Q2 2020 Natural Gas Services Group Inc Earnings Call
Good morning, ladies and gentlemen.
And welcome to the natural gas services group second quarter 2020 earnings call.
At this time, all participants will be in a within only mode.
Operator system available at anytime during this call by pressing star zero.
Oh leaders for today's call, our Leisha Dot Dot IR coordinator.
Taylor, Chairman, President and CEO I.
I'd now like to turn nickel turn the call over to Mr. leased about at least you may begin.
Thank you Ross and good morning listeners. Please allow me I'm into either following forward looking statement prior to commencing our earnings call.
Except for the historical information contained here in the statements in this morning conference call afford Lucky and are made pursuant to the safe Harbor provisions I've outlined in the private Securities Litigation Reform Act of 1995.
Forward looking statements have you may know involve known and unknown risks and uncertainties, which may cause natural gas services group actual result in future periods to differ materially from forecast that result.
Those risks include among other things lots of market share through competition or otherwise introduction of competing.
<unk> for environmental regulations, which could require natural gas services group to make significant capital expenditure.
The forward looking statements included in this conference call are made after the date of this call and natural gas services undertakes no obligation to publicly update such forward looking statements to reflect subsequent events or circumstances.
Important factors that could cause actual results could differ materially from the expectations reflected in the <unk>. Looking statements include but are not limit. It to you factors described in our recent press release and also under the caption risk factor in the Companys annual report on form 10-K filed with the Securities and Exchange Commission.
Having all that state it I will turn the call over 50, Taylor with President Chairman and CEO of natural gas services group Steve.
Thank you Alicia Thank you Ross good morning, everyone and welcome to.
I forgot services groups second quarter 2020 earnings review.
Well I want to thank all of your all for current indoor called.
In spite of continued weakness in energy demand a volatile energy commodity prices larger a result of the effects of the cobot 19 pandemic.
And yes posted solid financial results in the second quarter.
Our ability to react rapidly to reduce our cost structure and respond to our customers needs.
Resulted in less impact the many in our industry on both our income statement and financial condition.
We have been able to address our customers request for pricing and shouldn't assistance, while maintaining a strong financial position.
Our revenue declined in the corner, we were able to post sequential gains in both gross margin and EBITDA.
Importantly, we continue to strengthen our balance sheet and liquidity position even in this very challenging market environment.
And just levered free cash flow during the quarter and grow our cash balance to $15.5 million from $13.1 million at the end of the first quarter.
Our liquidity position is going to strengthen into third quarter as our cash balance at the in July was approximately $17 million.
What commodity prices have improved from the trough there remain significantly below levels that will spur significant oilfield activity.
Well business has improved the pace has been slow and inconsistent.
And we expect to continue.
Gradually improved through the balance of the year.
That said, we're seeing new opportunities for which we are uniquely qualified.
Our fabrication capabilities Superior service strong financial position will allow us to capitalize on those.
Is your where we stand the time period to fall or second quarter report to the impact of the covert 19 pandemic on the middle of community and our firm.
We remain vigilant in protecting the health of our team in as a result continue to work remotely when possible.
Our operating or build headquarters with a reduced in personal staff and urge our team members take staff to remain safe and healthy.
I feel team continues to exercise appropriate distancing and health practices, what working with customers on location.
These practices have added incremental cost for effort.
<unk> dedicated to protecting the health and welfare of our team and our customers and he's impressed and times.
Before I review, the detailed quarterly financial and operating results I do want to highlight particular aspects of the corner.
Our rental gross margins climbed to 56% improvement compared to the year over year and sequential quarters, but total gross margins gain across the board too.
We reported positive GAAP net income for the quarter.
Adjusted EBITDA grew compared to both year over year and sequential quarters.
And just delivered positive cash positive net cash flow from operating activities of $6 million.
This represents 38% of total written or from the corner.
And free cash flow was positive.
Our cash balance to 15 half million dollars again maintain what the best balance sheets in the industry.
With that let's move into the details.
And just reported total revenue of 17.4 million dollar for the second quarter 2020.
12, and <unk> percent decrease from the same quarter in 2019.
This decline was driven by a drop in sales revenues and serves and maintenance revenue.
Conversely, ngs experienced an increase in rental revenues or living in half percent when compared to the same quarter of 2019.
Sequentially total revenue decreased by 3% driven by a decrease in a rental revenues of 5.5%.
Sales revenue increased sequentially in the quarter. It helped offset the most decline in total revenue.
Our customers capital budgets continue to be constrained, we expect sales revenues remained soft in the coming months, that's companies favor short term rental commitments.
Or more permanent capital spending.
I do however, expect some recovery in our service and maintenance revenue due to specific activity, we see in this segment.
Given the continued challenges in our industry and in the overall economy, we're pleased with our operational performance in the second quarter of 2020.
Our rental revenue proved to be resilient in the quarter decline modestly just by the significant pull back and overall oil field activity.
We generated adjusted EBITDA of $6 million, an increase of 13% over the first quarter 2020.
Operating cash flow for the quarter was six definitely in dollars.
Total adjusted gross margin, which does not include depreciation for the three months ended June 30 2020.
Increased by 1% $8.8 million from $8.7 million for the same period ended June 30 2019.
Adjusted gross margin there as a percentage of revenue for three months ended June 30, 2020 was 51%.
And increased from 44% year over year.
Sequentially adjusted gross margin for the second quarter 2020 increased by <unk> percent $8.8 million from $8.1 million from the first quarter 2020.
Adjusted gross margin as a percentage of revenue increased to 51% in this quarter compared to 45 person in the prior corner.
These increases of adjusted gross margins are clear sign that our cost cutting efforts have had a positive effect on this corner.
Selling general and administrative expenses in the second quarter 2020 were $2.7 million remaining flat when compared to the same period in 2019 increase from $2.2 million in the first quarter 2020.
The sequential increase of $500000 and SDMA was driven by an unrealized gain in the first quarter and.
You know unrealized loss in the second quarter of the mark to market value of deferred compensation.
This was a noncash variation across the first two quarters of the year.
Yes, DNA as a percentage of revenue increased to 15%.
Slightly above our general run rate of 13% to 14%.
Despite an increase can be attributed to the aforementioned mark to market variations.
Operating income for the second quarter 2020, it was a loss of $148000 compared to positive income of $302000 in second quarter 2019.
The operating loss this quarter is mainly due to lower sales revenue and margins and higher depreciation expense offset by higher rental revenues and lower cost of those revenues when compared to same quarter 2019.
Sequentially operating income improved from a loss of 273000 last quarter to a loss of $148000 in the current quarter.
Yes reported net income of $165000 in the second quarter 2020.
This compares to net income of $327000 during the second quarter of 2019.
Sequentially net income report in the first quarter. This year was $4.1 million compared to $165000 this quarter.
Net income last quarter. If you recall was driven by positive tax benefit of $4.9 million due to net <unk> net operating loss carry backs. There now allowed in the government's cares Act.
And just reported earnings per diluted share of one cents for the second quarter of 2020 compared to two cents last year's comparative quarter and 30 cents in the first quarter this year.
EBITDA or earnings before interest taxes, depreciation and amortization and our adjusted EBITDA, which also excludes any increases in inventory lounge improved in both quarters.
Comparative quarters.
Adjusted EBITDA for the three months ended June 30, 2020 was $6 million, an increase of 5% from $6.2 million the same period in 2019.
Adjusted EBITDA increased approximately $749000 or 13% sequentially from $5.8 million in the first quarter of 2020.
Total sales revenues, which includes compressors flares and product sales.
Decreased $3.8 million to $2 million a year over year basis.
Year over year decline is mainly attributable to.
Decreasing compressor sales and to a lesser extent decreases in flares and parts sales.
Sequential sales revenue increased to 2 million dollar from one half million dollars, primarily due to an increasing compressor sales.
Year over year total sales gross margins declined from $1.4 million to $140000, primarily due to lower sales revenues and margins.
Lower margins were largely caused by higher <unk> higher level of unabsorbed cost due to underutilized compression fabrication facilities caused by the severe contraction in the industry.
Second quarter 2020, total sales gross margins.
Were positive at a $140000. This compares to a loss of 200.
98280, $9000 in the first quarter 2020.
Second quarter 2020, compressor only sales of $1.4 million decrease from $4.8 million in second quarter 2019.
However, compressor only sales this quarter increased to $1.4 million from $852000.
First quarter this year.
Compressor only gross margins were $990000 in the second quarter 2019.
Prior to losses of $127000 this quarter and for $35000 last quarter.
Again losses on these cells are largely caused by them zohr fabrication costs due to the underutilized facilities.
Our sales backlog as of June 30, 2020 rose approximately $1.3 million compared to approximately $1.4 million in the first quarter 2020.
We did however add another $400000 to the backlog in August So we're currently at $1.7 million.
Rental revenue in the second quarter, 2020 was $15.1 million compared to $13.6 million in the first.
Quarter of last year and $16.1 million last quarter.
No revenue increased 11% year over year and decreased 6% sequentially.
Compared to the first quarter 2020, our average rental rates on a per unit basis increased a little over 3%.
And were flat on average per horsepower basis.
Reported rental gross margins this quarter were 56% and increasing the first quarter 2020 rental gross margin of 51%.
And an increase from last year's second quarter of 51%.
As of June 30, 2020, we had 20 335 compressor packages in our fleet down from 2500 72 units at June 32019, you through to the retirement of 327 units representing approximately 40000 horsepower.
Third quarter 2019.
Despite this decrease from retirement of some of our smaller units. The Companys total fleet horsepower increased by 8% to almost 447000 horsepower at June 30 2020.
Compared to approximately 414000 horsepower at June 32019.
This reflects the addition of 58 high horsepower compressors, representing 68500 horsepower to the company's fleet over the past 12 months.
40% of our utilize pretty horsepower now classified as large horsepower equipment.
This is one of the advantage is moving into large horsepower offerings compared to small and medium horsepower large machines tend to fair better in a downturn.
This portion of our rental fleet provides a measure of stability when encountering periods are depressed activity.
Thank you advantage this quarter is apparent and proven.
Horsepower utilization the second quarter, 2020 was 64% compared to 68% in the first quarter this year and 60% in the second quarter of 2019.
Our unit base utilization of 55% in the second quarter 2020 compared to 60%.
Last quarter and 53% in the second quarter of 2019.
To demonstrate the volatility we've seen a second quarter our churn.
Which is a dimensionless metric tons calculated by dividing the number of really you know said by the number of really has returned in the given period.
0.1 in April.
0.6 in May and 1.9 in June.
And he number grade there one point node.
Vacates unit gross who seem quite a variation activity and only three months.
From equipment being shut in and returned to the toward page to a total turn of events a couple of months later.
As of the end of June we've had a bit more than half of the rental units are shut in returned to service. We anticipate the bounce come back online over the course of this year.
Just down draft.
Sure I called a downturn due to the ferocity and speed of it.
I was on typical of what we normally experience from moving into times are depressed activity.
Usually don't discount to the name of the game crude drops overtime various discounts from negotiated over many months and there's generally kind to adjust to decline market.
There's no time to adjusted with this.
Price discount for the norm for the first week and then we quickly moved into a phase of managing told was shut ins, which usually have no revenue associated with them and that's the big difference.
Instead, the usual rent reductions some revenue just vaporized overnight.
As mentioned the trough looks like it's behind US, we're seeing shut ins lifted, but we think it will take the balance of the year to get back close to what we lost.
The speed at which the business drafted down and then backup demonstrates the resilience or a field organization and their ability to quickly adjust to anticipate conditions.
Although there's not much good to talk about where we're managing through an unprecedented decline I think we've come through this and much better stand with our customers.
Our ability to be financially flexible and accommodate the majority of request for discounts or shut ins has enabled us to move into a preferred position I think we'll pick up additional future business from it.
For the first half of this year, we've spent a total of $11 million on capital expenditures, the non half million dollars that for rental equipment.
Going forward, we anticipate another $8 million to $10 million of capital expenditures for the balance of the year.
This is a couple of million dollars more than what we'd protecting our fourth quarter 2019 call.
But we have a pretty good line of sight to approximately $6 million and capital expenditures that we anticipate in their future.
These funds, who would be rental fleet additions for popular size compressors that repos presently sold out of.
Along with a nominal sale leaseback program with one of our customers.
Paul This capital would be deployed on long term contracts at above market rates.
From balance sheet perspective, our told bank debt remains minimal just over $4000 as of June 30, 2020, and our cash balance the strongest 15 have me in dollars.
Bounces up from $13.1 million at the end of last quarter in the sense grown for approximately $17 million in July.
Additionally, we have a largely untapped credit line $30 million at all to US which provides ample liquidity in early any conceivable scenario.
And none of this includes previously mentioned anticipated 15 million dollar cash tax refund that we've applied for.
We generated positive net cash flow from operating activities in this quarter of $6 million, which represents 30% of our quarterly revenue.
Free cash flow for this current quarter was $2.4 million.
In summary are not many companies in the oilfield services space that have a recurrent rental revenue stream.
Seeing no down the balance sheet cash reserves in the bank.
And they continue and ability to generate cash.
Before I take questions I want to thank the entire ingeus team for their dedication and efforts during this difficult period.
An environment, where we not only have to consider health concerns in effects, but also continue around the clock service to our customers employees have demonstrated the utmost and professionalism and dedication.
They are to be commended.
Well it bounced a 20 twond to remain challenging.
We do not believe it can be worse than what we experienced in the first half of the here and there are some mostly encouraging signs on the horizon.
More importantly, ngs is well positioned with a solid balance sheet strong customer base.
And team committed to providing Uncompromised service.
Well they stable to modestly improving operating environment, we believe there'll be opportunities in the bounce of the year, even more as we turn the page 2020.
Ross see into my prepared remarks, so if you would please open the phone line for questions.
At this time, we will conduct a question and answer session.
I'd like to ask the question. Please press star one on your phone now and you will be placed in the queue and order received.
You can press pound, what it anytime to remove yourself from the Q.
Once again, if you would like to ask the question. Please press star one on your phone now.
Our first question comes from Rob Brown from Lake Street Capital. Please go ahead rep.
Well Steve.
Hey, Rob like nice job in a tough environment.
[music].
Just wanted to get a little further color on the Capex, you're projecting for the rest of the year end and really that sounds like a new contract and maybe.
What areas that contract covering his horsepower business again, and maybe just some color on what that businesses.
Well you know just.
Just like about everything else in the world, It's a centered around the Permian.
So the majority of that.
$6 million, we're looking at is Permian based and probably.
Half of it.
Well 50, 60% is.
Yeah, well reclassified as large horsepower and a balanced ban.
Medium horsepower.
Well had gas lift years that were essentially out of but you know that are.
On a record also so.
Yes, it's a smattering, but it's still continues along the the Permian Route and then the large horsepower route.
Okay.
And then maybe just digging a little bit into the the cast for since the oil market are you seeing any recovery.
Or where are you seeing kind of the spotty recovery as it is it.
Basin, driven or resource driven or maybe some color and how the recovery is taking place.
Yeah. It's.
Permian is providing you know.
The majority of it but we have seen.
No more activity and some of the Scoop stack stuff no, Texas Panhandle, along there so.
It's a little spread and actually we're seeing a little more the Rockies somewhat so.
The resurgence in activity, we've seen has Ah.
You know is not just concentrated and the permit from the point of all the Capex, we just talked about the cat.
That's a smattering in in two or three geography, so Permian.
Mid continent, and and the Rockies would probably be the primary ones that were seeing most.
The re growth from.
Okay, and then I'll ask questions on that and the tax refund that he said a $15 million, Texas and the good plans before do you expect that this year and.
And what's the status of that.
GAAP and cash cost about trying to put a timeline on.
On the tax free from from the U.S. government in these times.
So.
Oh, good from accurate to say that we we hope fourth this year.
Ah, but there are no guarantees we think it should be but no guarantees to it and of course they want.
All right and give you any any help as far as timing stuff and.
Obviously, they're busy print checks for other things, but yeah. We're we're hoping for this year, but there's no guarantee on that.
Okay, great. Thank you I'll turn it over.
Okay. Thanks, Rob.
Once again, if you like to ask the question. Please press star one on your phone now.
And Steve at the time, there appears to be no further questions.
Okay Ross I appreciate it thank everybody for joining me on this call think we had good quarter, but we appreciate your time this morning, and look forward to visiting with you again next quarter. Thanks.
This concludes todays conference call. Thank you for attending.
Oh has ended this call goodbye.