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spk03: 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.
spk00: 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?
spk05: 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.
spk03: Ladies and gentlemen, at this time, we will conduct a question and answer session. If you would like to state a question, please press star 1 on your phone now, and you'll be placed into the queue in the order received. You can press pound one at any time to remove yourself from the queue. And our first question comes from Rob Brown from Lake Street Capital. The line is open. Hi, Steve.
spk05: Hi, Rob.
spk08: happening right now with the commodity price changes? Are you seeing, you know, I know the customers are cautious, but are you seeing kind of extended rental durations? Are you seeing, you know, the gas drillers kind of pulling more equipment out and putting it in? Or what's sort of the commodity price impact at this point?
spk05: You know, it's two different worlds, the oil price and the gas price. The oil price, as I mentioned, will see some incremental progress through the quarter and into next year. It's not going to be a rip-roaring increase in activity, as you would expect at this kind of price level, because as I also mentioned, due to capital conservation that the operators are exhibiting. But I think from the oil standpoint, we feel fairly confident it's going to hold up. and um you know we'll see some incremental activity that way we're not seeing any real change in terms um from that standpoint um so y'all i think it's just business as usual from an oil standpoint gas is interesting of course um some of the gas prices we've seen recently have been not historically high but relatively high compared to you know the recent recent world, you know, getting up to $5 or $6. But there's a real hesitation on the gas side that that's going to last long. I think we're seeing certainly winter coming on. You always get price increases then. We're seeing some storage issues. And there's a lot of LNG going out of the country too. So all those have combined to plus the increased demand from, you know, coming out of the pandemic. All those have combined to increase that gas price, but there's a real concern as to how long that's going to last. Once you get past wintertime, obviously warm weather depresses pricing a bit. The supply will catch up over time, etc. You're not seeing a whole lot of operator money going into drilling, production, etc. We do see a little hesitant to go longer terms on the gas side if you're just putting the equipment out there just to move gas. I think there's a real hesitation and some question as to how long the relatively good price will last. I tend to agree with them. I think we'll see some not horrible prices, but we'll see some lower prices starting the shoulder season next year and going through summer.
spk04: Okay, so we are seeing pushback on, people don't want to go longer terms on the gas side.
spk05: They're okay with it on the coal side.
spk08: Okay, good. And then maybe the high horsepower market, what sort of changes have you seen more recently? Is that still an area that is active? I know you've moved some equipment from standby to fully committed, but how is that market in terms of new sales?
spk04: We think it's going to be good.
spk05: Again, the high horsepower market for us and everybody is a permanent. That's the That's what's driving a lot of the centralized gas lift due to the oil, you know, oil volumes and oil prices. So, you know, the Permian is the, you know, the result of the equation as far as what happens from a high horsepower standpoint. And again, high horsepower is primarily related to centralized gas lift. So the thing's going to stay active. The visibility is a little, you know, more opaque right now. Certainly we want to see what some operator budgets look like, particularly in this area. But, you know, I think generally we're pretty optimistic that, you know, we're going to see continued growth in that place. And we know of some growth coming our way. You know, we're just not sure of the full vector and what the full year looks like yet. You know, everybody's... In this period, everybody's keeping their cards pretty close to their vest and not making a whole lot of projections out, not really committing to long-term projections from, hey, build this over this time and stuff like that, which is, I think, natural coming out of the pretty uneven period we've had the last year and a half. We think generally it's going to be good.
spk04: It's just hard to put up, you know, to quantify it yet. Okay, great. Thank you. I'll turn it over. Thanks, Rob.
spk03: Thank you. Our next question comes from Tate Sullivan from the Maxim Group. Your line is open.
spk01: Hi, thank you. Hi, hi, Steve. I missed your comment on the, hey, I missed your comment on the, did you say, So relative to the previous CapEx guidance for 2021, you increased it by 15 to 20%. Or is it still 15 to 20 for the full year?
spk05: No. Well, yeah. We originally projected 15 to 20 million for the full year. But, yeah, we're projecting a 15 to 20% increase over that 15 to 20 million. A little confusion, I guess. And obviously, since we're at 18 million, 15 to 20 percent is going to apply to the 18 to 20 million range we're in now.
spk01: Perfect. And then, similar to previous years, the dynamic of building the higher horsepower equipment, is it already spoken for by clients, or is some of that on spec in this environment? I mean, how many units by the end of the year pro forma without higher spending might you have available for rent? I'm sorry for a couple of questions in there.
spk05: You know, from a spec standpoint, it's probably only about one or two. So not a whole lot. Now, we will likely increase that next year because, you know, if we're right that the activity is going to increase on a high horsepower basis. side, you've got to have that stuff available. You can't wait six, nine months to rent something. People won't do it typically. Now, obviously, we had a favorable situation the last two or three years where we had a two-year bill program that was committed on a long term, but that bill program is essentially over, so it's now back to the regular market per se. We're going to have to have some spec One to two is what we're gonna end up with probably by the end of the year, but a good level is probably, for us anyway right now, is probably four to five. So we'll see that more so in 2020 along with any other committed units we've identified. And we're, right now, outside of the one to two spec we anticipate by the end of the year, right now anything we're building is committed.
spk01: Great, thanks. And then you mentioned you have, or I know it will be in the queue, and you may have mentioned it earlier, what were the number of rented compressors as of 3Q21, end of 3Q?
spk04: Of the total fleet? Yes.
spk05: Unit utilization was 50%, and horsepower utilization was about 65%. I think we had 2275 units. Okay.
spk01: And then with that number and with the number of units that you're building at the higher horsepower, just a modeling question, what do you expect? And I've just been tracking the average horsepower for your rented compressors. I mean, it's been proceeding every single quarter. building higher units, can it get up to 250, or how are you looking at that in terms of the total dynamic in the whole fleet?
spk04: The average horsepower per unit? Yeah.
spk05: Well, right now in this third quarter, it's 235 horsepower per unit. And it looks like over the year, we increased about 10 horsepower per unit. So it takes a while to get the whole fleet up on a per average unit basis. So I wouldn't say we'd be at 250 a year from now. Maybe 245 and showing the same growth we had. So like I say, it's hard to move the average on almost 2,300 compressors. But yeah, we anticipate that continues to climb. It's just hard to predict the exact rate on an average horsepower per unit.
spk01: Great. Thank you. And last for me, and just I'd love to hear more about the dynamic current and understanding the higher lubricant costs and supply chain disruptions. When you take sales backlog ending at $2 million in the quarter, unchanged from the prior quarter, Do you, when you accept those sales orders, is it almost just saying to your current customer, I mean, we'll do this for you now, are you passing on higher pricing, or what are the conversations like when you decide to take a sales order or turn it away?
spk05: Yeah, you know, it's a little better than it was six, nine months ago. You know, jobs quoted six months ago were, and I'm not making this up, you know, We had some stainless steel requirements for some packages, and they would only hold the quote, the stainless steel suppliers only hold the quote for 24 hours, literally 24 hours. That makes it a little tough to quote stuff. We typically quote on them, quotes are valid for 30 days. So what we did at that time, obviously we try to pass along what we can or go back or change orders and things like that. We absorb some of the costs going up through change orders and optional adders and things like that. We're able to bring that margin back in closer to what we quoted. There's certainly an impact on some of that stuff when you try to quote. Obviously, operators are reluctant to give us free reign on any cost increase that comes by because, you know, you can have an issue, maybe we're not paying attention or whatever, but it's abating somewhat now from the point of those kind of goods. Now, we are seeing price increases on engines, compressors, we've seen them in oil, in general parts, we're seeing some of that, but Those are some of those latter expenses, more operating expenses, and the former are capital expenses. So we've just got to – some of this stuff we've got to put in longer lead orders, and some of it you've just got to shop around a little more and try to economize where you can and raise prices where you can. It's a two-fold thing, trying to keep the cost down and keep the pricing up.
spk04: Great. Thank you, Steve. Thanks for answering my question.
spk05: Thanks, Dave.
spk03: Ladies and gentlemen, as a reminder, if you would like to state a question, please press star 1 on your telephone now. And our next question comes from George Milas from MKH Management. Your line is open.
spk02: Thank you. Good morning, Steve. George, can you talk a little bit more about CapEx and how much of the CapEx has been from that one program you have with one customer to purchase their lease equipment? And maybe you already have some sense of what CapEx might be like next year and what the composition of that CapEx would be.
spk05: The CapEx this year attributable to the leaseback program, I don't have the exact number, but I'm going to estimate it's in the $5 million to $6 million range, probably a quarter to a third of the total. accelerated quite a bit the last six months, so it's more than what we had originally anticipated, and hence the reason to go up a little on capital. It's probably in that five or six million dollar range. I'm not gonna project what CapEx for next year is yet. We need to get further into this quarter, start to see if some operators will give us a little more definitive word on what they're planning. Certainly we won't see anything published probably till early next year. Maybe some will tell us a little earlier, but it's just a conversation. We're trying to gather that information as we speak. So I don't I don't exactly know yet. So we'll update our 2022 perspective probably you know, on the next call, which will be the full end-of-the-year call.
spk02: Okay, great. Thanks for that. And maybe can you talk a little bit about the competitive environment? You have a number of competitors who are larger, but sort of restressed financially, and maybe some updates in that respect from your perspective.
spk04: Yeah.
spk05: primarily just not by name, but just generally of the public competitors, because everybody gets to look at them, just like they look at us. As I mentioned, we've had three quarters of increasing rental revenue. We've circumvented the globe per se on the trough of the rental revenues from the pandemic, and we're back up to just a little bit above the pre-pandemic levels. And looking at it, we're about the only one that's in that good of shape from a rental standpoint. Now, obviously, our sales is up and down, but they don't have sales. They don't compress or fabricate, so we'll throw that out of the discussion. So from a rental standpoint, we're doing relatively well compared to competitors. lost, and I say they, it's a generalization, they lost more equipment during the pandemic than we did from a unit standpoint and a horsepower standpoint, and more on a percentage basis. Now, we know that equipment's out there. We know they're trying to move it at relatively, we think, unattractive prices, and they will. Unattractive prices, move equipment. Low price drives utilization. And we'll see some of that, and we've already seen some of that. But we're still able to stay ahead and gain share. So, you know, I'm not rooting for the competition necessarily, but the sooner they get rid of that older, cheaper stuff, you know, the better the market is for everybody and certainly for us because we tend to have – our equipment is – our big horsepower equipment is all brand-new stuff. You know, it's the latest stuff. Technology, it's the latest emissions profiles, et cetera. And a lot of the stuff that's being marketed out there now is not new like ours, but maybe 5, 10, 15 years old, which 5 years old doesn't sound too bad from a compressor age standpoint when you capitalize this stuff over 15 to 25 years. But certainly from a technology standpoint or an emissions standpoint, it makes a big difference. As soon as they can get rid of that older stuff and get it out to somebody cheap and leave it out there, the better off we all are. But generally, just from the public filings that we and everybody else can see, we're doing pretty good compared to competition.
spk04: Okay, great. Congratulations. Thank you. Thanks, George.
spk03: and we have no further questions in queue at this time.
spk05: Okay. Thanks, Paul, and thank everyone for joining me on the call. I appreciate your time this morning and look forward to visiting with you again next quarter.
spk04: Thank you. This concludes today's conference call. Thank you for attending.
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