Natural Gas Services Group, Inc.

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Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Incorporated Quarter One 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. Anna Delgado. Please begin.

Thank you, Luke, and good morning, everyone. Before we begin, I would like to remind you that during the course of this conference call, the company will be making forward-looking statements within the meaning of federal security laws. Investors are cautioned that forward-looking statements are not guarantees of future performance, and those actual results or developments may differ materially from those projected in the forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Natural Gas Services Group disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's earnings press release and our filings with the SEC, including our Form 10Q for the period ended March 31st, 2025, annual report on Form 10K for 2024, and our Form 8Ks. These documents can be found in the Investors section of our website located at .ngsgi.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. In addition, our discussion today will reference certain non-GAP financial measures, including EBITDA, adjusted EBITDA, and adjusted gross margin, among others. For reconciliation of these non-GAP financial measures to the most directly comparable measures under GAP, please see yesterday's earnings release. I will now turn the call over to Justin Jacob, our Chief Executive Officer. Justin.

Thank you, Anna, and good morning, everyone. I'd like to welcome all participants to our first quarter 2025 earnings call. Let me first introduce the team. Joining me today, we have Ian Eckert, our Chief Financial Officer, and Brian Tucker, our President and Chief Operating Officer. I'd also like to extend special thanks to the entire NGS team for their dedication, passion, and unwavering commitment to servicing our customers. After two record years at NGS, we started off 2025 in great fashion. I continue to believe NGS has a very strong competitive position and will continue to deliver attractive growth in revenue and profits in the years ahead. Market demand for compression remains strong, and our success in winning market share stems from a combination of our innovative technology, high service levels driven by the strength of our people, and flexible balance sheet. While there has been a great deal of market volatility over the past couple of months, we have been fortunate that our business has not been materially impacted to date. Our 2025 unit deliveries, all of which are under a long-term contract, remain on target. In addition to the already contracted unit deliveries in 2026, our discussions with customers remain focused on growth in the future. We have and continue to allocate capital prudently, supported by our expanded credit facility and a balance sheet that affords flexibility even in these volatile markets. I'll give just a couple of highlights as it relates to first quarter financial performance. Rental revenue hit a quarterly record of 38.9 million, a 15% increase versus the prior year quarter, and 2% sequentially. Adjusted rental gross margin of 61.9%, another banner quarter for margins. Adjusted EBITDA of 19.3 million in the quarter, once again, a record number. We finished the quarter at 2.18 times leverage, providing significant margin of safety against any currently unforeseen softening of results, while also providing significant offensive firepower to maintain organic growth and add inorganic growth to the mix. As a final note in the quarter, we exceeded our internal expectations, which I will discuss further in our forward-looking guidance. Turning to the overall market conditions, there is obviously a lot going on in macroeconomic factors and commodity markets. Since our last call, we've seen WTI in the 50s, in the 70s, and everywhere in between. And our last call was less than two months ago. We've used this volatility to look at the business in multiple cases, an upside, a downside, and stable, so that in each case, we can mount an offensive game plan. We remain confident in our ability to perform, regardless of the volatility or price level that we see. Looking at the public pronouncements of customers to date, we see modest capex reductions that are not hitting us. These public statements are consistent with our discussion with customers that show a locked-in 2025 and growth in 2026. Obviously, we are keeping a very keen eye on this area. Natural gas prices are currently hovering in the mid-3s after peaking above 4, with a broad range of 2026 forecasts, some stable with current levels, with others well into the 4s and beyond. LNG export growth and new pipeline projects could create upside for our small and medium fleet and present an entry point into midstream large horsepower compression, a potential tailwind not yet reflected in our models. While tariffs remain a source of volatility, the direct impact on NGS is minimal, given our supply chain consists of mostly domestic vendors, and major imported components are largely exempt. That said, the indirect effects are harder to predict, so we will continue to monitor the market and engage with our customers and suppliers to better assess any indirect risks and plan accordingly. As it stands now, our business and customer installations remain on track for what is shaping up to be a strong 2025 and 2026. I'd like to now shift to our strategy and provide some updates as it relates to our growth and value drivers. I'm going to focus on three of them today, asset utilization, fleet expansion, and M&A. I'll start with asset utilization, which is comprised of converting non-cash assets into cash and increasing the utilization of our existing fleet. Our days receivable improved from 118 days a year ago to 35 days at the end of Q4-24 and stayed at 35 days at the end of Q1-25. This has been great progress which we are now maintaining. Additionally, we made significant progress on monetizing the $11 million income tax receivable. It was recently submitted to the Joint Committee on Taxation in the US House of Representatives for final approval. This is the last approval required, and typically this takes less than 12 months. We look forward to reporting the collection of this amount, nearly $1 per share in cash in the near future. We have significant owned real estate which we are looking to monetize in the near term. Currently, we're focusing on the two largest assets, our corporate headquarters in Midland and our recently closed fabrication shop in Midland. We also have opportunities to produce inventory further. As I've stated previously, the combination of the income tax receivable, owned real estate, and inventory creates an opportunity at least as large as the approximately $25 million we monetized in accounts receivable in 2024. Lastly, I'll add that in terms of horsepower utilization, the vast preponderance of idle horsepower is in small and medium units. We're continuing to review options for technology upgrades, electric conversions, and monetization. Although still early, I'm starting to see some green shoots in this area. Certainly strengthening natural gas prices and increased volumes are helping, but I think the technological innovation and service levels we are providing are starting to make a difference. As I've mentioned previously, this was never going to get fixed in a couple of quarters. This will take time, and while I don't have enough data points to have a trend, I'm cautiously optimistic of some anecdotes. The third driver, fleet expansion. We have previously disclosed signed contracts and unit deliveries scheduled to add roughly 90,000 horsepower, most of which in 2025, with another significant number of signed contracts for unit deliveries in 2026. These commitments are all focused on large horsepower, including a material increase in electric motor drives. The majority of these fleet additions are allocated to a key customer that will ultimately become our second largest with well over 10% of our total revenue once units are set. As you will note in the first quarter 10Q, our largest customer was 46% of revenue in the quarter, down from 54% fiscal 2024. This decrease in concentration is due to growth in our other customers, not with any loss with OXIE, as we continue to grow that relationship as well. Customer diversification has and continues to be a focus. We are growing both the number of key accounts and the volume of business we are doing with them. The fourth and final driver, M&A. We remain focused on continuing to drive significant organic growth, while at the same time continuing to explore the M&A markets. We remain well positioned, both operationally and financially, should strategic and accretive acquisition opportunities emerge. Given the current state of the markets, we believe consolidation will continue this year and more attractive assets may be in play. Our strong balance sheet and leverage position, coupled with the volatile commodity backdrop, makes us a natural consolidator where valuations are attractive. In April of this year, we amended and expanded our revolving facility from 300 million to 400 million, with an accordion future raised from 50 to 100 million. The amended facility has lower pricing and a more accommodating leverage covenant as well. This is a significant win that supports our industry-leading organic growth and provides optionality for M&A. We appreciate the continued confidence of our banking group and welcome our new lending partners. We look forward to delivering for them and for our shareholders. With that, I'll turn the call over to Ian to review first quarter performance in more detail.

Thank you, Justin, and good morning to those joining us. I'll begin with a brief overview of our first quarter, 2025, financial and operational performance. For the first quarter of 2025, Natural Gas Services Group reported total revenue of 41.4 million, a 12% increase over 36.9 million recorded in the first quarter of 2024. Rental revenue was 38.9 million, up 15% year over year and 2% sequentially. This increase was driven by higher average rented horsepower and continued pricing improvements, particularly from large horsepower units. Total adjusted gross margin for the quarter was 24.3 million, an increase of 3.1 million over prior year quarter and 1.3 million sequentially. Adjusted gross margin percentage came in at 58.6%, representing 140 basis point improvement over Q1 2024 and a 210 basis point improvement compared with the fourth quarter of 2024. These results reflect sustained pricing discipline, unit additions, and enhanced cost controls. Rented adjusted gross margin reached .9% up 80 basis points from the prior year and 150 basis points sequentially, marking one of the highest levels we've achieved in the past decade or so. Net income for the quarter was 4.9 million, or 38 cents per diluted share, compared to 5.1 million, or 41 cents per diluted share in the prior year period. Sequentially, net income increased by $2 million, largely reflecting the impact of the inventory allowances recognized in the fourth quarter of 2024 tied to the closure of our Midland Texas Fabrication Facility. SG&A expense rose by $0.7 million year on year to $5.4 million. However, as a percentage of revenue, SG&A remained essentially flat at 13%. Adjusted EBITDA for the first quarter was 19.3 million, an increase of 14% compared with the first quarter of 2024 and 7% sequentially. As of March 31st, 2025, rented horsepower totaled approximately 493,000, representing an 11% year over year increase. Utilization was 81.7%, essentially unchanged from a year ago and all recently deployed large horsepower units were fully utilized. Moving to the balance sheet, we ended the quarter with 168 million outstanding on our revolving credit facility. The leverage ratio was 2.18 times, down from 2.36 times at year end 24 and our fixed charge coverage ratio improved to 2.98 times. As of the end of the first quarter, we had 132 million in available credit. This excludes the $100 million expansion that we secured in April. These results put us well within our covenant thresholds. Accounts receivable were 15.4 million at quarter end, a modest decline from year end levels. Day sales outstanding performance remains strong, reflective of our continued efforts to monetize non-cash assets. Cash from operations of 21.3 million nearly quadrupled the 5.6 million generated in the first quarter of last year. Capital expenditures in the quarter totaled $19.3 million, including 16.7 million of growth capital and 2.6 million of maintenance capital. Growth spending is in line with our 2025 plan and will be weighted toward the back half of the year in conjunction with scheduled unit deployments. Our focus remains on margin expansion, discipline cost control and capital efficiency. Our balance sheet is solid and we have ample liquidity to fund our growth initiatives, which potentially could include pursuit of value accretive acquisition opportunities. With that, I'll turn the call to Justin for closing remarks.

Thank you, Andrew. We entered 2025 with strong momentum and our Q1 results exceeded our internal expectations. With that background, we are increasing the high end of our adjusted EBITDA guidance to 79 million. To preempt some of the conversations I suspect I might have with those following our stock, I know that our Q1 adjusted EBITDA of 19.3 million annualizes to 77.2 million. This puts us above the midpoint of our revised range without accounting for unit delivery schedule, which is predominantly in the second half. I suspect I might hear the word sandbagging at some point in those conversations. Given the current macro uncertainty and we're only two months since our year end call, I'm going to be, as I will describe it, prudent and a little patient to see another quarter of results and more importantly, overall market conditions. If macro economic conditions were more similar to 2024, then the high end of guidance would likely have had an eight on the front of it. I will reiterate that I do not currently see any material impacts of tariffs on our business and I'm excited for the balance of 2025 and 2026. We are maintaining the growth capex guidance we provided in March of 95 million to, excuse me, let me start over again there, we're maintaining the growth capex guidance we provided in March of 95 to 120 million, heavily weighted to the second half alongside maintenance capex of 10 to 13 million and a target of at least 20% return on invested capital. Rental revenue, margins and EBITDA are all tracking in line or ahead of plan and our expanded credit facility gives us the firepower to capitalize on organic growth and strategic M&A. We will continue investing in technology, systems and people to deepen customer partnerships, improve service levels and further differentiate NGS. In short, it's an exciting time for our company. We are taking market share, strengthening our financial position and focusing intensely on creating meaningful value for our shareholders. Thank you again for your interest in NGS. Operator, we are now ready to take, to open the call for questions.

Ladies and gentlemen, at this time, we will conduct the question and answer session. If you would like to state a question, please press seven pound on your phone now and you will be placed in the queue in the order received. You can press seven pound again at any time to remove yourself from the queue. We are now ready to begin. Our first question comes from Mr. Rob Brown with Lake Street Capital Market. Go ahead, please. Good morning.

Good morning, Rob, thanks for calling in. First question is kind of on the current demand environment and the volatility. Obviously, it's a bit of a volatile situation, but what's sort of the indications from customers and how do you see that flowing into your conversations? Is it really timing of the 26 deployments or is there starting to be some pricing pressure and just what's sort of the demand environment implications at the moment?

I would say we haven't really seen much of a change in the demand environment. Over the past, let's call it 16, from 90 days ago, 2025 is essentially all locked in, still having discussions with customers about 2026 growth. We have a significant number of units that's already contracted for delivery throughout 2026. And there remain ongoing discussions of incremental units to get contracted in 2026. And so from the demand environment there, really haven't seen any change. It remains a strong environment. On the pricing side, no material discussions. I mean, obviously there are always times with customers they ask for a price, but there's nothing that's any different from the environment we've seen, or at least I've seen since becoming CEO. So it's really pretty consistent from where we were even 90 days ago.

Okay, great, thank you. And then in the gross margins, they continue to take up, was there anything unusual in the quarter or is this just a function of the mix of the high horsepower and should that continue to expand as the mix?

Let me address two parts to the margin. One is the rental adjusted specifically and then the overall adjusted gross margin. On the rental adjusted, we're seeing, I think, consistency in kind of that something with a six on the front of it. We were 61.9 this quarter. The differences there are some items, including kind of parts, where you can see some movement in that quarter to quarter. It's not huge movements, but it can be enough to move it from a 61.9 to something that's 60.5 in that zone. So that's created just a little bit of movement. And some of those types of items were a little light in the first quarter. So that's kind of the natural volatility we're expecting to see, but I think we're proving out pretty consistent in the rental adjusted gross margins and this particular quarter was kind of a high end of that range. Overall, we were able to reduce the gross margin impact of the sales line that was particularly high in the fourth quarter of 24 as we were closing the Midland Fab facility. We've mitigated a significant amount of those losses in the first quarter and that's helping the overall adjusted gross margin as well.

Okay, great, thank you.

Congrats on a good quarter.

Thanks, Rob, appreciate it.

Thank you very much. Our next question comes from Mr. Jim Rolison with Raymond James. Go ahead,

sir. Hey, good morning, Justin and Ian. Justin, maybe circling back question to follow up on that margin question. You guys have obviously kind of been hanging around the low 60% range in rental specifically and I'm wondering as we go through the year and you start taking the bulk of your new deliveries, is there anything on the cost side as you kind of get prepped for those going in the field that might drag that down or is kind of a 60 plus percent rental margin being pretty sustainable as we go forward?

If you look historically for NGS and historically, meaning if you look over the kind of the last five years as we've been setting increasing amounts of large horsepower, there have been in certain instances over that period a temporary blip in expenses on installations. Now, sometimes that's offset with revenue, sometimes not, depends on the customer and just kind of depends and sometimes there's been no impact at all. It's something we're obviously closely looking at and monitoring to ensure to the greatest extent that doesn't happen. It's possible to be some, but it would be very temporary in nature and I wouldn't expect it to be a significant impact. Could it put us to kind of the lower end of the range on what we've seen on the rental adjusted gross margin over the past six to eight quarters or probably six quarters? It could, I don't foresee anything specific today, but it's just something that we're closely looking at and it would be temporary in nature.

Gotcha, this kind of seems like the low to mid point of guidance kind of embeds maybe even a 60-ish or low 60, so I was just trying to, or sub 60 range, so I was just trying to get on that. And then you talked a little bit of update around some of the monetization plans. Maybe just a reminder, you know, kind of, you went through the AR last year and still in the 30 days range, which is pretty impressive. As you go through and focus on the real estate, a couple of specific targets you mentioned and the tax receivable, what is your general plan for use of proceeds there? Given that you guys aren't at the stage of returning capital, is it just redeploying into additional organic growth? Is that the general kind of thought process right now?

It is, I think it's to, at that particular time, as we're creating proceeds from any of those different items that you mentioned, whether real estate or income tax receivable or inventory, the immediate use would be to pay down debt, but then it's organic growth. And there've been discussions both publicly and privately of return of capital, and that's something that the board has looked at closely and is continuing to look at very closely of, what do we think is the appropriate time and way to move to return of capital to shareholders? On the one hand, we're growing at a very high rate and have, we believe, very high return of invested capital that we're generating. On the other hand, our industry is one of which I think shareholders have an expectation around some form of return of capital, and the board is sensitive to that, and I think it's really just the timing of when do we move to that, and that's something we're looking very closely at.

Got it, appreciate that, and congrats again on the new credit facility, especially given the market environment when you guys got that signed up.

Thank you very much. We were quite happy to get that closed. I think it was right around two days after April 2nd, and as I looked at the high yield and term loan B market, not very much was getting done, so we thought it really spoke to the strength of the relationship and of the business.

Thank you very much. Our next question comes from Mr. Salmon Accio. Syphil, go ahead, please.

Hi, good morning, this is Tim on for Salmon. Congrats on the quarter.

Morning, Tim, thanks for joining.

So just first question, do you anticipate any of this crude oil volatility to bring some of the smaller compression providers to market, and then also given some producers are trimming some of their capex, do you think there's potential for more outsourced compression and less in-source compression? So on

the impact of crude oil prices, I think for us, that's primarily our horsepower sizes that are servicing really more crude oil wells are the large horsepower and the medium. On terms of the small horsepower, that's driven more by natural gas prices, and as I mentioned in the prepared remarks, we're seeing some green shoots there. Nothing trend that I would point to at this point, but I think there are some people who believe that L&J is really going to drive significantly both, not just volumes, prices too early to tell on that the impact of small horsepower, but I think the trend is modestly favorable at this point. In terms of the capex budgets, the ranges I've seen so far I think the low end was like .5% decrease up to 10%, really not hitting any of the areas in their budgets that impact us, and in fact, as I've read, a number of customer releases, really a big focus on productivity, and that really plays into our strong suit in terms of the technological innovation in our units, we help drive productivity and runtime for our customers, and so I think there's actually a greater focus on that. In terms of insourcing versus outsourcing, I think it's too early to tell on that. One would think if companies are concerned about leverage and cutting back capital, they would move more towards a renting mindset versus a buying mindset, but I think it's too early to tell on that.

Got it, perfect. And then just wondering if you could give an update on lead times for engines, frames, and packages, just kind of what you're seeing in real time on that. Sure,

really no difference from last quarter. Engines are running, depending on the model and the manufacturer of the model, you're looking probably somewhere six to nine months. Compressor frames at the shorter end of that, and fabrication is nine to up as much as 12 months. So really no change in that. Awesome,

thank you guys for the time.

Thank you, Tim, appreciate it.

And again, if you have any questions, please press seven pound. Our next question comes from Tate Sullivan with the Maxim Group, go ahead please.

Thank you, good morning, Joseph. Can you, did I just circling back to a comment from earlier, did you say the potential sale proceeds from Minlin Assets, the office and fabrication facility, that we've, the 25 million decrease in receivables, did you frame it that way?

Yeah, so if you look at the aggregate of those three different areas, meaning the income tax receivable, which that amount is defined, 11 million, and then adding in the proceeds from monetization of the real estate and inventory combined, we see that as an opportunity that's at least as large as the approximately $25 billion of cash we were able to pull out of AR in 2024. Okay, great,

and then Minlin, in the last two months, have there been a fair amount of real estate transactions building transactions in Minlin?

I think relative to the size of the market, yes, it's still been active. Real estate is a little bit more difficult to predict the time and a little bit longer lead time, and so we're actively working on those, the Minlin Fab facility, we didn't have fully closed down until really the end of the first quarter, and so those are ongoing processes in terms of monetizing those, I think they're attractive assets, and I think we aren't in a rush that we have to sell them for any reason, it's just improving the capital efficiency of the business, and so we can be prudent and move at our pace in terms of realizing full value there.

Thank you, and then a metric in the queue that you highlighted in the case, I hadn't focused on much before, the percent of your horsepower rented on a -to-month basis was 22% in the first quarter, do you think that's a level that will remain around that level or continue to come down as you deploy more larger horsepowers on a -to-month

contract? I think that number has been trending down over the quarters, and any new units going out, they're all large horsepower, they're all pre-contracted, and those are contract ranges that are in the -to-five year range and typically towards the high end of that. So the impact is yes, that number should continue to trend down.

Okay, and then last please is your comments on the LNG, is it mostly related to putting currently on utilized smaller horsepower out into the field, or could it indicate that some larger horsepower would be for midstream purposes or mostly on the smaller horsepower?

So in terms of our customers today and our applications, it is increased volumes, the small horsepower is used in gathering and natural gas, and that's where we're, primarily anyway, that's where we're seeing some increased level, it's a modest increase, but I think there is some at least positive feelings around that. We aren't in the midstream today in terms of true midstream on pipelines, but I think that is a potential opportunity, and even if we don't penetrate that customer base, it keeps what is, exceptionally, excuse me, basically 100% utilization of a large horsepower across the industry, it keeps that supply very, very tight, and so even if we don't enter into a midstream application, it just keeps the overall market very tight for where we are today in the large horsepower.

Thank you very much.

Thank you, Tate, appreciate it.

Thank you, and I don't see any other questions.

Great. So thank you, Luke, and thanks for all of your questions and participation on the call. We sincerely appreciate your support. We look forward to updating you on our progress in the next quarter. Thank you, and I hope everybody has a great day.

And this concludes today's conference call. Thank you, everyone, for attending.