Natural Gas Services Group Inc. Q1 2023 Earnings Call
Yeah.
Good morning, ladies and gentlemen, and welcome to the natural gas services group incorporated harder 120 23 earnings call.
At this time, all participants are in listen only mode.
Operator assistance is available at any time during this conference by pressing zero pounds.
And I would now like to turn the call over to MS. Ana Delgado they used to get.
Thank you Luke.
Hello, everyone and thank you for joining us to discuss our first quarter 2023 financial results.
Today's call is being webcast on our Investor Relations website N. G. S. G. I Dot Com also available on the site is our earnings press release, which was issued Monday may 15th.
Before I hand, the call over I'd like to remind everyone that during today's call, including Q&A. We made me forward looking statements regarding expectations of the company.
These forward looking statements involve known and unknown risks and uncertainties that may cause actual.
The results to differ materially from those expressed or implied on this call.
These risks are detailed in our most recent annual report on Form 10-K, and as such maybe amended or supplemented by subsequent quarterly reports filed with the Securities and Exchange Commission.
The statements made during this call are based upon information known to natural gas services group as of the date and time of this call and N. G. S assumes no obligation to update the information presented in todays call.
With that I'd like to turn the call over to Steve Taylor, Our chairman of the board interim CEO and President Steve.
Thank you Ann and Luc and good morning, everyone.
Welcome to our first quarter 2023 earnings conference call.
You you for joining us this morning.
Taking your questions I'll highlight our financial and operational results for the first quarter. There were detailed in our earnings press release.
Yesterday.
Discuss the current business environment and provide comments on other aspects of our business.
The quarter marked our ninth quarter in a row of rental revenue growth for the current sequential quarters rental revenue alone grew almost 11%.
Higher rental and sales revenues grew total revenues by 18%.
Adjusted rental gross margins slipped, 2% due to higher field expenses.
One time noncash adjustment.
But our total adjusted gross margin increased 4% sequentially.
SG&A declined 4% and our bottom line net income had a positive swing of over $1 million from last quarter as we posted positive GAAP earnings.
As mentioned in our last earnings call and just close our substantial line of credit from our bank at the end of February .
We're supposed to fund the additional high horsepower equipment, we have already contracted as we continue to execute on our growth plan.
Just had a solid and growing quarter we.
We have added more committed contracts over the past couple of months, our utilization continues to increase and pre contracted activity remains at a high level for the rest of the year.
With that said, let's look at the results from the first quarter of 2023.
Total revenue for the three months ended March 31, 2023 increased to $26 $6 million from $22 $5 million for the three months ended December 31 2023.
Or an 18% increase in sequential quarters.
Revenues increased year over year from $23 million for three months ended March 31, 2022 for 31% increase.
Rail revenue increased 11% from $26 million in the three months.
Ending December 31, 2022, compared to $22 $7 million on three months ending March 31 2023.
Rental revenue increased to $22 $7 million for the first quarter 2023 from $17 $1 million in the first quarter of 2022, 433% gain over the past year.
Both compared with period comparative period increases were primarily the result of the increased deployment of higher horsepower rental units.
Higher overall utilization across the fleet and rental price increases throughout the year.
Rental revenues have strengthened and are now running approximately 85% to 90% of our total revenues in all comparative periods.
As of March 31, 2023, we had 245 utilized rental units representing over 335000 horsepower compared to 276 units representing almost 307000 horsepower.
As of March 31, 2022.
We ended the first quarter was 66, 4% utilization on a per unit basis, and 77, 4% utilization on a horsepower basis.
These are both improvements from the prior quarter.
Notably approximately 96% of our higher horsepower horsepower fleet equipment is utilized in drawing rent while 100% contracted.
The 4% difference represents units waiting to be installed.
Utilized horsepower increased 9% in the first quarter when compared to the year ago period.
While revenue per horsepower increased.
21% when comparing the same periods demonstrating the impact of the growth in higher horsepower units and price increases we have been able to implement over the past year.
Our total fleet as of March 31, 2023 consist of 875 years.
With over 433000 horsepower.
Our large horsepower assets comprise approximately 15% of our current utilized fleet by unit count.
But these units provided approximately half of our current rental revenue stream.
Sales revenues for the sequential quarters increased from $1 $3 million in the fourth quarter of 2000 $23 million to $3 million.
In Q1 2023.
Yeah.
Up from Q4, 2022, I'm, sorry to the current quarter.
Large increase in sequential revenues is primarily from idle equipment sales from our rental fleet and a doubling of parts revenue from the sale of proprietary pressure control systems.
On a year over year quarterly basis sales revenue increased slightly from $2 9 million to $3 million.
As noted in our release this morning, adjusted gross margin slightly decreased sequentially from $11 3 million or 55% of revenue in.
In the fourth quarter 'twenty, two to $11 1 million or 49% of revenue in the first quarter 2023.
Half of this quarterly decline is due to a non cash reclassification of inventory items from the balance sheet to the income statement.
The balance of that expenses from higher R&M and parts costs.
On a year over year basis, our adjusted rental gross margin of $11 $1 million in the first quarter 2023 increased approximately 40% when compared to $7 9 million in the same period in 2022.
Our SG&A expenses declined $200000 in sequential quarters.
And totaled 17% of revenue this quarter.
Sequentially, we reported an operating loss of $314000 in the fourth quarter of 2022 <unk>.
Compared to positive operating income of $402000 in the first quarter this year.
This improvement was primarily due to higher total gross margin lower SG&A expense and $280000 less and equipment retirement expense.
This compares to operating income of $382000 for the three months ended March 31 2022.
Our net income in the first quarter of this year was $370000 or <unk> <unk> per basic and diluted share.
This compares to a net loss of $756000 in the fourth quarter.
F 2022, or <unk> <unk> loss per diluted share.
In the year ago quarter, our net income was $337000.
Adjusted EBITDA was flat at $7 $7 million for the sequential quarters, but increased 15% from $6 $8 million from.
From the same period in 2022.
Our cash balance as of March 31, 2023 was approximately $7 $4 million with $61 million outstanding under our revolving credit facility.
In the first quarter. This year, we realized cash flow from operations of $18 2 million.
Compared to $5 million in the same quarter last year.
We used $47 $8 million for capital expenditures $47 million of which was expanded on our rental fleet in this current quarter.
The compression market remains very strong and we continue to see demand for new compression units, especially in the high horsepower range.
Last quarter, I mentioned that if opportunities present themselves, we are likely to expand our fleet further to meet demand as long as thats expansion meets our return expectations contract requirements and our cash availability.
That said, we in fact secured additional contracts this quarter worth approximately 20% to $25 million.
We also accelerated our build schedule, which brought another similar amount into this current year.
This resulted in a large increase in our 2023 committed capital budget from the $95 million originally announced.
$250 million currently.
The large increase that this project is supported by President Bill schedules. So that we will add approximately $50 million for each of the next two quarters and equipment assets.
Caution everyone that this may fluctuate to the downside due to supply chain constraints, but this is our best present estimate.
Even with this we are still seeing added demand that we cannot fulfill this year.
I also want to take time to introduce two new members that we have recently appointed to our board.
Jacobs and downstream golly.
Adjusted EBITDA as the Management Committee Director at Mill Road Capital Management, one of our largest shareholder and dollars are chief Executive Officer of Augusta Advisory Group.
Have extensive experience in private and public board from a financial and governance perspective.
A full description of their backgrounds as in a recently published proxy.
We welcome them and look forward to their contributions to our board.
As Ive just discussed the demand for our equipment and services continues unabated.
Based on our current build orders and already executed contracts, we are essentially sold out this year and.
We anticipate this continuing into 2024.
It's too early to tell if next year continues as fast faster patient. This one the Barnett and extraordinary macro event, we anticipate there'll be another robust growth year.
Obviously, there can be headwinds, but consensus projected prices for WTS crude from Bloomberg anticipate crude oil in the mid 80.
Dollar per barrel range through 2025, another two plus years.
This is supported by Opec's recent decision to cut production the potential of refill the strategic Petroleum reserve and a continuing natural decline in production.
Presently approximately 75% of our utilized horsepower is employed in the production of crude oil. So our overall activity is now driven by crude oil pricing and production dynamics.
As far as natural gas the pictures murkier and not as rosy net gas prices have been extremely volatile over the past few months.
Spot prices exceeded $9 premium Btu in August of 2022.
And they are currently at $2.24 at the end of April 2023, that's a 75% decline in price in eight months.
The rigs drilling for natural gas hit their lowest point in seven years last week.
The spike in prices last year was caused by some short term worry about natural gas supply.
But that quickly abated, we're now unfortunately stuck in the same natural gas price scenario.
We have seen play out over the last decade.
I don't expect a whole lot of support to our business from natural gas prices and activity, but Fortunately only 25% of our utilized horsepower is employed in natural gas projects. However, if we do get any pricing uplift it'll add to the activity we already see.
There are a lot of moving parts of the business right now, but I think we're connecting all the dots I will look forward to continued growth.
Thanks for your time and I look forward to your questions.
Okay.
Luke.
Hello.
Ladies and gentlemen at this time, we will conduct a question and answer session. We would like to state. A question. Please press seven pound on your fallen again that seven pound and you will be placed in the queue in the order received.
Also perhaps seven pound again to remove yourself from the queue.
We are now ready to begin our first question comes from Rob Brown.
With Lake Street capital Rob go ahead.
Hi, Steve Congrats on a good quarter Hi, Rob.
Thanks.
I just wanted to get a sense of kind of demand environment for the high horsepower.
It's been strong how are you kind of seeing it with the curve.
Commodity prices are you seeing more interest and activity there.
Well.
Yes, the current commodity price of oil commodity price has weakened just a little bit but.
We're not if.
If we didn't know that we wouldn't.
Have you even knowing that there is a yes.
Yes.
$70.
Low $80 gas or oil price out there demand is.
Continued as I've mentioned essentially unabated.
Yes.
Just mentioned the additional contracts we've gotten we've tried to speed up some some bills to get this stuff out quicker and we're still seeing.
Demand.
Actually demand that we can't fill this year due to.
Schedules and.
And cash commitments.
So it's.
Presently it's just.
Continuing non stop now.
Yes, I think and we anticipate that continuing on.
Sure.
And if youre starting to look into 'twenty for what Youre trying to do now it's a little tougher because operators arent.
No really publicized in too much of their 2024 schedules, but just based on <unk>.
Continuing demand, we're seeing request for equipment and things like that too.
24 looks like it can be a good start.
But if everything else continues with the oil price.
Hanging in.
And.
I don't think it has to.
Go up a whole lot more I mean, the demand is there.
Even at the current price, which is you know as the price of the operators can I make money yet.
We anticipate demand continuing.
Our challenges.
Is now execution.
As I mentioned that you're sold out and.
Getting it built getting it out on time.
Apply chain continues to be somewhat of an issue not a not a killer but.
As long as all of that stuff stays together.
We see the rest of the year and into 2004 being good so.
Demand is there. It's just now I think among with us and in the industry generally is just how to fill.
Fulfill all of it and I don't think all of the 2023 demand will get fulfilled.
Slide over into 'twenty four.
Okay.
Maybe just review the capital commitment again on kind of what you've sold and is that capital commitment.
Sort of to fulfill contracts that you have in that Thats committed at this point and just provide us remind us what it is.
Yes, it's essentially the same stuff.
The contracts, we talked about last quarter.
<unk>.
Largely pre contract and I say, largely I think there is 90%, 95% pre contracted and the ones. We've added this quarter are contracts. So they are not now.
Speculative builds or are anticipated work there are signed contracts and that's why we would have an additive and increase the.
Capital budgets.
It's equipment, we've got to build now so.
The commitment level still stays at.
That 90% range, we've got that.
10% differences some equipment, we've got in there towards the.
End of the year and into 2014 that have not been committed at this point that are being built but we fully anticipate that equipment.
Over the next six months being rented.
So the bottom line is still run a 90% commitment rate on the stuff we're building.
Okay, Okay, and I may have missed it when you spoke with the capital the Capex expectations this year and I guess the way.
Would that be similar next year whats the capex expectations at this point.
I don't want to even project 2014 24, yet.
Yes, I think last call.
Ask that question I'll say well.
Just based on the difference in what we anticipate the capital budget being in the.
The bank line commitment we had there was about a $55 million difference.
Well if everything stayed static.
Probably be $55 million, we spend next year just finished.
To finish out the bank commitment.
But now.
The budget this year has grown to where there's there's very little.
Left in the bank commitment if we execute on.
Everything we've gotten in the committed stuff so.
It's very hard to.
To say, what 2024 is going to be right now like a mission the operators haven't really put out anything publicly I mean anything we hear is pretty much.
Speculation in advance projections.
Projections from from operators and.
Those are hard to.
Hard to.
I guess.
Commit to right now from a capital budget standpoint so.
We're trying to get a better handle on it but 2024.
It can be a robust growing year, whether we spend.
$150 million.
That's a lot of money for two years in a row and I would be hesitant to say that but.
Give me another.
A quarter or two and we'll have a lot better handle.
But it is going to be it can be a it's going to be a decent year I. Just don't know if it is can be is is as I mentioned in the remarks out enough, it's going to be as fast paced as this year because this is pretty extraordinary.
Yeah, Okay, great. Thank you I'll turn it over.
Okay. Thanks, Rob.
Thank you very much Rob our next question comes from Tate Sullivan with Maxim.
Go ahead please.
Hey, good morning, It's all 100 then.
Sullivan.
Congratulations on the quarter, it's all 100 and Neil on for Tate Sullivan, Okay. How are you.
Good how are you congrats on the quarter.
Kind of following up on on the Capex comment.
How much of the increased Capex guidance is for the 2500 horsepower market I think last quarter, you talked about it being about a third or a half.
The $95 million commitment.
We're increasingly now that an increase in capex.
No actually.
The majority of it is 50 higher horsepower units. So we didn't change the the.
2500.
Horsepower number is just primarily we've we've had a lot of interest in the <unk> higher horsepower equipment.
Great. Thank you and then.
Again, just kind of following up on the price increases.
Should we see.
Price increases throughout 2023 year, you think.
Can you guys give us a little more of a rundown on what we should be looking at.
Are you seeing price increases throughout the rest of the year.
Well from a from a new equipment standpoint.
We may.
<unk>.
Primarily because our engines are continuing to get more expensive compressors are more expensive build those more expensive so far.
From a new.
Build your cost of goods sort of thing.
We're still seeing increases and if they continue like they are we're going to have to increase the rental rate on new equipment going forward.
We'll probably look at it constantly look at it but we'll we'll make an assessment in the next quarter or so and.
Just see what we see from inflationary standpoint there.
From the existing fleet.
More of an operating.
Expense question and.
Where.
The inflationary.
Inflationary increases from the operating standpoint being labor.
Lubricants and stuff like that.
Have have they are still going up a little bit they mitigated somewhat recently, but we're keeping an eye on it and we'll just have to see what.
Again make an assessment of nice quarter as to what that.
Pricing is looking like but.
We're seeing a little slowdown in some stuff but.
It just it continues on its not as extreme as it was last year, but.
And in the earlier part of this year, but.
We still got to watch it a bit I think.
There is still price increases going on in the industry.
As we speak and I think thats more so.
Up to what we had already done.
Versus a.
Maybe doing enough last year. So there is still some price increasing going on still some costs going up but as far as we go we're just gonna look at very carefully pardon.
Quarter, so and determine if we need to do it there is getting to be yes.
Some pricing fatigue from customers.
Which is.
We know what they're talking about because we're getting a little of it too from our suppliers, but we just got to make an overall assessment to see what more pushes.
Great. Thank you so much.
Thank you very much.
Currently don't have any questions in the queue, but if you have them.
Please press seven pounds, and we will open up the line.
We have Hale hoak.
Okay co go.
Go ahead.
Hey, Steve it's hail congrats on a good quarter.
Just to follow up a little bit on the capex questions and asking a little differently if no new.
Equipment orders came in and you just fulfilled what Youre currently obligated to fulfill one would all of those units be in service is it six months from now or 12 months from now or how far out until all of them are in place.
Well.
Yes look at the Bill schedule of course.
You bet.
The buildup.
The third core then decline and this is from.
From the standpoint of Bill schedule being Okay. This is completed equipment <unk> equipment, we can start to place on <unk>.
Contract in rental so you get the typical sine wave.
So all of the equipment would be.
Yes.
And from a from a time delay standpoint or less.
Let's just say your equipment that gets built and we received it in Q2 will be installed and start generating revenue sometime in Q3. So you get about a lag like that so all of the equipment that we're building this year.
I would anticipate being installed and all of a point, 100% rent by the end of Q1 'twenty four.
Okay, Great I just was.
Thinking about Youre going to have you had a nice quarter now, but youre going to have a quarter with a real step function change in earnings power in.
I guess later this year or early next year and it was just trying to get my hands around the timing of that but yes.
Congrats and also congrats on the Alex guys to your board.
It looks like you'll get good perspective, and I'll talk to you soon.
Okay. Yeah appreciate it I appreciate the call.
Thank you very much our next question.
Last question comes from Kyle Krueger with Apollo capital go.
Go ahead.
Good morning, Steve Bob a couple of quick questions for you Hi.
Fantastic.
Increase in revenues during the quarter.
Year over year operating income was basically flat.
Expected significantly more operating leverage than that.
That dramatic of a revenue increase.
And I see some couple of other onetime backer.
But.
Is that.
Revenue.
Increase going to really are going to lead to significant profit prosperity going forward and if so what is the timing associated with that when will we start to see.
The earnings leverage come through.
Well I think just like.
Trying to help their second ago well.
We will see the majority of it.
Q1.
Yeah.
It was the beginning of the kind of Capex.
Build.
So as I mentioned, we're going to start getting the majority of the equipment in Q2 and Q3. So second half is going to look a lot different than the first half of the year. We'll just start now so we're going to be getting the equipment get installed getting the red stars and things like that so I think you'll start to see.
Some real improvements all the way up and down the.
Income statement and starting the second half and it will just build we will have a yes, I think youll see a Q3 Q4 and Q1 increase.
Pretty consistently gone that way.
Yeah, Yeah, and any any idea that you could give us as to what the expected incremental operating margin associated with a dollar revenue increase could be I mean, I would imagine it would be quite substantial I mean, 20%, 30% that we'll start to see flow through off of that.
Yeah.
The increase that we're going to see say the next.
Year next four quarters.
Yes.
Yeah.
But this way.
Yes forever.
Hi, Ian.
But for every dollar revenue, we see go up we're going to see a commensurate deal.
40% increase in.
Additionally, operating income so I don't think you're too far off of that because we're going to start seeing.
Pretty substantial increases in a lot of stuff revenue. This is new equipment going out in this new equipment is carrying higher prices in some of the existing equipment out there and so there's a lot of.
Yes.
A lot of levers in the income statement that will start to be polled as we go through our SG&A is going to get better I predicted that so we're going to have a lot of.
A lot of tailwind going forward. So I don't think you're too far off on on your operating leverage you think.
Yeah. Okay. Now typically you guys have played in.
Lower horsepower to 250, <unk> I think was the average horsepower of your installed fleet going back two three years ago. Now you are moving up into the 1500 and beyond range.
Yes.
Manufacturing and fabrication process similar enough.
That you can.
Garen key customers' contractual run time performance or is this really.
A new piece of equipment for you that is.
Needing to have run time performance in order to.
Pro forma according to.
What ordinary field levels.
Statistics might be.
Well, it's a magnitude of difference in the equipment, so you're right.
Yes.
Five plus years ago.
Our typical bill was a 202 hundred 50 horsepower unit.
Now we're routinely building 500 in stepping into that 2500 horsepower. So you get a magnitude change in just the horsepower and the size of the equipment you get a big change in and how it's operated and maintained in the field.
But from a design standpoint, and how you can maintain run time some of it's you know some.
So the basic stay the same they're all our designs we've built a fair amount of the bigger stuff, but currently in probably the last.
A couple of quarters, we've outsourced the majority of the big horsepower.
Car designs.
We've we've found a couple of good fabricators have good quality and.
Youll build at a good price for us.
And.
So we're using the outsourced model more so now than we ever have in the past from certainly from a.
Additional horsepower standpoint, but from a run time deal we've always guaranteed.
High run times on equipment now.
On this bigger equipment.
The customers typically demand even higher run time on them, because now you're starting to get into <unk>.
Critical infrastructure, when you're getting into centralized compression, maybe touching some midstream stuff or.
Any downtime, especially on a gas lift or production perspective.
Is very profitable or very expensive for the operators. So the more downtime you can give them the more money they make.
Number one that drives rental rates up because your manpower it gets more you're monitoring costs get more et cetera, but but we are able to deliver very high run Tom on this stuff, but you do have to spend a little more money to.
To do it and that drives some of our rates too but.
Customers are typically okay paying those higher rates. If you can give them that kind of run time, because a percent or two additional run time on.
On the hiring I mean at a higher 90% run time range is very profitable when you're lifting thousands of barrels of oil a day from centralized stations.
So it is more.
Critical now then actually it has been in the past with the you.
The medium horsepower.
And these are these being kind of brand new units for you guys than youre outsourcing that.
Fabrication of isn't.
Isn't it a new piece of equipment and are you sure.
Theyre performing according the contractual specifications then.
And are you confident.
How are you confident enough.
With really very few units out in the field now were accumulated performance how are you confident.
Spend up to $150 million then.
What has been pristine balance sheet one that.
Current current run rate basis, as three times debt to EBITDA going.
Presumably significantly higher.
Yeah, well I mean, we're we've dealt with this equipment.
The engines and compressors.
Having built for us in this equipment is.
Number one from the industry standpoint long standing.
Excellent quality.
Good so there's there's no issue with the quality of the engines and the compressors.
And you know.
That's from the industry standpoint from the NDS standpoint, we've been dealing in the same engines and compressors for four to five years. So we've we've also got some history with it and we're building more and more each day and.
With this equipment in.
Value of it and the run time expectations of service expectations.
One of these big units are are extensively monitor there's probably and there may be more 30 to 40 monitoring points constantly on this equipment to <unk>.
Track, what's going on what's good what's bad et cetera. So we've got.
An extremely high level of confidence and equipment were putting out we're getting a lot of support from.
The factory and the suppliers and everything else on this stuff so that's really not.
That doesn't keep us awake at night.
We lose sleep over making sure we can make the run time and things like that more of a service aspect.
Then a equivalent aspect.
Yes, yes, okay.
And could you update us Steve on Mei.
The bulk.
CEO replacement search.
Yeah, you know what kind of candidate Youre coming up with then.
Well, we've been we've had a search going on as I mentioned in the past.
Now with the.
Two new directors on the board, which we announced.
Couple of weeks ago, three weeks ago I think.
We want to involve them in that and so we're we're taking a look at where we are where we band what we're gonna do et cetera et cetera. So.
No I mean, the candidates are you would.
What you would expect we will were trying to sign.
Different levels of experience, whether it's equipment.
Equivalent experience financial experience et cetera.
That criteria to this point hasn't changed but we are.
Taking a little bit of a pause and.
Reassessing with our new directors.
Cash we've identified so far the profiles, we want and things like that but.
Yeah.
It'll it's it's it's going along but will resume.
To a fuller extent.
In the future.
Yeah, Okay and have you expanded that exercise to include sort of a full scope strategic review, where these new directors coming on which.
Presumably with the CEO transition so.
So so important.
Are you, including outright sale up to and including the outright sale of the company with respect to.
How the new directors and the CEO search is moving forward.
Well you know the new directors didn't come off from the point of.
Doing anything in particular with the company accept.
Increasing shareholder value right.
And.
We've made no.
No bones about the fact that.
We're going to look at the company from the perspective of we've got this organic growth plan going on and.
Got the Big Bank line.
And making sure that's assessed correctly, we're going forward the way, we want and things like that but I think you know whether its two new directors.
Yeah or the existing board before.
We're always constantly looking at what's the horizon you know what the future holds.
What direction to a while ago, what other strategies and things like that so that's really not going to change now certainly we've got two new perspective.
Two new eyes looked at things in which is great from a business standpoint, that's always what we ought to do and we're going to continue to assess.
Our strategies.
But our strategy right now is.
Uh huh.
What I've just talked about executing our growth plan.
Uh huh.
Putting in a lot of new equipment satisfying demand and stuff like that so really that's that's the point. We're at right now just making sure were as tight as we can be on our on our present plan.
Okay. Thank you best of luck going forward looking forward.
The leverage come through based on the dramatic.
Creep in revenue Thank you Steve.
Okay. Thanks Carl.
Thank you very much and that was our last question.
<unk> go ahead.
Okay. Thanks.
Luca and thanks, everyone for.
Your time and joining us on our call and I look forward to updating you on the on the next.
Earnings call next quarter. Thank you.
Thank you everyone. This concludes today's conference call.
Thank you for attending.