Q1 2021 Natural Gas Services Group Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the natural gas services group first quarter 2021 earnings call.
At this time, all participants will be in a listen only mode. Operator assistance is available at any time during this conference by pressing Star zero.
And your call leaders for today's call are Alicia Dada, IR coordinator and Steve Taylor, Chairman President and CEO.
I would now like to turn the call over to MS. Alicia Dada you may begin.
Yeah.
Thank you Ross and good morning listeners. Please allow me a moment to read the following forward looking statement prior to commencing our earnings call ex that.
For the historical information contained herein the statements in this mornings conference call are forward looking and are made pursuant to the safe Harbor provisions outlined and the private Securities Litigation Reform Act of $19 95.
Forward looking statements as you may know involve known and unknown risks and uncertainties, which may cause natural gas services group actual results and future periods to differ materially from forecasted results and those risks include among other things and lots of market share through competition or otherwise.
Production of competing technology by other companies and new governmental safety health or environmental regulations, which could require natural gas services group to make significant capital expenditures.
The forward looking statements included in this conference call are made as of 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 to differ materially from the expectations reflected in the port looking statements include but are not limited to you that Chris described and a recent press release and also under the caption risk factors and the company's annual report on form 10-K filed with the Securities and Exchange Commission, having all that stated I will now turn the call.
Over to Stephen Taylor, who is president and chairman and CEO of natural gas services group Steve.
Thank you Alicia and Ross and good morning, everyone and welcome to natural gas services group's first quarter 2021 earnings review.
Thank you for tuning into our call well it was only a year ago, when our business our industry.
And the world around us came to nearly a complete stop and it seems like it was just yesterday and for ever at the same time.
Well I've said this before and just one last mentioned the pandemic and the resulting slop and energy demand and collapse and energy prices had a profound effect on our business not just from a revenue and profit standpoint, but also from the way, we do business right and our core business from the homes of our employees.
And for place by cameras, and zoom meetings and necessity to completely re imagine and our field business to ensure the safety of our employees and customers.
The challenges to our business were unprecedented.
However, it is still our experienced and the weighing effects of the pandemic. We're hopeful of a slow return to normal will accelerate in the coming months.
As a result suggest the energy market is showing early signs of stabilization and we expect a generally steady recovery to continue.
We have continued enhanced safety protocols and field operations and many of our Central office employees continue to work remotely.
Given growth and vaccination rates, we are hopeful that our operations will evolve toward a more normal workflow and the coming months.
What day Corona virus challenges have been and focus for the past year. The first quarter brought another certificate challenge and unprecedented winter storm that effectively shuttered business and Texas and the reason for nearly two weeks.
Given the storm's impact on oil and gas activity and the region. Our business should have been significantly impacted however, largely due to the effort of our field team and quality of our compression equipment and we recorded no material downtime from the storm.
This performance is itself extraordinary.
Given all that we are pleased with our first quarter results before we discuss the details of the quarter and want to update you on a couple of company events.
And as announced yesterday, we closed on a new credit facility with our new banking partner, Texas Capital Bank. This.
And this facility initially provides $20 million and revolving borrowing capacity with the ability to expand to $50 million as needed under certain conditions.
The size of this the facility provides ample liquidity today and into the future.
For internal needs as well as potential extrinsic growth.
In addition, we believe the cost of the revolver is among the lowest and the industry.
And finally, the five year facility gives us plenty of runway and extends the refinancing horizon well beyond the energy industry average.
We're excited to work with Texas capital and Texas Bank with their continued interest and energy finance and the coming years.
Second earlier this week, we announced the appointment of Michael Foster as our new Chief Financial Officer.
And Mike has nearly two decades of oil and gas accounting and finance experience, both and audit as well as inside a public energy concern.
He stepped in and as our interim controller and January and was integral and our year and accounting process as well as working to close and new credit facility replaces Michael has joined the <unk> team and look forward to his financing accounting contributions.
And finally I want to thank Larry Lawrence for return to the company from his well deserved retirement.
To serve as our interim Chief Financial Officer.
Ladies and willingness to jump back and when needed and January was also key to completing our annual accounting as well as clothing and our new credit facility.
Larry will retire at the end of this week and <unk>.
Personally grateful for his efforts and our longstanding friendship.
As noted and as the details to follow and demonstrate we are pleased with our financial and operational performance and the first quarter of 2021.
Our rental revenue increased 4% sequentially driven by increased rentals of our large horsepower units. Our sales revenue has improved and gross margins across all product lines strengthened.
Unit and horsepower utilization remains solid and we generated adjusted EBITDA of $6 $5 million and improvement in both comparative quarters, and an increase of 21% over the fourth quarter of 2020.
Our operating cash flow for the quarter was a strong $7.4 million.
Looking further revenues and just reported total revenue of $18 4 million for the first quarter of 2021.
This is a 3% increase from the same quarter in 2020 and as.
The result of and almost doubling of sales revenues balanced against a modest 5% decline in rental revenues over the year.
When comparing consecutive quarters, we had an increase in total revenues of 8% or about $1.4 million.
This consisted of a 4% increase and rental revenue sales.
Sales growth of over $1 million balanced by fall and service maintenance revenue of.
Approximately $250000.
Our revenues are shown and resilience and consistency that is fairly unique and our business total revenues and sales revenues for both comparative periods group.
Rental revenues grew in consecutive quarters, and dipped only 5% when compared to last year's quarter.
The rental revenue number is particularly notable concern and extreme terminal due to COVID-19 pandemic and crude oil price collapse in 2020.
And the severe weather suffered in this current quarter.
Total adjusted gross margin for the three months ended March 31, and 2021 increased by 6% to $8 $6 million from $8 1 million for the same period ended March 31 and 2020.
Adjusted gross margin, which does not include depreciation.
As a percentage of revenue for the three months ended March 31 was 47% and increase from 45% year over year.
Sequentially adjusted gross margin for the first quarter 2020 increased by 10% to $8 6 million from $7 $8 million and the prior quarter.
Adjusted gross margin as a percentage of revenue increased slightly to 7% to 47% and in this quarter compared to 46% and the prior quarter.
Selling general and administrative expenses were $2 $6 million a year.
Year over year increase from approximately 23% and a decrease of approximately 18% sequentially.
The year over year increase was due primarily to an increase in our non cash deferred compensation expense, partially offset by lower professional fees and various other expenses.
Sequentially, the $580000 decrease was due to reduced compensation expense as well as decreases in non cash deferred compensation expenses and reduced professional fees.
A quick side noted and explanation and I've mentioned variations and deferred compensation expenses and their impact on SG&A.
The company sponsors does does not contribute to a deferred compensation plan and the investments and the plan of record quarterly and a mark to market procedure.
Although these are non cash unrealized gains or losses, they do impact our GAAP SG&A numbers.
Operating loss for the first quarter of 2021 was $369000 compared to a loss of $273000 and the first quarter 2020.
The operating loss increased due to higher non cash deferred compensation expenses and.
Slightly lower gross margin dollars from rentals.
Partially offset by higher total sales margins and profit dollars.
Sequentially operating loss improved by $1 $9 million from an operating loss of $2 $2 million and the fourth quarter 2020.
This increase was primarily driven by higher rental and sales revenues and margins and.
SG&A expenses.
Our net loss after tax for this quarter was $394000. This compares to a net income of $4 1 million and last year's first quarter, and a $1 9 million net loss and the fourth quarter 2020.
Our net income and the first quarter 2020 of $4 $1 million was driven by a $4 $5 million deferred tax benefit related to the cares act and our ability to claim net operating loss carry backs and recoup some past cash income taxes.
This will ultimately result in a total of $15 million and actual cash tax refunds and of which we have received $3 $5 million plus interest to date.
We reported a loss per diluted share of <unk> <unk> for the first quarter 2021, compared to income of 30 cents per diluted share and the first quarter 2020.
Sequentially, we were we reported a loss of 14 cents per diluted share and the fourth quarter 2020 and.
And a loss of <unk> and this quarter.
This sequential improvement was driven by increased rental and sales revenues and related margins as well as reduced SG&A expenses.
EBITDA is defined as earnings before interest taxes, depreciation and amortization and our adjusted EBITDA also excludes.
Any inventory allowances stock compensation expense and charges incurred related to fleet retirements, all of which are non cash expenses.
Adjusted EBITDA for the three months ended March 31, and 2021 was $6 $5 million, a slight increase from $6 $3 million for the same period and 2020.
Adjusted EBITDA increased approximately $1 $1 million sequentially from $5 $4 million last quarter to $6 $5 million and this quarter, primarily due to higher total revenues higher overall margins and lower SG&A expense.
Beginning with this first quarter 2021.
We have also added back noncash equity compensation to our calculation of EBITDA and have adjusted comparable quarterly data to provide for accurate comparisons.
Total sales revenues, which include compressors flares and product sales almost doubled from $1 $4 million to $2 $7 million on a year over year basis.
Sequential sales revenue increased 63% to $2 7 million from $1 $7 million.
The increase from both comparative quarters was primarily driven by an increase and compressor sales.
First quarter 2021 total sales adjusted gross margin was $95000.
This compares to a negative gross margins of $299000 and the first quarter 2020.
And positive gross margins of $48000 and the fourth quarter 2020.
First quarter 2021, compressor only sales increased to $1 $9 million from $850000 and the first quarter of 2020.
And we recorded no compressor sales revenue and the fourth quarter of last year.
And absorbed costs compressor only sales margins posted a loss of $136000 for the three months ended March 31 and 2021.
Compared to a loss of $435000 the same period, a year ago, and a loss of $713000 last quarter.
And you can tell we have not only and eliminated the losses and pasta and posted positive results and our overall sales business.
Last quarter and this current one but we have reduced the losses and our compressor sales business, which is a part of our total sales results significantly.
We've made a profit on each individual compressor sale with.
But the losses come after fabrication burdens.
Indirect expenses are applied.
However, we're seeing some improvement from expense management and higher sales volumes.
Our sales backlog as of March 31, and 2021 was approximately $400000 compared to approximately.
One seven and $5 million and the fourth quarter of 2020.
However, we have received additional orders totaling another $1 $5 million this month.
Rail revenue and the first quarter 2021 was $15 $3 million compared to $16 $1 million a decrease of 5% since the first quarter last year.
However, rental revenue grew and sequence of quarters by 4% or $600000 to $15 4 million from $14 $7 million last quarter.
[laughter].
This is significant and keeping our equipment running and online while installing new equipment this quarter during the extreme weather and.
As Testament to our field force their tenacity and dedication to our customers was exceptional.
Rental rates increased by an average of 4% per unit and a year over year quarters, mainly due to our continued penetration into the larger horsepower market.
Our per unit rental rate increase over the past year. When contrast against the active rental units highlights the positive impact of our large horsepower units.
As they carry much higher rates per year, and our average legacy units.
Compared to the fourth quarter to 2020, our average rental rates increased 4% on both a per unit basis.
And on an average per horsepower basis.
Reported rental adjusted gross margins this quarter were 53% and increased from both comparative quarters of 51%.
Besides as at the end of March 2020 one.
Totaled 238 compressors.
Or 441911 horsepower, which includes an additional 15 units or.
Or 35000 horsepower and the first quarter.
As of March 31, 2021.
<unk> 43 per cent over you less horsepower is classified as large over the past 12 months. We've added 45, new fleet units totaling just under 19000 horsepower.
With 74% of those units classified and our large horsepower category.
A significant portion of our active rental compression is now classified as large as compared to small and medium horsepower and Tim.
And as to fare better in a downturn.
This has been reflected in our financial results and balance sheet strength during this past year depressed activity.
Our horsepower utilization of 65% and unit based utilization was 57% as of the end of the first quarter of 2021.
Our capital expenses in the first quarter was about $5 million, including a four and a half million dollars a rental equipment.
We projected a capital expense budget of $15 million to $20 million. This year. So we're generally on track with our estimate.
Looking at the balance sheet as noted earlier, we entered into a new credit facility with Texas capital Bank and rich.
The most that we had on our previous facility.
Currently we have no borrowings on the new facility.
Our cash balance increased to $37 million at the end of the first quarter.
This compares to cash a year ago, a $13 $1 million and last quarter of $28 $9 million.
The combination of our cash balance and untapped credit line provides ample liquidity and nearly every conceivable scenario.
We generated positive net cash flow from operating activities and this quarter of $7 $4 million.
Which represents 40% of our quarterly revenue free cash flow was $1 8 million.
We continue to look at a number of opportunities to deploy capital and efficient and value added ways, including continued growth of our higher horsepower fleet strategic opportunities and share repurchases for which we have a reauthorization.
We do believe the current share price provides a unique opportunity to add value to our long term shareholders.
We continue to be one and a few companies and the oilfield that has a recurring rental revenue stream essentially no debt on the balance sheet with significant cash reserves and a consistent ability to generate operating cash.
We like our competitive position as the economy and energy markets continue to reopen.
There are a lot of assai remained somewhat blurred by the pandemic or the second quarter activity seems to be continuing a pattern and a slow steady growth well I have some concerns about the sustainability of higher commodity prices. It doesn't appear that prices even modestly lower from recent highs will continue to support incremental additional production activity, which helps our business.
Moreover, our continued transition to higher horsepower unions continues to provide opportunities for growth of market share and margins.
We remain optimistic that the balance of the year.
We will provide opportunities to grow rental activity gain market share and improve overall margins.
Before I conclude I also want to welcome Nigel Gen V to our board of Directors Nigel is a long time and energy strategy is focused on environmental issues and.
Food and spending two decades on developing carbon capture technologies.
Nigel recently joined Baker Hughes as managing director of their new frontiers initiatives.
Nigel brings a wealth of knowledge and experience to our board, including significant experience and addressing ESG issues.
We look forward to his expertise and input.
The Board also announced its decision to transform the former governance committee and to the environmental social and governance Committee with Nigel I as the chairman and another step and supported the company's commitment to continuous improvement and environmental social and governance issues until you and strong sponsorship for such initiatives from our board.
And as always our success is a result of the unwavering commitment of all members of the <unk> team to make certain of our customers are both satisfied and appreciate it.
And the past year. Our success is a direct result of the creativity and flexibility and effort of our people from the front office to the field to field services.
Thanks for a job incredibly well done.
Processing and in my prepared remarks, so if you would please open the phone lines for questions.
At this time, we will conduct a question and answer session.
If you would like to ask a question. Please press star one on your phone now and you will be placed in the queue and the order received you can press pound and one at any time to remove yourself from the queue. Once again, if you would like to ask a question. Please press star one on your phone now our first question comes from Rob Brown from Lake Street Capital. Please go ahead Rob.
And Steve.
Hi, Rob.
Thanks, Jeff and the quarter and they see some some recovery here I just wanted to get your view on the pricing environment. How is it and going this year, what are you seeing and the pricing.
At this point.
Yeah.
You almost have to break it down between horsepower ranges anymore seemed like I mean.
And the high horsepower.
Seems to be holding up fairly well.
You know we always.
Have somewhat of a.
Value added a price premium priced product and offering which we can get.
And we always seem to be the price leader.
So you know the competitors tend and Nestle and right under us.
GAAP seems to be steady so the price and there seems to be okay.
Smaller and medium horsepower is where you get traditionally more of the pricing pressure and we see a little bit of that and net and that's primarily driven and especially in the small horsepower by very small regional players.
So we see some of that but.
Generally I would say, it's fairly stable right now.
You know obviously.
Oil price helps our gas prices no worse and no barrier that was traditionally band and so it's kind of a non issue but.
Of the work being gas lift which is associated with the crude oil price and crude oil market seems to be a journey, okay right now.
Okay great.
And then and the high horsepower investments you talked about.
And where where do you see opportunities there and and I guess, what's what remains of ordered horse.
Power units that you have to put into the field at this point.
And there's still.
And opportunity there that's the small medium and large horsepower category, that's the world and scale with the most opportunity and it.
You know not just from share growth, but obviously.
Revenue growth because the revenue per unit so high on those.
So yeah we.
That is still our.
Primary focus obviously, we're not.
<unk> taken our off the ball and the medium and small horsepower, but certainly our primary focus from a capital spend standpoint is the higher horsepower. So there's a lot yeah. We're still the new kid on the block and that as far as and when you start looking at our bigger competitors.
And on it.
But we think we've made inroads and and we think we can continue that.
So that's where the opportunity lies there.
And you know and and it's and this and the traditional horsepower we've seen we.
Classify our large horsepower for our fleet.
And it was different from other people from 400 horsepower up to about 1400 horsepower.
And you know and we're even seeing opportunities to go a little higher on some of the stuff or evaluate we evaluate those as they come along but we're not we're not.
And worried about getting into that bigger horsepower, we just have to kind of see what they how.
How they develop but there's there's opportunities and the.
And that horsepower range I've mentioned, plus this even even larger horsepower too and we've got the.
Obviously the the.
Financial wherewithal to pursue those as required now.
Yeah, I'll mention too that.
All the.
Capital we're putting.
To work is as good return capital.
As far as what more do we have to put out.
Yeah, we've had a fair amount of units.
On standby.
Yeah getting.
Paid a standby rate, but they haven't been out full rate, but they are we anticipate the majority.
Of all of this large horsepower equipment being installed.
By cash.
And <unk>.
In Q2, Q3, and certainly by Q4, so by the end of this year.
All of the big horsepower cash.
We spent the last couple of years should be at and earnings for 100% revenue.
Okay.
Okay, great. Thank you I'll turn it over.
Okay. Thanks, Rob.
Our next question comes from Tate Sullivan from Maxim Group. Please go ahead.
Hey, Thank you good.
Good morning, Steve.
Hey, Ted.
Hey.
And you commented on the pricing a little bit but has any smaller horsepower units have any smaller horsepower units started to go out the door or do you see with more stable operating environment.
What will it take to get more smaller horsepower clients demanding more units.
Yes.
And.
That horsepower range.
You know is generally stable.
And we will get some fluctuations in our quarterly up or down depending on what's going on but.
Yeah.
What we need for a lot more to go out and that horsepower range is a lot better gas price and not just a lot better gas price with some surety that gas price lasts a little bit now.
You know, it's been kind of a cool.
Winter and spring Cros.
Cross country. So that's helped somewhat but we are headed into the shoulder season, and then into the summer season, and where you'll have.
Yes.
Commensurately.
Less horsepower on just pure dry natural gas because of.
Space heating requirements going down and stuff like that so generally you know several times and when it goes into storage and and pricing tends to moderate somewhat.
So you know it's been the case for 10 years right.
A little more gas price a little more gas price you can get it for about a week or two that it falls back down to normal.
Normal levels.
Which are.
You can tell by the rig count somewhat suboptimal for operators to chase gas.
So I O and I think as you stay as it goes on a smaller stuff.
We make money at it but we're not putting capital in it it's not a growth market, we've repeated that before and.
We are we take the opportunities to do what we can and that as we go along whether it's you know putting equipment out or yeah. Like we've done in the past you know taken taken some equipment out of the fleet, but that's not going to be a inc.
It's just not a growth area.
And obviously the growth is high horsepower and and we think the medium horsepower is.
Has opportunities for growth now from a capital standpoint, we've got the.
Equipment, we can utilize but certainly from a market share standpoint, a little low revenue standpoint, too so and that is primarily wellhead gas lift equipment at medium horsepower. So with the oil price yeah. We you.
We have some.
Hopes it will we'll get a little stronger and that towards the end of the year too.
Okay and last one from you and thank you.
You mentioned I think if I heard right at $1 5 million orders, so far sale orders so far this month and.
And do you expect a quick turnaround on those orders and.
And where they are they at similar margins compared to the last couple of quarters or can you just from your comments around those orders. Please yeah.
That's just the order so and actually.
Those are received you know this is Matt.
And may so this months last couple of weeks are fairly recent orders so.
And that we will recognize revenue.
And that equipment, probably it might make it into the into Q3.
Probably more likely Q4.
Friday long lead stuff. These jobs are these particular jobs are.
Pretty high spec stainless steel.
Type of compression so.
And it takes a little longer lead time for some of the exotic metals on that but we've got yeah. We've we've.
And you know some decent margins and that should have been a little more specialized so we we expect some some good returns out of it.
Thank you Steve.
Once again, if you would like to ask a question. Please press star one on your phone now.
Okay.
And Steve at this time, there appear to be no further questions.
Okay. Thanks, Russ and thanks, everyone for joining me on the call and I. Appreciate your time this morning and look.
Forward to visiting with you again next quarter.
This concludes today's conference call. Thank you for attending.
The House has ended this call goodbye.