Q1 2022 Natural Gas Services Group Inc Earnings Call

Okay.

Okay.

Good morning, ladies and gentlemen, and welcome to the natural gas services group first quarter 2022 earnings call.

At this time all participants are in a listen only mode.

Operator assistance is available at any time during the conference by pressing Star Zero. Your call leaders for today's call are Alicia Dada IR coordinator and Steve Taylor, Chairman, President and C. E O I would now like to turn the call over to Mrs. <unk> you may begin.

Thank you Billy and good morning listeners. Please allow me a moment to read the following forward looking statement prior to commencing our earnings call.

Except 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 as outlined in the private Securities Litigation Reform Act of 1995.

Forward looking statements as you may know involve known and unknown risks and uncertainties, which may cause natural gas services groups actual results in future periods to differ materially from forecasted results.

Those risks include among other things the loss 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.

Before it 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 Fort looking statements.

<unk>, 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, having all that stated I will now turn the call over to Mr. Stephen Taylor, who is president chairman and CEO of natural gas services group's Steven.

Thank you Alicia and Bally and good morning, everyone and welcome to <unk> first quarter 2022 earnings review.

Last evening, we issued a press release announcing our first quarter financial and operating results and filed our annual report on Form 10-Q, with the U S Securities and Exchange Commission.

The release and filing can be found on our website.

This morning, we also issued an additional press release announcing my decision to retire as President and Chief Executive Officer of the company.

Well no big like decision is easy and there's never a perfect time for this type of transition after 17 years at the helm of natural gas services group just feels right.

In consultation with our directors, we felt the company's business was in a good position and we have worked through most of the COVID-19 related issues, providing a good opportunity for transitions on my day to day responsibilities will slow a bit I will remain chairman of the board of directors.

While continuing to work closely with key customers of the company and will serve as an adviser during the transition. Most importantly, they remain a significant shareholder and well continue my commitment to doing everything I can in my role to build shareholder value.

I'm happy to say that our lead independent director John Chisholm has agreed to step in as the interim President and Chief Executive Officer.

John is the former president and CEO of Flotek, and New York Stock Exchange listed oilfield service concern.

The co founder of pro techniques, and leaving reservoir characterization technology company that is now owned by core laboratories.

Johnson willingness to step in and should provide both comfort and confidence as it does for me about the future of our company.

John and I will work closely together in the transition.

I urge to have my unwavering support and anything he needs.

While John is traveling today, he will join us for some introductory comments towards the end of the call.

That said in place to take a more detailed look at the first what we believe is a solid start to 2022.

As noted in our in our earnings release, our overall business is continuing to grow both sequentially and year over year basis.

Year over year total revenue grew 11% with our flagship rental business, leading the way.

Sequentially total revenues also grew 13% primarily due to a strong sales quarter.

Our core rental compression business continued to gain market share from our upstream customers with our fifth consecutive quarter of rental revenue growth.

<unk> rental revenue grew 4% sequentially.

And approximately 12% on a year over year basis, primarily driven by an increase in active rental horsepower.

As anticipated on last quarter's call we were.

Recorded a reduction of rental expenses from the highs experienced last year.

Especially in the fourth quarter sequentially from rental expenses declined 20% from the fourth quarter peak.

Well, we like everyone are experiencing inflationary and supply chain pressures across the business.

We are pleased with our cost reduction efforts.

We do realize however, we still have work to do to meet our goal.

50% adjusted margins on a rental business by the end of 2022.

Our compressor sales business experienced a good quarter with sales revenue up almost $1.8 million over the fourth quarter of 2021 with aggressive adjusted gross margins of 31% during the quarter.

We have not yet seen a change in demand from our traditional midstream customers and no sales were recorded from them this quarter.

Instead sales this quarter were driven by non traditional energy customers.

This includes various types of projects that we're developing an expertise in and we should see increase in sales volume from this energy transition segment in the future.

Now, let's look at the financial details of the quarter.

From a total revenue perspective, <unk> reported total revenue of $23 million for the first quarter 2022.

This is a $1 $9 million or 11% increase from the same quarter in 2021.

As a result of a $1.8 million increase in rental revenues.

$180000 or 7% increase in sales.

When comparing consecutive quarters with an increase in total revenues of 13%. This was driven by $1.8 million increase in sales.

And a $650000 increase in rental revenues, which were slightly offset by a little over $100000 decrease in our service and maintenance revenues.

Yeah.

Well, our sales revenues fluctuate quarter to quarter, our rental revenues have grown consistently.

4% and 12%, respectively in both sequential and year over year quarters.

Significantly in GFS has increased rental revenues in the last five quarters in a row.

Total adjusted gross margin, which does not include depreciation for the three months ended March 31, 2022 increased to $8 9 million from $8 $6 million for the same period ended March 31 2021.

Adjusted gross margin for the three months ended March 31 was 44% of total revenue.

The increase in margin for the quarter.

Due to increased margins on compressor sales primarily.

Sequentially adjusted gross margin for the first quarter 2022 increased to $8 9 million from $4 $3 million in the prior quarter.

As a percentage of revenue adjusted gross margin also increased to 44% this quarter compared to 24% in the prior quarter.

If you recall in the prior quarter. The majority of the gross margin pressure with some increased rental costs due to a higher mobilization commissioning and startup cost and to a lesser extent an increase level of unabsorbed cost in our manufacturing shops.

We like everyone are experiencing inflationary pressures across the business. We are pleased with our cost reduction efforts anticipate further improvement throughout the year.

Sales general and administrative expenses decreased five 5% and 10, 7% respectively in year over year and sequential periods.

Year over year, we realized lower stock compensation and noncash deferred compensation expense with a reduction in noncash deferred compensation expense also driving the sequential reduction in SG&A.

Operating income for the first quarter 2022 was $382000 compared to a loss of $369000 in the first quarter of 2021.

This increase was due to an increase in sales margins as well as a slight decrease in SG&A and depreciation expense.

Sequentially operating income increased to $382000 in the first quarter of 2022.

From an operating loss of $8 $2 million in the fourth quarter 2021.

This increase in comparative quarters is primarily due to the aforementioned lower sales and rental margins higher SG&A in Q4.

Loss on retirement of units from our fleet of $3 $1 million.

The inventory write offs of just over $200000.

Our net income after tax for this quarter was $337000. This compares to a net loss of $394000 in last year's first quarter and net loss of $5 $6 million in the fourth quarter of 2021.

We reported earnings per diluted share of <unk> for the first quarter of 2022 compared to a loss of <unk> <unk> per diluted share in the first quarter of 2021.

A loss of 42 cents per diluted share in the fourth quarter of this year.

I mean fourth quarter last year.

EBITDA is defined as earnings before interest taxes, depreciation and amortization in our adjusted EBITDA excludes inventory allowances fleet retirements as stock comp expense all of which are noncash.

Adjusted EBITDA for the three months ended March 31, 2022 was $6 $8 million, an increase from six and a half million dollars for the same period in 2021. Adjusted EBITDA also increased approximately four and a half million dollars sequentially from $2 $3 million last quarter to $6 $8 million in this quarter, primarily due to lower costs improve.

<unk>.

Yeah.

Total sales revenues, which as a reminder includes compressors flares and product sales was $2 $9 million this quarter.

This is an increase from $2 $7 million year over year and from $1 $1 million last quarter.

The change in the year over year quarters is due to normal volatility in the various sales components, but the sequential growth is attributable to the completion of two good revenue high margin transitional energy compression projects.

For this current quarter, we had a total sales adjusted gross margin of $907000 or <unk>, 31%.

This compares to gross margin of margin of $95000 or 4% in the first quarter 2021.

Our negative gross margin of $750000 in the last quarter.

First quarter 2022, compressor only sales increased slightly to $2 million from $1 $9 million in the first quarter of 2021.

We did not record any compressor sales in the fourth quarter of 2021.

Compressor only sales margins were $621000 for the three months ended March 31, 2022, compared to a loss of $136000 for the same period, a year ago, and a loss of $1 million last quarter.

As mentioned, we have not seen an increase in demand from our traditional upstream customers for purchase compression.

And as far as our customers are concerned capital allocation seem to have shifted to a rental compression the rental compression.

Rather than allocating capital to owning compression.

We have however seen increases in interest and demand from non traditional energy providers and are working to build those relationships.

With the completion of this quarter's transitional energy projects, our sales backlog as of March 31, 2022 dropped to $100000. However.

Even though as mentioned sales projects are scarce or compressor rental backlog has filled that gap with almost $24 million of compressors being built or scheduled to be built for the balance of this year.

Rental revenue in the first quarter, 2022 was $17 $1 million compared to $15 $3 million in the first quarter 2021, an increase of 12% year over year.

For the sequential quarters rental revenue grew to $17 $1 million from 16, and a half million dollars last quarter, an increase of 4%.

Adjusted gross margins this quarter were 46%, a 3% or $285000 decrease from the 53% gross margin we saw year over year.

A significant $3 million increase from the 30% gross margin last quarter.

Previously noted our fourth quarter 2021 margins were impacted by nonrecurring repetitive deployment and commission expenses as well as initial oil and antifreeze sales, which can be significant especially in larger horsepower units.

Well, we eventually recover those costs the recognition of the expense and the reimbursement.

Such where from time to time, resulting cost revenue mismatches.

Those that we experienced last year and particularly in the fourth quarter.

It has to be above where we are encouraged by a sustained oilfield activity.

It has created significant additional personnel expense not only has our head count increased to meet new equipment demand wages are rising and overtime as prevalent as finding qualified employees, especially in the Permian is challenging.

Hiring rotating employees from outside the Permian also results in higher training living we have provide remembered and travel costs as well as new equivalent and transportation expenses.

These inflationary pressures are reflected in our Q1 2022 results.

We are working to rein in these cost increases and to the extent possible increase rental rates to offset some of these cost increases.

As mentioned in past calls, we have instituted a patent 5% price increase on our rental customers. Those generally effective may one.

Obviously, no one likes price increases, but ours have.

Pretty universally been met with acceptance.

We still have some increases to implement but the majority have been accomplished.

Rental fleet size at the end of March 2022 totaled 2033 compressors.

Or over 421000 horsepower, which also reflects an addition of 10 units or approximately 3100 horsepower during the first quarter.

Over the past 12 months, we have added 16, new fleet units totaling approximately 17600 horsepower with a majority of that horsepower being classified in our large horsepower category.

As of March 31, 2020 to about 45% of our utilized horsepower is made up of compression units that are in excess of 400 horsepower per unit.

We announced our large horsepower strategy about five years ago with the antenna shifting the NDS rental fleet profile towards larger horsepower and simultaneously minimizing the small horsepower component of the fleet.

This was driven by a recognition that the large horsepower market offer greater growth opportunities, while the small horsepower fleet was becoming commoditized by the mom and pop operators.

Currently our rental fleet is approximately 45% large horsepower and 18% small horsepower the balances in the medium horsepower segment of our fleet.

We're continuing our growth in large horsepower as you may know the vast majority of our capital dollars go to larger horsepower equipment.

So while the company will continue to penetrate this market I think we can say that transitioned to a large horsepower provider has been successful.

Strategy accomplished.

Our horsepower utilization was approximately 73% and unit based utilization was approximately 63% at the end of this quarter.

On a unit basis utilization was approximately.

53% at the end of this quarter compared to 62% last quarter and 56% a year ago.

Our Catholic Smith for new gas compressor rental fleet units in the first quarter, which does not include the work in progress was approximately $8 1 million.

With 100, plus dollar oil prices and six plus dollar gas prices. It's no surprise that we're seeing increased activity of our customers primarily in the Permian basin. This year.

The address that we have revised our capital expenditure budget to approximately $30 million to $35 million of growth compression Capex. This year.

This increase and in fact, the large majority of majority of the total capital budget.

As for large horsepower compression for which approximately 90% has already been contracted at market leading rates and terms.

From a balance sheet perspective, we continue to have no debt outstanding at the end of the first quarter with a cash balance at the end of the first quarter at $16 $4 million.

This compares to cash a year ago and $37 million.

And last quarter of $22 $9 million.

In addition to funding our capital expenditures with cash flows from operations, we utilized $2 $9 million of cash to repurchase over 246000 shares of our common stock on the open market this quarter and $10 $8 million worth over the past year.

This equates to seven 3% of our outstanding shares.

Our average purchase over the course of 2022 is 11.88.

Since $11 98 per share.

Well below our calculated intrinsic value and below our current price.

In spite of our strong capital spending on committed rental 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 early every conceivable scenario.

We generated positive net cash flow from operating activities in this quarter of $5 million or 25% of our quarterly revenue. This is a strong cash flow conversion.