Q3 2021 Natural Gas Services Group Inc Earnings Call
Ladies and gentlemen, thank you for joining today's call. We will begin in a few minutes. Thank you for your patience.
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Okay.
Good morning, ladies and gentlemen, and welcome to the natural gas services group third quarter 2021 earnings call.
At this time all participants are in a listen only mode.
Operator assistance is available at any time during this conference by pressing Star zero.
Your call leaders for today's call are Alicia Dada.
Our coordinator.
Steve Taylor, Chairman President and CEO.
I would now like to turn the call over to Mr. <unk> you may begin.
Thank you Paul and good morning, everyone. Please allow me a moment to reap the following forward looking statement prior to commencing our earnings call.
Except for the historical information contained herein the stay.
This mornings conference call are forward looking and are made pursuant to the safe Harbor provisions as outlined in the private Securities Litigation Reform Act of 1995.
Statements as you may know involve known and unknown risks and uncertainties, which may cause natural gas services groups actual results in future periods differ materially from forecasted results.
Those risks include among other things and lots of market share through competition or otherwise introduction of competing technologies 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 factors described in our recent press release and also under the caption risk factors in the company's annual report on Form 10-K filed with the Securities and Exchange Commission.
With that stated I will now turn the call over to Steve Taylor, who is president chairman and CEO of natural gas services group.
Keith.
Thank you Alicia and thanks, Paul and good morning, everyone and welcome to natural gas services groups.
Third quarter 2021.
Thank you for tuning in.
As noted in our earnings release, our overall business is growing both sequentially and on a year over year basis.
In comparative year over year quarter total revenue was up 16%.
Each segment of our business rental sales.
That's showed improvement.
Sequentially total revenues increased almost 3% in our sales segment was the only one that decline and that was probably a relatively minor $100000.
Our core compression business continued to recover and grow in the third quarter of <unk>.
Third consecutive quarter of rental revenue growth.
<unk> rental revenue grew 4% sequentially and 9% on an annual basis.
Driven by both an increase in active rental horsepower as well as pricing improvements.
We generated adjusted EBITDA of $5 $4 million this quarter, a 19% increase from last quarter.
33% increase in operating cash flow for the quarter up to $7 2 million.
As you can tell this was a relatively good quarter from a revenue EBITDA and cash flow perspective.
Stronger energy markets southern provide opportunities to maintain and improve pricing.
Remain optimistic about growth as we complete 2021.
Enter the new year.
The temper, our enthusiasm a bit with a realism that exploration and production spending will likely grow incrementally.
Capital discipline remains the overriding mantra domestic producers, but we think the outlook is positive.
In addition to these operating highlights during the quarter, we continued our share repurchase program.
Year to date through September 30th.
We have repurchased over 431000 shares at an average price of approximately $10.
<unk> per share.
Which represents roughly three 2% of our outstanding shares.
Now, let's look at the financial details of the quarter.
We can further revenues in GFS reported total revenue of $18 $2 million for the third quarter of 2021.
This is a $15, 70% increase from the same quarter in 2020 for about two and a half million dollars.
As a result of an increase in all revenue streams, mostly due to a $1 3 million increase in rental revenue.
$935000 increase in sales revenues.
As you know the largest component of our sales revenues compressor sales I noticed historically volatile.
While we reported no compressed yourselves.
Third quarter of 2021 or 2020.
So a significant increase in part sales during the current quarter.
When comparing consecutive quarters, we had an increase in coal revenues of two 8% or almost $500000.
This was driven by a $582000 or almost 4% increase in rental revenue.
Partially offset by a decrease in equipment sales of only $100000.
Our sales revenues fluctuate with our customers' capital needs.
Rental revenues have grown three 7% and 9%, respectively, and both sequential and year over year quarters.
Significantly mgs's posted an increase in rental revenue every quarter this year.
Total adjusted gross margin, which does not include depreciation for the three months ended September 32021, $7 $5 million a decrease from $7 9 million for the same period ended September 32020.
<unk> 'twenty.
This was 41% of total revenue compared to 50% gross margin reported in last year's comparative periods.
But along with higher revenues. We are also seeing increased labor cost setting commissioning and startup expenses related to the growth of our compression deployment not to mention of inflationary costs driven by lubricants for repair parts.
Sequentially adjusted gross margin for the second quarter of 2021 increased to $7 5 million from $6 $6 million in the prior quarter.
As a percentage of revenue adjusted gross margin increased to 41% this quarter compared to 37% in the prior quarter.
This increase was due to reduced levels of repair and maintenance costs and startup expenses.
If you recall in the last quarter, we set a record number of high horsepower units, which in orderly drove higher expenses and correspondingly depressed margins.
Our rental revenue still grew this quarter as predicted the magnitude of cost wasn't as great.
Cost pressures from the upfront expenses incurred in the growing inflationary environment.
But we are working diligently to controlling counteract those.
Sales general and administrative expenses increased 8% over the third quarter 2020.
And three 8% over the second quarter 2021.
These increases were primarily generated by higher expense accruals.
However, as a percentage of revenue SG&A costs were reduced from 16% of revenue last year.
But we're flat at 15% of revenue compared to last quarter.
Operating loss for the third quarter, 2021 was $1 $6 million compared to a loss of $940000 in the third quarter of 2020.
This decrease was due to lower rental margins offset by an increase in sales margins as well as an increase in SG&A expense.
Sequentially operating loss decreased by $730000.
The operating loss of $2 $3 million in the second quarter of 2020.
This increase in comparative quarters is primarily due to the aforementioned higher rental revenues and margins.
Our net loss after tax for this quarter to $1 $3 million almost $700000 less than last quarter's loss of $1 9 million.
This compares to a net loss of $563000.
In last year's third quarter.
We reported a loss per diluted share for the third quarter 2021, compared to a loss of <unk> <unk> diluted share in the third quarter of last year.
<unk> this was an improvement of over.
Improvement over 14.
Per diluted share loss reported in the second quarter of this year.
Adjusted EBITDA for the three months ended September 32021 was $5 4 million.
The decrease from $6 $2 million for the same period in 2020.
Sequentially adjusted EBITDA increased almost $860000 for 19% up.
Up from $4 5 million last quarter.
This increase was primarily due to higher revenue and lower expenses, resulting in higher overall margins.
Total sales revenue, which as a reminder.
Those compressors flares and product sales $1 $5 million this quarter.
This is an increase from $945000 year over year.
It's down marginally from $1 6 million last quarter.
The change in both comparative quarters is due primarily to the volatility in part sales.
For this current quarter, we had a total sales adjusted gross margin loss of $9.
This compares to a negative gross margin of $460000 in the third quarter 2020.
Negative gross margins of approximately $200000 in the second quarter of 2021.
These gross margin improvements are primarily a combination of higher parts sales and reduce expenses and losses in our compressor sales business.
Although we have some compressor fabrication projects and progress our compressor sales business continues to be slow with no sales revenue recognized in all comparative quarters.
Despite the lack of customer capital spending.
Our total sales gross margin losses by decreasing our compressor fabrication expenses pushing higher revenues per player in parts sales.
We have more cost in new rental fleet units being built.
Our sales backlog as of September 32021 was approximately $2 million, which is the same as the prior quarter.
Rental revenue in the third quarter 2021 was $16 2 million.
Compared to $14 9 million, an increase of 9% since the third quarter of last year.
For the sequential quarters rental revenue grew $16 $2 million for $15 6 million last quarter and almost 4% increase.
Significantly.
Revenues this quarter exceeded our rental revenues in the first quarter 2020, which was the pre pandemic quarter.
We successfully reversed the trough of our rental revenue splits the startup pandemic.
Due to the successful execution of our high horsepower strategy garnered very uncertain periods.
Bill rates increased by an average of approximately six.
6% per unit and <unk>, 5% per horsepower sequentially, mainly due to our continued penetration into the larger horsepower market.
<unk> adjusted gross margins this quarter were 46%.
$730000 decrease from the 55% gross margin on a year over year basis.
$840000 increase from the 42% gross margin last quarter.
Fleet size at the end of September 2021 totaled 275 compressors.
Our over 452000 horsepower.
Replace a net addition of 18 units.
Our 50 480 horsepower in the third quarter.
Over the past 12 months, we have added 51, new fleet units totaling just over 14000 horsepower.
60% of that horsepower being classified in our large horsepower category.
As of September 32021, about 45% of our utilized horsepower.
Up a compressor units that are in excess of 400 horsepower per year.
Our horsepower utilization is approximately 64%.
On a horsepower basis and unit based utilization was a bit over 53% at the end of the quarter.
Her clinical experience for completed gas compressor rental fleet units in the third quarter, which does not include work in progress was approximately six $5 million.
Earlier this year, we projected our capital expense budget of $15 million to $20 million for the year.
It's almost $18 million capitalized for the first three quarters.
We believe we will end the year with our capital expenses above the high end of this projection.
Stronger than anticipated demand acceleration of the equipment purchase lease program, we have in place with one of our customers.
Just to increase our estimate capital budget <unk>.
2021 by 15% to 20%.
A precautionary note there is a possibility of delivery issues that could impact the timing.
Some of this added capital spending, but with demand intact with only delayed these expenses into early 2022.
From a balance sheet perspective, we continued to have no debt outstanding at the end of the third quarter, our cash balance at cash balance at the end of the third quarter at $24 $4 million.
This compares to cash a year ago at $27 $6 million last.
The last quarter of $26 2 million.
In spite of our strong capital spending on committed real equipment and our stock buyback program, our cash balance in all comparative quarters has continued relatively steady due to our ability to deliver strong operating cash flows.
The combination of our cash balance and untapped credit line continues to provide ample liquidity and an early every conceivable scenario.
We generated positive net cash flow from operating activities in this quarter of $7 $2 million with 39% of our quarterly revenue.
We also reinvested to $11 million back into the company through common stock buybacks this quarter.
Our total stock buyback of an initial authorization of $5 million for 39% of our standing stock as of September 32021.
On October one 2021, our board authorized a repurchase of an additional $10 million of our common stock.
We have purchased 105650 shares for $1 $2 million through the end of October.
We will continue to repurchase shares as we believe the fair value of the enterprise is well above at currently reflected in the public markets.
Our average purchase price for the first nine months of this year is $10 <unk> per share.
Well below our calculated intrinsic value in the current market value.
The final housekeeping note in the next couple of weeks, we will renew our shelf registration on form S. Three with the U S Securities and Exchange Commission, which would allow us if needed to issue debt or equity securities over time, using our current financial filings.
This is our second renewal of renewing our SUV prior to exploration allows us to effectively extend our existing S.
Three filing without additional fees.
While we are pleased with our third quarter results, we remain focused on improving margins and profitability as we enter the final months of 2021.
The new year.
Natural gas services group remains one of the few oilfield service companies with a strong recurring revenue stream no debt.
<unk> cash position and the ability to consistently generate meaningful operating cash flow.
For the holidays invariably impact activity in the fourth quarter, we are optimistic that our business is well positioned to benefit from higher commodity prices and the resulting incremental increase in production activity in.
The backdrop, we believe we will remain intact well into 2022.
Like every other energy service industrial company, we are feeling some impact due to supply chain issues and inflationary pressures.
We are fortunate in that we control our own fabrication process, we have taken steps to minimize and mitigate any infrastructure.
That said, we are likely to see some challenges related to supply chain disruptions that raw material inflation.
As we entered the Thanksgiving season, I'm truly thankful for the remarkable members of <unk> family.
Come to work every day to make certain we exceed the expectations of our customers.
<unk> on creating value for all of our stakeholders.
Paul at the end of my prepared remarks. So if you would please open the phone lines for any questions.
Ladies and gentlemen at this time, we will conduct a question and answer session.
If you would like to state a question. Please press star one on your phone now and Youll be placed into the queue. In the order received you compress pound one at any time to remove yourself from the queue.
And our first question comes from Rob Brown from Lake Street capital.
Your line is open.
Okay.
Hi, Steve.
Hey, Rob.
Yes.
Just kind of wanted to follow up on sort of your thinking about how the environments.
Happening right now with the commodity price changes are you seeing.
I know I know the customers are cautious but are you seeing.
Kind of extended.
Rental durations are you seeing.
The gas.
Drillers kind of putting putting more equipment out and putting it in or what's sort of the commodity price impact at this point.
Yes.
There's two different worlds, the oil price and the gas price.
The oil price I think as I mentioned, we will see some incremental progress.
Quarter and into next year, it's not going to be.
You are a rip roaring.
The increase in activity as you would expect that this kind of price level because.
It is also due to capital.
Conservation of the operators are exhibiting.
But yes, I think from the oil standpoint.
We feel.
Really comp is going to hold up and.
So we will see some incremental activity that way, we're not seeing any real change in terms.
From that standpoint.
So I think it's just business as usual from an oil standpoint.
Gas is interesting of course.
Yes, so the <unk>.
Gas prices, we've seen recently have been.
Now the historically high but relatively high compared to the recent.
Recent world getting up to five or $6, but there is a real hesitation on the gas side that that is going to last long.
I think we're seeing that certainly winter coming on you always get price increases then were seeing some storage issues and theres a lot of LNG going out of the country too. So all of those have.
Combined two plus plus the increased demand from.
Coming out of the pandemic. So all of those have combined to increase that gas price, but there is a real concern as to how long that's going to last so big once you get past wintertime, obviously warm weather depressed pricing a bit.
The supply will catch up over time et cetera, So you're not seeing a whole lot of.
Yes.
Operator money going into.
Drilling production et cetera.
We do see operators, a little hesitant to go with longer terms on the gas side, if you're if you're just putting the equipment out there just to move gas because I think that's a real hesitation.
Some question as to how long the relatively good price of less than 10 degree with them I think we will see.
Youll see some.
Not not horrible price about we'll see some lower prices.
Starting with solar season next year and go through summer.
Okay.
Firstly, a pushback on.
People don't want to go longer terms on the gas side, they're okay with it on the oil side.
Okay.
And then maybe the high horsepower market, what sort of changes have you seen more recently is that still.
An area that.
That is active or I know, you've kind of moved some equipment from <unk>.
Standby two to fully committed but how is that market in terms of new new new sales.
Yes.
Yes, we think it's going to be good and again the high horsepower market for us and everybody is the Permian.
So that's the.
And that's what's driving a lot of the <unk> gas lift due to oil.
Oil volumes at oil prices so.
The preeminent Permian is the.
Yes.
The result of the equation as far as.
What happens from a high horsepower standpoint, and again high horsepower primarily related to centralized gas lift so.
Thank you you're going to stay active.
The visibility.
It is a little.
<unk>.
More.
Pike.
Right now.
Certainly we want to see what was some operator budgets look like particularly in this area.
But I think generally we're pretty optimistic that.
Yes, we're going to we're going to see continued growth.
Growth in that place.
And we know we know of some growth coming our way, we're just not sure the full vector in and what the full year it looks like yet.
Yes airbase.
This period, everybody is keeping their cards pretty close to the vest and not making a whole lot projections out not really committing.
The long term projections from he built this over this time and stuff like that so which is I think natural coming out of.
Yes.
Pretty uneven period, we've had to last.
Europe has that.
We think Jeremy can be good we just it's just hard to put up.
To quantify it yet.
Okay, great. Thank you I'll turn it over.
Thanks, Rob.
Thank you.
Our next question comes from Tate Sullivan from Maxim Group.
Your line is open.
Alright, Thank you Hi, Steve.
I'll make a comment on that.
I missed your comment on that did you say so relative to the previous Capex guidance for 2021, you increased it by 15% to 20% or could you just.
Or is it still 15% to 20 for the full year.
Well yeah. It was we originally projected 15% to $20 million for the full year, but yes, we are projecting a 15% to 20.
Increase over that 15% to $20 million.
Okay. So confusion I guess.
And obviously you've hit rate 18 million yes.
15% to 20%, it's going to apply to the.
The $18 million to $20 million range, we're in now.
Perfect and then a similar to previous years the dynamic.
Building the higher horsepower equipment is it already spoken for by clients.
Or is some of that on spec in this environment.
I mean, how many units by the end of the year pro forma with the higher spending might you have available for rent.
A couple of questions.
Okay.
From a spec standpoint, it's probably only about one or two.
So not a whole lot and now we will likely increase that next year because.
If we're right that the activity is going to.
Increased on the high horsepower side, you've got to have you've got to have that stuff available you can't wait.
Six to nine months to rent something people wont do it typically now obviously we had.
Favorable situation last two or three years, where we had a two year build program.
As committed.
On a long term, but thats.
Yes, that'd be able program is essentially over so.
Now back to the I guess, the the regular market.
So yes, we're going to have to have some spec I wonder to what we're going to end up with probably by the end of the year, but.
At good levels.
For us anyway, right now is probably a quarter five so we'll see.
More so in 2020, along with any other.
We've identified and we're right now outside of the one to two spec we anticipate by the end of the year.
Right now anything we are building.
Committed.
Great. Thanks, and then you mentioned you haven't or I know it will be in the queue, but you may have mentioned it earlier what are the current number or is it what were the number of rented compressors Atlas III <unk> 21 and <unk>.
Okay.
Of.
Of the total fleet.
Yes. Thank you.
Hi.
Under utilization.
Utilization was 6% and horsepower utilization 65, I think we had.
275 units.
Okay.
Part of it.
And then with that number and.
With the number of units that you're building in at the higher horsepower just a modeling question.
You expect and I've just been tracking to average horsepower for your rental compressors.
Ben.
<unk> every single quarter building our units can it get up to 250 or how are you looking at that in terms of total that dynamic in the whole fleet.
The average horsepower per unit.
Yes.
Well.
Yes, right now in.
This third quarter's 235.
Horsepower per units.
And it looks like you'll over the year.
We increased about 10 horsepower per unit. So it takes a while to get the whole fleet up all of per average unit.
Basis so.
I wouldn't say, we'd be at $2 50, a year from now maybe.
Yes, $2 45.
Okay.
So on the same growth we had.
Had.
So I'd say, it's hard to move the average on 'twenty to almost 300 compressor, but.
We anticipate that continue to decline.
It's hard to predict the exact.
Right on.
Our average horsepower per units.
Great. Thank you and lastly, Ian.
Just I'd love to hear more about the dynamic correctly understanding the hiring costs.
Apply chain disruptions when you take sales backlog ending at $2 million in the quarter unchanged from the prior quarter do you see when you accept those sales orders as the almost just saying to your current customer.
We'll do discrete now already passing on higher pricing here.
What are the conversations like when you decide to take a sales or turn it away.
Yes, it's a little better than it was six nine months ago.
Jobs quoted six months ago.
And I'm not making this up.
You were sustained with steel requirements there is some packages.
And they would only hope to quote stainless steel suppliers only 24 hours literally 24 hours.
It makes it a little cut.
Quote Steph, we typically quote.
<unk> yeah.
So what we did at that time, obviously, we try to.
Pass along what we can or go back or change orders and things like that.
We.
We absorbed some of the costs going up.
Through change orders and.
Opsal adders and things like that we're able to.
Bring that margin back and closer to what we quoted but there is certainly an impact on some of that stuff when you.
Can you try to quote and obviously operators are reluctant.
Give you gave us free rein on.
Any cost increase that comes by because you know.
You can have an issue, maybe we're not paying attention or whatever but.
It's.
Abating somewhat.
Now from the point of those kind of goods now we are seeing price increases.
On engines compressors.
We've seen them in oil.
In general Parks, we're seeing some of that.
Those are.
So those latter expenses more operating expenses.
It is a factor.
Capital expenses.
So we've just got a couple.
There's stuff, we've got to put in longer lead orders and some of it you just got to shop brand a little more and they will try to economize, where he can and raise prices where you can.
No. It's a twofold thing trying to keep the costs down and keep the keep the pricing up.
Yes.
Great. Thank you Steve Thanks for answering my questions. Okay. Thanks, Dave.
Ladies and gentlemen, as a reminder, if you would like to state a question. Please press star one on your telephone now.
And our next question comes from George Melas.
From <unk> management.
Your line is open.
Thank you good morning, Steve.
George can you talk a little bit more about the capex and how.
How much of the Capex.
It has been for them.
That one program.
One question I had to purchase there.
Yes.
And it may be.
You already have some sense of what capex might be like next year and what the composition of that Capex would be.
The Capex this year.
Attributable to the.
Leaseback program.
No I don't have the exact number but I'm going to estimate it's in the.
$5 million to $6 million range probably.
Quarter to a third of the total.
Okay.
Accelerated quite a bit the last six months, so it's more than what we had originally anticipated so.
Hence the reason to go up a little capital.
It's probably in that $5 million to $6 million range.
Yes.
Not going to.
Project.
Capex for next year.
As yet we need to get further into the this quarter, we start to see if some operators will give us a little more definitive.
Word on what they're planning.
Certainly we won't see anything published probably til.
Early next year, maybe some will tell us a little earlier, but just the conversation we're trying to gather that information as we speak so I don't I don't exactly know yet so.
Well update.
Our 2012.
'twenty two.
Perspective, probably.
On the next call, which will be the.
So end of the year call.
Okay, great. Thanks for that Ed and maybe can you talk a little bit about the competitive environment.
Right.
You have a number.
If a competitor is larger but these stress financially.
Maybe some update in that respect from your perspective.
Yes.
Yes.
Primarily just not by name, but just generally the public competitors because everybody gets to look at them select the look at us.
As I mentioned we've.
<unk> had three quarters of increasing rental revenues.
Circumvented the globe per se on.
The trough of the rental revenues from the pandemic and we're back up to just a little bit above pre pandemic levels.
Looking at we're about the only one that's in that good shape from a rental standpoint, obviously, our sales was up and down.
But they don't have sales there.
They don't compressor fabricate so we'll pull that out of the discussion so from a rental standpoint.
Doing relatively well compared to competitors.
They lost say Weil.
General generalization they lost more equipment during the pandemic and we did from a unit standpoint, and a horsepower standpoint and more on a percentage basis.
Now.
We know that equipments out there we know theyre trying to move it at relatively.
We think unattractive prices.
And they will.
I could prices move equipment low price drives utilization.
We'll see some of that and we've all we've already seeing some of that.
But we're still able to.
Go ahead and gained share.
So.
No I'm not rooting for the competition necessarily the sooner they get rid of that.
And that older cheaper stuff.
Better the market is for everybody and certainly for us because we tend to have our equipment is.
Big horsepower equipment is all brand new stuff to latest tech.
Technology, it's the latest emissions profiles et cetera, and a lot of this stuff.
Marketed out there now is not new like ours, but maybe.
510, 15 years old which.
Five years old doesn't sound too bad for me.
And pressure age standpoint, when you.
Capitalize this step over 15% to 25 years with <unk>.
From a technology standpoint, and admissions standpoint, it makes a big difference so as soon as they can get rid of that older stuff and get it out.
Somebody cheap and leave it out there the better off we all are but generally.
No just from the public.
Filings.
We and everybody else can see we're doing.
Yes.
Pretty good compared to competition.
Okay, great congratulations thank you.
Thanks George.
And we have no further questions in queue at this time.
Okay. Thanks, Paul and thanks, everyone for joining on the call I. Appreciate your time this morning.
Forward to visiting with you again next quarter. Thank you.
This concludes today's conference call. Thank you for attending.
Okay.
The host has ended this call goodbye.
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