Q3 2024 Natural Gas Services Group Inc Earnings Call
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Speaker Change: Ladies and gentlemen, and welcome to the natural gas services group incorporated quarter three earnings call.
Speaker Change: At this time, all participants are in listen only mode.
Speaker Change: Our assistance is available at any time during this conference by pressing zero pounds.
Speaker Change: I would now like to turn the call over to MS. Anabelle got please forget.
Thank you Luke and good morning, everyone before we begin I would like to remind you that during the course of this conference call. The company will be making forward looking statements within the meaning of federal Securities laws investors are cautioned that forward looking statements are not guarantees of future performance and those actual.
Speaker Change: Adults or developments may differ materially from those projected in the forward looking statements.
Speaker Change: Finally, the company can give no assurance that such forward looking statements will prove to be correct.
Natural gas services group disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
Speaker Change: Accordingly, you should not place undue reliance on forward looking statements.
Speaker Change: These and other risks are described in yesterday's earnings press release and in our filings with the SEC, including our Form 10-Q for the period ended September 32024 form 8-K and in our Form 10-K for the year end December 31st 2023.
Speaker Change: These documents can be found in the investors section of our website located at Www Dot N G. S. G I dotcom.
Should one or more of these risks materialize or should underlying assumptions prove incorrect actual results may vary materially.
Speaker Change: In addition, our discussion today will reference certain non-GAAP financial measures.
Speaker Change: <unk> EBITDA adjusted EBITDA and adjusted gross margin among others for reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP. Please see yesterdays earnings release.
Speaker Change: I will now turn the call over to Justin Jacobs, Our Chief Executive Officer Justin.
Justin Jacobs: Thank you Anna and good morning I.
Justin Jacobs: I will start by introducing the team.
Justin Jacobs: Joining me today on the call. This morning is John Bittner, our interim Chief Financial Officer.
Justin Jacobs: Brian Tucker, our President and Chief operating officer is unable to join US This morning, but we'll be back on our fourth quarter earnings call.
Justin Jacobs: I Trust by now you've had a chance to review our third quarter results, which we announced yesterday after market close we are pleased with our performance as we had another quarter of significant topline and bottom line growth we.
Justin Jacobs: We reported higher revenue net cash from operations and adjusted EBITDA, while delivering tangible results against the key growth and value drivers I outlined on our last call.
Justin Jacobs: I'll focus a significant portion of my remarks today on these growth and value drivers optimizing our fleet improving asset utilization driving new unit growth, particularly large horsepower and then eventually M&A.
Justin Jacobs: Market dynamics remained strong and we continue to leverage our innovative compression technology strong customer relationships and our relatively low leverage to drive growth.
Justin Jacobs: With our recently announced awards for large horsepower compression and strong customer demand, we see significant opportunities for expansion in the coming years.
Justin Jacobs: I'll start today with a quick recap of the quarter, followed by some high level remarks around the industry and what we're seeing.
Justin Jacobs: I will then give an update on progress against our growth and value drivers as well as discussing some new additions to the team.
Justin Jacobs: And then turn the call over to John Bittner, who will review the quarter in more detail.
Justin Jacobs: I'll end with a few closing comments on our increased guidance for 2024, and our out our longer term outlook, which remains quite bullish.
John Bittner: For the third quarter, we reported 35% increase in rental revenue year over year, and a 7% increase sequentially with growth driven by higher rented horsepower as well as selective rate increases adjust.
John Bittner: Adjusted rental gross margin percentage was 61, 3% compared to 59, 3% last quarter and 51, 4% in Q3 of last year.
John Bittner: Adjusted EBITDA of $18 2 million increased 54% compared to last year's third quarter and was up approximately 11% from Q2.
Based on our results year to date, and our favorable outlook moving into the final quarter of the year, we increased our 2024 adjusted EBITDA outlook from $64 million to $68 million to a range of $67 million to $69 million.
At the midpoint of the updated range. This implies 48% growth over fiscal 2023 after posting growth of 56% last year.
John Bittner: As I noted on our last call natural gas services as it is a different company than it was just a few years back.
John Bittner: We are taking advantage of supply constraints and strong customer demand to increase our growth Capex in 2025.
John Bittner: Our guidance for 'twenty 'twenty four growth Capex, along with our newly provided 2025 growth Capex guidance is this is to support new contracts, we signed and I will add is entirely for large horsepower compression investments approximately 40% of the new high horsepower will be electric motor driven with.
John Bittner: With these new units, we will diversify our customer customer mix and reduce concentration with larger accounts.
John Bittner: More importantly, these contracts will help drive horsepower growth rental revenue and cash flow, while significantly increasing the earnings of our business.
As for market conditions, I'll first looked at oil.
John Bittner: W. T I has been in the high <unk> to low seventy's for the last several months.
John Bittner: This is a level at which we are seeing strong production and it's still driving significant incremental needs for compression.
John Bittner: While we are mindful of macro factors that could bring W. W. T I down general generally we see a strong market for oil.
I've received numerous questions regarding the coming administration change and impact on oil prices.
John Bittner: While I believe the new administration will materially ease the regulatory burden my personal view is that macro factors and the growth capital home oil companies are the significantly larger driver of oil prices, regardless of whether it was a democratic or Republican administration.
John Bittner: The natural gas market is a different story natural.
John Bittner: Natural gas prices prices remain weak activity is muted and this impacts demand.
For our small compression fleet.
John Bittner: I do believe the Trump administration will be materially more favorable for natural gas, particularly the east LNG permitting and ultimately drive production volumes up this should have a positive impact on the <unk> compression demand now.
John Bittner: That will just drive prices up I don't know, we're not including that in our plans. So if it happens it will have a positive impact relative to our current expectations.
John Bittner: I'd like to shift now to our strategy by reviewing our for growth and value drivers I believe we showed demonstrable progress against several of these drivers leading to leading to our strong quarterly results increased 2024 guidance as well as our bullish outlook for 2025 and the years ahead.
John Bittner: I'll start with the first driver fleet optimization.
John Bittner: Our monthly rental revenue per average horsepower, which I calculate as rental revenue in the quarter divided by the average utilized horsepower divided by three to look at the metric on a monthly basis, which is industry standard that.
John Bittner: That calculation yields a metric of $26.78 per horsepower in Q3 of this year.
John Bittner: This is a 12% increase over the same quarter from a year ago the.
John Bittner: The same metric increased meaningfully in Q3, and Q4 of 2023 with more modest increases since then.
The increase in revenue per average horsepower as a function of mix shift to higher horsepower units and price increases for installed units.
John Bittner: The second driver is asset utilization, which encompasses two parts converting noncash assets into cash and increasing the utilization of our existing fleet.
John Bittner: With respect to the former accounts receivable continued to decline.
John Bittner: It was $42 million at the end of Q1 went to 33 million at the end of Q2 and is now less than $25 million at the end of Q3.
John Bittner: Has created $17 $5 million in cash over two quarters or approximately $1 40 per share.
John Bittner: We believe there are additional areas to take cash off the balance sheet, including inventory and real estate, which in turn will be used to invest in new unit growth with higher anticipated levels of return on invested capital.
John Bittner: We are delivering against exactly what I told you we were going to do over the coming quarters and I'm confident that as we execute you'll see more of our noncash assets converted into cash leading to higher returns for shareholders.
John Bittner: As I noted on our last call. This is an ongoing.
John Bittner: Initiative, and we'll likely spend through 2025 to fully execute.
John Bittner: With respect to increasing utilization of our rental fleet. This is a key priority for us, but more of a medium term initiative as we perform technology upgrades and conversions of our utilized fleet.
John Bittner: The third driver is fleet expansion, we have made consistent progress on this driver was significantly more to come.
John Bittner: As of the end of Q3 2024, we had units rented totaling approximately 476000 horsepower.
John Bittner: This is and this is a 19% increase in horsepower rented year over year.
John Bittner: Just looking at the large horsepower units as of Q3 2024, we had approximately 333000 horsepower compared to approximately 253000 horsepower at Q3 2023.
John Bittner: This represents a 32% increase in our large horsepower.
John Bittner: As of Q3 2020 for 70% of our rented horsepower has in large units.
John Bittner: Over the coming five quarters, we currently expect to increase our large horsepower rental fleet by nearly 100000 horsepower.
John Bittner: I will reiterate that these additional units are all contracted with blue chip customers typically on four to five year terms with pricing that we expect to yield returns above our 20% return on invested capital target.
John Bittner: We are now almost entirely focused on units that will be set beginning in 2026 once again with an exclusive focus on large horsepower units with a mix of electric motor drives and natural gas engines.
Our fourth drivers accretive M&A, while we were while we remain active in looking at potential deals I want to reiterate that we will remain disciplined on the M&A front.
John Bittner: Any potential transaction needs to result in our company and our shareholders being in a better position than the already great position I believe we are in I would summarize it I don't feel we need to do an acquisition, we will only do a deal if it advances the strategic priorities of the business at a price that makes sense for our shareholders.
John Bittner: I would like to highlight two recent additions to the <unk> team.
John Bittner: Ian Eckert will join <unk> as Chief Financial Officer, and no later than January six 2025.
John Bittner: Ian has a broad range of financial experience, including public company accounting financial analysis and operational improvement. We are very excited to have him join our team.
John Bittner: John Bittner, who has served as our interim Chief Financial Officer. Since October 2023, we'll continue in that role until he can start date and that will provide transition services thereafter.
Speaker Change: Like to take this opportunity to thank John and all of his colleagues at the accordion team, who have worked with us over the past year and have been instrumental in our success.
Speaker Change: Gene I'll, let Jean Holly was added as a director of Ngls effective November one of this year.
Speaker Change: Gene's experience with other rental equipment companies outside of the energy, but energy space is additive to our board as well as for substantial technical experience as a former chief information Officer I believe we have a substantial opportunities in data to improve all facets of our business.
Speaker Change: Look forward to working with gene and implementing additional strategies towards that goal.
Speaker Change: And looking at the talent that has joined <unk> over the last 18 months at the management level on board and in the field I think it is a great indication of the power of our story and the opportunity that lies ahead.
Speaker Change: I also want to take a second to thank all of our employees, who delivered these results for our shareholders as well as to thank our customers for trusting us with their business.
Speaker Change: To paraphrase, our chairman, Steve Taylor, who should all put our sunglasses on as we look ahead to the future of Ngls.
With that it is now my pleasure to turn the call over to John.
John Bittner: Thank you Justin and good morning, everyone. Let me quickly hit the financial highlights.
John Bittner: Our third quarter.
John Bittner: Total revenue for the quarter was up sequentially by five 7% to $40 7 million in.
John Bittner: In rental revenue was up 7% to $37 4 million.
John Bittner: Total adjusted gross margin increased by $1 9 million sequentially, driven by a $2 2 million increase in rental adjusted gross margin.
John Bittner: Which came in at a gross margin percentage of 61, 3% for the quarter.
John Bittner: We've now realized four straight quarters with rental adjusted gross margin percentages near or above 60%, which continues to boost our confidence in the margin generating potential of our recently installed high horsepower compressor units.
John Bittner: Net income for the quarter was $5 million or <unk> 40 per share.
John Bittner: Our third quarter, adjusted EBITDA was $18 $2 million, which was a $1 $7 million or 11% increase sequentially.
John Bittner: At September 32024 rented units represented 475 534 horsepower compared to 454 of 568 horsepower as of June 32024 at.
John Bittner: At the end of Q3 2024, we had 1229 rented units compared to 1242 rented units as of June 32012.
John Bittner: Turning to the balance sheet, we ended the quarter with $163 million outstanding on our amended and restated revolving credit facility.
And looking at the Chief financial covenants contained in our credit agreement our leverage ratio was 2.25 times down from $2 five one times as of Q2.
John Bittner: Our fixed charge coverage ratio for Q3 was $2 seven one media that we were comfortably in compliance with both the brokerage mutual covenants at the end of the third quarter.
John Bittner: Our accounts receivable balance as of September 30 was $24 8 million.
John Bittner: A $17 $5 million decrease from our high balance at the end of Q1.
John Bittner: This put our DSO at around 55 days.
John Bittner: While this is a significant improvement over recent levels. It remains higher than we think ultimately achieved.
John Bittner: We are pleased with the progress today, but continue to believe there is opportunity to further improve this metric over the coming quarters.
John Bittner: But that substantial improvement will likely require an investment in upgrading certain of our systems.
John Bittner: We generated cash flow from operations of $57 million year to date in 2024.
John Bittner: Our capex for that same period totaled $57 million, which can be broken out to $49 7 million of new unit growth Capex in <unk>.
John Bittner: It'll upgrades with the remaining $7 7 million being maintenance capex.
John Bittner: We paid down the balance under our amended and restated credit lead by a net $1 million during the first nine months of 2024.
Speaker Change: With that I'll turn it back over to you Justin for closing remarks.
Justin Jacobs: Thanks, John with.
Justin Jacobs: With respect to our 2024 guidance our current outlook for 2024, adjusted EBITDA of $67 million to $69 million, which marks an increase from the prior guidance.
Justin Jacobs: And the range by $2 million and the midpoint of the range moved up by $2 million we.
Justin Jacobs: We did this based on our result results through the first three quarters of the year and our confidence in the margin generating potential of our rented compressor units, we're being mindful of costs looking to improve efficiencies lower noncore expenses, where we can and reallocate cash flow growth and cash flow generating initiatives with that said there are some incremental investments that are not.
Justin Jacobs: This area as it relates to improving scalability and efficiency of our operations. We also have some onetime costs related to people transitions, namely our new CFO and related professional service fees as well as some potential incremental labor expenses associated with significant new unit set activity that could happen in the holiday season.
Justin Jacobs: With respect to growth capital expenditures, we expect to spend between $65 million to $75 million in 2024, reflecting investments in new large horsepower compression.
Justin Jacobs: For 2024, we've tightened the range, but kept the midpoint the same to indicate our.
Justin Jacobs: Our expectation of the likely number.
Justin Jacobs: For 2025, our expected range for growth Capex is between 90 and $110 million at the midpoint of both ranges $70 million and $100 million, our growth capital would increase by more than 40%.
Justin Jacobs: This is a good indication of our view of the markets as well as the flexibility we have due to our low relative leverage and significant increase in cash from operations.
Justin Jacobs: Our outlook for 2020 for maintenance Capex remains unchanged at 8% to $11 million with the majority of expenditures related to our rental compression units and smaller amounts for field equipment, including trucks and other equipment and.
Justin Jacobs: In terms of return on invested capital our target remains at least 20%.
Justin Jacobs: In closing, we are taking advantage of the market and leveraging our relationships in position, where we can we are growing faster than our peers certainly the public ones and we are well positioned to capture an increasing share of the large horsepower compression market.
Justin Jacobs: We are profitable and continue to try and generate high net cash from operating activities to reinvest in our business our balance sheet remains strong and we are executing on our strategy to drive cash flow and earnings while never losing sight on increasing both near and long term shareholder value.
Justin Jacobs: All in I remain quite excited about what <unk> can achieve in the coming years.
Speaker Change: This concludes our prepared remarks, so I'll ask the operator to queue up for the Q&A portion of the call.
Speaker Change: Ladies and gentlemen at this time, we will conduct a question and answer session. If you would like to state a question.
Speaker Change: Please press seven pound on your phone now and you will be placed in the queue. In the order received you can press seven pound again to remove yourself from the queue.
Speaker Change: We're ready to begin.
Speaker Change: Our first question trace.
Speaker Change: <unk> so far is from Jim Rollyson with Raymond James Go ahead, Sir.
Jim Rollyson: Hey, good morning, guys and congratulations on another great quarter.
Jim Rollyson: Wondering if I can maybe yeah sure maybe circling back.
Speaker Change: Mr. Bittner made a good comment about margin drag you guys have.
Speaker Change: Posting kind of 60 ish plus percent margins for a little while as some.
Speaker Change: Kind of indicating a little bit lower.
Speaker Change: Because you weren't quite certain but as you look beyond say 24, we've got guidance.
Speaker Change: And you continue to shuffle in more large horsepower. That's on contracted terms at great returns. How are you thinking about the margin profile just beyond 2024.
Speaker Change: In the rental business.
Speaker Change: You know I would say that we are a we're certainly pleased with the with the third quarter.
Speaker Change: Margin of 61, three you know as we look at that prior to compared to some of the prior quarters. We had some some units going on standby and.
Speaker Change: So that that.
Speaker Change: That will pull that margin up a little bit.
Speaker Change: I think John's comments, both on this call on the previous calls that we're getting increasing levels of confidence that the that the margin levels that we've been seeing over not just this past quarter, but looking at the past four quarters that that should be kind of the levels going forward, then as kind of throughout 2025.
As we will see some mix shift with.
Speaker Change: With the higher horsepower units of which that will be kind of a little bit more backend loaded in the second half of the year.
Speaker Change: That we should see some shift to modestly higher margins.
Speaker Change: Got it that's very helpful and on the utilization front.
Speaker Change: <unk> been kind of in this low eighty's, 82% or so type of range and obviously as you add more large horsepower that time longer term contract I imagine.
Speaker Change: That number should trend higher I'm, just maybe little color on how youre thinking about that and even if you can give us a little detail on what utilization looks like on the large versus some of the smaller horsepower stuff today, just to think about that transition over time.
Speaker Change: Sure. So the I'll start with the second point, because I think really will drive kind of how you think about it going forward on the high horsepower side.
Speaker Change: We're effectively 100% utilized there is some.
Speaker Change: Friction all kind of here and there we don't have a unit or two come in but those are all really going back out quite quickly and so that's really the big driver.
As I've said on.
Speaker Change: Previous calls in our conversations.
Speaker Change: The horsepower thats not utilized its almost entirely in the small and the medium and Thats really kind of a medium term initiative for us to to drive that.
Speaker Change: Of that roughly 100000 horsepower in those size ranges drive that Unutilized number down.
Speaker Change: Perfect I appreciate that I'll turn it back to this one off type items.
Thank you very much. Our next question comes from Rob Brown with Lake Street capital market go.
Speaker Change: Go ahead please.
Speaker Change: Good morning.
Speaker Change: Morning.
Speaker Change: Just want to talk a little bit about the demand environment. That's quite strong I think you talked about electric drive coming into the mix, but maybe could you provide some further color on kind of the decision to.
Speaker Change: To wrap up Capex are you are you seeing customers signing contracts now for 2006 and.
Speaker Change: How much visibility do you have the kind of.
Speaker Change: Next I guess two years out that.
Speaker Change: Marketplace.
Speaker Change: Sure. So I think as we mentioned in the prepared remarks really were in terms of new unit set of really I shouldn't say, new you're going to set in terms of of contracts.
Speaker Change: We're really looking at 2026 at this point not saying there won't be any in the back half of 2025 incremental but really it's a focus on 2026 and looking with our.
Speaker Change: Some of our larger customers.
Speaker Change: Theyre, providing demand plans of what they think they're going to need in 2026, and so thats really kind of the focus of the business and I would say.
High level, it's still a little early for that but generally we're seeing still strong demand in terms of incremental compression thats that's required.
Speaker Change: Yeah.
Speaker Change: Okay great.
Speaker Change: And maybe a sense on the pricing environment, obviously, if demand is strong it's good but.
Speaker Change: How is how is pricing sort of looking year over year.
Speaker Change: So looking at price as a driver for the fleet.
Speaker Change: Our fleet average grade.
Speaker Change: I think on the <unk>.
Speaker Change: The price increases just overall in the.
Speaker Change: In our home market over the last five years or so have been so substantial in terms of magnitude driven by significantly increased cost of the equipment and of labor.
Speaker Change: And other other cost inflator is that the.
Speaker Change: The rate of change that we're seeing certainly has come down materially, but we're still seeing I think a positive upward bias on pricing just not at the same rate.
Speaker Change: We've been able to go through.
Speaker Change: Significant percentage of the of the utilized fleet.
Speaker Change: And and capture some some pricing there, which as you know really in conversation with customers driven by incremental expenses that we're seeing so I expect to see still kind of a positive bias on.
Speaker Change: On pricing.
Speaker Change: But just not at the levels that have happened over the past five years. So it's just really kind of step function changes.
Speaker Change: Okay, and then when we look back on your comments on Q4, I think you said there were some.
Speaker Change: Costs in terms of setting units that youre going to incur in maybe a little bit of.
Speaker Change: Costs in the quarter could you give us a sense of what that is.
Speaker Change: Okay.
Speaker Change: Sort of visibility there that cost.
Speaker Change: The specific comment where some potential incremental costs.
Not really.
Speaker Change: Revolves around kind of time of year.
Speaker Change: Holiday season Thanksgiving to Christmas.
Speaker Change: Potential weather challenges that can occur.
Speaker Change: In terms of cold snaps and <unk>.
Speaker Change: Really just.
Speaker Change: Sure that we're delivering for our customers.
That they need something at a particular time.
And if.
Speaker Change: Incremental labor is required for a short period of time to make sure that those units are up and running and servicing.
Speaker Change: That is an expense that we look at and say if that is required we want to make sure that we're delivering the service and exceeding the service levels that our customers expect and if that causes some short term modest amount of incremental expense that's fine as I said its potential at this point, we're just kind of looking forward over the next.
Speaker Change: Eight weeks or so.
Speaker Change: Just want to make sure that we exceed our customers' expectations.
Speaker Change: Okay got it thank you I'll turn it over.
Speaker Change: Thank you very much and again, if you have any questions. Please press seven pound.
Speaker Change: Our next question comes from Selman <unk> with Stifel.
Go ahead please.
Speaker Change: Thank you good morning, congratulations on a nice quarter. Thank.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: Let me start with your customer count declined sequentially 73 to 69 and I'm just curious is that you.
Speaker Change: Are you high grading raising prices and people returning or is that really just seeing the M&A.
Speaker Change: Going on out there.
Speaker Change: It's such a small decline.
Speaker Change: Kind of overall theres not a particular factor I would point to there there's nothing.
Speaker Change: From a conscientious of strategy that we were trying to reduce customer count I expect that number to fluctuate around and I don't see it as a particularly material driver for us.
Okay.
Speaker Change: And then.
Speaker Change: I may have missed this but do you think that your capex for next year, how much of the how many how much of that can be dedicated towards electric about.
Speaker Change: About 40% of the horsepower.
Speaker Change: And that's really looking from kind of the second half of 2024 into what is contracted in 2025.
Got it and then.
I guess.
Speaker Change: And I know you haven't provided guidance for 2025, yet you have provided the capex guidance, but just trying to think or see how maybe you're thinking about twenty-five you noted in the comments that sort of cash flow from ops equaled your investing activities. So far on a year to date basis.
Speaker Change: And I'm sort of looking at the capital you're investing next year.
Speaker Change: Maybe you get some more improvement in the balance sheet. As we think about 2025 are you viewing it as you expect to be sort of neutral from that standpoint, or would you expect to be out spending cash flow and therefore, having to.
Speaker Change: Leverage up just a bit.
Speaker Change: I expect our leverage will go up on.
Speaker Change: On an absolute basis.
Speaker Change: Leverage levels are certainly with the <unk>.
Speaker Change: <unk> or the ratio.
Speaker Change: Coming down in the third quarter somewhat materially I expect that number will be modestly higher.
Speaker Change: Uh huh.
In terms of.
Speaker Change: The we're going through the budgeting process right now for 2025.
Speaker Change: The key for US is just looking at kind of a set activity because that's ultimately as we look at the calendar year will be determinant of how much EBITDA is in that year, it's not going to impact how we think about exiting 2025 in terms of the kind of earnings power of the business because we know all of those units are currently expect all of that all of those.
Speaker Change: Units, which are under contract will be set before the end of 2025, just working through the timing.
Speaker Change: To figure out okay, how much of that gets captured in.
Speaker Change: 2020.
Speaker Change: Five versus kind of an exit run rate.
Speaker Change: Got it.
Speaker Change: And then just last one from me just kind of going back to your macro comments.
And I know, you're having discussions looking into 2026, but you think that oil.
Speaker Change: <unk>.
Speaker Change: What have you.
Speaker Change: Is there a levels that you see out there that would have we'd have to hit before you would see changes in your customers behavior.
Speaker Change: I think there are.
They're kind of ranges we're in conversation with customers, we will see some.
See some changes and the just a referenced publicly available data.
Speaker Change: Some of the different regional feds put out kind of prices at which.
Speaker Change: You start to see changes in behavior.
Speaker Change: Permian Basin, and what I've read, it's kind of low <unk>, where youre going to see new wells.
Speaker Change: That's kind of the marginal price production much much lower.
Speaker Change: I've seen kind of low forties and for some of the larger operators operating significant centralized gas lift is even in high <unk> in the Permian basin.
Speaker Change: I wouldn't expect to see.
Speaker Change: Absent drastic changes in <unk>.
Speaker Change: Changes of behavior on the production side I think it's really on the kind of incremental demand, which at this point you know we're looking out to 2026.
Speaker Change: And how how long term of view, if we saw a dip down to 60 <unk>.
Speaker Change: What customer start to change behavior I suspect they would the magnitude of that little bit difficult to know because then it gets to their how are they forecasting and are they looking at a particular spot price or looking over a longer range period at the time I suspect, it's more the latter, but I wouldn't say that.
Speaker Change: I expect to see I would expect to see some change of behavior, but once again, that's really kind of forward growth as opposed to existing production.
Speaker Change: Understood. Thank you so much for your time thank you.
Speaker Change: And our last question comes from Tate Sullivan with Maxim Group go ahead. Please.
Great. Thank you.
Speaker Change: Looking more at the average horsepower per compressor, which meaningful growth on trials. The results, but then the total number of rapid compressors down 13 quarter over quarter is there any I assume that's fully depreciated smaller horsepower is there any costs that any units to the scrap yard or do.
Speaker Change: Could you just offloaded to someone for transportation can you can you talk about that.
Speaker Change: Sure so on the.
Speaker Change: On the unit utilization you are correct.
Speaker Change: <unk>.
Speaker Change: It's not a huge number in units but that is.
Speaker Change: Primarily small and almost entirely small and medium combined.
Speaker Change: It's a low number we are doing a full review and kind of in the midst of a full review of particularly in the small and the medium.
<unk>.
Speaker Change: What.
Speaker Change: Or is there an opportunity to reduce some of those units nothing announced at this point I don't expect it to be a significant percentage of the horsepower part of the fleet, but certainly looking at the units and saying is some of the smaller units coming back.
Speaker Change: What's the right economic decision around that and some of it will be selling some of the existing underutilized lies units will be.
Speaker Change: It could be even be scrap, but it's really looking at those and saying how do we take unutilized assets, even if they are small and a small percentage of the horsepower fleet.
Speaker Change: But put them to their highest economic useful for us.
Okay.
Speaker Change: Wondering if you could monetize that medical where I assume it's fully depreciated.
Speaker Change: And then just in terms of Capex going out the door and looking when the new units are actually deployed.
Speaker Change: Like a quarter lag in terms of the bulk of the Capex in terms of.
Speaker Change: Sort of trying to model out how many units of larger horsepower going out the door.
Speaker Change: The lag time is.
Speaker Change: Okay.
Speaker Change: I may start with from the time that we're putting in and confirming in order at this point to.
Speaker Change: To have a unit fabricated.
Speaker Change: With a third party.
Speaker Change: Youre looking at a range of.
Speaker Change: Nine months closer to 12.
Speaker Change: Now the capital will get spent there are series of progress payments that we make over that period of time, but there is from kind of initials.
Speaker Change: Spend.
Speaker Change: Two units being completed and ready to go out in the field.
Speaker Change: It's more like that kind of three quarter lag.
Okay. Okay. Thank you very much.
Speaker Change: Thank you and.
Speaker Change: I don't see any other questions.
Speaker Change: Okay.
Speaker Change: Well, thank you Luke and thank you to all of our shareholders and potential shareholders and those listening and for your questions and participation on the call. We sincerely appreciate your support and we look forward to updating you on our progress in the next quarter. Thank you.
Speaker Change: Thank you very much everyone and this concludes today's conference call. Thank you for attending.