Natural Gas Services Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Service Group fourth quarter 2020 earnings call. At this time, all participants are in listen-only mode. Operator assistance is available at any time during this conference by pressing star zero. Your call leaders for today's call are Alicia Dada, IR Coordinator, and Steve Taylor, Chairman, President, and CEO. I would now like to turn the call over to Ms. Dana. You may begin.

Thank you, Paul, and good morning, listeners. Please allow me a moment to read the following forward-looking statement prior to commencing our earnings call. Except for the historical information contained herein, the statements in this morning's conference call are forward-looking and are made pursuant to the safe harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, as you may know, involve known and unknown risk and uncertainties, which may cause Natural Gas Services Group's actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise, the introduction of competing technologies by other companies, and new governmental safety, health, or environmental regulations which could require Natural Gas Services Group to make significant capital expenditures. The forward-looking statements included in the conference call are made as of the date of this call, and Natural Gas Services undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but are not limited to, factors described in our recent press release and also under the caption risk factors in the company's annual report on Form 10-K fought with the Securities and Exchange Commission. Having all that stated, I will now turn the call over to Steven Taylor, who is President, Chairman, and CEO of Natural Gas Services Group.

Thank you, Alicia and Paul. Good morning and welcome to Natural Gas Services Group's fourth quarter and full year 2020 earnings review. In spite of the time mix-up this morning, thank you for joining us. We released our fourth quarter 2020 results this morning and plan to file our annual report on Form 10-K for the 12 months into December 31, 2020 with the U.S. Securities and Exchange Commission on Wednesday afternoon. 2020 is well in the rearview mirror, and I don't know many oil fill operators that were sorry to see it go. However, as mentioned in our release this morning, given the pandemic, the economic shutdown, and the most precipitous decline in oil fill activity in my 40-plus year oil fill career, NGS not only survived but posted solid results. Before discussing our detailed financial and operating results from 2020, a few high-level comments are in order. As I consistently indicated on the unprecedented challenges of the past year, protecting our balance sheet and liquidity position has always been our top priority, especially in the most challenging of operating environments. In 2020, we did just that. In fact, our cash position grew and our overall financial position is amongst the strongest in the industry and historically strong for NGS. Our cash balance increased from just under $12 million a year in 2019 to nearly $29 million at the end of 2020, an increase of nearly 150%. On a year-over-year basis, our operating cash flow increased nearly 11% to $32.6 million. This means that for every $2 of revenue, we generated approximately $1 of operating cash flow. We accomplished both in spite of lower overall revenues. While sales were impacted by the pandemic and customer decisions to defer purchases, our rental revenues were robust, increasing 37% compared to 2019, even with the slide in oil fill activity. It is clear that the global and domestic energy markets will improve as economies reopen and demand for energy expands. Commodity prices are beginning to signal the need for more capital spending and production growth. While such signals won't result in immediate acceleration in activity, We believe 2021 will provide growth opportunities throughout the year, including the continuation of our penetration of the larger horsepower markets. That said, it is important to recognize that the impact of the coronavirus pandemic is not entirely gone, and it continues to alter both how we work as well as workflow from our customers. While the market continues to move forward as vaccines become more ubiquitous, the impact of the pandemic on the oil field while somewhat reduced, will likely linger throughout most of the year, resulting in continued challenges and costs throughout the business, especially related to our working environment as well as service and safety. I'm proud of how well the NGS team accepted and continues to adapt to the challenges of the year of COVID. As we look more specifically at our operations in the fourth quarter of 2020, while sales and service revenues declined in the quarter, our rental revenues were solid and grew on a year-over-year basis and were only modestly affected this quarter. Total adjusted gross margins came in at 48% and adjusted EBITDA was 33% of revenue. Although not unusual, and especially not in downturns, Thank you for joining us today. While sales were slowly recovering, it will take time for capital programs to be rekindled. We are beginning to see more inquiries regarding compression purchases and expect that trend to slowly continue in the coming months. Of course, while sales may have slowed, producers still require compression assets on existing projects, which supports our rental business, which remained firm in the fourth quarter. With that overview, let's review the fourth quarter and four-year results from the year just completed. NGS reported total revenue of $17 million for the fourth quarter of 2020 compared to revenue of $19.7 million in the same quarter of 2019, a 14% decrease. Sales and rental revenues both declined, with a 58% decrease in sales revenues, but only a 4% decrease in rentals. We did experience a 33% increase in service and maintenance activities when compared to the same quarter of 2019. Sequentially, total revenue increased by 8%. Sales revenues more than tripled, a 210% increase. Sequentially, and service and maintenance increased by 62%, while rental revenues slightly decreased by less than 1%. In the comparative year-to-date periods, our total revenues decreased approximately $10.4 million, or 13%, exclusively due to a drop in sales and service and maintenance revenues. Conversely, rental revenues increased by over 7%. Total adjusted gross margin for the three months into December 31, 2020 slightly decreased to $7.8 million from $7.9 million, or 1%, compared to the same period into December 31, 2019. Adjusted gross margin, which does not include depreciation or various non-cash, non-recurring items, as a percentage of revenue for the three months into December 31, 2020 was 46% of revenue, an appreciable increase of 40% of revenue for the same period in 2019. Sequentially, adjusted gross margin for the fourth quarter of 2020 slightly decreased from $7.9 million to $7.8 million, approximately 1% from the prior quarter. This is driven by lower rental revenues and margins and higher costs in our fabrication business, but an appreciable increase in our aftermarket product line, which includes parts sales and rebuild activities. Justin's gross margin as a percentage of revenue was 46% in this quarter compared to 50% in the prior quarter. Selling, general, and administrative expenses were $3.2 million in the fourth quarter of 2020, a year-over-year increase of approximately $488,000 and an increase of approximately $739,000 sequentially, a decrease in 2% or $160,000 when compared to year-to-date periods. The year-over-year increase was driven by increased insurance premiums for liability insurance, directors and officers insurance, and long-term incentive compensation accruals, while the sequential increase was related to the same compensation accruals. For the full year, SG&A expenses decreased due to a decrease in deferred compensation expense and expenses related to long-term incentive compensation. Not including the inventory write-offs and fleet equipment, In rental equipment retirements, adjusted operating income for the fourth quarter of 2020 reflected a loss of $1.8 million compared to an $882,000 loss in the fourth quarter of 2019. The adjusted operating loss this quarter was primarily due to higher depreciation expenses on our large horsepower equipment and higher SG&A expenses. Sequentially, adjusted operating income decreased $822,000, primarily due to higher SG&A expenses. Adjusted operating loss for the full year 2020 was $3.1 million compared to income of $156,000 in 2019 due to lower gross margin dollars related to lower sales, unabsorbed fabrication costs, lower service and maintenance revenues, and higher depreciation expenses. NGS reported a net loss of $1.9 million in the fourth quarter of 2020 compared to a net loss of $1.7 million in the fourth quarter of 2019 and a net loss in the third quarter of this year of $562,000. The decline in net income for the year-over-year comparative period is primarily attributable to the decline in total revenue, a higher level of unabsorbed costs in our fabrication facilities, and an increase in depreciation in SG&A expenses, but was somewhat mitigated by higher overall gross margins. Sequentially, higher SG&A and inventory adjustment of $184,000 and Fleet Rental Equipment Retirements totaling $291,000 contributed the majority of the increase in losses. In spite of the yo-yo effect just mentioned in quarterly comparisons, when comparing full-year net income, NGS reported a positive net income of $1.8 million in 2020, including an income tax benefit of $4.8 million. This compares to an adjusted net loss of $318,000 in 2019. Loss on earnings per diluted share was $0.13 for the fourth quarter of 2019, which compares to a loss per share of $0.04 last quarter and a $0.14 loss this current quarter. Earnings per share for the full year 2020 was a positive $0.14 compared to a loss of $1.06 in 2019. EBITDA, which is earnings before interest, taxes, depreciation, and amortization, and our adjusted EBITDA, which also includes the non-cash effects of goodwill, inventory write-offs, and fleet retirements. for the three months ended December 31, 2020 was $4.8 million, down from $5.2 million in the fourth quarter of 2019, an 8% decline. Sequentially, EBITDA decreased $800,000 from $5.6 million to $4.8 million. Adjusted EBITDA for the full year ended December 31, 2020 was $22.7 million compared to $24 million, a decrease of 6% for the full year 2019. Total sales revenues, which includes compressors, flares, and aftermarket sales, decreased $2.3 million from the fourth quarter of 2019 to $1.7 million for the fourth quarter of 2020. The decline is almost exclusively attributable to a lack of compressor sales. Sequentially, sales revenue increased to $1.7 million from $536,000. These gains are driven by increased activity in flare sales and aftermarket activity, which includes parts sales and rebuild services. We did not have any compressor sales this quarter, but our fabrication facilities continued to build new rental compressor units, flares, and overhauled reeling units for pending rental contracts. On a four-year comparative basis, sales revenues for the year ended December 31, 2020 were $5.7 million, a decrease from $19.8 million in 2019. The extreme dislocation we experienced in our compressor sales business was not unusual in the fact that a downturn always brings a decrease in capital equipment sales. What was unusual was that the severity of the decline happened in one year. This was, not surprisingly, due to the knock-on effects of COVID-induced demand destruction and a simultaneous and abrupt drop in activity due to the precipitous decline in crude oil prices. We have, however, seen a recent increase in sales inquiries and hope that this translates into an increased level of sales this year. Our sales backlog as of December 31, 2020 was $1.75 million compared to $1.7 million last quarter. Year-over-year total sales gross margins declined from $358,000 in the fourth quarter of 2019 to $48,000 in the current quarter, with sequential gross margins increasing from a negative $460,000 in the third quarter of 2020. to a positive $48,000 in the current quarter. For the full year 2020, total sales gross margins decreased from $3.7 million in 2019 to a $554,000 loss. The quarterly and year-to-date losses were primarily due to lower sales revenue levels and a higher level of unabsorbed costs due to underutilized compression fabrication facilities. These unabsorbed costs derive from the underutilized nature of our facilities with the excess capacity due to the severe contraction and the need for capital equipment in the industry. The overall strength of our rental business has been exceptional over the past year. Rental revenues in the fourth quarter of 2019 were $15.3 million compared to the current quarter of $14.7 million. This is only a 4% decrease over a year that was unprecedented in its severity. Sequentially, rental revenues were off less than 1%, but on a full-year comparative basis, rental revenues increased 7%, from $56.7 million to $60.8 million. Compared to the fourth quarter of 2019, our average rental rates on a per-unit basis increased 7%, and we're down 1% on average per horsepower basis. The slight decrease in per-horsepower rates is not uncommon, as larger horsepower equipment costs less per horsepower, which translates into lower rental rates per horsepower. Sequentially, rental rates were essentially flat. Our average active unit increased to 225 horsepower per unit, an 8% year-over-year increase. Quarter rental gross margins this quarter were 51% of rental revenue, a decrease from our third quarter 2020 rental gross margins of 55%, and an increase from last year's fourth quarter of 47%. Rental margins this quarter were impacted by a large amount of scheduled maintenance, but on a full year comparative basis, rental margins increased from 51% to 53%. Fleet size at the end of December 2020 totaled 2,224 compressors, or almost 439,000 horsepower. As of December 31, 2020, 42% of our utilized horsepower is classified as large horsepower machines, which we designate as units that exceed 400 horsepower per skid. Over the past 12 months, we've added 42 new fleet units totaling 23,000 horsepower, with 89% of those units classified in our large horsepower category. We added 11 units to the fleet during the fourth quarter. In the fourth quarter of 2020, we retired 216 units, totaling a little over 21,000 horsepower, or an average of 98 horsepower per unit. 198 units, or 92% of the total units, were classified as small horsepower. That is, skids less than 125 horsepower per unit. The average age of these units was over 14 and a half years. and were within six months of the expiration of their book lives. The non-cash expense that impacted our net income was $291,000 or approximately $2,300 per unit. Our horsepower utilization is 66% in the fourth quarter and unit base utilization was 58% as of December 31, 2020. This reflects an increase of 200 to 300 basis points from Q3 2020. In 2020, we spent a total of $15.3 million on capital expenditures, with $13 million of that dedicated to rental equipment. Last year at this time, I had projected we would likely spend approximately $15 million in CapEx on rental equipment, so we were pretty accurate in that respect. Looking ahead to the full year 2020, we were projecting a capital spend on rental equipment of approximately $15 to $20 million. We will have another $2 to $3 million allocated for service vehicles. Moving to the balance sheet, our total bank debt was $417,000 at December 31, 2020, but we have since retired that debt. Our cash balance remains strong at $28.9 million. Our present line of credit is set to expire tomorrow, March 31, and we are in the process of negotiating a replacement facility that should be in place by mid-April with what we believe will be favorable terms. We continue to possess ample liquidity for any conceivable scenario we might encounter. We generated positive net cash flow from operating activities in this quarter of $4.7 million. Our operating cash flow in 2019 was $29.4 million and increased to $32.7 million in 2020. This is an 11% increase in operating cash flow despite a 13% decrease in revenues. Our conversion rate of revenue into operating cash flow in 2019 was 38% and increased to 48% in 2020. Simply put, for every dollar of revenue generated, NGS converted half of it to operating cash flow. There are not many companies in the OFS space that have a recurring rental revenue stream, no debt on the balance sheet, cash reserves in the bank, with a strong cash flow yield while trading at a meaningful discount to tangible book value. Before we open the call to questions, I want to thank the entire NGS team for the remarkable effort during the past year and as we have entered 2020. into the new year. The challenges presented over the course of 2020 were unprecedented, unexpected, and frankly, unfriendly. Yet every member of our team responded to the call to be flexible, adaptable, and to focus on providing the best service possible to our customers. As a result, while it wasn't always easy or pretty, we continued to build customer relationships through exceptional service and care for our customers and each other. We exit 2020 with a strong balance sheet, loyal customers, and the best team in the compression business. We're looking forward to the balance of 2021, something that resembles a more normal world and the opportunities ahead of us. We continue to see new opportunities in the larger horsepower market with both existing and prospective customers. An industry-leading liquidity position provides us with the flexibility to swiftly respond to prospects to grow our company both intrinsically and through other strategic opportunities. Paul, that's the end of my prepared remarks. So if you would, please open the phone lines for questions.