Natural Gas Services Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Service Group fourth quarter 2021 earnings call. At this time, all participants will be in a 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 Dotto, IR Coordinator, and Steve Taylor, Chairman, President, and CEO. I would now like to turn the call over to Ms. Datto. You may begin.

Thanks, 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. Forward-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, 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 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 fought with the Securities and Exchange Commission. I will now turn the call over to Mr. Steven Taylor, who is Chairman, President, and CEO of Natural Gas Services Group.

Thank you, Alicia and Paul, and good morning, everyone. Welcome to Natural Gas Services Group's fourth quarter 2021 earnings review. Thank you for tuning in to the call. As noted in our earnings release, our overall business is growing both sequentially and on a year-over-year basis. Year-over-year, total revenue grew 6%, with our flagship rental business growing 12%. Sequentially, total revenue slipped 1%, primarily due to quarterly fluctuations in sales and our service and maintenance businesses. On a four-year comparative basis, every one of our business lines grew, with overall revenues up 6% and rental revenues increasing 5%. Our core compression business continued to recover from the pandemic-induced decline and again grew in the fourth quarter, our fourth consecutive quarter of rental revenue growth. Compression of rental revenue grew nearly 2% sequentially and approximately 12% on a year-over-year basis, primarily driven by an increase in active rental horsepower. While I'm pleased we continue to show gains in revenues across the board, expenses related to our rental compression business were also significant. The expenses were largely concentrated in the second half of the year and were primarily a result of new large horsepower compression installations. I'll expand on these later in the call, but they were primarily due to mobilization, commissioning, and startup costs related to large horsepower units, increased labor and hiring costs, and catch-up on deferred maintenance from last year. In short, while these expenses had a material impact on our bottom line, many are one-time transient startup costs that will result in better margins and potential for improved income over time and have further solidified our relationship with key long-term customers. It is also worth noting that general maintenance increase was higher than our traditional run rate, a result of increased maintenance costs as well as a level of maintenance catch-up that was necessary as our business and the business of our customers recovered from the pandemic. Now let's look at the financial details. NGS reported total revenue of $18 million for the fourth quarter of 2021. This is a $1 million, or 6.1%, increase from the same quarter in 2020 and is a result of a $1.7 million increase in rental revenues with an offset from sales and third-party sales and maintenance revenue. When comparing consecutive quarters, we had a slight decrease in total revenues of 1%. This is driven by an almost $500,000 decrease in sales and third-party revenues, partially offset by a rental revenue increase of $280,000. While our sales revenues fluctuate quarter to quarter, our rental revenues have grown consistently, 1.7% and 11.8% respectively in both sequential and year-over-year quarters, and 5% when comparing full-year results. Significantly, NGS has increased rental revenue in every quarter of 2021. Total adjusted gross margin, which does not include depreciation, for the three months into December 31, 2021, decreased to $4.3 million from $7.8 million for the same period into December 31, 2020. Adjusted gross margin for the three months into December 31 was 24% of total revenue. As noted earlier, margins were impacted by higher repair and maintenance costs, increased labor costs, and setting, commissioning, and startup expenses related to the growth and rental compression deployment, not to mention inflationary costs driven by lubricants and emissions and repair parts. Sequentially, adjusted gross margins for the fourth quarter of 2021 decreased to $4.3 million from $7.5 million in the prior quarter. As a percentage of revenue, adjusted gross margin also decreased to 24% this quarter compared to 41% in the prior quarter. The majority of the decline in gross margins resulted from increased rental costs, a significant portion of which impacted the fourth quarter. As noted earlier, the expenses include higher mobilization, commissioning, and startup costs, and to a lesser extent, an increased level of unabsorbed costs in our manufacturing shops. While rental revenue still grew in the fourth quarter, our expense profile was higher than anticipated. While many of these expenses are the result of new equipment mobilization, we are not immune from inflationary pressures seen in raw materials and supplies and supply chain challenges. We are working diligently to mitigate inflationary pressures and will be vigilant in our material and supply sourcing to improve efficiencies. We also believe that positive industry momentum will provide opportunities to selectively improve pricing and expense recovery. Sales general and administrative expenses decreased over 13% and increased almost 4% respectively in the over-year and sequential periods. Year-over-year, we realized lower executive comp expenses and professional fees, partially offset by increased health insurance costs. Sequentially, our fourth quarter SG&A was impacted by increased health insurance costs. Operating loss for the fourth quarter of 2021 was $8.2 million compared to a loss of $2.2 million in the fourth quarter of 2020. This increase is due to a decrease in margins across our operating activities, as well as a loss on retirement of units from our rental fleet of $3.1 million and an inventory write-off of just over $200,000. Sequentially, operating loss increased to $8.2 million in the fourth quarter of 2021 from an operating loss of $1.6 million in the third quarter of 2021. This increase in comparative quarters is primarily due to the affordments in lower margins, loss on retirement of the units from our fleet, and inventory write-offs. Our net loss after tax for this quarter was $5.6 million. This compares to a net loss of $1.9 million in last year's fourth quarter and net loss of $1.3 million in the third quarter of 2021. We reported a loss per diluted share of 44 cents for the fourth quarter of 2021 compared to a loss of 14 cents per diluted share in the fourth quarter of 2020 and 10 cents per diluted share in the third quarter of 2021. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization, and our adjusted EBITDA excludes inventory allowances, fleet retirements, and stock compensation expense, all of which are non-cash items. Adjusted EBITDA for the three months into December 31, 2021 was $2.3 million. It decreased from $5.4 million for the same period in 2020. Adjusted EBITDA decreased approximately $3.1 million sequentially from $5.4 million last quarter to $2.3 million in this quarter, primarily due to higher rental expenses resulting in lower margins. On a four-year comparative basis, adjusted EBITDA decreased $6.2 million to $18.7 million from $24.9 million in 2020. Total sales revenue, which, as a reminder, includes compressors, flares, and product sales, was $1.1 million this quarter. This is a decrease from $1.7 million year-over-year and from $1.5 million last quarter. The change in both comparative quarters is due to the volatility in the various sales components. On a four-year comparative basis, however, sales increased 22% from $5.7 million to $6.9 million. For this current quarter, we had a total sales adjusted gross margin loss of $750,000. This compares to a positive gross margin of $48,000 in the fourth quarter of 2020 and negative gross margins of $91,000 in the third quarter of 2021. Although we have some compressor fabrication projects in progress, our compressor sales business continues to be slow, with no compressor sales revenues recognized in all comparative quarters. As noted by our backlog, however, this does not mean the business doesn't generate any revenue, but with the long lead items associated with our current products, there are quarters that we are fabricating equipment but not recognizing revenue on that equipment yet. Due to the absence of any recorded compressor sales revenues this quarter and unabsorbed costs, compressor-only sales margins posted a loss of $1 million for the three months into December 31, 2021, compared to a loss of $713,000 for the same period a year ago and a loss of $557,000 last quarter. Approximately half of the current quarter's loss was due to inventory adjustment and obsolescence and unabsorbed costs. Our sales backlog as of December 31, 2021 was approximately $1.5 million compared to approximately $2 million in the third quarter of 2021. Rental revenue in the fourth quarter of 2021 was $16.5 million compared to $14.7 million in the fourth quarter of 2020, an increase of 12%. For the sequential quarters, rental revenue grew to $16.5 million from $16.2 million last quarter. Average rental rates increased approximately 14% per unit in the year-over-year quarters. While certainly positive, this is skewed due to the effect of setting more and more higher horsepower equipment that contributes in an outsized manner to a higher average rental rate. Rates were essentially flat sequentially. Rental adjusted gross margins this quarter were 30%, a $2.6 million decrease from a 51% gross margin year-over-year, and a $2.5 million decrease from the 46% gross margin last quarter. While rental revenues improved throughout the year, our expenses, largely related to new compression units which lead to increased revenue over time, were above expectations. In addition to the non-repetitive deployment and commissioning expenses, we did experience maintenance and supply expenses such as initial oil and antifreeze fills, which can be significant, especially in large horsepower units. While we eventually recover those costs, the recognition of the expense and the reimbursement of such will from time to time result in cost revenue mismatches like we experienced in the fourth quarter. These are, of course, necessary expenditures, but we can and do experience various expenses before revenue is generated. This is a transient problem and the initial expenses are recovered in time, but it does affect current operations and margins. In addition to the above, while we are encouraged by all of the activity, it has created significant additional personnel expense. Not only has our headcount increased to meet new equipment demand, wages are rising and overtime is prevalent, as finding qualified employees, especially in the Permian, is challenging. Hiring rotating employees from outside the Permian also results in higher training, living, we have to provide room and board, and travel costs, as well as new equipment and transportation expenses. In addition, to meet this concentrated demand, we have had to contract third-party field labor, which in itself was a $1.7 million expense in 2021. We also experienced over $2 million in the fourth quarter of what we anticipate is one-time maintenance expenses due to pandemic-related catch-up and increased year-end operating costs imposed by customers. In spite of all the fully absorbed higher costs we experience, The core rental expense of maintaining our equipment as measured by our direct cost of maintenance parts, lubricants, and fluids for the full fleet rose a competitive 14.9% on a year-over-year per horsepower basis. In addition to the gross margin impacts on our net income, we also retired a number of older compressor units from our rental fleet. A total of 263 compressor packages representing 38,200 horsepower were removed from the fleet at a non-cash charge of $3.1 million. With that, rental fleet size at the end of December 2021 totaled 2,023 compressors, or over 418,000 horsepower, which also reflects an addition of 12 units, or approximately 4,100 horsepower, during the fourth quarter. Over the past 12 months, we have added 65 new fleet units, totaling just over 18,000 horsepower, with the majority of that horsepower being classified in our large horsepower category. As of December 31, 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 71% and unit-based utilization was approximately 62% at the end of this quarter. Our capital expense for completed gas compressor rental fleet units in the fourth quarter, which does not include work in progress, was approximately $4.9 million. For the year, we expended $22.8 million on completed rental fleet additions with an additional $1.5 million in capital on vehicles and other PP&E. With the anticipated continuation of activity in the Permian Basin expected in 2022, we anticipate we will spend approximately $20 to $25 million on growth compression CapEx in the coming year. From a balance sheet perspective, we continue to have no debt outstanding at the end of the fourth quarter, with our cash balance at the end of the fourth quarter at $22.9 million. This compares to cash a year ago at $28.9 million and last quarter of $24.4 million. While we fully funded our capital expenditures with cash flows from operations, we utilized $7.9 million of cash on the balance sheet to repurchase over 737,000 shares of our common stock on the open market. 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 flows. The combination of our cash balance and untapped credit line continues to provide ample liquidity in nearly any conceivable scenario. We generated positive net cash flow from operating activities in this quarter of $8.6 million, or 48% of our quarterly revenue. This is a strong cash flow conversion. We also reinvested $3.4 million back into the company through common stock buybacks this quarter. Our total stock buyback program for 2021 totaled $7.9 million, or 5.6% of our outstanding stock as of December 31, 2021. Our average purchase over the course of 2021 is $10.65 per share. In short, 2021 was a year of growth and transition for NGS. We continued to build our large horsepower rental fleet, setting more horsepower in the last half of the year than in any other comparable six-month period. And we also began the process of returning to a normal workflow after nearly two years of pandemic-induced pandemonium. While those transitions should lead to transformational growth for NGS in the future, the costs and investments required in the process had a higher than anticipated impact on margins and profits, especially in the second half of 2021. As we have started the new year, we are focusing on improving efficiency and pricing as ways to boost margins and profits. While we won't shy away from continuing our large horsepower growth, which may result in a higher expense run rate, we will continue to focus on improving sourcing, procurement, and execution to reduce our overall cost profile. Inflation in the oil patch presents a number of challenges, but challenges we will address given our strong financial position and long-time vendor and supplier relationships. We'll also look for ways to use our fabrication expertise and facilities as an advantage to create efficiencies and continue to provide best in class equipment to our customers. We anticipate steady growth in the coming year. This will be primarily driven by activity in the Permian Basin but we are also seeing signs of increased activity in other areas. We have already had commitments for additional higher horsepower units in a couple of different operating areas, and we are currently ordering equipment. We have continued with our practice of ordering committed equipment for the majority of our needs to ensure that we maximize utilization and returns. Natural Gas Services Group remains one of the few oilfield companies with a strong recurring rental stream, no debt, a significant cash position, and the ability to consistently generate meaningful operating cash flow. With the new year well underway, we're steadily beginning to feel we're approaching a more normal operating environment. While many pandemic-related health and safety protocols will remain with us indefinitely, our people are beginning to return to more regular work patterns and more personal customer interactions are leading to new opportunities. We're fortunate that the NGS team remain largely healthy and continue to strive to meet the needs of our customers, regardless of the challenges. I'm grateful for the efforts during the past two years and for their continued efforts as we work to make 2022 another successful year for Natural Gas Services Group. Paul, that's the end of my prepared remarks, so if you would, please open the phone lines for questions.

Ladies and gentlemen, at this time, we will conduct the 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 in the queue in the order received. You can press pound one at any time to remove yourself from the queue. Once again, to ask a question, please press star one on your touchstone keypad now. And we have a question from Rob Brown from Lake Street Capital Markets. Your line is open. Hey, Rob.

Hey, Steve. Good morning. First question is on kind of margin trends. Some of this was one time in the quarter. How do you sort of see the margin recovering and will it normalize or will it take time to normalize with the pricing?

Well, it'll definitely improve because, as I said from the script you just mentioned, a lot of these costs are one time in transit. Now, the cost associated with installing and commissioning and starting up equipment, that's That's a necessary evil, right? That comes up first, and the revenues always follow that. You want that because that's your future growth. But even outside of that, there's, like I mentioned, we have some catch-up expenses from customers in the past that have put off some stuff, catch-up maintenance expenses. We actually had some customer-induced or requested expenses that we didn't anticipate in the fourth quarter for some additional operating catch-up from the point of with the oil and gas price being high, everybody wants to maximize flows through units, maximize operations and things like that. So there's a lot of... maintenance associated with bringing units back up to tip-top shape from the point of, not that they're not in shape, but from the point of if you're running three-quarter capacity, that's a different sort of maintenance profile than if you're running hundreds or 110% capacity. So there's a lot of that going around. you know that our guys in the field had to pay attention to and you know go out and you know either tune you'll do some maintenance on the units and stuff like that to bring them up to the the maximized capacity that the customer wanted to maximize their volumes and their prices. That was an unanticipated expense that we had. That should not repeat, I don't think, because we had quite a bit of that in Q4. There's probably a little something left out there, but That's what I kind of see as a transient expense. We won't experience much of that left. And obviously, the thing everybody sees, inflation and supply chain issues and stuff like that. You've had to pay up for parts. You've had to go to different sources for parts. You've had to compete for parts on a price basis. So all that stuff kind of compounds. There are a lot of moving, quote-unquote, parts in this corridor. A lot of them generated more expense than anticipated. All that said, if you strip out what we see as either one-time or transient costs, we'll get the margins back into that. We were aiming for the you know, we're mid 40s before aiming for the 50s and up to the 60s, we'll be back on that trend, you know, I think first half the year. Now, you know, and you can see that from the point that our core maintenance expenses, which were parts, fluids, you know, the direct cost for maintenance on this equipment went up 14.9%. Now, you know, year over year. So, That's not significant in this environment where we've got all the price increases from suppliers, supply chain issues, inflation, stuff like that. So when you dive, when you kind of get rid of all this noise, this one time in transit noise we saw in the fourth quarter, and dive into the core cost to maintain the fleet, that's very competitive. That's why I anticipate we'll get back on track pretty quick on this stuff. First half of the year, then I think we'll have a lot better. We'll have tailwinds after that. As I mentioned, we've already gotten orders for some big horsepower orders. that stuff's in the mill as far as ordering and everything. So the activity is continuing from the revenue standpoint, and with a lot of these costs stripped out of it, the margins will improve.

Okay, good. And my second question is really around the activity. Are you seeing really how many units of these high horsepower units are sort of somewhere on standby?

I assume those are in the field, not employed, but

You broke up on the last, but as far as the standby units, we don't have any more big horsepower standby units. the field so they're all fully utilized as far as big horsepower going forward we've got some committed orders and as I mentioned you know we we primarily order based on commitments we we don't step out too far on speculation now we do buy some speculative units because of the long lead times on some of this stuff. It can be 69 months to complete an order and deliver a finished piece of equipment. So you've got to have some inventory anticipated for some of that activity. But the vast majority, probably 75%, 80% of the equipment we build is speculative. committed with POs. So it's a hard, fast business. And then the balance perspective is obviously based on what's been popular. We're sold out essentially of just about all of our big horsepower. So we're ordering for the committed units, and we are ordering for some speculative units, too. You'll be able to address some of that stuff, because you do lose some business on deliveries if you don't have something available. So I think that answered the first part of your question, but I couldn't really hear the second part. You broke up some.

So my second part of the question is just really what's the demand environment overall with oil prices, where they are? Are you seeing lower returns or what's sort of the impact of what you're seeing with oil prices where they are?

Yeah, well, you know, oil and gas prices. You know, the oil prices have been good for a while, and, you know, that's driven that business. You know, what kind of puzzled me in the past was, you know, gas prices were pretty good, too, but you didn't see a whole lot of activity in just the gas-prone basins. You know, the oil-prone basins were fine, like the Permian, things like that, but the – predominant gas basins just hadn't moved very much. Now, we're starting to see a little more activity in some of that. It's not to the magnitude of the oil-driven areas, but it's picking up a little bit finally. You know, and some of that's just been the reluctance of operators to, you know, heck, We've had $2 gas for 10 years. Nobody believed $5 was going to last very long. They thought it was more of a peak and a couple months it comes off and everything else. In the meantime, operators will take the money, but they're not going to go drill anything new. So we're starting to see a little change in that attitude from some of the small and medium horsepower going out a little more. But again, the big horsepower is the story, certainly with us and in the market. And as mentioned, now 45% of our utilized horsepower is large, which is a pretty big shift that's happened over the last three to four years from predominantly a small to medium horsepower provider to now being a medium to large horsepower provider.

Okay, great. Thank you. I'll turn it over. Thanks, Rob.

Thank you. Our next question comes from Eric Cinnamon from Palm Valley Capital.

Your line is open. Thanks, Steve. Hey, any update on the tax refund?

I was about to ask you the same question.

You might have to put that in the long-term asset, Ben.

No, no update. We check all the time. In fact, you know, we were talking about this the other day, and it's still out there. They say they still owe it to us, but we're not seeing anything. So, yeah, I could make a political statement around that, but I won't. But, no, it's still supposed to be coming. They say they're running a year behind. It's been about a year or so. I can't predict anything, but we hope every quarter we see that check. But it's still a real deal.

And that would be $11 million?

Yes. Yeah, I think $11.1 million, maybe something like that, right around $11 million.

Okay, great. And assuming you receive that, what are your thoughts on more buybacks? Were you just going to fund the elevated levels of CapEx in 2022? No.

I don't know. We talked about it, but the... The CapEx authorization, we did the initial one a couple years ago, I think 2019, right before the pandemic hit, and that was $10 million. We suspended doing anything in 2020, just out of caution to see what Mark was going to do. We resumed it in 2021. We bought almost 6% back now, and we've just about run – We did a second authorization about halfway through the first for another $10 million. We're a little over $10 million total spent. Of course, about $8 million this year. We've got about $5 million left on that authorization. We'll continue with that. Once we get it, the board will look at it from the point of do we do additional or do you use it for capital, or what's the best use of it?

And you've been spending a lot on the CapEx on the high horsepower compressors. I'm just curious if you think maybe those compressors were underpriced, looking back at all these elevated expenses. And if so, what is your plan going forward to make sure you get an adequate return on capital on all that past CapEx?

Yeah. No, they're not underpriced. In fact, we're – some people might say we're overpriced. I don't think we're overpriced. I think we're competitively – we are priced for a good return on it. What's impacted us, obviously, and especially in 2021, were the – the rapid pace at which we installed a bunch of this equipment and the costs associated with it. And, you know, I've enumerated a bunch of those costs, but, you know, in there also are some operating efficiencies where, you know, We were putting in a ton of horsepower. We were trying to hire a bunch of people and everything else all at the same time. And, you know, you get some inefficiencies going in there, too, besides just the rote dollars spent. So, you know, I think 2022, I mean, 2021 is, you know, kind of a, I guess a shakeout year somewhat of finally putting all this equipment to work, getting it out, installing it. I mean, we installed a ton of horsepower in, you know, 2021. As I mentioned, you know, the last half, that was our most, our busiest time in the, you know, in history as far as horsepower installed. So it was just a bunch of, a bunch of activity going on. So, you know, Looking at 2021 as kind of a shakeout from an expense standpoint and getting that stuff in. 2022, as mentioned, some of these are one-time expenses, some are transient. Without barring a big burst of equipment like that, which I don't anticipate, the margins will climb and the returns will climb too. So they're priced right. It's just the expense piece of it has risen more than anticipated. But I think this year, as I just mentioned to Rob, the expenses I think will be, you know, the core expenses are good. We've got to get all these surrounding ones in shape, and I think we will.

And most of these compressors, Steve, they are under contract? And what's the average age of those?

Yeah, all of them are under contract. You know, when we... And they're between three- to five-year terms. And I would, you know, on average, probably some have been out there about three years and probably getting close to the term end. And some of them, you know, like I said, just went out the last half of this year. So, you know, it's hard to put an average age on it that means anything. But the vast majority... I'd guess 90-95% are still in the contract. Obviously different points of the term. But the The – let's see, I'm thinking all the horsepower we've ordered so far this year is under long terms, you know, the approaching five-year deals. And that's what we try to do, certainly on the big horsepower, go to those longer terms. And we do get good prices on it. It's just we've got – you know, this expense thing has come up in business this year, but that ought to be, you know, managed. So it's all – Essentially, I would say 90% of the big horsepower is contracted still within the minimum term.

And the pricing on those contracts, is that set throughout the contract term, or is there any way you can adjust assuming inflation continues to accelerate in the maintenance costs?

Yeah, we've got the ability on the majority of them to go back and ask for increases. Now, they're They're mutually agreeable increases, so there's always negotiations around that, but we've got the ability to do that. In fact, we're doing that. We're still doing some price increases last quarter. We've started that, and we're still in the midst of doing that. We're in constant contact with customers on this stuff and going for increases.

Well, Steve, we've got $4 or $5 gas now and $100 oil. A lot of these energy service companies, it's taken them a while to catch up with demand, and a lot of people are facing the same problems you are. Do you have any prediction of when the revenues will catch up to expenses and we'll see a profit?

Well, I'm hoping this year, like I just mentioned, I think if you look at the expenses, there's like five or six different kinds we saw in the fourth quarter that were either one time or transient or higher than anticipated. So it was a double or triple whammy this quarter. So certainly in 2022, the rental expenses will get back into the realm that we want them. We were on a... you know, a decent path to a higher margin before this fourth quarter hits. So we'll resume that path and certainly, you know, aim for that 50% margin by the end of the year. Then after that, you know, into next year, we ought to, you know, climb into that, you know, 60%. And that's our target on that.

Great. Thanks, Stephen. Good luck.

Okay. Thanks, Eric.

As a reminder, if you do have a question, please press star one on your touchstone keypad. And our next question comes from Justin Jacobs from Mill Road Capital. Your line is open.

Morning, Steve. Thanks for taking the questions.

Just to go back on the gross margin questions for a second, and all these you've stated that if you look at your adjusted gross margin on rental income Q4 this year versus prior year decline from 51% to 30%, if I apply that same 51% margin to a year ago, it implies about $3.5 million of incremental costs. And you've talked about different categories Both the release in your comments, you know, kind of one time, which are, you know, mobilization, commissioning, startup. In your comments, you just mentioned you got some increased labor costs and then increased deferred and maintenance. Can you give a sense in dollars of that kind of roughly three and a half million or some number around there? How much of those incremental expenses are to each of those different categories you've talked about?

Well, as I mentioned, we had about $2 million of that was in fourth quarter, either some catch-up on some deferred maintenance, either some we had deferred or the customer had asked us to defer, and then on the other side, some maintenance. not catch up, but I guess anticipatory expenses based on higher volumes, higher oil prices, stuff like that. Stuff I mentioned a while ago where we had to go out and maybe it was used to running three-quarter capacity and customer wants a 100% capacity. We've got to go out there and adjust things, tune things up a little more and dial things in better. So a couple million dollars was due to that, and we really didn't anticipate those expenses. You know, the, say the other million, million and a half, you know, if you probably, and it's hard to pigeonhole somebody in certain categories, Not pigeon hole, but assigned to certain categories. But I would say probably half of that remain, that mean and a half would be the startup, commissioning, mobilization and everything else expenses. And that includes the initial oil fills and things like that, which are not insignificant. And then a lot of that is these labor costs. They've really accelerated. They've really gotten high, and we've had to keep up, hire some third parties. So I would, you know, falling into that commissioning, mobilization, startup expenses, probably half of that, maybe, you know, three-quarters of a million dollars a year. And then the other, say, $3.25 million is going to be all the other miscellaneous stuff. You've got rotators now. They're very expensive to hire. So you've got a higher labor cost there. parts prices and increases. I mentioned the 15% increase just in the core maintenance expense being the parts and some of the lubricants. You're going to have a smattering of that sort of stuff, just higher costs on a lot of different categories for that balance.

That's helpful. Actually, a good segue into my second question. I heard you mention two numbers. a $1.7 million of contracted labor and $2 million of increased kind of customer-induced costs. Let's go to that $2 million for a second. So all of that was in the fourth quarter?

Yes.

Okay. Do you expect that cost to continue in Q1 now of this year in 2022 and maybe even Q2?

No, I mean, there might be a little carryover of that, Justin, but that was, like I say, some catch-up and some, you know, I guess what I'm calling anticipatory expenses. Not anticipatory, but, you know, optimization expenses, I guess, from the operator. You know, come out here, hey, let's get this stuff going. You've got a lot of oil or gas to move, prices are good, et cetera, et cetera. So there's a lot of that going on. So I don't... I don't anticipate a whole lot of that going forward for that $2 million. I think that was a surprise to us. We thought most of that stuff had been done and that equipment was operating as it should, but there was still some capacity things we had to address. You just had to tune them up to a very high degree where they weren't used to that. I don't think we'll see hardly any of that carry over.

Okay, that's helpful. And then back on the $1.7 million of contracted labor, that was, I believe, a total number for 2021?

Right.

And is that – when I think about that contracted labor, is that – Labor that you just didn't have available until you had the contract, but it's kind of the labor cost of running the business, or was that some kind of incremental cost that was outside? I'm just not quite sure how to think of that if it's third-party labor coming in.

Well, I'd say looking at it going forward, it would be incremental. But when we did it, it was integral cost because we just couldn't hire enough people in a quick enough time to sell this equipment. So we had to get it set. We had customer-imposed deadlines. And so we had to go out and hire some help. It's as simple as that. Now, we've got – we're – let me say we were fully staffed. We're probably 85% staffed. So, you know, we've got a lot more people on the payroll to handle that. We don't have to go out and hire the third party stuff. You know, we had to do it. It's painful to do it. We've, you know, really concentrated on getting more people in. But we just, you know, with the time imposition from the customers on how much equipment to set, you know, We just couldn't do it with the people we had, so we had to hire help for a bit. And that's one of those transient expenses, I think, that we'll still have some third-party, but it won't be near the magnitude of that. It certainly will be less than half of that or more because we've really concentrated on getting rid of that expense.

I see. And so you have the people, or you will have the people going in 2022. It's just there'll be... NGS employees versus third party contracted labor you're bringing in.

Right. Exactly. Yeah. We just had to use third party to plug the, plug the gaps.

Got it. And what's the, what's the incremental cost of doing it? You know, if that million seven, if that's kind of a third party rate, how much do you save on that when they come in house?

Oh, probably a third. Yeah. Okay. Yeah, a third to a half, it depends. Okay. Got it. That's helpful. Okay. Those are all my questions. Thanks for taking the time. Okay. Yeah. Thanks, Justin. And we have no further questions in queue at this time.

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.