Hanover Compressor Reports Third Quarter 2004 Financial Results

October 29, 2004

HOUSTON--(BUSINESS WIRE)--Oct. 29, 2004--Hanover Compressor Company (NYSE:HC), a global market leader in full service natural gas compression and a leading provider of service, fabrication and equipment for oil and natural gas processing and transportation applications, today reported financial results for the quarter ended September 30, 2004.

Summary

Third quarter 2004 revenue increased 17% to $322.5 million compared to third quarter 2003 revenue of $275.2 million.

EBITDA from continuing operations (consolidated income (loss) from continuing operations before interest expense, leasing expense, provision for (benefit from) income taxes, depreciation and amortization, and goodwill impairment) for the third quarter 2004 increased by 17% to $79.7 million from $68.2 million for the same period a year earlier. Included in third quarter 2004 EBITDA was a $4.0 million gain on the early cancellation of the note that was issued as part of the securities-related litigation settlement. The third quarter 2003 EBITDA included a $3.5 million reduction in the estimate for the securities-related litigation settlement.

Net loss for the third quarter 2004 was $5.3 million, or $0.06 per share, compared with a net loss of $145.4 million, or $1.79 per share, in the third quarter 2003. Based on the U.S. statutory rate, the company estimates that its tax expense for the three months ended September 30, 2004 was approximately $4.7 million higher because of its current tax position in the U.S. Included in the net loss for the third quarter 2003 was an $86.9 million after tax charge for the cumulative effect of the accounting change for the compression equipment operating leases that were consolidated into Hanover's financial statements as of July 1, 2003 and a $35.5 million impairment of the goodwill related to Hanover's investment in Belleli.

"In the third quarter of 2004, we demonstrated improved revenues across all of our business lines and generated positive cash flow that allowed the company to continue to pay down debt," said John Jackson, President and Chief Executive Officer of Hanover. "Going into the fourth quarter, we will continue to be focused on improving our operating margins and on finalizing the deployment of three rental projects in Nigeria and anticipate that all of these projects should be on line in early 2005. While we will continue to maintain capital discipline with a balanced approach to debt reduction and growth capital, we currently see solid growth opportunities in traditional markets such as Latin America, as well as new markets such as Russia and the West Coast of Africa, and are positioning the company to take advantage of these opportunities going into 2005."

Summary of Business Segment Results

                           Domestic Rentals
                            (in thousands)

                                      Three months ended
                                         September 30,      Increase
                                      -------------------
                                         2004      2003    (Decrease)
                                      ---------  --------  -----------
Revenue                              $  85,866  $ 82,823            4%
Operating expense                       37,816    31,833           19%
                                      ---------  --------
Gross profit                         $  48,050  $ 50,990          (6)%
Gross margin                                56%       62%         (6)%

Domestic rental revenue increased in the third quarter 2004, compared to the same period a year earlier, due primarily to improved market activity. Gross profit and gross margin for the quarter decreased, compared to the previous year's results primarily due to increased maintenance and repair expense at one of the company's three domestic geographical business units. The decrease in margin at this business unit decreased the company's overall domestic rental margin by approximately 4%.

                         International Rentals
                            (in thousands)

                                       Three months ended
                                          September 30,     Increase
                                       ------------------
                                         2004      2003     (Decrease)
                                       ---------  -------  -----------
Revenue                               $  56,579  $49,519           14%
Operating expense                        18,129   17,757            2%
                                       ---------  -------
Gross profit                          $  38,450  $31,762           21%
Gross margin                                 68%      64%           4%

Third quarter 2004 international rental revenue, gross profit and gross margin increased, compared to the third quarter 2003, primarily due to increased compression and processing plant rental activity in Venezuela, Brazil and Argentina.

                   Parts, Service and Used Equipment
                            (in thousands)

                                       Three months ended
                                          September 30,     Increase
                                       ------------------
                                         2004      2003     (Decrease)
                                       --------  --------  -----------
Revenue                               $ 50,872  $ 45,581           12%
Operating expense                       36,469    35,307            3%
                                       --------  --------
Gross profit                          $ 14,403  $ 10,274           40%
Gross margin                                28%       23%           5%

Parts, service and used equipment revenue for the third quarter 2004 was higher than the same period a year earlier due primarily to increased demand resulting from stronger industry conditions. Gross profit and gross margin for the quarter were higher than the previous year's results primarily due to a high margin on the sale of a gas plant. For the third quarter 2004, parts and service revenue was $36.7 million with a gross margin of 23%, compared to $29.7 million and 33%, respectively, for the third quarter 2003. Used rental equipment and installation sales revenue in the third quarter 2004 was $14.2 million with a gross margin of 43%, compared to $15.9 million at a 3% gross margin for the same period a year earlier.

                 Compression and Accessory Fabrication
                            (in thousands)

                                       Three months ended
                                          September 30,      Increase
                                       ------------------
                                         2004      2003     (Decrease)
                                       ---------  -------  -----------
Revenue                               $  46,605  $24,039           94%
Operating expense                        41,214   22,347           84%
                                       ---------  -------
Gross profit                          $   5,391  $ 1,692          219%
Gross margin                                 12%       7%           5%

For the third quarter 2004, compression fabrication revenue and gross profit increased primarily due to the company's increased focus on fabrication that led to increased sales. Gross margin increased, compared to third quarter 2003, as the company benefited from improved operating efficiencies in its fabrication centers partially as a result of higher sales volumes.

            Production and Processing Equipment Fabrication
                            (in thousands)

                                       Three months ended
                                          September 30,     Increase
                                       ------------------
                                         2004      2003     (Decrease)
                                       --------  --------  -----------
Revenue                               $ 76,193  $ 65,202           17%
Operating expense                       68,974    59,095           17%
                                       --------  --------
Gross profit                          $  7,219  $  6,107           18%
Gross margin                                 9%        9%           0%

Production and processing equipment fabrication revenue for the third quarter 2004 was higher than the same period in 2003 primarily due to increased Belleli revenue. Included in production and processing equipment fabrication revenue and expense for the third quarter 2004 was $38.5 million in revenue and $34.6 million in expense for Belleli, compared to $27.1 million in revenue and $24.6 million in expense for Belleli in the third quarter 2003. In comparison to the third quarter 2003, third quarter 2004 production and processing equipment fabrication gross profit increased primarily due to increased activity at Belleli which was partially offset by the negative impact of a loss on a production and processing job out of the company's United Kingdom fabrication facility of approximately $1.0 million. The loss on this project led to an approximate 1% reduction in gross margin for the quarter.

Selling, general, and administrative expense ("SG&A") for the third quarter 2004 was $44.2 million, compared to $40.2 million in the third quarter 2003. The increase in SG&A was due primarily to increased administrative costs associated with Sarbanes-Oxley 404 implementation. As a percentage of revenue, SG&A in the third quarter 2004 was 14%, compared to 15% for the same period a year earlier.

Depreciation and amortization expense for the third quarter 2004 decreased to $44.1 million, compared to $56.2 million for the same period a year ago. Included in the third quarter 2003 expense was a $14.4 million non-cash charge to write-down a portion of the company's rental fleet.

The company's effective tax rate for the third quarter 2004 was (216)%, compared to 14% for the same period a year earlier. Due to Hanover's recent domestic tax losses, the company cannot reach the conclusion that it is "more likely than not" that certain of its U.S. deferred tax assets will be realized in the near future. Accordingly, the company's provision for income taxes for the third quarter 2004 did not include a full tax benefit for the company's estimate of anticipated U.S. losses. Based on the U.S. statutory rate, the company estimates that its tax expense for the third quarter of 2004 was approximately $4.7 million higher because of its current tax position in the U.S.

Liquidity and Other

Hanover had capital expenditures of approximately $20 million in the third quarter 2004, compared to approximately $28 million for the same period last year. At September 30, 2004, the company had approximately $13 million in borrowings outstanding under its $350 million bank credit facility, approximately $1.7 billion in debt, and approximately $31 million in cash.

"In the third quarter, Hanover was able to repay approximately $61 million in debt and compression equipment lease obligations," said John Jackson. "Through mid October, we have paid off approximately $97 million in debt and compression equipment lease obligations and plan to pay down approximately $56 million in additional debt from the proceeds of our recently announced sale of our Canadian rental assets. We are ahead of schedule on our stated objective to pay off $180 million in debt over a three year period. We have been able to achieve this debt reduction through our continuing efforts to maintain capital discipline and selected asset sales, which has led to cash available for debt reduction. Year to date, we have spent approximately $58 million in capital expenditures and would expect to spend in the range of $25 million to $50 million in capital in the fourth quarter."

Total compression horsepower at September 30, 2004 was approximately 3,483,000, including approximately 2,569,000 horsepower in the United States and approximately 914,000 horsepower internationally. Hanover's total compression horsepower utilization rate as of September 30, 2004 was approximately 81.5%, compared to utilization of approximately 83.1% at June 30, 2004 and 79.9% at September 30, 2003. Domestic and international utilization at September 30, 2004 was approximately 76.4% and 95.9%, respectively, compared to approximately 78.5% and 96.1%, respectively, at June 30, 2004, and approximately 74.7% and 94.4%, respectively, at September 30, 2003.

At September 30, 2004, Hanover's third-party fabrication backlog, excluding Belleli, was approximately $115 million compared to approximately $104 million at June 30, 2004 and $61 million at September 30, 2003. Backlog for Belleli at September 30, 2004 was approximately $143 million, compared to approximately $162 million at June 30, 2004 and $66 million at September 30, 2003.

Conference Call Details

Hanover will host a conference call at 10:00 a.m. Eastern Time, on Friday, October 29, 2004 to discuss financial results for the third quarter 2004, and other matters. To access the call, U.S. and Canadian participants should dial 800-601-8584, international participants should dial 706-643-1959 at least ten minutes before the scheduled start time. Please reference Hanover conference call number 1386877. For those unable to participate, a replay will be available from 1:00 p.m. Eastern Time on Friday, October 29th until midnight on Friday, November 5th. To listen to the replay, please dial 800-642-1687 in the United States and Canada, or 706-645-9291 internationally, access code 1386877. The company's conference call will also be broadcast live over the Internet. To access the webcast, log onto the company's web site (www.hanover-co.com), and click on the webcast link located on the company's home page.

About Hanover Compressor

Hanover Compressor Company (www.hanover-co.com) is a global market leader in full service natural gas compression and a leading provider of service, fabrication and equipment for oil and natural gas processing and transportation applications. Hanover sells and rents this equipment and provides complete operation and maintenance services, including run-time guarantees for both customer-owned equipment and its fleet of rental equipment. Founded in 1990 and a public company since 1997, Hanover's customers include both major and independent oil and gas producers and distributors as well as national oil and gas companies.

Certain matters discussed in this document are "forward-looking statements" intended to qualify for the safe harbors established by the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can generally be identified as such because of the context of the statement or because the statement includes words such as "believes," "anticipates," "expects," "estimates," or words of similar import. Similarly, statements that describe Hanover's future plans, objectives or goals or future revenues or other financial measures are also forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those anticipated as of the date the statements were made. These risks and uncertainties include, but are not limited to: our inability to renew our short-term leases of equipment with our customers so as to fully recoup our cost of the equipment; prolonged substantial reduction in oil and gas prices, which could cause a decline in the demand for our compression and oil and natural gas production equipment; reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies; legislative changes or changes in economic or political conditions in the countries in which we do business; the inherent risks associated with our operations, such a equipment defects, malfunctions and failures and natural disasters; governmental safety, health, environmental and other regulations, which could require us to make significant expenditures; our inability to implement certain business objectives such as integrating acquired businesses, implementing our new enterprise resource planning systems, generating sufficient cash, accessing capital markets, refinancing existing or incurring additional indebtedness to fund our business, and executing our exit and sale strategy with respect to assets classified on our balance sheet as discontinued operations and held for sale; our inability to comply with covenants in our debt agreements and the decreased financial flexibility associated with our substantial debt. A discussion of these and other factors is included in the Company's periodic reports filed with the Securities and Exchange Commission.

                      HANOVER COMPRESSOR COMPANY
                      CONSOLIDATED FINANCIAL DATA
                       AND EBITDA RECONCILIATION
          (in thousands of dollars, except per share amounts)
                              (unaudited)

                             Three Months Ended   Nine Months Ended
                               September 30,        September 30,
                            -------------------- --------------------
                               2004       2003      2004       2003
                             --------  ---------  --------  ---------
Revenues and other income:
   Domestic rentals         $ 85,866  $  82,823  $256,138  $ 241,728
   International rentals      56,579     49,519   170,507    151,973
   Parts, service and used
    equipment                 50,872     45,581   137,392    118,327
   Compressor and accessory
    fabrication               46,605     24,039   118,914     81,839
   Production and processing
    equipment fabrication     76,193     65,202   192,639    211,152
   Equity in income of non-
    consolidated affiliates    5,147      7,581    14,906     16,873
   Other                       1,245        452     2,983      3,356
                             --------  ---------  --------  ---------
                             322,507    275,197   893,479    825,248
Expenses:
   Domestic rentals           37,816     31,833   108,305     94,043
   International rentals      18,129     17,757    50,451     47,682
   Parts, service and used
    equipment                 36,469     35,307   101,447     85,781
   Compressor and accessory
    fabrication               41,214     22,347   107,584     73,950
   Production and processing
    equipment fabrication     68,974     59,095   170,557    188,802
   Selling, general and
    administrative            44,196     40,164   125,752    119,658
   Foreign currency
    translation                 (532)     1,536    (1,407)     1,336
   Provision for (reversal
    of) cost of litigation
     settlement               (4,000)    (3,500)   (3,903)    40,253
   Other                         556      2,446       903      2,951
                             --------  ---------  --------  ---------
                             242,822    206,985   659,689    654,456
                             --------  ---------  --------  ---------
     EBITDA from continuing
      operations(1)           79,685     68,212   233,790    170,792

   Depreciation and
    amortization              44,144     56,199   131,588    126,886
   Goodwill impairment            --     35,466        --     35,466
   Leasing expense                --         --        --     43,139
   Interest expense           37,188     32,849   108,169     57,283
                             --------  ---------  --------  ---------
                              81,332    124,514   239,757    262,774
                             --------  ---------  --------  ---------
Loss from continuing
 operations before income
  taxes                       (1,647)   (56,302)   (5,967)   (91,982)
Provision for (benefit from)
 income taxes                  3,555     (7,940)   18,006    (18,463)
                             --------  ---------  --------  ---------
Loss from continuing
 operations                   (5,202)   (48,362)  (23,973)   (73,519)
(Gain) loss from
 discontinued operations,
  net of tax                     (72)   (10,147)      184    (11,382)
Cumulative effect of
 accounting change, net of
  tax                             --    (86,910)      --     (86,910)
                             --------  ---------  --------  ---------
Net loss                    $ (5,274) $(145,419) $(23,789) $(171,811)
                             ========  =========  ========  =========

Basic loss per common share:
   Loss from continuing
    operations              $  (0.06) $   (0.59) $  (0.28) $   (0.91)
   Loss from discontinued
    operations, net of tax        --      (0.13)       --      (0.14)
   Loss from cumulative
    effect of accounting
     change                        --     (1.07)      --       (1.07)
                             --------  ---------  --------  ---------
Net loss                    $  (0.06) $   (1.79) $  (0.28) $   (2.12)
                             ========  =========  ========  =========

Diluted loss per common
 share:
   Loss from continuing
    operations              $  (0.06) $   (0.59) $  (0.28) $   (0.91)
   Loss from discontinued
    operations, net of tax        --      (0.13)       --      (0.14)
   Loss from cumulative
    effect of accounting
    change                        --      (1.07)       --      (1.07)
                             --------  ---------  --------  ---------
Net loss                    $  (0.06) $   (1.79) $  (0.28) $   (2.12)
                             ========  =========  ========  =========

Weighted average common and
 common equivalent shares
  outstanding:
   Basic                      85,418     81,439    84,527     80,907
                             ========  =========  ========  =========
   Diluted                    85,418     81,439    84,527     80,907
                             ========  =========  ========  =========

Gross profit percentage:
     Domestic rentals             56%        62%       58%        61%
     International rentals        68%        64%       70%        69%
     Parts, service and used
      equipment                   28%        23%       26%        28%
     Compressor and
      accessory fabrication       12%         7%       10%        10%
     Production and
      processing equipment
      fabrication                  9%         9%       11%        11%

(1) EBITDA from continuing operations consists of consolidated income
(loss) from continuing operations before interest expense, leasing
expense, provision for (benefit from) income taxes, depreciation and
amortization and goodwill impairment. We believe that EBITDA is a
commonly used measure of financial performance for valuing companies
in our industry. EBITDA should not be considered as an alternative to
measures prescribed by generally accepted accounting principles and
may not be comparably calculated from one company to another.
Forward-looking information concerning Hanover's 2004 net income,
which we believe is the most directly comparable GAAP financial
measure to Hanover's EBITDA is unavailable because the following items
are significantly uncertain so as to make a 2004 prediction
inadvisable: interest expense, taxes, depreciation and net results
from and proceeds of the sale of our discontinued operations. The
ultimate outcome of these uncertain items may have an impact on our
net income.
------
    CONTACT: Hanover Compressor Company
             Lee Beckelman, 281-447-8787 (Investor Relations)

    SOURCE: Hanover Compressor Company