Google Hangouts has an update rolling out for Android that is probably best described as a house cleaning release. The update takes the messaging app to version 16 and cleans up contact lists and improves search within the app. Contact lists in this update are more streamlined with the Contacts option in the menu now gone. It has been removed from this part of the app as it was redundant to the Floating Action Button in your chat lists. You can use that FAB to add a chat with any contact(s) so they are effectively listed there for you.
Search within Hangouts has also been improved around contacts. Now when you tap the FAB to start a new conversation, when you start to type in the name of a contact, you will see four different lists: Frequent, On Hangouts, Your Groups and Not on Hangouts. The idea here is to quickly identify what communication paths are open for a contact so you can chose the best one for them. For those who are not on Hangouts, you will see an “Invite” link by their name.