Exterran Holdings Is Facing Huge Headwinds

May. 7.12 | About: Archrock Inc. (AROC)

Exterran Holdings Inc. (EXH) is an oil and gas services company, which specializes more on natural gas services than on oil well services. One of its main businesses is natural gas compression. It has a North American fleet of 8,485 natural gas compression units and an international fleet of 1063 compression units as of Dec. 31, 2011. Unfortunately for EXH the bottom has fallen out of US natural gas prices. From their near term high last summer of $4.98/MMbtu , Nymex natural gas prices have fallen to $2.30/MMbtu as of this writing. There is a glut of natural gas. All of the new shale natural gas fields have increased the US natural gas production far beyond the current demand, and the production is increasing still. This is such a big problem that many of the natural gas producers such as Chesapeake Energy (NYSE:CHK), Ultra Petroleum (UPL), Continental Resources (NYSE:CLR), Consol Energy (NYSE:CNX), EQT Corp. (NYSE:EQT), and many others are cutting their natural gas development projects for 2012 and 2013. Some are also cutting production. This new business environment for EXH will hurt its bottom line. It has many long term contracts, but it will get fewer new ones. It may find it has more competition for both new and even existing contracts. This should impact margins.

EXH has no PE. It is losing money. It has no FPE. It is still projected to lose money for FY2013. It has a low Price/Book of 0.55; but having a lot of expensive, idle equipment around is not a formula for success. It has a Total Debt/Total Capital ratio (mrq) of 51.35%. This is high compared to the industry average of 29.06%. It has a Quick Ratio of 1.14 and an Interest Coverage ratio of 0.36. It may well have trouble paying its bills in this kind of environment. It cannot afford to have its equipment standing idle. The fiscal data above is from Yahoo Finance and TDameritrade.

If the glut in natural gas supplies were not enough of a reason, the EU is about to be officially be declared in recession. Plus the US economic numbers have been looking weaker of late. The NonFarm Payrolls data was a big disappointment on Friday. The Durable Goods Number for March was -4.2%. There will be worry that the US is catching the EU's cold until at least the next NonFarm Payrolls number. If indeed the US is catching the EU's cold, there will be further slowing on that basis. Further the time is ripe for an overall market pullback. Goldman Sachs' (NYSE:GS) Chief Forecaster, David Kostin, has a three month target on the S&P500 of 1275. The S&P500 is still a long ways from that target. Small Cap companies that are not making money (and not forecast to make money soon) should be among the hardest stocks hit in an overall market pullback. If a further slowdown due to the EU recession hits, EXH could experience yet more idle equipment -- bigger losses. Already analysts are trimming estimates for the company. The Q2 2012 average analysts' earnings estimate has fallen from -$0.27 to -$0.37 in the last three months. The FY2012 average analysts' estimate has fallen from -$1.00 to -$1.13 in the same three months. It seems destined to fall further. EXH is likely to lose business in the US, Canada, and Europe. It may see business slow downs in many other areas due to an overall world economic slow down. Meanwhile its increasingly idle equipment will obsolesce. Replacing it with newer, more sophisticated equipment will be yet another expense down the road. I think you sell this stock until such time as you see an upturn in the world economic situation and/or the natural gas development business in North America. If you are an aggressive trader, you consider shorting this stock.

The two year chart of EXH provides some technical direction for a trade.

Click to enlarge

The slow stochastic sub chart shows that EXH is near over bought levels. This is confirmed by the Bollinger Bands in the main chart. EXH has run up on the recent rebound rally in natural gas prices. However, this rally is likely over. Virtually all energy prices have been hit hard this year, with the exception of oil, and oil is beginning to get hit due to the overall weakness in the world economic situation. US natural gas prices seem unlikely to move up significantly before next winter at the earliest. There is simply no stimuli for such a move. Rather the main chart of EXH above shows that EXH is still in a strong down trend. The 200-day SMA is trending strongly downward. With the EU recession, the weakening US economic picture recently, and the likely overall market pullback, the EXH down trend is likely to continue. In fact some analysts are estimating that earnings for the drilling services companies are currently 20% to 40% too high for the expected negative environment. This estimate includes market leaders such as Halliburton (NYSE:HAL), Baker Hughes (NYSE:BHI), Schlumberger (NYSE:SLB), Nabors (NYSE:NBR), etc. A non-profitable small cap (approximately $800M) will get killed in this kind of environment. It would be smart to take advantage of the recent up blip to get into a short position. The chart shows that EXH can easily fall to the $9-$10 level. You may be able to make an easy 20%-40% by shorting this stock from its current level of $12.70. The set up is good both fundamentally and technically. Of course, you should take into account that Monday could be a rebound day from last week's selloff.

Good Luck Trading.


Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in EXH over the next 72 hours.