Q3 2022 Natural Gas Services Group Inc Earnings Call
Excuse me, ladies and gentlemen, this is the operator today's conference call is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
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Good morning, My name is Dennis and I will be your conference operator today.
At this time I would like to welcome everyone to the natural gas Services Group, Inc. Third quarter 2022 conference calls.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad to withdraw your question Press Star one again.
I would now like to turn the conference over to Michael Foster Chief Financial Officer. Please go ahead.
Thank you Dennis and good morning, everyone.
Before we begin I need to remind you that during this call. We will make forward looking statements within the meaning of section 21 E of the Securities and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by and information currently available to natural gas service group's leadership team, although we believe that the expectations reflected in such forward looking.
And that's a reasonable we can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the United States Securities and Exchange Commission for the factors that may cause actual results to differ materially from those in the forward looking statements made during this call.
In addition, our discussion today will reference certain non-GAAP financial measures, including EBITDA adjusted EBITDA and adjusted gross margin among others for reconciliations of these non-GAAP financial measures to our GAAP financials financial results. Please see this mornings yesterday afternoon's press release in our forms 8-K 10-K.
And 10-Q furnished to the SEC I will now turn the call over to John Chisholm.
Yeah.
Thank you Micah.
As most of you likely read in our press release last night I resigned as interim CEO for Ngls, but will remain as a director until March one 2023.
My focus over the past 15 years as a director with Ngls has always been on what creates the most shareholder value for Ngls, but I concluded that was my other growing obligations some of which are international.
Required, but actually provide would not be sufficient.
I want to thank employees of Ngls and my fellow directors. So this last six months, leading the company.
I trust that either extended the foundation of Ngls and contributed to our value creation.
Now.
My longtime friend and colleague Steve Tailor Steve.
Good morning, and thank.
John and thanks for your contributions to and yes, we are.
To your knowledge and insight and look forward to your continued guidance and.
And thank you for the systems you have given me during this transition.
Before I get to my prepared remarks, I do want to reiterate reinforce that the company will continue our search which is ongoing for a permanent CEO , we will provide updates as required.
We'd also like to note that in addition to micro Foster our Chief Financial Officer with US today is Jim Hays, but our vice president of technical services.
Jim and I will be happy to answer your questions. After our discussion of the third quarter results and our current operating environment.
Turning our attention to the business as we noted in our second quarter.
Earnings call the current macro environment for the energy industry is unique in my career.
Upstream operating customers typically continued with their capital restraint, which supports higher commodity prices.
It's clearly a week supply strong demand dynamic in play is being influenced by traditional natural gas demand decline.
Declining pressured and partners in existing basins and increase in LNG consumption.
And it continued strength in crude oil commodity prices with a large amount of crude oil produced grew gas compression assisted techniques.
It's a unique dynamic that demonstrates that gas compression demand is presently divorced from appreciably higher capital spending.
Absent a large scale geopolitical event, we believe that we are at the beginning of at least a couple of years of higher commodity prices.
GFS with our past financial discipline is well positioned to take advantage of these opportunities beginning in this year and 2023 and beyond.
We have been and will continue to be focused on operational efficiencies our visibility of organic growth opportunities in our large horsepower market has never been stronger.
We have worked diligently with our customers to understand understand their needs in 2023 and beyond and have started discussions with our financing partners could provide us with the needed liquidity to build out significant new large horsepower additions at highly accretive rates.
We have always been protective of our balance sheet.
We have the financial ability to execute on opportunities and we are now in and land of opportunity.
While the ultimate amount of capital required for our <unk> program has not yet been finalized we are working with our board and bank to complete the process along with this.
We have already begun work on a meaningful amount of new large horsepower compression that is already committed under long term contracts.
Our previously announced electric electrification convergent project on a number of our 250 horsepower units is well underway and we anticipate that we will complete the conversion of 60 of these units by mid year 2023.
Additive to this our plan is to deploy our first 2500 horsepower electric units and next year.
But most of our capital is committed to traditional gas fired engine additions, we are seeing more demand for high horsepower electric units from our customers.
We do think there'll be more opportunities in this realm.
Turning to our quarterly results. We are pleased to report our seventh consecutive quarter of increased rental revenues.
Revenue increased 15% to $18 6 million from $16 3 million in the third quarter.
Last year.
3% over the second quarter rental revenue of $18 1 billion.
Q3 saw a slight decline in operating margins on a rental business after consecutive quarters of improved margins.
This scenario pressures primarily in labor newborn parts drove this decline.
During the quarter, we worked with our customers to increase our rental pricing given these inflationary pressures the price increases we rolled out will impact approximately half of the active rental fleet in the fourth quarter with a balance of the fleet seen increases beginning in January 2023.
These price increases where needed to not only recapture operating costs due to inflation.
But to roll back previously negotiated price concessions, we've seen over the last two to three years and during the pandemic.
These all have a positive and sustained impact on revenues and EBITDA. We believe these price increases are appropriate given the current cost environment.
And we will restore our margins to the levels needed to continue to invest in the business and bring on new compression to support our customers' activities.
As Youre all aware, we began our strategic shift towards the higher horsepower market nearly five years ago.
And it has been and continues to be an excellent source of cash margins and returns.
Our asset mix. However by unit count is still heavily weighted towards small to medium sized compression.
Our large horsepower assets comprised approximately 14% of our current utilized fleet by unit count.
But these units provide an approximate 45% of our current rental revenue stream.
As a small to medium sized compression market is the most competitive.
And thats the most price sensitive we anticipate that our unit utilization will experience some volatility covered months.
But it will not have a meaningful impact to our revenue stream.
However, we anticipate that our horsepower utilization will continue to grow reflecting our large horsepower growth.
With that I will turn the call over to Mike to discuss our quarterly results in more detail.
Thank you Steve as previously mentioned total revenue for the three months ended September 30 of 2022 increased to $20 7 million from $18 2 million for the three months ended September 32021 rental revenue increased 15% to $18 6 million in the third quarter of this year from $16 2 million in the third quarter of last year due to the.
Increased deployment of rental units, primarily higher horsepower packages as of September 30 of 2022, we had 1196 rented units representing 305953 horsepower.
Compared to 1221 rented units representing 288706 horsepower as of September 32021, we ended the third quarter was 65% utilization on a per unit basis, and 72, 2% utilization on a horsepower basis utilized horsepower increased by 6% in the third quarter when.
Third to the year ago period, while revenue per horsepower increased six 8% when comparing the same periods.
Sequentially total revenue increased four 1% to $20 7 million in the third quarter of 2022 compared to $19 9 million in the second quarter of 2022, primarily due to a half a million dollar increase in sales revenues and a half a million dollar increase in rental revenues, partially offset by a $200000 decrease in service and maintenance revenues as <unk>.
Noted in our release this morning, adjusted rental gross margin of $8 6 million increased 17% when compared to $7 4 million in the same period in 2021 with a marginal decline of 300 basis points when compared to the $8 9 million recognized in the second quarter of this year adjusted rental gross margin as a percent of rental revenues was 46 <unk>.
For both the third quarter of 2022, and 21 and 49% for the second quarter of 2022.
Operating loss for the three months ended September 32022 was $1 5 million compared to an operating loss of $1 6 million for the three months ended September 32021, operating loss improved primarily due to higher rental margins, partially offset by increased G&A, primarily driven by severance costs related to the retirement of our former chief Exec.
They've officer, Steve Taylor sequentially, we reported operating income of 700000 in the second quarter of 2022 the decline in operating income during the current period was a product of severance charges and to a lesser extent increased rental expenses.
Our net loss for the three months ended September 32022 was $80000 or a penny per basic and diluted share compared to a net loss of $3 6 million or 27 per basic and diluted share for the three months ended September 32021 improved rental margins.
Bind with a $1 3 million gain on the sale of certain assets from our rental fleet were the primary contributors to the decrease net loss, we recorded a net loss of $70000 in the second quarter of the year or a penny per basic and diluted share.
Adjusted EBITDA increased to $7 7 million or 44% for the three months ended September 32022 from $5 4 million for the same period. In 2021. This increase was primarily the result of higher rental margins and gains recorded on asset dispositions sequentially adjusted EBITDA increased 13% from $6 7 million.
Primarily as a result of asset dispositions.
SG&A in the quarter was approximately $4 1 million or $1 4 million increase from the year ago period, and an increase of approximately $1 8 million in the second quarter of this year. These increases were primarily attributable to severance expenses related to the retirement agreement between the company and our former CEO as well as other costs related to our executive Trans.
<unk> process, while we anticipate fluctuations in SG&A with our heightened activity, we anticipate severance and executive transition costs to be temporary in nature and do not expect them to impact our business beyond the mid point of 2023.
Our cash balance as of September 32022 was approximately $2 6 million with $2 million outstanding under our revolving credit facility in the first nine months of the year, we realized cash flow from operations of $18 8 million and used $35 4 million for capital expenditures $34 6 million of which was expanded on our rental fleet as.
<unk> noted in our second quarter earnings call. The compression market remains strong and we are fielding calls daily from our customers enquiring about the availability of new compression primarily higher horsepower during the second quarter, we accelerated our new equipment development program and anticipate we will end the year at the high end of our previously previously forecasted $40 million to $50 million of Capex spend.
With that I will turn the call back over to Steve.
Thanks, Mike.
In my opening comments I mentioned that we will be fabricating and installing.
2500 horsepower electric drive units are first.
That's significant that also want everyone to understand that this is only part of a new phase in our large horsepower strategy.
We start on this shift to remake our fleet about five years ago, and we've been quite successful as evidenced by the fact that today, 45% of our rental fleet revenue.
Associated with our large horsepower assets, we're now embarking on another complementary phase and that is moving into the 2500 horsepower asset size.
Besides providing an additional growth Avenue, we will be able to leverage our existing large horsepower compression infrastructure. There has already been established.
In the past, we have been fortunate in being awarded rental contracts with longer term.
Ice and the general market.
Positive aspects continue as the contract equipment that 2500 horsepower range.
With our entry into the very large compression horsepower market, we anticipate our utilized fleet horsepower will see double digit growth by this time next year.
Hi chain disruptions in customer delays can certainly impact that but in general we anticipate this level of activity.
Besides the promise we see in our traditional business. We think we also have the optimum type of gas compression packages to capitalize on the methane reduction initiatives that continue to be legislated.
As recently evidenced in the in place and a reduction Act <unk>.
Combined with our technological prowess and experience.
R E comps.
Yeah.
Malik capital C O M P.
Yeah.
Compression package will not only reduce the carbon footprint of our equipment, both simultaneously reduce the taxes operators pay related to those emissions.
If you've followed in GFS for anytime at all I'm pretty conservative when it comes to predicting the future.
Certainly it looks like we are uniquely positioned to take advantage of this positive cycle.
They do not expect to be coming back into and GSM data operating room, but through Johns efforts and the contributions of being just team. We're in an excellent position to grow the economy and our focus will continue to be on capital execution.
Appointment of new compression equipment.
And maintaining our service quality.
I will of course provide further updates on our end of year call.
We're happy to take any questions. So Dennis if youll open up lines.
At this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
And your first question is from the line of Rob Brown with Lake Street Capital. Please go ahead.
Yeah.
Good morning, Steven talking again.
Hey, Rob.
Yes.
Sure.
On the demand environment, you said, it's quite strong and youre seeing customer activity, increasing I guess is that strength across the board or is it or is it really focused on the high horsepower market or are really what's driving demand and we're using it.
Without getting some increase across the board but.
I mean, that's a desk prices are good.
But it is primarily big horsepower.
We are seeing.
The majority I think the numbers.
85% of our Capex is spent on large horsepower.
<unk> been pretty.
And basically over the last few years anyway.
Overall.
Worse, we're concentrating in seeing.
Large horsepower demand.
Jim do you want to add anything to that.
Well, Steve Youre, absolutely correct most of our most of our build out our planned build out will be in the large horsepower 500 horsepower 2500 horsepower.
<unk> units. They are as you know there are some small ones, but not very much.
Yes.
Yes, Thanks, Jim.
Rob Please.
Natural gas prices has been.
Okay.
Volatile but.
Still it's still pretty decent compared to the last decade.
There is uplift evercore I mean <unk> been in traditional just pure natural gas basin Barnett Sam.
San Juan <unk>.
South, Texas places like that.
But really what's driving the large horsepower demand or are all commodity prices and gas lift techniques, which require compression. So it was kind of an indirect.
Activity, but.
The gas lift market is really the warner's driven.
Are you seeing the big horsepower by four or five years, So I don't want to but I think that's a transient claim.
It's a high oil prices are driving the vast majority of the big horsepower demand.
Okay. Okay, great. Thank you and then.
And then on the methane reduction kind of market. That's that's opening up in the government support how.
How do you see that in terms of opportunity for you and kind of growth drivers next year and beyond.
Well.
Yes.
It's a double edged sword right, it's an opportunity, but it's also driven by legislation and you know that legislation I mentioned in your post introduction of that.
Quite the misnomer.
Yes, there is having some.
Portions of it directed towards methane reduction.
Even bottom year to date kind of doubled down a little bit on some of that stuff. So.
Seeing.
That's from a legislative standpoint every quarter, but certainly there is an opportunity from the point that <unk> got more.
More popular.
Youre going to be you're going to be the yes.
Yes, you are going to be to grow up a bit.
The answer yes, it gets all the boys because I'll, let set to come along.
Thanks, Doug.
It was in the replacement reduction Act.
Jim Craig if I'm wrong, but I think.
Yes, there is a tax regime and they're based on.
Carbon emissions methane emissions and stuff like that and.
So when you start looking at that.
Yeah.
Particularly the equipment.
Fixing that we're using.
Whether it's engines or go into electric drives or E com.
Phase of our type of equipment.
We can reduce.
Operators taxes quite a bit just due to taxes imposed on methane emissions. So.
There are there's all kinds of opportunities around whether it's.
E.
Our mental whether it's financial gallbladder goods, we're going to get started on it.
And I was.
Just kind of growth.
Jim I don't know if you got anything else about that Aker.
Our equipment now you're wearing secrets.
I wont does it it involves capturing the.
<unk>.
Escaping methane from a traditional package in and we do it by <unk>.
<unk> are in devices.
And things like that and we can get it down.
Quite a bit on the on.
On the electric drives we can we can move it down pretty close to zero. So.
Steve Youre right. It's also I would like to mention that I heard yesterday, even that in Mexico.
Increasing their risk their quad O restrictions on methane so.
It's coming down is coming down too.
Who can do who can do.
More and better so you are right as to the girl at the dance.
Yeah, So yeah, and then Jim mentioned, the Mexico itself.
Hello, The Permian basin.
So part of me that's driving.
The largest big horsepower a lot of the concentrates Amish.
Et cetera. So.
Yes, we're going to be well positioned.
And that.
We will start.
Testing some phases of equipment in about a month or so.
Yes, we're going to be we're going to be able to offer to the operator.
<unk>.
Cleaning machine.
Okay, great Great. That's great color. Thank you and then I guess last questions on the pricing environment, you talked about increasing pricing and then maybe a second round for the rest of your fleet how.
What sort of degree of price increases you can get in.
And health callings that take to flow into the into the average.
Well.
As I mentioned about half the fleet, we'll see price increases fourth quarter and the other half.
First quarter.
Next year.
Yes.
How much the increases.
Were they buried.
And.
Yes, depending on the current price of equipment.
Over time in the rental business.
Same.
Size.
Hi, Linda.
It's different.
Different rental rate solid.
What are the same customers are certainly among customers because depending on when you put that stuff out and.
<unk> was the highest figure lower activity environment and things like that.
And your cost in certain areas are higher than the other areas. So you've got different.
Different.
Rates out there.
And.
One of the things.
Got it.
Obviously, you get everything.
Yes.
A decent return profile so.
The increases are all different.
Generally, though they were.
Instead of a shotgun.
Broad approach like we did in in March.
Flat across the board, 7% to 8%.
This means more surgical.
You noted that in sort of a year.
Credit, therefore, leading that effort and.
That will come in.
I don't know if <unk> got anything I'll say on the price increases.
Yes.
Think you hit it Steve.
This is when we say, 50%, we're really looking at that from a revenue.
Basis right. So so half of our revenues, we will see a price uplift in the fourth quarter with the balance rolling into the first quarter.
A big piece of that we've got one large customer, whose whose equipment is primarily still under contract terms and so negotiating.
Price increases there we can't just do that unilaterally. It's it's a real negotiation there where we've got to prove out here's here's the cost burden more bearing in and try to prove that out to them. So that's what we're expecting to come in in the first quarter, but in the.
Fourth quarter this was.
Across the rest of our customer base and as we kind of enter.
Intimated within the script a lot of this was on small compression that is obviously the most competitive in the market as far as as far as price is concerned and so we anticipate Rob a little volatility in our utilization going forward as some of these units come back to US we also have.
On several occasions, when we talked with the customer and said here's here's the price that we need to take.
To realize to keep operating this machine in the field for you.
This is some older equipment that does is it really part of our core strategy going forward and those customers at times have kind of raised their hand, and said Hey, we would you sell that to US and then maintain it for us and so we've done that as well so.
Sure.
We're working through all the options available to us to help our customers continue to with their operations, but at the same time help us realize the margins we need to go forward to continue to invest in the business.
Yes, Rob.
Yep.
A lot of inflationary pressures lot of supply chain.
Yes, he's still on the supply chain is getting a little better in some respects in other respects, it's not certainly price.
Inflation driven pricing.
It has not abated.
In spite of what the government says.
Obviously.
Steve My Digression, Youll button that had been to a grocery store or hadn't bothered compressor part in a while because they are all still.
Still advanced and cost.
Pretty significantly so.
I mentioned in the.
And the narrative.
We've got a lot of this is close to recover some costs.
Certainly get our margins to where we need them to continue to provide.
Equipment, there's a lot of demand out there.
Got.
It is unique.
Yes, it's pretty high.
Fortunate that we're in the immediate the market right now.
<unk> hundred 2500 horsepower.
Realm is pretty accurate.
No.
We think we think we're going to be in good shape.
And the new contracts, we're getting as I mentioned on the <unk>.
Bigger equipment.
Is excellent.
So.
Yes, I think you'll see that flow through.
Italy into 2023.
And as long as we don't have some disruption in the market that pricing should hold for a bit.
Okay. That's excellent color. Thank you I'll turn it over.
Once again, if you would like to ask a question simply press Star then the number one on your telephone keypad.
Your next question is from the line of Tate Sullivan with Maxim Group. Please go ahead.
Hey, Steve.
Yes.
Hey, Steve commented earlier on a navy seeking other financial partners to finance building larger compressors and this type of market.
The customer demand enough to rationalize using more debt than you have historically.
How comfortable are you with using more debt to build the higher horsepower.
Well, it's not going to be it's not going to be too hard to use more than we have more debt than we have traditionally because traditionally has been zero.
And yes, we are.
As I mentioned, we're talking to.
Others about additional liquidity and things like that but the issue you get in and we start moving into 1500 horsepower yes.
And save medium horsepower youre running into equipment that brands brand, new maybe 250 $300000.
Moving to the <unk> hired horse realm, and you've got stuff Thats, one and half $2 million start moving into 'twenty 500 horsepower.
Is two $5 million to $3 million.
So.
The magnitude of the expenditures grows even though.
The number of equipment debt.
So yeah.
We're going to have to and Thats, what were doing and Mike is leading the charge on that we're going to have to.
Some other sources outside of our operating cash certainly that's going to be stronger Barbara but.
Yes, we're going to have to supplement just because number one you get the.
Higher cost of equipment, and just have such a demand, but our cash flow. This is kent.
Take advantage of it right now.
Mike you arent going well more on that.
No I think you hit it right on Steve.
It's something as we've said numerous times, we've been very protective of the balance sheet waiting for the right opportunity in the market that we're seeing today.
The wide gap between supply and demand.
The rates, we can we can secure with this new large horsepower additions are very accretive and something that we don't it doesn't bother us to take on leverage in this kind of operating environment. It's just that the rates that you can get and the returns you can achieve on those investments.
Is too good to pass up so it's something we're working on diligently talking with our banks and others to make sure that we have the financing lined up so we can go execute on the opportunities available to us.
And just thank you.
I will mention the word.
We're keeping an eagle eye on the balance sheet, but I can go out there.
Five to six times EBITDA.
Leverage and stuff like that so we're going to keep it in the reasonable realm, while still being able to.
Grow the sleep pretty vigorously.
And then related to the larger 2500 2500 horsepower is it is it not a element of the industry for customers that to installment payments or any upfront payments as they go up to the larger horsepower or do you have to finance the whole construction until the rental receiving wrestling well yeah Andre.
It's all on US now if we're building something for somebody certainly we get upfront payments progress payments things like that but that's not a that's not a capital expense that's just a bit.
Build and sell the margin so we're not too worried about that stuff right there that wallet.
Impact our capital profile too much it's a rental equipment that we've got to put the whole Bill and then we turn around.
Rent it for that return.
Okay, great. Thank you Steve Thank you Mike.
Thanks, Dave.
At this time there appear to be no further questions I will now turn the call over to Steve for any closing remarks.
Okay I appreciate everybody.
Colin and certainly want to again.
Thank John for his contribution to the company and continued.
Insight.
I appreciate.
Jim and Mike have joined the call and certainly all of the NDS employ forgot it.
A lot of opportunity in front of us so.
Thanks, everybody and we will see you next quarter. Thank.
Thank you.
This does conclude the natural gas services Group, Inc. Third quarter 2022 conference call. We thank you for your participation you may now disconnect.
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