Natural Gas Services Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group third quarter 2021 earnings call. At this time, all participants are in the 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, Steve Taylor, Chairman, President, and CEO. I would now like to turn the call over to Ms. Datto. You may begin. Ms.

Thank you, Paul, and good morning, everyone. 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. Short-looking statements, as you may know, involve known and unknown risk and uncertainties, which may cause natural gas services groups' actual results in future periods to differ materially from forecasted results. Those risks include, among other things, a loss of market share through competition or otherwise, introduction of competing technologies by other companies, and new governmental safety, health, or environmental regulations, which could require natural gas services groups to make significant capital expenditures. The forward-looking statements included in this 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 Bob with the Securities and Exchange Commission. Having that stated, I will now turn the call over to Steve Taylor, who is President, Chairman, and CEO of Natural Gas Services Group. Steve?

Thank you, Alicia, and thank you, Paul, and good morning, everyone. Welcome to Natural Gas Services Group's third quarter 2021 earnings review. Thank you for tuning in. As noted in our earnings release, our overall business is growing both sequentially and on a year-over-year basis. In the comparative year-over-year quarters, total revenue was up 16%, and every segment of our business, rental, sales, and service and maintenance, showed improvement. Sequentially, total revenues increased almost 3%, and the sales segment was the only one that declined, and it was by a relatively minor $100,000. Our core compression business continued to recover and grow in the third quarter, the third consecutive quarter of rental revenue growth. Compression rental revenue grew 4% sequentially and 9% on an annual basis, driven by both an increase in active rental horsepower as well as pricing improvements. We generated adjusted EBITDA of $5.4 million this quarter, a 19% increase from last quarter, and a 33% increase in operating cash flow for the quarter, up to $7.2 million. As you can tell, this was a relatively good quarter from a revenue, EBITDA, and cash flow perspective. Stronger energy markets certainly provide opportunities to maintain and improve pricing, and we remain optimistic about growth as we complete 2021 and enter the new year. We temper our enthusiasm a bit with a realism that exploration and production spending will likely grow incrementally because capital discipline remains the overriding mantra of domestic producers, but we think the outlook is positive. In addition to these operating highlights, during the quarter we continued our share repurchase program. Year to date, through September 30th, we have repurchased over 430,000 shares at an average price of approximately $10.24 per share, which represents roughly 3.2% of our outstanding shares. Now let's look at the financial details of the quarter. Looking further at revenues, NGS reported total revenue of $18.2 million in the third quarter of 2021. This is a 15.7% increase from the same quarter in 2020, or about $2.5 million, and is a result of an increase in all revenue streams, mostly due to a $1.3 million increase in rental revenue and $935,000 increase in sales revenues. As you know, the largest component of our sales revenue is compressor sales, and it is historically volatile. While we reported no compressor sales in the third quarter for either 2021 or 2020, we saw a significant increase in parts sales during the current quarter. When comparing consecutive quarters, we had an increase in total revenues of 2.8% or almost $500,000. This is driven by a $582,000 or almost 4% increase in rental revenue, which is partially offset by a decrease in equipment sales of only $100,000. While our sales revenues fluctuate with our customers' capital needs, our rental revenues have grown 3.7% and 9% respectively in both sequential and year-over-year quarters. Significantly, NGS has posted an increase in rental revenue every quarter of this year. Total adjusted gross margin, which does not include depreciation, for the three months ended September 30, 2021, was $7.5 million. It decreased from $7.9 million to the same period ended September 30, 2020. This is 41 percent of total revenue compared to 50 percent gross margin reported in last year's comparative period. But along with higher revenues, we have also seen increased labor costs and setting, commissioning, and startup expenses related to the growth in real and compression deployment, not to mention inflationary costs driven by lubricants and repair parts. Sequentially, adjusted gross margin for the second quarter of 2021 increased to $7.5 million from $6.6 million in the prior quarter. As a percentage of revenue, adjusted gross margin increased to 41% this quarter compared to 37% in the prior quarter. This increase was due to reduced levels of repair and maintenance costs and startup expenses. If you recall, in the last quarter, we set a record number of high horsepower units, which inordinately drove higher expenses and, correspondingly, depressed margins. While rental revenue still grew this quarter, as predicted, the magnitude of cost wasn't as great. There remained cost pressures from the upfront expenses incurred in the growing inflationary environment, but we are working diligently to control and counteract those. Sales general and administrative expenses increased at 0.5% over the third quarter of 2020 and 3.8% over the second quarter of 2021. These increases were primarily generated by higher expense accruals. However, as a percentage of revenue, SG&A costs reduced from 16% of revenue last year and were flat at 15% of revenue compared to last quarter. Property loss for the third quarter of 2021 was $1.6 million, compared to a loss of $940,000 in the third quarter of 2020. This decrease is due to lower rental margins offset by an increase in sales margins, as well as an increase in SG&A expense. Sequentially, operating loss decreased by $730,000 from an operating loss of $2.3 million in the second quarter of 2020. This increase in comparative quarters is primarily due to the aforementioned higher rental revenues and margins. Our net loss after tax for this quarter is $1.3 million, almost $700,000 less than last quarter's loss of $1.9 million. This compares to a net loss of $563,000 in last year's third quarter. We reported a loss per diluted share of 10 cents for the third quarter of 2021 compared to a loss of 4 cents per diluted share in the third quarter of last year. Sequentially, This was an improvement of over 14 cents per deleted share loss reported in the second quarter of this year. Adjusted EBITDA for the three months into September 30th, 2021 was $5.4 million. It decreased from $6.2 million to the same period in 2020. Sequentially, adjusted EBITDA increased almost $860,000 for 19%, up from $4.5 million last quarter. This increase was primarily due to higher revenue and lower expenses, resulting in higher overall margins. Total sales revenue, which, as a reminder, includes compressors, flares, and product sales, was $1.5 million this quarter. This is an increase from $935,000 year-over-year and is down marginally from $1.6 million last quarter. The change in both comparative quarters is due primarily to the volatility in part sales. For this current quarter, we had a total sales adjusted gross margin loss of $90,000. This compares to a negative gross margin of $460,000 in the third quarter of 2020, negative gross margins of approximately $200,000 in the second quarter of 2021. These gross margin improvements are primarily a combination of higher part sales and reduced expenses and losses in our compressor sales business. Although we have some compressor fabrication projects in progress, our compressor sales business continues to be slow, with no sales revenue recognized in all comparative quarters. However, despite the lack of customers' capital spending, we have lowered our total sales gross margin losses by decreasing our compressor fabrication expenses pushing higher revenues from flare and part sales, absorbing more costs and new rental fleet units being built. Our sales backlog as of September 30th, 2021 was approximately $2 million, which is the same as the prior quarter. Rental revenue in the third quarter of 2021 was $16.2 million compared to $14.9 million, an increase of 9% since the third quarter of last year. For the sequential quarters, rental revenue grew to $16.2 million for $15.6 million last quarter, an almost 4% increase. Significantly, rental revenues this quarter exceeded our rental revenues in the first quarter of 2020, which was the pre-pandemic quarter. We've successfully traversed the trough of our rental revenues since the start of the pandemic through the successful execution of our high horsepower strategy during a very uncertain period. Rental rates increased by an average of approximately 6% per unit and 3.5% per horsepower sequentially, mainly due to our continued penetration into the larger horsepower market. Rental adjusted gross margins this quarter were 46%, a $730,000 decrease from the 55% gross margin on a year-over-year basis, but an $840,000 increase from the 42% gross margin last quarter. Fleet size at the end of September 2021 totaled 2,275 compressors, or over 452,000 horsepower, which reflects a net addition of 18 units, or 5,480 horsepower, during the third quarter. Over the past 12 months, we have added 51 new fleet units, totaling just over 14,000 horsepower, 60% of that horsepower being classified in our large horsepower category. As of September 30, 2021, about 45% of our utilized horsepower is made up of compressor units that are in excess of 400 horsepower per unit. Our horsepower utilization is approximately 64% on a horsepower basis, and unit-based utilization was a bit over 53% at the end of the quarter. Our capital expense for completed gas compressor rental fleet units in the third quarter which does not include work in progress, was approximately $6.5 million. Earlier this year, we projected a capital expense budget of $15 to $20 million for the year. With almost $18 million capitalized for the first three quarters, we believe we will end the year with our capital expenses above the high end of this projection. Stronger than anticipated demand and an acceleration of the equipment purchase lease program we have in place with one of our customers, leads us to increase our estimated capital budget 2021 by 15 to 20%. On a precautionary note, there's the possibility of delivery issues that could impact the timing of some of this added capital spending. But with demand intact, we'd only delay these expenses into early 2022. From a balance sheet perspective, we continue to have no debt outstanding at the end of the third quarter, and our cash balance at cash balance at the end of the third quarter at $24.4 million. This compares to cash a year ago at $27.6 million and last quarter of $26.2 million. In spite of our strong capital spending on committed rental equipment and our stock buyback program, our cash balance in all comparative quarters has continued relatively steady due to our ability to deliver strong operating cash flow. The combination of our cash balance and untapped credit line continues to provide ample liquidity in nearly every conceivable scenario. We generated positive net cash flow from operating activities in this quarter of $7.2 million for 39% of our quarterly revenue. We also reinvested $2.5 million back into the company through common stock buybacks this quarter. Our total stock buyback under the initial authorization totaled $5 million for 3.5% of our outstanding stock as of September 30, 2021. On October 1, 2021, our Board authorized the repurchase of an additional $10 million of our common stock, of which we have purchased 105,650 shares for $1.2 million to the end of October. We will continue to repurchase shares as we believe the fair value of the enterprise is well above that currently reflected in the public markets. Our average purchase price for the first nine months of this year is $10.24 per share, well below our calculated intrinsic value and the current market value. The final housekeeping note. In the next couple of weeks, we'll renew our shelf registration on form S3 with the U.S. Securities and Exchange Commission, which would allow us, if needed, to issue debt or equity securities over time using our current financial filings. This is our second renewal, and renewing our S3 prior to expiration allows us to effectively extend our existing S3 filing without additional fees. While we are pleased with the third quarter results, we remain focused on improving margins and profitability as we enter the final months of 2021 into the new year. Natural Gas Services Group remains one of the few oilfield service companies with a strong recurring revenue stream, no debt, a significant cash position and the ability to consistently generate meaningful operating cash flow. For the holidays and variable impact activity in the fourth quarter, we're optimistic that our real business is well positioned to benefit from higher commodity prices and the resulting incremental increase in production activity. The backdrop, we believe, will remain intact well into 2022. Like every other energy service and industrial company, we are feeling some impact due to supply chain issues and inflationary pressures. We are fortunate in that we control our own fabrication process. We have taken steps to minimize and mitigate any disruption. That said, we are likely to see some challenges related to supply chain disruptions and raw material inflation. As we enter the Thanksgiving season, I'm truly thankful for the remarkable members of the NGS family Come to work every day to make certain we exceed the expectations of our customers and focus on creating value for all of our stakeholders. Paul, that's the end of my prepared remarks, so if you would, please open the phone lines for any questions.