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Rating Action: Moody's changes Exterran's rating outlook to positive following Enerflex acquisition announcementGlobal Credit Research - 24 Jan 2022New York, January 24, 2022 -- Moody's Investors Service (Moody's) affirmed Exterran Energy Solutions, L.P.'s (EESLP or Exterran) B1 Corporate Family Rating (CFR), B1-PD Probability of Default Rating (PDR) and B3 senior unsecured notes rating. The SGL-3 Speculative Grade Liquidity Rating remains unchanged. The rating outlook was changed to positive from stable.This rating action follows Exterran's announcement that it has agreed to be acquired by Enerflex Ltd. (Enerflex) in a stock-for-stock transaction [1]. The transaction, which is expected to close in the second or third quarter 2022, is subject to shareholder approvals, regulatory approvals and other customary closing conditions."Enerflex's announced acquisition of Exterran is credit positive and should benefit Exterran's credit metrics, supported by increased size and scale of the combined company," commented Amol Joshi, Moody's Vice President and Senior Credit Officer.Affirmations:..Issuer: Exterran Energy Solutions, L.P..... Corporate Family Rating, Affirmed B1.... Probability of Default Rating, Affirmed B1-PD....Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD5)Outlook Actions:..Issuer: Exterran Energy Solutions, L.P.....Outlook, Changed To Positive From StableRATINGS RATIONALEThe positive outlook reflects Moody's expectation that the announced acquisition by Enerflex will place the company on the path of meaningful deleveraging, while industry conditions improve and gross margins in contract operations remain robust. The merger's strategic rationale is sound, consolidating the two companies' global presence and increasing scale. Exterran's limited North American exposure is complemented by Enerflex's meaningful US operations, enhancing diversification. Enerflex's $925 million bridge loan facility is sufficient to support the takeout of existing Exterran debt including its senior unsecured notes, likely leading to Moody's withdrawing EESLP's ratings. If EESLP's notes remain outstanding, the rating on the EESLP notes could change depending on its ranking in the new capital structure and the availability of separate financial statements. If separate financial statements and sufficient disclosures are not made available to support the maintenance of ratings, Moody's will likely withdraw EESLP's ratings.EESLP's B1 CFR reflects its elevated debt leverage, a business mix which has become increasingly exposed to project construction risk, offset to an extent by the stable and robust gross margins attributable to its contract operations (natural gas compression and processing) business segment. Contract operations, however, require ongoing capital investment and is subject to contract renewal risk. Customer retention has proven to be sticky (given high equipment switching costs), and there is considerable flex in operating costs and capital spending requirements sufficient to keep high gross margins intact and stable. Product sales' order rate and backlog are subject to periods of volatility and exposed to natural gas market conditions. While its product sales are largely self-financed through customer progress payments, the projects themselves are subject to construction and execution risk. The company's third operating segment, aftermarket services, tends to generate low volatility revenues and margins.EESLP's senior unsecured notes are co-obligations of EES Finance Corp., and are fully and unconditionally guaranteed by Exterran Corporation (EXTN), as well as by its principal domestic operating subsidiaries. EESLP is a wholly-owned limited partnership through which EXTN owns its operating subsidiaries. The notes are rated B3, two-notches below the B1 CFR, reflective of the notes' junior position relative to the priority claim of the company's relatively large senior secured revolving credit facility.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded if Exterran significantly grows EBITDA while debt/EBITDA falls below 3x. Should Exterran experience significant additional challenges in project execution or should leverage increase above 4x, the ratings could be downgraded.Exterran Corporation is headquartered in Houston, Texas and provides contract compression services to the oil and gas industry outside the US as well as processing and compression equipment manufacturing and aftermarket services. The company was spun off in November 2015 from Exterran Holdings, now Archrock, Inc. EESLP is a Delaware limited partnership and an indirect wholly owned subsidiary of Exterran Corporation. EES Finance Corp. is a Delaware corporation and a direct wholly owned subsidiary of EESLP formed to serve as co-issuer of certain debts.The principal methodology used in these ratings was Oilfield Services published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1277306. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Exterran Corporation Form 8-K 24-Jan-2022Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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