Natural Gas Services Group, Inc.

Q4 2022 Earnings Conference Call


spk01: Good morning and welcome to Natural Gas Services Group Inc's fourth quarter 2022 earnings conference call. All participants are in a listen only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Alicia Dada, investor relations representative. Thank you. Please go ahead.
spk00: Thanks, Julian. Hello everyone, and thank you for joining us to discuss our full year and fourth quarter fiscal 2022 financial results. Today's call is being webcast on our investor relations website at Also available on the site is our earnings press release, which was issued Friday, March 31st. Before I hand the call over, I'd like to remind everyone that during today's call, including the Q&A, we may make forward-looking statements regarding expectations of the company. These forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call. These risks are detailed in our most recent annual report on Form 10-K and, as such, may be amended or supplemented by subsequent quarterly reports filed with the Securities and Exchange Commission. The statements made during this call are based upon information known to Natural Gas Services Group as of the date and time of this call. NGS assumes no obligation to update the information presented in today's call. With that, I'd like to turn the call over to Steve Taylor, our Chairman of the Board, Interim CEO and President. Steve?
spk02: Thanks, Alicia and Julianne. Good morning, everyone.
spk04: Welcome to our year-end 2022 earnings conference call. Thank you for joining us this morning. Before taking your questions, I'll highlight our four-year results that were detailed in our earnings press release Friday afternoon, discuss the current business environment, and provide comments on other aspects of our business. I also note that we filed our annual report on Form 10-K with the U.S. Securities and Exchange Commission on Friday. Before providing the financial highlights for the fourth quarter and full year of 2022, let me provide some context on the current operating environment. Like the broader markets, energy commodities have been increasingly volatile in recent weeks. This isn't terribly surprising given the overall uncertainty in the broader economy. We anticipate that velocity to continue, at least in the near term, until the broader financial markets experience more stability and a clearer picture regarding the banking system, Federal Reserve activity, and the overall economy emerges. That said, while it's unlikely that we will see the same oil price acceleration experienced in the past year, we believe the capital discipline of exploration and production companies, the production restraint demonstrated by OPEC Plus members, and the lack of near-term production growth is likely to protect the market from an oversupply of crude in the coming months. And if this weekend's unexpected OPEC production cut is any indication, we may be witnessing a new chapter in global energy economics unfold, one that provides even further support for hydrocarbon prices. On the demand side, while we are cautious on demand growth and in fact could see modest contraction from Western economies, that slowdown should be mitigated by a steady increase in petroleum demand from China as the economy reopens. In short, while we are less optimistic about price acceleration in the coming months, we are relatively confident that prices will settle in somewhere in the $80 range. We should provide excellent support for current production activity and the growth plans budgeted by our customers. Of course, we will vigilantly watch for signs of changes in supply and demand fundamentals and look to position the company to take advantage of opportunities and identify challenges that would impact our operations and capital spending plans. While the natural gas market has less impact on our business plan, it is fair to say we are somewhat confounded by the lack of support for gas prices. That said, a perfect storm of an incredibly mild winter, especially in Europe, What appears to be more moderate industrial demand in North America and maintenance issues that reduced LNG export capacity from the United States all had an impact on gas prices. While all of those variables are likely to return to more normal levels over time, it is unlikely that natural gas prices will meaningfully accelerate in the near term. That said, regardless of the actual level of oil and natural gas prices, the dynamics of the production market provide significant opportunities for the compression business and natural gas services group in particular. As noted in previous quarters, as reservoir pressures decline, unconventional production increases, and other production challenges arise, every barrel of oil produced in North America and around the world requires advanced techniques to reach the surface, one of the most important of which is compression. After some major economic or geopolitical surprise, which could include continued production restraint from OPEC, that would have an impact on global energy demand, we believe commodity prices should remain firm, which should lead to steady growth in production spending. NGS, with our past financial discipline, is well-positioned to take advantage of these opportunities, beginning this year and beyond. As we have said in our last call, while we have been and will continue to be focused on operational efficiencies, our line of sight to organic growth opportunities in the high horsepower market remains as strong as the industry has seen in a long time. We announced during the quarter that we expanded our credit facility with Texas Capital Bank to provide running room for future growth. At the end of 2022, we had approximately $25 million drawn on that facility, and at the end of the first quarter this year, our bank debt is roughly $55 million. This leverage has allowed us to grow our fleet for key customers, the vast majority of which is pre-contracted work. While our largest customers are among the best capitalized and strongest companies in the exploration business, we are always seeking new clients as a way to expand and diversify our revenue base. While our position as a net borrower is a relatively new development for a natural gas services group, We have a long track record of successfully managing our balance sheet and making calculated, optimistic investment decisions. Our borrowings are the result of the opportunities presently in front of us and our assessment of the future potential key customers, including our quest to maximize returns for our shareholders. In the past, we have been able to fund our capital equipment expansions with a combination of balance sheet cash and operating cash flow. But the present activity is so strong and the equipment is so expensive, they were only able to take advantage of the market with supplemental borrowing. I also want to emphasize that these are high-graded opportunities, ones with long-term contracts and market-leading rates. We are not chasing every job available to us. With that said, let's look at the results from the fourth quarter of 2022. Total revenue for the three months into December 31, 2022 increased to $22.5 million from $22 million for the three months into September 30, 2022, or a 2% increase. Total revenues increased year-over-year from $18 million for the three months into December 31, 2021, for a 25% increase. Rental revenue increased 10.4% from $18.6 million in the three months ending September 30, 2022, compared to $20.6 million in the three months ending December 31, 2022. Rental revenue increased to $20.6 million in the fourth quarter of 2022 from $16.5 million in the fourth quarter of 2021 for a 25% gain. Both comparative period increases were primarily the result of the increased deployment of higher horsepower railing units with the fourth quarter of 2022 growth supplemented by rental price increases. Rental revenues have strengthened and are now running between 85% to 90% of our total revenues in all comparative periods. As of December 31, 2022, we had 1,221 utilized rental units, representing just over 318,000 horsepower, compared to 1,254 rented units, representing 298,000 horsepower as of December 31, 2021. We ended the fourth quarter with 65.3 utilization on a per-unit basis and 74.8% utilization on a horsepower basis. Notably, all of our higher horsepower equipment is rented, meaning that everything from 400 horsepower and larger is 100% utilized. Utilized horsepower increased by 7% in the fourth quarter compared to the year-ago period, while revenue per horsepower increased 27.3% when compared to the same periods, demonstrating the robust price increases we have been able to implement over the past year. Our total fleet as of December 31, 2022 consisted of 1,869 units and just over 425,000 horsepower. Our large horsepower assets comprise approximately 14% of our credit utilized fleet by unit count, but these units provide approximately 45% of our current rental revenue stream. Sales revenues for the sequential quarters declined from $1.8 million in the third quarter of 2022 to $1.3 million in the fourth quarter of 2022. But on a year-over-year quarterly basis, sales revenue increased from $1.1 million to $1.3 million. For the full year comparison, sales revenues increased from $6.9 million to $8.6 million, or a 24.5% increase. As noted in our earnings release, adjusted gross rental margin increased sequentially from $8.6 million or 46% of revenue in Q3 2022 to $11.3 million or 55% of revenue in the fourth quarter of 2022. This represents a rental gross margin increase of $2.7 million or approximately 30% in the sequential quarters. On a year-over-year basis, our adjusted rental gross margin of $11.3 million in the fourth quarter of 2022 more than doubled when compared to $4.9 million in the same period in 2021. Adjusted rental gross margin as a percent of rental revenues was 55% in the fourth quarter of 2022 and 30% in the same period of 2021. If anyone recalls, in the first quarter call of 2022, I stated that we would achieve at least a 50% adjusted gross margin in our real-land business by the fourth quarter of 2022. I'm happy to say we exceeded that with all the credit going to our service forces in the field. That is their primary financial metric, and they did an excellent job. Sequentially, we reported an operating loss of $316,000 in the fourth quarter of last year, compared to an operating loss of $294,000 in the third quarter of 2022. The slight increase in operating loss from the current period was primarily due to higher SG&A and approximately $280,000 in equipment and inventory retirements. This compares to an operating loss of $8.2 million for the three months ended December 31, 2021. Operating income improvement was primarily due to higher rental revenue, higher rental gross margins, and significantly lower write-downs from rental and fleet equipment retirements and obsolete inventory. Our net loss in the fourth quarter of 2022 was $757,000, or six cents per diluted share. This compares to a net loss of $80,000 in the third quarter of the year, or a penny per basic and diluted share. The higher net loss in the quarter was due to higher SG&A and a higher income tax rate. On a year-over-year quarterly basis, our net loss for the three months into December 31, 2022 was $757,000, or $0.06 per basic and diluted share, compared to a net loss of $5.6 million, or $0.42 per basic and diluted share, for the three months into December 31, 2021. Improved rental revenue and gross margins were the primary contributors to the lower net loss. For the comparative four years, net income improved dramatically from a loss of $9.2 million in 2021 to a $570,000 loss in 2022. For Q4 2022, adjusted EBITDA was essentially flat at $7.8 million when compared to the prior quarter, but increased significantly from $2.3 million for the same period in 2021. I will note that S&A expenses in the fourth quarter of 2022 were approximately $4.8 million. a $2 million increase from the year-ago period and an increase of approximately $700,000 in the third quarter of 2022. These increases were primarily attributable to severance and retirement expenses, as well as other costs related to our executive transition process. Many of these costs were extraordinary and short-term in nature, and we expect them to significantly decrease by the end of this year. SG&A is likely to fluctuate over the next several quarters due to trailing transition costs and the overall growth in our business, but we are acutely focused on these expenses and anticipate bringing them back into the 13% to 15% of revenue range that we have historically experienced. Our cash balance as of December 31, 2022 was approximately $3.4 million, with $25 million outstanding under our revolving credit facility. In 2022, we realized cash flow from operations of $27.8 million and used $65.1 million for capital expenditures, $57 million of which was expended on our rental fleet. As a side note, for those of you keeping track of the saga of our elusive $11 million tax refund, there has been some progress. We've been lobbying the advocate's office of the IRS and recently had a conversation with the service. There is movement, but it's a government speed movement. Any refunds over $5 million have to go through an audit, which is estimated to take another year to complete. Mind you, this is on top of the almost three years we've already been waiting. In spite of that, We are celebrating the fact that it appears a real person exists in the IRS that acknowledges we have a valid claim. As indicated earlier, the compression market remains strong and we continue to see demand for new compression units, largely in the high horsepower range. We are likely to continue to deliberately expand our fleet to meet demand as long as such expansion meets our return expectations. While subject to change based on market conditions and variability in opportunities, we expect our annual capital budget this year to be $95 million. This may fluctuate due to the number of actual contracts we secure, our contract projections, and our assessment of any spec bills we need to pursue, but we think this is a realistic figure at this time. Before I take your questions, a couple of closing thoughts. First, as noted in our 10-K file on Friday, our audit noted a weakness in controls related to our accounting for work in progress, or WIP, and how we categorize certain WIP and inventory versus long-term assets, as well as how and when we expense certain WIP inventory. This weakness, essentially a balance sheet reclassification, was a result of a lack of control policy that resulted in the misclassification of certain WIP inventories. As a result, we have made adjusting journal entries to correct the errors and worked with our accounting staff and external auditors and consultants to address this issue, including developing appropriate controls to prevent this issue in the future. We also believe the recent changes in our accounting and finance team and oversight from our new external auditors will mitigate future errors. Overall, we are pleased with the progress made over the past 12 months. While the noise around executive transitions could have been a distraction, NGS was able to remain focused on the business of growing our company and serving our customers, which is reflected in solid growth in our financial and operating metrics. It was now over five years ago that we began our transition to a company focused on large horsepower compression. That transition continues, and as noted earlier, continues to grow in importance to our story. Nearly half of our rental revenue now comes from high horsepower compression, and large horsepower equipment is a key component of our margin growth. As noted last quarter, we are now fabricating 2,500 horsepower compression packages, the largest units in our fleet, and continue to gain traction with those units as well as other categories of large horsepower equipment. We currently have 15 contracts for these very large packages. This is significant as we continue to leverage our large horsepower offerings with a broad range of existing and new customers with an eye towards potential opportunities in midstream markets. We continue to sign rental contracts with both premium rate and term. Continued improvements in service and availability should allow that advantage to continue, and we believe it should extend to the 2500 horsepower market. Also, in addition to our traditional compression business, we continue to see opportunities to provide compression related to methane reduction initiatives, which have received a boost from the Inflation Reduction Act. While still early in the game, our technology should not only reduce the carbon footprint of our compression equipment, it should create operating and tax efficiencies for those engaged in that business. The balance of 2023 could be a pivotal year for this emerging business. On the governance and leadership front, our board of directors continues to engage in the search for new chief executive and chief financial officers. That said, the team and I will continue to focus on the opportunities ahead of us. We are energized by the daily activity and are excited about the future of our company. I'm grateful to J.D. Faircloth and his willingness to step in as interim CFO and help balance our finance and accounting group. And as always, I'm incredibly grateful and proud of the entire NGS team for their dedication and efforts in making this not only a great energy compression company, but a great place to come to work every day. Thank you, and I look forward to your questions.
spk01: As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Rob Brown from Lake Street Capital. Please go ahead. Your line is open.
spk05: Good morning, Steve. Hey, Rob. Just wondering if you could give a little bit more color on the demand environment for high horsepower. I think you said you had 15 contracts in place. How is the new sales activity funnel, and how is the cost-demand environment, I guess?
spk04: Now, the 15 contracts are just 2,500 horsepower units, so that's a brand new market penetration for us. What we classify as larger horsepower is 400 horsepower and up, and the 400 horsepower is very robust. We're sold out of those, and we're building some more, and more than likely, we expect those to be contracted as they roll off. You move up into the 1,400 and 1,500 horsepower range equipment, and same thing there. We're totally sold out in that respect, and we're building more of the 1,500 horsepower units. And again, most of, whether it's 400 horse or 1,500 horse or 2,500 horse for that matter, the majority... of that equipment, 85 to 90% of it is already contracted. So obviously the market is very robust. At this point in time, we don't have anything in the yard. Everything is being built either on pre-contracts or, you know, in the 400 horsepower little, you know, some spec units being built in there because it's a pretty popular unit there. But, you know, so the demand is great right now, and we anticipated staying that way. You know, our projections, internal projections, see a fair amount of big horsepower needed the second half of the year and into next year. The OPEC move this weekend will do nothing to hurt that and probably enhance that. So I would expect that the big horsepower just continues on until and unless we see some disruptive factor in it. But right now, we see it as being pretty positive.
spk05: Okay, great. And then the capex expectations of $95 million, how much of that is from that 2,500 horsepower market?
spk03: Let me calculate in my head.
spk04: That's probably, you know, that's a third to a half of it, just those units right there. They're pretty expensive. So, you know, in the third to a half, that's, you know, somewhat of a range, but it kind of depends on how the rest of the You know, the bill schedule comes out, too, on 1,500 horse or bent towards 400 horse, something like that. But, you know, that would give you a rough idea, say 35 to, you know, 50% of it is going to be that bigger stuff.
spk05: Okay. And you talked about pretty nice growth in the rental in the fourth quarter from my price increases. Do you see opportunity for further price increases, or will that just flow through in 23 and drive the growth in 23?
spk04: We had some additional increases in Q1 of this year, which we'll report on in the next call. Now, I think we're at a good point right now. Now, any further price increases we see or choose to implement will probably just be as a result of cost of goods going up either Either the equipment itself or if we have continued inflation and supply chain issues, just inflationary impacts from those items. But from the point of market driven or induced price increases that we may just choose to We feel like we're okay where we are right now. And again, anything further will be just due to cost of goods or cost of service.
spk02: Okay, thank you. I'll turn it over. Okay, thanks, Rob.
spk01: Our next question comes from Tate Sullivan from Maxim Group. Please go ahead. Your line is open.
spk07: Hey, thanks. Hi, Tate. Just looking at change in rented compressors, do you, I mean, on net-net, do you still have any smaller horsepower units coming back to you from the field, or should it be, given your recent CapEx and 95 million CapEx plans, should it be a pretty consistent cadence of increasing the total number of rented compressors in the field? Okay.
spk04: Any increase in the fleet is going to be obviously primarily driven by larger horsepower stuff. Any increase in rented compressors will just be dictated by utilization, which we expect the high horsepower utilization to stay high. I think the medium horsepower will probably stay fairly steady. The only risk to utilization will probably be in the smaller horsepower, which is primarily driven by gas markets. But we haven't seen, even with the drawdown in gas price, we haven't seen a whole lot of return on that. We had some return last year due to price increases, which we expected. And obviously operators don't like the lower gas price, but we haven't seen a lot of equipment come back due to that. I think, you know, You have to remember, the gas price fell, but it didn't fall below where it's been for a decade. You know, it went up, you know, mid to the end of last year, and then it's come back down. But, you know, it kind of came back down to where it was, you know, just a low price we've all been used to for a long time. So, you know, if you look at it on, you know, just a point-to-point basis, it looks pretty bad. But if you look at the, you know, the trend the last year or two, it's pretty much business as usual. just doesn't do much. There's just a lot of gas in this country. So we don't see a whole lot right there. We have seen some weakness in pricing on it, but that's about it, but not a whole lot of return to equipment at this point. Anyway, I'll kind of expand on that a little bit. I've had comments about, well, gosh, you know, you, you get this, um, you know, you go out and get this line of credit and, uh, you know, you take on some debts you haven't had and, And people don't remember, we used to have debt, but it's been 10, 12 years ago. And, you know, you do this and, you know, and now, you know, oil prices had gone down. Of course, it came back up today. Gas prices had gone down. Interest rates are going up. You know, oh, my gosh, you know, what, you know, what the heck's going on? And if you look at our overall fleet, you know, about 25% of our revenue is driven by natural gas activity. So it's pretty small. It used to be 10 years ago it was 100%. And with this large horsepower diversification, it started shifting our revenue towards oil commodity economics versus natural gas commodity economics. And so only roughly 25% of our revenue is driven by pure natural gas activity. And the other 75% is driven by oil, mainly due to the gas lift operations that a lot of producers have started doing based on with the shell production. So if you look at gas price, it's something I'd love it to go to $5 or $10. I don't think it's going to anytime soon. But any variation in that gas price has a limited effect on what we're doing, has no effect on on our capital expense because we really don't reinvest in that smaller market, which is driven by natural gas primarily. All of our investment goes into the oil market. Now, they're both commodities. They both fluctuate. Oil is a better commodity from the standpoint that there's less. It doesn't stay low. Obviously, it fluctuates. You go high, you go low, but it comes back into a fairly normalized range at times. And then you look at what's happened on the macro aspect from the banking and interest rates and stuff like that, and they continue to go up and whatever the Fed's going to do in inflation and everything else. I mean, there's all kinds of countervailing winds on that. You know, the interest rates, we've got a good banking group behind us. You know, TCB's in there. There's some big banks in there. They did a lot of due diligence on our projections and financials and are comfortable with our plans. You know, and we have some nominal, you know, leverage requirements. we don't ever in our projections see going above three to one. In a downturn, we are typically protected by longer terms and the higher rates on that. So whether it's debt you're looking at or just the normal fluctuations in the business, those contracts help get you through those. And then if you ever have to do something on interest rates, presently there are interest rate swaps that are fairly attractive and things like that. You can go from variable to fixed and vice versa. you know, if need be. So, you know, the interest rate thing obviously is something we watch. We haven't watched it in 10 years, haven't had to. But now with the CapEx we're spending, you know, we'll generate a higher level of cash, and EBITDA, and our projections look very good and strong, and the banks agree with that. So, All those factors now, whether it's commodity pricing or interest rates, we've pretty well got a good handle on it and feel like we're either naturally hedged or can get hedges in place if there appears to be a problem. So a long answer to a short question, I guess, but from the commodity prices and macro interest rate environment, we think we're pretty good shape.
spk07: And just one follow-up question on the compressors that you are retiring, and you're retiring, maybe it's more of an accounting change when you choose to retire those units, but could there be any residual value in the retired units at all, or do they just simply go to scrap with no potential proceeds? long-term for you?
spk04: Yeah, the ones we retired in Q4 were all smaller units, you know, pretty close to the end of their depreciable life and, you know, and actually useful life because, you know, when we look at the retirement, it's not just book value we look at, but, you know, it's the cost of re, you know, overhauling something or rebuilding something back up to usable potential and then what's your potential economic benefit from it, right? What's your rent going to be? And so that drives those decisions too. We were talking about $200,000 worth, which was actually about 150 or 200 units. So it wasn't much of a write-down for the number of units, but they were primarily smaller. We got them out of the fleet. We typically will – it's like telling a kid to a candy store. We have these units scattered around. We'll have the field guys – strip off any parts they can reuse. And then, you know, if we don't think we're going to use them to refurbish or reapply, we'll take them to scrap. But, you know, one example of reapplication is what we announced last year, some electric motor conversions. We took some 250 horse class compressors, took the engines off those, actually rebuilt some of the engines to reuse, then put electric motors on them, and we're building up some electric drive packages. So we squeeze whatever juice we can out of that lemon before we just send the rest out to the scrapyard.
spk02: Great. Well, thank you, Steve. Okay. Thanks, Tate.
spk01: Our next question comes from Justin Jacobs from Mill Road Capital. Please go ahead. Your line is open.
spk02: Good morning, Steve. How are you doing? Hey, Justin. Good. You?
spk08: Well, appreciate you taking the time here. A couple different categories of questions here. Let me start on CapEx. The CapEx numbers are surprisingly large, you know, $30 million in the most recent quarter. Sounds like you'd probably do something around another $30 million in the first quarter and $95 million for the coming year. Can you give me a description, you know, kind of as of year end, because that's when we have detailed info, you know, how many units are in the process of getting built? Can you break that out by, you know, 2,500 horsepower, 1,200 to 1,300 horsepower, 400 horsepower? Just kind of trying to get a sense of what the fleet is going to come online in the coming year.
spk04: Yeah, from a debt balance standpoint, so as I mentioned, we have $25 million at the end of 2022. you know, and 55 million at the end of essentially Q1 this year. So we did spend $30 million, you know, in Q1. We'd spent $25 million in Q4 because we had, you know, essentially zero debt at the beginning of the fourth quarter last year. We're anticipating each quarter going forward about $20 to $25 million, you know, so Q2, Q3, Q4, and that'll end up at that $25 million plus $95 million or $120 million debt balance at the end of this year. Now, what that's made up of, and if you'll allow me, I'm going to be a little... vague on the counts of equipment. I mentioned the 15, 2,500 horsepower units. I don't want to give too much away to the nefarious ones listening in. But the balance, the majority of the remaining... The remaining capital is 1,500 horse units. And that's going to be you know, probably half of the budget, of the total budget, you know, so the state, you know, used $120 million. And then the balance between that and the 2,500 horse units is going to be the 400 horse range. So it boils down to 400 horse, 1,500 horse, and 2,500 horse. And The 400 is going to be roughly 10%. The 1,500 horse is roughly 50%, and the balance is 2,500.
spk08: Okay, so let me go a little different direction. All-in cost right now for a 2,500 horsepower, what are one of those compressors? Not just the compressor, the overall piece of equipment to get it out in the field, what's the capital cost for that? Approximately.
spk04: The package, you know, it's going to run in the $2.75 to $3 million range. Okay.
spk02: And what is it for the $1,500s now? Those are in the... That's the same thing about $1 million cheaper. Well, let me say $1.5 to $1.75 million. Okay. All right. So those...
spk08: Those have gone up a little bit because my recollection from a year or two ago, probably two years ago, those were more a million to a million and a quarter.
spk04: So we've seen inflation. When we started building those 1,500 horse, probably almost four years ago, yeah, they were $1.1 million roughly.
spk02: Yeah. They've gone up quite a bit.
spk08: Okay. I could probably back into... Are any of the 2,500 horsepower as of year end, were any of those out in the field of the, I think it was said 14 that you guys contracted?
spk04: No, no, they're being built.
spk08: What's the expectation of timing when they go out in the field?
spk04: It's going to be a second half. I mean, it's hard to nail it down because some of that stuff shifts around, but it's a Q3, Q4 sort of time frame.
spk02: Okay. You know, I guess I give a... Go ahead.
spk08: Yeah, I guess these are big CapEx numbers here. If we look at the earnings call a year ago, you told shareholders to expect $20 to $25 million. Instead of the $20 to $25 million, we did $65 million last year. We're doing $95 million this year. I think it's important for shareholders to understand what the plan is and where are we going here on capital outlay. I appreciate some of the competitive concerns you have in terms of breaking out number of units, but it's very difficult to project kind of what EBITDA is going to be generated out of this in the coming year and specifically the timing without some better detail on each of these units and what the fleet is going to look like.
spk04: Yeah, and I understand what you're saying. And we've got, obviously, detailed schedules on when things are anticipated to come out. Unfortunately, those schedules probably change every two weeks based on customer drive and demand. We've got them contracted, but the customers sometimes shift things around, move units in front and behind, things like that. And I appreciate what you're saying. I just am hesitant to put out too much detail, as mentioned, just from a competitive standpoint, as far as people knowing when and where. And obviously, they can guess. Most of the stuff goes to the Permian. So I can try to think through and maybe come up with a better way to give a clearer picture. But I think if you... You know, I don't want to break down exactly when certain units are coming out, et cetera. You know, and sometimes just the, you know, the quarterly spend that I went through a You know, it's probably about the best detail I can give you without going into this many units, that many units. And I understand it's, you know, it's hard to project EBITDA growth off that. But without getting into too much detail, I'm a little hesitant.
spk08: All right. Well, let me ask another question, which is, as you look forward beyond that into 2024, What level of capex should we expect?
spk02: In 2024? Yeah.
spk08: I mean, I'm just trying to understand if the building spree is going to continue and that it's kind of baked in.
spk03: Yeah.
spk04: You know, they'll put our, well, I just went through puts our debt balance at 120 million at the end of the year. I'm assuming no, you know, no interim pay down or anything. Yeah. And we've got $175 million commitment. Our borrowing base now is about $140 million. So presuming we get to the borrowing base goes up to $175 million, that leaves about $55 million, if nothing else changes as to what's left on that commitment. The 2024 CapEx budget is going to probably depend on really what happens Q3 and Q4 as far as what other orders come in on large horsepower rented equipment. It's real hard. Yeah, it's real hard and almost impossible to say right now. I mean, if nothing else, you could say, well, it's $55 million, then we run out of commitment, right? But obviously, by that time, we'd have higher EBITDA flowing through and could get more if the market demanded more.
spk08: Well, I mean, just to push back on that for a second, I mean, if you're saying that you've got these $2,500 that are coming on sometime in the second half, you know, maybe the EBITDA is hitting that point, but maybe it's not. If there are delays, some issues getting out there. I mean, Q4 a year ago, you had significant issues in incremental costs and getting new equipment out in the field. And so that's my question here is this kind of all plays into then capital structure, as you said, you know, $120 million by year end. You know, that's slightly below what your market cap is currently. That's a pretty material change. And you've got $125 million uncommitted accordion on top of that. I just don't know where you're going from a capital perspective. And I'm trying to get an understanding of, you know, thinking forward, not just one quarter or even three quarters, how much more debt is going to be on this business.
spk02: Yeah.
spk04: Well, your projections – show that our debt would peak, and this is based on 2023 from what we see, and then this equipment being said, and some EBITDA being generated in 2024, obviously. The full year of whatever is put in the second half. Our debt would peak in about the fourth quarter of this year, and All I can say is what we see from a static standpoint now based on our projections now and what we see from the market and the borrowings. And then the EBITDA coming in starts paying that down and we would have the debt paid down in a couple years after that. That's static, I know. And I know your question is, well, I want to know dynamics. I want to know what's going on next year. It's real hard to say what's going on next year.
spk03: If the market stays strong, it could be another $95 million maybe.
spk04: But I don't know. I hesitate to even throw that number out there because it could be $50 million or it could be $25 million if we have a big recession next year and things fall down. It's just hard to say. I'd have to really take a stab at something that really we don't have any basis in fact for right now as far as what next year is going to look like.
spk08: Okay. All right. Let me... Let me go to a different topic here, which is the SG&A increase. If I look at 2022, it's $13.6 million, which is an increase of $2.9 million versus last year. All this increase is Q3 and Q4. In the fourth quarter, you're running at 4.8 of SG&A. Two questions for you. First is, what are the components of the $700,000 sequential increase from Q3 to Q4? And then second question is, what are the components of the $2 million increase from Q4 a year ago?
spk03: Okay.
spk04: The primary differences in the year-over-year are... The retirement and severance expenses, and frankly, that's my retirement agreement. And then John Chisholm's severance expenses, the interim there. So we had... You had higher costs there, over a million dollars on that. There were double salaries in there from a CEO standpoint, certainly for about six months. We've had higher administrative salaries, around $140,000 or $50,000. There we had about $150,000 higher software expenses. And about... about half a million dollar higher consulting and stock expense. So that was year over year. Now, sequentially, The consulting and deferred comp, again, ran about $500,000 higher. Health insurance is a little over $100,000 higher. Stock about $300,000 higher and administrative salaries also. That's the majority of it. The majority of it is, as I mentioned, some of these transition costs of my retirement agreement coming back in, John being interim for six months in there, and the associated expenses there, and then higher administrative salaries and some higher software costs.
spk08: What were the consultants? What were the nature of the consulting expenses?
spk04: We've had consultants, like I mentioned, on the accounting side. We've had some, I don't know if the search expenses fell into any one of those. I'd have to check on that. That may be Q1 expense. And just some miscellaneous contract settlements and expenses we terminated.
spk08: That's one of my follow-up questions is, you know, where are the search expenses? I know the company's got multiple search expenses. I was hoping at least that that's in Q4, but it sounds like that actually may be in Q1, so we've got incremental SG&A coming.
spk04: Yeah, it doesn't look like the search expenses are – and I'd have to – I don't think the search expense, I had to double check for sure, but I don't think the search expenses are in, you know, up through Q4. I think they will show up in Q1. And so that's why I mentioned, you know, we're still going to have some tailing off of some transition expenses over the rest of the year, you know, getting the SG&A more in shape and down as we, you know, get other people in and other people out.
spk08: Yeah, well, it sounds like it's actually going to go up a little bit, because if you have your retirement agreement expenses that we're hitting in both Q3 and Q4, they're going to be there in Q1 still, I assume.
spk04: Yeah, that will be, but John Chisholm's expenses are all totally in Q or last year. And then I think a fair amount of those consulting expenses are there too. And really the RSU expenses ought to come down. So there's going to be, the search ones would kick in, but there's going to be some offsetting savings there too.
spk08: Yeah, I mean, it's kind of this big picture that I look at, you know, Q3 to Q4, your company adjusted EBITDA, went up $20,000 on what were rental incentives. You just cut out there, Justin. Oh, sorry. Can you hear me again? Yeah. Okay, yeah, the company adjusted EBITDA on Q3 to Q4, I mean, went up $20,000. So your rental profit increase, which is material, is getting completely eaten up by SG&A, and I'm trying to figure out you know, what are the new units that are coming in and when is that EBITDA rolling in? I've got SG&A volatility. Very difficult to see kind of what EBITDA looks like for the year.
spk04: Yeah, I know. You're right. That was a disappointment in these results that, you know, the very, you know, good operating results got, you know, chewed up by some other transition, you know, severance retirement expenses, you know, And I know we don't break those out publicly on the SG&A, but that's just looking forward and seeing what's coming off and what may be coming on, which the only thing coming on that we see would be search expenses. Yeah, we think we'll still be able to get down into that 13% to 15% historical range. We'll be approaching towards the end of the year, but certainly into next year I think we'll have that in a lot better shape because there are some trailing ones, admittedly.
spk08: Okay. Let me get to the last question briefly, and this is kind of audit function questions around the company. I know this is a material weakness in the K. Can you describe the issue a little bit?
spk04: Yeah, it was primarily a balance sheet issue. There was some WIP that should have been classified as long-term assets versus inventory, and that was the biggest. Primarily, it was engine and compressor build parts, stuff being built that was classified as wrong. There's also some vehicle and software expenses that rounded out, but the majority were compressor components and costs that were just misclassified on the balance sheet.
spk08: But you did, I think you mentioned other places, you have brought in accounting consultants to, is that partially to address, at least partially to address these issues?
spk04: Yeah, to help us, well, the issues were addressed by our auditors and, you know, and our own personnel. We did employ an accounting consultant to help us, you know, you know, write up some, you know, clearly write up some findings. We thought it was better for a third party to write the findings for the SEC and the K to, you know, put them, you know, a little more detailed and succinctly in there. So that was the extent of the accounting consulting we used on that primarily to help us clearly define exactly what it was. But we, along with our auditors, had found it.
spk08: I note also your earnings were delayed. Your call was rescheduled to this morning. This is the second time this has happened in the last year. Can you talk to me about why the earnings were delayed?
spk04: It's primarily just the transitions going on. We've got an interim CFO in, and then with the – With the earnings and everything, you know, we had to essentially have Moss Adams come back in and attest to the findings. Also, you know, any time you switch auditors, which we did last year, you know, the prior auditors have some review responsibility on that. So that took a lot. You know, the whole process took a little longer than we had anticipated. And so we held off the call. We announced 10 days ago or so we held off to make sure everything was done. Obviously, you know, the Friday was the deadline for the case. We went ahead and put that out in the earnings and then, you know, had the call of day. So it was a lot of transition and then just working through, you know, some of the issues that showed up in the material weakness. And plus, you know, two sets of auditors helping us.
spk08: Yeah. Okay. So basically the resignation of Moss Adams was a factor in this delay. Okay.
spk04: Well, only from the point that they had to come back in and review and attest to what they had done because they were part of last year.
spk08: Yeah. I'm saying the fact that they weren't the auditor. You got a transition here. They were resigned. So going through all that transition plus not having a full-time CFO, that's an impact.
spk02: Yes, sir. Definitely. Okay. All right, Steve. Thanks for taking all my questions. I appreciate it. Okay. Thanks, Josh.
spk01: Our next question comes from Hale Hoke from Hoke & Company. Please go ahead. Your line is open.
spk02: Hey, Steve.
spk06: How are you?
spk02: Hey, Hale. Good. You?
spk06: Doing well. Thanks. I know this whole transition of your retirement has kind of dragged on longer than you wanted and been a little messier than you wanted, but I appreciate you stepping back in and seeing it through. I'm curious, it seems like there's so much going on at the company. As the prior caller mentioned, you've spent almost your entire market capping CapEx. As it relates to that, if you're spending $150 of CapEx between 2022 and 2023, and I'm using round numbers, and I know you're hesitant to give guidance, which I totally appreciate, but is there any kind of directional... numbers that you want us to think about on paybacks? I know when John Chisholm was involved, I think he was talking about kind of five-year paybacks or 20% returns. I mean, can we think of this $150 million of CapEx over two years, adding $30 million of incremental EBITDA once it's all up and running? Or is there any range you're willing to give us?
spk04: Yeah, and the returns we are looking at, you're in the right ballpark. We're looking at a five to six year, depending on the equipment, five to six year cash on cash paybacks. Some are a little higher, but none of them are below the 15% to 20% range, and some of them are up into the 20% to 25% range. So the returns look good. From an EBITDA standpoint, again, we're starting you know, toeing the line of giving guidance or projections. But, you know, I think the, you'll see EBITDA returns in line with what that, you know, the five to six year payout shows up to. So if you can look at that,
spk06: uh that capex i think you'll you'll be able to take that capex number and look at that five to six year payback and and be pretty close to what we think ebitda is going to be all right thanks um and i guess uh getting back to your transition you know there's obviously a ceo search going on but there's also um some new directors being proposed it seems possible to probable to me that you have a different looking board in the next three months. It seems fair and reasonable to me that those potential new directors should have some input on who your new CEO is. Are you willing to stick around for three to six more months and let the board vote occur before a new CEO is committed by potentially a smaller and older board or the existing board.
spk04: Well, you know, certainly from the, you know, from the same perspective that I stepped back in when John needed to, you know, step down. You know, I've got a, as I remind people a couple of times, I've got a pretty good, you know, stake in the company. I own over, you know, 5% myself. So I'm, you know, intimately and intricately involved in how the you know, the company operates and the returns given and certainly the value derived through the share price. So, you know, I serve at the pleasure of the board and I would serve longer at the pleasure of the board if need be. You know, I'm not going to, You know, my agreement ends June 30th, and, you know, at that point, you know, per the agreement, you know, the CEO and president duties, you know, would transition. They could transition earlier, too, depending on what the search finds. But, you know, that'd be the agreement shows that as the last date. But, you know, if the company and the board deemed it necessary, I'm not, you know, I'm I'm not disconnecting my phone on July 1. Obviously, I've been with the company a long time. We felt like we built a pretty solid foundation of stuff, and it looks like we're at a pretty good jumping off point on some of this stuff. I serve at the pleasure of the board, either moving out or staying in, whatever the circumstance may be that the board determines is best.
spk06: Well, the board serves at the pleasure of the shareholders, and you're an extremely large shareholder, and our firm is your largest shareholder, and I would love to see you stick around and let the new board shake out. I mean, it's quite possible or probable that there's two new directors added, and I think that those people should have input on the CEO. That's important to me. And if the current board tries to ram through a new CEO before the annual meeting, I'd be extremely disappointed.
spk02: Yeah.
spk04: I appreciate your comments and your confidence. As you say, being a large shareholder myself, my duty would be to address shareholder concerns and shareholder value just like you're wanting as being the largest shareholder and certainly as Justin would like to. So again, you know, whatever, whoever ends up on the board and, you know, and I think, you know, the present board's got nominations to come, you know, and whoever else might be added to it. Certainly I'm all, you know, I'm all for whatever we need to do to enhance the value of the company and, you know, contribute to the growth going forward.
spk06: Well, I appreciate your flexibility as always, and thanks for your hard work.
spk02: Okay. Thanks, Hale.
spk01: We have no further questions. I would like to turn the call back over to Steve Taylor for closing remarks.
spk04: Okay, well, I appreciate everybody dialing in and the questions. As I just mentioned, I think we've got a good base to build from. We've got a lot of opportunity coming up. Obviously, some things are different. We're going through transitions. We've got a bank line we need to utilize and use, and certainly we need to deliver the returns at that point. that demands and entails and I think we will have a good year going forward and of course I'll provide updates on our progress you know in the next first quarter call. So thanks again to everybody and enjoy your day.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect.

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