Natural Gas Services Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group second quarter 2022 earnings call. At this time, all participants are in listen-only mode. Operator assistance is available at any time during this conference by pressing zero pound. I would now like to turn the call over to Mr. Michael Foster, Natural Gas Services Group's Chief Financial Officer. Mr. Foster, please begin.

Thank you, Luke, and good morning, everyone. Before I turn the call over to John Chisholm, our interim president and chief executive officer, I remind you that during this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, based on our current beliefs and expectations, as well as assumptions made by and information currently available to Natural Grass Services Group's leadership team. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the United States Securities and Exchange Commission for the factors that may cause actual results to differ materially from those in the forward-looking statements made during the call. In addition, our discussion today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, and adjusted gross margin, among others. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday afternoon's press release in our forms 8K, 10K, and 10Q, furnished to the SEC. Now, I'd like to turn the call over to John Chisholm, Natural Gas Services Group's Interim President and Chief Executive Officer. John?

Micah, thank you, and thanks to each of you for taking the time to join us for today's second quarter 2022 Earnings Conference Call and Operational Review. In addition to Micah Foster, our Chief Financial Officer, with me today is Jim Hazlett, Natural Gas Services Group's Vice President of Technical Services. Micah, Jim, and I will be happy to answer your questions after our discussion of the company's second quarter results and some comments on the current operating environment. Every good plan is subject to the power or lack of technology. We apologize for the inconvenience this morning, but apparently our conference call provider's carrier had a massive outage at 7.59 a.m. Eastern Time, just in time for our call. We aren't telephony experts, so we aren't exactly sure what happened, but we will get to the bottom of it to make sure it never happens again. This after we had a practice run with the system last night. That said, here we are, about 90 minutes later than expected, but everyone is safe and we're ready to go. And in the big picture, if this is the biggest challenge of the week, we will all have a pretty good week. Now, as they say, on with the show. Yesterday, NGS released its financial and operating results for the three months ended June 30, 2022, in a press release and filed its quarterly report on Form 10-Q with the U.S. Securities and Exchange Commission. Financial details for the second quarter and first half of the year can be found in those filings. While we will not regurgitate all the data in those reports, we will discuss the highlights of the quarter, provide some additional context regarding the current operating environment, detail key initiatives at the company, and provide some conclusions and general comments about what we see in the coming months. When I agreed to step into the role as Interim President and Chief Executive Officer from the Board of Directors, I was quite comfortable with the financial position of Natural Gas Services Group. As I noted on the last call, Steve Taylor, our former president and chief executive officer and current chairman, was an exceptional steward of the company's financial position. He left NGS in a much stronger financial and competitive position than when he joined the company nearly 17 years ago. From that standpoint, Steve's shoes are hard to fill. As the transition process and responsibilities were developed, the board asked me to focus on accelerating the growth of the enterprise. evaluating and seizing appropriate opportunities available in the present energy market environment, and position the company and its culture for its next generation of leadership. While only just over two months in the process, I'm humbled by the acceptance of the NGS team of my new role and enthused by the opportunities that are ahead. As I get to know my colleagues, I've been impressed with their initiative and enthusiasm and believe we have one of the best operating teams in the domestic compression business. As noted in our press release last night, we reported total revenue $19.9 million for the three months ended June 30, 2022, including $18.1 million in rental revenue, a 6% sequential increase and a 16% increase when compared to the year-ago period. For the first six months of the year, rental revenue totaled approximately $35.3 million, an increase of nearly 14% from the first six months of 2021. As we've noted in the past, sales revenue can fluctuate wildly, and we saw a modest sequential reduction in sales in the second quarter. We should note that an emerging trend in the current acceleration in oil field activity is the continued reticence of exploration companies to commit capital for oil field equipment purchases when leasing options are available. As a result, at least for now, we expect sales to be rather subdued as most upstream participants continue to focus on compression rental opportunities. Before MICA provides additional color on our financial performance for the quarter, I'd like to share with you four key priorities as we work through the balance of 2022 and into 2023. As nearly anyone who's been around the oil field across multiple economic cycles will tell you, the current environment is certainly unique. In my nearly four decades in and around the oil patch, I have never seen variables converge to create more durable opportunities for energy service and technology concerns, including compression. It is our mission at NGS to seize those opportunities to create long-term value for our shareholders. First, we remain committed to our large horsepower strategy. While we're not neglecting smaller horsepower opportunities, there are plenty of them, we remain committed to growth in our large horsepower fleet. The vast majority of our capital is committed to large horsepower projects, and we expect that to continue for the foreseeable future. NGS has a key advantage over many of our peers in that our balance sheet strength allows us to more assertively but prudently take advantage of large horsepower new build opportunities. That said, we intend to be deliberate in our capital commitments and return requirements going forward. It is important that we receive appropriate consideration from our clients to commit capital for high horsepower projects that have longer-term payback parameters. During the challenges of the pandemic slowdown, we worked with our clients that required flexibility in deliveries and pricing. Today, with oil and natural gas prices near cycle highs, we expect our clients will understand our need to forge partnerships that have economic symmetry. Second, we are focused on new technologies and initiatives that can make compression more efficient and provide benefits to both our clients and our investors. Our recent announcement that we are accelerating the conversion of a meaningful number of combustion engine compression units to electric drive motors is just one example. As upstream clients seek ways to reduce emissions, demand for electric drive compression is accelerating. Moreover, electric compression typically operates more efficiently, can be incrementally more reliable than combustion engine packages, and as a result, generally is deployed at a better price point. Our proprietary SIP compression technology allows for ready, rapid, and relatively simple conversion from combustion engine to electric drive units. In addition, We continue to roll out proprietary smart system on most new units in our fleet and are retrofitting several existing units with this system. The technology provides real-time monitoring of gas lift compression surface and downhole pressures to ensure steady pressure levels and optimize production. This technology provides NGS with a competitive advantage with several key clients. We continue to look at a number of other technologies. from those that could enhance existing compression systems to some that claim to be the next great evolution in compression technology. While many will not pass the scrutiny of our technical team, we won't know unless we look. And in today's market, new technologies may be the difference between emerging as a future leader in energy service technology or losing your competitive edge in the market. Hence, we remain focused on innovation. While not directly a technology initiative, we've accelerated our swing program of comprehensive equipment overhauls and upgrades to make sure our deployed compression is operating reliably and at an optimal efficiency level. There is nobody better than our Jim Hazlett and his 40 years of compression experience to lead this initiative. Third, as the energy cycle continues to strengthen, we are focused on a rational pricing policy. Our team, led by Micah and Jim, is working diligently to ensure our pricing economics are fair for our clients and optimal for our investors. As anyone with oil field experience knows, oil field pricing is more art than science, and many times the art isn't terribly appealing. As mentioned earlier, Too often, energy service concerns providing pricing allowances as cyclical demands recedes but don't recover and maintain pricing when the cycle accelerates. With what now appears to be durable cyclical growth, we believe the value of our equipment and services should be recognized by our clients, which should provide benefits to you, our shareholders, as well. As demand for compression equipment exceeds supply, We do not expect our business to be an exception to pricing theories embedded in economic history. Fourth, we are acutely focused on operating in capital efficiencies. While there isn't a lot we can do about overall inflationary and supply chain pressures, we are fixated on what we can control. Internally, we are using technology to improve efficiencies. Whether it's automating hourly technicians' time clocks or moving toward real-time field inventory tracking, we are undertaking a major automation program for field services tracking and data analysis. While this won't happen overnight, the availability of real-time data and analytical capabilities combined with the elimination of the delay inherent in paper reporting should result in less time spent on paperwork, and more time on productive interaction with clients and their equipment. Another example, simply equipping service vehicles with GPS should help us be more responsive to maintenance calls, reducing downtime for clients and reducing unnecessary travel time and expenses for our technicians. In addition, in response to supply chain challenges, we are working with key supplier partners on preferred supply agreements and partnering with them to develop delivery schedules that help us ensure we can better meet the needs of our clients. Those agreements in many cases may also provide us with preferred pricing and reducing our overall capital costs, resulting in an opportunity for incrementally better returns on new equipment. We recognize there are a number of operating expenses and disposable items that are putting pressure on operating margins. We work daily to secure optimal pricing on disposables such as lubrication fluids. However, even with negotiated bulk pricing, lubrication oil prices have increased over 30%. We're working with our clients to recover those increased operating costs and will continue to push for fair expense recovery as appropriate. I would be remiss not to mention labor pressures as well. As activity continues to accelerate in the Permian Basin in West Texas as well as in other key energy markets, competition for quality people continues to grow. We are regularly benchmarking our wages to make sure we are competitive. We are also increasing and improving our training opportunities and enhancing benefits while in many cases holding the line on benefit costs. An example is a pending change in retirement plan providers. that will provide more robust options and accessibility features while reducing the overall administrative cost of the plan. Kudos to Mona Porras, our Human Resources Director for her leadership on these initiatives. With that, I'll turn it to Micah to provide additional color on our second quarter financial results. Micah?