Q2 2023 Natural Gas Services Group Inc Earnings Call
Most active oil field in the U S and one of the most active in the world here.
With two towns of 150000 people each so theres not a big labor pool and its been.
It's been exhausted for a little bit I think the last official figures I saw.
It's about 2% and when.
I mean, you're down to that.
That number you're essentially fully employed because it was 2% are not the ones you want coming in.
Right.
So we're having to you know.
A little harder.
And a little wider too because most of what gets hired now are.
Rotator or commuter.
People that we have to bring in.
From.
Outside of the area, So Louisiana, Oklahoma.
Various other places and these are the service tax you know these are the field guys in maintaining the equipment and keep it run it in primarily the higher horsepower.
Technicians that are harder to find.
So you got to you got to look in different places all the time and.
And we do that we're able to keep up but it is a.
<unk> approach and a full time job.
Just to do that of course.
In an environment like that drives.
Cost labor cost.
So we do have an impact from that you also have an impact from essentially having to.
<unk>.
Yeah.
Feed and shelter or whoever you bring in.
So it's a it's a room and board.
Thank you.
The the Incrementals say the premium cost on doing this and I'm just talking about the Permian I'm not talking about the whole company because that would dilute the cost a bit but.
Just from the Permian standpoint, I'd estimate based on say premium labor costs and.
And mobilization de mobilization costs for people.
<unk>.
You know it would be in the 15% to 20% range.
Of our of our labor cost out here.
It's appreciable and.
We pay attention to it and try to manage it.
But it's very hard to mitigate it such.
Such competitive market, you've pretty much if you want good people you pretty well have to.
Target them and.
Pay them what they are.
What the market is a little above and get them get them on the payroll.
Well part of the Genesis of the question and I don't know if you can put some color on this.
And it's maybe on the early side you ask the question in terms of when it when it's likely to normalize but.
Your activity level in terms of getting new equipment is extraordinarily high this year.
Probably stays fairly strong going into the first half of 'twenty, four I'm going to guess, but.
At some point that should normalize and doing and kind of managing logistics and personnel should become operationally, a little easier not necessarily cheaper, but better too.
To optimize.
Bob.
And be able to manage your costs down a little bit and I'm wondering if you have a sense for kind of that timeline and again, maybe on a quarterly run rate basis, what might be excess.
Is it a $1 million of.
Excess expenses.
Or is it a few hundred thousand or is it even more than a $1 million and again.
Getting very precise on that we'd probably be a challenge.
But I'm wondering if you have a bit of a feel in terms of because im just trying to obviously get a sense for what things look like as you go through them to the middle of next year I got to believe that some of these operating costs start to abate a little bit.
Yeah.
Cost from a labor standpoint, I don't.
Really see much relief on that for <unk>.
Really a couple of years.
So I mentioned 23 is is basically you already know the whole years.
Active in.
Essentially sold out.
We're thinking 24.
He is going to be busy too so as long as it is theres going be a pull on labor and especially.
Well no it is getting better when we can start finding local people, but that's a long way away, we're still going to be having to bring in.
People will supplement the small labor force here, so I don't see really much abatement in labor pressures for.
Probably a couple of years you know are contingent upon the activity remained like we think it is going to remain.
Hey.
And then over time it will you know unless you get.
Some ups in the interim that leads to.
A downturn, which can happen, but we don't anticipate it. So I think we still got 18 to 24 months. So.
Labor pressure on some of that in labor availability too.
Yeah from a.
Finite number standpoint.
It probably is.
<unk>.
Our total labor.
Standpoint.
A million dollars.
I would not be be too far off.
And about the 15% to 20% premium.
Okay, Alright cool great.
And actually there's been nothing Theres a related question I think you alluded to this.
Perhaps.
Last quarter of the quarter before but SG&A is running around 18% I think of revenue and I think you've mentioned that that should settle out to eight to something more like 14, if I'm remembering correctly.
You have a.
You have some sort of a timeline on that and I'm not even sure. If my numbers are correct I'm going by recollection not notice at this point.
Yeah.
No, we anticipate Q3 and four.
Being lower you know, there's some legacy costs that.
The last of which we experienced in Q2.
Those are gone.
So you know I think the.
You know I don't I don't remember exactly I think I might've, even probably shouldn't even.
I'll get myself in trouble here I think I'd, even talk about maybe 12 or 13% in the past, but I'll.
I'll take your 2014.
Alright.
But now we will see we will see those come down Q3 and Q4, okay great.
And then this is a kind of a quick question on some of the numbers.
Just a couple of things I wanted to try to work through their numbers related.
One is the software impairment.
You've kind of called out enough information to back into something but it kind of looks like the accounting earnings might have been around nine or 10.
Without that although I'm not sure how to tax effect that number exactly does that sound about right.
Well the.
The software impairment was 700.
20780.
Yes.
If you just take seven to eight divided by.
Yeah roughly.
Yeah, we got about what permanent of 13 million shares.
Yeah, just just that quick math, and I'm, not I'm, not representing any ever being pre tax or tax or whatever but that's <unk> that's <unk>.
So it is isn't appreciable charge.
Yes, yes, okay, alright, yes, it wasn't kind of.
It wasn't.
Kind of set out as you kind of a normalized number. So I was just trying to trying to get a sense for that because the stock is still fairly inefficient and not broadly covered so yeah.
Getting numbers off of.
Our research base is not.
It's still challenging.
Another question Yeah, Okay, a couple of things another as I think you alluded to this and maybe I have this number right but.
I've been trying to look at your fleet as kind of a.
Tale of two fleets really although you break it down into small medium and large I kind of look the rest of the industry.
Yourselves are.
Benefiting from this trend in high horsepower stuff you you'd be marked at around 400 horsepower.
And if you look at the fleet.
Above 400 horsepower and below 400 horsepower.
The fleet above 400 horsepower did you say that the.
The utilization rate for that part of the fleet is 97%.
Yes.
So then the stuff it's smaller so your medium and small horsepower what would be the utilization on that part of the fleet is probably no better than.
50% I would guess, they're probably net debt approximate range.
No.
It's in the 60% to 65% range on the small and medium it's not horrible, it's just not where we want it.
Right and you have been you have been kind of calling that a little bit that youre doing it judiciously and not.
Right now I think of 20 cents on the dollar, but taking kind of.
100 cents on the on the book or something.
I recall, yeah, yeah, the utilization numbers can be a little misleading from color standpoint from number one the number one on the way.
You know everybody seems to calculate it differently.
The same some of us feel differently, but you know you can yes.
You can read people choosing cage and see how they calculate theres some differences there so.
As you know, we just you know we're not smart enough to.
Do you fancy, whether we just take what we owe and.
And comparator against what's running and that's the that's the utilization rate you know nothing fancy about it.
Okay, but also from a.
Financial perspective, you may look at 66, 5%.
Thats.
Whats the.
The financial impact of that from a when you look at the book value of this equipment just about all of our small horsepower is.
Depreciate it out so there's there's little book value, even though on the books on a lot of that stuff in the medium horsepower generally require about two thirds depreciated all of that stuff. So you've got we've got a lot of units in that small and medium horsepower from a unit.
Standpoint.
Not as much horsepower.
And really the.
The book value impact is relatively small too and we have you know overtime cold out.
Certain sizes, either that had gotten down to much lower utilization that didn't make any sense or some areas that we just had.
More on the fleet than we thought it was prudent.
Okay great.
You touched on something before.
Let me know if I'm, if I take I can get back into queue up their people.
In the Q.
But you touched on this before you put in a big slug of equipment for.
Specifically one particular.
Customer a handful of years ago, I think you said 345 years ago and some of that stuff has come off of their long term contracts.
Still utilized they are still very busy.
Again things.
Still heavily Permian weighted.
That stuff is still being utilized but one of the things that I was wondering about and maybe you could sell this year is.
Is that if you were to take.
One of those pieces of equipment, let's say a 500 horsepower unit.
You basically could put that to be because the market.
Put that to work.
And probably higher rate certainly went in to begin with.
And one of the dynamics I'm wondering about as we get through this period of putting new equipment into service and then renewing those contracts down the line some of your newer customers.
What would be if you looked at that 800 horsepower unit. If you were to do some maintenance capex on that unit and then place it in another long term contract, let's say five years.
What would what would that dynamic look like in other words Youre your annualized recurring revenue from the new contract would be higher by something maybe 20% I don't know what the number is that.
That maintenance number would it be 10% of the original cost of the equipment, what's the order of magnitude of that and then what would be the.
The cost to two.
Set that into a new into a new location and new contracts.
Well the.
AG question first the cost to move it from one location to another is borne by the customer.
We don't have any financial impact from that or impact from that is primarily manpower right, helping them get it out have been reset it up and stuff like that so.
That's primarily a customer expense.
And the point of if you have a you know coming off let's say been on contract for.
You know three or five years or you know, maybe it's kind of month to month in and.
They don't need it anymore, we can put those out at higher rates and those you know those rates vary but.
Yeah, typically if you if you go to.
Maybe a three or four year old one you know those rates now are probably 20% maybe 25% higher.
Some of these units so definitely they would go out at the higher new rate.
Now.
You get that but were also.
Sure.
Getting some of those rates up too because.
You can look back at those all the rights and know that you got you.
You kind of fixture capital expense back then and now.
And you sat there, but all the other maintenance and operating costs.
<unk> have gone up and we all know the inflation environment in <unk>.
Supply chain issues and stuff like that and.
All of that has gone up so we are.
Going back on all of those contracts and asking our customers for increases and been successful it's not.
Everybody is everybody understands what's going on obviously, the suppliers and the customers too so too.
Protect and preserve and hold on to that equipment. It's just more expensive to do it for the customer and us too because we've got a we've got these costs we've got to pay.
Sure.
So we're not just we're not just waiting for stuff to come off and then we raised the rate we are trying to be proactive in going back.
And getting that from.
From what we've got there.
Yeah from a maintenance standpoint.
When you pull a unit off you generally.
Need to go through to make it ready for the next contract from a point of.
Yeah.
Certainly.
Tune ups from the point of making them.
Rentable, but typically you need some sort of a major or minor overhaul.
And that can those costs can vary.
All over the board so I don't want to.
Say, how much of how.
How much it might be but if you're if you're into a 20% rental increase say get one odd Rachael ray 20%. It goes to the next contract.
The overall impact from a maintenance standpoint, you're not going to be different than if you just stay on the location because after so many hours, whether it's at that location or its mood or some other location. After so many hours you gotta do maintenance on it.
And so you might just have a you might do it a little quicker if it comes off.
10000 hours before rescheduled.
But it's just a.
Okay.
Cost of money essentially it's not a it's not a really a maintenance cost is as you might have to do a little quicker to get it out to a location than you otherwise would.
Okay.
One of the things I'm trying to.
Yields a model a little bit and let's talk about this for a minute is that if I look at your trailing four quarters of <unk>.
Discretionary cash flow, which is which is the metric that a lot of your compression peers use for a variety of reasons. One is that there is some in some cases are supporting dividends that are covered so MLP like.
As the coverage base.
Basis also.
But basically one of my point is you may recall as debt.
That discretionary cash flow is really your accounting Ernie and over the last five or six years, you haven't shown much in the way of accounting earnings that you generated a ton of internal capital.
From your operations from your discretionary cash flow that you've you've recycled and reinvested into into the newer fleet that youre able to deploy at this point.
But to get to that discretionary cash flow number.
I tried to look at and try and I'm trying to back into some sort of a maintenance capex number which would include some of the maintenance capex on.
On the trucks and Youre your facilities, but also the kind of stuff on the bigger on the bigger machines that you'd have to invest it to reset something into a five year contract.
Ladies still new enough. So there's probably not a ton of that in there yet but at some point over time that'll that'll become part of the model.
And I don't.
I don't know if you can kind of verify this but it seems like your discretionary cash flow over the past four quarters has been on the order of about 35 ish million.
And that equates to something like $2 80, a share I had I've had my internal model.
Something like $2 60 to $2 80, but that also suggests that maybe for.
'twenty three that also suggest that you may run a little higher than that this year, but also be able to grow that next year.
I don't know if you if you have the numbers to be able to verify whether that $2 80 number is kind of a good number or.
A ways off.
And I also wonder if you'll start to look at discretionary cash flow as a metric just because your other compress your peers do and it does seem like Jermaine.
It's remained a metric.
Yeah.
Yeah, I I hesitate to hazard, a guess right now in the discretionary number you've got.
Tim I can.
Check into a little more and get back to you on how we're looking at it okay.
But yes. It is a it is a valid and a good number to go to to watch and keep an eye on as you note a lot of our competitors do it from the point of.
Couple of them are mlps, that's very important.
Our limited partners.
And it shows coverage on dividend coverage on debt et cetera.
We haven't had to use it too much in the past because we didn't have either.
But you're right. It's one we watch.
Closely of course it.
Discretionary cash flow.
Certainly in times of.
Hi activity like now and potentially going forward.
Gets eaten up.
It was less discretionary right and it gets eaten up pretty quick by just activity in capex, but.
Let me let me.
<unk> dive into the numbers a little more with you all offline and we can we can talk to that one.
Okay, No I appreciate that and I would I would love to follow up in the next couple of weeks, but to <unk> point earlier.
The peers are trading I think archrock may be at.
Seven or eight times discretionary cash flow and.
I think Kodiak just came public is probably in the 60 ish number I want to say in your.
It tended to half bucks or whatever it is today.
On my numbers, it's sort of four times. So it's a number of multiple points away it does seem to be.
A number that the industry focus is on.
I am going to E. Thanks, very much for the feedback and I would look forward to chatting with you next couple of weeks I'm going to jump off because there may be some more people that want to ask questions and I do not forget.
Appreciate the feedback and we'll look forward to it.
Talking again soon.
Okay very good thanks, Tim.
Thank you.
Thank you very much our last question comes from Kyle Krueger with Apollo capital.
Go ahead.
Go ahead please.
Thank you for taking my question Steve.
Hi, coffee the hie thee.
The balance sheet transformation has been nothing short of dramatic of course, and I have a follow up to Mr. Hoax question on you know on return, presumably looking at the horsepower and the fact and the utilization on the high horsepower stuff youre, putting out would indicate that you're putting this stuff.
Out on <unk>.
On on five year fully paid leases.
With with good credits, which is a great model. The only thing to solve for is what is the corporate return hurdle.
That you are imputing into that number one so that's my first question what what's your return bogey and those those five year full payout leases in the second thing is are you protected at all.
Against inflation on the inputs that you guys are required to provide over that period of time.
I would tell you the last question first.
Some contracts have.
Inflationary protection and.
But frankly, most don't know the ones that.
Don't we actually have not had any trouble getting price increases.
I think.
Those are good to have but even if you have just like any contract. Even if you have something in there and the market doesn't.
Agree with what you're doing for example, you can have inflationary increases, but if the market is a slow activity slow things like this you may have the contractual ability to go in and ask for something but you probably don't have in reality the.
The market ability to go in there and asked for from the point that a customer may not accept it.
So.
Yeah.
I think contractually gives you a little more leverage but it does not prevent you from getting your cost where they need to be.
So number one you can go and certainly after the expiration of contracts.
It's not very satisfying when you have three to five year contracts, but typically those three to five year contracts on what we've seen.
You know the last few years, you can go in and ask for.
And justify price increases that will keep us whole so.
Although most of our contracts don't have it we are starting to put more and more in.
We haven't been impacted negatively by not being able to get in the price increases if we want.
You know from the from the corporate hurdle on what we want to do.
Interest rates now.
Look at those and hopefully there are mitigating some of what we'll see.
On what people think about what the fed may do but.
That's into the.
Eight 910% around probably eight or 9%.
Currently so certainly you've got to factor that into that plus return you want.
And we will give a.
More color on that.
The third quarter call just like Hail had mentioned.
That's a it's a valid comment it will we'll go into a little more detail on what we see is the returns what the returns implied by.
The price, we're charging and things like that.
Hello.
Yep.
Mr Kreger.
Have any follow up.
No. Thank you very much appreciate it thanks, Thank you Kal.
Thank you very much.
Mr. Taylor, we don't have any further questions.
Okay. Thanks Luke.
And thank you everybody for participating in our call and look forward to updating you on our progress next quarter. Thanks again.
Okay.
This concludes today's conference call. Thank you everyone for attending.
The moderator has ended the conference Goodbye, Thank you for calling.
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Good morning, ladies and gentlemen, and welcome to the natural gas Services Group, Inc. A court.
Quarter, two 2023 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.
I would now like to turn the call over to MS. Ana Delgado.
Again.
Thank you Luke and good morning, everyone.
Before we begin I remind you that during this call we will make forward looking statements within the meaning of section 21 E of the security and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions.
By and information currently available to natural gas services group's leadership team are.
We believe that the expectations reflected in such forward looking statements are 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.
A reconciliation of the non-GAAP financial measures to our GAAP financial results.
See yesterday's press release, and our form 8-K, 10-K, 10-Q furnished to the SEC.
I will now turn the call over to Steve Taylor, our chairman and interim President and CEO Steve.
Yeah.
Thank you Anna and Luc and good morning, everyone welcome to our second quarter 2023 earnings Conference call.
Thank you for joining us this morning.
Before taking your questions I'll highlight our financial and operational results for the second quarter.
The current business environment and provide comments on other aspects of our business.
Reflecting on the quarter total revenue and rental revenue grew when compared to both sequential and year over year quarters sequentially. Our sales revenues declined but are strategically important rental revenues continue to grow at a brisk pace.
<unk>, our 10th consecutive quarter of rental revenue growth.
Our overall gross margins improved led by higher rental margins and lower operating expenses.
And operating income and net income both increased over the comparative quarters.
We're starting to see the results of our 2023 capital program and our revenues margins and bottom lines.
The overall environment industry continues to be positive and we anticipate further improvement.
Total revenue for the three months ended June 32023 increased to $27 million from $26 6 million for three months ended March 31 2023.
Or one 3% increase in sequential quarters.
Total revenues increased year over year from $19 9 million for the three months ended June 32022 for 35% increase.
A small increase in sequential total revenue was due to a $1 $4 million drop in sales revenues in the first quarter.
Although that was offset by an increase in rental revenues and our service and maintenance business.
By the way now and going forward, we will be referring to our service and maintenance business is aftermarket services.
There is no change in the revenue components make up this segment, but after market services or Ams conforms closer to how our industry generally refers to it.
Rental revenue increased 6% from $22 $7 million in the three months ending March 31, 2023, compared to $24 $1 million in the three months ending.
June 32023.
Total revenue increased to $24 $1 million in the second quarter 2023 from $18 $1 million in the second quarter 2022 for 33% gain over the past year.
Both comparative period increases were primarily the result of the increased deployment of high horsepower rental units.
Higher overall horsepower utilization across the fleet.
Price increases throughout the year.
Rail revenue is now composed of approximately 85% to 90% of our total revenues in all comparative periods.
Adjusted gross margin increased sequentially from $11 1 million or 49% of revenue and.
In Q1, 2023 to $12 8 million or 53% of revenue in the second quarter of 2023.
This is a 15% increase in gross margin dollars since last quarter.
On a year over year basis, our adjusted gross margin of $12 8 million in the second quarter of 2023 increased approximately 42% when compared to $9 million in the same period in 2022.
In the comparative year to date six month periods.
Our rental revenues have increased 33%, while adjusted gross margins grew by 42%.
As of June 32003, we had 249 utilize really units rep.
Representing over 372000 horsepower compared to 281 million units, representing just over 311000 horsepower as of June 32022.
The net decrease in fleet units was due to the combination of a sale of rental units to a customer and a retirement of idle units both of which happened in 2022.
In spite of that we had an approximate 20% increase in horsepower over the past 12 months.
We ended the second quarter was 65, 4% utilization on a per unit basis, and 78, 6% utilization on a horsepower basis.
Utilization remained relatively flat horsepower utilization increased from 77, 4% in the first quarter of this year.
Utilized horsepower increased five 7% in the second quarter when compared to the year ago period, while revenue per horsepower increased 15, 5% when comparing the same periods demonstrating the impact of the growth in higher horsepower units and the price increases we have been able to implement over the last year.
Our total fleet as of June 32023 consisted of 911 units.
473884 horsepower or 250 horsepower per unit.
Our average horsepower per unit has grown by 19% per unit over the last year.
Notably approximately 97% of our high horsepower fleet equipment is utilized in drawing rent.
Of our $150 million capital budget. This year approximately 90% of it is presently committed to long term agreements with a balanced anticipated to be contracted in the third quarter. This year.
As of June 32023, we have shipped and set approximately 50% of the units and horsepower anticipated in the 2023 capital expense budget.
Presently our large horsepower assets comprise approximately 17% of our current utilized slate by unit count and over half of our utilized horsepower and current rental revenue stream.
Approximately five years ago, and he has decided to enter the large horsepower market.
At this time with more than half of our utilized horsepower and revenues emanating from larger units I think we can say that we are an established player in this market segment.
Sales revenues for the sequential quarter decrease from $3 million in the first quarter. This year to $1 6 million in the second quarter.
Two thirds of the second quarter decrease was from a nonrecurring idle equipment sale that occurred in the first quarter.
The balance of the typical quarterly fluctuation we experienced in parts sales on.
On a year over year quarterly basis sales revenue increased slightly from $1 $3 million to $1 6 million.
Our SG&A expenses increased approximately $300000 in sequential quarters in total 19% of revenue.
Sequentially, we reported increased operating income of $712000 in the second quarter 2023 compared to $402000 in the first quarter. This year, a 77% increase.
This improvement was primarily due to higher rental revenues and gross margin.
Negatively impacting our operating income this quarter was a software obsolescence charge, we took without that operating income would have been roughly twice what we reported.
In either event with or without the software charge operating income this year improved over the operating income of $658000 for three months ended June 32022.
Our net income in the second quarter of 2003 was $504000 or <unk> <unk> per basic and diluted share.
This compares to a net income of $370000 in the first quarter of the year or <unk> <unk> per basic and diluted share.
In the year ago quarter, our net loss was $70000 or <unk>.
Adjusted EBITDA increased 27% to $9 $9 million from the first quarter number of $7 8 million and increased 48% from $6 $7 million for the same period in 2022.
Our cash balance as of June 32023 was approximately $4 $3 million.
In the second quarter of this year, we realized cash flow from operations of $22 6 million compared to $13 $2 million in the same quarter last year.
At the end of this quarter, we have utilized $93 5 million for capital expenditures $93 million of which was expanded on our rental fleet.
Outstanding debt on our revolving credit facility as of June 32023 was $100 million.
The leverage ratio was 253 and our fixed charge coverage ratio was four 7%.
These are both well within the bounds of the covenants and the company is in compliance with all terms conditions and covenants of the credit agreement.
Last quarter, our market, we thought the activity we are experiencing would contain the balance of this year and likely into 2024.
Based on what we're seeing and hearing internally and from customers. We think that's positive forecast continues to be correct.
We are in an under supplied market and we see little relief to us soon.
Industry utilization is high there was no appreciable capacity being added to the industry.
Lead times for major components are long customer inquiries from established and new customers continue to flow in.
And we have the ability to increase prices to ensure our.
Our shareholders get a fair return.
Commodity prices in the future production and consumption data.
So seem to support present activity.
It's been a long time since we've had this kind of a positive dynamic in activity and pricing and there appears to be a greater capital discipline from customers and competitors.
That may help sustain this environment.
Yeah.
In the past Theres, a matter used when the industry was going through repeated boom bust cycles.
It was an excuse my colloquial messaging.
Please Lord gives us one more boom, we promise not to screw it up this time.
It's taken a few decades for us to think and that maybe we havent right.
However, there is always caution required in a volatile commodity based industry like ours.
There will be another downturn at some point.
Thank you NDS is somewhat mitigated that impact with long term contracts, good pricing exceptionally strong customers and contracts and long lived equipment.
We are bullish on the industry over the next couple of years and hope to take advantage of the strong environment.
Thanks for your time and I'll look forward to your questions.
Ladies and gentlemen at this time, we will conduct the question and answer session.
I would like to state a question. Please press seven pound on your phone now and you will be placing the order received.
You can pass seven pound again at any time to remove yourself from the queue.
Our first question comes from Rob Brown with Lake Street capital.
Go ahead please.
Good morning, Steve.
Hey, Rob.
Just wanted to get a little bit into your comments about the positive environment and sort of demand how do you see that impacting your capital plan I guess throughout the rest of this year and into next year and.
Whats sort of the visibility on that.
And activity.
Well, it's not going to impact that too.
Too much this year, because like I mentioned.
90% of all of that capital.
Is contracted and committed and we anticipate the balance.
Come in.
And the contract.
During the third quarter, so so that's pretty well set.
As far as.
In 2024 as I mentioned, we are receiving inbound calls on.
Customer requirements customer needs.
Items like that we haven't.
Youre really starting to put together.
Anything formal they will want to announce at this time on that but certainly it looks pretty strong.
We'll feel a little better obviously as you get towards the end of the year and people start.
Yes.
People, I say, meaning customers will start publicly.
Signaling budgets announcing budgets and things like that to that point.
It's pretty informal pretty much conversation as to what might or might not be required, but but as I mentioned, we're pretty bullish on.
Certainly the balance of this year, because thats baked in but.
'twenty forward looking pretty strong.
Yes.
We'll see how 24 flows into 'twenty, five, but theres already been comments made by some that.
Customers are looking at an even 25, primarily just because of the lead times on equipment now and.
The tightest foreseeing in the market.
As COO.
Cause of that.
Customer population to look out further than what's actually been required in the past but.
We're getting to the point of where.
24 cellular will become a reality in 'twenty five will become the.
Next.
Our realized projection but.
Right now no specific numbers, but.
No. We think 24 is it can be a pretty good year.
Okay, Okay, great and then.
Where are you at in terms of your sort of weighted average contract duration I think I think many of these high horsepower contracts where longer term I guess, where.
What's sort of your contract duration at this point and what's the incremental contract.
Besides that.
Any new contracts.
That includes anything that we've.
Got committed this year that were.
You've had been put out or will be put out the rest of this year.
As.
On the bigger horsepower.
500, 2500 horsepower is is five years without exception we don't.
They need to and see any reason to go below that.
Tinder.
Overall.
With some horsepower.
Being put out about five years ago on on three to five year contracts.
Our average right now is in that three to five year.
Range.
But we've actually had.
Some contracts just go.
The month over the past year or so based on some of this first half we put out three or four year terms that we put out three or four years ago.
Sure.
So those are actually on a month to month, even even on the say 50 higher horsepower.
Range equipment.
But we've only had I think overall this time.
Maybe.
Less than a handful of units.
Be terminated within their immediately re rented.
And terminations Werent typically do too.
Anything other than needed.
Move equipment around or.
Put it on some other locations.
In that respect it wasn't due to.
Lack of need so.
I think as I've mentioned in the past.
These are minimum term contracts. So for example, a five year stuff, we're putting out now that is a minimum term, but that doesn't mean they come back after five years that just means that's a minimum.
Financial and contractual commitment the customer makes to get that equipment right now, but we're seeing.
Are you seeing.
Equivalent approach in one or two years beyond the contract term and Thats why.
While we expect to when we first entered into this and Thats and Thats playing out but.
To answer your original question, we are in that on average probably into that three to five year.
Range across a whole high horsepower fleet.
Okay, Great and then.
Are you seeing the market strength in the medium horsepower area as well or is this all going to hell large horsepower phenomenon.
It is primarily large horsepower.
Yes, there has been.
The medium horsepower.
Hangs in there.
Okay, where you start getting some <unk>.
Some volatility more so than us in some of the smaller horsepower, which is primarily natural gas directed.
<unk>.
Because it's smaller lower pressure lower volume top equipment, and very sensitive to natural gas prices, whether its $2 or $3 versus kind of the.
The range is running.
So we see more movement in and out in that market.
The medium horsepower is single well gas lift and <unk>.
Obviously, neither one of those is smaller to medium horsepower are as robust and active as a as a large horsepower, but they tend to just kind of hanging in there and go up and down a little et cetera, but and Thats why you see some of the just the unit utilization flat.
Flat, but the the horsepower utilization climbing pretty aggressively primarily from the large horsepower.
Okay, great. Thank you I'll turn it over.
Petrarch.
Thank you very much and our next question comes from.
Hale Hoak Windhoek in company.
Please go ahead.
Hello.
Hello, I'm, sorry, Hello.
Please go ahead ask your question.
Hey, Steve.
Yeah.
Congrats on a nice quarter as you are.
And I have talked in the past I'm excited and supportive supportive of your growth plan.
And the transition of the business and the balance sheet. The one thing that I think would be helpful. For people, though is if you could maybe work your way into getting a little bit more guidance or return information on the capital that you're spending.
It seems like you're on a run rate maybe exiting the year at close to $50 million of EBITDA.
And maybe on the on the next quarterly call you could give some guidance on what Youre seeing for 2024 and your growth plans, but based on our math.
And compared to your peer group.
This could be a 15% or $20 stock at some point and I think it's going to be easier to get there. If you could maybe articulate guidance and gross capex plans.
Yes, no good point.
We're sensitive to that.
And where.
Getting the models.
Tightened up so we can give.
Libelee now a little more.
Detail and granularity on some of that stuff.
We've traditionally not given a whole lot of guidance from that usually the the.
The context of the room.
Remarks will give people enough information about but you are right.
With the debt the large amounts of capital et cetera.
Something we need to be a little more.
Passive about so.
We will we're working towards that recognize that and.
We will give.
Additional.
Color on that respect nice quarter.
It sounds great congratulations again.
Okay. Thanks, a lot.
Thank you very much and again, if you have any questions. Please.
Please go ahead and ask them by pressing a seven pound.
Seven pounds. Our next question comes from Tim O'toole with Petra Capital management.
Go ahead please.
Hi, Good morning, Steve how are you.
Hey, Tim Good U.
Im quite well.
And actually I'd also like to.
I, usually don't dial in and speak during these things, but I'd like to also congratulate you on executing.
You just plan and also kind of on.
Youre positioning as you came into this cycle.
Clearly you had.
A very solid balance sheet to start.
Separate with kind of unlike a lot of your peers.
Who have carried historically a lot of that which I think constrained in terms of being able to really invest in this cycle.
Couple of things that I would like to.
To get a little more.
Color on it if we can one is that I know that.
Labor, especially skilled labor.
In the Permian, especially they are probably a lot of the oil basins.
Has remained fairly tight.
I think it's becoming a little more manageable and you're and you're getting paid for it a little bit better. However, I got to believe it's still on the tight side and I'm wondering if you could characterize maybe you haven't been able to slice and dice the data this way, but I will.
Wonder if you could characterize.
The kind of run rate.
What might be excess expenses because of the high activity level on the fact, you'd probably have to continue.
<unk> continued to contract for or some of the labor to put all of these contracts.
Compression sets in place.
Okay.
Yeah.
Youre right labor continues to be.
Tight.
We're able to keep up with it but it is a.
It's more of a.
Battle than it has been in the past just from the point of finding people and bringing them on et cetera.
In the Permian.
Tight everywhere, but it's not as bad as out here.
We've got.
Operations in different parts of the country and.
You're always looking for good people.
<unk>.
Having a little turnover in some areas but.
Exceptional out here.
You've got the.
Most active oil field in the U S and one of the most active in the world here.
With two towns of 150000 people H, so theres not a big labor pool and its been.
It's been exhausted for a little bit I think the last official figures I saw.
It's about 2% and when.
I mean, you're down to that.
That number you are essentially fully employed because those 2% are not the ones you want coming in.
Right.
So we're having to.
A little harder.
And a little wider too because most of what gets hired now are.
Rotator or commuter.
People that we have to bring in.
From.
Outside of the area.
So Louisiana, Oklahoma.
Various other places and these are the service tax you know these are the field guys maintain the equipment and keep it run in primarily the higher horsepower.
Technicians that are harder to find.
So you got to you got to look in different places all the time and.
And we do that we're able to keep up but it is a.
Approaching a full time job.
Just to do that of course.
In an environment like that drives.
Cost labor cost.
So we do have an impact from that you also have an impact from essentially having to.
Sure.
Feed and shelter or whoever you bring in.
So, it's it's a room and board.
Thanks.
The incremental say the premium cost on doing this and I'm just talking about the Permian I'm not talking about the whole company because that would dilute the cost a bit.
Just from the Permian standpoint, I'd estimate based on say premium labor costs.
And mobilization demobilization costs for people.
It would be in the 15% to 20% range.
Of our of our labor cost out here.
It's appreciable and.
We pay attention to it and tried to manage it.
But it's very hard to mitigate it.
Such competitive market pretty much if you want good people you pretty well have to.
Target them and.
And what they are.
What the market is a little above and get them get them on the payroll.
Well part of the Genesis of the question and I don't know if you can put some color on this.
And maybe on the early side you asked the question in terms of when it when it's likely to normalize but.
Your activity level in terms of getting new equipment is extraordinarily high this year.
Probably stays fairly strong going into the first half of 'twenty, four I'm going to guess, but.
At some point that should normalize and doing and kind of managing logistics and personnel should become operationally, a little easier not necessarily cheaper, but better too.
To optimize.
Bob.
Be able to manage your costs down a little bit and I'm wondering if you have a sense for kind of that timeline and again, maybe on a quarterly run rate basis, what might be excess.
Is it a $1 million of excess expense. This quarter is it a few hundred thousand or is it even more than $1 million.
Again.
Getting your getting very precise on that we'd probably be a challenge.
But I'm wondering if you have a bit of a feel in terms of because im just trying to obviously get a sense for what things look like as you go through the middle of next year I got to believe that.
Some of these operating costs start to abate a little bit.
Yeah.
Costs from a labor standpoint, I don't.
Really see much relief on that for <unk>.
Really a couple of years.
So you mentioned 23 is basically you already know the whole years.
<unk>.
Essentially sold out.
We're thinking 24.
Is it going to be busy too so as long as it is.
There's going to be a pull on labor and especially.
Well no it's getting better when would you start finding local people, but thats a long way away, we're still going to be having to bring in.
People will supplement the small labor force here, so I don't see.
Much abatement and labor pressures.
Probably a couple of years.
Upon the activity remained like we think it's going to remain.
Okay.
And then over time, it will and you know unless you get some ups in the interim that leads to a.
A downturn, which can happen, but we don't anticipate it. So I think we've still got 18 to 24 months.
Labor pressure on some of that in labor availability too.
From a.
Finite number standpoint.
Yes, it probably is from.
Total labor standpoint.
A million dollars, probably would not be too far off.
Thinking about the 15% to 20% premium.
Alright cool great.
And actually there is another there is a related question I think you alluded to that.
Perhaps.
Last quarter of the quarter before but SG&A is running around 18% I think of revenue and I think you've mentioned that that should settle out to eight to something more like 14, if I'm remembering correctly.
And you have a.
You have some sort of a timeline on that and I'm not even sure. If my numbers are correct I'm going by recollection that notes at this point.
Yes.
No, we anticipate Q3 and four.
Being lower you know there is some legacy costs that.
The last of which we experienced in Q2.
Those are gone.
So.
The.
I don't I don't remember exactly I think I might've, even price didn't even.
I'll get myself in trouble here I think I'd, even talk about maybe 12%, 13% in the past but.
I'll take your 2014.
Alright.
But now we will see we will see those come down Q3 and Q4, okay great.
And then this is a kind of a quick question on some of the numbers.
Just a couple of things I want to try to work through their numbers related.
Is the the software impairment.
You kind of called out enough information to back into something but it kind of looks like the accounting earnings might have been around nine or 10.
Without that although I'm not sure how to tax effect that number exactly does that sound about right.
Well.
I think the software impairment was 700.
<unk> thousand 780.
Yes.
If you just take seven eight divided by.
Yes, roughly.
Yes, we've got about.
Permanent 13 million shares.
Just just that quick math and I'm, not I'm, not representing any of it being pre tax or tax or whatever but that's <unk> that's <unk>.
So it is.
Here's an appreciable charge.
Yes, yes, okay, alright, yes, it wasn't kind of.
It wasn't.
Kind of set out as you kind of a normalized number. So I was just trying to trying to get a sense for that because the stock is still fairly inefficient and not broadly covered so.
Right.
Getting numbers off of.
Our research base is not.
It's still challenging.
Another question, Okay. A couple of things another I think you alluded to this and maybe I have this number right, but I've.
I've been trying to look at your fleet as kind of a.
A tale of two fleets really although you break it down into small medium and large I kind of look the rest of the industry.
Yourselves are benefiting from this trend in high horsepower stuff you marked at around 400 horsepower.
And if you look at the fleet above 400 horsepower and below 400 horsepower.
Above 400 horsepower did you say that the.
The utilization rate for that part of the fleet is 97%.
Yes.
So then.
It's smaller so your medium and small horsepower.
What would be the utilization on that part of the fleet, it's probably no better than.
50% of our guests are probably net debt approximate range.
No. It's in the 60% to 65% range on the small and medium not horrible, it's just not where we want it.
And you have been you have been kind of calling that a little bit that youre doing it judiciously and not.
Writing it and I think at 20 cents on the dollar, but taking kind of.
100 cents on the book or something as I recall, yeah, yes, the utilization numbers can be a little misleading from a couple of standpoints from number one number one on the way.
Everybody seems to calculate it differently.
The same somewhat differently, but you can you.
You can read peoples, choosing caged and see how they calculate theres some differences there so.
Ours.
We're not smart enough to.
Fancy, whether we just take what we own.
And.
Compared against what's running and that's the that's the utilization rate nothing fancy about it.
Okay, but also from a.
Financial perspective, you may look at 66, 5%.
That's.
Whats.
The financial impact of that from a when you look at the book value of this equipment just about all of our small horsepower is.
I appreciate it out so theres little book value, even though on the books on a lot of that stuff in the medium horsepower generally.
Probably about two thirds depreciated on that stuff. So you've got we've got a lot of units in that small and medium horsepower from a unit standpoint, just not as much horsepower.
And really the.
Yes.
The book value impact is relatively small too and we have over time cold out.
Certain sizes, either that had gotten down to much lower utilization that didn't make any sense.
Or some areas that we just had.
More on the fleet than we thought it was prudent.
Okay great.
You touched on something before.
Let me know if I'm if I'm.
I can get back into queue up their people.
In the Q.
But you touched on this before you put in a big slug of equipment for.
Specifically one particular.
Customer a hand.
Four years ago, I think you said $3 five years ago, and some of that stuff has come off of their long term contracts.
Still utilized they are still very busy.
And things.
Still heavily Permian weighted.
Stuff is still being utilized but one of the things that I was wondering about and maybe you could fill this Dan is that if you were to take.
One of those pieces of equipment, let's say 500 horsepower unit.
You basically could put that to be because the market such that you can put that to work.
And probably higher rates and certainly went in at to begin with.
And one of them.
I'm wondering about as we get through this period of putting new equipment into service and then renewing those contracts down the line in some of your newer customers is what would be if you looked at that 500 horsepower unit.
If you were to do some maintenance capex on that unit and then place it in another long term contract, let's say five years.
What was the what would that dynamic look like in other words your annualized recurring revenue from the new contract would be higher by something maybe 20% I don't know what the number is.
That maintenance number would it be 10% of the original cost of the equipment.
The order of magnitude of that and then what would be the.
The cost to two.
Get that into a new into a new location and new contracts.
Well.
The easy question first the cost to move it from one location to another is borne by the customer.
We don't have any financial impact from that or impact from that is primarily manpower, helping them get it out have been reset it up and stuff like that so.
That's primarily a customer expense.
The point of if you have a unit coming off let's say been on contract for.
Three to five years, or maybe it's kind of month to month and.
They don't need it anymore, we can put those out at higher rates and those those rates vary but.
Typically if you if you go to.
Maybe a three or four year old one those rates now are probably 20% maybe 25% higher.
On some of these units so definitely they would go out at the higher new rate.
Now.
You get that but were also.
Giving you some of those rates up too because.
You can look back at those older rates and know that you got you.
You kind of fixture capital expense back then.
And you sat there, but all the other maintenance and operating costs.
<unk> have gone up and we all know the inflation environment.
Supply chain issues and stuff like that.
All of that has gone up so we are.
Going back on all of those contracts and asking our customers for increases in being successful it's not.
Yeah.
Everybody is everybody understands what's going on obviously suppliers and the customers too so too.
Protect and preserve and hold on to that equipment. It's just more expensive to do it for the customer and us too because we've got a we've got these costs we've got to pay.
Sure.
So we're not just we're not just waiting for stuff to come off then we raised the rate we are trying to be proactive in going back.
And getting that from.
From what we've got there.
Yeah from a maintenance standpoint.
When you pull.
Unit off you generally.
Need to go through to make it ready for the <unk> contract from a point of.
Certainly.
Tune ups from the point of making them.
Grunenthal, but typically you need some sort of.
A major or minor overhaul.
And that those costs can vary.
All over the board so I don't want to say.
Say, how much of how much that might be but if you're if you're into a 20% rental.
Increase say get one off <unk>, 20% it goes to the next contract.
The overall impact from a maintenance standpoint, you're not going to be different than if you just stay on the location because after so many hours, whether it's at that location or its mood or some other location. After so many hours you gotta do maintenance on it.
And so.
You might just have a you might do it a little quicker if it comes off.
10000 hours before rescheduled.
But it's just a BLA.
Cost of money essentially it's not a it's not a really a maintenance costs as you might have to do a little quicker to get it out to the location than you otherwise would.
Okay. So one of the things I'm trying to.
Yields the model a little bit and let's talk about this for a minute is that if I look at your trailing four quarters.
Discretionary cash flow, which is which is the metric that a lot of your compression peers use for a variety of reasons. One is that there is some in some cases, you're supporting dividends that are there.
Maybe you could cover so MLP utilize that it is the coverage.
Basis also.
But basically one of my point is you may recall as debt.
That discretionary cash flow is really your accounting Ernie and over the last five or six years, you haven't shown much in the way of accounting earnings that you generated a ton of internal capital.
From your operation some of your discretionary cash flow.
Recycled and reinvested into into the newer fleet that youre able to deploy at this point.
But to get to that discretionary cash flow number.
I tried to look at and try and I'm trying to back into some sort of a maintenance capex number which would include some of the maintenance capex on.
On the trucks.
Your facilities, but also the kind of stuff on the bigger on the bigger machines that you'd have to invest to reset something into a five year contract. Your fleet is still new enough, though there's probably not a ton of that in there yet but at some point over time that'll that'll become part of the model.
And I don't I.
I don't know if you can kind of verify this but it seems like your discretionary cash flow over the past four quarters has been on the order of about $35 million.
And that equates to something like $2 80, a share I had I've had my internal model.
Like $2 60 to $2 80, but that also suggests that maybe.
'twenty three that also suggest that you may run a little higher than that this year, but also be able to grow that next year.
I don't know if you if you have the numbers to be able to verify whether that $2 80 number is kind of a good number or.
A ways off.
And I also wonder if youll start to look at discretionary cash flow as a metric just because your other compression peers do and it does seem like Jermaine.
Jermaine metric.
Yes.
I hesitate to hazard, a guess right now in the discretionary number you've got.
Tim I can take.
Kick into a little more and get back to you on how we're looking at it okay.
But yes. It is a it is a.
Valid and good number to.
Watch and keep an eye on.
As you know a lot of our competitors do it from the point of.
Couple of them were Mlps, that's very important.
The limited partners.
And it shows coverage on dividends just coverage on debt et cetera.
We haven't had to use it too much in the past because we didn't have either.
But youre right its one we watch.
Closely of course it.
Discretionary cash flow.
Certainly in times of.
Hi activity like now and potentially going forward.
Gets eaten up.
There's less discretionary right and it gets eaten up pretty quick by just activity in capex, but.
Let me let me.
Dive into the numbers a little more with you all offline and we can we can talk to that one.
Okay No I appreciate that.
Would love to follow up in the next couple of weeks, but to <unk> point earlier.
The peers are trading I think archrock may be at.
Seven or eight times discretionary cash flow and.
I think Kodiak with just came public is probably in the 60 ish number I want to say and you are.
At $10, five bucks or whatever it is today.
On my numbers that it's sort of four times. So it's a number of multiple points away.
It does seem to be.
A number that the industry focuses on.
I am going to thanks, very much for the feedback and I would look forward to chatting with you next couple of weeks.
I jumped off because there may be some more people that want to ask questions that I've been on for a bit.
Appreciate the feedback and we will look forward to talking to you soon.
Okay very good thanks, Tim.
Thank you.
Thank you very much our last question comes from Kyle Krueger with Apollo capital.
Go ahead.
Go ahead please.
Thank you for taking my question Steve.
Hi, Kyle.
Hi.
Balance sheet transformation has been nothing short of dramatic of course, and I have a follow up to Mr. Hoax question on.
On return, presumably looking at the horsepower and the fact and the utilization on the high horsepower stuff Youre, putting out would indicate that you are putting the stuff out on.
On an on five year fully paid leases.
With good credits, which is a great model the only thing to solve for is what is the corporate return hurdle.
That you are imputing into that number one so that's my first question what is your return bogey and those those five year full payout leases in the second thing is are you protected at all.
Against inflation on the inputs that you guys are required to provide over that period of time.
Yes, I'll take your last question.
First.
Some contracts have.
Inflationary protection and.
But frankly, most don't know the ones that.
Don't we actually have not had any trouble getting price increases.
I think.
Those are good to have but even if you have just like any contract. Even if you have something in there and the market doesn't.
Agree with what Youre doing for example, you can have inflationary increases, but if the market is.
Low activity slow things like this you might have the contractual ability to go in and ask for something but you probably don't have in reality the.
The market ability to go in there and ask for from the point that the customer may not accept it.
So.
Yeah.
I think.
Actually gives you a little more leverage but it does not prevent you from getting your cost.
Or they need to be.
So number one you can go in certainly after the expiration of contracts.
That's not very satisfying when you have three to five year contracts, but typically those three to five year contracts on what we've seen.
The last few years, you can go in and ask for and justify price increases that will keep us whole so.
Although most of our contracts don't have it we are starting to put more and more in.
We haven't been impacted negatively by not being able to get in the price increases if we want.
From the from the corporate hurdle on what we want to do.
Interest rates now you can look at those and hopefully there are mitigating some of what we'll see.
Pins on what people think about what the fed may do but.
That's into the.
Eight 910% round, probably eight or 9%.
Currently so certainly you've got to factor that into that plus the return you want.
And we will give.
More color on that.
Third quarter call just like Hail had mentioned.
I think thats a valid comment.
Go into a little more detail on.
What we see is the returns.
The returns implied by.
The price, we're charging and things like that.
Hello.
Okay.
Mr Kreger.
Have any follow up.
No. Thank you very much appreciate it thanks. Thanks.
Thanks Kyle.
Thank you very much.
Mr. Taylor, we don't have any further questions.
Okay. Thanks Luke.
And thank you everybody for participating in our call and look forward to updating you on our progress next quarter. Thanks again.
This concludes today's conference call. Thank you everyone for attending.