Exterran Corp (EXTN) Q4 2020 Earnings Call Transcript

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Exterran Corp (EXTN)
Q4 2020 Earnings Call
Mar 2, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Exterran Fourth Quarter 2020 Earnings Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Blake Hancock, Vice President, Investor Relations for Exterran. Thank you. You may begin.

Blake Hancock -- Vice President of Investor Relations

Good morning, and welcome to Exterran Corporation's fourth quarter of 2020 conference call. With me today are Exterran's President and Chief Executive Officer, Andrew Way; and David Barta, Exterran's Chief Financial Officer.

During this conference call, we may make statements regarding future expectations about the Company's business, management's plans for future operations or similar matters. These statements are considered forward-looking statements within the meaning of the US securities laws 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 in the Company's filings with the Securities and Exchange Commission.

Management may refer to non-GAAP financial measures during this call. In accordance with Regulation G, the Company provides a reconciliation of these measures in its earnings press release issued earlier today and a presentation located in the Investor Relations portion of the Company's website.

With that, I will now turn the call over to Andrew.

Andrew J. Way -- President and Chief Executive Officer

Thanks Blake, and good morning, everyone. I hope you and your families are keeping while during these difficult times. I'm sure you will all agree that the fourth quarter and 2020 as a whole has been challenging for many reasons, primarily related to the COVID pandemic, which has greatly affected the global economy and changed our lives in many ways. At Exterran, our primary focus throughout 2020 was employee safety, particular attention to cost actions and executing our strong backlog, all while navigating the challenging oil and gas macro environment.

During the fourth quarter, Exterran executed well against its performance metrics. With our expectations and guidance in the high $30 million EBITDA range, as adjusted EBITDA came in at $39 million. This was driven by a modest improvement in contract operations revenue, along with improved margins in our product sales business, underscored by strong cost management, both at the operating expense and SG&A levels. As we look forward, the rollout of the COVID vaccination brings hope that life will one day return to a semblance of normalcy, which is becoming evident with travel and indicators like the rebound in commodity prices over the past couple of months. However, I believe the pandemic is far from over as we continue to see some logistical challenge merge with hotspots appeared in some regions across our operations. We remain optimistic about all the events that have unfolded during the past couple of months and the proactive steps we have taken to achieve positive results despite these challenges.

Commercially, we had some very significant wins, beginning with the large Middle East product sales award we secured in the first quarter of 2020, followed by over $200 million of contract operations renewals in Latin America. We continue to manage what was in our control as our SG&A came down by another 13% year-over-year as we focused on margin improvements and returns. I'm excited to report today that 2020 saw us continue on our strategic journey to transition away from a traditional oilfield service company to an energy industrial service company. This took a significant step forward at the end of the year with the closing another sale of our US Compression Fabrication business, which considerably reduces the volatility in earnings, while also demonstrating the stability and higher margins delivered by our core business.

Another important element of our transformation is our water solutions business, or EWS, which had a very productive year in 2020. The team focused on driving market penetration around knowledge of our products and services, while also looking to progress our industry-leading technology. Over the past couple of quarters, I've talked about the increase in commercial discussions we have been engaged in regarding our EWS business. And I'm extremely happy to announce that during the first quarter of 2021, the Company won its first significant ECO project. This exciting project is a multi-year contract in the Middle East worth over $200 million. This project represents a stake in the ground for Exterran and further launches our transformation to an energy industrial service company. Just looking at our ECO backlog at the end of the year, in addition to this award, EWS now makes up approximately 15% of the Company's backlog. What is even more exciting is the fact that we see additional opportunities for the percentage to grow over the coming year, given other projects that are in the pipeline.

Globally, we have seen an increase in opportunities for pilots of our products, which support our strategic direction to use the Company's geographic scale to position the product line. The team is also working on a number of key product development initiatives that will support increased efficiencies in process and operations that will drive a step change in the carbon footprints of water treatment facilities. Additionally, we have launched an initiative to readdress the usability of produced water with an integrated processing system approach that will drive cost down dramatically to obtain desalination water from produced water. The team has filed patents over the course of 2020 related to some of these developments, and we are keen to see the opportunities unfold over the coming years. This product line is valuable to us for many reasons, including the fact that it's an environmental and sustainable solution. It has strong IP, high margins and has applications across multiple industries over the medium to long term. As more companies and industries look to control their waste consumption, the need to reuse and recycle will be critical to environmental sustainability. This all bodes well for our technology having a long-term solution for these problems.

As I look at our traditional product lines around the world, I feel better about what the next 12 months holds compared to six months ago. We continue to see resiliency in the international markets and new opportunities in ECO, product sales and our AMS segments. The US market, however, continues to face challenges, but there are some green shoots albeit limited. While the timing of new project awards and turnaround in the US market is challenging, we're also investing a significant amount of time exploring how we will participate and contribute to the energy transition.

Exterran's foundation is built on processing and moving molecules and electrons, whether that be oil, gas, water or electricity, which provides us with the needed skill set to contribute to some of the cleaner energies. However, even closer to home, we are focused on expanding our service offerings to our customers. As many of you know, many in the industry are targeting meaningful emission reductions over the coming years. Our aftermarket service teams are enhancing our service offerings to provide customers with additional sustainable offerings, including conversion kits to electric drive, low emission valves, leak detection and repair services, along with the preventative maintenance solutions to drive lower operating costs and improve cleaner [Phonetic] and operating efficiencies.

Overall, I'm extremely pleased with the progress the company has made in its transformation and the long-term prospects of the Company to participate in the energy transition. And with that, I'll turn it over to Dave.

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

All right. Thanks Andrew. All results presented have been restated to exclude the US Compression Fabrication business from our reoccurring numbers as it was reclassified to discontinued operations. For the quarter, we delivered EBITDA as adjusted of $39 million, which is in line with our guidance, on revenue of $152 million. This represents an EBITDA margin rate of 26% compared to 21% in Q3 and 24% in Q4 2019.

From a segment perspective, revenue for contract operations was $84 million, while adjusted gross margin was $58 million, resulting in an adjusted segment gross margin rate of 69%. ECO backlog at the end of the quarter stood at $1.1 billion. For AMS, revenue was $30 million and adjusted gross margin was $6 million. This resulted in adjusted segment gross margin rate of 18%. The margin rate was impacted due to service parts mix and some contract revenue delays. Revenue in the product sales segment was $38 million and adjusted gross margin was $5 million, resulting in an adjusted gross margin rate of 14%. Revenue decreased sequentially as we completed a number of international compression projects in Q3, along with some COVID-19-related project delays. Margins increased for the quarter due to better mix. Our product sales backlog was $465 million at the end of the fourth quarter compared to $497 million at the end of the third quarter.

SG&A expenses were $28 million, down from the $30 million in the third quarter. Full year SG&A was $123 million, down from $142 million in 2019 and down from $153 million in 2018, reflecting the strong cost controls and productivity achieved over the past two years.

Moving to the balance sheet, net debt at the end of the fourth quarter was $522 million. Our leverage ratio is 3.98 times and compares to 3.51 at the end of the third quarter. During the quarter, we made an offensive decision to approach our bank for an amendment to our revolver. We secured that amendment, which allows us to recognize a pro forma EBITDA contribution from ECO projects that are under construction, subject to certain limitations and restrictions. We also elected to reduce the total size of the revolver by $50 million to $650 million. Andrew discussed the increase in commercial activity we are seeing globally, and this was the driver for that revolver amendment.

Now, turning to 2021, as we said for the past two quarters, we expect 2021 to be a growth year for the Company, given our strong backlog, even with the assumption of limited new bookings that would impact the year. This still remains the case. For the year, we expect full year EBITDA as adjusted in the range of $140 million to $160 million. This range takes into account the continued fluid environment that exists as a result the ongoing pandemic. The water ECO deal we just announced is an 18-month to 24-month build and will not contribute to this year's EBITDA. SG&A for the year should be between $125 million and $135 million. This range anticipate some additional commercial project management and engineering costs that may be required given the improving macro environment. The total committed capex for the year is expected to be between $75 million and $85 million. Reimbursable capex, which would be reflected as additions to deferred revenue, should be between $35 million and $40 million.

Some other guidance topics for the year: cash taxes should be between $20 million and $25 million, interest expense between $40 million and $45 million and deferred revenue to be recognized for the year should be between $50 million and $55 million. And lastly, net working capital should be a use of cash if around $50 million, but this is dependent on finalizing project schedules, which will drive inventory purchase and customer payment timing.

Looking at the first quarter of the year, we expect this to be the low point for EBITDA for the year, driven by the typical seasonality in AMS and less revenue recognized from our product sales backlog. We see first quarter EBITDA as adjusted in the low-to-mid $30 million range, and it will be improving each subsequent quarter.

And with that, I'll turn the call back over to Andrew for his closing remarks.

Andrew J. Way -- President and Chief Executive Officer

Thanks Dave. So, looking forward, Exterran is well on its way in its transformational journey, and the water win during the first quarter sets a strong foundation for the years to come. Our sustainable product offerings and global footprint provides us the opportunity to continue to participate in the energy transition as many in this space will struggle to find their way in the evolution. Our core competencies revolve around processing, treating and moving molecules regardless of the type and will give us the ability to look at ways to participate across the water consumption and reuse advancement, along with the hydrogen, renewable, natural gas and carbon capture value chains.

Our extensive service footprint and installed base affords us the ability to help our customers focus on their emission reduction targets, while allowing us to build additional recurring revenues. We will maintain a strong focus on protecting the core of the organization and improving our long-term cash flow and returns of the organization. We have a solid backlog to start the year that will require a strong focus on execution and delivery. I'm very excited about the opportunities I see ahead.

And with that, I'll now turn the call back to the operator.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Kyle May with Capital One Securities. Please proceed with your question.

Kyle May -- Capital One Southcoast -- Analyst

Good morning, everyone.

Andrew J. Way -- President and Chief Executive Officer

Good morning, Kyle.

Kyle May -- Capital One Southcoast -- Analyst

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

Andrew J. Way -- President and Chief Executive Officer

Yeah, sure. So first, over the past 12 months, I'd say that our regional teams in particular have continued to do a really great job of building, first of all, the foundation for strong customer relationships, which in turn has led to a fair amount of bid activity. That bid activity is obviously what feeds our pipeline. And as we sit today, we've seen over the past six to nine months, a fairly large pipeline but a lack of awards, which I think gave us a pause at the end of 2020 as we were considering will these projects go ahead. What I'd say this year, as demonstrated by the water project, is that a lot of this pipeline has really started to get to a place where we feel customers will be making awards. So not only is the pipeline being continuing to grow, but I think there's a confidence that we're seeing certainly internationally. I'll talk about the US in a second, but certainly internationally, there is a lot more dialog, a lot more late night phone calls with the Middle East, a lot more weekend calls and just a lot more activity with regards to the commercial pipeline, whereas I'd say six months ago, internally, we were very busy and it just felt as though it was going into a pipeline. So something is different. We were talking about this recently as a leadership team. Something is different in the last two to three months, and it feels as though it's prime in order for a lot of these projects that we've been bidding on to come through, which is just great news for us.

As I sit today, I'd say that the Middle East continues to be by far the busiest region for us. Over the last 12 months, we've continued to develop our team in the Middle East. We've added resource both from an application and engineering. We've built stronger project management teams. We've added commercial resource to the region for both our core products and also some of the products that we've talked about that we're expanding into. And so, as we sit today, our largest part of our pipeline, whether it'd be new customer orders for customers that are looking to potentially add additional trains, gas processing trains that we've previously sold. So similar to the US model, where we've got a large installed processing fleet, we are seeing customers in the Middle East wanting to add a second train or in some cases a third or a fourth train. That's very positive. And then, also I'd say our water pipeline in the Middle East is as strong as it's ever been, and it continues to be. Every time we operate in new areas, our reputation and the technology gets known. It gets more and more traction. And so, as I said in my prepared remarks, our team did a really good job last year building the capabilities in the region and explaining and really putting our portfolio out there, and that's really manifesting itself into a lot more bid activity. So, in a nutshell, Kyle, we're really busy on the front end commercially right now, bidding projects and working through technical clarifications and projects for both ECO and product sales.

Asia Pacific, which is predominantly for us being an aftermarket, AMS business, has really seen some new breakthrough in opportunities, both again on ECO and product sale, also for processing facilities. I really feel this year will be a breakthrough year for us in the region selling processing facilities that we haven't typically seen. And again, we also have a number of clients in the region interested in our water technologies, and we're spending quite a bit of time with a few applications, which also include some offshore thoughts that we have with some of the water cleaning and reusable technology that we have right now. So Asia Pacific slightly behind the Middle East in terms of total pipeline, but refreshing to see the activity level.

Latin America for us has really been about renewals. As I said in my prepared remarks, the team has truly done an outstanding job renewing contracts in a brutal environment in 2020. There 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 spots of customers that have a need for equipment to purchase. And so, again, we have some processing equipment that we're currently seeing in the pipeline and some other activity there, along with some water deals. And so that's encouraging.

And then I saved the North America for last for a reason, and I think that's the area that we're still seeing today some challenges. Really for us, in the past 12 months, it's been rightsizing the organization. We've taken appropriate cost actions to see the demand and the supply drivers. We've got some green shoots for the first time in a while. We're certainly seeing that in certain basins, mostly gas related. But equally, given our strong AMS performance that we've seen in terms of the focus areas, we were certainly working on some opportunities in some areas in order for us to help our customers either debottleneck or in some cases enhance some of the facilities.

So in that order, Middle East, the strongest. We certainly have good visibility in Asia. Latin America is about renewals. And then, I think for us, it's probably more of a second half 2021 wait and see what happens in North America. Hopefully, that gives you a little color.

Kyle May -- Capital One Southcoast -- Analyst

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

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

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

Kyle May -- Capital One Southcoast -- Analyst

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

Operator

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

Doug Becker -- Northland Capital Markets -- Analyst

Thanks. Andrew, you mentioned at a high level some of the opportunities you see to help customers achieve energy transition, 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.

Andrew J. Way -- President and Chief Executive Officer

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

Doug Becker -- Northland Capital Markets -- Analyst

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

Andrew J. Way -- President and Chief Executive Officer

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

Dave, maybe you have a few thoughts.

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

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

Doug Becker -- Northland Capital Markets -- Analyst

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

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

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

Doug Becker -- Northland Capital Markets -- Analyst

Thank you very much.

Operator

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

Samantha Hoh -- Evercore ISI -- Analyst

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

Andrew J. Way -- President and Chief Executive Officer

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

Samantha Hoh -- Evercore ISI -- Analyst

Great. And then maybe just keeping on the Middle East topic, I noticed that on your sustainability award, you guys kind of highlighted -- or your sustainability report that you guys highlighted some work that you had done in terms of helping customers there reduce flaring. And that just seems to be a topic that's just really going to start going up in the US soon. I was wondering if you could maybe explain to us how you go about doing that and then where we would say that. Is it -- if you could just kind of explain that process, how it benefits or different segments, what it really means for Exterran as we potentially get some new regulations here in the US, that would be really great.

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

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

Operator

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

Brian DiRubbio -- Baird -- Analyst

Good morning. Dave, maybe starting with you, can you help us understand sort of what are the drivers that get you to the low end of the guidance versus the high end of the guidance?

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

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

Brian DiRubbio -- Baird -- Analyst

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

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

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

Brian DiRubbio -- Baird -- Analyst

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

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

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

Brian DiRubbio -- Baird -- Analyst

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

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

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

Brian DiRubbio -- Baird -- Analyst

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 ECO contracts that are being built? Thank you.

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Yes. I think on the, 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 operation once it's up and running. And many of those contracts, just on kind of 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 O&M side of the contract, we've got offsets in pricing for labor increases. So we will see more of an inflation impact would be on an existing project that we're currently constructing, given the length of time. And with those, we try to anticipate upfront. We try to really push hard on productivity to offset anything. And you certainly have the opportunity to go back to customers in certain circumstances with engineering changes. And again, we try to be as upfront, accounts for everything as we can and make sure we've got the right contingencies and so forth in place to guarantee that we're going to deliver a project as promised in terms of returns and margins.

Brian DiRubbio -- Baird -- Analyst

Great. Thank for the time.

Operator

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

Andrew J. Way -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Blake Hancock -- Vice President of Investor Relations

Andrew J. Way -- President and Chief Executive Officer

David A. Barta -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Kyle May -- Capital One Southcoast -- Analyst

Doug Becker -- Northland Capital Markets -- Analyst

Samantha Hoh -- Evercore ISI -- Analyst

Brian DiRubbio -- Baird -- Analyst

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