Natural Gas Services Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Inc. Quarter 2, 2023 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 Ms. Ana Delgado. Please begin.

Thank you, Luke, and good morning, everyone. Before we begin, I remind you that during this call, we will make forward-looking statements within the meaning of Section 21E of the Security and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by an information currently available to Natural Gas 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 Security and Exchange Commission for the factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, and adjusted growth margin, among others. For reconciliations of the non-GAAP financial measures to our GAAP financial results, please see yesterday's press release in our forms 8K, 10K, 10Q, furnished to the SEC. I will now turn the call over to Steve Taylor, our Chairman and Interim President and CEO.

Thank you, Anna and Luke, and good morning, everyone. Welcome to our second quarter 2023 earnings conference call. Thank you for joining us this morning. Before taking your questions, I'll highlight our financial and operational results for the second quarter, discuss the current business environment, and provide comments on other aspects of our business. Reflecting on the quarter, total revenue and rental revenue grew when compared to both sequential and year-over-year quarters. Sequentially, our sales revenues declined, but our strategically important rental revenues continued to grow at a brisk pace, reflecting our 10th consecutive quarter of rental revenue growth. Our overall gross margins improved, led by higher rental margins and lower operating expenses, and operating income and net income both increased over the comparative quarters. We're starting to see the results of our 2023 capital program in our revenues, margins, and bottom lines. The overall environment in our industry continues to be positive, and we anticipate further improvements. Total revenue for the three months into June 30, 2023 increased to $27 million from $26.6 million for the three months ended March 31, 2023, or a 1.3% increase in sequential quarters. Total revenues increased year-over-year from $19.9 million for the three months ended June 30, 2022, for a 35% increase. The small increase in sequential total revenue was due to a $1.4 million drop in sales revenues in the first quarter, although that was offset by an increase in rental revenues in our service and maintenance business. By the way, now and going forward, we will be referring to our service and maintenance business as aftermarket services. There is no change in the revenue components to make up this segment, but aftermarket services, or AMS, conforms closer to how our industry generally refers to it. Rental revenue increased 6% from $22.7 million in the three months ending March 31, 2023, compared to $24.1 million in the three months ending June 30, 2023. Rental revenue increased to $24.1 million in the second quarter of 2023 from $18.1 million in the second quarter of 2022 for a 33% gain over the past year. Both comparative period increases were primarily the result of the increased deployment of high horsepower rental units, higher overall horsepower utilization across the fleet, and rental price increases throughout the year. Rental revenues now compose approximately 85 to 90 percent of our total revenues in all comparative periods. Adjusted gross rental margin increased sequentially from $11.1 million or 49% of revenue in Q1 2023 to $12.8 million or 53% of revenue in the second quarter of 2023. This is a 15% increase in gross rental margin dollars since last quarter. On a year-over-year basis, our adjusted rental gross margin of $12.8 million in the second quarter of 2023 increased approximately 42% when compared to $9 million in the same period in 2022. In the comparative year-to-date six-month periods, our rental revenues have increased 33% while adjusted gross margins grew by 42%. As of June 30, 2023, we had 1,249 utilized rental units representing over 372,000 horsepower compared to 1,281 rented units representing just over 311,000 horsepower as of June 30, 2022. The net decrease in fleet units was due to the combination of a sale of rental units to a customer and the retirement of idle units, both of which happened in 2022. In spite of that, we had an approximate 20% increase in horsepower over the past 12 months. We ended the second quarter with 65.4% utilization on a per-unit basis and 78.6% utilization on a horsepower basis. While unit utilization remained relatively flat, horsepower utilization increased from 77.4% in the first quarter this year. utilized horsepower increased 5.7% in the second quarter when compared to the year-ago period, while revenue per horsepower increased 15.5% when comparing the same periods, demonstrating the impact of the growth in higher horsepower units and the price increases we have been able to implement over the last year. Our total fleet as of June 30, 2023 consisted of 1,911 units and 473,884 horsepower, or 250 horsepower per unit. Our average horsepower per unit has grown by 19% per unit over the last year. Notably, approximately 97% of our high horsepower fleet equipment is utilized in drawing rent. Of our $150 million capital budget this year, approximately 90% of it is presently committed to long-term agreements, with a balance anticipated to be contracted in the third quarter this year. As of June 30, 2023, we have shipped and set approximately 50% of the units and horsepower anticipated in the 2023 capital expense budget. Presently, our large horsepower assets comprise approximately 17% of our current utilized fleet by unit count and over half of our utilized horsepower and current rental revenue stream. Approximately five years ago, NGS decided to enter the large horsepower market. At this time, with more than half our utilized horsepower and revenues emanating from larger units, I think we can say that we're an established player in this market segment. Sales revenues for the sequential quarters decreased from $3 million in the first quarter this year to $1.6 million in the second quarter. Two-thirds of the second quarter decrease was from a non-recurring idle equipment sale that occurred in the first quarter. The balance was the typical quarterly fluctuation we experience in parts sales. On a year-over-year quarterly basis, sales revenue increased slightly from $1.3 million to $1.6 million. Our SG&A expenses increased approximately $300,000 in sequential quarters and totaled 18% of revenue. Sequentially, we reported increased operating income of $712,000 in the second quarter of 2023 compared to $402,000 in the first quarter this year, a 77% increase. This improvement was primarily due to higher rental revenues and gross margins. Negatively impacting our operating income this quarter was a software obsolescence charge we took. Without that, operating income would have been roughly twice what we reported. In either event, with or without the software charge, operating income this year improved over the operating income of $658,000 for three months into June 30, 2022. Our net income in the second quarter of 2023 was $504,000, or 4 cents per basic and diluted share. This compares to a net income of $370,000 in the first quarter of the year, or 3 cents per basic and diluted share. In the year-ago quarter, our net loss was $70,000, or one cent. Adjusted EBITDA increased 27% to $9.9 million from the first quarter number of $7.8 million and increased 48% from $6.7 million for the same period in 2022. Our cash balance as of June 30, 2023, was approximately $4.3 million. In the second quarter this year, we realized cash flow from operations of $22.6 million compared to $13.2 million in the same quarter last year. At the end of this quarter, we've utilized $93.5 million for capital expenditures, $92.3 million of which was expended on our rental fleet. Outstanding data on our revolving credit facility as of June 30, 2023, was $100 million. The leverage ratio was 2.53, and our fixed charge coverage ratio was 4.17. These are both well within bounds of the covenants, and the company is in compliance with all terms, conditions, and covenants of the credit agreement. Last quarter, I remarked that we thought the activity we were experiencing would continue the balance of this year and likely into 2024. Based on what we're seeing and hearing internally and from customers, we think this positive forecast continues to be correct. We are in an undersupplied market, and we see little relief to it soon. Industry utilization is high. There is no appreciable capacity being added to the industry. Lead times for major components are long. Customer inquiries from established and new customers continue to flow in, and we have the ability to increase prices to ensure our shareholders get a fair return. Commodity prices and future production and consumption data also seem to support present activity. It's been a long time since we've had this kind of positive dynamic in activity and pricing, and there appears to be a greater capital discipline from customers and competitors that may help sustain this environment. In the past, there's a mantra used when the industry was going through repeated boom-bust cycles. It was, and excuse my colloquial messaging, please, Lord, give us one more boom. We promise not to screw it up this time. It's taken a few decades for this to sink in, but maybe we have it right. However, there is always caution required in a volatile commodity-based industry like ours. There will be another downturn at some point, but I think NGS has somewhat mitigated that impact with long-term contracts, good pricing, exceptionally strong customers and contracts, and long-lived equipment. We are bullish on our industry over the next couple of years and hope to take advantage of the strong environment. Thanks for your time, and I look forward to your 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 7-pound on your phone now, and you will be placed in the order received. You can press 7-pound again at any time to remove yourself from the queue. Our first question comes from Rob Brown with Lake Streets Capital. Go ahead, please. Morning, Steve.

Hey, Rob. I just wanted to get a little bit into your comments about the positive environment and sort of demand. How do you see that impacting your capital plan, I guess, throughout the rest of this year and into next year? And, you know, what's sort of the visibility on that activity?

Well, it's not going to impact it too much this year because, like I mentioned, you know, 90% of all that capital is is contracted and committed, and we anticipate the balance coming into contract during third quarter. So that's pretty well set. As far as 2024, as I mentioned, we're receiving inbound calls on customer requirements, customer needs, items like that. you'll really start to put together anything formal you know they will want to announce at this time on that but certainly it looks pretty strong now we'll feel a little better obviously as you get towards the end of the year and people start you know people I say meaning customers, will start publicly signaling budgets and announcing budgets and things like that. Up to that point, it's pretty informal, pretty much conversational as to what might or might not be required. But as I mentioned, we're pretty bullish on certainly the balance of this year because that's baked in. But 24 is looking pretty strong, you know, and we'll see how 24 flows into 25. But there's already been comments made by some that, you know, customers are looking at into even 25. primarily just because of the lead times on equipment now. And, you know, the tightest we're seeing in the market has caused the customer population to look out further than what's, you know, actually been required in the past. But, you know, we're getting to the point to where, you know, 24 certainly will become a reality and 25 will become the, you know, the next realized projection. But, you know, Right now, no specific numbers, but we think 2024 is going to be a pretty good year.

Okay, great. And then where are you at in terms of your sort of weighted average contract duration? I think many of these high-horsepower contracts were longer term. I guess what's sort of your contract duration at this point, and what's the incremental contract being signed at?

Any new contracts, and that includes anything that we've got committed this year that has either been put out or will be put out the rest of this year, is on the bigger horsepower, the 1,500, 2,500 horsepower, is five years without exception. We don't need to and see any reason to go below that. You know, overall, with some horsepower being put out about five years ago on three- to five-year contracts, you know, our average right now is in that three to five year range. But we've actually had, you know, some contracts just go month to month over the past year or so, you know, based on some of the first stuff we put out, you know, the three or four year terms that we put out three or four years ago. So those are actually on a month to month, even on the, say, 1,500 horsepower range equipment. But we've only had, I think, over all this time, maybe less than a handful of units be terminated, but then they were immediately re-rented. And terminations weren't typically due to anything other than needing to move equipment around or put it on some other locations. In that respect, it wasn't due to lack of need. So I think as I've mentioned in the past, these are minimum term contracts. So for example, the five-year stuff we're putting out now, that's a minimum term, but that doesn't mean they come back after five years. That just means that's a minimum financial and contractual commitment the customer makes to get that equipment right now. But we're seeing... We're already seeing equipment approaching one to two years beyond contract term, and that's what we expect when we first enter into this, and that's playing out. But to answer your original question, we're in that, on average, probably into that three to five year range across the whole high horsepower fleet.

Okay, great. Are you seeing the market strength in the medium horsepower area as well, or is this all really a large horsepower phenomenon?

It's primarily large horsepower. There's been the medium horsepower hangs in there okay. Where you start getting some volatility more so is in some of the smaller horsepower, which is primarily natural gas directed because it's smaller, lower pressure, lower volume type equipment and very sensitive to natural gas prices, whether it's $2 or $3, which is kind of the range it's running. So we see more movement in and out in that market. The medium horsepower is single-well gas lift, and obviously neither one of those is smaller than medium horsepower or is robust and active as a large horsepower. But they tend to just kind of hang in there and go up and down a little, et cetera. And that's why you see some of the, you know, just the unit utilization flat, but the horsepower utilization climbing pretty aggressively, you know, primarily from the large horsepower. Yeah.

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

Thanks, Rob.

Thank you very much. And our next question comes from Hale Hoke with Hoke and Company. Please go ahead. Hale? Hello? I'm sorry. Hale Hoke, please go ahead. Ask your question.

Hey, Steve.

Hey, Hal.

Congrats on a nice quarter. As you and I have talked in the past, I'm excited and supportive of your growth plan and the transition of the business and the balance sheet. The one thing that I think would be helpful for people, though, is if you could maybe work your way into giving a little bit more guidance or return information on the capital that you're spending. it seems like you're on a run rate to maybe exiting the year at close to $50 million of EBITDA. And maybe on the next quarterly call, you could give some guidance on what you're seeing for 2024 and your growth plans. But based on our math and compared to your peer group, this could be a $15 or $20 stock at some point. And I think it's going to be easier to get there if you could maybe articulate guidance and growth CapEx plans.

Yeah, no, good point. And we're sensitive for that. And we're getting the models tightened up so we can give reliably a little more detail and granularity in some of that stuff. We've traditionally not given a whole lot of guidance from that. Usually the context of the remarks will give people enough information, but you're right. With the debt, the large amounts of capital, et cetera, it's something we need to be a little more expansive about so we will we're working towards that recognize that and you know we will give a you know additional color on in that respect next quarter that sounds great congratulations again okay thanks a lot

Thank you very much. And again, if you have any questions, please go ahead and ask them by pressing the seven pound. And that's seven pounds. Our next question comes from Tim O2 with Petra Capital Management. Go ahead, please.

Good morning, Steve.

How are you?

Hey, Tim. Good. You?

I'm quite well. And actually, I'd also like to... I mean, I usually don't dial in and speak during these things, but I'd like to also congratulate you on executing this plan and also kind of on your positioning as you came into this cycle. Clearly, you had a very solid balance sheet to start this effort with, kind of unlike a lot of your peers who have carried historically a lot of debt, which I think constrained them in terms of being able to really invest in this cycle. A couple of things that I'd like to get a little more color on if we can. One is that I know that labor, especially skilled labor in the Permian especially, but probably a lot of the oil basins, has remained fairly tight. I think it's becoming a little more manageable and you're getting paid for it a little bit better. I've got to believe it's still on the tight side. And I'm wondering if you could characterize, maybe you haven't been able to slice and dice the data this way, but I wonder if you could characterize the kind of run rate of what might be excess expenses because of the, you know, the high activity level and the fact you probably have to continue to contract for some of the labor to put all these compression sets in place.

Yeah, you're right. Labor continues to be tight. We're able to keep up with it, but it's more of a battle than it has been in the past, just from the point of finding people and bringing them on, et cetera. In the Permian, and it's tight everywhere, but it's not as bad as out here. We've got operations in different parts of the country, and You're always looking for good people and having a little turnover in some areas, but it's exceptional out here. You've got the most active oil field in the U.S. and one of the most active in the world here with two towns of 150,000 people each. So there's not a big labor pool, and it's been great. It's been exhausted for a little bit. I think the last official figures I saw, the unemployment is about 2%. When you're down to that number, you're essentially fully employed because those 2% are really not the ones you want coming in. We're having to look a little harder and a little wider too because most of What gets hired now are rotators or commuters, people that we have to bring in from outside the area, so Louisiana, Oklahoma, various other places. And these are the service techs. These are the field guys that maintain the equipment and keep it running, and primarily the higher horsepower technicians that are harder to find. So you've got to look in different places all the time, and we do that. We're able to keep up, but it is approaching a full-time job just to do that. Of course, an environment like that drives... cost labor cost You know, so we do have an impact from that. You also have an impact from Essentially having to you know feed and shelter whoever you bring in. It's a room and board thing. The incremental, say the premium cost on doing this, and I'm just talking about the Permian. I'm not talking about the whole company because that would dilute the cost a bit. Just from the Permian standpoint, I'd estimate based on, say, premium labor costs and and mobilization demobilization costs for people, it's, um, you know, it would be in the 15 to 20% range, um, you know, of our, of our labor costs out here. It's, um, you know, it's appreciable. And, um, um, We pay attention to it and try to manage it, but it's very hard to mitigate it. It's such a competitive market. If you want good people, you pretty well have to target them and pay them what the market is a little above and get them on the payroll.

Part of the genesis of the question, and I don't know if you can put some color on this, is And it's maybe you're on the early side to ask the question in terms of when it's likely to normalize. But, you know, your activity level in terms of setting new equipment is obviously extraordinarily high this year. Probably stays fairly strong going into the first half of 24, I'm going to guess. But at some point that should normalize and kind of managing logistics and personnel should become operationally a little easier. Not necessarily cheaper, but better to um to optimize um you know and be able to manage your costs um down a little bit and i'm wondering if you have a sense for kind of that timeline and again you know maybe on a quarterly run rate basis what might be excess is it you know is it a million dollars of excess expense a quarter is it you know a few hundred thousand or is it even more than a million and you know again Getting very precise on that would probably be a challenge, but I'm wondering if you have a bit of a feel in terms of – because I'm just trying to obviously get a sense for what things look like as you go through the middle of next year. I've got to believe that some of these operating costs start to abate a little bit.

Yeah. Costs from a labor standpoint, I don't – really see much relief on that for really a couple years. As I mentioned, 23 is busy. We already know the whole year is active and essentially sold out. We're thinking 24 is going to be busy too. So as long as it is, There's going to be a pull on labor. And especially, you know, we'll know it's getting better when we can start finding local people. But that's a long way away. You know, we're still going to be having to bring in people to supplement the small labor force here. So I don't see really much abatement in labor pressures for, you know, probably a couple years. You know, contingent upon the activity remain like we think it's going to remain. Okay. And then over time it will, unless you get some upset in the interim that leads to a downturn, which can happen, but we don't anticipate it. So I think we've still got 18 to 24 months of labor pressure on some of that and labor availability, too. Okay. finite number standpoint, you know, it probably is, you know, from, you know, a total labor standpoint, you know, a million dollars probably would not be too far off if you're thinking about the 15 to 20% premium.

Okay. All right. Cool. Great. Okay. And actually, there's a related question. I think you alluded to this perhaps in the last quarter or the quarter before. But SD&A is running around 18%, I think, of revenues. And I think you've mentioned that that should settle out to something more like 14, if I'm remembering correctly. And do you have some sort of a timeline on that? And I'm not even sure if my numbers are correct. I'm going by recollection, not notes at this point.

Yeah. No, we anticipate Q3 and 4 being lower. You know, there's some legacy costs that the last of which we experienced in Q2. Those are gone. So, you know, I think that. And I don't remember exactly. I think I might have even, probably shouldn't even, you know, get myself in trouble here. I think I'd even talk about maybe 12 or 13% in the past, but I'll take your 14 since we're at 18. All right. But no, we'll see those come down, Q3 and Q4.

Okay, great. And then, you know, this is a kind of a quick question on some of the numbers. There's a couple things I want to try to work through that are numbers related. One is the software impairments You know, you kind of called out enough information to back into something, but it kind of looks like the accounting earnings might have been around $0.09 or $0.10 without that, although I'm not sure how to tax effect that number exactly. Does that sound about right?

Well, I think the software empowerment was $720,780. $780, yeah. If you just take the 780, you know, divided by, you know, roughly, you know, we've got about, you know, 12 and a half, 13 million shares. You know, just that quick math, and I'm not representing any of it, you know, being pre-tax or tax or whatever, but that's six, you know, that's six cents. So, you know, it is an appreciable charge.

Yeah, yeah, okay. All right. Yeah, it wasn't kind of, you know, it wasn't, kind of set out as a kind of a normalized number. So I was just trying to, trying to get a sense for that because the, the stock is still fairly inefficient and not broadly covered. So, you know, getting, getting numbers off of, you know, off of a research base is not, is still challenging. Another question. Yeah. Okay. A couple of things. Another is, I think you alluded to this and, and maybe I have this number, right, but I've been trying to look at your fleet as kind of a, A tale of two fleets, really, although you break it down into small, medium, and large, I kind of look, you know, the rest of the industry and you yourselves are benefiting from this trend in high horsepower stuff. You demarked that around 400 horsepower. And if you looked at the fleet above 400 horsepower and below 400 horsepower, the fleet above 400 horsepower, did you say that the – that the utilization rate for that part of the fleet is 97%? Yes. So then the stuff that's smaller, so your medium and small horsepower, what would be the utilization on that part of the fleet? It's probably no better than 50%, I would guess, or probably in that approximate range.

No, it's in the 60% to 65% range on the small and medium. It's not horrible. It's just not where we want it.

Right. And you have been kind of culling that a little bit, but you're doing it judiciously and not, you know, not writing it down, not taking 20 cents on the dollar, but taking kind of, you know, 100 cents on the book or something. as I recall.

Yeah, the utilization numbers can be a little misleading from a couple of standpoints. From number one, the way everybody seems to calculate it differently. Some of us do it the same, some of us do it differently, but you can read people's Q's and K's and see how they calculate. There's some differences there. Ours, we're not smart enough to get fancy with it. We just take what we owe and And, you know, compared against what's running, and that's the utilization, right? You know, nothing fancy about it. Okay. But also from a, you know, financial perspective, you may look at, you know, 60%, 65%, you know, that's, you know, what's the financial impact of that? When you look at the book value of this equipment, just about all of our small horsepower is depreciated out. So there's little book value even on the books on a lot of that stuff. And the medium horsepower generally... We're probably about two thirds depreciated on that stuff. So, you know, you've got, we've got a lot of units in that small and medium horsepower, you know, from a unit standpoint, just not as much horsepower. And really the, you know, the book value impact is relatively small too. And we have, you know, over time called out certain sizes either, you know, that had gotten down to much lower utilization that didn't make any sense, you know, or some areas that we just had more in the fleet than we thought, you know, was prudent. Okay, great.

You touched on something before, and, you know, let me know if I'm taking – I can get back in the queue if there are people, you know, in the queue – But you touched on this before. You put in a big slug of equipment for specifically one particular customer a handful of years ago. I think you said three, four, five years ago. And some of that stuff has come off of their long-term contracts, still utilized. They're still very busy, as I understand things, and still heavily Permian-weighted. So that stuff is still being utilized. But one of the things that I was wondering – about and maybe you could fill this in is that if you were to take you know one of those pieces of equipment let's say a 1500 horsepower unit um you basically could put that to because the market's so tight you could put that to work at probably higher rates than it certainly went in at to begin with and One of the dynamics I'm wondering about as we get through this period of putting new equipment into service and then renewing those contracts down the line with some of your newer customers is what would be, if you looked at that 1500 horsepower unit, if you were to do some maintenance CapEx on that unit and then place it in another long-term contract, let's say five years, what would that dynamic look like? In other words, Your annualized recurring revenue from the new contract would be higher by something, maybe 20%. I don't know what the number is. That maintenance number, would it be 10% of the original cost of the equipment? You know, what's the order of magnitude of that? And then what would be the cost to set that into a new location and thus a new contract?

Well, the easy question first, the cost to move it from one location to another is borne by the customer. So we don't have any financial impact from that. Our impact from that is primarily manpower, right, helping them get it out, helping them reset it up and stuff like that. So that's primarily a customer expense. From the point of if you have a unit coming off that's, say, been on contract for, you know, three or five years or, you know, maybe it's gone a month to month and they don't need it anymore, we can put those out at higher rates. And, you know, those rates vary, but, you know, typically if you go to, you know, maybe a three or four-year-old one, you know, those rates now are probably 20%, maybe even 25% higher on some of these units. So definitely they would go out at the higher new rate. You get that, but we're also, you know... getting some of those rates up too, because you can look back at those older rates and, and know that you've got, okay, you know, you kind of fixed your capital expense back then and you're set there, but all the other, you know, maintenance and operating costs have, have gone up and we all know the inflation environment and, you know, supply chain issues and stuff like that. And, you know, all that's gone up. So we are, you know, going back on all those contracts and asking the customers for increases and being successful. It's not, you know, it's everybody understands what's going on, you know, obviously the suppliers and the customers too. So to, you know, protect and preserve and hold on to that equipment, you know, it's just more expensive to do it for the customer and us too because we've got these costs we've got to pay. Sure. So we're not just waiting for stuff to come off, and then we raise the rate. We are trying to be proactive in going back and getting that from what we've got there. From the maintenance standpoint... When you pull, you know, a unit off, you generally, you know, need to go through it to make it ready for the next contract from the point of, you know, certainly, you know, tune-ups, you know, from the point of making them, you know, runnable. But, you know, typically you need some sort of major or minor overhaul. And those costs can vary, you know, all over the board. So I don't want to... You know, say how much of, you know, how much it might be. But if you're into a 20% rental increase, say you get one off, raise the rate 20%, it goes to the next contract. You know, the overall impact from a maintenance standpoint is not going to be different than if it just stayed on the location. Because after so many hours, whether it's at that location or it's moved or some other location, after so many hours, you've got to do maintenance on it. And so, you know, you might just have a, you might do it a little quicker if it comes off, you know, uh, 10,000 hours before it was scheduled. Um, but it's just a, you know, a, a, um, you know, cost of money, essentially. It's not a, it's not a really maintenance cost. It's just, you might have to do a little quicker to get it out to that location than you otherwise would.

Okay. So one of the things I'm trying to, um, be able to model a little bit, and let's talk about this for a minute, is that if I look at your trailing four quarters of discretionary cash flow, which is the metric that a lot of your compression peers use for a variety of reasons. One is that in some cases they're supporting dividends that they need to cover, so they utilize that as a coverage basis also. But basically one of my points, as you may recall, is that that discretionary cash flow is really your accounting earnings. And over the last five or six years, you haven't shown much in the way of accounting earnings, but you've generated a ton of internal capital from your operations, from your discretionary cash flow that you've recycled and reinvested into the newer fleet that you're able to deploy at this point. But to get to that discretionary cash flow number, you know, I try to look at and I'm trying to back into some sort of a maintenance capex number, which would include some of the maintenance capex on the trucks and your facilities, but also, you know, the kind of stuff on the bigger machines that you'd have to invest to reset something into a five-year contract. Your fleet is still new enough, so there's probably not a ton of that in there yet, but at some point over time, that'll that'll become part of the model. And, and I'm, I don't, you know, I don't know if you can kind of verify this, but it seems like your discretionary cashflow over the past four quarters has been on the order of about 35 ish million. And that equates to something like two 80 a share. I've had, I've had you, my internal models said something like two 60 to two 80, but that also suggests that maybe, you know, for 23, That also suggests that you may run a little higher than that this year, but also be able to grow that next year. I don't know if you have the numbers to be able to verify whether that 280 number is kind of a good number or a ways off. And I also wonder if you'll start to look at discretionary cash flow as a metric just because your other compression peers do, and it does seem like a germane metric.

Yeah. Yeah, I hesitate to hazard a guess right now on the discretionary number you've got, Tim. You know, I can, you know, dig into it a little more and get back to you on, you know, on how we're looking at it. Okay. But, yeah, it is a valid and good number to watch and keep an eye on. As you note, a lot of our competitors do it from the point of a couple of them are MLPs. That's very important to the limited partners. And it shows coverage on dividends, coverage on debt, et cetera. We haven't had to use it too much in the past because we didn't have either. But you're right. It's one we watch closely, of course, at discretionary cash flow. Certainly in times of high activity like now and potentially going forward, it gets eaten up. It becomes less discretionary, right? It gets eaten up pretty quick by just activity and CapEx. But let me dive into the numbers a little more with you offline, and we can talk through that one.

Okay. No, I appreciate that, and I would love to follow up in the next couple of weeks. But to Hale's point earlier, you know, the peers are trading, you know, I think ArchRock maybe at, seven or eight times discretionary cash flow and um i think uh kodiak we just came public is probably in the six-ish number i want to say and you're you know at uh ten and a half bucks or whatever it is today uh on my numbers that's it's sort of four times so it's a number of multiple points away and it does seem to be um you know a number that the that the industry focuses on um I am going to, Steve, thanks very much for the feedback, and I would look forward to chatting with you in the next couple weeks. I'm going to jump off because there may be some more people that want to ask questions, and I've been on for a bit. Appreciate the feedback, and we'll look forward to just talking again soon.

Okay, real good. Thanks, Tim.

Thanks, Steve.

Thank you very much. Our last question comes from Kyle Krieger with Apollo Capital. Go ahead. Go ahead, please.

Thank you for taking my question, Steve. Hi, Kyle. Hi. The balance sheet transformation has been nothing short of dramatic, of course, and I have a follow-up to Mr. Hoke's question on return. Presumably, looking at the horsepower and the utilization on the high horsepower stuff you're putting out would indicate that you're putting this stuff out on on five-year fully paid leases with good credits, which is a great model. The only thing to solve for is what is the corporate return hurdle that you are imputing into that, number one. So that's my first question. What's your return bogey in those five-year full payout leases? And the second thing is, are you protected at all against inflation on the inputs that you guys are required to provide over that period of time.

I'll tell you the last question first. Some contracts have inflationary protection, but frankly, most don't. Now, the ones that don't, we actually have not had any trouble getting price increases. I think... Those are good to have, but even if you have, just like any contract, even if you have something in there and the market doesn't agree with what you're doing, for example, you can have inflationary increases, but if the market is slow, activity is slow, things like this, you may have the contractual ability to go and ask for something, but you probably don't have in reality the ability you know the uh the marketability to go in there and ask for it from the point that the old customer may not accept it um so you know i think contractually gives you a little more leverage but it does not prevent you from getting your cost where they need to be so number one you can go in certainly after the expiration of contracts That's not very satisfying when you have three- to five-year contracts. But typically those three- to five-year contracts, on what we've seen the last few years, you can go in and ask for and justify price increases that will keep us whole. So although most of our contracts don't have it, we are starting to put more and more in. We haven't been impacted negatively by not being able to get in the price increases we want. you know from the corporate hurdle on what we want to do you know interest rates now you know you can look at those and hopefully they're mitigating somewhat we'll see you know depends on what um people think about what the fed may do but um you know that's into the you know eight nine ten percent uh realm probably eight or nine percent uh uh currently so certainly you've got to factor that into you know that plus return you want um And we'll give more color on that in the third quarter call, just like Hale had mentioned. I think that's a valid comment. And we'll go into a little more detail on what we see as the returns, what the returns implied by the price we're charging and things like that.

Hello?

Mr. Krieger, do you have any follow-up?

No. Thank you very much, Steve. Appreciate it. Thanks, Kyle.

Thank you very much. Mr. Taylor, we don't have any further questions.

Okay. Thanks, Luke. And thank you, everybody, for participating in our call. I look forward to updating you on our progress in the next quarter. Thanks again.

This concludes today's conference call. Thank you everyone for attending.