the maturity date of our term loan and revolving credit facilities to May 2018.

Available but undrawn debt capacity under our revolving credit facility at March 31 was approximately $412 million. We believe that our enhanced debt capacity gives us the financial flexibility to finance organic growth and positions the partnership for future acquisitions. As of March 31, 2013, Exterran Partners had a total leverage ratio, covenant total debt to adjusted EBITDA of 3.4x compared to 3.7x at the end of 2012. Gross capital expenditures for the first quarter 2013 were $32.7 million, consisting of $24.4 million for fleet growth capital and $8.3 million for maintenance activities. For the full year 2013, we continue to expect total fleet growth capital expenditures to be in the $125 million to $150 million range and maintenance capital expenditures in the $45 million to $50 million.

In summary, Exterran Partners had a solid quarter, highlighted by earnings of $0.31 per unit, 8% sequential growth in quarterly distributable cash flow and 1.34x distributable cash flow coverage.

This concludes our prepared remarks. And I think at this point, we'd like to turn over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from James Rollyson from Raymond James.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Good quarter. Just a couple of questions around Partners, if I may. Obviously, you didn't get the benefit of the drop-down in the quarter, although I see it that you kind of did the ending horsepower that seemed to show that. As we transition into the second quarter, how shall we think about utilization, assuming it will come down a little bit initially, and maybe price per revenue per horsepower and margins, just kind of with the influx of that capacity?

William M. Austin

Jim, let me try a little bit, I don't know -- I mean, we obviously are dropping down horsepower that's highly utilized, so I don't see any -- there may be some blips here and there, but I don't see utilization coming down. And as you can see, we dropped it down on March 31, so you're going to see the full value of the EBITDA in the second quarter, which you didn't see in the first quarter. So while there is probably a little bit more of make ready and a little bit of this and that, I don't know that you'll see tremendous differences in the second quarter versus the first quarter.

David Miller

And Jim, this is David. All the horsepower being dropped down is utilized. And that horsepower, in terms of its rights and that sort of thing, shouldn't be much different than horsepower that was already in the partnership.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Pretty much steady as she goes.

William M. Austin

Yes, that's how I see it.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay. That's helpful. Obviously, this gives you continued room for growth and distribution. Should we expect just a similar kind of steady increments as opposed to any big uptick? Is that kind of still the philosophy?

William M. Austin

I think our history has been that way, Jim, and while we don't make those kinds of projections, that's been our history. And we certainly want to prove out this increased profitability, and show that we can to the things that we said we're going to do without the benefit of cost caps. I think that's starting to get a little traction here, but just look at our history, I think it's probably a good indicator.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay. And the last one, just maybe a little bit of what you're seeing in domestic market here, given the pickup in gas prices here that we've experienced, especially relative to where we were a year ago. Is that starting to lead to more activity, are you seeing? Or just maybe a little more color on the market?

D. Bradley Childers

On the market overall, it remains stable and good, especially -- Jim, it's Brad -- in the growth plays. And we're encouraged by that uptick in gas price, but we haven't seen it drive a lot of change in behavior yet in the dry gas plays. So it just -- actually, we just haven't seen that yet, but we are encouraged by it. And we do believe that if we continue to see increase in the gas price and if the producers believe it's stable, we believe the first impact is going to be a slowdown in some of our net stop activity in dry gas plays. And so we are looking to see if we can find that yet, but we just haven't seen a change at this point.

Operator

Our next question comes from Mike Urban from Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

In the North America business, I understand why the margin guidance is lower sequentially, but what's going on behind the closure of the processing plant? Is that an end the contract? Is the profitability on that not what you would like, and therefore, once those demob costs are incurred, you should -- that's part of the upward trajectory? Just trying to get a little more color on that.

D. Bradley Childers

Sure. So yes, we are just -- we're going to stop operation of a plant that's been operating for a long time. It's just that it hit -- it hit the end of its useful operating life in that location. So we're demob-ing that plant. It's an unusual activity for us, we don't have a bunch of this stuff. And so we're trying to make sure that we're clear on what the costs -- what we think the costs are going to look like for the next 2 quarters on this demob. And that's what's really behind those numbers.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay and so presumably, it wasn't, I guess -- while you said it's at the end of its useful life, but presumably that would also mean that at some point, kind of weighs on the margin. So again that's -- as those run off is kind of margin improvement that we've seen in the last couple of quarters, is that what you think the underlying run rate is right now?

D. Bradley Childers

No, from a gross margin percentage basis, I don't think that this is going to show up as a negative at all in our run rat on gross margin percentage. And we see that for the year, once we make it through this, we're still expecting net growth especially in the back half of the year in our overall contract operations business in North America. So I think that this will show up as a onetime for these quarters on the expense side primarily, and that it's going noticeable after that.

William M. Austin

And Mike, just let me add, that plant is not in the EXLP, by the way.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. That's helpful. And on the fabrication side, you again gave us some guidance there. Was there anything -- actually it doesn't look like it's based on the guidance. But was there anything kind of pulled forward into that first quarter number or just kind of good execution there?

D. Bradley Childers

Yes, just good execution on the top line, we had a lot more pull-through across our fabrication, all of our fabrication product lines in the quarter. So it's really just good execution is what we saw.

Operator

Our next question comes from Blake Hutchinson from Howard Weil.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Just, Brad, from a big picture perspective, I guess, the one thing that sticks out in the release is your mention some of the delays and awards that were impacting international bookings. You kind of hit on that in your commentary, but I know you're reluctant -- or were reluctant earlier in your tenure to kind of size for us the international opportunity set and really talk more about the type of projects you are looking for or the company's now looking for. I was hoping you could maybe kind of just expand upon opportunities that you're seeing, maybe compare it to where you were 6 months ago, a year ago and just give us some comfort in what's out there or in store for the international markets?

D. Bradley Childers

Sure, there are really 2 main points to it. Number one, we see the opportunity set as very consistent, supporting our current level of activity. So by comparison, we grew our backlog fairly consistently throughout 2012. And we see that in 2013, our bookings level will be what we saw also in '12. But we're not seeing the same level of growth in backlog that we previously experienced. And that's what I wanted to really hit, is that with that comment, is that we are at a good level of operating activity today in fabrication. And we see that continuing certainly in the market and our opportunity set is good to support that level. That's really the point I was trying to make sure I drove.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

So that was a more of a fabrication comment rather than an international contract compression comment.

D. Bradley Childers

Yes, it was. It was much more around the fabrication business.

William M. Austin

We wanted to take your growth trajectory. It's a good activity, but calm down the growth trajectory.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Understood. And I'm not sure what we kind of decided on the previous kind of margin line of questioning with regard to North America. And Bill, you've been kind of reluctant to call any kind of natural level, but I take it there wasn't anything unusually positive in 1Q. So as we work through some of these 2Q and 3Q expense issues, is 55% a good -- do you feel good that that's more of a natural margin for the business right now?

D. Bradley Childers

I'll take that. We have been reluctant to guide to an absolute margin level. And Blake, honestly, we're still not going to guide to a natural margin level. What we've tried to suggest is we believe we're going to get improved profitability in the margin consistently. If we got it pretty consistently last year, we're going to get it very consistently this year. There is, of course, some fluctuations in cost quarter-to-quarter. And while we had a very good operating quarter, I think it reflects really good -- good execution. There are no significant onetime items in the 55% that we achieved this quarter. There are minor contributors, but we believe all of it is pushing us in the right direction. So we're still not going to fixate on a particular percentage point, but we're focused on continuing to improve profitability in that operation, even from here.

Operator

Our next question comes Sunil Sibal from Citigroup.

Sunil Sibal - Citigroup Inc, Research Division

Couple of things. On the third party acquisition market for the North American contract, business, just curious what are you seeing in terms of the opportunity set there?

D. Bradley Childers

Yes, Sunil, it's Brad. We won't talk and -- we can't really talk about specific opportunities that we see in the marketplace. So we can't go down that road at all. What we're convinced of, however, is that while we had good growth at EXLP, number one, organically; and number two, we're going to continue with drop downs, and that's provided a real engine of growth for us to date. We're anxious to add the third leg of growth and look at what the market does offer us for acquisition opportunities from our customers directly or on the market. That's really about all we can say at this point.

Sunil Sibal - Citigroup Inc, Research Division

That's fair. In terms of your process-driven initiatives, I was kind of curious, how much more headroom do you guys have -- something on your cost structure?

D. Bradley Childers

Yes, going back to the prior question, we're not going to quantify exactly how much room we have, but we believe that we will be executing a solid -- I mean these are actions we are taking now and implementing all year long, not just ideas but actions that will continue to improve the profitability and competitiveness of our business. So we believe we have headroom.

Operator

Our next question comes from James Bardowski from Sidoti & Company.

James A. Bardowski - Sidoti & Company, LLC

Just had a couple of generalized questions, if you don't mind. Regarding the fleet -- the reevaluation of the compression fleet, is that still going out correct?

William M. Austin

Every quarter, James, we look at our fleet and there are some, what I describe as nips and tucks. There's some equipment that is no longer competitive, and we look it every quarter. And you'll see that from quarter-to-quarter as we standardize on our fleet, as we introduce new equipment to our fleet. There are always some units that drop out or become noncompetitive, so you'll see that -- I think that's what your question is, is it? Did I answer your question?

James A. Bardowski - Sidoti & Company, LLC

You did, yes. So it's an ongoing quarterly aspect.

William M. Austin

Absolutely.

James A. Bardowski - Sidoti & Company, LLC

So regarding -- I guess, regarding any kind of potential horsepower that might come out, do you see the company implementing more horsepower, i.e. for North American contracts versus horsepower that could potentially be removed? Just trying to get an idea of how I could view the utilization rate going forward.

D. Bradley Childers

Yes, I think just going to look, building the expectation of what you should see expect looking forward, I would look at our kind of most recent 12- to 24-month period as being indicative of what the interaction looks like between horsepower coming in and horsepower coming out, absent a significant change in the gas price outlook. So I think that it's hard to predict the future exactly. But what we performed in the more recent periods is fairly indicative of what that in and out looks like on horsepower.

William M. Austin

And I'll add to that. From a utilization standpoint, we're in that mid-80%, 85%, 86%. That's a nice utilization rate.

James A. Bardowski - Sidoti & Company, LLC

I guess on a separate question though, is there -- regarding the future drop downs to the LP, is there a preference towards what type of payment you prefer? Would you rather see an assumption of debt from the parent company or would you prefer additional equity interest in the growing North American contracts?

William M. Austin

Yes, if you look historically, we've had, I think it's about 7 drop downs and about 2/3 of those drop-downs have been equity and about 1/3 debt. And some of which, we taken back in this last drop-down. We've obviously taken back at the parent, while all equity, we thought it was only the right thing to do at the time to keep the capitalization at EXLP at an appropriate level, what we thought was a very good investment on our part. And we do have 41% -- approximately 41% interest in the limited partnership. Longer term, we want a significant position in our limited partnership. I'm not saying it has to be at 41% but a significant investment. So -- but we haven't given an indication of exactly we'll drop down in the future. Over time, the partnership will need a combination of debt and equity to finance its organic growth and we'll look at that at that time or at the appropriate time. I hope that answers your question.

Operator

[Operator Instructions] Our next version comes from Daniel Burke from Johnson Rice.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

I just want to make sure I understand your commentary or perspective on international correctly then. So in the press release, when you talk about maintaining overall activity levels, does that mean then that the fabrication topline in first half '13 is sustainable through second half '13? Is that the right interpretation of that comment?

D. Bradley Childers

Yes, it's pretty good. Look, it's a lumpy business. So from a booking's perspective and a performance perspective. But what we're really suggesting is targeted at new bookings. And on the good news side, what we expect is that our bookings level in '13 will be comparable to our bookings level of '12. And that does support the run rate on fabrication revenues at the level that we're seeing currently for the rest of '13.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay. Great, that's helpful. And then, Bill, if I heard you correctly, did you say that NACO revenues will be down a bit in Q2 versus Q1? Is that because of the closure of the nat gas plant? Is that also affecting the revenue line or did I mishear the...

David Miller

No, you heard it correct. And that is what happening in that plant, will take our revenue down a little bit as well.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay, good. Just want to clarify that. And then just to continue with one last one, skipping around the segments. On the international contract compression side, it doesn't sound like much changed there in the outlook, but it seems like I think you guys have been throwing around a $50 million number, now $40 million. I just want to understand if anything had fallen out of that backlog. And then on the comment that in Q2, you'll have demobs. Is that still Brazil where you guys are dealing with that, or is it elsewhere in Latin America?

William M. Austin

Yes, if I remember, and I got to go back and look, we've been saying about this $30 million to $40 million. I think we were at $50 million sometime early last year. But the backlog has stayed relatively consistent in terms of the backlog to be installed. And yes, the demob that we're looking at is -- some in Brazil, but I think there's a little bit in some of the other Latin American countries as well.

Operator

Our next question comes from Marc Silverberg from Barclays.

Marc Silverberg - Barclays Capital, Research Division

For the partnership, you previously indicated a comfortable long-term coverage, excluding the cost caps of between 1.1x and 1.2x, realize that wasn't firm guidance. But this quarter, looks like you landed right down at the center of that. Do you want a few quarter buildup at this level before you were to think about removing these caps? Any updated thoughts on how we should be thinking about the timing for the eventual termination of these caps?

D. Bradley Childers

Marc, let me just say, we'd like to target. And I think in some of the go-arounds, I said it would be a nice target that 1.1x to 1.2x is a long-term target we'd be comfortable at. As far as the cost caps, we extended some of the cost caps through '14 at some, what I would call, reduced levels, as we improve our operations there. So our cost cap support technically terminates in 2014. And to be very blunt about it, we'd like to be able to say we don't need them anywhere past that '14, and that's certainly our goal.

Operator

At this time, we have no further questions. I'll now turn the call over to Brad for any closing remarks.

D. Bradley Childers

I want to thank you for everybody for your participation in our call this quarter. I want to make sure that we're clear on what's going well in the company right now. We continue to execute well and driving improved profitability in our core operations. And we're looking forward to '13 being our second year of improved performance. We continued to have opportunities to take actions to improve that profitability, and we'll do that all year long. And the current market is really -- and our bookings level, is supporting our current activity levels. And with that, we look forward to talking to you again next quarter. Thanks very much.

Operator

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

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