Q2 2025 Natural Gas Services Group Inc Earnings Call

Speaker #1: You will now be placed into the conference. You are muted on this call. This call is being recorded.

Speaker #4: Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Inc Q2 Earnings Call. At this time, all participants are in listen-only mode.

Luke: Good morning, ladies and gentlemen, and welcome to the Natural Gas Services Group Inc. Q2 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 pound. I would now like to turn the call over to Ms. Anna Delgado. Please begin.

Speaker #4: Operator assistance is available at any time during this conference by pressing zero pound. I would now like to turn the call over to Ms. Anna Delgado.

Speaker #4: Please begin.

Speaker #5: 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.

Anna Delgado: 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 security laws. Investors are cautioned that forward-looking statements are not guarantees of future performance, and those actual results or developments may differ materially from those projected in the forward-looking statement. Finally, companies can give no assurance that such forward-looking statements will prove to be correct. Natural Gas Services Group Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place undue reliance on forward-looking statements.

Speaker #5: Investors are cautioned that forward-looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in the forward-looking statements.

Speaker #5: Finally, 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.

Speaker #5: Whether as a result of new information, future events, or otherwise, accordingly, you should not place undue reliance on forward-looking statements; these and other risks are described in yesterday's earnings press release and in our filing with the SEC, including our Form 10-Q for the period ending June 30, 2025, and our Form 8-Ks.

Anna Delgado: These and other risks are described in yesterday's earnings press release and in our filing with the SEC, including our Form 10-Q for the period ending June 30, 2025, and our Form 8-Ks. These documents can be found in the investor section of our website located at www.ngsgi.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. In addition, our discussion today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, and adjusted gross margin, among others. For reconciliation of these non-GAAP financial measures to the most directly comparable measures under GAAP, please see yesterday's earnings release. I would now like to turn the call over to Justin Jacobs, Chief Executive Officer. Justin.

Speaker #5: These documents can be found in the investors' section of our website, located at www.ngsgi.com. Should one or more of these risks materialize or should underline assumptions proved incorrect, actual results may vary materially.

Speaker #5: In addition, our discussion today will reference certain non-GAAP AP financial measures, including EBITDA, adjusted EBITDA, and adjusted gross margin, among others. For reconciliation of these non-GAAP financial measures to the most directly comparable measures under GAAP, please see yesterday's earnings release.

Speaker #5: I would now like to turn the call over to Justin Jacobs, Chief Executive Officer. Justin?

Speaker #6: Thank you, Anna. And good morning, everyone. Joining me today is Ian Eckert, our Chief Financial Officer. Before I begin with my formal remarks, I want to start by thanking the entire NGS team, including our first-rate team of field service technicians.

Justin Jacobs: Thank you, Anna, and good morning, everyone. Joining me today is Ian Eckert, our Chief Financial Officer. Before I begin with my formal remarks, I want to start by thanking the entire NGS team, including our first-rate team of field service technicians. Your unwavering dedication, both to our customers and to the company, is driving these results. Thank you to each and every member of the NGS team. Let me now start with the second quarter. We delivered a record quarter across several key metrics driven by exceptional field service, the performance of our smart-enabled large horsepower fleet, and disciplined execution by the NGS team. Rented horsepower ended the quarter at an all-time high, reflecting both fleet growth and improved utilization. Additionally, rental revenue and rental gross margin were strong, driven by higher rented horsepower, continued makeshift to larger horsepower units, and increased pricing.

Speaker #6: Your unwavering dedication, both to our customers and to the company, is driving these results. Thank you to each and every member of the NGS team.

Speaker #6: Let me now start with the second quarter. We delivered a record quarter across several key metrics driven by exceptional field service, the performance of our smart-enabled large horsepower fleet, and disciplined execution by the NGS team.

Speaker #6: Rented horsepower ended the quarter at an all-time high, reflecting both fleet growth and improved utilization. Additionally, rental revenue and rental gross margin were strong, driven by higher rented horsepower, continued mix shift to larger horsepower units, and increased pricing.

Speaker #6: The second quarter adjusted EBITDA was a record 19.7 million, and first-half adjusted EBITDA was 39 million. These results, combined with a favorable business outlook in the second half, supported by new large horsepower unit deployments, drove our increase in 2025 adjusted EBITDA guidance to 76 to 80 million.

Justin Jacobs: Second quarter adjusted EBITDA was a record $19.7 million, and first half adjusted EBITDA was $39 million. These results, combined with a favorable business outlook in the second half, supported by new large horsepower unit deployments, drove our increase in 2025 adjusted EBITDA guidance to $76 to $80 million. In July, we initiated NGS's inaugural quarterly dividend, another step to enhance shareholder returns. Our board also authorized the share repurchase program, which we will discuss shortly. Both initiatives underscore the durability of our cash generation and the confidence we have in our outlook. Speaking of outlook, it's important to note that returning capital does not preclude growth. With ample liquidity and balance sheet flexibility, we can continue to fund our organic growth program while remaining ready for accretive M&A opportunities as they may arise.

Speaker #6: In July, we initiated NGS's inaugural quarterly dividend, another step to enhance shareholder returns. Our board also authorized a share repurchase program, which we will discuss shortly.

Speaker #6: Both initiatives underscore the durability of our cash generation and the confidence we have in our outlook. Speaking of outlook, it's important to note that returning capital does not preclude growth.

Speaker #6: With ample liquidity and balance sheet flexibility, we can continue to fund our organic growth program while remaining ready for creative M&A opportunities as they may arise.

Speaker #6: As we continue to grow, increase cash flow, and further strengthen an already strong balance sheet, we will look to enhance our capital return programs in ways that will increase shareholder value.

Justin Jacobs: As we continue to grow, increase cash flow, and further strengthen an already strong balance sheet, we will look to enhance our capital return programs in ways that will increase shareholder value. We are also building a strong foundation for 2026 with new contracted units and an active pipeline of opportunities, including several that position us to displace competitors and continue taking market share. Simply put, we believe NGS is in the best position in the company's history. Turning to the broader market, we delivered strong results throughout the first half of the year, despite ongoing market volatility and global macroeconomic uncertainty. While these conditions persist today, we are confident in raising our 2025 outlook, not only due to our results, but due to the commentary of our customers. That, to us, is the best indicator for planning.

Speaker #6: We are also building a strong foundation for 2026 with new contracted units, and an active pipeline of opportunities, including several that position us to displace competitors and continue taking market share.

Speaker #6: Simply put, we believe NGS is in the best position the company's history. Turning to the broader market, we delivered strong results throughout the first half of the year, despite ongoing market volatility and global macroeconomic uncertainty.

Speaker #6: While these conditions persist today, we are confident in raising our 2025 outlook not only due to our results but due to the commentary of our customers.

Speaker #6: That, to us, is the best indicator for planning. This leads me to the macro factors that are primarily driving our optimism, despite market uncertainty.

Justin Jacobs: This leads me to the macro factors that are primarily driving our optimism, despite market uncertainty. First, our customers. While they are all looking to enhance production uptime, they are also working in tandem to lower costs, realizing that any market challenges need to be offset through efficiencies. This was a common theme amongst many operators reporting this quarter and is consistent with our conversations with them. Second, even if WTI were to fall further and investments were to slow, our oil-related business is tied to production. Production is expected to remain stable, with increasing demand for compression. Third, demand for natural gas is expected to grow by more than 30% over the next five years, which is significantly higher than what we have historically experienced. Market expectations are for significant growth in LNG exports, AI data centers, and overall power generation.

Speaker #6: First, our customers. While they are all looking to enhance production uptime, they are also working in tandem to lower costs, realizing that any market challenges need to be offset through efficiencies.

Speaker #6: This was a common theme amongst many operators reporting this quarter and is consistent with our conversations with them. Second, even if at WTI were to fall further and investments were to slow, our oil-related business is tied to production.

Speaker #6: Production is expected to remain stable, with increasing demand for compression. And third, demand for natural gas is expected to grow by more than 30 percent over the next five years, which is significantly higher than what we have historically experienced.

Speaker #6: Market expectations are for significant growth in LNG exports, AI data centers, and overall power generation, and natural gas compression is vital to delivering this growth across major oil and gas basins in the U.S.

Justin Jacobs: Natural gas compression is vital to delivering this growth across major oil and gas basins in the U.S. Overall, compression is essential to production throughput, and with the improvements we've made to our platform, infrastructure, and technology, not to mention the upgrades to our team, we believe that NGS can compete against anyone in the market today and win. Our market share gains are a testament to that. It is our belief that customers will stay focused on capital discipline while prioritizing throughput, reliability, and emissions performance, conditions that favor outsourced compression and the cutting-edge technology of the NGS fleet. Lastly, as we continue to get asked this question, with respect to tariffs, we do not expect a material impact at this time. Our vendors and suppliers are largely U.S.-based, and our exposure should largely be limited to second-order effects through raw materials and components.

Speaker #6: Overall, compression is essential to production throughput and with the improvements we've made to our platform, infrastructure, and technology, not to mention the upgrades to our team, we believe that NGS can compete against anyone in the market today and win.

Speaker #6: Our market share gains are a testament to that. It is our belief that customers will stay focused on capital discipline, while prioritizing throughput, reliability, and emissions performance, conditions that favor outsource compression and the cutting-edge technology of the NGS fleet.

Speaker #6: Lastly, as we continue to get asked this question, with respect to tariffs, we do not expect a material impact at this time. Our vendors and suppliers are largely U.S.-based, and our exposure should largely be limited to second-order effects through raw materials and components.

Speaker #6: Given these dynamics, we remain confident in 2025 and expect continued momentum into 2026, supported by contracted large horsepower sets and several large-scale opportunities in RFPs in process, tied to both growing energy demand and the need for better competitive solutions.

Justin Jacobs: Given these dynamics, we remain confident in 2025 and expect continued momentum into 2026, supported by contracted large horsepower sets and several large-scale opportunities and RFPs in process, tied to both growing energy demand and the need for better competitive solutions. I'll move next to the key growth and value levers I've discussed on prior calls. First, we continue to optimize our fleet assets, and we made good progress this past quarter. We are improving our systems platforms to take our smart-enabled large horsepower fleet and other unit technology to the next level. We are using operational data to a greater extent to optimize resources, improve uptime, and identify opportunities for further growth and cost reduction. Second, and with respect to asset utilization, we ended the quarter at approximately 30 days' sales outstanding.

Speaker #6: I'll move next to the key growth and value levers I've discussed on prior calls. First, we continue to optimize our fleet assets, and we made good progress this past quarter.

Speaker #6: We are improving our systems platforms to take our smart and other unit technology to the next level. We're using operational data to a greater extent to optimize resources, improve uptime, and identify opportunities for further growth and cost reduction.

Speaker #6: Second, and with respect to asset utilization, we ended the quarter at approximately 30 days sales outstanding. For historical purposes, so you can see the magnitude of improvement, from year-end '23 through today, we've ve reduced accounts receivable by 25.4 million, and relative to the larger scale of today's business, lowered working capital by roughly 31 million dollars.

Justin Jacobs: For historical purposes, so you can see the magnitude of improvement, from year-end 2023 through today, we have reduced accounts receivable by $25.4 million, and relative to the larger scale of today's business, lowered working capital by roughly $31 million. We continue to believe that monetization of non-cash assets in 2025 and early 2026 can be at least comparable to the cash we unlocked in 2024. Our income tax receivable remains under review with the Joint Committee on Taxation, and we expect to provide further color next quarter. Lastly, our Midland fabrication facility is now classified as held for sale, and we remain focused on monetizing our real estate. As I've told our team, we are in the rental compression business, and I want all of our owned assets out in the field. I will add that further monetization of non-cash assets offers additional capital to support our fleet expansion.

Speaker #6: We continue to believe that the monetization of non-cash assets in 2025 and early 2026 can be at least comparable to the cash we unlocked in 2024.

Speaker #6: Our income tax receivable remains under review with the Joint Committee on Taxation, and we expect to provide further color next quarter. Lastly, our Midland fabrication facility is now classified as held for sale, and we remain focused on monetizing our real estate.

Speaker #6: As I've told our team, we are in the rental compression business, and I want all of our owned assets out in the field. I will add that further monetization of non-cash assets offers additional capital to support our fleet expansion.

Speaker #6: In that regard, I'll offer the following as to how we look--excuse me--as to how we look at organic growth. Simply divide growth CapEx by EBITDA.

Justin Jacobs: In that regard, I'll offer the following as to how we look at organic growth. Simply divide growth CAPEX by EBITDA. Based on public disclosures, our large peers are set to invest on average approximately 30% of EBITDA in growth in 2025. Our guidance implies approximately 140%. This massive gap underscores the strength of our balance sheet, and perhaps more importantly, that we are taking market share. I would note these market share gains also occurred in 2023 and 2024. We continue to add contracted large horsepower units, and the existing large horsepower fleet's assets are running at very high utilization. The M&A market has remained active, and we expect to see more activity in the second half of the year. I believe we are operating from a position of strength, and we will remain disciplined in our approach to M&A, targeting strategic, accretive M&A opportunities at fair valuations.

Speaker #6: Based on public disclosures, our large peers are set to invest on average approximately 30 percent of EBITDA in growth in 2025. Our guidance implies approximately 140 percent.

Speaker #6: This massive gap underscores the strength of our balance sheet and, perhaps more importantly, that we are taking market share. I would note these market share gains also occurred in 2023 and 2024.

Speaker #6: We continue to add contracted gas engine and electric motor-driven large horsepower units, and the existing large horsepower fleet's assets are running at very high utilization.

Speaker #6: The M&A market has remained active, and we expect to see more activity in the second half of the year. I believe we are operating from a position of strength, and we will remain disciplined in our approach to M&A.

Speaker #6: Targeting strategic, creative opportunities at fair valuations. Before turning it over to Ian, I want to address a personnel transition noted in our release. Brian Tucker, our President and COO, will transition out of these roles with an expected conclusion at the end of October 2025, with the possibility that this period could be extended.

Justin Jacobs: Before turning it over to Ian Eckert, I want to address a personnel transition noted in our release. Brian Tucker, our President and COO, will transition out of these roles with an expected conclusion at the end of October 2025, with the possibility that that period could be extended. As noted, Brian's transition is solely due to an unexpected family loss, which I am sad to say is the passing of his wife. I will read a brief passage from a note I sent to all NGS employees. After unexpectedly becoming a single parent of five great kids, Brian has carried an immense personal and logistical burden while continuing to lead this company with integrity and purpose.

Speaker #6: As noted, Brian's transition is solely due to an unexpected family loss, which I'm sad to say is the passing of his wife. I'll read a brief passage from a note I sent to all NGS employees.

Speaker #6: After unexpectedly becoming a single parent of five great kids, Brian has carried an immense personal and logistical burden while continuing to lead this company with integrity and purpose.

Speaker #6: I can't begin to imagine the weight of the burden he has carried, and I know I could not have handled it with the same level of courage, grace, and optimism that he has.

Justin Jacobs: I cannot begin to imagine the weight of the burden he has carried, and I know I could not have handled it with the same level of courage, grace, and optimism that he has. We will miss Brian, both personally and professionally. We are highly confident in the strong leaders who will assume his responsibilities, and we expect a smooth transition because of the strength of the team and Brian's high integrity and incredible character. Thank you, Brian. You will always be a part of the NGS family. With that, I will turn the call over to Ian to review detailed financial and operating results.

Speaker #6: We will miss Brian, both personally and professionally. We are highly confident in the strong leaders who will assume his responsibilities, and we expect a smooth transition because of the strength of the team and Brian's high integrity and incredible character.

Speaker #6: Thank you, Brian. You will always be a part of the NGS family. With that, I will turn the call over to Ian to review detailed financial and operating results.

Speaker #7: Thanks, Justin, and good morning, everyone. From a financial standpoint, the second quarter played out as follows. Total revenue was 41.4 million, up 8 percent from 38.5 million, in the prior year quarter.

Ian Eckert: Thanks, Justin, and good morning, everyone. From a financial standpoint, the second quarter played out as follows. Total revenue was $41.4 million, up 8% from $38.5 million in the prior year quarter. Sequentially, total revenue was flat, as the first quarter benefited from inventory liquidation tied to the Midland fabrication wind down. Rental revenue increased 13% compared to the prior year quarter to $39.6 million and was up 2% sequentially. Total adjusted gross margin was $24.2 million, up $3.2 million year over year, and down $0.1 million sequentially. The sequential change primarily reflects idle facility costs related to the Midland closure. Net income was $5.2 million, or $0.41 per diluted share, up $0.9 million year over year and $0.3 million sequentially, driven primarily by rental equipment retirement activity in the first quarter, partially offset by higher depreciation associated with new unit sets in the second quarter.

Speaker #7: Sequentially, total revenue was flat, as the first quarter benefited from inventory liquidation tied to the Midland fabrication wind-down. Rental revenue increased 13 percent, compared to the prior year quarter, to 39.6 million.

Speaker #7: And was up 2 percent sequentially. Total adjusted gross margin was 24.2 million, up 3.2 million, year over year, and down 0.1 million sequentially. The sequential change primarily reflects idle facility costs related to the Midland closure.

Speaker #7: Net income was 5.2 million, or 41 cents per diluted share, up 0.9 million year over year, and 0.3 million sequentially, driven primarily by rental equipment retirement activity in the first quarter, partially offset by higher depreciation associated with new unit sets in the second quarter.

Speaker #7: Adjusted EBITDA was 19.7 million, up 3.2 million year over year, and 0.4 million sequentially. Operationally, our fleet expansion continues, rented horsepower ended the quarter at approximately 499 thousand, up from roughly 455 thousand in the prior year quarter, and 493 thousand in the first quarter of 2025.

Ian Eckert: Adjusted EBITDA was $19.7 million, up $0.2 million year over year and $0.4 million sequentially. Operationally, our fleet expansion continues. Rented horsepower ended the quarter at approximately 499,000, up from roughly 455,000 in the prior year quarter and 493,000 in the first quarter of 2025. Year on year, total rented horsepower increased 10%. Fleet utilization was 83.6%, an improvement of 130 basis points year over year. Essentially, all large horsepower equipment is 100% utilized. Rental revenue per average horsepower per month was $26.62 versus $25.91 a year ago, up 2.7%. As of June 30, about 80% of total rented horsepower is on term contracts, up from about 67% a year ago. The average remaining tenor of contracted units is 2.5 years.

Speaker #7: Year on year, total rented horsepower increased 10 percent. Fleet utilization was 83.6 percent, an improvement of 130 basis points year over year. And essentially, all large horsepower equipment is 100 percent utilized.

Speaker #7: Rental revenue per average horsepower per month was 26.62 cents, versus 25.91 cents a year ago, up 2.7 percent. As of June 30, about 80 percent of total rented horsepower is on term contracts, up from about 67 percent a year ago.

Speaker #7: The average remaining tenor of contracted units is 2.5 years. These new fleet assets help to deliver cash from operations of 11 million dollars in the quarter.

Ian Eckert: These new fleet assets help to deliver cash from operations of $11 million in the quarter, supported by continued collections improvement, as our DSO was roughly 30 days at the end of the quarter. Capital expenditures totaled $25.8 million, including $22.1 million of growth CAPEX and $3.7 million of maintenance CAPEX. Sequentially, growth CAPEX rose by $5.4 million, reflective of the new horsepower planned for the back half of the year. We ended the quarter with $182 million outstanding on our upside revolver and $172 million in available liquidity. Our leverage ratio was 2.3, up modestly from 2.1 in Q1. Despite what some of our large competitors may claim, this is the lowest leverage level of any of the public comparables, and it is the lowest by a significant amount. Finally, held for sale designation for the Midland fabrication facility reinforces our intent to monetize real estate.

Speaker #7: Supported by continued collections improvement, our DSO was roughly 30 days at the end of the quarter. Capital expenditures totaled $25.8 million, including $22.1 million of growth CapEx and $3.7 million of maintenance CapEx.

Speaker #7: Sequentially, growth CapEx rose by 5.4 million dollars. Reflective of the new horsepower plan for the back half of the year. We ended the quarter with 182 million of outstanding--I'm sorry, with 182 million outstanding on our upside revolver and 172 million in available liquidity.

Speaker #7: Our leverage ratio was 2.3, up modestly from 2.1 in Q1. Despite what some of our large competitors may claim, this is the lowest leverage level of any of the public comparables and it is the lowest by a significant amount.

Speaker #7: Finally, the held-for-sale designation for the Midland fabrication facility reinforces our intent to monetize real estate. As it relates to capital returns, our approach remains disciplined and balanced.

Ian Eckert: As it relates to capital returns, our approach remains disciplined and balanced. We recognize that market expectations for our dividend are for a profile that is flat to up. While we are not providing specific dividend guidance today, our objective is to deliver a growing dividend over time, supported by cash generation. With respect to share repurchases, we would like to set expectations. The approach to a repurchase program can be on a spectrum. On one end, it's programmatic, for example, buying X% of shares outstanding each quarter, and on the other end, it's highly opportunistic and valuation sensitive. We will very much be on the opportunistic and valuation sensitive side of that spectrum. Therefore, you should not expect frequent repurchases, but we will be happy to reward our shareholders if the market discounts our future performance.

Speaker #7: We recognize that market expectations for our dividend are for a profile that is flat to up. While we are not providing specific dividend guidance today, our objective is to deliver a growing dividend over time, supported by cash generation.

Speaker #7: With respect to share repurchases, we would like to set expectations. The approach to a repurchase program can be on a spectrum. On one end, it's programmatic, for example, buying X percent of shares outstanding each quarter, and on the other end, it's highly opportunistic and valuation sensitive.

Speaker #7: We will very much be on the opportunistic and valuation sensitive side of that spectrum. Therefore, you should not expect frequent repurchases. But we will be happy to reward our shareholders if the market discounts our future performance.

Speaker #7: Overall, the second quarter reflects strong execution and healthy demand. And our balance sheet positions us well for organic growth and disciplined M&A. Justin, back to you.

Ian Eckert: Overall, the second quarter reflects strong execution and healthy demand, and our balance sheet positions us well for organic growth and disciplined M&A. Justin, back to you.

Speaker #6: Thanks, Ian. Looking ahead, here is our outlook for 2025. Based on our year-to-date performance and a strong second-half deployment schedule, we are raising our 2025 adjusted EBITDA outlook to $76 million to $80 million, from $74 million to $79 million, a 2 percent increase at the midpoint.

Justin Jacobs: Thanks, Ian. Looking ahead, here is our outlook for 2025. Based on our year-to-date performance and a strong second-half deployment schedule, we are raising our 2025 adjusted EBITDA outlook to $76 to $80 million from $74 to $79, a 2% increase at the midpoint. We expect 2025 growth CAPEX of $95 to $115 million, a slight tightening of the range due to increased visibility on specific timing. I would note that more than half of the full-year guidance will be deployed in the second half. Looking beyond 2025 and into 2026, we are going to refrain from providing guidance at this point, as it is simply too early in the process. However, I would like to provide some perspective using the growth to CAPEX to EBITDA framework I discussed earlier.

Speaker #6: We expect 2025 growth capital expenditures of 95 to 115 million, a slight tightening of the range due to increased visibility on specific timing. I would note that more than half of the full-year guidance will be deployed in the second half.

Speaker #6: Looking beyond 2025 and into 2026, we're going to refrain from providing guidance at this point as it's simply too early in the process. However, I would like to provide some perspective using the growth CapEx to EBITDA framework I discussed earlier.

Speaker #6: As of today, with what we already have contracted for 2026, we expect to again outpace our larger peers when looking at growth CapEx to EBITDA.

Justin Jacobs: As of today, with what we already have contracted for 2026, we expect to again outpace our larger peers when looking at growth CAPEX to EBITDA. As we are only in August, I expect the contracted number for 2026 to go up. Once again, this is but one more indication to me that we have taken market share over the last several years, and we will continue to do so in 2026. Our 2025 maintenance CAPEX is expected to be $11 to $14 million, and our guidance on return on invested capital is unchanged. To summarize our comments today, contracted growth is strong, rental demand is healthy, and our capital allocation framework remains focused on creating long-term shareholder value. We are optimistic about the second half of 2025 and beyond. We continue to make enhancements to our technology and our service offerings.

Speaker #6: As we are only in August, I expect the contracted number for 2026 to go up. Once again, this is but one more indication to me that we have taken market share over the last several years and we will continue to do so in 2026.

Speaker #6: Our 2025 maintenance CapEx is expected to be 11 to 14 million, and our guidance on return on invested capital is unchanged. To summarize our comments today, contracted growth is strong, rental demand is healthy, and our capital allocation framework remains focused on creating long-term shareholder value.

Speaker #6: We are optimistic about the second half of 2025 and beyond. We continue to make enhancements to our technology and our service offerings. We plan to utilize our strong financial position to capitalize on growth opportunities that add value for our customers and our shareholders.

Justin Jacobs: We plan to utilize our strong financial position to capitalize on growth opportunities that add value for our customers and our shareholders. Operator, we are ready to open up the line for questions.

Speaker #6: Operator, we're ready to open up the line for questions.

Speaker #8: Ladies and gentlemen, at this time, we will conduct the question and answer session. If you would like to state a question, please press 7 pound on your phone now, and you will be placed in the queue in the order received.

Luke: Ladies and gentlemen, at this time, we will conduct the question and answer session. If you would like to state a question, 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 at any time to remove yourself from the queue. We are now ready to begin. Our first question comes from Rob Brown with Lake Street Capital Markets. Ms. Brown, go ahead, please.

Speaker #8: You can press 7 pound again at any time to remove yourself from the queue. We are now ready to begin, and our first question comes from Rob Brown with Lake Street Capital Markets.

Speaker #8: Mr. Brown? Go ahead,

Speaker #9: Good morning.

Speaker #8: please.

Speaker #9: Hey, good morning. I just wanted to first touch on the opportunity pipeline you talked about, some new growth, contracts that you're chasing, and opportunities that you're chasing.

Rob Brown: Hey, good morning. Just wanted to first touch on the opportunity pipeline you talked about, some new growth contracts that you're chasing and opportunities that you're chasing. Could you give some color on the areas that you're seeing activity in and really, I assume that's 2026 potential, but just a sense of the timing?

Speaker #9: Could you give us some color on kind of the the areas that you're seeing activity in, and and really, kind of, I assume that's 2026, potential, but just a sense of the timing?

Speaker #9: Sure. so that is, just to hit the timing first, you know, those are 2025 is is really locked in at this point. so these are, almost entirely really looking at 2026.

Justin Jacobs: Sure. So that is just to hit the timing first. You know, those are 2025 is really locked in at this point. These are almost entirely really looking at 2026. Outside of putting, as it relates to new units, I should say, when it comes to existing units, obviously we're continuing on 2025. But in terms of new units, you're really looking at 2026. A significant majority of our business is in the Permian, and that's where we're seeing a majority of the opportunities from a dollar perspective. But we are seeing opportunities in a number of different basins, really kind of across our business. So it's broad-based from that perspective with, you know, kind of the percentages tying relatively closely to our current business mix.

Speaker #9: outside of putting as it relates to new units, I should say, when it comes to existing units, obviously, we're, continuing on 2025. But in terms of new units, you're really looking at 2026.

Speaker #9: and, you know, significant, majority of our business is in the firm, and that's that's where we're seeing a majority of the opportunities from a dollar perspective.

Speaker #9: but we are seeing opportunities, in a number of different basins, really kind of across our business, and so, it's it's broad-based from that perspective with, you know, kind of the percentages, tying relatively closely to our current business mix.

Speaker #8: I, I, well, go ahead, please.

Luke: I, go ahead, please.

Speaker #9: Just checking Rob, did we lose you there? Oh, sorry. Go ahead.

Justin Jacobs: Can I just check and drop that we lose you there? Oh, sorry. Go ahead.

Speaker #8: I'm here. Thank you. and second, just want to touch base on the gross margins, strong in the quarter again. just wanted to get a sense of your view on the sustainability of the rental gross margins and, and how you see that, sort of trending.

Rob Brown: I am here. Thank you. Second, I just want to touch base on the gross margins, strong in the quarter again. Just wanted to get a sense of your view on the sustainability of the rental gross margins and how you see that sort of trending.

Speaker #9: Sure. So I think they are, sustainable when you look over the last, you know, number of, of quarters. You look over the last year, all the quarters have been, you know, in kind of those low 60s.

Justin Jacobs: Sure. I think they are sustainable when you look over the last number of quarters. You look over the last year, all the quarters have been in kind of those low 60s. We believe those numbers are sustainable.

Speaker #9: we believe those numbers are, are sustainable.

Speaker #8: Excellent. Thank you. I'll turn it over.

Rob Brown: Excellent. Thank you. I will turn it over.

Speaker #6: Thanks, Rob.

Justin Jacobs: Thanks, Rob.

Speaker #8: Thank you very much. Our next question comes from Salman Akyol with The Cycle. Go ahead, please. Thank you. good morning all. So first of all, very kind words for Brian.

Luke: Thank you very much. Our next question comes from Salman Akhil with the Cycle. Go ahead, please.

Salman Akhil: Thank you. Good morning all. First of all, very kind words for Brian. They certainly come from the heart, so that was very nice. You mentioned several times taking market share, and I am wondering if you could just maybe elaborate on why you think that is. Also, in your opening comments, you talked about emissions, and I am curious if that is playing a part of that taking market share.

Speaker #8: they certainly come from the heart, so that was very nice. can you, you mentioned several times taking market share and I'm wondering if you could just maybe elaborate on why you think that is and also in your opening comments you talked about emissions and I'm curious if that's playing, a part of that taking market share.

Speaker #9: Sure. So the, I mean, the, the very, you know, simple way outside of, of what we see in our business is I just look at the, the publicly stated numbers, you know, the three largest players, are all public and they are, you know, ballpark 75 percent of the rental compression market.

Justin Jacobs: Sure. So, the very simple way outside of what we see in our business is I just look at the publicly stated numbers. The three largest players are all public, and they are ballpark 75% of the rental compression market. I just look over the last several years at the amount of growth CAPEX that they've spent and the amount of growth CAPEX we've spent. I come to the conclusion it's mathematically impossible, knowing what I know, that we've done anything other than taken market share. That's the simple framework I look at. Then I look at also what we're seeing in terms of opportunities. One of the comments we made was on displacing competitors, and that is the number of different opportunities that we're seeing, both for existing units and new unit growth. That's how we, or at least how I come to that conclusion.

Speaker #9: and I just look over the last several years at the amount of growth CapEx that they've spent and the amount of growth CapEx we've spent, and I come to the conclusion is mathematically impossible, knowing what I know that we've done anything other than taken market share.

Speaker #9: and so, that's the, the simple framework I look at. and then I look at also, what we're seeing in terms of opportunities, and one of the comments we made was, was on displacing competitors, and that is, a number of different opportunities that we're seeing, both for existing, units and new unit growth.

Speaker #9: so that's, that's how we, or at least how I come to that conclusion. on the emissions side, you know, we have a, a relatively new fleet, certainly on the large horsepower side, and emissions character, the emissions characteristics of those are quite attractive for our customers, and we think that is, one of several different things that they're looking at, in, in coming to us for additional equipment.

Justin Jacobs: On the emissions side, we have a relatively new fleet, certainly on the large horsepower side, and the emissions characteristics of those are quite attractive for our customers. We think that is one of several different things that they're looking at in coming to us for additional equipment.

Speaker #8: Got Got it. and then, and I know you're not giving guidance on 2026, but if I were just to say, how does '26 look relative to where '25 looked one year ago?

Salman Akhil: Got it. And then, I know you are not giving guidance on 2026, but if I were just to say, how does '26 look relative to where '25 looked one year ago? Is it taking longer with customer conversations? Is it about the same? Is there anything you can say there?

Speaker #8: is it taking longer with customer conversations? Is it about the same? Is there any, anything you can say there?

Speaker #9: You know, it's, it's a little difficult for, for me to, provide a good comparison there, at least for us, just because of the significant, you know, the, the high numbers that we've had in the past and those related to some, specific customer orders.

Justin Jacobs: It's a little difficult for me to provide a good comparison there, at least for us, just because of the significant, the high numbers that we've had in the past, and those are related to some specific customer orders. There's nothing I really look at from a timing perspective and draw any conclusions year over year.

Speaker #9: So there's nothing I really look at from a timing perspective, and draw any conclusions year over year.

Speaker #8: Got it. And then, on just in terms of leading-edge pricing, still up and to the right, but at a slower pace?

Salman Akhil: Got it. And then, in terms of leading-edge pricing, still up and to the right, but at a slower pace?

Speaker #9: Yeah, I think we're, you know, seeing and kind of expectation of, you know, certainly inflation is not at 9 percent, I didn't see what the, report was this morning, but, you know, it's, it's more modest levels of inflation, at least more, closer tied to kind of historical norms is our expectation.

Justin Jacobs: I think we are seeing and kind of expectation of, certainly inflation is not at 9%. I did not see what the report was this morning, but it is more modest levels of inflation, at least more closer tied to kind of historical norms is our expectation and what we are seeing out there.

Speaker #9: And, and what we're seeing out there.

Speaker #8: Got Got it. I'll leave it there. Thank you so much.

Salman Akhil: Got it. I will leave it there. Thank you so much.

Speaker #9: Thanks, Salman.

Justin Jacobs: Thanks, Salman.

Speaker #8: Thank you very much. And again, if you have any questions, please go ahead and press 7 pound. Our next question comes from Connor Jensen with Dream & James.

Luke: Thank you very much. If you have any questions, please go ahead and press seven pound. Our next question comes from Connor Jensen with Raymond James. Go ahead, please.

Speaker #8: Go ahead, please.

Speaker #10: Hey, Justin. Thanks for taking my call. got it. Saw that the, total horsepower fell while the rented horsepower continues to rise. Were there any divestments or retirements out of the non-port fleet during the quarter, and how should we expect the kind of divestments to go as the, year progresses?

Connor Jensen: Hey, Justin. Thanks for taking my call. I saw that the total horsepower fell while the rented horsepower continues to rise. Were there any divestments or retirements out of the non-core fleet during the quarter? How should we expect the kind of divestments to go as the year progresses? Thanks.

Speaker #10: Thanks.

Speaker #9: Sure. you know, I think that is an ongoing review for us of, taking a look at the fleet and seeing where do we want to put capital in the existing, we've talked about that we were going to review, the fleet consistently and this is, you know, primarily, actually entirely in, in small and medium horsepower.

Justin Jacobs: Sure. I think that is an ongoing review for us of taking a look at the fleet and seeing where we want to put capital in the existing. We have talked about that we were going to review the fleet consistently, and this is primarily, actually, entirely in small and medium horsepower, of just going through and relatively small dollar amounts, sales of some equipment or some retirement. That is kind of an ongoing review, and there was a little bit larger piece of that in Q2.

Speaker #9: just going through and, and, relatively small dollar amounts, you know, sales of, of some equipment or, or some retirement. So that, that's kind of an ongoing review and there, there was a, you know, a little bit larger piece of that in, in Q2.

Speaker #10: Got it. That makes sense. And you talked a little bit about the kind of new opportunities out of gassy basins as operators look to grow volumes to meet LNG needs.

Connor Jensen: Got it. That makes sense. You talked a little bit about the kind of new opportunities out of gassy basins as operators look to grow volumes to meet LNG needs. Are you thinking about acting on a lot of these opportunities, or is there more than enough demand in the Permian right now with just increasing associated gas and GORs to kind of meet your demand for now?

Speaker #10: Is, are you thinking about acting on a lot of these opportunities, or is there more than enough demand in the Permian right now with just increasing associated gas and GORs to kind of meet your demand for now?

Speaker #9: I would say we are looking at new opportunities in, in all the basins that, or we will look at any, new opportunities in any of the basins that we operate.

Justin Jacobs: I would say we are looking at new opportunities in all of the basins that, or we will look at any new opportunities in any of the basins that we operate. I have mentioned in the last couple of calls we were seeing some green shoots in some of the gassier basins, and I think that is an opportunity both for our small horsepower operating close to the wellhead, and it is going to create, or is creating incremental demand for large horsepower and more gathering in midstream.

Speaker #9: And, and I've mentioned in the last couple of calls we were seeing some, some green shoots in, in some of the, you know, gassier basins and I think that's a, that's an opportunity both for our, our small horsepower, operating close to the wellhead and it's going to create, incre or is creating incremental demand for large horsepower and more gathering and, and midstream.

Speaker #10: Got it. Thanks, guys.

Connor Jensen: Got it. Thanks, guys.

Speaker #9: Thank you.

Justin Jacobs: Thank you.

Speaker #8: Thank you very much. Our next question comes from, John Daniel. Daniel, image your partners. Go ahead, please. Oh. Let me try that again. go ahead, Mr. Daniel.

Luke: Thank you very much. Our next question comes from John Daniel, Daniel Energy Partners. Go ahead, please. Let me try that again. Go ahead, Mr. Daniel.

Speaker #11: All right. Sorry. can you hear me okay, Justin?

John Daniel: All right, sorry. Can you hear me okay, Justin?

Speaker #9: Yeah, we got you, John. Thanks for joining us.

Justin Jacobs: Yeah, we got you, John. Thanks for joining us.

Speaker #11: Okay, cool. Yeah, the first one on the inquiries: How much of the inquiries today are coming from potential new customers versus existing customers?

John Daniel: Okay, good. The first one on the inquiries: How much of the inquiries today are coming from potential new customers versus existing customers?

Speaker #9: If I look at the dollar basis overall, I would say it clearly skews to existing customers. With that being said, there are a number of new customer opportunities that we're looking at.

Justin Jacobs: If I looked at the dollar basis overall, I would say it clearly skews to existing customers. With that being said, there are a number of new customer opportunities that we are looking at. The consolidation, or I should say kind of M&A that is occurring on the operator side in terms of both acquisition and divestiture, is creating really new customer opportunities for us. It is across the board, although I would say overall, clearly the dollar amount is weighted to existing customers.

Speaker #9: And, the, you know, consolidation or I should say kind of M&A that's occurring on the operator side in terms of both acquisition and divestiture, is creating, you know, really new customer opportunities for us.

Speaker #9: and so it's, it's across the board, although I would say overall, clearly the dollar amount, is weighted to, existing customers.

Speaker #11: Okay. Got it. And then this is, sort of a housekeeping question. I probably should know the answer to this, but can you remind me on sort of the useful life of the equipment and, you know, some of your competition has been around for a long time?

John Daniel: Okay. Got it. This is a sort of a housekeeping question. I probably should know the answer to this, but can you remind me on the useful life of the equipment? Some of your competition has been around for a long time. I am curious, is there a replacement cycle about to hit everyone on the head three, five, seven years from now?

Speaker #11: I'm curious, is there a replacement cycle about to hit everyone on the head three, five, seven years from now?

Speaker #9: You know, the, the answer to that is if you properly maintain the equipment, you know, I and Ian, you can correct me here, I think the book life that we have for, for small, small horsepower is 15 years, medium is 20 and large is 25.

Justin Jacobs: The answer to that is if you properly maintain the equipment. Ian, you can correct me here. I think the book life that we have for small horsepower is 15 years, medium's 20, and large is 25. You are getting into these large assets. Assuming that the equipment is maintained properly with both the engine or drive capital plan and the compression frames, I think you clearly see equipment that lasts longer than 25 years. With that being said, that requires significant capital, which is baked into all of our different projections and guidance to make sure that we do that.

Speaker #9: You're getting into these large assets. assuming that, that the, equipment is maintained properly with, you know, both the engine or drive, capital plan and, the compression, compression frames, you know, I think you can, you clearly see equipment that lasts longer than 25 years.

Speaker #11: Okay.

Speaker #9: with

Speaker #9: that being said, that requires, you know, significant capital, which is baked into all of our, our different projections and guidance. to make sure that we do that.

Speaker #11: Uh-huh. Okay, fair enough. And then the last one, this is going to come across as a softball, but it's actually not meant to be a softball question. When everything is going as great as it is today, I mean, you continue to deliver great numbers and all that.

John Daniel: Okay, fair enough. The last one, this has come across as a softball, but it is actually not meant to be a softball question. When everything is going as great as it is today, I mean, you continue to deliver great numbers and all that. Where is your greatest stress point?

Speaker #11: I mean, where's your greatest stress point?

Speaker #9: You know, I think, as I look at the risks across the business, or maybe I put it differently and say challenges, you know, I'd put them in two buckets.

Justin Jacobs: You know, I think as I look at the risks across the business, or maybe I put it differently and say challenges, I would put them in two buckets: those which we can control and those which we cannot. Those which we cannot are obviously macro and commodity prices and volumes. We can plan and scenario analysis around that, but we cannot control those. So I try to focus both myself and the organization on what are the things that we can control. I think the challenges that we see in the business are ones that we have been talking about for a number of quarters, and those are labor first and foremost, and especially in the Permian Basin, that is right at the top of the list.

Speaker #9: Those which we can control and those which we can't. those which we can't are obviously macro and, and commodity prices and, and volumes and, you know, we can plan and scenario analysis around that, but we can't control those.

Speaker #9: so I try to focus, both myself and, and the organization, what are the things that we can control? And I think the, you know, the challenges that we, we see in the business are ones that we've been talking about for a number of quarters and those are, you know, labor first and foremost and, and, especially in the permian basin, you know, that's right at the top of the list.

Speaker #9: we have opportunities in our business in terms of, you know, better utilization of the fleet. and I think we are, starting to see, some results around that opportunity.

Justin Jacobs: We have opportunities in our business in terms of better utilization of the fleet, and I think we are starting to see some results around that opportunity. As Ian Eckert mentioned, large horsepower is effectively 100% utilized. So this is an opportunity in the small and the medium. I think we are taking some steps there, and I think we have more work to do, which I think we are going to do over time. Those are the couple, and then what happens in terms of 2026 and demand, we stay in close contact with customers, obviously, and we just plan for different scenarios and control what we can control.

Speaker #9: It's, you know, as we, as Ian mentioned, you know, large horsepower is effectively 100 percent utilized. And so this is an opportunity in the small and the medium, I think we're taking some, some steps there.

Speaker #9: and I think we have, more work to do of which, you know, I think we're going to do over time. so, you know, those are, are the couple and then, you know, what happens in terms of '26 and, and demand, you know, we, we stay in close contact with our customers, obviously, and, you know, we just plan for different scenarios and control what we can control.

Speaker #11: Okay. Well, I appreciate you including me on the Q&A. Thank you.

John Daniel: Okay. I appreciate you including me in the Q&A. Thank you.

Speaker #9: Absolutely. Thank you, John.

Justin Jacobs: Absolutely. Thank you, John.

Speaker #8: Thank you very much. And our last question comes from Salman Akyol with Cycle. Go ahead, please.

Luke: Thank you very much. Our last question comes from Salman Akhil with Stifle. Go ahead, please.

Speaker #9: All All my questions have been answered. I'm good. Thanks.

Salman Akhil: All my questions have been answered. I am good. Thanks.

Speaker #6: Thanks, Salman.

Justin Jacobs: Thanks, Salman.

Speaker #8: Thank you very much. We don't have any other questions.

Luke: Thank you very much. We do not have any other questions.

Speaker #6: Thank you, Luke. and thank you for all of your questions and your, continued interest in NGS. we sincerely appreciate your support. and we look forward to updating you on our progress next quarter.

Justin Jacobs: Thank you, Luke. Thank you for all of your questions and your continued interest in NGS. We sincerely appreciate your support. We look forward to updating you on our progress next quarter.

Luke: This concludes today's conference call. Thank you, everyone, for attending.