Natural Gas Services Group Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 16, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Incorporated Quarter 1 2023 Earnings Call. And I would now like to turn the call over to Ms. Anna Delgado. Please begin.

Speaker 1

Thank you, Luke. Hello, everyone, and thank you for joining us to discuss our Q1 2023 financial results. Today's call is being webcast on our Investor Relations website, ngsgi.com. Also available on the site is our earnings press release, which was issued Monday, May 15. Before I hand the call over, I'd like to remind everyone That during today's call, including Q and A, we may make forward looking statements regarding expectations of the company.

Speaker 1

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 ks 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, and 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?

Speaker 2

Thank you, Anna and Luke, and good morning, everyone. Welcome to our Q1 2023 earnings conference call. Thank you for joining us this morning. Before taking your questions, I will highlight our financial and operational results for the Q1 There were details in our earnings press release yesterday, discuss the current business environment and provide comments on other aspects of our business. The quarter marked the 9th quarter in a row of rental revenue growth.

Speaker 2

For the current sequential quarters, rental revenue alone Grew almost 11%, while higher rental and sales revenues grew total revenues by 18%. Adjusted rental gross margin slipped 2% due to higher field expenses and a one time non cash adjustment, But our total adjusted gross margin increased 4% sequentially. SG and A declined 4% and our bottom line net income had a positive swing of over $1,000,000 from last quarter as we posted positive GAAP earnings. As mentioned in our last earnings call, NGS closed on a substantial line of credit from our bank at the end of February. This was to fund the additional high horsepower equipment we have already contracted As we continue to execute on our growth plan, NGS had a solid and growing quarter.

Speaker 2

We have added more committed contracts over the past couple Our utilization continues to increase and pre contracted activity remains at a high level for the rest of the year. With that said, let's look at the results from the Q1 of 2023. Total revenue for the 3 months ended March 31, 2023 increased to $26,600,000 from $22,500,000 For the 3 months ended December 31, 2023 or an 18% increase in sequential quarters. Total revenues increased year over year from $20,300,000 for the 3 months ended March 31, 2022 for a 31% increase. Real revenue increased 11% from $20,600,000 in the 3 months ending December 31, 2022, Compared to $22,700,000 in the 3 months ending March 31, 2023.

Speaker 2

Rental revenue increased to 20 $2,700,000 for the Q1 of 2023 from $17,100,000 in the Q1 of 2022 for a 33% gain over the past year. Both comparative period increases were primarily the result of the increased deployment of higher horsepower rental units, Higher overall utilization across the fleet and rental price increases throughout the year. Rental revenues have strengthened and are now running 85% to 90% of our total revenues in all comparative periods. As of March 31, 2023, we had 1245 utilized rental units, representing over 335,000 horsepower compared to 1276 rented units, representing almost 307,000 horsepower as of March 31, 2022. We ended the Q1 with 66.4 percent utilization on a per unit basis and 77.4 percent utilization on a horsepower basis.

Speaker 2

These are both improvements from the prior quarter. Notably, approximately 96% of our higher Horsepower fleet equipment is utilized and drawing rent, while 100% is contracted. The 4% difference represents units waiting to be installed. Utilized horsepower increased 9% in the Q1 when compared to the year ago period, while revenue per horsepower increased 21% 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 past year. Our total fleet as of March 31, 2023 consists of 18 75 units with over 433,000 horsepower.

Speaker 2

Our large horsepower assets comprise approximately 15% of our current utilized fleet by unit count, But these units provide approximately half of our current rental revenue stream. Sales revenues for the sequential quarters increased from $1,300,000 In the Q4 of 2023 to $3,000,000 in Q1 2023 From Q4 2022, I'm sorry, to the current quarter. This large increase in sequential revenues is primarily from idle equipment sales from the rental fleet And a doubling of parts revenue from the sale of proprietary pressure control systems. On a year over year quarterly basis, sales revenue increased slightly from $2,900,000 $3,000,000 As noted in our release this morning, adjusted gross rental margin slightly decreased sequentially From $11,300,000 or 55 percent of revenue in the Q4 of 2022 to $11,100,000 or 49% of revenue in the Q1 of 2023. Half of this quarterly decline is due to a non cash reclassification of inventory items From the balance sheet to the income statement, while the balance of that expense is from higher R and M and parts costs.

Speaker 2

On a year over year basis, our adjusted rental gross margin of $11,100,000 in the Q1 of 2023 increased approximately 40% when compared to 7 $9,000,000 in the same period in 2022. Our SG and A expenses declined $200,000 in sequential quarters In total, 17% of revenue this quarter. Sequentially, we reported an operating loss of $314,000 in Q4 of 2022 compared to positive operating income of $402,000 in the Q1 of this year. This improvement was primarily due to higher total gross margin, lower SG and A expense and $280,000 Less in equipment retirement expense. This compares to operating income of $382,000 for the 3 months ended March 31, or $0.03 per basic and diluted share.

Speaker 2

This compares to a net loss of $756,000 in the 4th quarter of 2022 or $0.06 loss per diluted share. In the year ago quarter, our net income was $337,000 Adjusted EBITDA was flat at $7,700,000 for the sequential quarters, but increased 15% from $6,800,000 from the same period in 2022. Our cash balance as of March 31, 2023 was approximately $7,400,000 With $61,000,000 outstanding under our revolving credit facility, in the Q1 this year, we realized cash flow from operations of 18 point $2,000,000 compared to $5,000,000 in the same quarter last year. We used $47,800,000 for capital expenditures, $47,000,000 of which was expended on our rental fleet in this current quarter. The compression market remains very strong We continue to see demand for new compression units, especially in the high horsepower range.

Speaker 2

Last quarter, I mentioned that if opportunities present themselves, We are likely to expand our fleet further to meet demand as long as such expansion meets our return expectations, contract requirements and our cash availability. That said, we in fact secured additional contracts this quarter worth approximately $20,000,000 to $25,000,000 We also accelerated our build schedule, which brought another similar amount into this current year. This resulted in a Large increase in our 2023 committed capital budget from the $95,000,000 originally announced to $150,000,000 currently. This is a large increase, but this projection is supported by present build schedules, so that we will add approximately $50,000,000 for each of the next two quarters in equipment assets. I'll caution everyone that this may fluctuate to the downside due to supply chain constraints, but this is our best present estimate.

Speaker 2

Even with this, we are still seeing added demand that we cannot fulfill this year. I also want to take time to introduce 2 new members that we have We have recently appointed to our Board, Justin Jacobs and Don Tringale. Justin is the Management Committee Director of Mill Road Capital Management, one of our largest shareholders, And Donna is the Chief Executive Officer of Augusta Advisory Group. Both have extensive experience in private and public boards from a financial and governance perspective. A fuller description of their backgrounds is in our recently published proxy.

Speaker 2

We welcome them and look forward to their contributions to our Board. As I've just discussed, the demand for our equipment and services continues unabated. Based on our current build orders already executed contracts, we are essentially sold out this year and we anticipate this continuing into 2024. It's too early to tell if next year continues at as fast a pace as this one, but barring an extraordinary macro event, we anticipate that it will be another robust growth Obviously, there can be headwinds, but consensus projected prices for WTI crude from Bloomberg anticipate crude oil in the mid-eighty Dollar per barrel range through 2025, another 2 plus years. This is supported by OPEC's recent decision to cut production, The potential to refill the strategic petroleum reserve and the continuing natural decline in production.

Speaker 2

Presently, approximately 75% of our utilized horsepower is employed in the production of crude oil. So our overall activity is now driven by crude oil pricing and production dynamics. As far as natural gas, the picture is murkier and not as rosy. Natural gas prices have been extremely volatile over the past few months. Spot prices exceeded $9 per MMBtu In August of 2022 and they are currently at $2.24 at the end of April 2023.

Speaker 2

That's a 75% decline in price in 8 months. Rigs drilling from natural gas hit their lowest point in 7 years last week. The spike in prices last year was caused by some short term worry about natural gas supply, but that quickly abated. We are now unfortunately Stuck in the same natural gas price scenario that we have seen play out over the last decade. I don't expect a whole lot of support to our business from natural gas prices and activity, But fortunately, only 25% of our utilized horsepower is employed in natural gas projects.

Speaker 2

However, if we do get any pricing uplift, It will add the activity we already see. There are a lot of moving parts in the business right now, but I think we're connecting all the dots and we look forward to continued growth. Thanks for your time and I look forward to your questions. Hello? Hello.

Operator

Ladies and gentlemen, at this time, we will conduct We are now ready to begin. Our first question comes from Rob Brown with Lake Street Capital. Rob, go ahead please.

Speaker 2

Hi, Steve. Congrats on a good quarter. Hi, Rob. Yes, thanks.

Speaker 3

Just wanted to get a sense of kind of demand environment for the high horsepower. It's been strong. How are you kind of seeing it with the current Commodity prices, are you seeing more interest in activity there?

Speaker 2

Well, Yes, the current commodity price, oil commodity price has weakened just a little bit. But we're not If we didn't know that, we wouldn't have even known that there's a $70 low $80 gas or oil price out there. Demand has continued, as I mentioned, essentially unabated. Just mentioned the additional contracts we've gotten. We've tried to speed up some bills to get this stuff out quicker and we're still seeing Demand, and it's actually demand that we can't fill this year due to schedules and And cash commitments.

Speaker 2

So presently, it's just Continuing nonstop. Now, I think and we anticipate that continuing on. And if you're starting to look into 2024, which you're trying to do now, it's a little tougher because Operators aren't really publicizing too much of their 2024 schedules, but just based on Your continued demand we're seeing and request for equipment and things like that, 2024 looks like it's going to be you have a good start. But if everything else continues with the oil price hanging in and I don't think it has to Go up a whole lot more. I mean, the demand is there even at the current price, which is the price that the operators can make money at.

Speaker 2

We anticipate demand continuing. Our challenge is now execution. As I mentioned, you're sold out. And getting it built, getting it out on time, supply chain continues to be Somewhat of an issue, not a killer, but as long as all that stuff stays together, we see the rest of the year and into 2024 Good. So demand is there.

Speaker 2

It's just now I think among with us and in the industry generally is just how to Fulfill all of it and I don't think all the 2023 demand will get fulfilled. It will slide over into 2024.

Speaker 3

Okay. Okay. And then maybe just review the capital commitment again on kind of what you've sold and is that capital commitment Sort of to fulfill contracts that you have and that's committed at this point and just provide remind us what it is?

Speaker 2

Yes, it's essentially the same stuff. The contracts we talked about last quarter were Yes, largely pre contract and I say largely, I think there's 90%, 95% pre contracted. And the ones we've added this quarter are contracts. So they're not speculative builds We're anticipated work. They're signed contracts and that's why we went ahead and added them and increased the capital budget.

Speaker 2

It's equipment we've got to build now. So the commitment level still Stays at that 90% range. We've got the 10% difference is Some equipment we've got in there towards the end of the year and into 2014 That have not been committed at this point that are being built, but we fully anticipate that equipment over the next 6 months being rented. So the bottom line is we're still running a 90% commitment rate on the stuff we're building.

Speaker 3

Okay. And I may have missed it when you spoke with the capital, the CapEx expectations this year. And I guess, the way you're talking, would that be similar next year? What's the CapEx

Speaker 2

I don't want to even project 2014 or 2024 yet. Yes, I think last call, I was asked that question. I said, well, just based on the difference in what we anticipate the capital budget being and the bank line commitment we had, there's about a $55,000,000 Difference. I said, well, if everything stays static, it would probably be $55,000,000 we spend next year just to Finish out the bank commitment. But now, the budget this year has grown to where There's very little left in the bank commitment if we execute on everything we've gotten and the committed stuff.

Speaker 2

It's very hard to say what 2024 is going to be right now. Like I mentioned, The operators haven't really put out anything publicly. I mean, anything we hear is pretty much speculation and Your advanced projections from operators and those are Hard to, I guess, commit to right now from a capital budget standpoint. So We're trying to get a better handle on it, but 2024, like I said, I think it's going to be a robust growing year whether we spend $150,000,000 I'd that's a lot of money for 2 years in a row, and I would be hesitant to say that. But give me another Quarter or 2 and we'll have a lot better handle.

Speaker 2

But it's going to be a decent year. I just don't know if it's going to be As I mentioned in the remarks, I don't know if it's going to be as fast paced as this year because this is pretty extraordinary. Okay, great. Thank you. I'll turn it over.

Speaker 2

Okay. Thanks, Rob. Thank you

Operator

very much, Rob. Our next question comes from Tate Sullivan with Maxim. Go ahead please.

Speaker 4

Hi, good morning. It's Alejandro Nunez on for Tate Sullivan. Congratulations on the quarter. It's Alejandro Nunez on for Tate Sullivan.

Speaker 2

Okay. Alejandro, how are you?

Speaker 4

Good. How are you? Congrats on the quarter. Just kind of following

Speaker 5

up

Speaker 4

on the CapEx comments. How much of the increased CapEx guidance is for the 2,500 horsepower market? I think last quarter you talked about it being About a third or a half for the $95,000,000 commitment. So I wanted to see if we're increasing it now that we've increased the CapEx guidance as well.

Speaker 2

No, actually, the majority of it is 1500 horsepower units. So we didn't change the 2,500 horsepower number. It's just primarily We've had a lot of interest in the 1500 horsepower equipment.

Speaker 4

Great. Thank you. And then, Again, just kind of following up on the price increases. Should we see continuous price increases throughout 2023? Or do you think Can you kind of just give us a little more of a rundown on what we should be looking at as you see price increases throughout the rest of the year?

Speaker 2

Well, from a new equipment standpoint, we may, Primarily because engines are continuing to get more expensive, compressors are more expensive, building is more expensive. So from a new Build cost of goods sort of thing. We're still seeing increases and if they continue like they are, we're going Have to increase the rental rate on new equipment going forward. We'll probably look at it We constantly look at it, but we'll make an assessment next quarter or so and just see what we see from an inflationary standpoint there. From the existing fleet, it was more of an operating expense question.

Speaker 2

And we're The inflationary increases from an operating standpoint, being labor, Lubricants and stuff like that have they're still going up a little bit. They've mitigated somewhat recently, but we're keeping an eye on we'll just have to see what again, make an assessment of the next quarter as to what that pricing is looking like. But Yes, we're seeing a little slowdown in some stuff, but it just it continues on. It's not as extreme as it was last year, but In the earlier part of this year, but we're still going to watch it a bit. I think The steel price increases going on in the industry, as we speak, and I think that's more so a Catch up to what we had already done versus maybe doing enough last year.

Speaker 2

So there There's still some price increasing going on, still some costs going up. But as far as we go, we're just going to look at it very carefully probably in the next Quarter or so and determine if we need to do it. There's getting to be some pricing fatigue from customers, Which is we know what they're talking about, because we're getting a little over too from our suppliers, but we just got to make an overall assessment and see what more it pushes.

Speaker 4

Great. Thank you so much.

Operator

Thank you very much. Currently don't have any questions in the queue, but if you have, please press 7 pound and we will open up your line. We have Hale Hoch with Hoch and Co. Go ahead, please.

Speaker 6

Hey, Steve, it's Hale. Congrats on a good quarter. Hi, Hale. Just to follow-up a little bit on the CapEx questions and asking a little differently. If no new equipment orders came in and you just fulfilled what you're currently obligated To fulfill, when would all of those units be in service?

Speaker 6

Is it 6 months from now or 12 months from now or how far out until all of them are in place?

Speaker 2

Well, the yes, look at the build schedule, of course, it's Yes, the buildup about the Q3 then the decline and this is from the standpoint of the build schedule being okay, this is completed equipment, Equipment we can start to place on contract and rental. So you get the typical sine wave. So all of the equipment would be and from a Time delay standpoint, let's just say, equipment that gets built and we receive it in Q2 will be installed and start generating revenue sometime in Q3. You got about a lag like that. So all the equipment that we're building this year, I will anticipate being Installed and all of it pulling 100 percent rent by the end of Q1 'twenty four.

Speaker 6

Okay, great. I just was thinking about you're going to have a you had a nice quarter now, but you're going to have a quarter with a real Step function change in earnings power and I guess later this year or early next year and we're just trying to get my hands around the timing of that. But Congrats and also congrats on the adding some guys to your board. I think it looks like you'll get good perspective and we'll talk to you soon.

Speaker 2

Okay. Yes. Appreciate it. Appreciate the call.

Operator

Thank you very much. Our next Last question comes from Kyle Krueger with Apollo Capital. Go ahead.

Speaker 5

Good morning, Steve, Bob, a couple of questions for you. Hi. Fantastic increase in revenues during the quarter. Year over year operating income was basically flat. Would have expected significantly more Operating leverage than that with that dramatic of a revenue increase.

Speaker 5

And I see some couple of the one time factors. But Is that revenue increase going to lead to significant Profit prosperity going forward? And if so, what's the timing associated with that? When will we start to see the earnings leverage come through?

Speaker 2

Well, I think just like you're talking to Hale there a second ago, we'll see the majority of it. Q1 It was the beginning of the kind of the CapEx build. So as I mentioned, we're going to start getting the majority of the equipment in Q2 and Q3. So the second half is going to look a lot different The first half of the year, we're just starting out. So we're going to be getting the equipment, getting installed, getting the rent started and things like that.

Speaker 2

So I think you'll start to see Some real improvements all the way up and down the income statement and starting the second half. And it will just build. We'll have Yes, I think you'll see a Q3, Q4 and Q1 increase pretty consistently going that way.

Speaker 5

Yes. Any idea that you could give us as to what the expected incremental operating margin associated with A dollar revenue increase could be, I mean, I would imagine it would be quite substantial, I mean 20%, 30% That we'll start to see flow through off of that dramatic ramp in revenue?

Speaker 2

Yes. The revenues is The increase that we're going to see, say, the next year, next 4 quarters or so We'll be I would guess for every dollar revenue We see go up, we're going to see a commensurate 20% to 30% increase in additional in operating income. So I don't think you're too far off of that because we're going to start seeing pretty substantial increases in A lot of stuff, revenue. This is new equipment going out and this new equipment is carrying higher prices and some of the existing equipment out there. And so there's a lot of levers in the income statement that will start to be pulled As we go through, your SG and A is going to get better, I predicted that.

Speaker 2

So we're going to have a lot of tailwinds going forward. So I don't think you're too far off on your operating leverage, you think.

Speaker 5

Yes, okay. Now typically you guys have played In lower horsepower space, 250 ish, I think was the average horsepower of your installed fleet going back 2, 4 years ago, now you're moving up into the 1500 and beyond range. Is the Manufacturing and fabrication process similar enough that you can Guarantee customers, contractual runtime performance or is this really a new piece of equipment For you that is needing to have run time performance in order to Perform according to what ordinary field level statistics might be?

Speaker 2

Well, it's a magnitude of difference in the equipment. So you're right, Say, 5 plus years ago, our typical build was a 200, 250 horsepower Unit. Now we're routinely building 1500 and stepping into the 2,500 horsepower. So you get a magnitude change in just the horsepower The size of the equipment, you get a big change in how it's operated and maintained in the field. But from a design standpoint and how you can maintain run time, some of it's some of the basic stay Same.

Speaker 2

They're all our designs. We've built a fair amount of the bigger stuff, but currently in probably the last Couple of quarters, we've outsourced the majority of the big horsepower to our designs. So it's We've found a couple of good fabricators that have good quality and will build at a good price for us. And so we're using the outsourced model more so now than we ever have in the past from a certainly from an Additional horsepower standpoint. But from a runtime deal, we've always guaranteed high run times on equipment.

Speaker 2

Now On this bigger equipment, the customers typically demand even higher run time on them because now you're starting to get into Critical infrastructure, when you're getting into centralized compression, maybe touching some midstream stuff or Any downtime, especially on a gas lift or production perspective, Is very profitable or very expensive for the operator. So the more downtime you can give them, the more money they make. Number 1, that drives rental rates up because your manpower gets more, your monitoring costs get more, Etcetera. But we are able to deliver very high run time on this stuff. But you do have to spend a little more money To do it, and that drives some of our rates too.

Speaker 2

But your customers are typically okay paying those higher rates if you can give them that kind of Run time because a percent or 2 additional run time on the higher end, I mean, into the higher 90% Run time range is very profitable when you're lifting thousands of barrels of oil a day from centralized stations. So it's more critical now than actually it has been in the past with the medium horsepower.

Speaker 5

And these are these being kind of brand new units for you guys and you're outsourcing the production fabrication of them. Isn't it a new piece of equipment? And are you sure that they're performing according to contractual And are you confident how are you confident enough With really very few units out in the field now with accumulated performance, how are you confident To spend up to $150,000,000 and take what has been a pristine balance sheet to one that on a Current run rate basis has 3 times debt to EBITDA going presumably significantly higher.

Speaker 2

Yes. Well, I mean, we're we've dealt with this equipment. The engines and compressors we're Having built for us in this equipment is number 1 from the industry standpoint, long standing, Excellent quality goods. So there's no issue with the quality of the engines in And that's from the industry standpoint. From the NGS standpoint, we've been dealing in the same engines and compressors 4 to 5 years.

Speaker 2

So we've also got some history with it and we're building more and more each day. And With this equipment and the value of it and the runtime expectations and service expectations, every one of these big units Are extensively monitored. There's probably and there may be more 30 to 40 monitoring points constantly on this equipment to track what's going on, What's good, what's bad, etcetera. So we've got an extremely high level of confidence in the equipment we're putting out. We're getting a lot of support from The factory and the suppliers and everything else on this stuff.

Speaker 2

So that's really not That doesn't keep us awake at night. We lose sleep over making sure we can make the run time and things like that, more of a service aspect Then a equipment aspect.

Speaker 5

Yes, yes. Okay. And could you update us, Steve, on the CEO, the full time CEO replacement search? Yes. What kind of candidates you're coming up with and

Speaker 2

Well, we've been we've had a search going on, as I've mentioned in the past. Now with the 2 new directors on the Board, which we announced a couple of weeks ago, 3 weeks ago, I think, Yes, we're going to we want to involve them in that. And so we're taking a look at where we are, where we've been, what we're going to do, etcetera, So, no, I mean, the candidates are what you'd expect. We're trying to find Different levels of experience, whether it's equipment experience, financial experience, etcetera. That criteria to this point hasn't changed, but we are taking a little bit of a pause And reassessing with our new directors, the candidates we've identified so far, the profiles we want and things like that.

Speaker 2

But it's going along, but it will resume to a fuller extent in the future.

Speaker 5

Yes. And have you expanded that exercise to include sort of a full scope Strategic review of these new directors coming on, which presumably with a CEO transition So important. Are you including the outright sale up to and including the outright sale Of the company with respect to how the new directors and the CEO search is moving forward?

Speaker 2

Well, the new directors didn't come on from the point of doing anything in particular with the company except Increasing shareholder value, right? And we've made No bones about the fact that we're going to look at the company from the perspective of we've got this organic growth plan going on And we've got the big bank line and making sure that's assessed correctly. We're going forward the way we want and things like that. But Yes, I think whether it's 2 new directors or the existing board before, we're always constantly looking at what's Horizon, what's the future hold? What direction do we want to go?

Speaker 2

What are the strategies and things like that? So that's really not going to Change. Now certainly we got 2 new perspective, 2 new eyes looking at things, which is great. That's from a business standpoint, that's always what we ought to do. Yes, we're going to continue to assess our strategies.

Speaker 2

But our strategy right now is what I've just Talked about executing our growth plan, putting in a lot of new equipment, satisfying demand and stuff like that. So Really, that's the point we're at right now, just making sure we're as tight as we can be on our present plan.

Speaker 5

Okay. Thank you. Best of luck going forward looking forward to seeing the leverage come through based on the dramatic Increase in revenue. Thank you, Steve.

Speaker 2

Okay. Thanks, Kyle.

Operator

Thank you very much. And that was our last question. Mr. Taylor, go ahead.

Speaker 2

Okay. Thanks, Luke, and thanks everyone for your time and joining our call. And I look

Operator

Thank you, everyone. This concludes today's conference call. Again, thank you for

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